Todd Stottlemyre

Todd Stottlemyre is a master of games. Todd is best known as a former Major League Baseball pitcher. However, he is quickly becoming equally well-known for his professional successes as an investor and trader.

Todd points out three critical keys to success: never give up; never stop learning; and, believe you can accomplish anything within your talent set. Todd is an incredible example of how a burning desire to learn can empower dreams. Todd meticulously studied his opponents on the baseball field, but his humble work ethic as a trader may be his greatest accomplishment yet.

In several days Todd will be partnering with friend and professional financier Joe Donohue to launch a new hedge fund called Desert Shores Capital. Despite the challenging times in private equity, Todd is ready to shoulder the responsibility to his investors. Moreover, like his family legacy in Major League Baseball, Todd wants to build a legacy in finance which one day may be carried on by his children.

In true Market Wizards fashion, when I got off the phone with Todd I was ready to conquer the markets. There is something special many professional athletes and military personal bring to a career in finance, and Todd was kind enough to share “It” …

Damien Hoffman: Todd, tell me a little about your high school experience. Were you a jock? An intellectual? Or, a student-athlete?

Todd: I was definitely a student-athlete. When you’re in high school you’re always looking ahead, “Man, I can’t wait to graduate and move on.” But when you look back at high school, they are great days growing up. I had great friends and sporting activities. I look back at the teams I played on — whether it was a baseball or basketball team — with fond memories. Those were great times. No matter where you live or where you go to high school, where you grow up is home. And home is always a part of you.

Damien: Although I was also a student-athlete in high school, I was more of a jock until I got to college. Then I became more interested in intellectual pursuits because I wasn’t an athlete. I felt like I developed a neglected side of me. How did you balance being a great athlete as well as a smart guy interested in things outside of sports?

Todd: There are definitely different groups in school. But I went to a really diverse school which set me up for life. We had a lot of different cultures and races. For example, your skin color didn’t matter. Whether we were learning or participating on the fields or in the gym, we were just kids being kids.

People weren’t pigeonholed into “he’s on the basketball team,” “she’s on the cheer squad,” or “those are the cool kids.” I’m very fortunate to say that whether you were a singer or in the school play I attended a school that was really bound together very tightly. That experience was very cool. So, I didn’t just hung out with the smart kids or the kids on the baseball and basketball teams. I hung out with the people in the cooking class, too. I hung out with the people in the photography class. I grew up in a small town. So maybe it was the small town roots that made it that way.

Damien: Since you were never pigeonholed as “Todd the baseball player” or “Todd the student,” when you moved through your baseball career in college and the pros, did you always have an eye on what you’d do when your playing career ended?

Todd: I’d like to say yes, but I did not. Until I was a senior in high school I was just participating in sports and being a kid. Then, when I was a senior in high school, my baseball career clicked. For the first time I thought, “Maybe I can play for the biggest stage someday …” That day arrived when I signed my first professional Major League Baseball contract with the Toronto Blue Jays. A very close friend of mine used to babysit me in New York when my dad was playing for the Yankees — a guy by the name of Frank Ayello. Frank had worked on Wall Street. When I signed with the Blue Jays and got a little bonus money, Frank managed it. Frank helped me manage my money during my entire career.

The first stock we ever bought was Pepsi. It went up from 30 to 100 and split three-for-one that year. I thought, “Wow! How did that happen? I want to figure that out!” [Both laugh] The issue wasn’t the return because we only had a few shares. It was a game in itself to me.

So, I began to study the market. It was a home study for me. I didn’t advertise it — I just did it. I studied securities analysis, the Graham and Dodd books, Warren Buffet, Peter Lynch, and Jesse Livermore. I studied the Market Wizard books and wanted to understand what traders were looking at. I wanted to know the difference between an investor investor and a trader. So, I continued to read business book after business book and Wall Street book after Wall Street book. As I made more money during my baseball career, I became more active in the market — for better or worse.

You can read all the books you want and do all the studying you want, but you won’t truly learn what discipline means until you are physically trading and investing. That’s when you learn how to invest or trade to fit your personality. That’s when you set yourself up to be successful.

