No one wants to miss out on money. It’s a huge problem for many newtraders—they cannot resist following the idea of another person becausethey don’t want to miss out. But you should know that I don’t actually havethat Euro trade that you’re talking about. I don’t necessarily want to sellthe EUR/USD at 1.2200. It’s not something that I am going to do for sure.This is the danger in jumping in on a trade because you hear about some-one else taking it. You take it, but in the end, that other person might not,and then what do you have? A trade with no backup, no planning, no ra-tionale other than you didn’t want to miss out.”
I gulped. That was not good. I was now planning to place an order totake a trade that I thought had substantial backup. But I was on my own.No Harvey, no U.S. National Bank standing behind the order. Suddenly, Ifelt dumber than ever. I was going to lose my trading account any momentnow with plans like this. I could feel it. All the money I put in there wasgoing to go up in flames. I needed to stop trading.
“But Craig said—”
“Craig was looking at his order screen and saw Hank Doorecker test thewaters. An order 200 pips above the current market price is way too far offto leave out there. We do actually want to sell in the near future, but wewanted to see how much enthusiasm was out there for it. It’s not like some-one else was going to trade that far out of the market.”
“So really, why did you do it?”“We want to sell. We do. That is for sure. But we want to only sell afterit’s gone up a bit. Hank has a theory that he has tested for many years thatif he puts an order out there, way out there, that it will tempt people to bid.I don’t agree. It is so far away that it is really just showing them our cards.I like to hold my ideas closer than that.”
“How so?” I was now feeling better. At least Harvey really did want tomake a trade on the Euro. I just didn’t know where. So the idea wasn’t so
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far-fetched,  after  all.  And  I  might  still  be  able  to  piggyback  on  the  trade.That is, if I could now find out what the trade would actually be.
“I want to see the price rise, then I’ll make up my mind. I don’t have to
do anything sudden or immediate.”
“You sound really uninterested in trading. Like, if you do or you don’t,
it doesn’t matter. If you don’t trade, you won’t make any money.”
He  grinned.  “I  was  hoping  you  would  get  around  to  that.”  He  leanedcloser to me but did not lower his voice: “Harry, if you do trade, you won’tmake any money.”
This hurt. But he did not back off.“Are you upset about that? I can see that you are. It’s natural. I used towork with a lot more traders. The one thing that everyone asks me is, howare they supposed to make any money when I am telling them to be patientand not trade, or to be patient and look at the long-term charts? They saythat if they don’t trade, they can’t make any pips and if they can’t make anypips, they don’t make any money. But the reality is that until that point, allthey have proven is that if they do trade, they lose money.”
I could not dispute it. He wasn’t telling me this because he hated me.
He was telling me this because he wanted to help me. And he was right.
“I  agree  that  you’re  right.  I  have  proven  that  when  I  trade,  I  lose
money.”
“Yes  you  have.  One  thousand  dollars  in  the  toilet  on  one  trade.  Thatwas  a  huge  amount  of  your  account.  You  will  learn  more  about  moneymanagement over time, but the basic premise is this: you have to under-stand  that  taking  more  trades  does  not  mean  you  will  be  making  moremoney. Especially for a new trader.”
“How do you know about my trade?”He smiled. “Your forex dealer? The guy who started it?”“Yes? What about him?”He smiled again, this time much wider.“You  know  him?”  I  asked.  Then  I  said  it  again,  this  time  more  sure:“You  know  him.  You  probably  worked  with  him  five  hundred  years  agowhen you were trading the Florentine Peso against the German Potato.”
“Not quite. But yes. I did work with him years ago. He’s an old friend. I
haven’t seen your account statements but he did tell me about the loss.”
So this is how Harvey knew so much about me. He knew everyone in
the business.
“Back to business, Harry,” he told me. “Does it make sense that if you
make more trades right now, you don’t necessarily make more money?”
