Each cyclical purge witnesses the fall from grace of investors who, while superhumanly belief-defyingly profitable in the past have their Icarus moment with hubris, greed, fat-tails, or mere complacence. To a reasonably conservative [risk-taker, not political orientation] contrarian, the flame-outs typically involved large egos quite literally losing more money than they EVER made, for their successes were on smaller amounts of capital where their risk-taking denoument gone awry was typically upon a mind-numbingly large wodge of capital. I still smile at this phrase: They lost more money than they ever made (think Merriweather, Carhart, Jon Wood, Brian Hunter, Cioffi to mention but a few).
Such escapades in the corporate realm of the diversified financial enterprise were rarer, though as The FT pointed out this morning (with thanks to Yves Smith at Naked Capitalism) Merrill Lynch is coming decidedly close to reaching the same point as having "lost" more than they've ever made in cumulative profits since listing. While few are celebrating at the near breaching of this ignoble threshold, some (perhaps Mr Thain, and a handful of Merrill's recent hires) who've struck options and incentive plans to the firms' fortunes with stock at de minimus levels may find a pot of gold in such ignominimy, as anyone who elected to forego cash bonuses and was awarded HERBIES in 1990 and 1991 (named fondly after Herb Allison, the Stuffer of The Stuffees). I am surprised John Mack hasn't tried that one....
Many years ago, intending to teach my children that in casino gambling you are sure to lose, I set up a spreadsheet to model parimutuel gambling with a hundred or so participants.
ReplyDeleteEach row was a gambler, each column a race or game on which they bet. The house take was variable, but set at around 3%.
Much to my surprise, I found that although as expected most of the gamblers lost money, there was always a "Mr. Lucky" row that won again and again and again.
Of course it was completely random as to which row would be Mr. Lucky, but it seemed there was always a Mr. Lucky no matter how many times I ran the simulation. I could find no error in my formulas.
In a business with so many participants as the financial markets, it will be inevitable that will be a significant number of Mr. Luckies who appear from their trading successes to be phenomenally talented, but who are in fact only a manifestation of randomness.
And so it will be also in many other fields of human endeavor. The fellow who seems always to win may not be the genius everyone thinks, but just a Mr. Lucky.
thanks for sharing that JM.
ReplyDeleteAll that said, I continue to respect Moore, Tudor and Kovner for they respect prudent risk management techniques (though it must be said after learning their own lessons the hard way in times past). Note that these guys weren't posting high double digit numbers nor triple digits through the great liquidity bull. As Dwight Anderson's investors discovered, concentrated highly correlated positions in crowded trades - however great the fundamental story - in positions that have already experienced unprecedented returns is as petulant as once can get, and it deserves the ultimate spanking, and subsequent hanging upside in the naughty-tree.
I will try the spreadsheet with my own eldest as she wrestles with probability, luck and skill-attribution.