Interview With a Trading Legend, Part I

March 16, 2011
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Peter Brandt, author of Diary of a Professional Commodity Trader, may be the greatest trader you’ve never heard of. We consider him a legend thanks to his stunning performance – a thirty-year track record (audited) of 41.6% compound returns.

Just as impressive is the manner in which those returns were achieved. Over a multi-decade span, Peter’s best year topped 600 percent… and yet his worst losing year (of which there were only four) was a single-digit decline of less than 6 percent! (How did he do it? That’s one of the questions he’ll answer.)

Peter’s history is intertwined with the futures markets. He was one of the early hedgers for major commercial operations… an early adopter of Schabacker, Edwards and Magee in commodity trading… and even a trader for the legendary Commodities Corp., the birthplace of “Market Wizards” like Marcus, Kovner, Seykota and Jones.

In addition to the above, Peter is relaxed, down to earth, and an all-around great guy. Mike McD and I had the privilege of hanging out with him over a snowy weekend in Reno/Tahoe, and conducting the following interview.

In part I of this multi-part Mercenary Vault series, you’ll find out all about how Peter got started in trading… how he handled his early “going bust” experiences… and the first big move (in the Swiss Franc) that really put him in business as a trader.

JS

Note: This interview segment is Part I of a series. Also available:

JACK SPARROW: So, just to get things started, this is the Mercenary Trader interview with Peter Brandt, author of Diary of a Professional Commodity Trader. Why don’t you start off by telling us a little bit about how you got interested in trading, and just how your journey in markets began.

PETER BRANDT: Sure. I lived in Chicago… we moved to Chicago in 1972, right out of college. I went to work for a big advertising agency, living in a suburb just north of Chicago – Evanston, Illinois.

I had a young son who played hockey. And so it ended up that a father of another hockey player living just down the street from us was a soybean trader. And I really liked the man, he was a good guy. He’d invite me down to lunch, “Come on down to the Board of Trade and have lunch with me.”

And so I would visit him, and then there was a Board of Trade members’ dining room, which overlooked the trading floor. At the time it overlooked the Wheat pit… and he took me on the floor and I was captivated. These guys are yelling and screaming, shouting matches, pushing people… I thought “This is crazy.”

But I was really entrepreneurial. I had earned my own way in life since I was quite young. I had parents who split up, and I was raised by my mom and we were a welfare family… so from the time I was young I was figuring out ways to make money. And the Chicago Board of Trade was captivating. These floor trader guys had freedom, they didn’t report to anybody, they made their own way in life… they knew how they did at the end of every day… that to me was ideal, and it was a question of just “How do you break into that business?”

JACK SPARROW: So how did you actually break into the business?

PETER BRANDT: I just went literally door to door at the Board of Trade asking people “How do I get into this business?” And it ended up that Continental Grain, owned by a European family, which at the time was the second largest grain exporter in the world next to Cargill, were starting to look to do commercial business with individual farmers and grain users: food companies, smaller exporters, and so on.

And so they wanted to do more on the floor than just their own trading, and they were looking for “customer’s men.” You know, people who could learn the grain business and bring in other customers who could also do the grain business. They had all the memberships so they figured they might as well take the commission, and work the commission side of the business.

So I went to work for Conti, the futures market division of Continental Grain, and at the time I think I was making $28,000 a year in advertising. And so I went to the president of the advertising agency and said “Look, I’m doing this. I’m going down to the Board of Trade, and I’m going to try it out. If I blow it – if I screw up – can I come back in a year and get my job back at a fifty percent raise.” And he said yes!

And so I had the “license to fly.” I went to the Board of Trade, started learning the business, learned the grain business primarily… a little bit of livestock… and my big client in advertising was the Campbell Soup Company (although I also worked on the McDonald’s account).

I knew the president of Campbell’s really well. He was kind of a rebel guy, had been president of Campbell’s Canada and now was heading Campbell’s USA, John Morris, and so I went to him and said: “Why don’t you send a purchasing guy out to Chicago and work with me to determine whether Campbell’s ought to be using futures?” Which they did. A guy came out for a few months.

And the premise was we would go back to the top management team and tell them the truth – either there’s nothing here for you (in respect to futures) or there is something here. And it was just a layup. Campbell’s use of futures was just a no-brainer.

JACK SPARROW: What made it a layup? Why was it such a no-brainer?

PETER BRANDT: Oh, because they used cocoa, they used soybean oil, they used sugar… although sugar is funny, the sugar #11 contract is all the sugar nobody has bought under a long-term agreement. It’s the non-wanted sugar in the world, and that’s why it’s so crazy. Most sugar in the world trades under long-term agreements. It’s called contract sugar. And then you have the #12 Sugar contract in the US which is domestically protected sugar. The #11 sugar is basically the sugar that’s not spoken for. That’s why it vacillates so much, because it only represents about 10 percent of the world’s sugar production. But that portion of the world’s production can disappear quickly. Or it can glut quickly.

