I was unwittingly introduced to trend following.
A friend worked for a big, well established stock broking firm, and he was looking for a clerk. So it ticked all my boxes; I got to catch a train to work, carry a briefcase, and wear a suit and work in a building. So I started as a clerk straight out of school, working in the commodities section of a stock broking firm. They had a small dealing there that dealt in interest rate and bond futures, here in Australia.
One day I took a stroll around the office and I walked past the equity private client advisors. There was one guy and he had some chart paper in front of him –this is 1985 before computers. He was doing a five and ten day moving average crossover of the share price index futures, which is the same as the S&P 500 futures. I’m looking at this chart and I asked what he was doing.
“When the blue line crosses the red, you buy. When it crosses down below the red, you sell.” And I could see it; I could see the trends on the chart. It made sense.
That afternoon I went down to the stationery store and I got some chart paper, I got a black pen to mark out the high/low close. I got a red and a green pen, and I started working out the moving averages. Then about two or three days later when I was really seeing these trends I decided to open a futures account. I was eighteen. I was earning twelve thousand dollars a year. I saw the office Manager, who was a wily old man who’d been around the block several times. I said I wanted to open a futures account and he just looked at me and shook his head.
He couldn’t believe that an eighteen year old on twelve grand a year wanted to trade futures. But he let me. He said, “If you want to place an order I’ll let you do that. But I’ve got to sign the ticket each time you do it, and then you phone it down to the trading floor.”
And that’s how I started. That was in 1985 when we had to send paper around the place, it wasn’t electronic. Before 1987 the stock market was moving along so quickly, that people were buying stocks and realizing they actually couldn’t pay for them. In that situation the script desk would take ownership of the stock, and then they had two weeks to sell it. Running into 1987, the stock market was going up day after day. So you could sit on the stock without paying for it for two weeks, then sell and make a motza. So that’s exactly what we did.
Of course it had to end...and it did in October 1987.
I was holding a tonne of stock that I hadn’t paid a cent for. I was earning twelve thousand dollars a year and by the end of the day my trading career had come to a very quick finish, and my father had to bail me out. That was a very expensive lesson.
That was my biggest lesson. It may sound odd, but I bought myself a diamond ring a couple days after that event. It’s a reminder not to be such an idiot, and I still wear the ring thirty years later.
I didn’t realise how much damage I’d done to my own account for about three or four days.
On the day of the crash I knew something was going on but I didn’t get the full gist of it until I went down to the Sydney Futures Exchange trading floor. That was my first time on the trading floor. What a way to start!
The bond and interest rate pit opened a little bit earlier than the stock indices. Everyone was sitting there waiting for the stock market to open. It was just horrific. Normally there was a one tick bid offer spread. The traders had agreed that they would quote fifty tick bid offer spreads before the market opened, and it just went one way as soon as the market opened. It was unbelievable. I vividly remember security guards came in within about one minute of the opening bell, and physically removed some of the option traders. These guys had been selling options for the last three or four years –these were the kinds of guys that had their Ferraris and their Porsches parked straight at the front door in a no standing zone. They were physically taken off the trading floor. They were bankrupt immediately. I was standing there as an eighteen year old, thinking, “Wow! This is quite amazing.” And that’s when it really started to sink in that something historic was occurring.
The share price index futures on a big day would move forty points. But this thing was gapping two hundred, three hundred points backwards and forwards.
It made me realise that I had no way to handle this; I had no strategy. I had no risk management in place.