“That makes sense.”“Why? Explain to me why it makes sense. I want to hear it from you.”I stopped and thought about it for a moment. Just thinking about this,I could sense that what he was teaching me was true. “You’re saying, if I
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understand you correctly, that a beginning trader has no idea why he is tak-ing trades. He is making trades to, well . . . just to make trades. It’s terribleto realize this, you know. I am feeling pretty stupid now.”
“Tell me why you feel stupid.”“I feel dumb because I just wanted to be like Craig. I thought that if Itraded  the  short-term  charts,  that  is  where  the  action  would  be.  That  iswhere  all  the  movement  would  be,  right  after  a  major  economic  report.And I sort of just assumed that, because it was moving a lot, I could cap-ture a bunch of it. But I have no idea how to do that. I was using software,or hearing rumors about trades that other people take. I wasn’t basing mytrades on any kind of analysis.”
“And?”“And what?”“Harry,” he started. “That’s an excellent start, but there is more to it.You’re correct that new traders have no idea why they are buying or sell-ing.  They  are  usually  buying  because  they  bought  software  that  teachesthem  that  they  don’t  have  to  think  for  themselves,  or  because  price  isshooting upward, or because they heard a rumor that someone else wasdoing it. The rumor trades are the worst because you can’t even confirmthat it is true, and you have no idea if the rumored trade is actually for real.And you can’t talk to the trader to find out if he actually takes the trade youheard about. But there is more than that.
“When  you  said  that  you  are  not  basing  your  trades  on  any  kind  of
analysis, what did you mean?”
I  told  him  that  I  didn’t  really  know  what  I  meant.  But  I  knew  it  was
true.
“A solid, honest answer. But it’s no good,” he replied. “You gotta do bet-
ter than that.”
I thought for a moment. “I meant to say that I’ve now started to assumethat a good trader is going to have to do some type of his own analysis be-fore  he  takes  a  trade.  Some  kind  of  a  plan.  Some  kind  of  a  checklist  ofthings to look for.”
“Excellent!” Harvey cried out. No one paid any attention or turned to
look at us. Apparently, he was known to scream like this.
“A  checklist,”  I  continued,  “would  guide  me  through  the  process  ofmaking sure that I am following something that works. So if I took a trade,and I am just making this up, but it is sounding really good, that means thatI am implementing a system.”
“Right! Right again!” he exclaimed. “That means you are implement-ing a system. And if you have a system that you are following, it doesn’treally matter if the trade is a winner or a loser, as long as you understandthat over time the system is going to return profits. The goal is to makemoney, right?”
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“Right!”“The goal is not to make trades. Can you see the confusion with peo-ple?  They  want  to  make  trades,  just  like  a  gambler  wants  to  pull  on  theslots, or a dope head wants to get high. They are doing it for the sake of get-ting the rush. They are not serious about making money. Can you imagineif a brand-new lawyer at Wakeman wanted to step into the courtroom andrepresent the largest corporation in the world, on his first day on the job?”
“Yes, I can imagine exactly what Herb Johnson would say.”“He would throw him out onto the street. A new attorney doesn’t earnthe right to step into a role that important until he proves that he can betrusted with that much authority. And a new trader is no different. Untilyou can prove that you don’t have to trade, you are not going to ever dothis successfully.”
“Prove that I don’t have to trade. It makes sense now, but it’s nearly
melting my brain to think like this.”
“It’s melting your brain because you are thinking about two things atonce. You are thinking about supporting your family. And you are thinkingabout making good trades. If you combine those two concepts, you get azero equity balance in your trading account. Why?”
“You’re asking me?”“Yep. Why is that true? Why is it the case that a trader who is trying to
pay the bills is going to be far more likely to lose his account?”
This didn’t make sense to me. Wasn’t it good to be hungry for profits?Couldn’t a need to make money drive a trader to do better, not worse? Itold him this.
“You are defending the concept because you are living in this very situ-
ation,” he told me.
