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This publication is designed to provide accurate and authoritative information in re-
gard to the subject matter covered. It is sold with the understanding that the publisher
is not engaged in rendering legal, accounting, or other professional service. If legal ad-
vice or other expert assistance is required, the services of a competent professional
should be sought.

Vice President and Publisher: Cynthia A. Zigmund

Acquisitions Editor: Mary B. Good
Senior Project Editor: Trey Thoelcke
Interior Design: Lucy Jenkins
Cover Design: Megan Monaghan
Typesetting: the dotted i

© 2003 by GlobalTec Solutions LLP

Published by Dearborn Trade Publishing, a Kaplan Professional Company

All rights reserved. The text of this publication, or any part thereof, may not be
reproduced in any manner whatsoever without written permission from the publisher.

Printed in the United States of America

03 04 05 10 9 8 7 6 5 4 3 2 1

Library of Congress Cataloging-in-Publication Data

Thompson, George, 1965–

Don’t play in the street : unless you know which direction your stock is traveling /
George Thompson
p. cm.
Includes index.
ISBN 0-7931-7926-2
1. Stocks. 2. Investments. I. Title.
HG4521.T467 2003
332.63′22—dc21
2003009722

Dearborn Trade books are available at special quantity discounts to use for sales pro-
motions, employee premiums, or educational purposes. Please contact our special
sales department, to order or for more information, at [email protected] or 800-
621-9621, ext. 4404, or write to Dearborn Financial Publishing, 30 South Wacker Drive,
Suite 2500, Chicago, IL 60606-7481.
DEDICATION

I dedicate this book to every individual investor who is willing to take ad-
vantage of the financial opportunities that the heritage of our great nation
has provided. My greatest reward is to help the individual investor financially
succeed in a marketplace where major institutions have historically domi-
nated. Technology has made it possible for each of you to have the proper
trading tools to succeed in any market environment.
 C o n t e n t s

ACKNOWLEDGMENTS vii

INTRODUCTION ix

1. WALL STREET SCANDALS Same as It Ever Was 1

2. MEDIA DARLINGS But Not Your Darlin’, Clementine 21

3. WHAM, SCAM, NO THANK YOU, MA’AM 27

4. KNOWLEDGE IS POWER 47

5. MIRROR, MIRROR Taking Stock of Yourself 77

6. PICKING A BROKER WHO WON’T MAKE YOU BROKER 81

7. THE GENESIS OF WIZETRADE™ New Approaches in a New World

of Investing 99

8. LET’S GET PERSONAL Applying Foundations to Your Trading Strategy 123

9. TIPS AND PITFALLS 139

10. ADVANCED STRATEGY Short Orders 155

11. EVALUATING 35,000 STOCKS IN SECONDS 167

PHOTO GALLERY 181

APPENDIX 187

GLOSSARY 192

INDEX 207

v
 A c k n o w l e d g m e n t s

A fter years of research and development a

longtime dream of mine was fulfilled in 1999. I released the first version of the
Wizetrade™ software. My deepest appreciation goes out to my good friend and
partner, Marc A. Sparks, for helping me fulfil my personal dream of creating
a system and an organization that allow individuals to create their own finan-
cial independence. Marc’s vision and leadership have been the driving force
behind the success of the Wizetrade™ program and the assembly of the finest
group of individuals to create the company that exists today. Without Marc,
this book would not exist, and neither would Wizetrade™, 4X Made Easy, or
Options Made Easy. Here’s to you Marc and that little ad you ran in the Dal-
las Morning News on December 5, 1999, that brought us together.

Need Capital?

Investment firm is seeking dynamic D/FW companies in need of

capital. Owners must remain; companies must be at least one
year old. (No restaurants.) Prefer e-commerce, high-tech busi-
ness, and manufacturing, but will consider retail. Equity partici-
pating funds provides capital, management and marketing
assistance where needed. Fax outline of capital needs, business
summary and financials to Mr. Gwinn at 972-387-4830.

