MARK RITCHIE: All of a sudden, a great big dong went off. A bell like we hadn't heard before. And it went crazy. There's only one topic I want to talk about. And that's losing. That's what you're doing when you trade, you're putting capital where its most efficient.

ED HARRISON: You may have seen my interview with Mark Ritchie II of RTM Capital. Well, we have something special for you today, because he's going to be doing the interview. And he's going to be interviewing one of the original market wizards, his own father, Mark Ritchie. And they're going to be talking not just about investing, but also how to invest. I think it's one of the great interviews. We hope that you like it.

MARK RITCHIE II: I'm here today in the Real Vision studio with my father, Mark Ritchie the First, I guess or Mark the Greater as he's commonly known- to interview him on a life, I guess of speculation and trading, investing, some of the different lessons, let's get right into it. First of all, what your background is, how did you get into this crazy business of speculation? So start maybe just a little bit, if you can, dad, with your upbringing, and maybe what was different, say, than the conventional upbringing of the baby boom generation?

MARK RITCHIE: It is a crazy business. I guess everybody knows that, your Real Vision's people ought to know that. If they don't know that by now, they're beginners. I spent part of my childhood in the Jim Crow South, another part of my childhood trading kites and pigeons in the streets of the bazaars of Kabul, Afghanistan. And then another part of my childhood messing around here in the US. Well, by the time you're done with all of that, you're ready for some crazy stuff. So by the time I got to this business, I had a method of thinking differently. Real Vision's thinking differently if they put a trader in here to interview someone what it was like back in the antique days when they had to yell and scream.

MARK RITCHIE II: So, one thing on that note is we're prone, us Ritchies, to go on tangents from time to time.

MARK RITCHIE: You just heard one.

MARK RITCHIE II: Oh, yeah, that was a good one to get started. So, take things then from willing to try different things to the Chicago Board of Trade, yelling and screaming in pits. Some may have read either one of your books, or I get constant questions as if you're still doing what you were doing in Market Wizards that you were interviewed for 30 plus years ago. Talk me through that transition. Maybe when you first saw it. How did you realize this was a playground for you, this was the kind of crazy you could get into?

MARK RITCHIE: Yeah, my brother and I went to the Board of Trade to visit one time, we're standing in the visitors' gallery overlooking the floor, we'd heard legends about how wild the place was. Didn't look that wild to us. A lot of noise, a lot of noise going on. But it just didn't look all that wild. All of a sudden, a great big dong went off. A bell like we hadn't heard before. And the pit went crazy.

MARK RITCHIE II: So, you hadn't been trading yet when you were watching it.

MARK RITCHIE: We didn't know, we didn't know, they were just passing around orders getting ready for the opening, jockeying. We were standing above the soybean pit and the traders went up to side and down the outside, back down and over the other side. It happened to be an exceptionally wild opening. We both looked at each other. This is the place for us. It was pretty clear.

MARK RITCHIE II: And what year was that?

MARK RITCHIE: That was '75. That was '75.

MARK RITCHIE II: Consequently, was that the jump off point then?

MARK RITCHIE: Pretty much, pretty much. Yeah.

MARK RITCHIE II: Would it be accurate to say that you probably haven't had a salary since that jump off point?

MARK RITCHIE: Well, my brother Joe was hired actually by another company to come from Los Angeles. And almost no one from outside the financial industries ever was successful invading them. And he was hired to come and check this thing out. So, he comes and sees me. He says I don't have a suit, you got a suit. He put on one of my suits. And I put on a suit. And we went into some of these people at the Chicago Board of Trade. We said, how could we get a membership with the Chicago Board of Trade? The guy just took one look at us when he came to the door. He said, you boys have got to be at the wrong place.

MARK RITCHIE II: What was it about what you guys were doing on the floors? And what started from what I understand is just yelling and screaming like everybody else to figure things out then wound up becoming, developing into a pretty large trading enterprise?

MARK RITCHIE: We did, we yelled and screamed like everybody else but we brought to it a mentality of trying to do stuff different. A willingness to do stuff different, not follow the crowd. I don't know how many the viewers here tune in to this station to look for who's buying what. Well, I got nothing against that. But if you're just following the guys where I happen to be long gold right now, you want to use that to develop your own strategy. The crusade has come around right now is the quote from Einstein. The definition of insanity, doing the same thing over and over and expecting a different result. Okay, fine.

Okay, most people who quote these geniuses don't know what they were talking about. The geniuses or don't know what they're talking about. In our business, we do the same thing over and over. And we do expect different results. And we get it every time too. So, we went into the pit. Yes, with the strategies, we were arbitraging silver between New York and Chicago. But we brought every different idea we could possibly think of to the game.

MARK RITCHIE II: To do that more creatively.

