John Piper is one of the world’s most respected and able market analysts, and is the UK’s most experienced independent trader in futures and options on the web.
John Piper Interviews Bob Rothman in The Technical Trader, the City’s most respected trading newsletters
John has been trading markets since the mid 80s, trading right through the ’87 Crash, annual turnover exceeding £2m of option premiums on his personal account, managing money in excess of $1m, TV trading contest winner, and founder of The Technical Trader subscription newsletter – the definitive trading resource since 1989.
He is also the best-selling author of The Way To Trade, the classic work on trading psychology that gets deep into the mind of the market, and his 2007 book Binary Betting revolutionises the way we trade today.
JP: It is Wednesday 27th May and I am sitting here with Bob Rothman a professional trader with a difference. Bob do you want to explain?
BR: I call myself a professional gambler. I think both terms are more or less the same, one day you’re trading the next day you’re gambling. It’s all fundamentally the same principal. You buy cheap, sell expensive.
JP: Do you mean that one day you are trading in the sense…
BR: I do regard the trading element of gambling as more of the pussy side of things. Where you take a small secure profit, so trading for me is where I back a horse at 5-1, and then lay it at 4-1 to get a sure win. That would be trading. Whereas just backing it at 5-1 is the gamble. Personally I think trading is bad value because you are giving away too much. If you are laying off part of the bet you have to pay a premium or give a premium price to lay it off.
JP: Yes, with binary bets it is the same thing. If you bail out you miss the lion’s share of the profit. You may do better on the one bet but if you keep doing it you miss out on the big wins.
BR: The value is to iron out fluctuations in your cash flow and also the fluctuations in your emotional state because it maybe you haven’t got what it takes to carry on. By trading you can guarantee you will have some winners all the time but they will be smaller winners. I don’t think you will make as much money by trading out of situations.
JP: Yes, I have come to the same conclusions myself. To succeed profits have got to run.
BR: I tell you where I would trade myself and that is to increase value. Say I wanted £1000 on a horse and you “know” it is going to shorten up (meaning get more expensive to back – Ed.) then I may put £2000 on it and sell £1000 back. So you have increased the value, you have increased your net value on the £1000 that you were willing to bet in the first place.
JP: OK, but say if that does not happen.
BR: Then you have made a bad decision.
JP: You don’t bail out if that happens.
JP: In fact we are getting a bit ahead of ourselves, the first question I was going to ask you was how did you get into this to start with? What attracted you to this business?
when I was a kid, I guess about 16 or 17, I thought it would be cool to be a professional gambler
BR: Well, I tried a couple of times actually. The first time I tried was when I was a kid I guess about 16 or 17 and I thought it would be cool to be a professional gambler. So I tried it for around three months and I could not make it pay.
JP: This was horses?
BR: Yes, horses. Actually I played a bit of cards and I could win money playing cards among friends. But basically I gave it up as a bad idea.
JP: You were quite good at backgammon as I recall.
BR: Backgammon I loved. I think backgammon is a wonderful trading training game for trading skills. Because backgammon teaches you to be honest about your decisions. There are a few situations where there absolutely is a right and a wrong answer. So unless you perform perfectly in those situations where you know there is a right or a wrong answer you have got no chance of performing when the answer is a bit more ambiguous.
I guess the classic one is in the 3 rolls v. the 3 rolls run-off in the end game. The rule is it’s a double and it’s a drop (meaning you do not accept the doubling dice after a double – Ed.). People only take (the dice) when they are steaming, when they are chasing. So you know, if someone takes the dice, that they have a flaw in their decision making process. Usually its because they are emotionally upset because they are losing. Obviously you get into more complex situations where it is not clear cut and it then becomes a matter of opinion.
JP: When we played together I just felt that you had a huge psychological advantage over me for various reasons. I am not quite sure what they were. You seemed to be able to read the game much better and were much less affected psychologically by what was going on. I have never played the game that seriously so I guess that is what I should expect.
