What I Learned from Losing $200M (2015) | Hacker News Reader

What I Learned from Losing $200M (2015)

nautil.us

178 pointssamspenc130 comments

I was working in the crude oil / nat gas options pit at the NYMEX during the summer of 2008 when these trades went down (where much of Mexico's hedge was traded but not necessarily the author's portion.) A highly ironic part of this story is that the traders in the pit selling to Mexico thought they were getting an incredible deal. Both because the price of crude was so high at the time but also because they were able to "fade" the market. When you're in a pit like this, there are only ~100 "seats". At the time this meant 100 people who had firms with enough cash to front ~$1.5M so that you could stand for 6.5 straight hours in a tiny space at the NYMEX and shout back and forth. Basically what happens is someone will yell out to the other 100 people "what's the market on DEC'9 crude?" The point is they aren't supposed to say whether they want to buy or sell. Other people will yell out the prices they'd be willing to buy or sell at and the quantity. Say someone is willing to sell 200k options at $100/option, and someone else likes that price, they can yell "sold, 50 DEC'9 crude at 100." meaning they just bought 50k options expiring in December 2009. For this particular trade, there were three brokers that were known for representing mexico's hedge in previous years. Traders were expecting them to come back around this time. When one of these brokers came into the pit and yelled out "what's the market on DEC '9 crude" traders guessed he was hedging for mexico and quoted a price a full dollar above where the market was at. A bunch of people piled on willing to sell at even higher prices. The brokers had no choice but to accept this higher price. I was just a 22 year-old DRW intern on loan from a Stanford PhD program and in my head I was thinking "what the hell is going on.. that's not the fair price. I need to be selling!" I didn't actually sell anything because I didn't have the confidence or authority (it was my first month). But a senior trader explained this to me on our walk back to 7 world trade center after.

Also, this hedge became an extremely famous trade in the years to come, netting Mexico $8B in savings.

https://www.ft.com/content/ccd87f9e-9bd9-11de-b214-00144feab...

https://www.bloomberg.com/news/features/2017-04-04/uncoverin...

Thank you for sharing this! One outsider/laymen question:

> When one of these brokers came into the pit and yelled out "what's the market on DEC '9 crude" traders guessed he was hedging for mexico and quoted a price a full dollar above where the market was at

> The brokers had no choice but to accept this higher price.

I don't understand this. They didn't say they want to buy or sell anything. Why were they obligated to do either?

I think they meant it's because traders knew that these brokers wanted to buy (to hedge), so the price was only going to go up further.

Funny story from the LIFFE pit, told to me by one of the locals (ie market makers):

For a while the brokers used one colour of paper for buys and another for sells.

As a derivs trader myself, I find much wrong with this account.

First of all, he came away net positive, so the title is a bit of a humblebrag.

Aside from that though, he should have known beforehand how models work. David Hume mentioned it hundreds of years ago; you only have the past, and the past might not contain all the dynamics of the future. Lest you think this only happens to social science models, there have been plenty of engineering accidents that our models did not predict.

If you have a huge position, the market again does not behave like when you're just observing. Your moves push things around, often the wrong way. That's another thing he and his bank should have known.

Finally, there's a big attribution issue. He got paid well, but is it trading skill that won the day? I'd say it's the salesmanship of getting the Mexican government to let them out of the trade, apparently at a price that was better than mid. Normally when you're screwed, you don't get mid.

Agreed. This part seemed like an exaggeration to me:

> Hitting a market’s ceiling like this was something that none of my methodologies accounted for.

I worked at a bank in 2008. The biggest blowup in recent memory then was LTCM in 1997 (seems quaint now), which blew up partly because they had positions too large for the markets they were in. It is simply not credible that someone would put on a huge position in 2008 and not give any thought to the impact their own trading would have on prices.

>> It is simply not credible that someone would put on a huge position in 2008 and not give any thought to the impact their own trading would have on prices.

And yet it keeps happenning, see "London Whale": https://en.wikipedia.org/wiki/2012_JPMorgan_Chase_trading_lo...

Good point, it is surprising this keeps happening. There was difference, though. The London Whale got too big for his market, but I don't recall him ever suggesting that he hadn't even considered the effect his own trading would have on prices.

As a junior trader navigating the markets during that time I noticed that nobody has a clue about anything. Pundits, researchers, analysts, Junior guys, Senior guys... They all pretend to know. I'm not suggesting the markets are truly random. Systematic profits are feasible year over year... But only to the select few who are in the right product or looking at the market in the right way. I suppose it's those guys that keep attracting fresh blood to a zero sum game where there are mostly losers.