As a company, Wizetrade™ has come a very long way since we opened our
doors. Now called GlobalTec Solutions, LLP, the company produces seven
software products—Wizetrade™, Wizefinder™, Options Made Easy, Option
Hunter, 4X Made Easy, LiquidTrader, Command Trade—and has developed
training programs to help the average American participate in the financial

vii
viii Acknowledgments

opportunities provided by our capitalist system. I am very proud to be sur-

rounded by the individuals that have made GlobalTec the company it is today.
Writing Don’t Play in the Street was an interesting project and a bigger chal-
lenge than I initially expected. This book would have never been completed
without the dedication of many friends and colleagues.
I am forever grateful to my partner, Marc Sparks, for his tremendous
focus and dedication and to Marc’s brother, Scott Sparks, for his insight into
the art of fine writing. Their encouragement kept me motivated to stay with
the project until the book came to fruition. Many times they would make me
laugh and say just the right thing to create a spark that would lead to the com-
pletion of yet another chapter. Scott’s uncanny ability to grasp this industry
and add humor to this story made him a joy to work with.
Many other people have made major contributions and donated their
precious time to creating this book as well. Claude deGuchi’s outlook on the
investment industry added valuable insight to the book and his editorial ef-
forts are sincerely appreciated. A special thanks goes to Trish Coulman for
keeping everyone involved, organized (just like she does with all of our proj-
ects), and focused on the task at hand. Thanks also to Megan Monaghan, the
most talented graphic artist I know, who is one of the most dedicated people
with whom I have had the opportunity to work. Megan and Marc Sparks work
magic together. Finally, thanks to Susan Dufour who came to this organization
with a background in the investment and software industries. Her dedication
and knowledge of these two industries have provided powerful perspectives
and insights for my book.
Thank you all and congratulations on a job very well done.
 I n t r o d u c t i o n

DON’T PLAY IN THE STREET

Unless You Know Which Direction
Your Stock Is Traveling

MISSION IMPOSSIBLE?

Heck no! You can make money on Wall Street by yourself and you can
even thrive in these turbulent times. Forget about what brokers and analysts and
the media tell you. After all, look where they led millions of Americans dur-
ing the tough times—down a primrose path of misinformation if not outright
lies. Throw out their old rules and start thinking like a professional trader.
Open your mind and consider how you can take total control of your finan-
cial destiny.
My mission in writing this book is to level the playing field for individuals
in the stock market against all those brokerage firms, market makers, analysts,
and Wall Street crooks who let their self-interests and greed outweigh the eth-
ical issues of helping their customers succeed.
I want you to beat the experts. You can. For me, satisfaction is watching
the little guy beat the big guy, like David versus Goliath. It’s not that I want to
see the big guys fail, I just want the underdog to win. As an entrepreneur, I re-
late to the underdog because, by nature, entrepreneurs are underdogs—they
blaze their own trails. It shouldn’t surprise you that I have vivid and fond
memories of enjoying The Bad News Bears as a young kid, cheering on society’s
rejects as they beat the best in the world.

ix
x Introduction

My mission in this book is to prepare you to be an independent and em-

powered stock investor. I appreciate and understand that education is the key
to accomplishing this mission. Once you are educated, you can confidently
take charge of your finances. Therefore, you need to:

• Understand the institutions that are inherent players in the stock mar-
ket and identify the pitfalls in dealing with those players due to their
conflicts of interest
• Understand the ABCs of investing and trading
• Learn about the criteria and tools at your disposal to confidently choose
your own investments

STOCKING UP

Let’s be clear from the get go: This book is geared towards trading stocks
for personal growth. Though I address the important topics of overall portfo-
lio management as well as your risk tolerance and diversification strategies,
this book is not intended to cover in depth any other kinds of investment,
such as bonds, insurance, retirement accounts, and real estate. Only you can
determine how much and what percentage of your money you can or want to
invest in stocks.
Why stocks? Stocks have outperformed any other form of investment
mechanism over the long term. This is because the U.S. market has enjoyed a
continuous upward trend for well over a hundred years. Even through slumps
and bear markets, you can thrive and make money—not just protect your cur-
rent portfolio.
There are lucrative and sound investments out there during both bull
markets and bear markets. Utilizing the right tools, stocks are by far the best
investment in which to grow your money.
There is always an element of uncertainty with stocks no matter how
wisely and safely you play it. That is why you need to devise a solid plan. To do
this you need to follow some objectives so you know what you’re striving for
and can strategize a plan to reach your goals.
 Introduction xi

OBJECTIVES: TAKING STOCK

In general:

