Pit Bull Lesso n s from Wall S t r e e t ' s Champion T rade r Martin "Buzzy" Schwartz with Dave Morine and Paul Flint A HarperBusiness Book from HarperPerennial A hardcover edition of this book was published in 1998 by Harper- Business, a division of HarperCollins Publishers. PIT BULL. Copyright © 1998 by Martin Schwartz. All rights reserved. Printed in the United States of America. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles and reviews. For information address HarperCollins Publishers, Inc., 10 East 53rd Street, New York, NY 10022. HarperCollins books may be purchased for educational, business, or sales promotional use. For information please write: Special Markets Department, HarperCollins Publishers, Inc., 10 East 53rd Street, New York, NY 10022. First HarperPerennial edition published 1999. Designed by Nancy Singer Olaguera The Library of Congress has catalogued the hardcover edition as follows: Schwartz, Martin S. . Pit bull : lessons from Wall Street's champion trader / Martin "Buzzy" Schwartz with Dave Morine and Paul Flint. p. cm. Includes index. ISBN 0-88730-876-7 1. Floor traders (Finance) 2. Wall Street. I. Morine, Dave. II. Flint, Paul. III. Title. HG4621.S295 1998 3 3 2 . 6 4 ' 2 7 3 2 1 97-4931 ISBN 0-88730-956-9 (pbk.) 05 06 07 08 • / RRD 10 9 8 To all of my family, especially my wife, Audrey, who embodies the essence of life Contents Acknowledgments XI 1 Trade or Fade 1 Mashed Potatoes I5 2 The Plan 17 The Grubstake 30 3 Paradise Island 33 Viva Las Vegas 47 4 The Great Pyramid 49 Inside Skinny 67 5 Auric Schwartz 69 Going for the Gold I 77 6 Made to Trade 81 Switch Hitting 96 7 Never Short a Republican 99 The Losing Streak 110 8 Champion Trader 113 Honor Thy Stop 122 9 Little Brown Bags 125 To Thine Own Self Be True 141 10 Lots 204 and 207 143 Big Shots Make Big Targets 186 x Contents 1 Going for the Gold I 159 Sitting Down by the Lake, Waiting for the Tidal Wave 172 12 Comodities Corp 175 How I Read the Wal Stret Journal 185 13 Sabrina Partners 189 14 How's My Money Doing? 203 Sory, Dad, You're Fired 212 15 Down the Tubes 215 Two Lesons for Life 29 16 Night Fighting 23 Money Talks, Bullshit Walks (aka Early in the Day, Early in the Wek) 246 17 The Best Trade 249 The Pit Bul's Guide to Sucesful Trading 263 My Typical Day 28 Index 295 Acknowledgments I would like to thank my family for their universal support and encouragement throughout my life. To my parents, who often- times sacrificed greatly to give me the best education and a lov- ing and honest home. To my brother, Gerry, who spent many hours teaching me to be a better athlete and a better person. To Pappy Snyder, who represented the epitome of optimism and left me with the legacy of his journal to continue the "story." To my wife, Audrey, who is the rock of the family and able to demonstrate great humanity and wisdom. To my children, Stacy and Bowie, who teach me how rewarding and challeng- ing it is to be a good parent. To Dave Morine who had the vision and skill to bring me through this project. To Ruth Morine for her constant cheerful encouragement. To Paul Flint for his marvelous intellect and good humor—once a Marine, always a Marine. Semper Fi. To Jim Levine, my agent, Amherst classmate, and friend, for his patient guidance and professional skills. To Morgan McKenney, my superb assistant, for her energy and drive in helping me fin- ish the last chapter, "The Pit Bull's Guide to Successful Trading." To all of the people at HarperBusiness for their help in bringing this project home—you are all first-class. To Adrian Zackheim for gambling on a first-time author and seeing the project through. To Dave Conti for his superb editorial skills— your suggestions made the book much better. To Lisa Berkowitz for her marketing skills and promotional contacts. To Janet Dery, Maureen Kelly, and Amy Lambo for making this project easier. To all of those unnamed people who have taught me so much both good and bad along this journey that is called life. Thanks, Buzzy X I 1 Trade or Fade Three Bid for Ten, Three Bid for Ten, Three Bid for Ten. I kept saying it over and over in my mind like a mantra. If Mesa Petroleum hit 6254, I was going to try and buy ten October 65 call options at $300 per option. Each option would give me the right to buy one hundred shares of Mesa stock at a "strike price" of $65 per share any time up until the third Friday in October, the expiration date of the call option. This was going to be my first trade from the floor of the American Stock Exchange and I was scared to death that I was going to screw it up, that I wasn't going to be able to hack it as a trader. It was Monday morning, August 13, 1979, and Trinity Place was bustling with men in business suits heading to work. New York's financial world was preparing to start another day. I stopped outside the entrance of the building marked 86, took a deep breath, pulled out my badge, and for the first time walked through the door that said "Members Only." The guard looked at my badge, saw that it said "Martin Schwartz & Co., 945," nodded a good morning, and let me in. I turned left down the stairs to the coatroom. Members were lined up at