> Systematic profits are feasible year over year... But only to the select few who are in the right product or looking at the market in the right way.

You seem to be falling for the same myth: That "certain wizards" can get +EV. Every casino on Earth makes money from this myth. I believe that there are no wizards in the stock market (or in business in general), and everyone's gains and losses vs the total market are for the most part random chance.

I'm reminded of the coin flip exercise one of my statistics professors did. Everyone in the class stand up and get a coin. Flip the coin, if it's tails, sit down, and the rest of the class repeats the exercise until only one person remains standing. Then interview that student and ask them how they became such a good heads-flipper, and what great strategy he/she used to flip so many heads in a row. This illustrates the survivorship bias we fall victim to when we look at someone successful and try to determine what wizardry they used to become that way.

Your comment seems so ignorant to me. Maybe that's true if you are day trading, or picking dozens of short-term holds each year instead of long-term buys.

My stock picks have been:

* Google in 2003, because I worked in a call center and saw EVERYONE using it all the sudden to find answers on tech support calls.

* Chipotle at their IPO because I saw the huge lines at every location in my city.

* Amazon in 2008 after the big stock market crash, simply because it just seemed super undervalued considering everyone was still using it / loved it.

* Broadcom in 2014 because it was obvious the cellular industry was going to keep growing and they were well-positioned / undervalued at the time.

None of that thinking required me being a wizard. Nor was it luck. More just seeing obvious momentum and being willing to act.

That a great example of survivorship bias! Take a successful outcome and look back for decisions that must have led to it.

This ignores the people who also "saw the obvious" in 2003, 2008, and 2014 who lost their shirt.

The issue with your argument is pretending the stock market is similar to a coin flip. That's a very facile comparison. In reality each company is a very complex black box in which you can only see very limited internals.

The examples I listed were not random chance. They are companies that had absolutely dominated their market positioning and were later massively rewarded for doing so. It's fairly easy to see when a company is eating everyone else's lunch.

Again, it isn't just random chance. It also isn't rocket science..

Please tell us about your big failures as well - statistically you must have had some, and I’m sure you’ve been tracking them with equal rigour?

I've only invested in five stocks. Four are listed above, the fifth was basically an OTC penny stock in 2009 that eventually went out of business.

The typical argument why traders don't make money is not that the stock market behaves as a coin flip. The argument is that, if you see "obvious momentum," many others in the market are likely to see that too, and the current stock price already factors all of that information in.

Of course, it is possible that one beats the market if either 1) one has privileged information, or 2) one has exceptional insight. Both situations are possible, but rather implausible.

I'd agree with that 100%. The coin flip example is what I was taking issue with. While it's a good illustration of survivorship bias, it does not apply to the stock market as the stock market isn't random.

Your reasoning seems to contradict itself, it's a very complex black box of limited internals yet you were able to still easily glean big winners?

Stock picking is the same as gambling, you look for value and try overtime to beat the market. Also like gambling is how people remember and talk about their wins but forget/ignore their losses.

Because I don't look at the internals, I look at the outcomes.

Eg - Everyone using google, everyone eating at Chipotle, everyone being addicted to cell phones, etc.

Picking stocks based on "everyone uses..." is a great example of a bubble. What about all the companies that are not consumer facing?

A bubble is "everyone buying because everyone knows someone will buy even higher." "Everyone uses..." is a great example of a revenue generator. I assume you are meaning that you buying based on popularity of places you frequent is an example of an echo chamber?

Regarding non-consumer facing companies, I don't see what the problem is. If you have no information about the company, then it's gambling to buy it. So you miss out on some companies, no big deal. Most people only have enough money to make a few bets, so you should bet on what you know about. It's not like a test where you lose points if you don't answer a question; you don't lose money if you don't buy a stock you don't know about.

Think about it differently though. He didn't really pick stocks, he picked well established products or brands that started doing or (despite a correction) continued to do well.

If the market would crash 30-50% tomorrow, which stocks would you buy? Probably Google, Apple, Facebook, Amazon, and the likes.

Everyone has losses, and you can't always be right. But within your area of expertise or interests, you should probably be able to pick a few good stocks of good companies because you actually care and understand how they operate. But to do it structurally and consistently is harder.

I'm sure someone will reply bullshit, but that's at least what I believe. The market isn't efficient.

> It's fairly easy to see when a company is eating everyone else's lunch.

