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Lesson 6: How Fortunes Are Made

HOW FORTUNES ARE MADE

by
Bruce Gould

Bessie Anderson Stanley defines "Success" as follows: He has achieved success who has lived well, laughed often, and loved much; who has enjoyed the truth of pure women, the respect of intelligent men and the love of little children; who has filled his niche and accomplished his task; who has left the world a better place than he found it, whether by an improved poppy, a pretty poem, or a rescued soul; who has never lacked appreciation of earth's beauty or failed to express it; who has always looked for the best in others and given them the best he had; whose life was an inspiration; whose memory a benediction.

Success is not counted by the money you have. There are many among us who have accumulated money and yet are far from successful. Money in itself is simply a means to other ends, it is without value except in relationship to the ends which can be obtained through it. Howard Hughes accumulated a substantial sum of money and yet was poor in the area of life's treasures. Concentration solely upon the accumulation of money is not a pursuit I would suggest to any person, friend or enemy. For some money can act as a security blanket, as the sole object in their environment worthy of trust, the sole object which will never let a person down. And yet, those who seek money and not the objects which money can bring to one, sacrifice human relationships and human attributes along the way. I recently read a book entitled "Money Madness" which deals with the problems associated with the accumulation of and/or love for money. It is one thing to seek it when you have none. It is another to handle it once you have a significant sum. For many people, especially those who seek money as the sole object of trust within their environment, a cruel joke is taking place. The more money one accumulates, the less trusting one becomes of other people, the more one turns to money itself as security and in the end never realizes that additional sums do not add happiness and security but add fear and unhappiness. Once money becomes more important than living, love, caring, warmth, kindness, giving, sharing, laughing, the object of one's pursuit (money) becomes the devil in disguise. Money can indeed be the devil and many a person has paid the price in lost love and living for valuing numbers on paper above all else. If you seek money for money's sake, the price you pay for the numbers on paper will be tragically high.

There are certain universal laws which govern life as we know it. Laws which when followed allow one to squeeze more out of life than if such laws are ignored. You can be happy as an embezzler or as a dealer in illegal drugs. Undoubtedly some people who are involved in such activities are happy. But for the overwhelming majority of us, wronging other people for one's own ends will not bring happiness. Violating mores or rules worked out through centuries of human development may bring some people happiness, but not 1 of a 1,000. We have all read of the fugitive who has remained undetected for 20 years and yet surrenders simply to "live with himself". He has paid through his mental anguish for his inability to remain within the laws of the human race. I never believed Richard Nixon should be put in jail, never for a minute. Mr. Nixon knew he went on national television and lied to the American people and people of the world. That is a shame he will have to live with forever and the price he is paying few men could sustain. It is a marked tribute to Mr. Nixon that he has survived under these circumstances for few among us could ever withstand the pressure and humiliation Mr. Nixon had endured.

If one wishes to succeed in life, the truisms and moral rules and mores of our societies, when followed, are far more likely to provide beneficial returns than unhappy returns. "Do unto others as you would have them do unto you", and "you shall reap what you sow" did not arrive for the human race from outer space. These and many other rules are the product of human experience both happy and unhappy and few among us have not experienced the working of these rules firsthand.

So, in the accumulation of wealth, certain routes to that achievement, when followed, will more often yield positive results than when not followed. Fortunes are rarely made accidentally. Fortunes are made by those who know how to accumulate money and follow the principles of such accumulation.

And, in my opinion, the main avenue to follow in your path to money accumulation involves horizontal and vertical analysis.

As one experiences life, many (the number will depend upon the individual, his resources, luck, and abilities) horizontal opportunities will come before that person. Let's take a typical small businessperson, assume several businesses during a lifespan, some failures and some successful. Our businessperson at one time or another is involved in the following:

  1. Safeway boxboy
  2. Assistant Manager, Safeway
  3. Small grocery store owner (goes broke)
  4. Owner of small shoe store (goes broke)
  5. Works for retail outlet, assn't manager, hardware.
  6. Owns hardware store (marginally successful)
  7. Buys 7-11 (24 hour franchised quick stop outlet). Moderate success.
  8. Buys second 7-11 store, 2 stores now earn him $40,000 annual income.
  9. Buys 3rd,4th,5th stores. Annual income exceeds $100,000.
  10. Buys entire franchise for 7-11 stores for State of Kansas, has 45 stores in state, his personal income exceeds $500,000 annually.
  11. Retires at age 62, net after tax capital upon retirement exceeds $1million.
  12. Judged a success for his peers. Accumulation of wealth accomplished.