• Take control of your financial destiny

• Establish financial freedom and independence
• Build and control wealth

Regarding outside influences:

• Ignore most of the old rules—learn which ones you don’t need to know!
• Disregard market gurus, full-service stockbrokers, and newsletters
• Cut out all the special interests of indifferent industrial entities
• Avoid the common mistakes and fallacies of investing

Regarding stocks in particular:

• Take the guesswork out of trading stocks

• Grasp what really drives stocks up and down
• Know what criteria to identify great opportunities
• Make trading choices simply, quickly, and reliably
• Pinpoint entry and exit signals (when to buy and sell) for your trading
style
• Increase your profits and stop your losses
• Establish a method of trading that yields consistent positive results
• Manage your stock portfolio in minutes per day
• Make money in bull and bear markets

On a personal note:

• Identify your trading style and strategy

• Become proficient in your trading style
• Invest within your comfort level so you sleep well at night
• Devote only the time you need for your trading style
• Remove the emotions of fear and greed when trading by following your
plan of action
• Get rid of shaky stocks in your portfolio now!
• Boost your personal trading confidence dramatically
xii Introduction

Finally, invest only in “the best of the best”—not merely in stocks which
are going up, but in those which have the most demand and meet all your
good investing criteria.
Much of the material in this book seems simple (because it is), but I urge
you to take your time to fully grasp it. As Abraham Lincoln once said, “Give
me six hours to chop down a tree and I will spend the first four sharpening
the axe.” I suggest you keep a highlighter and pen or pencil handy as you go
through the rest of the book. Underline, circle, highlight, write down your
own notes, or do all of the above. This will keep you actively involved as you
go through this guide and will give you quick reference later to the points of
particular interest or concern to you.
The time you spend now preparing yourself to be a successful trader will
pay off huge dividends and won’t leave you with an axe to grind later.
Ready? I know you are. With basic education and some tools at your dis-
posal to help you make sound investments in well-chosen stocks, I have full
faith that you can succeed beyond whatever doubts you may have—and re-
gardless of the whims of the stock market as a whole.
The goal is for you not only to be self-reliant but to assure your success.
 C h a p t e r

1
WALL STREET SCANDALS
Same as It Ever Was

W h a t Y e a r W a s I t ?

Okay, let’s play a little game. Guess the

year of the following storyline and headline.
Hint:They were both published in the Wall Street
Journal in the same year within two months of
each other.

STORYLINE
Source: The Collection of the Museum
“In a story like this, every story is a posi- of American Financial History
tive one. Any news is good news. It’s pretty
much taken for granted now that the market is going to go up.”

HEADLINE
“Stocks Plunge 508 Amid Panicky Selling; Percentage Decline Is Far Steeper
than in 1929”
The answer can be found later in this chapter.

1
2 D O N ’ T P L AY I N T H E S T R E E T

Let’s open with a little story that may sound all too familiar.
A speculator creates a new company, financed with huge sums of money
from banks and rich friends. This company quickly evolves into a financial
empire and the the original speculator becomes fabulously wealthy. Suspect-
ing insider chicanery, the government orders the company’s books be audited.
Outrageous amounts of money are found missing. The government sues the
company’s president and carts him off to jail.
In the wake of the scandal, the company’s empire collapses, bankrupting
many creditors, bankers, and brokers and causing a financial panic on Wall
Street. The Secretary of the Treasury meets with prominent brokers to set
rules to regulate trading. He proclaims that “there should be a separation be-
tween honest men and knaves . . . between respectable stockbrokers . . . and
mere unprincipled gamblers.”
This story is true. At the time, it was an outrage and a scandal, and it in-
troduced a time-honored American tradition.
It is the story of what’s been dubbed Wall Street’s first scandal—in 1792.
The “knave” was William Duer who used his insider knowledge (he was once
Assistant Secretary of the U.S. Treasury) to speculate in and manipulate bank
stocks. The amount found missing was $238,000—a heap of cash in 1792. And
the Secretary of the Treasury who’s quoted here was none other than Alexan-
der Hamilton. You may have noticed his picture on the ten-dollar bill.