That could be true. I didn’t argue with it. He continued.“You want to believe that a new forex trader who needs to support hisfamily is going to be driven to be the best. But that’s an image you’ve con-jured up in your head. A new forex trader is more likely, because he has tofeed his family or pay his electric bill, to make a bunch of dumb trades.”
“Because he’s got to make money, and how else is he going to make
money unless he trades?”“Right! Right again!”“That  makes  sense  now.  And  a  new  trader,  like  me,  has  maybe  seenother  people  do  this  on  television,  or  someone  like  Craig.  And  we  thinkthat trading profitably is just the act of pushing some buttons. We expect itto be easier or simple or . . .”
“Or what?”“I don’t know. I guess we expect it to be less like a job.”“Bingo. You’ve got it. You understand it perfectly now. Trading is just ajob, like filing stuff away at some windbag Midtown law firm founded by
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Thomas Jefferson or something. And traders don’t want to hear that trad-ing is going to be like a job. They want it to be sexy. They want to imaginethat  they  can  just  sit  down  at  the  computer  at  any  time  of  day,  and  theforex market will be there ready to offer them golden pips served by a but-ler. They don’t work for it. They think all they have to do is want it.”
“Saying it is like a job makes it sound awful.”“You’re right. It does burst the image. Does it change your mind about
whether you want to do it?”
I shook my head. “Of course not! I want to do it more than ever. It’sokay if it’s like a job. I am fine with that. It still seems like a better job atleast. Better because I don’t have to have people yelling at me. Better be-cause I can set my own hours. Better because it will pay more over time.Better because I can see my family more often.”
“Harry! Harry!” He reached out and grabbed me by the cheeks. “Youdon’t understand! You are about to try to be successful at one of the mostdifficult jobs on the planet. You want to be a trader! You know how manypeople can do this and make money at it? Hardly anyone! And you knowwhat? The people who do well at this don’t necessarily get to see their fam-ily more often. They might have people yelling at them. They might havehorrible hours. And at the start, it pays worse than picking up garbage.”
He was now staring down at me and didn’t look happy.“Yes?”“I thought we were making progress. But we’ll have to talk again to-
morrow.”
I was devastated. Where had I gone wrong? If trading was going to bemore difficult, give me less family time, not make me any money right now(because I wasn’t going to be trading), and would involve people yelling atme with longer hours, then what in the world was I thinking? Why not justback out now? I had gone from superhappy and on top of the world, to de-pressed that I could never succeed at doing this for a living, and even if Icould, I wouldn’t like it anyway!
Harvey broke me out of my thoughts. “Stop sulking, kiddo. You’re notout of the woods yet. I got more bad news for you. And we’re going to getthe bad news tomorrow. I want to get it all out of the way.”
I straightened up. “All right,” I agreed. “I am ready for whatever youwant to teach me. I am a bit confused, but I can take it. I want to do this.”
“Despite what I just told you?”“Yes, despite the fact that you just burst the bubble and made trading
sound like a job as a filing manager.”
“Good. That is good, Banes,” he replied. “This conversation has done agood job over the years at busting through the myths. But it usually takeslonger. And usually creates way more depression. So we’re going to speedthings up, like I said. We’re going to get the bad news out of the way.”
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“What’s the bad news?”“I am going to take you to a hedge fund tomorrow. It’s a firm that is
running two billion dollars in other people’s money.”
This didn’t sound bad at all. It sounded downright fantastic!“You might think it’s going to be fantastic,” he said to me, reading my
mind. “But you’re going to see that it’s pretty dumpy.”
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CHAPTER  12
Looks CanBe Deceiving
In a plain-looking 25-story building, in a so-so looking part of no-man’s
land, on the border between Midtown and Chinatown, we stood at areceptionist’s desk that appeared to be just a door set on top of twosawhorses. The receptionist had a computer, but it was running so badlythat I could hear it clanking around. And instead of a fancy flat-screenmonitor, he had a huge clunky monstrosity that looked like it belonged ina dump. There wasn’t any sign or notice of where we were. Either thiswas a superprivate hedge fund or it was doing so badly that it didn’t wantany attention.
