Trading Lesson 2: The 90’s Were Alive

Time for another trading lesson.  Back in 1996 I took a job with Sunkist Growers as their Pension and Investments Manager.  I was hired to manage pension assets for a mature fund.  By mature this means there were many beneficiaries drawing monthly pensions, and as the company had been around 100 years the plan was old, I was charged with stepping up the pace of returns relative to the minimum required contribution by the company owners.

The 90’s were a time when markets started to rise sharply, and as the decade ended there was a thirst for risk, not to mention a flood of liquidity by the Fed over a potential scare from Y2K.  That turned out to be unfounded, but by then the horse was out of the barn and stock prices had catapulted to nosebleed levels.  It was certainly an overvalued stock market, and I was fully entrenched in the bubble.  It was a fun ride, but a great lesson in humility, risk management and diversification.

As I started my career as pension manager, on the side I had a small stake of 7K in my personal trading account.  Not much to work with, but I could margin up and that would at least give me a five figure stake, and as long as I was paying attention then I would be careful.  I wasn’t trading options back then (well, only sparingly to sell premium) but I was fascinated by the internet and dotcom names that would move sharply each day.

Now, this time period had its share is problems – the Asian contagion in 1997, the Russian Ruble crisis in 1998 and Long Term Capital Management blowup the same year.  These events were quite large and concerning.  The asian crisis made some wonder about an worldwide economic meltdown. Long Term Capital threatened to cripple the bond market severely.  But, as we know these crises are often contained and fixed with capital infusions.

With heavy flows of capital into our equity markets, a budding new industry called the internet and IPO’s coming nearly on a daily basis there was a good appetite for risk.  Valuations didn’t seem to matter as money continued to chase stocks.  401K’s were being stuffed, mutual fund flows hit a zenith during this time.  Equities were the place to be, markets were soaring to all time highs.  The talk of cocktail parties and events were ‘my account is up xxx% this month alone — it is so easy’.  Or, so they thought!

Back at my desk, I was thriving in this asset bubble.  The flavors of the day – be it Yahoo, Doubleclick, CNET, CMGI, Internet Capital Group, Excite,, Lycos or Infospace – these stocks were white hot and getting hotter by the day.  I of course couldn’t resist playing the game here, my job still a priority.  Yet, the temptation was real and satiating and I could not get off the gravy train if I tried.  My little account would explode each day, week and month. I would leap frog from stock to stock, buying and selling, buying and selling.  It worked though, as by the end of the millennium my 7K had grown to over 450K in equity value.

Today, many of these companies are history.

I did it of course by margining up to the hilt at all times, only selling stuff when it looked bad (which wasn’t often, the markets were quite forgiving).  By end of February my equity had grown to 550K, and I had over 1 million in stock holdings.  Hence, about 50% margin.  Now, I did take some off the table to start my hedge fund, pay off some bills and some much needed home repairs. But the margin balance was far to big, and that would eventually cause a tumble.  That was a grave error that would bite me hard over the next few months.   That will be my next story.