MARK RITCHIE: Right, to do it as creatively as we possibly could. And then later went into soybeans. And there was an interesting, almost illegal thing going on here in the States at that time. And that was the marketing of options on commodities. And we had options on stock, but we didn't have any options on commodities. So, there were people who bought them retail in London and marketed them retail here in the US.

MARK RITCHIE II: So, sure, making a ridiculous spread on that.

MARK RITCHIE: Yes, it was the kind of thing that's only legal because reasonable minds didn't realize what was happening. But it was about as improper as possible, and it got closed down. But it did result in eventually and the options becoming regulated here. And we were prime to take advantage of that. At one point, the biggest option pit was the bond option pit. At one point, there were days in which our firm took as much as 50% of the trades in the option pit. They wouldn't have actually been open interest, but they're always going someplace with it. We were as market neutral as anybody could ever be.

MARK RITCHIE II: Could have taken a lot of the volume. And if I understand too, the claim to fame from even your trading CRT was, let's hit as many more or less base hits as possible versus swing for the fences.

MARK RITCHIE: Yeah, if you want to use the baseball, then it was get hit by the pitch as much as possible. Or go for a walks for bonds. Yes, absolutely. Joe once described it as picking up dimes in front of a bulldozer, one of the rules is never add to a loser. That was probably my biggest strategy, adding to losers. Don't do what I say. Use what I say to try to come up with your own strategies.

MARK RITCHIE II: So, that raises a really good question and transition point on just this idea of losses and risk management. And a question I often get from people is, what did your dad teach you? And usually they're assuming this idea that you have handed me some type of secret sauce. And I often jokingly say, the crystal ball that my dad had in the '70s and the '80s is broken, because I don't have it. But what I do say that you taught certainly directly and indirectly is this idea of taking losses and managing risk.

So, when you say I was adding to losers, you had a puke point for lack of a better word where it was time to throw in the towel. And so, could you talk about the importance of risk management, how you think about taking losses, and just why that's so essential? And why you're still around as any form of a speculator, whether it's trader, investor, long-term investor?

MARK RITCHIE: Okay. There's a sense in which everything we've said so far and everything we'll say after this, everything we've said so far is a warmup to this topic, and everything we say after it is warm down from the topic. Yes, because there's only one topic I want to talk about. And that's losing. That's losing. I might be a lousy loser, but I know how to lose. You've got to be a pro to lose. And if you can't lose, you can't play this game.

We have a joke. How do you make a million dollars trading commodities? You start with 2 million. But it ain't no joke. It ain't no joke. I sat across the table from a guy whose accounts were in trouble and he wanted me to help him. I said, I can make you a million dollars. I did make a million dollars, but you're going to think you lost a million. He did. I made him to a million. He lost a million, got mad, took his money and left. Exactly what I told him was going to happen, got furious and left me. Do you even know about one relative? Sure, sure. I got him into a deal. I said, I guarantee you will not lose money on this thing. We will both do it, we'll take profits. I'll tell you where to take profits. And if you lose money, I'll write you a check, don't worry about nothing, okay? You know the story.

I'm going to tell the story anyway. Because people need to hear the story. I took profits, I took my profits. I told him where to take the profits. Take your profits there. He calls me back in six months when he's turned his profit into a loser and says, are you still going to write me a check? That's how ignorant, that's how ignorant- and he's never spoken to me again.

MARK RITCHIE II: Not only do he lose money, he also lost a friendship.

MARK RITCHIE: He lost money on that trade. But he made money on all the other trades that he made, he made plenty of money with me, never spoke to me again. Mad at me. Got out, wouldn't take the profits where I told him to take the profits. To make money, you got to make two trades, you got to get to the end and you got to get out.

MARK RITCHIE II: So, the lesson being- let's talk a little bit more on what do you mean by learning how to lose?

MARK RITCHIE: I hope the audience doesn't mind if I get a little too upset.

MARK RITCHIE II: We're prone to do that too.

MARK RITCHIE: I get bent out of shape over these things. Because actually I'd used to be, pros in my business did not talk about our business outside of the business. Because we didn't want people to get into the business, not because we didn't want them to make money and take money away from us, because we knew they were going to lose. And we didn't want them to get hurt. And I originally got into speaking in this business by an investor who said, I keep telling my people not to invest in commodities, not to invest in commodities, and they won't listen to me. If you come and tell them not to invest in commodities, maybe they'll heed. I did that. That's why I started my thing. So, I'm a little bit nervous that now, [inaudible] and I could certainly-

MARK RITCHIE II: Now, here you are telling people what it takes to be a good trader.

MARK RITCHIE: And I know good and well that some of the people who are watching this program are not winning. And I want the guys who are winning to learn why the losers are losing so they can tell them why they're losing, either get them to stop trading, or stop losing. I don't care which one they do. They either got to stop trading or stop losing. I'll tell you a story here.