What kind of hedge fund was this? While we waited in the receptionarea I thought I’d find out what kind of fly-by-night operation had dumpycomputers and ratty carpet.
“What kind of place is this, Harvey?” I spoke in a low voice so I wouldn’tembarrass him or myself. We were waiting for the chief trader or somethingand I didn’t want to be caught talking trash about his trashy office.
“You’ll find out in a moment.”And that’s when the owner of the place, or the chief trader, or what-ever,  walked  into  the  room.  He  was  looking  dumpier  than  everyone  andeverything else in the place. He wore a suit that was at least 700 years old,and his shirt was frayed at the cuffs. His hair stuck up straight in the back,where  he  had  fallen  at  his  desk  or  something.  Although  he  had  a  brightsmile, I kind of felt sorry for him. He held out his hand and I wondered if itwas clean enough to shake. I did anyway.
104
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“Harry Banes, meet George Sisler,” Harvey said. I winced. The man had
a strong handshake and wasn’t afraid to use it.
“Thanks for meeting with me,” I offered. I hoped we could get this overwith quickly and then we could go see the $2 billion hedge fund that Har-vey had talked about.
We  walked  through  a  (not  surprisingly)  old  door  and  out  onto  whatwas apparently George’s trading floor. It was a scattered group of more olddoors sitting on top of sawhorses, sitting on top of old carpet. The com-puter  screens  looked  newer,  but  the  20  or  so  traders  were  all  wearingeither older suits (even the young guys) or casual clothes. The other thingthat looked remarkably different was that there were an equal number ofmen  and  women  here  or  perhaps  even  more  women  than  men.  All  thetraders that I saw had the same things on their screen: an Excel spread-sheet up with a bunch of columns stretching into eternity, a set of pricesflashing quotes for several currencies, and charts. The place wasn’t quiet,but  it  wasn’t  a  playground  either.  I  could  tell  that  I  was  standing  in  themidst of a focused crowd.
I figured that we would sit down inside George’s office for a chat, butwhat I didn’t understand at first was that the entire room had no private of-fice.  It  was  just  one  room,  sitting  high  enough  that  we  had  an  excellentview out the windows of a Chinese restaurant, an overflowing dumpster,and a parking lot with cars stacked on top of each other Manhattan style.Inside the room, beside the desks, there was a broken 30-inch televisionand a watercooler. This was one classy place!
Because George had no office, we sat down at his desk, which was inno  way  distinguishable  from  any  of  the  other  desks.  It  wasn’t  bigger;  itdidn’t have more screens; it was not in a prominent place (like the center)of the room. But it was spotless. There wasn’t one piece of paper floatinganywhere. Nothing out of place. It felt very strange to be sitting down for ameeting about this guy’s business, while everyone else was easily withinhearing range.
Despite all my impressions of the place, Harvey seemed delighted tobe here. This appeared to be something of a reunion between him and aformer student (who apparently needed some help). From the moment wehad entered the office, Harvey was scanning the room, grinning and happyand altogether way too jolly about everything he saw. Walking in betweendesks, he was shaking hands with people he knew, bending down to lookat their screens, asking about trades, and basically acting like he was theMayor of Piptown.
“Harry,” he told me as he finally came over to sit down next to us, “isn’t
this a great place? Now, Harry, this is how to run two billion dollars.”
I was speechless. George wasn’t. He said: “Three billion.”
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Harvey lighted up. “Howdy do! Wow! Fantastic, George. Not a surprise.
Are you up 50 percent for the year?”
“Yes.  We  are.  We  have  really  been  hitting  it  good  for  the  past  four
months.”
It was possible that Harvey would now explode into shards of happi-ness. I imagine his head flying off his body, but still smiling and still com-menting  about  how  cool  this  place  was.  At  the  same  time,  I  was  havingtrouble keeping my own head attached to my body. Had I heard right? Wasthis George Sisler guy really managing three billion dollars? Could he notafford  some  nicer  stuff?  This  was  nothing  like  what  I  saw  at  ErnestWellington, or other major banks, or on business television.