BR: There are two edges in backgammon. They are that you maximise your winning possibilities by moving your pieces in such a way that, firstly, more rolls are lucky for you and, secondly. unlucky for your opponent. If you do that well and your opponent doesn’t do it well the result is that you appear to be lucky more and your opponent feels that he is being unlucky.
JP: Hmm, so I was only playing half the game.
If you feel you are not doing well, you start doing worse
BR: Yes, and if you feel you are not doing well, you start doing worse. Apart from that, the other strength is just in making the right decisions. Take the classic example of the doubling dice. The rule is that you double when you have the advantage and you accept the double if you have no less than 25% chance of winning the game. So at a 25% chance it would be a neutral decision; more than 25% you take it and less than 25% you drop.
So, as long as you make the right decision, in other words if you knew you had a 26% chance of the game and you took the cube even though you lost it because you were likely to lose it, as the odds are around 3-1 that you are going to lose, you can be proud of yourself because you made the right decision. It doesn’t matter that you have lost. What does matter is that you have made the right decision.
JP: And you compute that mathematically?
BR: Well, you try to. As I say, in backgammon there are only a few situations where it is absolutely clear cut where you can calculate. The others are matters of opinion. When you play backgammon, even with world experts, there will be a range of opinions. They will argue and they will disagree as to which is the right course of action. Generally they will agree but there will be some moves where no one will know which is the best move.
JP: Interesting! To return to your trading now the first time you tried you were 16 or 17 on the horses…
BR: That didn’t work and the second time was just as I was leaving the second job in my life…
JP: As an accountant?
BR: No, actually no, the first 9 months was with Price Waterhouse and then 9 months with Olivetti. I left and was in business, and my girlfriend, Sandy, broke down on the A3 and got a lift home by a trainer. John Jenkins. He stopped, gave her a life home with an owner in the car and they saw we had stables and we got talking about horses.
I won 3 months salary and I didn’t bet again for another 5 years.
This guy, she told me later, he said something like, “back this horse, Sunnybanks Angel, it will win next week.” The trainer then said, “shut up, shut up, you idiot!” She explained it much more elegantly than that and I thought, hmm, looks like someone has let something slip and they shouldn’t have done. I bet it and I think I went for £1500 which, compared to what I was earning at the time, which was around £500 pm. So I won 3 months salary and I didn’t bet again for another 5 years.
JP: So that was your second go, one bet?
BR: I had the second go and I realised that I did not want to bet again without an advantage. I had realised as a child that I could not make it work and the next time, and this was when I really started betting. Sandy and I split up, we had horses at home and they went into a livery yard and I used to go and ride my horse at the weekend. One weekend I was talking to the guy who was the handyman at the stable. We were just chatting and he said “Oh I backed this horse at 20 to 1 and this one at 16 to1.” My ears pricked up and I said “Oh really, how come you can do that.” He told me he used to work in racing, “I used to ride out, and I hear a lot of stuff . In fact the owners of this place, they have a horse that is going to win in a couple of weeks time called Tom Forrester.
I forgot all about it really. A week or so later I was sat having breakfast and I suddenly thought, crikey that horse will be running soon. I had better check it. I opened up the paper and there it was. It was the first time I had looked at a racing paper for years. I thought, my God, this is a sign, this is karmic resonance (laughs).
I must have intuitively known this was the right day and I was driving into work and I stopped at the traffic lights near the Chessington World of Adventure and there was a Ferrari in the window of the garage there. I looked across and it was a beautiful sunny day and the Ferrari was about 30 grand – this was 20 years ago. And I thought – I’ll win that! That’s it, I’m going to win that Ferrari today.
The horse was 14 to 1. So I went to the bank, I got 2 grand out and I took the morning off work. I said to the guys, I’m just going out for a meeting, and I spread all this money round these betting shops.
JP: You couldn’t put it on all at once?
BR: No, because you would kill the odds. I felt like I had done a good job as they had only shortened up to 12. Which I thought was pretty good. It took a lot of driving around, 50 quid here and a 100 quid there.
JP: But you knew enough about betting to know that you needed to do that?