If it's so easy, then everyone would be buying the stock and it would be pushed up. Then you're risking buying an overpriced stock that's not going to be able to deliver on the expectations required for it to pay off.

Amazon is clearly eating everyone else's lunch in its domains but then it's trading at over 275 times earnings. It's not remotely obvious that you should buy Amazon stock at that price.

Tesla is a good example of that. Much riskier investment.

I've personally invested all my capital into my own ventures at this point, so I haven't really thought much about the next big thing, stock-wise.

But, short answer, look around at what products people (or businesses) are addicted to now that they weren't two years ago.

Not many people I know are addicted to Teslas. And Amazon was just as addictive two, or even five years ago. So it's well past its prime now (lol).

Tinder is doing great with millennials. Match Group stock is up 100% YoY.

Stories about buying stocks is utterly useless.

When did you sell? And what is you track record of wins vs losses?

That kind of stock picking is dangerous.

First, it's easy to look around your little bubble and see that people are lining up at your local Chipotle or that people use Google for solving tech support problems, and conclude that Chipotle and Google are taking off. They may be not be doing as well in other locales/sectors.

And second, how do you know that these signs of promise aren't already priced in? If you can see signs that Chipotle is doing well, so can everyone else. And they have deeper pockets and better information-gathering capabilities than you do. Nowadays satellite imaging and computer vision are used to count the number of cars in parking lots of retailers to predict earnings!

Lastly, there are innumerable complicating factors that the average retail investor has no idea how to account for. Maybe the stock price is low because their EBITDA is barely staying ahead of debt service payments. Did you read the SEC filings? Maybe they're having difficulties scaling their supply chain because they lost a big contract with a major supplier. Do you know enough about the domain to account for how much that should affect the stock price? Who knows, maybe there's even a seasonality factor to the number of people who go to eat spicy food, and your guesstimates will fall apart in 6 months.

I wouldn't even bother with this kind of investing. It's just gambling. If you seem to be winning over time it's either because you're lucky or because the markets are going up in general. So just invest in index funds- you'll have lower volatility and you won't be betting against people who have nothing to do but sit around all day thinking about how to beat you.

I'm sure you're correct, all stock picking is dangerous though. I'd assert that my style is the least dangerous.

> look around your little bubble

I didn't (and don't) have a bubble. In fact, I frankly despise the Bay Area and SV because it constantly tries to put you in a liberal / wealthy bubble.

>If you can see signs that Chipotle is doing well, so can everyone else.

Apparently not, though. They doubled on IPO but most people were still VERY skeptical of them. I could see that they had 100% solved the problem of "fast casual" service.

>Nowadays satellite imaging and computer vision are used to count the number of cars in parking lots of retailers to predict earnings!

That should make you want to invest in the #1 company that manufactures satellite components.

> I didn't (and don't) have a bubble. In fact, I frankly despise the Bay Area and SV because it constantly tries to put you in a liberal / wealthy bubble.

Almost everyone lives in a bubble. Unless you're a nomad traveling constantly, you mostly just see what's in the vicinity of your house or apartment. Your local area with the successful Chipotle is a bubble. Tech support is just one tiny slice of the uses for a search engine- a bubble.

> Apparently not, though. They doubled on IPO but most people were still VERY skeptical of them. I could see that they had 100% solved the problem of "fast casual" service.

Usually when people say this, there was some element that they didn't identify which made the investment riskier than they realized. It seems in retrospect that it was inevitable that the stock would go up, but if you could go back in time and get inside the minds of other investors you might be appalled to learn of the complicating factors that you didn't even take into account.

Just think about it for a moment. Think about how much human effort and capital is poured into price discovery in the markets. Billions of dollars. Teeming trading floors, millions of lines of code, people all around the world running models and analyzing filings and biting their fingernails watching the ticker. Do you think you know better than they do what the price of Chipotle stock should be?

The answer to that question may well be "yes" if you have expertise in the domain and you're experienced with investing and financial modeling. But it's probably not.

> That should make you want to invest in the #1 company that manufactures satellite components.

Which is what everyone else is thinking too. The trick is determining whether the price that the market has agreed on is too high or too low.

You're just assuming that no one can see trends more effectively than you. The reality is that you have no idea how other people see the world, people could be way ahead of you and you'll never know it.

For big companies thousands and possibly tens of thousands of professionals around the world are putting in long hours thinking about what the correct stock price is. They are meeting with management, buying proprietary research, and hiring PhDs to analyze quantitative data. Despite all that the market makes mistakes a lot, and sometimes a perceptive amateur might even be able to pick up on those mistakes. Still, I really doubt that many people are good enough at spotting trends to generate market-beating returns. If they could do it reliably they'd be billionaires.

