“What the hell are you doing?” my boss asked me. “Yesterday you lost fifty, and now today almost a hundred… What’s going on?”
I had been working in my new role as the institutional index proprietary trader for under a year, and although it had been going well, these last two days had been hell. My partner on the futures floor and I had been overwhelmed with a tsunami of buy orders. They just kept coming and coming. At first we gently leaned into the wave, but eventually it reached a point where we thought it was stupid.
So we shorted it. And then watched it rise, and rise, and rise. Our brains stopped working. All we could think about was the stupidity of the buyers. Of course I was scared, but we were convinced we were right.
“You dumb twits,” my boss responded as I explained what was going on. “Stop fighting the market. Get your head out of your ass. Cover half right now before the market closes, and by tomorrow at lunch, be flat. And don’t make me have this conversation ever again.”
All the traders reading this piece understand this feeling. There can be a point where you are so attached to a trade, instead of covering, all you can do is come up with reasons why it will work.
And it’s not just hacks like me that experience this pitfall. One of the legendary traders in Market Wizards, Marty Schwartz recounted almost an identical brain fart:
It was Election Day, and the Republicans did much better than expected in the congressional races. The market ran up 43 points, which at that time was one of the largest point advances in history. I was short, and like an imbecile, I sold more with the S&P locked at the 500-point limit against me and less than an hour left in the trading session.
My wife, who was working with me at the time, was out that day. The next day she came into work, and every ten minutes she would say, “Get smaller, get smaller.” I kept taking losses, just getting out of the position.
Whenever you get hit, you are very upset emotionally. Most traders try to make it back immediately; they try to play bigger. Whenever you try to get all your losses back at once, you are most often doomed to fail. That is true in everything—investments, trading, gambling. I learned from the crap table at Las Vegas to keep only X dollars in my pocket and never to have any credit, because the worst thing you can do is to send good money after bad. If you can physically remove yourself from the premises, which is the same thing in futures trading as getting flat, you can see things in a whole different perspective.
Although traders are much more prone to this behaviour, it also happens to investors, just in a more slowed down version.
On Friday, when I learned about Bill Ackman’s four hour marathon conference call defending his Valeant Pharmaceuticals position, all I could think was there is no one to tell him to stop talking, and immediately start covering his position until he can think straight again. Ackman is no longer objective. He isn’t dispassionately analyzing the investment merits of the company and coming to a conclusion. No, he is long, and trying to come up with reasons why he shouldn’t sell. Not only that, he is trying to persuade everyone else not to sell as well.
I know CNBC loves Ackman and most of the hedge fund cronies they trot out on a regular basis. But listening to these guys is bad for your financial health. They may sound smart, but they are just as prone to large errors as the rest of us. Actually their excessive hubris might make them even more susceptible.
And Ackman is a doozy, even by elevated hedge fund standards. The story recounted to Vanity Fair by Dan Loeb sums up the hedgies’ attitude about Bill:
It happened last summer when Ackman decided to join a group of a half-dozen dedicated cyclists, including Loeb, who take long bike rides together in the Hamptons. The plan was for Loeb, who is extremely serious about fitness and has done sprint triathlons, a half-Ironman, and a New York City Marathon, to pick up Ackman at Ackman’s $22 million mansion, in Bridgehampton. (Ackman also owns an estate in upstate New York and lives in the Beresford, a historic co-op on Manhattan’s Central Park West.) The two would cycle the 20 or so miles to Montauk, where they would meet up with the rest of the group and ride out the additional 6 miles to the lighthouse, at the tip of the island. “I had done no biking all summer,” Ackman now admits. Still, he went out at a very fast clip, his hypercompetitive instincts kicking in. As he and Loeb approached Montauk, Loeb texted his friends, who rode out to meet them from the opposite direction. The etiquette would have been for Ackman and Loeb to slow down and greet the other riders, but Ackman just blew by at top speed. The others fell in behind, at first struggling to keep up with the alpha leader. But soon enough Ackman faltered—at Mile 32, Ackman recalls—and fell way behind the others. He was clearly “bonking,” as they say in the cycling world, which is what happens when a rider is dehydrated and his energy stores are depleted.
While everyone else rode back to Loeb’s East Hampton mansion, one of Loeb’s friends, David “Tiger” Williams, a respected cyclist and trader, painstakingly guided Ackman, who by then could barely pedal and was letting out primal screams of pain from the cramps in his legs, back to Bridgehampton. “I was in unbelievable pain,” Ackman recalls. As the other riders noted, it was really rather ridiculous for him to have gone out so fast, trying to lead the pack, considering his lack of training. Why not acknowledge your limits and set a pace you could maintain? As one rider notes, “I’ve never had an experience where someone has gone from being so aggressive on a bike to being so hopelessly unable to even turn the pedals…. His mind wrote a check that his body couldn’t cash.”
Nor was Ackman particularly gracious about the incident afterward, not bothering to answer e-mails of concern and support from others in the group until months later.
Another hedge-funder describes the problem he has with Ackman in more measured tones. “There is a saying in this business: ‘Often wrong, never in doubt.’ Ackman personifies it He is very smart—but he lets you know it. And he combines that with this sort of noblesse oblige that lots of people find offensive—me, generally not. On top of that he is pointlessly, needlessly competitive every time he opens his mouth.
I am not going to wander into the Valeant debate and say I know where it is headed. I am not nearly as arrogant as Bill Ackman to claim to have all the answers.
But I know that you should ignore Ackman’s advice. He has pulled the same bike stunt in the market. He thinks he is smarter than everyone else. Ackman has blown off to the front of the pack, buying more VRX and lecturing us all on the superiority of Valeant as an investment opportunity.
On Friday an hour before Bill’s presentation, Valeant announced they would be severing ties with Philidor, the speciality pharmacy that VRX might, or might not, control. This was an important development. It would be natural for Ackman to cancel his presentation to analyze the information.
But Bill is so confident, he didn’t cancel or even delay his presentation. This in itself shows Ackman is no longer thinking clearly.
The short seller Citron Research that originally brought the Valeant concerns to light had a great line over the week-end:
VRX has a better chance of going to zero than HLF ever will.
This of course refers to the previous Ackman public feud with other high profile hedge fund managers about Herbalife.
Ackman managed to escape that mess without blowing up, but I am not so confident his arrogance won’t get him into a lot of trouble one of these days. His doubling down on positions has disaster written all over it. We are all wrong sometimes, even Bill…
Regardless of whether there is fraud at VRX, there is no doubt the increased scrutiny will make the previous business model highly suspect. For Bill to ignore this fact and argue the future is all rosy for VRX shows he is wearing big huge blinders.
As the Citron Research guy said on Bloomberg TV – “don’t trust me, do your own homework and make your own decision.”
I couldn’t agree more.
CNBC’s high school girl infatuation with these hedge fund managers only costs you money. Don’t forget that during the last cycle, there were plenty of blowhards the media also fawned all over. Where are they now?
Thanks for reading,