Urban Trade Breakdowns: Munehisa Honma, Zen and the Art of Making Money

Munehisa Honma was the greatest trader in history. The OG. A bad motherfucker and a good person. He went deep and invented the game as we know it. This is going to tax your Instagram attention spans but I couldn’t think of another way to tell the story and I’m lazy and didn’t feel like editing.

Way back in the day, rice was money in Japan. They needed it and survived on it and lacking a better unit of currency to tax and oppress your people, the Japanese Shogun (the main man) authorized a rice futures market.

Munehisa Honma was born in 1717 in Sakata. They grow rice there. He was adopted into a farming family with a small plot of land and as is their tradition, when he became a man he was given responsibility for the family’s money. When you are born into the the lowest class in a feudal country where there ain’t really shit else to do and all you know is rice, if you don’t want grow rice, another option was to trade it. This is what Honma decided he wanted to do and he thought that if he could succeed trading rice, he would make his family proud.

But Honma had a younger brother who wasn’t adopted and was no fan of rice trading and when he eventually got old enough to take the reins of the family’s cash, he made his move against Munehisa, who he saw as little more than a degenerate gambler, so he kicked him out.

Newly homeless with a little bit of money and a lot to prove, Honma set out to trade on the local exchange in Sakata. And fuck, he had a knack for the shit, eventually making about $100k in today’s money.

And of course, being a dude this went straight to his head and so he decided to bail on the country grinders in Sakata and try his luck with the no-limit rice ballers in Edo (modern-day Tokyo). But the Edo market was huge with hundreds of traders from all over Japan, massive volumes, all kinds of fancy shit to look at and fucking people everywhere (at a million people, Edo was one of the largest Cities in the World at the time). Honma was so determined to hang with the big boys that he just tore into it, trading early and often. And at first, he did aite. He made a little scratch on a couple of trades, lost a few, but he was up for the first few days. Chillin’ in bed at night, Honma had yen-signs in his eyes and couldn’t wait to get back to the exchange. And when he gets there, he gets all kinds of cocky and goes at it hard. He then starts to lose. This pissed him off to no end and so he picked up the pace, making bigger bets, eventually yolo’ing the last of his money on a couple hundred bails of Niigata’s finest and poof! He’s broke as fuck.

Honma was crushed. He felt like a loser and a failure.

So with no cash he hitched his way back to Takata and headed to the mountains to check himself into a monestary he used to visit when he was a kid. And for days he just lay in bed, not saying shit.

Then one day a monk came to him and asked him to join him for tea. Across the garden a flag was fluttering in the wind and the monk asked him why he thought the flag was fluttering in the wind. Honma gave him some dumb-ass answer and the monk asked him again why the flag was fluttering in the wind. ‘Fuck man, can’t you see I’m depressed’, he thought. But the monk stared into his eyes for a few seconds, all Jedi-like, and then told him: “the flag is fluttering because your mind is shaky”.

Honma thought about that for a long-ass time. And at first it seemed like some old monk bullshit but then he thought about Edo. More precisely, he thought about the state of his mind in Edo. He went ready to win and be somebody. He was greedy. And when he lost, he got pissed. And when he lost more, he got really fucking pissed. His mind was shaky as fuck and he realized that his decisions were guided by his emotions and that’s some primal shit you can’t control.

So he packed up and headed for Osaka and the Dojima rice market, the biggest rice market in Japan. And once there, he just watched. And then he started writing down every trade, not just the price but the open, the high, the low and the close. And he did this for a long fucking time and then found a stack of old price records from the past few years and he wrote all that shit down. And he started to see that shit moved in waves and patterns and these repeated themselves. But he didn’t know why and he needed to know why. So he locked himself in some dark-ass room in some shitty inn and just stared at the numbers until the sun started to set. And as it got darker, he reached over to extend the wick on his gas lamp and saw that the flame got brighter as the wick got longer. And as he stared at the flame, he realized that the flickering moved in patterns that resembled the rhythms of the trades. And the flame glowed strong when the gas was full and the wick was long. And he looked back at the numbers and wrote them out in the shape of a candle, with the high on the wick and the low on the bottom of the tail and the open and close on the top and bottom of the candle. When he wrote out all the prices this way, he smiled for the first time in months, ‘cus the shit started to make sense.

But this motherfucker didn’t stop there. He continued just watching the market and listening to the traders and writing shit down. He saw how the price reacted when some scrabbly ass motherfucker came down from Nagano with reports of a flood, or when some baller rolled in with a caravan full of rice from Korea, or when the weather was hot, or when people traded hung-over. And after just watching all this shit for a really long time, he started trading.

And he never lost again.

What he realized was that the markets moved on information as expressed in the emotions of the traders, predictably. And if could keep his head clear (his deepest insight and the only thing you should take away from this) and get ahead of the information, he would see the pattern start to form and trade it. So he started paying people to bring him information and he built a network of messengers throughout the country to bring him updates on supply, demand, weather, wars, the cash flow demands of distant land-owners, insects, etc. Everything mattered. He then hired 150 people to stand in a row 4km apart from one another on the top of tall buildings and mountains along the entire 600km road from the Takata rice market to the Dojima rice market to arbitrage price discrepancies between both markets.

And he kept winning. There are documented runs of over 100 winning trades in a row. And these were huge trades. No one knows exactly how much he made but most agree it was over $10b and possibly as much as $100b in today’s money.

So here’s what this motherfucker figured out: the candlestick chart, technical analysis, a framework for incorporating fundamental analysis in technical trading, the world’s first near real-time market data-feed, the world’s first inter-exchange arbitrage platform, the first detailed documentation of the specific role of psychology on markets and traders, and some of the most enduring trading strategies in history.

“The rise and fall of rice markets depends on nature, which you should never meddle with unless you are highly skilled”

Word.