1

2

3

4

5

6

7

Boxboy
 

A. Mgr.
 

Grocery
Store

Shoes
 

Hdware
 

Hdware
 

7-11
 

The Horizontal Plane - the seven different business and employment opportunities experienced by this person during a working life. Across the plane the person went, no financial accumulation as a boxboy, assistant manager, grocery store involvement, shoe store involvement, working in a hardware or owning a hardware. Of the first 6 boxes in this person's plane of experience, it wasn't until he came to box #7 that wealth accumulation really began. In terms of making a fortune, the first 6 boxes can be judged a total failure (in and of themselves except as they prepared this person for later work and ownership opportunities).

How did wealth accumulation come about? Simple. It came about from testing many of life's opportunities in a horizontal plane and when success started in one of the boxes on that horizontal plane, the person whose goal it was to achieve wealth shifted from a horizontal plane to a vertical plane. On paper it looked like this:

Wealth accumulation came when the person shifted from a horizontal plane to a vertical plane......when the person had the good sense to recognize that he was finally aboard a "winner" and maximized his efforts and capital staying aboard that winner.

"Grab it if it comes your way" is a line out of a song by Cat Stevens and it has more meaning that the 7 words convey at first listening. When (as you define it) you are on board a winner, grab it and stick with it and run it for all your time and effort will allow. For it is by sticking with winners that goals are achieved and by cutting losing positions (endeavors) short that defeat is minimized.

Success in business is not the rule. It is the exception. Success is highly unlikely. Failure is the norm. If you fail in your venture, that is to be expected.

State
Franchise

7-45
7-25
7-6

5th Store

7-5

4th Store

7-4

3rd Store

7-3

2nd Store

7-2

Boxboy
 

A. Mgr.

Grocery
Store

Shoes
 

Hdware
 

Hdware
 

7-11
 

  
 

1

2

3

4

5

6

7-1

8

It is if you succeed that should cause surprise. You should expect to fail in your various business activities, for more likely than not you will. Failure is the rule, success is the exception.

The reason so few business oriented people accumulate wealth is not because they have failed at a given activity, but because they do not have the time, capital, or endurance to push on until the winner comes. They simply give up and assume they are failures. They are not failures, they are in fact simply proving that success is difficult and that when one looks at opportunities along a horizontal line, failure is quite common.

But it is hard to convince someone who has worked 5 years in a grocery store, 5 years in a hardware store, 7 years in shoes, 3 years here and 4 years there and 5 years another place that success may come. 29 years of one's life is a lot of time, a lot of money, and a lot of effort. Success may in fact never come to that person. That person may never hit "his 7-11 bonanza" and may struggle on from one opportunity on the horizontal plane to another and another and another and finally simply quit. He may well judge his life a failure, but it is not. It is simply stated by saying that this person never hit (or didn't recognize) a winner within the boxes on that person's horizontal opportunity frame. He wasn't a failure, he simply just never hit a winner (or didn't recognize it when he did).

WHAT DOES THIS ALL HAVE TO DO WITH MAKING A FORTUNE AND THE COMMODITY FUTURES MARKETS? A great deal! Commodity trading is business shoved into a short time span, nothing else. It is 50 years shoved into 1 year. It is 25 years shoved into 6 months. It is 6 months shoved into 24 hours. It is opportunity on a horizontal plane shoved before us as traders day after day after day........it is an entrepreneur's dream. It is life without having to wait 50 years to find out if you have the ability to accumulate capital when you have hold of a winner.

1

2

3

4

5

6

7

8

9

10

11

Grocery

Gas
Station

Lawyer

Real
Estate

Oil
Wells

Cattle
Ranch

Car
Dealer

Stationery
Store

Mail
Order

Candy
Shop

Wheat
Ranch

Live
Cattle

Corn

Yen

Ginnie
Mae

Gold

Hogs

Pork
Bellies

Cotton
 

Soybeans

Sugar

Wheat

1

2

3

4

5

6

7

8

9

10

11

What does the grocery business, a gas station, being an attorney, involved in real estate, owning land where oil might exist, having a cattle ranch, owning a car dealership, a stationery store, a mail order business, a candy shop or a wheat ranch have to do with the commodities of cattle, corn, yen, ginnie mae, gold, hogs, pork bellies, cotton, soybeans, sugar and wheat?