FLASH FORWARD TO THE YEAR 2002

Today, most economic historians and analysts aren’t surprised by the rev-
elations of all the shenanigans that have surfaced since Enron filed for bank-
ruptcy in December 2001. Hindsight helps, because only a couple of them
predicted our present predicament just a few years ago in the late 1990s.
Much of America’s grand and glorious financial history has been marked
by cycles of Wall Street scandals. Typically, the cycle goes like this:

• There’s a period of unparalleled prosperity like the one we enjoyed

through the late 1990s. Everyone’s making money so everyone’s happy.
Don’t fix it if it ain’t broke.
• The bubble finally bursts and countless hordes lose their shirts.
• Hard questions are asked that should have been asked throughout the
prosperous period.
 Wall Street Scandals: Same as It Ever Was 3

• Probes lead to unpleasant answers, revelations of books being cooked,

forced resignations, lawsuits, and criminal investigations.
• The Securities and Exchange Commission, prosecutors, Congress, and
the president all condemn the scoundrels and float ideas for new reg-
ulations to prevent future scandals.
• Insulted but contrite, Wall Street promises to clean up its act and vows
it can self-regulate with no more new laws or restrictions.
• Wall Street returns to business as usual.

A line from a Peggy Lee song comes to mind: “If that’s all there is, my
friend, then let’s keep dancing.”
The most recent corporate audacity and misbehavior are mind-blowing.
The trillions of dollars that went down the tubes is breathtaking and there’s
plenty of blame to spread around.
A Washington Post article on June 28, 2002, quotes the dean of Yale Uni-
versity’s School of Management, Jeffrey E. Garten.

I think it’s fair to say that there was nobody in the business community who
is not implicated in this in some way. Not the executives who were under the
excruciating pressure of having to meet quarterly earnings targets, no mat-
ter what. Not the lawyers and the accountants and bankers who were forced
to compete furiously to get and keep clients. Not the regulators who became
so intimidated by all the exuberance in the air. Certainly not the under-
writers or the analysts or the credit-rating agencies or you in the press. . . .
Even those of us at business schools are implicated. It’s not like the edu-
cational establishment sounded any warning. We were cheerleaders, too.

But don’t kid yourself that this is something new. Sure, there’s been a
meltdown of dot-com and telecom companies that didn’t exist in days of yore.
But the scandals and allegations of law-breaking and insider trading at com-
panies like Enron, WorldCom, Merrill Lynch, and Tyco only earns them a spot
in the rogue’s gallery that we might dub the Wall Street Hall of Shame.
They’re far from being the original inductees.
To quote Robert Reich, former labor secretary:

Really, there is no limit to the cons and swindles that have been seen over
the years. The human mind is capable of inventing very innovative prod-
ucts and services—and also extraordinarily innovative swindles.
4 D O N ’ T P L AY I N T H E S T R E E T

The corporate chicanery uncovered in recent scandals has been an inte-

gral part of every burst bubble since the 17th century Dutch tulip mania. (More
about bubbles later.)
Some great names in American history made their fortunes through
shameless swindling—Vanderbilt, Morgan, Rockefeller, and Kennedy to name
a few. Do you only relate these names with their philanthropy? Perhaps their
consciences finally got the better of them when mortality stared them down.
Financial crooks tend to be respectable folks who demonstrate their pa-
triotism by giving vast sums of money to America’s politicians, asking nothing
in return except maybe a tweak in the tax code, in the smallest print possible,
benefiting their industry.
In the election year of 2002, Republicans and Democrats alike were jock-
eying for sound bites to pronounce that their side had taken and will continue
to take the high road. Each side was biting at the bit to blame the other side
for letting this mess unfold. Yet candidates from both parties had received
campaign contributions from Enron, WorldCom, and Arthur Andersen.
These companies contributed millions of dollars to our lawmakers.
Okay, let’s take a moment to enjoy another true story. This one is from the
1800s. Washington Post staff writer Peter Carlson’s February 10, 2002, article
contributed the details of these scams of yore.