There are many different ways to trade and invest. However, I say this all the time: If you watch a Major League Baseball pitcher every night, everybody’s motion is different. Whether it’s slightly or dramatically different, it’s different. Everybody throws a different type of fast ball, a different type of curve ball. No two sliders are the same from one guy to the next. However, you can take two guys and get similar results even if they throw with different hands or varying speeds. Same thing in markets. You can have strategies from A to Z. You might be a quant, an investor, a technical trader, or a fundamental trader. All those people can have success using different strategies.

Success depends on discipline. Do you fit with your discipline? Do you cut your losses and write them down? At the end of the day, it comes down to discipline. I learned my discipline on the baseball field. It took a long time. In a sense, I learned how to be a trader from being a pitcher. As a pitcher I had to understand preparation: What hitter was I going to face? What were his strengths? Where were his aggressive swings in the strike zone? What were my strengths? Was I willing to match my strengths against his strengths? The answers to your questions depend on the type of game you are playing. In trading, we look at different stocks, indices, and ETFs. We ask, “Where are they strong? When are they strong? When are they weak? When should you be short? When should you be long?” The key to my success has been preparation, strategy, and discipline.

Damien: Todd, like a true market wizard, it sounds like you are always learning.

Todd: That’s true. Let me tell you a story: I’ll never forget my last day in uniform. I knew it was my last day. My arm was shot. My body was shot. I left everything on the field. It was the team’s last day for the year [2002], but I knew it was my last day playing the game of baseball for the rest of my life. It was extremely difficult to take off the uniform that day. More importantly, even on that last day I was still learning about the game of baseball. Even after fifteen years, on the day I was going to take off the uniform for the last time, I still learned something about hitters, pitchers, and the game. That attitude as transformed me as a trader. I am now able to move into a role as a hedge fund manager. And if I’m fortunate enough to live twenty, fifty, or even sixty years from now, I can promise you on my last day, on my last trade, before my last breath, there will be something to learn in the market.

The minute you think you’ve got the game as an athlete figured out, the market as a participant figured out, or the world as the President figured out, that is the minute you’re surprised and something bad happens. That’s when you realize you don’t have it all figured out.

It goes back to discipline. If you’re passionate about something, passion will drive the learning experience. I would say that my goal moving forward is to become the best trader I can possibly be within my skill set and intellect. If that means I could someday become the best trader in the world, then that’s my goal. Even if I became the best trader in the world, how hard would it be to maintain that position? People make it to the big leagues and play Major League Baseball. It’s hard to get there. But it’s harder to stay there.

Damien: You said we’re all different and need to understand our strengths. What is Todd’s trading style and how does that relate back to the strengths you took from baseball?

Todd: I’m probably a better trader than investor. I’m an instant gratification guy. So, I want my positions to work fast. Based on that, it would be hard for me to value invest because value investors are buying depressed assets that reflect value over long periods of time. I don’t have the patience for that. So, today I’m not interested in buying Citigroup as a value play. If Citigroup at three dollars a share is a value play, maybe someday it trades to ten, fifteen, twenty dollars. But, it might take five, six, seven, eight years to get there. That’s not my style.

If I’m looking at Citigroup, I’m looking for particular triggers — either on the long or short side. On the long side, a breakout of a three month high. I’ll look inside those charts and try to understand what’s going on in the thirty-minute and hour time frames. I want to see supply and demand on those time frames. Then I drill down to a daily chart and look for the right triggers. If I get my move, the trade is on. That’s my strength as a trader.

Damien: Would you ride something so long as it’s moving in your favor? Or, is there a part of you that says, “Lock in gains … out and onto the next thing”?

Todd: It’s a card game, right? To never lock in a gain is to never make any money. If I like a certain area where I’m going to buy a stock, I might scale into it with a certain spread that says, “OK, I’ll stop scaling into it at twenty, and my stop-loss will be below that.” There’s also a scale out approach. I’ll move up my stop-loss on the stock to make sure I never turn a winning trade into a loser.

Damien: A couple years ago, Brian Shannon taught me the value of scaling out of stocks.

