WHAT I LEARNED ABOUT THE MARKETS FROM THE MILLIONAIRE MASSEUSE AND THOUSANDS OF RETAIL INVESTORS
I had just gotten my Series 7 license. It was 1995. I was 20 years old and had replaced going to class with trading equity options by day and mingling in currency trading at night. I wasn't going to get on the trading floor of Goldman Sachs at 20 without any experience. My Series 7 was a ticket into a retail brokerage firm placing orders for customers. Anything to be around the financial markets as much as possible. Internet trading was just beginning in the mid-90's. Most customers were still calling in to place their orders. I was the guy who would route the order for them.
I was working in Downtown San Jose at Waterhouse Securities. Back then it was owned by a guy named Larry Waterhouse. He eventually sold out at what turned out to be an enormously undervalued selling price. It was right before the internet trading and .com boom of the late 90's.
I was obsessed with trading. It was rare that I would find a customer who was profitable being an active trader. In fact, out of the thousands of customers I came across, I only found a few who were worth following. The rest were either losers or marginal winners without much ability. Whenever I would find a consistently profitable trader I would begin studying his trades. I came across the following characters:
Old Man K-Mart - he would only trade spreads in Kmart option contracts. Back then the symbol was KM I think. He knew what he was doing. He made a consistent profit trading a variety of bull and bear spreads on K-Mart options. He was knowledgeable. Worked his account into the low 7 figure range.
Breakout Billy - sly as a fox. Disciplined as a Navy Seal. Breakout Billy was by far one of the most consistent traders I have ever come across. To this day I don't know of many that matched his consistency. He would play very simple breakouts on companies that were making all-time highs. He would also trade companies that had a good deal of short-term momentum. Simply playing breakouts of short-term consolidations within the uptrend. He cut his losses extremely short. If a trade didn't move for him after a day or two, he was out. I witnessed him grow an account from $100,000 to over $600,000 in two years. And he made some significant withdrawals. In fact, one of the traits I noticed was that he would withdraw a portion of profits on a fairly frequent basis.
Gut Check Charlie - he was a casino manager. A good trader. He relied on some system that he described to me in very vague terms. He would take on extremely large positions. It wasn't uncommon to see him double his money in a matter of months. His account had some enormous swings. Overall he was very profitable, however.
The Millionaire Masseuse - by far the most interesting character of all. This person opened an account under a corporate name having to do with massages. Promptly deposited $10,000. The account came to my attention after the customer turned the $10,000 into $30,000 during the first week of trading. The Millionaire Masseuse would only trade OEX options. OEX (S&P 100) options were a big thing back in the 90's.
The account didn't stop at $30,000. The streak continued. The account was over $100,000 within two weeks of it being opened. Within a month it was at $500,000. After the month and a half point it was over $1,000,000. I remember vividly that the risk management department put a position limit of 10,000 contracts per side for The Millionaire Masseuse. It didn't stop at $1,000,000. The account grew to $2,000,000 very quickly. At around two and a half months it was at a little over $3.5 million. At three months the account was at 0. He lost all of his profits in only a couple of trades. He never redeposited after that.
The Millionaire Masseuse didn't withdraw a penny. In fact, The Millionaire Masseuse didn't slow down through the entire exercise of nuclear gains in options trading. He had a simple method of buying a ton of calls or puts at one strike for near-term expiration. That's all The Millionaire Masseuse did.
I'm not sure if he was enormously lucky and went on the run of a lifetime or he was incredibly skilled, but didn't know when to stop. Whatever it was that became the most rapid rise I have ever witnessed in a trading account to this day.
Those initial years made me realize just how many losers there are in the markets. I would see consistent patterns of traders depositing, redepositing and re-redepositing. Margin calls were frequent. We would sell out guys who would just get tired of answering their phones. Worn out from the torture of losing on a daily basis.
Those experiences created the contrarian mentality that is at the core of my trading strategy today. The traders I witnessed in those days all chased the same stocks. And they all ended up with the same results. Every few months the choice group of stocks would shift. They would all somehow find a way to lose regardless of what that group became.
It's rare that you get to witness the statistical 90% of those who lose in the markets in action. I did. It has created the skepticism with which I greet every single trading decision that is joyously embraced by the masses. From the love for AAPL stock. To the skepticism over companies like NFLX and LNKD. I have seen from experience that the market will take advantage of consensus. It will frown at your tendency to love and smile at your ability to hate. It's not supposed to make any sense. If it was, all of the Silicon Valley engineers and doctors with advanced degrees and a solid helping of intellectual ability would be able to number crunch and think their way to profits.
Instead, I saw investor after investor walk away in a daze, wondering how something so obvious turned out to be so obviously wrong.
What is obvious IS obviously wrong. They don't teach that in college.
