CHAPTER 1 The Crucible Black Monday October 19, 1987. When the sun rose on that Monday morning, I felt financially secure. I had a great job, a beautiful house, nice cars, money in the bank, and a belief that the future would bring me greater and greater riches. By the time the sun set that evening, I was broke! During the course of the day, the Dow Jones Industrial Average dropped more than 500 points. The Dow lost approximately 22 percent of its total value in a single day. One trillion dollars of financial assets vanished as quickly as a tiny puff of smoke in a strong wind. And, of course, the Dow was not alone. The Nasdaq also fell, losing more than ten percent of its value. The United States financial markets underwent a free fall and there seemed to be no stopping, or even bracing, the fall. Furthermore, the decline was not limited to the United States. Major markets around the globe took a nosedive. It was as though a flame on Wall Street quickly got out of control and spread around the world faster than a fire in a parched, dense thicket. Close to home, the Canadian market reeled from historical losses and dropped over 20 percent before the disaster ended. The international scene was not any better: by the week's end, the average stock value on the London Financial Times Stock Exchange had declined by over 20 percent; Asian markets also tumbled. On October 20, the Nikkei experienced the biggest loss in its history. The market in Singapore was down significantly for the week. After experiencing a huge decline on October 20, the Hang Seng closed for days. In the wake of the crash, the Australian market suffered a record double-digit loss. Some exchanges and indices closed for a few days in the hope that the break or timeout would serve to calm jittery nerves. The reality of a global economy became all too real. What caused the crash? Theories were cheap. Everybody had one. Program traders, soaring federal debt, high bond yields, market overvaluation-these were only a few of the speculated causes. In reality, all of these factors probably played a role. I didn't know the cause, and I really didn't care. To me, the debate was strictly academic. What was real was that I, and some of my clients and dearest friends, had lost a lot of money. I had lost not only my wealth, but my self-confidence as well. I was broke and my faith in my trading ability was undermined. I grieved for my clients and for myself. Even in the depths of my despair, there was no time for pity or resignation. I had a wife and two small children depending on me. It was time to be tested. Failure was not an option.

FROM PORK BELLIES TO PAN AM

At the time of the crash, I had been a trader for almost a decade. My experiences with the stock market began in 1978 when I was stationed in Spain with the U.S. Air Force. One of my fellow officers was trading pork bellies. He often talked to me about his experiences and the money he was making. He made it all sound very exciting and easy. I knew absolutely nothing about trading pork bellies or anything else, but I wanted a piece of the action. I did not have a clue as to how to begin, and the only brokerage firm I had ever heard of was Merrill Lynch. (This was back in the days when their major television advertisement was the bull in the china shop.) I truly thought that Merrill Lynch was the only brokerage firm in existence. I was stationed at Torrejon Air Force Base in Madrid and the brokerage house was in the city's central business district. I had to use the subway, which I usually avoided because I found it so difficult. My Spanish was poor and my southern accent added a slow twang to the few Spanish words that I knew. Then, as now, I couldn't roll my tongue. In an effort to communicate, I gestured profusely. This small-town boy found downtown Madrid daunting. As I searched for the brokerage office, I just kept asking directions and gesturing. It was southern Spanish spoken with hand signals. When I finally arrived at the office, I opened an equities account with the intention of trading pork bellies. I was so ignorant and naive that I didn't understand that pork bellies were a commodity and, therefore, couldn't be traded via a stock account. If you want to know the truth, I am not sure I even knew that pork bellies were commodities and equities were stocks. At any rate, I am sure that I did not have a clear view of the significant distinctions between the two. Nevertheless, I opened an account. The military published The Stars and Stripes, a paper to boost the spirits of service people abroad and to help them stay in touch with events at home. I began following the financial information and paid close attention to the stock quotes, even though the quotes were about three days old. That was the extent of my market research. After reading The Stars and Stripes for a number of days, and considering the information presented, I decided to purchase my first stock. I bought 100 shares of Pan Am and another 100 shares of Eastern Airlines. I eagerly awaited every issue of The Stars and Stripes so that I could follow the fluctuating price of my holdings. It was exciting to be a stockholder and I enjoyed talking about my new portfolio. Unfortunately, in the long run, my investments did not work out and both companies filed for bankruptcy. I had no stops; it was an all or nothing mentality. When both of my stock picks eventually went belly up, I lost everything from my first venture. However, I was not easily dissuaded. One loss did not make me a quitter. I enjoyed investing and I continued to study the markets looking for other stocks to purchase and other investment opportunities. Trading was the closest profession to sports that I had ever tried and I quickly gravitated to it. I had no idea that I would eventually become a professional trader. I just enjoyed the markets.

My Avocation Becomes My Vocation

After getting out of the military and returning to the United States, I settled in Oklahoma City and started attending law school. Trading for a living was not part of my life plan; in fact, I never even considered it. I intended to be a lawyer. I enrolled in law school while also continuing to invest in a small trading account. My trading was a hobby from which I hoped to eventually make a few bucks. My broker, Henry, and I soon developed a friendship and he introduced me to stock options in oil companies. At that time, oil was king in Oklahoma City. Henry taught me his trading strategy for options. It was a very easy three-step plan that he called the Bigger Fool Theory. The essence of the theory was simple: Buy a stock at a high price and there is always someone (a bigger fool) who will buy it from you at an even higher price. Here is how the system worked. A stock price would rise one day, we bought it on the second day, and we sold it on the following day. I began regularly watching the market. Just as the strategy dictated, if an oil stock went up one day, I bought it on the second day, and then I sold it on the third day. Believe it or not, I successfully executed this strategy over and over again. Oklahoma City was booming and oil prices seemed to go up every day. The Bigger Fool Theory was working like a charm for me and my account was growing. I seemed to have a knack with options as evidenced by my profits. I didn't know that the odds of trading options to the long side were like playing the lottery. One day I was surprised to receive an invitation to come to the local brokerage house and meet the boss. From the time I entered the door until the time I left the office, I was treated like royalty. I soon learned that the office manager was aware of my successful options trading. Everyone seemed to be impressed and they offered me a position. I was still attending law school and planned to finish my studies. I was not sure I wanted to be a broker or work in the financial field. I intended to be a lawyer. I communicated my feelings to them. However, the firm offered me a chance to achieve both objectives: accept the position with them and attend law school at night. I could be a broker in the Oklahoma City office and my studies would not be interrupted. It was an offer I could not refuse. I took the deal. From that day forward, my life would never be the same. I began the journey to becoming a trader. I started to educate myself about the stock market. I wanted to learn all of Wall Street's secrets. Soon I received training in New York; not long thereafter I obtained my brokerage license and I returned to Oklahoma City where I honed my skills. I did well and gained the confidence of my clients and the management team at Merrill. I was dedicated to profitably managing my clients' portfolios and assisting them with their financial wealth management. I liked the industry and saw the potential to succeed and achieve my personal goals. Trading was both a passion and a profession for me. I loved it. In 1982, the S&P Futures opened for trading. It was a watershed day for me. On that first day, I made the best and the worst single trade of my career. I bought the S&P at the open for a price of approximately 118.70. With the S&P currently trading at 1220.00, the trade would be worth $275,000.00 today! And that is just for one contract! That was my best trade ever because I have been buying it and selling it ever since. However, I also sold the S&P; that was my worst trade because if I had kept it, my investment would have yielded me incredible profits. So, from the very beginning, I traded the futures indices. After studying futures, I added to my credentials by...