CIVIL WAR AND THE LIVING IS EASY

Many of the Civil War–era’s robber barons dodged the draft by paying
someone $300 to fight in their place. We’re talking J.P. Morgan, John D. Rock-
efeller, Andrew Carnegie, and Jay Gould. Their small investments gave them
the opportunity to avoid getting shot, thereby leaving them free to get rich
during the war.
During the war, Morgan arranged a deal to buy 5,000 rifles from a Union
Army arsenal in New York for $3.50 apiece. He turned around and sold the ri-
fles to the Union Army in Virginia for $22 each. A judge ruled the deal was
legal, even though the rifles were defective causing soldiers to shoot their
thumbs off.
Some on Wall Street speculated in gold. The gold rose in price, rising
against the dollar, with each defeat of the Union Army. Getting wind of this,
President Lincoln made it clear that he hoped that every gold speculator “had
his devilish head shot off.”
 Wall Street Scandals: Same as It Ever Was 5

After the war, the railroad business provided these entrepreneurs with
easily their biggest payoff. According to Mr. Carlson’s account of this episode:

In the 1860s, the federal government subsidized the building of a

transcontinental railroad by granting millions of acres of free land to two
railroad companies, the Union Pacific and the Southern Pacific. Eager to
line their pockets at the expense of their stockholders, Union Pacific
management formed a dummy construction company with an impressive-
sounding French name, Credit Mobilier, and hired Rep. Oakes Ames as
president. Credit Mobilier charged Union Pacific about $100 million to
build the railroad—nearly twice what the job actually cost. The rest of the
money went to Credit Mobilier’s stockholders, a group that included
many of Ames’s congressional cronies and Vice President Schuyler Col-
fax, who had been bribed with cheap stock to look the other way.

Congressional hearings were held and there were angry editorials and a
federal lawsuit. Ultimately, the Credit Mobilier scammers went their merry
way, far richer for their modest efforts. Viva America! And Credit Mobilier!
One more side note from this era: President Ulysses S. Grant was scammed
by a Wall Street crook and lost his fortune.

BUBBLE, BUBBLE, BOIL AND TROUBLE

A speculative bubble is a period when stock prices rise to unsustainable

levels, driven primarily by investor optimism when they speculate—that is,
when they guess or rely on gut instinct or emotions—that one or more stocks
or industries will skyrocket. Speculators engage in risky business transactions
on the chance of making quick and vast profits. Optimism is contagious so the
bubble grows as others join the frenzy. Who wants to miss out on what seems
to be a sure bet?
But when the bubble bursts—the speculators’ “crik” comes up empty
where gold nuggets were expected—investors jump ship and sell their stocks
that are dramatically losing value every moment. Stocks sometimes lose over
half their value in no time flat, and those stocks hardest hit may remain de-
pressed for years. Some never recover. The companies either go out of busi-
ness or they’re absorbed by stronger companies. The market becomes survival
of the fittest.
6 D O N ’ T P L AY I N T H E S T R E E T

The late 1990s was an example of a speculative bubble. (Ain’t hindsight

great?) During this period, the Nasdaq Composite Index, representing many
of technology’s “red hot” dot-com and telecom stocks, rose sharply, peaking
at 5,048 in March 2000. Eighteen months later, the Nasdaq fell to 1,423. The
dot-com and telecom stocks that flooded the market accounted for most of
the rapid growth and even more rapid depreciation of the Nasdaq.
Today, many of those companies are floundering or no longer exist. The
speculators in those stocks lost trillions of dollars, devastating many retire-
ment funds and leaving hundreds of thousands of employees scrambling for
new jobs. Was there any forewarning? Did history provide any lessons that we
should have heeded? After all, we know that history has a habit of repeating
itself.
Perhaps present-day speculators should have taken a gander at past bub-
bles that burst, namely:

• The late 1920s just before the 1929 crash

• The period between 1970 and 1972
• The period between 1982 and 1987

In each case, you can recognize the cycle of scandals and scams repeating itself.
Let’s take a closer look at the 1929 crash as it relates to our current bubble-
and-burst scenario.

1929: THE NIGHTMARE ON WALL STREET

In the early 1920s, the climate for great business was super. The president
proclaimed “the business of America is business.” Between 1926 and Septem-
ber of 1929, U.S. stocks soared to euphoric heights. The market was pumped
up by corporate profits, the government’s probusiness policies, and deals al-
lowing stock to be purchased for only 10 percent down.
Near the peak, some prominent economists and bankers debated about
whether the market would sustain a boom or succumb to a bust. Those who
predicted a crash were criticized and scorned into silence as party poopers.
The rabid speculators who were caught up in stock mania favored the “ex-
perts” who were predicting that the market reached a plateau of new heights
that would sustain itself forever more. The feeling was the market would never
go lower.
 Wall Street Scandals: Same as It Ever Was 7