I could tell that there was going to be a lesson here for me and that,like everything else Harvey had told me so far, it would overturn some mis-taken assumptions about the business of trading.
Harvey spoke and broke me out of my daze: “Still hitting singles?”George nodded. “Yep. Still hitting them.”And  then  Harvey  looked  at  me.  “It’s  time  for  you  to  ask  questions,
Harry. Ask George anything you want.”
I had lots of questions. But most of them I thought would be insulting
or at least inappropriate.
“Go  ahead,”  Harvey  said,  responding  to  my  thoughts.  “Ask  him  any-thing.  George  already  knows  you’re  wondering  why  his  office  looks  likea dump.”
I INTERVIEW GEORGE
George didn’t have much time for me. But in the time we talked, I learned aton about how a hedge fund works, and about what I was going to need todo to be successful.
ME: Harvey was right. I am wondering about your office.GEORGE: It’s not that spiffy, I know. But we do get the job done.ME: If you are managing so much money for other people, why not up-
grade just a bit? For clients?
GEORGE: You can imagine that you’re not the first person to ask. But theanswer is that I am no longer impressed by wealth, or really a show ofwealth. I have come to believe in the obvious truth that showing offwealth is not the same thing as being wealthy. Material possessions areto be used in the process of building wealth. But showing off wealth ortrying to look better than other hedge fund managers—that’s not whatthis place is all about.
ME: What is this place all about?
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GEORGE: The accumulation of wealth. We want to earn the most amountof money with the least amount of risk, while spending the least amountof money on overhead.
ME: Sounds  okay  with  me.  But  why  can’t  you  also  accumulate  somedesks? Normal chairs? Don’t your clients expect to see someone whoappears, well . . .
GEORGE: More successful?ME: Right. I didn’t mean for it to sound bad.GEORGE: It doesn’t sound bad at all. You see, my clients expect to makethe most amount of money possible. So I don’t charge them a manage-ment fee. Most hedge funds will charge a fee of 2 percent of total assetsunder management, plus about 20 percent per year of the profits. What’s2 percent of three billion dollars?
ME: Um . . .HARVEY: He is a math genius.ME: Um . . .GEORGE: It’s sixty million dollars.ME: [silence]HARVEY: [silence]GEORGE: This  year  we’ll  walk  away  from  60  million  dollars  in  possiblemanagement fees that we could just pay out to ourselves in this office.Instead  of  putting  that  sixty  million  dollars  in  our  own  pockets,  we’llreinvest it, we’ll put it to work. That sixty million by the end of next yearmight be worth eighty million. And guess what? We get a cut of the prof-its. So if we do well, we get paid well. Do you see how charging a man-agement  fee  like  2  percent  would  reward  us  even  if  we  were  notperforming well?
ME: [silence]HARVEY: George, I think he’s still thinking about the sixty million
dollars.
GEORGE: Ha! I don’t blame him. My wife thinks about it all the time. But,think, Harry. Think about it for a moment. If you invest your money withme, do you want me to be rewarded if we succeed, or if we fail?ME: If you succeed. If you fail, I want to take my money elsewhere.GEORGE: Right! And if we fail and still take 2 percent of your money everyyear, that seems ridiculous. Completely at odds with what is obviously atrue  principle:  A  money  manager  should  only  be  compensated  if  heearns money for his clients.
ME: That does make sense. So how much money do you earn when you
succeed?
GEORGE: We  charge  the  standard  20  percent  of  profits.  This  year,  we’vemade a billion dollars. We had a big win when we bought a chain of su-permarkets in the Midwest, and then sold them to a larger chain. Right
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there that deal was five hundred million dollars. If we stopped tradingright now, we’d take in an incentive fee, at the end of the year, of abouttwo hundred million dollars.
