'Round Midnight: Heart Of Darkness

"Kroll once received a letter from a man who as a boy had asked his father how you make money in the futures market. His father answered, 'You have to be bold and you have to be right.' Kroll's correspondent then asked his father, 'What if you are bold and wrong?' 'You just go down with the ship.' 'He did just that, unfortunately,' added the correspondent. "

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I almost went down with the ship about ten years ago

Stock Index Futures were my iceberg at the time -- and it is an unbelievably painful memory.

Most traders who've survived for a few years have their own "going bust" trade as Bruce Kovner refers to it. Mine was equal parts suicidal ignorance.......and the mistakes of an underling who....

.....no, that last part was a lie.

It's so difficult to recount that I end up doing that, trying to find a scapegoat, but yes, it was all my own fault. The truth was, I was seized by a madness of a sort. A dark degrading sort of madness. Yes, I think that captures my state of mind at the time.

And what's more, I found myself on a 'Heart Of Darkness' sort of quest to find -- No, not Kurtz -- but something far more important to me then........

....Instant & Overwhelming Personal Riches

So that was my mission, and I pursued it relentlessly.

As I recall, I slept very little in that period, and was plagued by a feverish delirium, alternating between periods of perfect lucidity and babbling incoherence. Have you ever tried to traverse that thin, gyrating line yourself? .... Have you? ... Have you I say?!

I must calm myself. My apologies.

So, thinking back, the one thought, the one insidious idea that kept spinning and spinning in my head, over and over again, in and out like some sort of deranged earwig was this --- I must trade bigger. I'm trading too small.

Thus developed my morbid and self-destructive obsession with Leverage.

Insane leverage.

Oh, you wouldn't believe it. I was trading a number of S&P 500 Contracts more appropriate for an account 20 times my size.

Yes, really.

And I reasoned, in my feverish state, that if I could just get a rally of 20 or 30 S&P points, I was home free. I'd have over a million dollars in equity....

......which I could lever up again and again ...........

Well, looking back, I believe it was simply an act of Providence that I didn't completely blow out and end up as an intern on the Kudlow & Cramer show.

Now, I don't take and will never take anything even approaching that level of risk again. These trips into madness tend to kill the speculative fever and once you've been there you never want to return.

I won't make the big killing, but I also won't get knocked out of the game.

Many of you have recently E-Mailed me about my year-to-date returns. I doubt that I'll get into that for reasons of both privacy and legality.

However, I can tell you that I was fortunate to have a very good quarter that could have been a great quarter if I had controlled drawdown better.

Right, that really eats at me.

And look, I'm not a benchmark trader, a perfectly fine endeavor for many but not for me. I look for absolute, not relative returns. But I also will have bigger swings quarter to quarter than many can stomach.

So there you have it. I'm not even going to put up charts tonight, because this Monster Payroll Number may invalidate anything I say.

What's your take?

For me, I think a blockbuster number puts the Fed in Wheels Of Death mode and this "retracement" turns into something spectacularly bloody.

A number somewhat below consensus is what traders want to see, but these things are extremely difficult to game.

And that's why you see the big Cash position in the Portfolio area to the right.

Have a relaxing night and we'll see you in the morning.

Stephen

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Comments

[Jacob Whitney]

Very well writen and entertaining blog stock blog.

[Don]

Everyone wants to hit homeruns, when consistent singles will let you sleep at night.

[Vance]

That is a fine summary of a lesson that just about every trader must learn.

My own indicator is what I might call the "thrill indicator". If your investing gives you thrills and excitement, you're way too far out on the risk spectrum. Investing must be kept boring. As Don notes, keep hitting those singles.