A Foray into Some Very foolish Futures

Some people never learn

Reprinted (and actually retyped) by kind permission of The Motley Fool. Originally published in The Motley Fool UK Investment Guide 1998.

This was the second of my attempts at career suicide. Not for the faint of heart!

The news from the front line of idiocy is that a fool and his money continue to enjoy a short acquaintance.

Only a few months ago I was reading a Sunday Times article about spread betting on sporting events. A throwaway line there suggested that spread betting on the financial markets was best left to the experts. I recall feeling certain that I knew better.

I had, after all, been paper trading the FTSE 100 Index for all of a month, using as my guide the live prices published on the City Index website. Out of twenty-five trading days I had shown a profit on all but two. Betting £10 a point, I was already £10,000 ahead. On paper, that is.

I don’t know what rush of blood to the head or hormonal imbalance led me to believe that I could turn that notional paper money into the folding, bankable variety. The impulse was strong enough, however, for me to resign a well paid, if boring, career to risk my Christmas bonus on the pursuit of serious riches.

Equipped with a futures pager and a mobile phone, and with accounts opened with two financial spread betting companies, I was ready to start throwing my money at the market. I had no clear strategy — merely an unshakeable belief that I could spot the trends at an early stage, jump on to their coat tails and ride them to a quick profit.

I laughed at the very idea of using the limited risk products offered by both companies, namely traded options and limited risk futures. The cost of the option premiums or additional futures spread looked like so much wasted money.

The outcome was sadly predictable. I could have foreseen it myself had it been anyone else who was approaching the business this way.

On Day 1, I was late into the market on the morning of a huge rise in the FTSE 100. I bought near the top, over-committed by betting £20 a point and spent all day sweating it out to come out only £80 in front. A late surge by Wall Street saved my bacon. Even at this stage the numbers were frightening. £500 down in the UK market and £580 up in the US. A lot of money had been at risk for the eventual paltry reward.

Day 2 was somewhat better, with another strong finish on Wall Street leaving me up around £350. Again I had taken a pounding in the FTSE contract and was beginning to doubt my innate ability to read market directions. I was also beginning to see how misleading paper trading could be.

Both of the financial spread betting companies set their quotes not at the current level of the index, but rather at where they think the index is heading. The result was that by the time I thought I had spotted a trend, they were ahead of me by 10 or 20 points. Adding that to the normal spread between buying and selling prices of between 6 and 8 points meant that there had to be a substantial market movement just for me to break even.

On Day 3 it all began to fall apart, with me giving up almost all of the previous day’s gains. Again I was pacing the floor until the close of the US markets at around 9pm. This time Wall Street didn’t come to the rescue.

Even at this stage it didn’t occur to me that perhaps I wasn’t cut out for the life of a trader, this knife-edge balance between elation and despair. Nor did I think of starting to use limited risk products. Instead I simply thought that tomorrow would be the crunch day and I would have to make up for my dismal performance to date.

I was right that the crunch would come on Day 4.

The market was waiting for the latest interest rate pronouncement from the Bank of England and I correctly guessed that it would stay unchanged. As a result, by ten o’clock in the morning I was showing a profit of £580. At this stage I should have gone back to bed.

Instead a greedy notion came over me that the London market might be given an extra boost by any early gains on Wall Street, which were indicated by the direction of the futures markets. I hadn’t exactly played a cautious game up until this point, but now I really lost the plot. By using up my credit limits with both companies I was able to place a total of £40 a point on both the FTSE 100 and the Wall Street Dow-Jones index.

Within minutes of opening, Wall Street had indeed soared to new heights. However, perversely, the London market seemed to be slipping. Unknown to me, Merrill Lynch was taking advantage of the market conditions to offload a large number of March FTSE futures. As the effect of this sell off took hold, first the FTSE, then the Dow began to slide down, with me on the wrong side of the market.

At this stage I should have panicked and sold, taking the loss on the chin. Instead I calmed myself down, reassured myself that the market would turn around and watched it plummet for the next five hours.

A kind of fear-induced paralysis came over me. I was terrified to close my positions, because it would mean taking the losses. At the same time a residual optimism was telling me that the markets must surely turn around again and that I could still end up with a handsome profit on the day.

Head in hands, I bowed to the inevitable at around 8pm, with just an hour left of trading in the USA. I started ringing around, closing positions and counting the cost.

Which was huge.

To close out all of my positions left me with a net loss of just over £8,000, wiping out a large portion of my bonus and completely annihilating any illusions of my possessing the ability to trade in the futures markets.

Bizarrely, one of the people whom I instructed to close my account, who had just told me that I owed his company £6,000, asked me whether there was any particular reason why I was closing the account. I guess they must have people throwing money at them like this on a regular basis. And coming back for more.

I told him that I had passed my personal pain threshold by a sizeable margin and didn’t want to have the mechanism open for me to repeat the experience.

So four days into my career as a financial speculator, I resigned. I wouldn’t say that it’s impossible to make money in that way. What it does take is a certain discipline to know when to let your profits ride and when to cut them, when to take an early loss to avoid a later larger loss. A sensible approach to the management of risk, including the use of the range of limited risk products available.

And a lack of naive optimism.

Ah well, back to the grind. Anyone know of any vacancies for an unexpectedly available senior audit manager, with extensive experience in derivatives risk management?

Many thanks for reading!

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