ME: Do you mostly buy companies? Then sell them?GEORGE: No. The supermarket deal was dropped in our lap—we have a guy here who trades for us, and he was a grocery analyst at a majorWall  Street  firm.  He  liked  what  he  saw  in  this  Midwestern  chain. We  manage  some  money  for  the  CEO  of  a  major  U.S.  chain,  and we told him that we were going to bid for the business. We had no in-tention of keeping it for a long time, but we realized we could get agreat  deal  on  it  and  then  resell  it  later  after  we  trimmed  it  up  a  bit.First  he  told  us  that  he  wasn’t  interested,  and  six  months  after we bought it, he told us that he was, and we sold it to him at a majormarkup.
ME: And this was a one-time-only type of deal?GEORGE: Yes, that’s a good way to put it. A deal too good to pass up. Wegenerally trade a lot of currency and foreign stocks and bonds. We don’tdo  much  in  the  United  States,  really.  We  see  the  growth  overseas  andthat’s where we are focused.
ME: There aren’t very many traders here.GEORGE: Right.  I  hate  managing  people.  These  people  manage  them-selves. We hardly ever hire. When we do, I offer a million dollars as a signing bonus and we don’t have a lot of trouble getting the peoplewe  want.  This  is  totally  and  completely  a  performance-based  busi-ness.  Each  of  these  traders  manages  as  much  of  the  capital  as they  can  justify  to  the  rest  of  the  team.  Each  one  is  an  expert  in one  area—Mickey  Cochrane  over  there  borrows  money  in  Japan and buys British, Brazilian, Australian, and New Zealand bonds. He’smaking a killing for us right now and it looks like it’s going to keep on moving.
ME: He borrows money in Japan?GEORGE: Right. This is what is called the carry trade. Ever heard of it?ME: No. I don’t think so.GEORGE: I’ll describe it to you. I hope that it blows your mind like it didmine the first time I heard about it—and keep in mind, I was a year outof  Goldman  Sachs  and  should  have  already  known  about  it.  Are  youready?ME: Ready.GEORGE: How can a person or a company borrow at low interest rates?ME: Good credit.GEORGE: What else?ME: From a bank offering a competitive rate.
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GEORGE: Excellent.  Perfect.  What  would  you  say  if  I  told  you  that  rightnow, I can borrow a hundred million dollars from a Japanese bank at 1percent interest?
ME: I  would  say  you  should  buy  yourself  a  new  television  and  some
couches.
GEORGE: Very good! Probably true. But what else?ME: I would say that you should look for a way to earn more than 1 per-cent on your money, since you are going to have to pay back the princi-pal and the interest.
GEORGE: Brilliant! That is correct. Well, guess what? We can go to our bro-kerage firms—Bear Sterns, Goldman Sachs, for example—and depositthe money. They will let us leverage that money a few times over. So wecan  invest  with  three  hundred  million  dollars.  That’s  called  investingwith leverage.
ME: Sounds even better now.GEORGE: And if we go out and buy a basket—or a collection—of foreignbonds that earn a combined average of 7 percent, then we are earning 7percent on three hundred million.
ME: But you only have to pay interest on one hundred million!GEORGE: Bingo! Give the man a banana. You’re right on target. We borrow,
and then we invest with leverage.
ME: So  you  are,  in  essence,  earning  21  percent  on  that  money  annually,
minus the 1 percent interest on the loan.
GEORGE: Right. That is exactly right. Now it gets more complicated, ofcourse. Mickey has to move money around, and has to open and closetrades to get into the best collection of bonds and so forth. And wepay fees and commissions on the trades we take. But that’s the basicstrategy.
ME: Very cool. I want to do that. Can I borrow from a Japanese bank?GEORGE: Theoretically,  yes.  But  practically,  probably  not.  You  probablycan’t get the trade going right, unless you have a few million dollars. Doyou?
ME: Very no. Definitely no. I wish.GEORGE: Well