This blog post originally appeared on RealMoney Silver on Oct. 13 at 10:04 a.m. EDT.
"What we have learned from history is that we have not learned from history." -- Benjamin DisraeliDreams of avarice provided a once-in-a-generation orgy of speculation in the late 1990s and a new class of investors emerged back then -- daytraders. It's now official: Daytraders might be returning (at least one is in Boca Raton!), so a know-nothing bunch of vagabonds who contributed to the last bubble could now contribute to the new one. How can I be sure? I speak from firsthand experience, and I want to tell you a true story about my favorite daytrader from the old days. This particular daytrader, Biff Marksman -- his name has been changed in order to protect innocent subscribers from him! -- is an old acquaintance. Biff operates out of an area of Boca Raton, Fla., a locale that former SEC Commissioner Breeden once described as a town where there are more sharks inland than in the waters surrounding it. A town where the Mercedes, quiche and opulence run wild! It is the capital of the daytrading community, and in the late 1990s, it was the capital of brokerage boiler rooms as well. It is Biff's (the ultimate daytrader) home. I hadn't heard from Biff until yesterday, as I thought that he was cured from the leveraged daytrading influence that took the U.S. and the markets by storm in the mid to late 1990s, contributing to a mushrooming in margin debt, the ultimate speculative rise in our markets and the eventual -- or should I say inevitable? -- piercing of that bubble. I thought his next unprofitable foray from 2007 to 2009 (and the credit crisis that stamped out his profits) coupled with a $10 million loss from a fraudulent security he purchased in late 2009 were enough to rid him of his market jones. Apparently, I was wrong! But first a little background. Of the daytraders and plungers extant, there are few that have experienced greater ups and downs than my friend, Biff. Similar to most daytraders, Biff had a real job owning a door and window business, but as stocks mounted their speculative ascent 12 years ago, his primary vocation took a back seat to trading stocks. Biff operated out of his den and turned about $500,000 into almost $15 million in a matter of 24 months by daytrading the most speculative stocks extant. From 1998 to 2000, I spoke to Biff about 20 times a day. In most of our conversations, Biff ridiculed me for not "getting on the bandwagon" and trading the most speculative four-letter stocks on the Nasdaq. Our conversations were one-way, as Biff did the talking, or, in most cases, the gloating, as his disinterest in the companies' business and models was legion. Coherence of thought and clarity of expression were not Biff's forte.
After Biff made the first $10 million, I suggested that, after all our conversations, he had absolutely no knowledge of his trades/investments and that he should stop trading and book his profits and place them into municipal bonds. His response to my recommendation is not suitable for these pages, and off on his merry daytrading way he went, adding another $5 million or so of profits into late 1999/early 2000. His original trades of 5,000 to 10,000 shares in size quickly turned into investments of 150,000 to 200,000 shares in emerging stocks that became submerged stocks. Biff's sojourn into daytrading ended badly, as the market environment ended with a bang, and he lost not only the $15 million of profits but an additional $5 million leaving him in a very, very deep financial hole. Humbled and broken, he went back to work in his old day job in the construction business. Boca Biff spent a few years licking his wounds. I next heard from him in mid-2005, when his largest trading sojourn was in long crude oil futures -- just in time to witness a $15 drop to below $60 per barrel by the end of the year! That cost him almost $4 million. After that loss, Boca Biff promised his family, who apparently could no longer tolerate the ups and downs, that he wouldn't again venture into the stock or commodity markets. Nor would he speculate in homes and land. But after casually responding to one of those spam emails to refinance his home from an eager mortgage broker that was about to go out of business -- he's got a beautiful old Mizner-style home in Boca! -- he found himself, very soon thereafter (in early 2006) with about $1.5 million of loose change. His young wife forced him to give the proceeds of the refinancing cash out to a mutual friend, Baron Von Broker, who dutifully put these funds in a money market account and far from the hands of Boca Biff. When the market bottomed in the spring, Baron Von Broker turned bullish and encouraged Boca Biff to buy some large conservative growth stocks. True to his promise to his wife, Boca Biff demurred and kept his monies in the money market account for a while. Boca Biff watched the market's unrelenting rise through the summer of 2006 and into the fall until he couldn't take it anymore and finally made the plunge (on margin) in an attempt to make back his accumulated loss of $20 million-plus (from the top!) by purchasing a package of out-of-the-money calls on a group of high-beta stocks that recently were making 52-week highs, including Apple ( AAPL), Goldman Sachs ( GS), Merrill Lynch, Google ( GOOG), First Marblehead ( FMD), Fairfax Financial, Research In Motion ( RIMM), Allegheny Technologies ( ATI), U.S. Steel ( X), Baidu ( BIDU) and Las Vegas Sands ( LVS).