Todd: I love Brian Shannon. I read his blog. I’ve read his book [Technical Analysis on Multiple Timeframes]. Brian has become a friend. Brian taught me how to look inside a daily chart and understanding the deeper activity. Today I talk about that skill as part of my strategy and discipline. That wasn’t something I studied ten years ago. It’s something I picked up from Brian in the last year. It might not help me buy the next stock, but it helps me with my risk management.

Damien: Brian has also taught me the art of patience. Since learning from him over the years, I stopped trying to make X number of trades a day and started simply trading only when my setups said, “Trade!”

Todd: Brian also helped me with the discipline to wait for good setups. Sometime the best trade is no trade at all. I have days when I can’t get comfortable trading. Maybe I’m not reading the markets correctly. Or maybe I’m getting whipped. So, I’ll fold my arms and become a spectator. I will go through all kinds of charts. If something jumps out at me, the trade could be on.

I’ve had days when I’m getting a great feel. I get real aggressive on those days because those are the days when you’re in the zone. You’re in your sweet spot. It’s almost like you’re seeing things before they happen. Those are very fun days. On the other hand, you can make a lot of mistakes on days when you don’t feel good — when you’re not in the zone and trying to force something to happen.

Damien: Definitely. I can attest to that.

Todd: We’ve all done it. We’re all human. If you don’t take a good trade setup, you don’t make any money. If you’re forcing something, you’re losing money. On those days you might say, “Why did I even do anything? I lost some money today and that money shouldn’t have been lost because the entry target price never hit.” When you’re losing money you’re thinking, “Hey, that stinks. I hate losing money!” Actually, I hate losing in general. However, I must understand that if I’m right 60% of the time, that means I’m going to be wrong 40% of the time. During the 40% of the time I’m wrong, the discipline has to come into play to push the button and say, “I’m out.” You must preserve that capital.

Damien: Sometimes not wanting to lose can cause people to ride their losers. How do you prevent your aversion to losing or emotions from screwing you? How do you keep that from becoming a weakness of yours and instead use it as a strength?

Todd: We all have the primal desire to be right. But being right can mean taking a loss. That’s a positive. It seems like a negative because you just lost money. I had to lose a lot of money to figure that out. There were plenty of times when I got into a trade and the trade turned into an investment. The minute a trade turns into an investment, that’s a loser. If you don’t cut it loose, it could be a big loser. Instead of losing one or two percent on that loser, you might be down eighteen or twenty percent before you can even breathe. To prevent that problem, I have a specific exit where I say that’s all the pain I will take. Generally speaking, that pain threshold is based on looking at different charts. If I get long, I’m looking for certain break points where maybe there’s no support or the support is too far under my cost. I don’t want to take that much risk.

I always look for setups. I’m willing to lose one to win four. That would be a great risk-reward ratio. It’s not always one to four. Sometimes it’s one to three, or one to two. But if the risk-reward is one to one, then there’s a better trade somewhere else.

If you lose enough money enough times by riding something down, eventually you’ll be frustrated and take your loss. Unfortunately, sometimes the market tries to talk you back in. Let’s say your stop loss has been hit and you’re out. Then the stock reverses and runs back up, so you re-enter. Then, you get stopped out again. After the market has done that five or six times, you start saying, “This is a dumb strategy. Let me widen my stops.” But, the moment you start widening your stops from your original stop price, you start saying, “Maybe I should buy it here because it’s going to reverse.” Then, my friend, you’ve bought yourself into a falling knife. Maybe you’re down 30% and your twice your original trade size. You’ve gotten yourself into an ugly scenario.

That happened to me on my worst trade of all-time. I was trading options. Then I doubled up. Then I doubled up again. Then I doubled up again. I was two or three days facing expiration and my options were worth nothing. I’m trying to sell them and nobody’s buying. I had a huge loss. That day will stick with me for the rest of my life. Doubling down while thinking you’re right is dangerous. You might believe the fundamentals are right and you’re right, but the market will tell you, “Guess what … you’re wrong!” And you’ll know you’re wrong because the price is going down.

Damien: We’ve been talking about trading, but can you back up a bit and walk me from the time you stepped off the mound to when you became a recommended person on Stock Twits?

