The Best Trader In the World Worked for Bernie Madoff

The night Bernie Madoff got caught for running a $60 billion Ponzi scheme I got a call from my friend “Eddie” (not his real name) who for many years worked for Madoff.

I couldn’t tell if he was crying but he was very upset. “I can’t believe it,” he said, “Bernie was like a father to me. Mark Madoff was like a brother to me.”

We spoke on and off all night as more news came in and he came to grips with the new world he was living in.

I called Eddie yesterday and said I wanted to write an article about him and how I thought he was maybe the best trader I ever knew.

I’ve met and worked with over a thousand traders. I traded for hedge funds. I ran a fund of hedge funds. I’ve written five books on trading.

He laughed. For two reasons:

  1. He never thinks he’s a good trader.
  2. He was afraid his name would be used. “I can’t have my name out there. I can’t be associated with Madoff at this point.”

Eddie lived right next door to me for years. We met  in 2004 or 2003.

He always wanted to work with me because he had read my articles and books about trading. I always said no. I never told him the real reason I didn’t want to work with him.

The real reason is I would’ve brought his results down. I wasn’t as good as him by a longshot.

Every day he wanted to talk his trades with me. He’d stop by and we’d chat for an hour or so about his trades. Sometimes I avoided him for a few weeks at a time. Because that’s the moron I am. I don’t really know how to talk to people.

My daughter, Josie, would see him in the street and say, “hey, there’s your friend, lets talk to him.” And I would be like, “Josie, shut the F up and keep walking so he doesn’t see us.”

But 6 years olds don’t understand. “Why, Daddy, why?” And I wouldn’t explain, leaving a volcano sized hole in her brain about the way humans interact.

Oh well, she’ll figure out shame eventually. And it won’t be a pretty lesson.

Eddie worked on the prop trading desk for Bernie Madoff. Not the hedge fund that was later exposed as a total Ponzi scheme.

One time we were riding into the city together. He said, “James, what am I going to do? I want to move to the hedge fund side but Bernie won’t let me.

He said, ‘you’re not ready for the hedge fund side’ and I can’t understand it. I’ve put up good results on the prop side. I’ve had 35 up months out of the past 36. I’m up a huge amount of money for him. Why won’t Bernie put me on the hedge fund side?”

Since I’m always thinking I came up with a brilliant idea right then and there. One that would not only solve Eddie’s problem but would benefit me immensely. That’s the way I think. “Why don’t you ask Bernie if you could set up a feeder fund into the hedge fund side. I can help you raise the money for it. With Bernie’s results I can raise over $100 million no problem.”

What a stupid stupid man I am. Thank god Eddie just laughed and said, “I don’t know, James. I just want to trade.”  Else maybe we’d all be in jail or suicided by now.

(this guy ran a feeder fund into madoff’s fund. He killed himself. His family traces its wealth back to the 1600s. Doesn’t matter.)

So, on Bernie’s advice, Eddie left the Madoff firm and went working for other hedge funds where he continued to rack up successful year after successful year, proving that it didn’t matter whether he was at Madoff or sitting at home, or sitting anywhere for that matter. He knew how to trade.

I saw him trade everything from stocks to carbon credits, to electricity futures to fish oil futures over the years.

He’s married to a beautiful wife. Has beautiful kids, lives on a farm with views in every direction. Collects beat up race cars and fixes them. He escaped the misery.

Quickly, some stories:

One time Eddie brought me in to meet Madoff. I’ve written about this before and why they rejected me.

But one thing Mark Madoff (R.I.P.) told me was, “See all these traders out there”, and he pointed out all the prop traders sitting on the desks outside his glass office.

“Most of them are useless. Computers are better than them.” I think Mark Madoff was legit and didn’t know what was going on. Maybe he was also stupid and turned a blind eye, which one can argue makes him just as illegal. But he seemed focused on just building up the prop side, which I knew through Eddie was completely legit.

(Mark had it all. Then killed himself)

Another story: the night Madoff got caught Eddie was telling me, “oh man, if I had stayed there I probably would’ve lost a million dollar bonus. I can’t even imagine what all those guys are going to do.”

A few weeks later I ran into “Meade” (not his real name). He had earned and then lost well over a million dollar bonus when the Ponzi scheme was revealed. I think there’s a trial still going on because he once ran Andrew Madoff in the street and beat the crap out of him. A lot of pain happened. Eddie was lucky. But there’s always a reason people are lucky.

One time a woman from Minnesota called me after I wrote an article about Madoff. She had lost her entire $800,000 savings. She was 57 years old and retired. She was crying on the phone. “What am I going to do now? I have no money.”

