I never considered myself a currency trader. My strength was analysis and software development. Since my disaster with Palsby back in 1968, I had never invested in the stock market, or any other market. Any savings I had, and they were not much, had gone into conservative bonds.
I adopted what I considered to be a conservative strategy, committing only ten percent of my capital at a time for a one month period to buy the best options according to my computer analysis. I could at most lose ten percent of my capital in a given month. My analysis indicated that I could expect to earn about 6% per month on my capital, assuming my estimates of volatility and trend would continue to be as much better than the market’s as they had been in the test period. I was very excited about finding out if the real world behaved as my theory said it would.
With $100,000 to work with and a typical one month option costing about 1% of the underlying exposure, I could spend roughly $10,000 per month on premium (i.e. option purchases), corresponding to about one million dollars of exposure. With a shaking hand I put on my first option in May 1984 for about $2500. Thereafter I systematically put on one option a week and put them away in the drawer to await expiration day, without worrying about what was happening in the meantime. For me, trading options was like playing craps with loaded dice, where I had a slight edge, but would still lose my entire “bet” about 45% of the time. That uncertainty can be very unnerving to some people. But personally, I decided from the very start that I would regard it unemotionally as a game of bets that might work and might not, so it never bothered me. I had no personal prestige tied up in it, and could walk away from it with no regrets if it didn’t seem to work. Aside from my banking contacts, very few people had any idea what I was doing.
It was first some years later that I learned that nobody else traded options the way I did. Most professionals at the banks are actually sellers of options. When they do buy, they tend to monitor their positions on a continual basis on their Reuters screens, trading against them in the currency market to cut losses or lock in profits. That was not my style. I was too busy with other things in my one-man operation and had neither the time nor the inclination to follow the minute by minute fluctuations on a Reuters screen. Indeed I never had a Reuters screen, then or later. I used at most a half day a week putting on my trades and keeping track of them on my computer.
As the months progressed I had some unexpected experiences. One thing that surprised me was the tremendous differences in the prices quoted at different banks for the same option. I was able to exploit that in a way that would not be possible years later when the market became much more efficient. But in 1984, it was still the forex jungle. Many currency traders had no idea of the risks they were taking.
By late 1986, I had enough evidence to see that my trading strategy was making a return on capital in line with my theoretical expectations – over 100% per annum. I had built up a capital of about $400,000 and began to think about next steps.
An essential part of my thinking was the ownership structure. I wanted the benefits, if any, to accrue primarily to the environmental movement, to the movement towards sustainability. My idea was to have a charitable foundation own Gaiacorp, as my way of integrating spirituality and materialism. It would be ironic indeed if I were able to extract money from the currency market and divert it to useful purposes benefiting the planet. There were so many good people and projects out there that lacked capital. If my numbers were right, there was an opportunity here to make a difference. I had to find out!
I pointed out to the others that I considered this a forty year project. We had to think in terms of long term stable structures. Perhaps none of us would still be around at the end of that period. I proposed that Gaia Trust hold 90% of the shares of Gaiacorp, and I would keep 10% for myself.
By May, 1988 Gaiacorp was a reality. I had done my last trade in the currency market. From now on it was up to Gaiacorp’s professional traders to carry on from where I had left off. Within three years Gaiacorp became a very successful and well-known player in the international currency market, worth over $20 million, and became one of the largest currency option buyers in the market. Later it had a rocky period for a while as the nature of the market shifted and the EMS broke up. But it recovered, and the charitable program was never greatly affected.