In September 1929, the limits of demand and available capital for invest-
ing were sorely tested. The market drifted slightly lower, and then selling built
into a deluge. Panic ensued. During two October days, more than $9 billion
of the market value of American business was erased, leaving prices 25 per-
cent lower. That was the infamous crash of the stock market.
Far more devastating to the country and the entire world was the depres-
sion that followed. Stock prices bottomed 90 percent below their 1929 highs
in the aftermath of what is probably the most far-reaching and widely felt spec-
ulative bubble in economic history.
Let’s look at the numbers.

Year Date News

1929 September 3 Dow Jones peaks at 381

October 28 Dow Jones, 260
October 29 Dow Jones, 230
1930 April 17 Dow Jones, 294 (a rise, what’s the deal?)
1932 July 8 Dow Jones falls to 41! (a 90 percent decline from its
peak on September 3, 1929)

After the stock market crashed in 1929, Congress investigated and uncov-
ered countless instances of skullduggery, chicanery, and unadulterated fraud.
In one notable example, Ivar Krueger, a Swedish entrepreneur known as
the “match king,” acquired monopolies to control two-thirds of the world’s
kitchen match industry. He controlled his companies through an illegal
pyramid-based holding company. When the pyramid collapsed during the
Great Depression, Krueger shot himself.
In 1934, five years after the crash, the federal government finally created
the Securities and Exchange Commission to regulate and police the stock
market, which had always enjoyed the privilege of regulating itself. Incensed,
Richard Whitney, president of the New York Stock Exchange, told Congress
that the stock exchange didn’t need an overseer and that they could police
themselves without bureaucratic interference, thank you very much.
In 1937, Whitney was caught stealing $150,200 worth of bonds belonging
to the New York Yacht Club and $667,000 from the Stock Exchange Gratuity
Fund which had been set up to aid the widows and orphans of brokers. He de-
manded that the stock exchange cover up his crimes because, in his words, to
millions of people “I mean the stock market.” Instead, he was sentenced to five
to ten years in Sing Sing.
8 D O N ’ T P L AY I N T H E S T R E E T

THEN AND NOW

Far more than any other precedent, present-day historians, economists,

and columnists are comparing the bubble and burst we’re experiencing today
to that of 1929 and the period that followed. Few predict that we’re now fac-
ing a depression like that of 70 years ago, but any comparison of our present
predicament to the “worst of times” is sobering, considering its consequences
in the past.
The 1920s stock market investor knew little about the stocks he bought or
sold. Investors moved in herds in and out of stocks based on news events, hot
tips, or the actions of the ticker tape. Even as their stocks plummeted, they
hated to sell them because everyone told them not to.
Today, we no longer have the cumbersome ticker tape, but our increased
access to moment-by-moment stock market fluctuations becomes more dan-
gerous because today’s investor is generally not any more savvy to what really
moves the market and is prone to making even quicker knee-jerk decisions on
his holdings. Investments still are based too much on emotions—namely
greed and fear. And misplaced loyalty still leads investors to hold onto a los-
ing proposition. We wouldn’t want to disappoint our broker, would we?
Also, the technology of the 1920s runs strikingly parallel to the tech boom
of the 1990s. For example, at its peak, the auto industry was comprised of close
to 2,000 carmakers. It was an exciting and heady days for investors. Today the
auto industry is dominated by only a handful of companies, only two of which
are wholly American.
In the 1990s, it seemed, there were hundreds of Internet companies on
the stock exchange and investors poured huge sums of money into companies
that had yet to earn a penny, had no business plans other than to do “some-
thing” on the Internet, and were run by cocky twenty-somethings. Again, his-
tory was repeating itself. Like the auto industry, the vast majority of Internet
companies from the late 1990s have either tanked and died or consolidated
with the few survivors. That’s the way it works. Always has, always will.
In both scenarios, devoted investors who worshipped at the temple of the
tech market went from rags to riches to rags again, and somehow we’re
shocked? During both decades, unscrupulous corporations, accountants, and
brokers were more than willing to string us along and prey on our gullibility
because they made money every time a stock was sold. They smugly used in-
sider information (and, more recently, computer projections programmed at
a level that no human brain can digest) to pull the plug on their own invest-
 Wall Street Scandals: Same as It Ever Was 9

