On Plungers, High Rollers and Graveyards  

Posted by Book Eater in

The graveyards of Wall Street are filled with great people who were right too soon.”

Juanis Barredo, Citiseconline Technical Analyst

I am privileged enough to have heard Juanis quote this line to remind fellow traders and investors that big bets in Wall Street will leave you either living with the hall of fame or forever doomed to the hall of shame. He quoted this line to remind us that we don’t need to be great in trading. We just have to be consistent with our risk management. This must be a revelation to most beginning traders as all other professions would want their trainees to dream and be at the top of their leagues. In the markets, I keep on reminding myself, not to bet aggressively, to follow my stops and always be humble especially in determining how much position a bet will be. (Sounds more like Danny Go telling absolute traders to be disciplined right?)

Ospraie Closes

Sept. 3’s most read event was the highly publicized closing of Ospraie, a $3.6 Bil hedgefund in the US after losing 38% due to the unwinding of the commodities and agriculture this past month. Personally, I cannot help but feel sorry with the traders of this fund. Every price chart pointed that the commodities will be collapsing anytime soon. It’s just too difficult to get out of positions that are already too large without affecting the prices. To be a hedge fund trader is perhaps the pinnacle of any new trader’s dream. Managing billions of dollars of other people, however, is a hell of a job.

Dwight Anderson, Ospraie Management LLC founder, poses in the Park Avenue offices in New York, on Oct. 12, 2007

I quote from a Bloomberg article below:

`I Live With Stress'

Anderson says the task of managing $7 billion of other people's money is a persistent source of anxiety. ``I live constantly with stress,'' he says. ``I'm always worried that we're wrong.'' Until the 6-foot-3 inch (1.9-meter) money manager got married two years ago, he relieved the pressure with motorcycle riding, scuba diving, bungee jumping and heli-skiing -- the last at resorts in Cordova and Girdwood, Alaska. He says he's cut back on adventure sports since getting married and having a child.

Graveyard lessons

I guess the only thing I wanted to point out in this short story is that the demise of Anderson’s hedge fund is very parallel to the trading style of the best hedge fund manager in the US last year, John Paulson. In 2007, Paulson’s funds were up $15 Bil over the previous year, helped by aggressive betting against the overvalued subprime mortgages and securitized risky mortgages. The stark difference between the two is that John Paulson’s team got it right while Anderson wasn’t able to leave while the commodities were still hot. I guess the story poses a lesson to all traders, new or old, that traders’ number one job is to protect the capital, not necessarily to earn money in such a tight environment. Perhaps this is a revolutionary idea to some, since traders are expected to make money. No one ever highlighted that before making money, not losing money is the more important job. Position sizing is key. Aggressive traders who are blind to risk will show up either in the billionaires club or sued by their clients. Nassim Taleb, the author of the book “The Black Swan”, has perhaps excelled in teaching Wall Street to prioritize their risk issues before making any bets once said that

The payoff in a human venture is, in general, inversely proportional to what it is expected to be. — Nassim Taleb

In summary, life is always uncertain. There are no sure bets in life, except as they say, death and taxes. We can have all our support and resistances, our preferred entries, our chart patterns, our fundamental catalysts, insider information, astrological superstitions or what have you, but the key to everything is position size. Not everything is what we expect to be. Kindly don’t suicide in trading. I’ll miss you.

- Nix (lonevoice)

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