At that time, he told me the notional value of his calls (if exercised) exceeds $30 million! When asked why now, Boca simply said, "Don't be a moron, Dougie! It's global liquidity. Don't you get it?" And then he actually said to me that he heard from his driver that General Electric ( GE) will receive a bid by a private equity sometime in the next six months. (I should add that Boca Biff transferred all his money from the money market fund invested with Baron Von Broker, who, being a conservative and intelligent fiduciary, refused to accept Buff's aggressive strategy, and purchased the call positions from a newly formed, Boca Raton, Fla.-based brokerage, Penny, Shark & Oakmont.) For a while, Biff was in clover, and he actually made back his entire loss. He leveraged his account further as it rose in value. Suffice to say, the great bear market of 2008-2009 wiped him out, again. I should also add that Biff's wife divorced him. I again heard from Biff, the paragon of speculation and the ultimate plunger, in September 2009, after the S&P 500 had risen by 400 points from the generational bottom of March that year. I hadn't spoken to Boca Biff in a while as he had fallen on bad times, and I think he was embarrassed to call me. He had been licking his wounds, which included unprofitable forays in the stock market, large losses in speculating on homes in South Florida, a near collapse in his window and door business -- and all this after a failed marriage. As Boca Biff related in our telephone conversation a bit over a year ago, he got remarried one and a half years ago to a woman who had received a reasonably large divorce settlement. Biff went on to say that he watched and watched the market's unrelenting rise through the summer and into the fall until he couldn't take it anymore and finally made the plunge in September 2009 (again, on margin). It appeared that, with large accumulated losses over the course of the last decade, Boca Biff was back at it. I asked, "Why now?" He responded, "Don't be a moron, Dougie. It's global liquidity. Don't you get it? Moreover, I am getting 11 basis points currently in my cash reserves at my brokerage account with Baron Von Broker." He went on. "Importantly, I have remarried and my new wife not only comes with some money but she has no clue regarding my investing mistakes of the past. I managed to keep my Mizner home in Boca, she loves it here, and she adores me."
His favorite stock? American International Group ( AIG). "Why?" I asked "Are you nuts?" he replied. "I heard from my new brokerage firm, Kennedy, Fitzpatrick and Gould
a Boca Raton-based brokerage named after the first three commissioners of the SEC that AIG has normalized earnings power of $40 a share. And FMG (my brokers) tell me the government will be forced by Hank Greenberg (who is coming back to the board of directors) to help renegotiate their debt with the company." "What qualifies them to make that analysis?" I asked. "I'll tell you what, dope, two of the guys still have their Ferraris, so they've gotta be smart. And they have tripled my accountant's brokerage account with them in the last three months after buying the private mortgage insurers, PMI Group ( PMI) and MGIC Investment ( MTG); that's why! Oh, they had been out of business until seven months ago; they had a little problem with the authorities and were barred from doing brokerage business for a couple of years, so they are hungry and aggressive and need to make their new clients some ca-ching. I forgot to tell you that they are so confident that they will make me money that they didn't even charge me commissions for the trades; they said all they wanted was 10% of the profits." I told Boca that was illegal. His response? "Whatever, loser. They've gotta live." "What else?" " Fannie Mae ( FNM), Freddie Mac ( FRE) and CIT Group ( CIT) are going to double digits on the heels of a 'V' recovery in housing. And they have huge short positions. The government is saving everybody. You can't lose." "Anything else?" "Yeah," said Boca Biff, "but my brokers told me they would break my legs if I mentioned them. They haven't finished buying yet." "Come on, Biff," I said, "Give at least one name up." "There's one, Kennedy bought me 4 million shares at $2.12 last week. He has a lot of confidence in it. I think he put over three-quarters of my account in it. It's run by Kennedy's niece. She's young (I think 28 or 29), but she was a really big mortgage broker in Delray Beach in the day, and the company she runs is now buying subprime mortgages from a bunch of banks in South Florida. After the housing markets blew up, she went to Nova Southeastern University in Ft. Lauderdale and got an associates' degree in real estate in May. She's a smart one, I tell you."
"What's the name of the company and the symbol?" I asked. "It's called Boca Industries, I don't know the symbol. It's on the pinksheets or something. I can only get a quote from Kennedy, my broker. I think his firm owns most of the float, so he has to know something." Suffice to say, Boca Industries was a fraud and went belly up, and it turns out that Biff was buying his brokers' stock position that they had received to promote the company. Biff was forced to liquidate his other stock holdings after, once again blowing up. And, Kennedy and his broker partners are all in jail. Which gets me to last night's phone call. After yet another divorce, Boca Biff, who obviously has a way with the opposite sex, married the young daughter of a well-known New York City real estate magnate who owns a professional sports team in Miami. In last night's conversation, Biff told me that he has been purchasing out-of-the-money calls in his wife's name (and with his wife's money) on only two stocks: Netflix ( NFLX) and Apple. For a total investment of "only" $4 million, Boca Biff tells me he has calculated that when the securities rise by another 50%, he will recoup his entire losses of the last decade back. When I questioned the wisdom of putting all his eggs into two baskets, he laughed at me. "Moron, these stocks go up every day whether the market rises or falls. An idiot can see that these stocks will go up another 50% in the next few months. And maybe I am too conservative; they could double. Jim Cramer hasn't even put the symbols on his knuckles the way he used to do with Google on his Mad Money show! Just you wait for that!" "How do you know for sure that they will continue to rise, Biff? Isn't holding out-of-the-money calls on only two stocks very risky?" I asked. "My stock broker is my new stepson. Do you think he would hurt his mother? Dougie, don't you read Warren Buffett's rules of investing? He says that wide diversification is only required when investors do not understand what they are doing. I know what I am doing! Anyway, how else can I get my money back?" Doug Kass writes daily for RealMoney Silver , a premium bundle service from TheStreet.com. For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.