What a waste, isn't it? Or maybe better put, how presumptuous to think that years of statistical modeling and formal economic theory somehow endow someone with effectively better intuition than the next person. Maybe if those years of training actually lead to better investments there would be something to consider, but you can't argue that professional gamblers are better than casual intuitive ones if the pros don't actually yield better results.

They do. The median active investment fund underperforms the market, but the median active retail investor way underperforms the market.

And the median active investment fund underperforms the market for a reason. If a fund plowed 100% of its investment into the S&P 500 they'd be exposing themselves to laughably high volatility.

With all that human effort and market efficiency, why isn't Amazon getting shorted like crazy, based on ratio trends like this...?

https://market-ticker.org/akcs-www?post=232505

My understanding is that Amazon's management believes that they can "flip a switch" and stop expansion and R&D, making them suddenly ludicrously profitable. Investors are fine with that because the longer management holds off on flipping the switch, the higher the eventual eps will be.

Thank you, interesting take on it. Do you believe them? Is that precedented at all?

> That should make you want to invest in the #1 company that manufactures satellite components.

I understand the idea, and I might agree. I just wanted to point out that in the book "The Intelligent Investor", there was the idea that you could think about investing into the second best player in a certain space.

I think the reasoning was that there is more opportunity for growth for a second-grade company than a first grade company. Maybe the first-grade company is not looking at the problem in an innovative way. I think it probably depends on the case.

I tried to look into "second-grade" in my copy but that's a term relating to stocks, and not the leaders of an industry.

Maybe I'm misinterpreting that book or misremembering it

Edit: By the way, good job on the successful investments! I wish I was as confident about my observations of different businesses.

I'm not sure I'd want to invest in the second-place search engine or second-place social network.

Well, they’re just ad providers, and plenty of people invest in nth tier ad providers.

>I'm sure you're correct, all stock picking is dangerous though. I'd assert that my style is the least dangerous.

Why? Seems to me that all stock picking has the exact same level of risk.

If the stock market were truly random, then yes, all stock picking would be equally risky. But the stock market is a voting machine voting on the future of companies, and is definitely not random. So you could look at two stock picking strategies: 1) throw darts at the Wall Street Journal and buy whatever it hits, 2) buy new companies that are being used by lots of people in your area (the parent's strategy). #1 should give random results centered around the performance of the entire market. #2 will probably give better results, because it incorporates some information relevant to the voting, namely that customers like the product. Which company would you rather have: some random company or a company that people are willing to stand in a visible line for? If there are lines, either people need the product or they love the product, and either way that tends to correlate with profits.

But #2 historically does not give better returns. Since the information is already public it has already been included in the price of the stock. The vast majority of investors are not smarter than Wall Street.

As someone who has done some gambling in the stock market using this kind of thinking it has not been a good strategy compared to just buying and holding index funds. Sometimes I get lucky and sometimes I get unlucky buying individual stocks but my most best returns have been buying broad index funds and holding them.

Exactly.

How many losers have you picked?

Your last five stock picks were winners. And yet strangely, every academic study done on this indicates that the chances your sixth pick outperforms the market is the same as someone whose last five picks are losers. I know it seems strange, but you are a living example of the lucky coin flipper analogy.

...Google's IPO was late 2004.

Are those the only stocks you have picked? Have you picked any that didn't do as well? Or any that were losers? What led you to miss on Apple or Priceline?

I picked one OTC penny stock loser in 2009 that went completely out of business. Something associated with vertical farming.

I missed out on Apple because almost NOBODY used Apple in the Midwest in the mid 2000's -- everything was MS. That's a great example of me living in a bubble (which I just said in another comment that I didn't, but there ya go)

I missed out on Priceline even though the tech support center I was working in had a whole division dedicated to doing their customer support! Basically, they just never seemed "legit" to me, they seemed like a scam, who the hell wants to "choose your own price" for something important like a flight and then wait and see if it gets accepted? Very weird to me. People also never seemed too excited about them in general... extremely hard to predict they would become the acquisition masters that they did.

Both solid examples of blind spots in my strategy.

“Everyone using their tech support” doesn’t appear to be a viable purchasing decision for a company’s stock.

Those are all your stock picks in the last fifteen years? No losers at all?