So Campbell Soup used sugar, they used beef, they grew 150 million chickens a year from scratch… they contracted with corn growers and bought soybean meal for their grow-outs… and we ended up really working out some fascinating hedges for them. For example we worked out hedges on the feed ratio, the cost to produce cattle, chicken or pork per pound. We’d look at the price of the live pig or cattle on the hoof compared to the different cuts they were using, and so they might buy forward on some of their needs, or they might sell short against their inventory depending on what the spreads were. Or they might sell their chicken production to the Board as iced broilers if it made economic sense to go out in the free market and buy their chickens. So we really got creative in how Campbell Soup used the futures. And they became a big commission client of Continental Grain.

JACK SPARROW: When did the focus shift to your own personal trading?

PETER BRANDT: I knew then that I wanted to start trading for myself. So I started dabbling a little bit, accumulating a little bit of money, starting in ’78, doing some trades… and I didn’t really know what I was doing.

One of the first trades I did came from my friend in Evanston who was the bean trader. I was just learning the business, and he had told me he was really bullish on soybeans: “Peter, I’m REALLY bullish on these beans.”

And so I watched them for a few days – I think they were around $5.50 or so – and I’d saved up a few thousand dollars to speculate. And they crept up like ten cents, and so I bought a contract, and they went up like five more cents – and then they went down twenty cents.

And so I got out with my loss, and eventually saw John again and said: “John, so what about those beans?” And he said “Yeah, was that a magnificent move or what?”

JACK SPARROW (laughing): Oh no…

PETER BRANDT: Yeah, and I said “What are you talking about?” And so it ends up that John is a scalper. He never takes a position home at night. He trades the beans for half a cent to a penny, and he had such a conviction on beans that he had a position he was willing to carry for three or four days. Well I find this out after the fact. He takes ten cents out of the bean market, which for him is a gigantic move, and I wasn’t even thinking that way!

And that was a good lesson. Traders at the Board of Trade would constantly say they were bullish or bearish, and it was a good lesson that the words “bullish” or “bearish” did not mean anything. I would have to ask, “What’s your timeframe? How long do you hold trades? How much money are you looking for in a trade? Where are you wrong – what will tell you that you’re wrong? Why are you bullish or bearish, what do you know?”

And so I learned really early on that bullish or bearish didn’t mean squat.

JACK SPARROW: So was that your “going bust” experience? Or did you have a going bust experience early on, as so many professional traders do?

PETER BRANDT: Sort of, but I went bust in little bits. You know, break open the cookie jar, take two or three thousand bucks out, and trade until I was forced to just trade oats!

JACK SPARROW (laughing): So you kept getting bumped down the ladder on contract margin.

PETER BRANDT: I did. But then I’d build up a little bit, you know, put some money away from Campbell Soup… I also had some money from other customers that came in. One of the things that helped was that I had the nerve to approach Homestake Mining in South Dakota. I knew nothing about gold, and they didn’t do any hedging. But I went and pitched them and they ended up hedging some gold with me. And so they became a gold client. And again, I know nothing about gold. But I was the guy that went and pitched their business.

JACK SPARROW: This was before hedging was a common practice.

PETER BRANDT: Right, nobody hedged. Except for grain merchandizers, companies didn’t hedge. The tax implications of corporate hedging hadn’t been clarified… most commodity-connected companies just didn’t do any hedging.

But I picked up a few valuable clients. I ended up getting another customer that just traded tons of copper – a giant copper user. They made paint for the Navy. You know the gray paint? The paint used on Navy ships had a very large copper content. And that’s what kept the metal from rusting. All that paint that they put on ships contains something like 15 percent copper. So the company was a huge copper user.

And so I had those three clients and that was mainly it. And I would save a couple thousand and I would trade it. I didn’t know what I was doing. I was listening to different people with different ideas, and one guy even had this plastic thing he used to identify cycles. I tried many approaches such as cycles… and seasonals… point and figure charts… fundamentals… I didn’t know what I was doing, and I kept losing money.

To answer your original question, yes, I went broke, but I went broke many times in little amounts. I would save up five grand, save up ten grand, blow it. And I just constantly was losing, not knowing what to do next.

MIKE McDERMOTT: A lot of people would have given up at that point. What made you convinced that you could learn this?

PETER BRANDT: I was in the business and I knew I was going to be there. The commission side of the business was covering my expenses, and I was not risking huge amounts in the trading account. A year had passed and I had stayed… I had come to the point where I was making a lot more than I was making in advertising… so I was making a fairly good living. This was 1978, and I was making sixty or sixty-five thousand dollars a year, which was a lot of money back then.