BR: Oh yes, I remember now, I managed a betting shop before I went to university. That was how I knew that bookmakers, if a stranger came in with a big bet for a horse, they would ring it through to their head office. If two or more shops rang it through the head office would shorten up the horse and so I was putting it in, in fairly small amounts in different betting shops.
JP: So really that job in the betting shop was your apprenticeship almost? The way it turned out.
BR: Yes, it was helpful. Not in picking winners. Anyway, I guess like many people, the race came up, the horse ran absolutely terribly (laughs) and I was choked, I couldn’t believe it, I had just wasted two thousand pounds. I wasn’t well off at the time. I needed the money.
In fact I had split up with Sandy and I was living at a friend’s house in a tiny little box room while she was sitting at home entertaining people around the swimming pool and I was running out of cash.
Anyway, I rode my horse that weekend, and Bill said “Oh hello, I hope you didn’t back that horse, or lose too much on it.” I couldn’t tell him what I had done and I told him I had lost a tenner. And he said “that’s good. Its good, because what happened was their grandmother died and they had a funereal in the morning. So obviously they went to the funeral and they must have unsettled it in some way…
Anyway, finally I start winning and I guess fundamentally my strategy was to identify other people I thought were winners, and help them win by getting money on for them and that way I would be privy to the information and it worked. I met a couple of very good people who mentored me and helped me sift through. I mean at one stage I had around 40 people ringing me up every day with information. It was driving me mad.
But luckily I could turn to one of my mentors and say, I’ve had this guy ringing me up about this horse here. “What an idiot” he said, I’ve spoken to the stables this morning and it’s not even fit. What about this other guy, he has rung me up about this horse. He would say, “that is ludicrous, it is not the right distance for that horse.” So he helped me sift out horses and information and I learnt about the business and then finally I started winning.
The first time I won, I think I won about twelve thousand quid over a couple of weeks and I was going halves with this other professional. I found a guy who used to be a racehorse owner, in fact, he still had horses. He had some outlets and some bookmakers who were taking what in those days were called Sporting Life prices.
In other words they were laying the prices in the paper, fundamentally when they find mugs they would say, look you can have this price in the paper, and I said, don’t you worry, I will give you the bets, and we will win. So I did, I gave him the bets, we lost the first week. I sent him £500 I think.
The second week I think I won about £3,000, the third week around £8,000 and then about another £5,000. It was about £13,000 he owed me and…. he did a runner (laughs).
JP: Oh no!
BR: I caught him, I wondered what was going on, anyway, I caught him one night emptying his office out and he gave me three cheques and they all bounced. The saddest thing was the professional I was working with, he was in
for half, so I had to honour the £6,500 of the £13,000 that we won. So my first major victory actually put me even more in the hock.”
JP: That is not fun is it? So you didn’t know him very well then.
BR: No, I didn’t know him very well. He had been introduced through someone else. It is another of those things you start learning.
JP: What happened to the money do you think.
BR: I don’t think he had the money. I think what happened was, I had given him cash to put the bets on and it turned out he had a horse. He was in trouble and he had a horse that was running, it was running in a cellar somewhere, and he had taken the cash…
JP: A cellar?
BR: A cellar, which is a low grade horse race and I think he was desperate and he had taken the cash that I had given him, and maybe the cash we had won as well, and he had backed his own horse and lost it all. Anyway, he was going skint and he was a sad person. So it was a lesson. It’s not the only time. That’s one thing about trading in the stock market, you don’t get knocked, do you, you always get paid.
JP: Yes, you do, I’ve never had a situation like that.
BR: I had another one. I had a bookmaker and I sent him a £5,000 deposit and I bet with him and I won’t mention names because the guy who used to do his card is now a very major player in racing, but with the bookmaker I bet and won £1,000 so now I’m owed £6,000 and he did a runner (laughs) with my five grand and my winnings. So the first lesson is…getting paid.
JP: This is still 1985/86 we are talking about?
BR: Yes, or maybe 86/87.
JP: And you have been doing this ever since so it is now over twenty years…
(to be continued)