The Wisdom of the Tape

I approached my career by observing successful men in the field and reading everything I could find on the financial markets. At Pershing, I observed Milton Leeds, who appeared godlike to me as he sat on the platform overlooking the trading room in his tailored suits and immaculate, white, custom-made shirts. Over a microphone, he would yell out "99!" which meant that a trade for the firm was forthcoming and would take priority over everything else. The clerks would look up at him in an electric silence until he would call out something like "Buy 3,000 Telephone at the market!"

Leeds was known as a "tape reader," but what he generally did was trade on news. He would sit and watch the Dow Jones and Reuters tapes for news, and the moment any significant news broke he would make a decision and place an order. In seconds, his floor brokers were executing his order. His quickness of mind in judging the impact of news on the market plus the physical setup of his organization gave him a jump on the market, and that's how he made so much money. He was a very shrewd man, and his trading record was excellent, especially in its consistency. Although I never emulated his particular methods, his very image became a symbol of success for me. I thought that I wanted nothing more than to become a successful tape reader.

In those days, tape reading was the way most well-known traders and speculators made their money, and I intended some day to join their ranks. I read the few books that were out on the subject, and practiced watching the tape and memorizing the latest print on many different stocks. Though consistent practice, I began to get a sense of the market.

For those of you who don't know about tape reading, it was the infant that grew into modern technical analysis. As technical analysis does today, tape reading relied on pattern recognition. The biggest difference was that the pattern recognition was as much or more subconscious than conscious. Like being "on" in sports, if you stopped to ask yourself what you were doing right, you could lose your concentration. All kinds of factors came into play, too many for your mind to be explicitly aware of. You watched a group of 10 to 40 stocks, constantly memorizing prices, previous high and low points, and volume levels. Simultaneously, you were subconsciously aware of the speed and rhythm of the tape movement, the sound of the ticker, the frequency of new prints on a specific stock, the rate of change of prices of the market averages and on any given stock, and repeating price and volume patterns. The subconscious conclusions drawn from all this contributed to what was often called an "intuitive feel" for the market.

Advances in knowledge, particularly in computer and communications technology, have made tape reading a dead art. Today, all the formerly "intuitive" knowledge is available at the fingertips of anyone who can afford to pay for any of the fine computerized information systems available. You can track the movement of any stock, stock group, index, or futures market with charts that are updated automatically tick by tick. With some software, you can draw trendlines, alarm-buy and -sell points, and much more. I believe tape reading required a special kind of aptitude that just isn't practical or necessary anymore, except maybe on the floor of the exchanges. Consequently, trading is open to a wider field of competition.

There is at least one thing, however, that all good tape readers knew that still holds true today. When you make a trading decision, you should feel absolutely confident that you are right, but you must also recognize that the market can prove you wrong. In other words, you are absolutely right until you are proven wrong. Consequently, you have to trade by rules and principles that take precedence over your feelings and wishes. Whenever you buy or sell any market, you have to ask yourself, "At what point will the market prove that I'm wrong?" Once you establish that point, nothing should stop you from closing out when the market hits it. This is the basis for the rule: Cut your losses short. Violating this rule is the single biggest reason that people lose large sums of money in the financial markets. It is a curiosity of human nature that no matter how many books talk about this, saying the same thing in different ways, people still keep making the same mistake. It is my investigation of this problem, and my pursuit of an explanation that led to my interest in the emotional and psychological part of trading.

Back to ancient history. Along with working at Pershing, I enrolled in night school at Queens College to study economics and finance. In addition, I began to read The Wall Street Journal and whatever books I could find on the markets. After six months making $65 a week at Pershing, I did some disastrous time on a statistics desk as Standard & Poor's. The pay was better, $90 per week, but I simply couldn't perform well in the hushed, library-like atmosphere, crunching and transferring numbers from one column to the next for hours on end. I used to be grateful when somebody sneezed; it gave me the opportunity to say "Bless you!" and break the oppressive silence. I made too many mistakes, and I got fired. It was my first failure in a job, and I was too devastated to have the sense to be thankful to the guy who gently encouraged me to pursue my trading career, but to take a different path within it.

Fortunately, my courses in accounting at college helped me to land a position maintaining the books, accounts, and records in the private tax department for 12 of the 342 partners at Lehman Brothers in late 1966. Lehman Brothers, a pioneering firm in investment banking, made a fortune on such deals as buying huge quantities of Litton Industries at four cents a share and holding it while it appreciated to $120 a share. Working at Lehman Brothers, I got an insider's look at the world of investment banking and a first-hand view of the stock and options portfolios of one of the world's largest market participants. I gained an understanding of how options worked and became somewhat of an expert in options tax accounting.

I learned a huge lesson at Lehman Brothers that I'll never forget. In keeping the books, I knew how much money these guys made. One day, in going through the paperwork, I saw that Lehman was building up a huge position in Superior Electric for its trust funds. In my youthful naïveté, I figured that the firm must know what it was doing, so I called [my friend] Harry Lorayne and told him about it. On my say-so, Harry took a large position of his own in the stock, going long at $44 per share. Over the next few months, I watched in dismay as the stock price plunged to $30. Harry closed his position, losing $40,000 on the trade. I felt worse about it than any personal loss I had ever suffered. It was the last time I ever recommended a stock to a friend but, unfortunately, not the last time I would be suckered into taking a position because people who "knew what they were doing" were involved. But I did learn a lesson: Don't do your friends a favor by offering them unsolicited advice on any market position. It's one thing to manage someone's money, even a friend's, on a professional basis; if you lose, it's just part of the professional agreement. It's another thing to offer market investment advicewhen you think you're doing people a favor – you usually hurt them more than you help them.

Good investing,

Victor Sperandeo