Todd: Sure. I retired from baseball in 2002. I was only 37 years old. My goal was to take off a year, but after six months I was ready to do something new. Since I had an interest in the markets I thought about setting up a hedge fund. But how many people were going to trust me with their money since I didn’t have a track record? I just walked off the baseball field throwing a 3-2 slider with the bases loaded, right?

I was fortunate to have the financial stability to do anything I wanted at the time. So, I wanted to do what I loved to do. My next door neighbor, Alan Fonner, was the director of Merrill-Lynch and he said, “Hey, we’d love to have you if you want to give it a shot.” So I took the leap of faith and went to the training program at Merrill-Lynch. I got all licensed up and started gathering assets. After a couple of years, I was successful at bringing in assets and had built a nice little team. I grew bored because I really wanted to trade.

Merrill-Lynch has a great business model and they’re a great institution. But it didn’t fit my passion. I wanted to make a decision. I was used to being the pitcher. I decided when to throw a fast ball, in, out, or a slider. As a broker just brought in the assets, diversified the assets, and handed them off to institutional money managers. Then they make all the decisions about trading the money. I wanted to do that.

Damien: Sounds like moving from pitching to ticket sales when you’re used to being in charge of the whole game on the field.

Todd: Exactly. When you’re a pitcher standing in the middle of the field, you have a huge responsibility. You have a huge responsibility to your teammates, the manager, the pitching coach, the coaches, and everybody who bought a ticket that day to root for you. You’re responsible for all of those people on that particular day. As a broker I was responsible for the family who gave me their money, but now I handed off the responsibility to somebody else. And those people get all the credit. Obviously those people have MBAs and CFAs. They went to business school and they’re really bright people. But for me personally, I wasn’t used to handing off responsibility. So, after about four and a half years I decided I wanted to be a trader. I wasn’t going to get any better at being a trader while I was a broker, so I walked out the door on good graces with the people at Merrill. I have great respect for them.

Could I pick a worse time than September of 2007 to become a professional trader? [Both laugh] You can look at it the other way and say, “Woah, that’s a great time.” The de-leveraging phase created the discipline I have today. During that time I met a gentleman by the name of Howard Lindzon. I was in the process of presenting Howard a private equity deal and he presented me a private equity deal called Stock Twits. I thought, “Wow. This is a great idea. I’d really like to be involved.” That day I made a small investment, Howard signed me up on Twitter, and soon after posted my trades.

One day I noticed a guy on the system that goes by “UpsideTrader.” He’s a very fast, nimble, and successful trader. When he took his losses they were really tight losses. So I looked into his background. He was a guy who had been in the financial markets for twenty five years. He had worked as a retail broker, ran a hedge fund, and was very successful. So I sent him a direct messaged said, “Hey, Joe. I’d love to talk to you about your strategy.”

About a week later, I picked up the phone because he’d sent me his number. I said, “I am going to call this guy and just start asking him questions.” Every time I asked him a question and he answered, he’d go into how he looks at a trade. He explained his understanding of what’s going on from a macro-global standpoint, how it fits with different sectors, how those sectors fit with different stocks, and how different types of charts break down the stocks. He’s looking for breakouts and breakdowns, whether to be short or long, and tries to understand market psychology.

At first he advised I just start eyeballing this process he had laid out for me. He said, “After a few days, see if you’re picking up on winners.” I actually didn’t trade for three or four days — I just watched and used the process. Then, when I started, I picked winners. I called Joe, “Hey, Joe! Check this one out.” He would make a few dollars on the trade and he’d call me back and say, “Great eyes. That was a great trade. Hey, I made eighty cents on it.” After doing this for a few days I thought, “To heck with this. I’m putting real money in this!” So I began trading for real. Joe continues to mentor me. We talk every day.

Then I got listed as one of the top traders on Twitter with Nobel Prize winners like [Nouriel] Roubini. There are all these famous traders and then this guy who walked off the baseball field and spent a few years at Merrill-Lynch. I was humbled to be named with these guys. It was awesome. But at the same time that was a whole new pressure. I got all of these new followers because of people said, “This guy’s a top trader. I’ll follow him.” When I put on my trades and posted them I wanted to make sure I could live up to the expectations. It’s like pitching the big game and the bright lights are on. If you’re already thinking about your interview afterwords, you’re finished. In fact, if you’re thinking anything past the next pitch in that game, you’re in trouble. But that’s the animal in every one of us.

