Futures Trader in Love With Game : Smolen Plays the Market With the Same Zeal as in a Bridge Tournament
Outside, an incessant Santa Ana wind has blown the haze off the San Fernando Valley, and from Michael Smolen’s Woodland Hills home, the eye can see from Ventura to Pasadena.
Smolen, a paunchy, 48-year-old wheeler-dealer, couldn’t care less. He has eyes only for the hieroglyphics of Wall Street streaming across the two muted television sets in his living room. One is tuned to Financial News Network; the other picks up Channel 22, a local station specializing in finance.
Smolen, who gave up a personal injury law practice last year to become a full-time futures trader, is rooted in an overstuffed leather chair aimed at the two sets. Within easy reach are three essential tools of his trade: a portable calculator, a remote-control television zapper and a cordless telephone pre-programmed with the numbers of the two discount brokers who share his $400,000 account.
Today, a typical trading day here in Woodland Hills, Smolen has taken positions in three of the four markets he allows himself to trade in. He has bought 18 futures contracts for U.S. Treasury bonds. He has also bought some silver contracts and has “sold short” futures on two stock indexes, betting that the market will drop. Today is not a day for trading Japanese yen, French francs or West German marks, Smolen’s favorite currencies for speculating.
Ahead of the Game
When the trading day ends, some eight hours after it began, Smolen is ahead of the game. He has sold nine of his 18 bond contracts, producing actual profits of about $2,800, and his remaining nine contracts have increased nearly $4,800 in value. But his silver position has dropped $300 in value and doesn’t look solid. And those stock index futures, which performed so well the day before, have just erased the earlier gain.
Fewer Individual Traders
Still, Smolen is a decidedly happy trader. “Before I did this, I used to hate Mondays. Now I hate Saturdays because the markets are closed,” he says. “My only hope is that I can do well enough at this so I won’t have to go back and earn a traditional living.”
By all measures, Smolen is small potatoes in the high-rolling world of commodity and financial futures trading. According to the most recent surveys, individual investors account for less than 30% of the trading on the nation’s 12 commodity exchanges. And their ranks continue to thin as activity on the exchanges is increasingly dominated by banks, insurance companies, pension funds and corporations.
Futures are contracts to buy or sell a specified amount of a commodity or financial instrument for a set price on a specified date in the future. Futures trading is a highly speculative activity, often employing complex market strategies and high-stakes betting.
Nevertheless, commodity and financial futures trading offers a panache and a promise, albeit elusive, of overnight riches that simple trading on a stock exchange can’t match. And Smolen, who has been trading futures off and on for the last two dozen years, is utterly hooked.
Although a slick trader can make some very fast and very big money, the vast majority of individual investors don’t. Including Smolen. “No one I know who does what I do makes any money,” he says. “They say 90% of investors lose money, but I think it’s closer to 98%.”
Since he began playing the futures markets full time, though, Smolen has managed to break even. He hasn’t lost the nest egg he accumulated from earlier trading; but he hasn’t added to it much, either. Yet he professes little concern for the results, so long as he can maintain a sufficient stake to continue. It’s the process that totally absorbs him.
Starts Day Early
“It’s just a game, that’s all; a vehicle for a socially acceptable form of gambling,” he acknowledges. “A guy who goes to Las Vegas and gambles all the time is socially unacceptable. But if you say you’re a futures trader, it’s OK. But essentially it’s the same thing.”
Smolen shrugs off the recent allegations of fraud in Chicago’s futures markets and likens it to the cheating known to exist in other forms of gambling. “You can complain about it,” he says. “But when it’s the only game in town, you accept it.”
On a typical day, and today is one of those, Smolen awakens at 4:45 a.m. and is ready to begin trading when the markets open 35 minutes later. Within the first hour of trading, Smolen has placed virtually all of his orders for the day, carefully following the agenda he mapped out the day before.
He periodically checks on his positions throughout the morning, changing them as the agenda dictates. The two television sets provide one barometer. For additional information, he calls one or both of his brokers. His moves vary little from the daily script he prepares every afternoon following the market close.
Smolen is what is known as a technical trader. He doesn’t care about world strife and the effect it will have on markets; he doesn’t worry about what the big banks are doing with their prime rates; he doesn’t give a whit about the balance of trade with the Japanese or the stability of the dollar abroad.
Instead, he watches a handful of arcane indicators and indexes that others have created, and some that he has created himself. Some indicators track the differences between the highs and lows of certain markets; others track percentage movements in certain markets. One of Smolen’s favorites is the “Standard & Poor’s oscillator,” which plots and compares the moving average of a portion of the S&P; index over five- and 35-day periods.
Accomplished Bridge Player
Somewhere in all these numbers that Smolen has captured and massaged on his personal computer is a message that dictates when he should buy and sell.
About the only respite from the futures market in Smolen’s life is his bridge game. He’s a tournament-level player, ranked No. 23 in all-time points by the American Contract Bridge League. It probably comes as no surprise that he attacks the game with the same intensity that he uses in investing.
Evenings, weekends and vacations are spent at bridge tournaments. Recreational reading tends to be bridge manuals. To relax, Smolen will think through a complicated bridge hand.
“I’m one of those obsessive-compulsive persons,” he admits. “If one is good, then I figure 200 is better. . . . If it weren’t this, I’d be doing something else 16 hours a day.”
Smolen worked for years to earn this “perfect” life style.
After graduating from law school at UC Berkeley’s Boalt Hall in 1965--the same class as former state Supreme Court Chief Justice Rose Elizabeth Bird--Smolen spent most of the next decade working as a government prosecutor. In 1974, he opened his own law practice, specializing in personal injury and criminal defense cases. At about the same time, Smolen was divorced from his wife of 13 years and the mother of his two children.
In the early 1980s, Smolen discovered technical trading, and for the next several years he split his time between his law practice and his investing. He finally gave up his law practice after discovering that he suffers from a potentially life-threatening blood disorder. “If I’m not going to be around forever, I might as well be happy,” he shrugs.
Last July, Smolen and his girlfriend, Randi Montin, each sold their houses and paid all cash for the Woodland Hills home they share. Smolen doesn’t want the pressure of a monthly mortgage to interfere with his trading.
Controls His Emotions
Montin, a divorced mother of two college students, is happy to oblige Smolen’s quest. A nationally ranked bridge player herself, Montin plays the stock market and manages her real estate investments while Smolen is glued to the television sets and his investment guides.
Today, when the last of the markets closes at 1:15 p.m. PST, Smolen is unfazed by his winnings. “You can’t get too high on good days or too low on down days,” he reflects. “You can’t get too close to it emotionally.”
After lunch and perhaps a nap, Smolen enters the results of the day--both his and the markets he follows--into the computer. And for the next hour he plots tomorrow’s course. This activity, he says, is the “real work” of trading.
For help, Smolen has recently purchased G.E.T., a new piece of personal computer software that he uses along with two other software programs to make his trading decisions. But he has six other indicators for his bond trading alone, and several additional indexes that he uses to guide his activity in the currency, stock index and silver markets.
He subscribes to several telephone hot line services and market newsletters, including the Elliott Wave Theorist and the Short Term Consensus Hotline. But his all-time favorite remains the Market Mania Newsletter, published by Glenn S. Cutler in a San Francisco suburb.
“It’s like handicapping the ponies,” he says of his after-market work. “You do all the studying and comparing and by the time you place your bet, the real work has been done. Watching the race is just for the excitement. You don’t have to do it to win.”
Nevertheless, he will be there tomorrow.