Everything. The games are identical. The object of each (from a financial point of view only) is (a) living income (b) wealth accumulation. The people involved in real estate or owning a cattle ranch are identical with the people having 5 contracts of cotton and 3 contracts of sugar. Both wish to earn a regular sum of money and also to accumulate money beyond needs. We in the commodity futures trade are not doing anything which any other person who is seeking those goals is not doing. We are business people just like all the others are business people.

NOW, STOP AND THINK OF OUR ADVANTAGES IN TERMS OF WEALTH ACCUMULATION.

Question (1)

Could any person be all 11 occupations during a single lifetime in the above top line? Probably not, it would be very unlikely for any single person to be involved in all 11 activities in a single life. So, if those 11 are the choices you wish to involve yourself in - in the search for wealth accumulation, you will have to start off by eliminating several of them for you won't have the time to engage in all 11.

Question (2)

Could any person have financial interests in all 11 commodities listed in the second horizontal line? Sure, not just those 11, but 111 more. No problem at all in having a financial interest in live cattle, corn, yen, ginnie mac contracts, gold, hogs, pork bellies, cotton, soybeans, sugar, and wheat. We could even toss in the British Pound, Canadian Dollar, Canadian Barley, Rapeseed, and platinum if we liked. The point is that we as commodity traders have a tremendous advantage from the start in wealth accumulation because we can be involved in several financial activities at a single time.......

Now, assume the businessman is involved in the first line, but he has to select a reasonable list from that 11, say he picks a grocery store, gas station, cattle ranch, car dealer and stationery store. That is 5 from the 11. The chances are that those 5 will occupy him for his entire life. He will have no more time or money left if he does not accumulate money from one of the five selected. He has five chances, it will require the major portion of his life to succeed, so he had better select his five well. Maybe a candy shop, which was not selected, is the business which can be taken from a horizontal to a vertical emphasis. Maybe the business person selected 5, stopped before the candy store, and never got to 6. He never made his fortune because he ran out of time and money before the candy store idea ever came to him. He worked all his life on a horizontal plane and never got to see how skillful he was at making money from a vertical plane. Never had the chance.

BUT THE COMMODITY TRADER is not limited by time. He may be limited by money, but not by time. We have all the time in the world to work on vertical skills. Our excuse for failure will not be that we never got a market which gave us a vertical opportunity. If we fail to accumulate capital it will be because we did not learn how to squeeze capital out of vertical opportunities.

Take the list we started with.............And start with this requirement:

STAY WITH EACH MARKET UNTIL YOU LOSE $200 CAPITAL, IF $200 IS LOST, CUT YOUR LOSSES SHORT AND GET OUT.

Here are the positions you have:

  1. long 2 cattle
  2. short 1 corn
  3. long 1 yen
  4. short 2 silver
  5. long 2 gold
  6. short 2 hogs
  7. long 1 pork belly
  8. short 1 cotton
  9. long 2 soybeans
  10. short 1 sugar
  11. long 2 wheat

Long
2

Short
1

Long
1

Short
2

Long
2

Short
2

Long
1

Short
1

Long
2

Short
1

Long
2

------------------------------------$200 Loss Line--------------------------

You will stay with all your positions until they cross the $200 loss line. Whether it be 3 hours, 3 days, 3 weeks, or 3 months, you will stay with the position until the $200 loss line is crossed. All on a horizontal plane, all having an equal chance (if your ability of picking winners and losers was equal) of crossing that line. And what happens on this horizontal plane?

Within one month, you have a loss in 7 of the 11 commodities. You have a $1400 loss and are out of 63% of your positions. You are a loser already in nearly 2/3 of the positions you took.

What has really happened? What has really happened is not that you are a loser at all. You have merely experienced an economic fact of life that most business opportunities do not provide financial rewards. Failure is the rule, success the exception. You have not failed, you have succeeded, succeeded in proving that failure is the rule, for you 63% of the time you have lost $200 of your capital.

