Bill Lipschutz: The Sultan of Currencies

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What happened to architecture?

What happened to architecture?

Well, I had heard that you have a degree in architecture. How is it that you ended up as a trader?

While I was enrolled in the architectural program at Cornell, my grandmother died and left me a portfolio of a hundred different stocks with a total value of $12,000, which I liquidated at great cost because all the positions were odd lots. The proceeds provided me with risk capital. I found myself using more and more of my time playing around with the stock market. It wasn't that I got less interested in architecture, I just became a lot more interested in trading.

Also, architecture is very much an Old World profession. There is a long apprenticeship-three years in this country-before you can take your licensing exam. Then you spend many more years as a draftsman. It takes a long time before you get to me point where you have control over the design process.

Did you get your degree eventually?

Yes, of course. Actually, I got two degrees. The full-time architectural program took five years. It was not unusual for architectural students to also enroll in other courses and take longer to finish their degree. I ended up taking a lot of business courses and also earned an M.B.A.

What happened after you graduated Cornell? Did you get a job related to architecture?

No, I never practiced as an architect because of the long apprenticeship process I just explained. I went directly to work for Salomon.

How did you get that job?

It's typical for students in the M.B.A. program to get business-related summer jobs. In the summer of 1981 I got a job at Salomon Brothers. By that time, I was trading stock options very actively for my own account.

Was this the account you started with the $12,000 your grandmother left you?

Yes, and by this time I had built it up a bit.

What did you know about stock options when you started trading?

I didn't know a whole lot.

Then on what basis did you make your trading decisions?

I tried to read everything I could on the subject. I spent a lot of time in the library reading annual company reports. I became an avid reader of the various financial periodicals such as The Economist, Barron's, and Value Line.

I also began to watch the stock tape on cable. Because Ithaca, New York, is surrounded by mountains, it has particularly poor television reception. As a result, it was one of the first places in the country to get cable TV in the early 1970s. One of the channels had a fifteen-minute delayed stock tape. I spent many hours watching the tape and, over time, I seemed to develop a feel for the price action.

Was that when you decided to become a trader?

I can't remember making any conscious decision, "I want to be a trader; I don't want to be an architect." It was a gradual process. Trading literally took over my life.

Was the Salomon summer job related to trading?

My wife and I met while I was attending Cornell. She's very aggressive and has a very strong economics background. The previous summer she had managed to get a job working for Dr. Henry Kaufman (a world- renowned economist) in the bond research department. I subsequently met her immediate superior, who also happened to be a Cornell alumnus. He arranged for me to interview with Henry Kaufman for the same position my wife had held (by this time, she had graduated and had a full-time job).

Ironically, around the same time, Salomon Brothers sent a representative to Cornell to do recruiting. I was invited to come to New York to interview for their summer sales and trading intern program. I was interviewed by Sidney Gold, the head of Salomon's proprietary equity options desk. Sidney is a very high-strung guy who speaks very, very fast.

He took me into an office that had a glass wall facing out onto a large trading room, with a view of an electronic tape running across the wall. I sat with my back to the tape, and the whole time he was interviewing me, he was also watching the tape. He started firing questions at me, one after the other. Here I am, a college kid, wearing a suit and tie for the first time in my first formal interview, and I had no idea what to make of all of this. I answered each of his questions slowly and deliberately.

After about ten minutes of this question-and-answer process, he stops abruptly, looks me straight in the eye, and says, "OK, forget all this bullshit. So you want to be a trader. Every fucking guy comes here and tells me he wants to be a trader. You said you're trading your own account. What stocks are you trading?"

"I've been pretty involved in Exxon recently," I reply.

He snaps back, "I don't know that stock. Give me another one."

"I've also been pretty involved in 3M," I answer.

"I don't know that one either," he shoots back. "Give me another one."

I answer, "U.S. Steel."

"U.S. Steel. I know Steel. Where is it trading?"

"It closed last night at 30 1/2."

"It just went across the board at 5/8," he says. "Where did it break out from?" he asks.

"Twenty-eight," I answer.

He fires right back, "And where did it break out from before that?"

"Well, that must have been over three years ago!" I exclaim, somewhat startled at the question. "I believe it broke out from about the 18 level."

At that point, he slows down, stops looking at the tape, and says, "I want you to work for me." That was the end of the interview.

A few weeks later, I received a call from the fellow who ran Salomon's recruiting program. He said, "We have a bit of a problem. Sidney Gold wants to hire you, but Kaufman also wants you to work for him. So we worked out an arrangement where you'll split your time between the two." I ended up working the first half of the summer doing research for Dr. Kaufman and the second half working on the options trading desk. At the end of the summer, Sidney offered me a job. Since I still had one semester left in business school and also had to finish my thesis for my architectural degree, I arranged to work for Sidney during the fall semester, with the understanding that I would return to school in the spring.

Did the job working on the equity options desk prove valuable in terms of learning how to trade options?

The job was certainly helpful in terms of overall trading experience, but you have to understand that, at the time, equity options trading at Salomon was highly nonquantitative. In fact, when I think back on it now, it seems almost amazing, but I don't believe anybody there even knew what the Black-Scholes model was (the standard option pricing model). Sidney would come in on Monday morning and say, "I went to buy a car this weekend and the Chevrolet showroom was packed. Let's buy GM calls." That type of stuff.

I remember one trader pulling me aside one day and saying, "Look, I don't know what Sidney is teaching you, but let me tell you everything you need to know about options. You like 'em, you buy calls. You don't like 'em, you buy puts."

In other words, they were basically trading options as a leveraged outright position.

That's exactly right. But that whole trading approach actually fit very well with my own tape-reading type of experience.

Did you return to the equity options department when you finished Cornell?

I worked there at the beginning of the summer, but then I went into the Salomon training program, which is something that every new hire does. The great thing about the Salomon training course is that you get exposed to all the key people in the Firm. All the big names at Salomon came in, told their story, and in essence delivered their persona. You were indoctrinated into Salomon Brothers, and the culture was passed on. Having spent my entire career at Salomon, I feel very strongly that it was important for the culture to be passed on.

In the late 1980s, a lot of that culture was lost. The programs got too large. When I started at Salomon, there was one program of 120 people each year; by the late 1980s, there were two programs with 250 people apiece. The trainees also seemed to come from more of the same mold, whereas in the early 1980s there appeared to be a greater willingness to hire a few wild-card candidates.

What did you get out of the Salomon training course besides being indoctrinated into the culture?

That was what I got out of it.

It doesn't sound like very much. Was there more to it?

No, that was a tremendous amount. Clearly you have never worked for Salomon. The company is all about the culture of Salomon Brothers.

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