JACK SPARROW: So you could basically fund your trading experiments.

PETER BRANDT: I could fund the losses, but I still had expenses. I had bought a home, I had a family to support, and I even bought a BMW — the worst car I’ve ever owned, I’ll never own German again.

 

MIKE McDERMOTT (laughing): Ouch, don’t say that.

JACK SPARROW: What led to the breakthrough?

PETER BRANDT: Well I met this guy who said, “I trade these patterns. I buy these chart books each week and I draw these lines and look for geometric patterns. You ought to go down to the Board of Trade bookstore and buy this book by Robert Edwards and John Magee. Buy the book and read it.”

Which I did – the book had a yellow and blue cover. And so I started reading this book, and I felt like “Okay, I’m at home now. I understand this. I can do this.” It just made sense to me. It was clear, it wasn’t mechanical – because at the time people were starting to play with mechanical approaches –

JACK SPARROW: And again this was around 1978?

PETER BRANDT: Yeah, ‘78 or ‘79… and so I consumed this book, gathered some more money, and figured I really liked this approach, and I could trade the approach without going bust again. But I wanted to trade the approach with the proper amount of capital. So I accumulated a pretty good amount to start with compared to previous attempts when I would fund an account with only a few thousand dollars – and then lose the money. I decided I would put a better chunk of change together so that I could actually hold a position and not get knocked out, and I was going to try and trade it the right way.

So I can’t remember the exact amount, $20,000 I think it was. And I started to make a little money. Lose a little, make a little… and I started to make enough that I felt comfortable. Then it was “I just have to make a decision to do this. I can’t be a customer’s guy and a trader.”

And so I left Continental Grain and went off on my own. I still kept a relationship with Campbell Soup to cover expenses, but started trading. And it went well. I made money the first year, made a lot of money the second year… and so my account was growing, but I didn’t feel like “I’ve arrived,” that I had enough where I could say I’m REALLY a trader. I’m still kind of hanging on by my fingernails. But my account was growing.

And then something happened in the currency markets in 1982 that changed the game for me. Foreign currencies were trading at the International Monetary Market divison of the Chicago Mercantile Exchange. And the European currencies set up in a way that just sang a song for me based on the charts. And I felt so strongly, that “this is it…the time to bet the farm.”

And it was Wednesday, the day before Thanksgiving – Thursday was Thanksgiving, Friday the markets were closed in the U.S., Saturday and Sunday the markets were closed. And on Wednesday the Swiss Franc broke out.

MIKE McDERMOTT: The day before Thanksgiving.

PETER BRANDT: Yes, the day before Thanksgiving. And I bought ten contracts, which for me was a lot. That was equal to $1,250,000 Swiss francs, which for me at the time was a huge position. I bought late in the day when the market was already up about 50 points – the market ended up closing something like 70 points higher.

And I called London on Thursday, and the currency traders there just didn’t care what had happened on Wednesday in Chicago. It was “Who cares what the IMM did.” The value of the Swiss Franc did creep higher in London on Thursday, but was still way below where the IMM had finished on Wednesday. I talked a banker into selling me ten contracts of deutschemarks on that Thanksgiving Thursday.

So now I’m long ten Swiss, I’m long ten deutschemarks, it’s Friday… London was still not a believer of Wednesday’s strength at the IMM and the Swiss Franc opened lower in Chicago. But despite Europe’s hesitation, the U.S. took the lead on Friday to strongly rally the European currencies. By the end of the trading day at the IMM on Friday I had a significant profit in both the D-Mark and the Swiss Franc. I had a feeling that on Monday London would again not be a believer of Friday’s rally in the U.S. Yet, I slept well over the weekend. I just felt like “London’s wrong. The U.S. is right.”

By Monday morning the tone in Europe had changed to be in line with the strength in Chicago. The European currencies opened higher at the IMM and didn’t look back. The Swiss Franc and D-Mark just went straight up for the next five weeks.

With that trade, all of a sudden I had a serious amount of money in an account. And from that point on I could seriously consider myself to be a trader.

JACK SPARROW: You reached that critical mass.

PETER BRANDT: I reached that critical mass. I was like the other guys I knew at the Board of Trade who really were traders. All of a sudden I had the capital to “be a trader.” I could hold onto positions, I could build big positions, and I could trade enough to where I didn’t have to triple my money every year to provide living expenses.

Continued in Part II: Mental Milestones



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One Response to Interview With a Trading Legend, Part I

  1. Brett on March 20, 2011 at 12:53 pm

    Fun, easy, smart interview. Thank you.

    I would love to hear more detail about the account size threshold Peter addresses that moved him out of a cycle of "being broke" in a series of small trades.

    Specific details as to how committing to two, $50K positions delivered different results than trading
    10 positions of $10K.

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