Damien: So how did you take that newfound notoriety and parlay it into starting the new fund Desert Shores Capital?

Todd: The conversation with Joe carried on. We began trading together while shooting each other charts and setups. We built a bond and friendship while looking for opportunities in the market. About six months after that, Joe flew to Arizona and we talked about managing a fund together. We had several reasons. Number one, we were successful in very difficult markets. Number two, everywhere we turned it seemed like a scam going on. People were getting taken for their hard-earned money.

Emotionally, that bothered me. It’s one thing to fail while running an honest strategy and working as hard as you can. But to just steal money is the scum of the earth. So, I said to Joe, “If we’re going to to do this, let’s be transparent. Let’s build a legacy that we’ll work hard and have the passion to excel in the markets. Let’s do good by doing good for other people.” If we stick to that discipline for our entire career, we’ll do well and never have to worry about people wanting to invest with us. The honesty and hard work will show up in our returns. We’ll build something very special.

Damien: Where are you with the new fund?

Todd: We’re going to start trading the fund August 17th. We began raising some capital. It’s a very tight circle of money. It’s family, friends, and people within our own circles because there’s no track record yet. So the money we’ve attracted is from people who know us and trust we’ll work hard. I also feel very honored to say I’m putting my own money in this fund. There’s a huge responsibility because no matter who puts money in this fund, every dollar and trade will be like it’s mine. That’s a great dynamic when the managers and investors have the same goals because they’re all together. At Merrill-Lynch I used to say, “I don’t want to show any client anything I don’t have my own personal money in.” I tried to live by that as close as I could. But in this case, I have my money, my father’s money, my brother’s money, and we’re all in this as a family. Joe is the same way.

The fund will be a relatively very small fund to start. We’ll build this thing one brick at a time. This is not a sprint. This is not a fund in which we’re going to chase performance for two years so the managers can get a performance fee, we’re rich, sell out the fund and move on. This is the concept of building a legacy. My father played Major League Baseball and after he played Major League Baseball he was a coach in Major League Baseball. He was probably in Major League Baseball for fifty-some odd years. That’s a legacy. I was fortunate to follow in his footsteps as a player. My brother followed in his footsteps and is now a pitching coach for the Arizona Diamondbacks. That’s the legacy of baseball.

I would love to leave a legacy of running a fund and finance company that someday my children say they want to be a part of. So, this is a journey. August 17th will be the first day of the rest of my life. It’s actually the first time I have had the same passion, excitement, and work ethic I had when I played the game of baseball. The pressure comes in the form of posting results every month. Joe warned me, “Hey, it’s every month.” I said, “That’s cool. I used to pitch five games a month and my results were posted once a week. So if you’re worried about me from the pressure of having running other people’s money, I have no issues with that.”

Our fund will be very disciplined. Cash is a position in our fund. Preserving capital is a priority. Growing capital is another priority. That doesn’t happen fast. This isn’t a get rich quick scheme. It’s a two man show: me and Joe. We’re going to build the infrastructure as money comes into the fund. If we have capacity issues with how much money is coming in, we’ll build up the organization to handle it one man or woman at a time.

Damien: Todd, recently we all saw in the media that Lenny Dykstra is going bankrupt after running a fund and multiple investment-related businesses. What would you say to a prospective investor who just heard about Dykstra and might be scared of investing with a former athlete?

Todd: First, I’m not up to speed with the Lenny Dykstra situation. I’m not sure what happened there. But if you take a look back to last year, look at all the different money managers who were wrong. I’ll never forget almost everybody calling for the crisis to be over in early 2008 –that was the worst part, by the way. So a lot of people were very wrong. Unfortunately, somehow it touched Lenny. But I don’t know what side of the fence he was on as far as running money and doing all those things. I’m certainly not here to judge anybody. Now, how does this relate to me? Obviously, somebody is going to say, “Here’s another athlete coming into the world of finance. How long will it take for him to blow up?”