ments when the bubble began to burst. And who’s left to hold the empty bag?
Not them. I guess that leaves us.
None of what went on in the 1920s or the 1990s would have been possi-
ble without the cooperation of the investing public. Human emotion and pub-
lic euphoria led to speculation and set the stage for both bubbles—and busts.
What is different today is that stock ownership is no longer the sole do-
main of the rich, the daredevils, and the fools. The middle class became fully
vested, and therefore vulnerable, even if their only involvement was through
their 401(k)s at work. Now, when corporations, accountants, and the brokers
have conflicts of interests that favor the “big boys” instead of the “little” inves-
tors, we are all prone to suffer the consequences.
Are you up for one more episode? This one’s from the 1980s just so we
don’t make the mistake of only relegating scandals to the distant past.

GREED IS GOOD

Taxpayers lost hundreds of billions of dollars in depositor bailouts during

the savings-and-loan crisis of the 1980s. Though fraud played a role, the prob-
lem resulted mainly from incredible mismanagement.
But what do we remember most leading up to the crash in 1987? Okay, I’ll
personalize it—what do I remember most? On “Black Monday” in October
1987, I had capitalized a brokerage firm (but was not a broker myself, my two
brothers were licensed brokers in my company). I vividly remember that bro-
kers all across America took their phones off the hook so that they could sell
their own positions first before helping their bigwig clients bail out. The in-
dividual investors got a busy signal until after the institutional investors were
taken care of. I couldn’t get through to my own broker during that crash! (To
ensure that this doesn’t happen again, the Small Order Executive System
(SOES) was created to execute agency orders in Nasdaq stocks (1,000 shares
or less) to bypass the bias of brokers toward their biggest customers.)
What led up to this stock market loss of 508 points—20 percent—in a sin-
gle day, exceeding the percentage decline of the crash of 1929? (If you’re pay-
ing attention, I just answered the trivia question at the beginning of this
chapter.) The loss largely was based on a huge decline in investor confidence
due to scandals. Surprise.
You may remember the “greed is good” speech delivered by Michael
Douglas in the 1987 movie Wall Street. He played a slick but chilling character
10 D O N ’ T P L AY I N T H E S T R E E T

named Gordon Gekko. But did you know that his speech was based almost
word for word on a speech given by Ivan Boesky to some business students in
1985? Boesky told the students, “Greed is all right, by the way—I want you to
know that. I think greed is healthy. You can be greedy and still feel good about
yourself.”
Boesky didn’t just talk the talk, he walked the walk. After making hun-
dreds of millions of dollars on stocks and bonds, he wanted more. Much
more. He admitted fantasizing about climbing atop a huge pile of silver dol-
lars because it would be an “aphrodisiac experience.” Boesky then paid mil-
lions of dollars to an investment banker named Dennis Levine with Drexel
Burnham Lambert for insider information on corporate takeovers. Boesky
made millions more on insider trading.
The SEC caught Levine who ratted on Boesky. Boesky then ratted on
many other wheeler-dealers, including Michael Milken, Drexel’s legendary
“junk bond king.” Boesky acquired incriminating evidence on Milken by lur-
ing him into a hotel room and recording their conversation about their elab-
orate insider trading network.
Boesky served 18 months in prison and paid a $100 million fine. Milken
served three years and paid $200 million. Drexel Burnham Lambert went
bankrupt. A fellow named Rudolph Giuliani made his mark prosecuting all of
these guys.
Unlike its delayed reaction after the 1929 crash, when it took the govern-
ment five years to intervene in a significant way by creating the SEC, the gov-
ernment stepped in immediately after the 1987 crash. The Federal Reserve
guaranteed the credit of market makers the day after the crash and a reces-
sion was averted. But it gave investors the faulty impression that the govern-
ment’s intervention could solve every pesky tumble off the cliff.

THE WRITING WAS ON THE WALL

Okay, let’s look at a timeline of the most recent movement of the market
from 1998 to mid-2002, including the intrusion of scandals as the bubble
burst. With your newly heightened insight into the cycle of scandals, I’ll re-
frain from interpreting the events for you and present just the facts, ma’am.
(See Figure 1.1.)
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