How Larry Hite Made Fortunes Through Innovative Investing

Larry Hite.

Larry Hite had a few disadvantages growing up, which made him an unlikely candidate to become a legendary investor.

Hite was born in 1941 in Brooklyn to Jewish parents in a working-class neighborhood. His father, who had not graduated from high school, was a partner in a small bedspread maker. Hite was blind from birth in his left eye and had such poor vision in the right that he could barely make out the “E” at the top of the eyesight chart. His parents tried to correct it with glasses, but he could still barely read or write anything. Only much later did he learn that he had dyslexia.

“I did poorly at everything I tried and felt like a failure for most of my childhood,” he wrote in the recently published “The Rule: How I Beat the Odds in the Markets and in Life—and How You Can Too” (McGraw-Hill). “But because I expected to fail big, I began engineering my actions so that a failure could not kill me, and this became central to my later trading philosophy. I learned what didn’t work. You could say that I won because I expected to lose. My advice is to learn what your flaws are and embrace them.”

Hite also discovered that he had a few other home-court advantages. Not only was his father an entrepreneurial role model, and his mother loving and supportive, a nearby aunt and uncle were rich. “I noticed that their family had a different culture,” Hite told Startup Savant. “Go get what you want. Think big. Their values seeped into my mind.”

He discovered that his learning disability and klutziness came with a good sense of humor that made everyone laugh. His limitations also released his imagination about what was possible. He learned to “poker-face bluff my way through much of my early life,” which led to a brief career as a method actor. That experience helped him understand the different types of personalities he would work with in business.

However, early in high school, he was flunking biology and was told he would have to repeat it or get a perfect score on the state regents exam. He dreaded retaking the course and knew he wouldn’t do any better. He bought some prep books and found prior multiple-choice tests, then worked hard to study them, despite his reading challenges. He realized he could quickly eliminate most of the answers, and he wrote out and memorized the correct ones. The result: a perfect score. His teachers and administrators were baffled.

Near the end of high school, he was about to be sent to a trade school instead of college because of his poor grades. A perceptive examiner gave him an oral instead of a written test, which revealed that he had very high math reasoning skills, having had to do math in his head all his life. He was accepted at the New York University School of Commerce, the only college that would allow him in, though he had no real interest in business, so he took the minimum number of courses.

The Light Bulb Moment

While at NYU, Hite paid bills by acting, selling some movie scripts (none ever made the screen), and, Tom Sawyer-like, hiring others to do menial jobs.

One day in class, a professor was discussing various financial instruments, including commodities futures, which are bets on where prices will be for everything from food to clothing. The teacher dismissed this as far too speculative, given factors like the weather and geopolitics that influence prices, and noted that traders often borrow the 5% down payment “on margin,” raising the consequences of the risk.

“My brain jolted awake,” Hite wrote. “Had I just heard him say that with a mere $500 cash in a margin account, you could trade $10,000 in commodities? The whole class laughed except one person who later went out and became a multimillionaire. That was me.”

He realized that since Treasury bills paid 3%, he could borrow the money so the cost for a futures contract would actually be just 2%. He also knew that the professor was addressing the risk of putting an entire investment in one commodity while it could actually be spread over many. “I would learn through my own testing and data analysis that over time, that diversified commodities futures are no riskier than stocks,” he explained.

After a six-year struggle, Hite graduated from NYU, but instead of working at an investment firm, he tried promoting bands and taking a cut at the gate. In the process, he met the Beatles’ Brian Epstein and found they had much in common, including a philosophy of not placing all their proverbial eggs in one basket. But after shootings at some clubs that caused one of his bands to disband, he got a job as an order clerk at a stock brokerage in 1968. He knew what the traders would never admit: that this was a form of gambling. His family was card players and he had intensively studied the odds in blackjack and Las Vegas solitaire.

“Wall Street preys on the desire of people to believe in stories the analysts tell about how they can predict the future,” Hite said. “These often obscure the actual probabilities, and I’ve seen highly intelligent investors stick with stocks as they went down and down and never recovered. I learned early in my life never to bet more than I could afford to lose, so I place stop-loss orders to minimize the risk, automatically selling when the stock goes down to a certain point. At worst, I would have a small loss or, because I spread my investments, a bunch of small losses. The buy-and-hold value strategy can make money over time if you can afford to wait and risk big losses, as is the case for Warren Buffett, but it’s not wise for most investors.”

“Let Your Profits Run”

To actually make serious money on investments, Hite has adhered to the philosophy of the 19th-century British economist David Ricardo, who advised, “Cut short your losses, and let your profits run.” This is now known as “trend following”: riding the wave of a stock or future contract that has been rising. This does not depend on predicting the future; it is following the crowd. But the trend investor won’t be selling when the wave peaks at its highest, but when it falls back to the stop-loss level, which Hite programs to change as the price rises.

The trick to amassing wealth, Hite said, is to bet big (but not one’s shirt) on stocks or futures that have minimal risk but great potential. He calls this using asymmetrical leverage, and he developed ways he describes in the book to assess where to make these critical investments.

The actual journey to enduring success, however, was rocky. In 1975, after noting that coffee consumption had been rising steadily, but not prices. After studying 50 years of weather patterns and supply/demand data, he bought $1 million in call option futures over the course of a year (he was making that every eight months in trading, so it was not a potentially fatal gamble). Call options are contracts to give the buyer the right, but not the obligation, to actually make the purchase at a specified price in a certain period. Coffee was $0.60 a pound and he rode the wave to $3.10. When he got out at age 35, he had $12 million.

But he lost it all because, he says, he was “not ready to be rich” and started making emotional decisions. The key lessons were to set up a system that fully automated trades, blocking changes to the system, and constantly diversifying the individual investments.

In 1981, Hite founded Mint Investment Management and developed an advisory relationship with the commodities futures giant ED&F Man in London. His performance impressed its leadership, and they invested in Mint in 1983 and introduced him to their global network. By 1988, Mint had a seven-year average annual compounded return of 30%. Two years later, it became the biggest hedge fund globally, managing over $1 billion in assets.

In 2000, Hite decided to manage his leave to manage his own money and formed Hite Capital. In 2010, he merged it with International Standard Asset Management, led by the former chairman of ED&F Man.

In recent years, Hite has diversified into real estate, buying buildings that are nearly fully-rented and pricing units at 10% less than the market. The results of his life’s work is a net worth of $100 million.

In 2012, Hedge Funds Review honored Hite with a Lifetime Achievement Award.

He attributes much of his success to having written goals: he advises writing out 5 to 10 and coming back periodically to refine them. “Goals force us to reconcile conflicting desires,” he explained. “You have to stop watching Netflix or playing with the latest iPhone and persevere or you will fail. Your dreams are more important than your distractions or your limitations.”

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Scott S. Smith

Scott S. Smith has had over 2,000 articles and interviews published in nearly 200 media, including Los Angeles Magazine, American Airlines’ American Way, and Investor’s Business Daily. His interview subjects have included Bill Gates, Richard Branson, Meg Whitman, Reed Hastings, Howard Schultz, Larry Ellison, Kathy Ireland, and Quincy Jones.

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