My goal is ten years from now during an introduction at a business meeting the other person would never believe I played baseball beforehand. Today people are going to see the name and say, “I think he played in the majors, right?” My goal isn’t going to happen overnight. I’m not going to earn the trust of an institution overnight. We have to go out and prove ourselves. I have no problem putting in the hard work and doing this one brick at a time to prove myself to people who may want to make an investment.

There are always going to be people taking shots. Trust me. When I took the mound half the people in the stadium liked me and the other half didn’t — even at my home ballparks. I’m not worried about whether people like us. We have to perform, preserve their capital, and earn trust. That trust isn’t like the wind or weather which comes and goes. Earning trust takes time. Today I talked to my children about trust. I told them when trust is broken from one person to another, it takes a long time to earn that trust again.

So, I don’t look at myself as just another athlete entering the world of finance. I don’t look at it as, “Lenny Dykstra wore a baseball uniform and Todd wore a baseball uniform, we should be grouped together.” Roger Staubach wore a uniform too. Look at the success Roger has built in real estate. He has become a leader for a company. Comparing me to Lenny is like saying every hedge fund manager is a Ponzi scheme artist like Madoff. I’m not out here to fight the demons of people’s thoughts and thought processes. My focus is to build the legacy one brick at a time.

Let me say I wish Lenny all the best. I don’t know what happened there. A lot of CEOs had a lot of wealth tied up in their own stock, margined that stock, and lost it all. Some very brilliant guys did that. As we move forward in this launch time will show how am I different from other guys. I hope that someday I might be compared to some of the best traders in the world rather than somebody who took off a baseball uniform and entered the world of finance.

Damien: Based on the trustworthy and successful people who have surrounded themselves by you, I am sure you will be successful at your new fund with Joe. With that said, what kind of advice do you have for young student-athletes like who are interested in finance when they are done with sports?

Todd: Three things: never give up; never stop learning; and, you can do anything, regardless of those who say you can’t. You can be whatever you want if you have the passion and will to learn and never give up. I played baseball as a kid. Then I was fortunate enough to play Major League Baseball. I am extremely fortunate to have a mother and father who taught me about being responsible. My parents are the greatest parents in the world. If not for them, I wouldn’t have been able to do many things. In our family there was no such thing as giving up or can’t. My parents taught me I can do anything I want if I’m willing to do the work. I’m very thankful for that.

I also did stupid things and made dumb mistakes. I made dumb statements that caused sleepless nights. I had those sleepless nights because I had the responsibility that was given down from my parents. They told me I am responsible for whatever I say and do. My dad used to say, “If you’re gonna dance, you have to pay the fiddler. If you throw up, you sleep in it.” [Both laugh] I’ve had plenty of times when I’d call him up and say, “Hey, Dad …” and he’d respond, “You threw up again, didn’t you?” I’d say “Yup.” And he’d say “Well, you gotta sleep in it now.” He meant to take responsibility for my actions.

The other day I was telling a young college kid there were a lot of times in high school I couldn’t wait to go to college. When I was in college, I couldn’t wait to go pro. When I was in the pros, I couldn’t wait to go to the big leagues. When I retired from baseball and went to Merrill-Lynch, I couldn’t wait to have my own fund. Basically, you can always look to the future because there’s always something. It’s great to have goals and dreams, but don’t forget to take care of today before you look forward to tomorrow.

With our fund there are a lot of bricks that have to be laid before August 17th — and the 17th will be here soon enough. I’m not looking to the 17th right now. Today I’m doing what I have to do to set up our fund for success. I always ask, “What can I do today?” Then, tomorrow I ask the same question. But I can’t take care of anything tomorrow until I finish today’s tasks. And when the fund launches it’s going to stay one day at a time. How can we make money every day? That will be the focus. Concentrating on one day at a time leads to success.

Damien: Todd, I think that’s the perfect ending to an incredibly inspirational conversation. I wish you guys all the best with the fund and look forward to following up with you in the coming months.

Todd: Anytime, Damien. Joe and I love your interviews and I’m honored you were interested in interviewing me.