Guy calls one day, his secretary says there's somebody on the phone, he said, I never heard of him and he didn't know you and you don't know him, anybody's got to talk to you. He's got a target. He's got a target. So, take this call. Okay, I'll take a few minutes. So, I took the call. Guy was a pastor, he knew I was a Christian. He called me up. And he told me a story, only took him about 60 seconds. I knew I know these stories. I've heard them all over the place. He made a little money and then didn't and okay.

I told him the rest of the story myself. I said you took your children's college fund and you lost that. And you took the retirement fund that you had, and you took all your savings, and you lost that. And you had also lost everything. Yeah, yeah, yeah, I did all of that stuff down here. You're a pastor, you talk about integrity all the time, and so forth, and yeah.

MARK RITCHIE II: Go a little conflict of interest.

MARK RITCHIE: Yeah. So, I said, well, for starters, don't do anything stupid. There's a little pause. And he said, like what? And I said, like taking your own life. Then there was a long pause. And he says, oh, you know about that. All of a sudden, there was a connection between us that he knew that I knew how dramatic-

MARK RITCHIE II: This was trying on his soul, if you will.

MARK RITCHIE: Yeah, yeah, that's right. That's right. I'm going to, I'm just priming the pump. I'm just priming the pump here. Because most people who go into trading have no idea that that is where this road can lead- and sooner or later will lead there. Because we think that the law of averages owes us an even break. It does. That's true. But the law of averages also, it will kiss you. There are times, I've had days where you can't make a losing trade. Everything you sell goes down. Everything you buy goes up. Yes, the law of averages deducted.

MARK RITCHIE II: And it seduces you.

MARK RITCHIE: The law of averages will do the other.

MARK RITCHIE II: And then it'll take it away. Yeah.

MARK RITCHIE: Yeah. And if you're not emotionally ready for it, and financially ready for it, you're going to make a call like this guy.

MARK RITCHIE II: So, the idea of, how do you regularly-

MARK RITCHIE: How do you manage these things?

MARK RITCHIE II: How do you manage these things?

MARK RITCHIE: I'll give an audience a test. We got time for it, I guess. Say, I'm flipping a coin, say your trade- you got a 50/50 chance of a profitable trade. Say you went, half the time, you lose- could be investment, trade, anything. The beginners always think, well, you buy the thing, shoot, you got a 50/50 chance. It's either going to go up or it's going to go down. I'll tell you, it's going to go up and down.

MARK RITCHIE II: Yeah, it's going to be both.

MARK RITCHIE: But we got a 50/50 chance, okay, but when you win, you're going to win more than when you lose, okay? So when you win, let's say you get a 20% win. You invest $10 dollars, you get $12 back when you win, when you lose, you lose your $10, okay? All right. I'll leave and tell the audience I'll lend you a hundred bucks. But you can start with anything you want to start with. But you have to maximize your profit.

How much do you want to invest of this hundred dollars? In fact, I'll even line the people up in the front row. Give me $100 bill. How much you want to invest? How much you want to invest? How much you want to invest? And whoever makes the most money on this deal, I'm going to do this, 10th, I'll let you keep it. You've seen against, you know against-

MARK RITCHIE II: You know the scheme and the result for the audience always works out.

MARK RITCHIE: Disaster. Disaster. In fact, well, I'll give you the numbers. Let's say you do $50 on this thing, okay, and you win. 50%. Okay, so you win, you get a 20% bump, so you win $60. And then now, you have $160. You got $160 because you win the first one. Okay, the second one, you're going to invest 50% as well. What's 50% of $160?

MARK RITCHIE II: $80.

MARK RITCHIE: $80. Okay, so you lose the $80. Now you're down to $80. All right, folks, you took two shots. Law of averages was nice to you. You won one, you lost one. And you're behind, you're down from $100 down to $80. My line is you- business schools, you did this at a business university. I want to see the blood drain out of your head. Because you think, you think that the way to maximize your profits is to invest more.

MARK RITCHIE II: Take more risk.

MARK RITCHIE: Now, I started talking about creative thinking. Anytime everybody tells you, x, you must think y. You must think y. If they tell you the world is round, you have to consider that it's flat. You have to consider that it's flat.

MARK RITCHIE II: We're going down a real dangerous row there.

MARK RITCHIE: Yeah, that's right. That's right. This mind is working, your mind is working.

MARK RITCHIE II: You're considering it.

MARK RITCHIE: Yes. Everybody knows that the more you invest, the more you make. So, he's investing 50%, he thinks the guy next to him is going to invest 20% and I'm saying you have to think to yourself, at least consider for a minute that maybe the way to make most money is investing less, maybe, and try it. Now, if the guy does 20%, he's still going to lose money but he won't lose as much.