What else has happened? In one month you have been involved in 11 different financial opportunities. 11 in one month. Remember our business person who had to limit his total list to 5 because there was not enough time in that person's life to experience more than 5. You, as a commodity investor, have already progressed through 11 different financial opportunities in a month's time. 7 of the markets have provided losses. You have a 63% loss ratio. But this loss ratio should not disguise from you the fact that you have lived through more markets than a businessman can live through in a lifetime. The opportunities you have experienced exceed the average horizontal opportunities of an average businessman during an entire lifetime. Think about that for a while. The opportunities you have experienced exceed the average horizontal opportunities of an average businessman during an entire lifetime.

Now there is something else.....

You, unlike the 5 business businessman, have an opportunity to test your skills at accumulating capital through vertical application.

What happened to the 4 markets (the 37% of your positions) which did not result in a $200 loss? They are still around. You have been kicked out of 7 of your 11, but 4 are still around and earning a profit. Lets take a look at them.

Up
$1000

Up
$400

Up
$500

Up
$800

 

 

Yen
 

 

 

Hogs
 

Pork
Bellies

 

Soybeans
 

 

 

Unlike the businessman who would not experience 11 opportunities in a lifetime of business and who might never experience vertical success, in a month's time as an investor you have experienced 11 opportunities, have failed in 7, but have success in 4. You have 4 opportunities to work with vertical application within a single month while the businessman never had 1 chance during an entire life. It is sad, but it is very true. Very very true. As a commodity investor you will have more business opportunities in a single month than the average business person has in a lifetime and your skills in working with winners will be tested while the average businessman's may never be tested due to a lack of opportunity. It is sad from the businessman's point of view but this is a true statement.

Wealth accumulation then is nothing more than your ability to work with winners. You don't have to worry about accumulating wealth from losers, for few have that ability. Your wealth accumulation will come solely from your ability to work with winners--------and in our example you have 4 chances to work with winners in a single month. If you don't accumulate wealth it will not be because you have not been given the opportunity (assuming you have sufficient capital to trade more than one market). It will be because you did not develop sufficient skills and patience to wring money from the winners you will be given. You won't have to worry about never having a chance to work with vertical procedures, for you will have plenty of chances. And the more you work with such, the greater your skills will become in making such markets give you the money you deserve for surviving and becoming skillful at your trade.

Forget about commodities for a minute and think of all the successful (financially) people you know. How many made their money from horizontal analysis-trading and how many from vertical? How many truly wealthy people do you know or have read about who were successful on a horizontal plane. Virtually none. They were all successful vertically. Conrad Hilton didn't make his fortune by building one hotel and then opening a car wash. He may have had a car wash before he had a hotel, but once he found hotels and they succeeded, it was hotels, hotels, and more hotels. He had gone from horizontal to vertical. J. D. Rockefeller didn't make his family's wealth by horizontal application. He discovered oil, and then continued in the field where success lay. I know a man (know of him but do not know him personally) in Seattle who had a small store in a key location. It wasn't his first venture, it was one of many along a horizontal line. The store started to earn some income. He started to get a name. He started to sell some of his products by catalog and mail order. He kept his name and put in more stores. He had no special skills beyond those of hundreds of thousands of businessmen in America. But he did recognize opportunity on a vertical scale and he maximized that opportunity. Within a period of years his ownership of that small store and what he had developed was sold for millions. He had accumulated wealth through vertical development of what had started as a horizontal opportunity-experience. Did Ray Kroc who owned McDonalds start one hamburger stand and then open a dry cleaners? No. He is almost a billionaire because the first McDonalds became the first of many thousand. He had a winner, he stayed with it, and wealth was accumulated.

Well our commodity trader of one month has some winners too. Winners in the Japanese Yen, Live Hogs, Pork Bellies, and Soybeans. Four winners (Ray Kroc only had one) and each can help our commodity trader accumulate wealth. Not one chance......but four. And not in a lifetime, but in a single month.

In the spring of 1999, sugar futures declined below five cents a pound. One day sugar will rise to higher levels. When that happens, those who bought at the lower levels will have an opportunity for profit. If sugar does not rise in price in 1999 or in 2000, other markets surely will and those who make wise buying and selling decisions in those other markets will have an opportunity to profit in them.

Big money is made in commodity markets the same way it is made in any other business venture, it is made by testing many products-investments-opportunities and cutting losses short on those which are unsuccessful and maximizing profits on those which are successful. It is taking horizontal opportunities and turning the winners into vertical successes. It is that simple.