Its horrible. I told her. But let’s just focus for a second. Do you have any interests?

“I used to love designing furniture,” she told me.

Ok, I said, Do you believe in God? I do, she said. Ok, I said, now we have to get real for a second and you have to do what I tell you: put your house up for sale immediately and get the equity out of that. Then you’re going to have to work. You have to understand this. The world is different now. The money is gone. And all throughout this, you’re going to have to pray every day to God. He wants you to do well.

She was crying. But she agreed. She said, “And what is it with all the jews? They keep saying in the newspaper that the jews lost all their money with Madoff. They forget about all the Christians who lost money with Madoff also. We’re all good Christians in Minnesota.”

Another time I ran into “Howard J” (who I wrote about in “All You Have to Do is Ask”) and he said to me, “Jimmy, what are these people going to do? They’re 80 years old. They play golf every day. They thought they had $3 million with Bernie. Now they have $0. Their only choice is to kill themselves. You’re going to see non-stop suicides in the next few months.”

I followed Eddie’s trades almost every day for years. I can tell you what I thought made him a great trader.

A) He’s probably the most humble trader I know

He never thinks he’s a good trader. He moved into the smallest house in the world, a thousand miles from the city, becacuse he assumed he was going to be fired any day for making a horrible trade.

He still thinks this way. Humility is not something you can learn. As an example, the worst trader I know is always convinced he is right. He calls me up and says, “Why is the market doing this? Doesn’t everyone see that it’s being manipulated by the government and by the big funds?”

My friend, the mad trader, never admits he’s wrong. And every day he loses money. If you’re Captain Ahab, there’s only one way this story ends: Moby Dick kills you. Every good trader I know is infinitely humble.

B) The Eddie Technique: I call it “news arbitrage”

I’ll demonstrate via example.

Let’s say some data about oil reserves was going to come out at 10am. Eddie would pick a basket of relatively low volatile oil stocks. He’d have an idea of how the data was going to come out and how the stocks would react. He’d make his bet.

If the data came out differently than he expected, he’d get out instantly. If the data came out as he expected but the stocks reacted differently than he thought they should, he’d be out within five seconds.

He had no religion when it came to the markets. If they didn’t move the way he wanted he didn’t come up conspiracy theories to support his case. He was out. He didn’t lose money. That was his only religion.

“The market is too tough,” he told me. “If something happened different than I expected, I was out.” I was about to write that he said, “I’d get the hell out.” But Eddie didn’t say “Hell.” If the stocks reacted like he wanted them to, he’d stay in for about two minutes tops, because he knew eventually they’d reverse direction when the traders had their fill.

C) The Eddie Technique, part II

He always went into stocks that were low volatility.

He didn’t want to take the chance he’d go to the bathroom,  potentially standing right next to Bernie Madoff in next urinal over, and then come back to his computer and a stock would be 10% against him.

He’d get comfortable with a stock like HPQ. He’d learn how it works. He’d watch how the specialists on the floor of the NYSE would play the stock. He’d learn who the major players were in the stock.

If someone was selling 3,000,000 shares he’d watch and wait for the selling to be over. Then he’d start buying. If the seller started again, he’d get out.

Otherwise, he’d ride the stock for a few minutes and then get out. He had about five stocks like this and he told me it would take a few months to really learn the behavior of some stocks.

D) The Eddie Technique, part III

He studied his own statistics every night.

For instance, one time he noticed that for several months he had basically broken even on Ford stock. Ford was one of the stocks he had spent months studying to get used to its behavior.

He thought Ford was going to be a big money maker for him. But when he saw that over time he had broken even on Ford over a several month period, he dropped it. “I didn’t understand it like I thought I did,” he said.

E) TET, part IV

He would take a basket of stocks, like all the natural gas stocks. They all traded together. If one of them was veering off, i.e. not trading with the rest, he’d look to see if there were big sellers or any big news.

If there was no big news, he’d go long the stock. If he lost money on it after a few seconds, he’d get out of it. Otherwise, he’d wait for it to trade with the rest of the group.

You know how Eddie met Madoff? He was in Grand Central and found a wallet with a thousand dollars in it. It doesn’t matter if the wallet had a million dollars in it. He called up the number on the business card in the wallet and returned it.

The owner of the wallet was a trader who worked right next to Mark Madoff. They hired Eddie on the spot when he came in.

This is not a story about Madoff, or suicide, or trading. This isn’t even a story about Eddie. Eddie wanted to read the article before I posted but I said no. This is a story about how being a humble, good person has its rewards. The reward is life.

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