the counter, exchanging their sport jackets for their blue smocks, the official garb of the American Stock Exchange. Since it was my first day, I didn't have a blue smock, so I had to introduce myself to Joey Dee, the attendant, and give him my badge number, "945." I put on my smock, pinned on my badge, and checked to make sure that I had my pen. Men in blue smocks were sitting on benches all around me changing their shoes, putting on crepe soles and shoving their leather ones into the cubbyholes that lined the walls. I couldn't find a seat so I decided to change my shoes later. Having crepe soles was the least of my worries. I went upstairs to the members' lounge to await the open- 1 2 Pit Bull ing. Walking into the members' lounge of the American Stock Exchange was not like walking into the Harvard or Yale Club. The cloud of smoke that hung over the room came from ciga­ rettes, not pipes; the furniture was covered in Naugahyde, not leather; and the members were mostly Irish, Italians, and Jews, not WASPs, or at least WASPs who had gone to the right schools. These guys were the В team of finance, the direct descendants of the Curb Exchange, the group of bootleg traders who ran their books on the streets outside the New York Exchange from the 1890s until 1921. I made myself a cup of tea and walked out onto the floor. The morning light streamed through the enormous windows that take up almost the entire wall on the far side of the Exchange. It's a huge room, about three-quarters the size of a football field and easily five stories high. The floor was set up a lot like an indoor flea market. Specialists, guys named Chickie and Frannie and Donnie, the people who made the market on specific stocks and options, were perched on metal stools in front of horseshoe-shaped racks of pigeonholes going through their orders. There were different pigeonholes for different stocks, options, expiration dates, strike prices, day orders, mar­ ket orders, whatever. The other members, the traders and bro­ kers, were wandering around, pens and tickets in hand, getting ready to buy and sell. Above, in the balcony, which was suspended over three sides of the floor, representatives from the brokerage houses sat in tiers, checking their phones and spotting their runners on the floor. Between them, on the near wall, spectators were begin­ ning to file into the visitors' gallery. Holding everything up were huge Roman columns with bulls and bears sculpted on either side and binding it all together, like the ribbon around a huge box of candy, was the big Trans Lux ticker tape. The tape ran along the walls blinking out the prices of all the stocks while just above it the Dow Jones wire flashed the latest news. Even though the Exchange had yet to open, all eyes were darting around searching for quotes and other bits of information that might give them an edge. Precisely at ten, the bell rang and everyone started moving. Trade or Fade 3 They reminded me of horses breaking from the gate, except now / was part of the race. I galloped over to the far corner where Mesa options were traded. A noisy little crowd of blue smocks was gathering around Louis "Chickie" Miceli, the spe- cialist. The specialists for stocks and options on the Amex were responsible for maintaining orderly markets. As the specialist for Mesa options, it was Chickie's job to facilitate buy and sell orders for other brokers and to trade for his own account, con- stantly adjusting the market price so that the supply matched the demand. "Chickie!" shouted a broker from Merrill, "How are the Oct 65 Mesa calls, Chickie?" He was coming in from the edge of the crowd with a public order. "Three to a quarter, fifty up," Chickie said. I had to work through in my mind just what they were saying. Chickie would buy up to fifty October 65 Mesa options at a price of 3 and sell up to fifty at a price of 334 Since an option represented one hundred shares of stock, that meant that at this moment I could buy up to fifty options for $325 per option. Each option would give me the right to buy one hundred shares of Mesa stock at a price of $65 per share at any time between now and the third Friday in October. I was betting that before then the price of Mesa would go up, making my options more valuable. But 3 1/4 was too much. I was willing to buy ten options at 3, for a total of $3,000. The mantra kept ringing in my head, "Three Bid for Ten, Three Bid for Ten." "Three and an eighth bid for ten," barked Merrill. "Sold," yelled a guy from Hutton. The Hutton broker had hit the bid from the floor. If he hadn't, Chickie, as the specialist for Mesa options, could have hit the bid at 3 1/8, or could have placed it on his book. I wished that my ear was attuned to the language of the floor. That would come with time, I hoped. I checked the quote screen above Chickie's head. Mesa had opened on the New York Stock Exchange at 62 7/8. I nudged my way further into the crowd. Elbows dug into my ribs as other traders jockeyed for position. I wormed in as close as I could. Chickie had a phone cradled to his ear checking on how Mesa was running on the Big Board, the New York Stock Exchange (NYSE).