And just as there are maxims and rules for life, there are maxims and rules for successful commodity trading on a vertical scale which, when applied with some discipline, will yield success more often than not. Let's look at a few, we have discussed them before,

  1. Don't pour good money after bad. What does that mean? It means if you have a horizontal opportunity which results in a loss, get out and look for another opportunity. Don't continue to put money into a losing opportunity.

  2. Pour good money after good. When you get a winner, add to your investment if you consider the opportunity a sustained one. If you wish to switch from 2 contracts to 10, do it with the winners rather than starting with 2 contracts and averaging down hoping to break even in a losing position.

  3. Scale in your orders. This means, add to winning positions when the profits continue to mount in your favor (if you think the position's move, again, will be sustained).

  4. Realize that big profits take considerable periods of time to be achieved (months generally) and be patient through the use at trailing stops, or other trend following methods during this period of time. Don't be too eager to get out from a winner.

There are many others, but they are elsewhere in the back issues of the newsletter and so there is no need to repeat them. The important consideration which one should reflect on is that as commodity traders we have many advantages which an ordinary businessman does not have. Both in the opportunities for trading and also in the time span in which success can come. We will have more opportunities for failure (and we will fail many times which will keep us humble) but we will also have more opportunities for success ( and many will succeed, time and time again).

We must learn to view opportunities horizontally and not be afraid if we lose now and then. But when we have a winner, we must learn to trade on a vertical scale, maximizing our efforts, time, and capital to earn the money which a winner delivers to those who accurately ride with her.

Not long ago I had a discussion with a friend who works for IBM and who has just gotten involved in commodity trading. He knew me from several years ago when he sold me a typewriter and so, after suffering a loss in the soybean market, he came by to discuss trading. He said that he and two of his friends had split an investment in soybeans, 3 or 4 contracts. This was the only position they had. They bought soybeans with the trend, rode it down against the trend, hated to take a loss, held on, rode it back up with the trend, were about even, it came back down again and they suffered a loss. Probably around $3,000 in total, I would guess, though I didn't ask the precise amount. My own response to this person was as follows. The first mistake you made was to assume that your soybean position had any importance at all. It did not. It had no more importance than the first five cards you might have been dealt in a poker game. You no more had to win with that position in soybeans (to be successful long term) than you have to win with the first hand in poker you are given. That position was totally immaterial in your overall success and abilities to succeed. By watching that position the three of you were attaching more importance to it than it deserved.

By forming any conclusions from your loss, you are giving it significance it does not deserve. It is nothing in your trading program. Absolutely nothing. It matters not. What you have to do is not succeed on the first contract you buy or sell. You have to succeed over a series. That is what is important. If you cannot succeed over a series you will not accumulate money. If you cannot succeed over a single position, that means nothing. Absolutely nothing. You would be far far better off rather than taking 4 contracts in soybeans to have 1 in cotton, l in sugar, and 1 in wheat and soybeans. Then you will not attach more importance to your soybean position than you will to any of the others. If you lose $200 in soybeans, so what, you may make $1000 in sugar. You will not draw conclusions based on a single commodity which the 3 of you watch day in and day out. Would the 3 of you stand behind a single poker hand (the first one dealt that evening) and all bet on it and draw conclusions as to how good a poker player you are because you lost?.... It makes no sense to see a commodity position as an entity any more than it makes to see a poker hand separate from the end results when the chips are finally counted.

TO WIN YOU SIMPLY MUST HAVE THIS ABILITY

  1. The ability to make reasonable judgments on a horizontal plane so you can increase your likelihood of hitting winning positions(which you can work on a vertical plane)beyond mere chance of 50/50.

  2. Once you develop that ability, then you must develop the ability to work with winners, be patient, learn how to add to markets, decide how much capital to commit, develop all the skills which any successful businessman must develop.

  3. Once you develop that ability, then you must overcome the problems which excess money will cause. Handling money in itself is a problem. You must learn to exist in a world where normal sums of capital are dwarfed by the figures you will be dealing in. You must learn that money is simply a means to other ends. It is nothing in itself. It is something to work with, to develop with, to grow with, to do good with. It is not good in and of itself. It is nothing in and of itself. It is simply money, just as a tree is a tree or a rock is a rock. It is what you can do with money that counts and whether you learn to master it or it learns to master you.

HORIZONTAL TO VERTICAL........how money is accumulated.

 

Bruce Gould

 

Always remember that stock, options, and futures trading may involve substantial risks and that past performance is no guarantee of future performance.