How'd you miss on Domino's Pizza? Could have picked it up for about $5/share back in November of 2008. Closed at $178 today. You'd be up about 3460% in 9 years. Google (+574%), Amazon (+2000%), or Chipotle (+350%) can't touch that - assuming you bought all three in November of 2008 and sold today.

I had no idea Dominos outperformed the rest of the food industry to that extent. Sort of crazy.

Buying Google pre-IPO is a very clever trade, you must be a market wizard.

And yet, you have rentec medallion, virtu, buffet, gross and quite a few others who have quite consistently beat the market.

Each has their own secret sauce, and you won’t get their returns just by sitting at home and picking stocks. But they do prove that the market is far from random.

Those would be the few on the right-most side of the distribution who flipped heads 10 times in a row. As soon as they inevitably flip tails, we'll post facto find others who have gotten consistent returns and declare them to be the ones with the secret sauce.

Virtu trades 3 million shares a day, they are way out on the bell curve in terms of statistical significance.

There are of course many risks to their business model, e.g. high fixed costs, competition, regulatory risk, technical malfunctions, etc.

They are "lucky" to be in a position to capitalize on the opportunity, but investment luck does not play a role on a day to day basis.

Virtu trades far more than 3 million shares a day. They may even make 3 million trades a day.

If you've seen a system like this in action, it's a beautiful thing to behold and cannot be mere luck. Transactions stream in constantly. It's not just one big, lucky bet, but thousands of tiny bets with a slight edge. A plot of profit & loss with respect to time looks like an almost perfectly smooth upward line. And if you're good, you can do this every single day for years and years.

Still, I wouldn't say guys like that have beaten the market in a real way. I've certainly never felt like I did. This style of trading doesn't need outside capital and can't scale. If I gave you $100 and armed you with a scalping bot, I bet you could easily turn it into $200 buying hot tickets on Ticketmaster and reselling them. But would anyone call you a genius trader? Could you do it with a million? A billion?

As a business net of all costs like employee compensation and technology, returns to owners are pretty lousy. Compare owning Virtu stock to an index fund since their IPO. Ouch.

You are right, I miscopied from their website. 3 million trades, billions of shares daily. Whether market making is beating the market is mostly semantics, I was just responding to the guy who said they flipped heads 10 times and got lucky.

There's also the fact that winning enough coin tosses gives one the ability to improve the odds on subsequent tosses. Buffet is perspicacious and patient, yes - but when you add that he has a $100B float to play with, you've really got something!

That's not how math works.

Buffet has been "flipping heads" consecutively for several decades, with no regression to the mean.

Buffet has lost money on his bets before. Not all tosses are heads, just most of them.

Some info I gained from when I last read some of Buffett's annual letters: (1) He said he likes the insurance business (Gen RE, Geico) as it gives him money to use; (2) He doesn't like to use that money to buy shares, he likes to buy the whole of solid, multi-million family businesses e.g. furniture businesses; (3) He encourages the previous owners & management to stay on and run the business; (4) He doesn't pay dividends - so you aren't going to get that regular income by investing in Berkshire Hathaway; (5) If he buys shares, he intends to hold those shares for decades, e.g. American Express and Coca-Cola (he now owns about 10% of each); (6) He constantly warns that he might lose substantial amounts through insurance payouts. How much will he lose through the damage done this hurricane season? A list of his present holdings: https://en.wikipedia.org/wiki/List_of_assets_owned_by_Berksh...

Just to fawn over Buffett and Berkshire assets a bit more. Coca Cola and Amex are part of his original big four, along with Wells Fargo and IBM. Amex is the highest percentage ownership while Wells Fargo is the biggest investment in dollars. More recently he has had 3 new huge investments come in, they all exceed some of his four in value. Bank of America (about as much percent as IBM), Apple (only 2-3% but that adds up to a ton), and Kraft Heinz (over 25%) or whatever they call themselves now. That's his biggest major stake now, but a bit different as he worked with 3G of Brazil to first buy Heinz, then merge with the bigger Kraft.

And even more recently he did the cool thing of being a top or the top shareholder of the big 3-4 airline companies in America: United, Delta, American, Southwest.

There have also been some pretty big complete buy outs this century. Two come to mine. One being some manufacturing company. Another being a rail company. Both buyouts were in the low tens of billions. And then Gen Re insurance as mentioned above was no small thing either.

Buffet is now a poor example; Berkshire Hathaway has many structural advantages that no individual investor, and almost no institutional investors can exploit.

There are many articles on this: https://www.forbes.com/sites/adamhartung/2014/11/19/why-you-...

Virtu and others (that aren’t as public, some of which i’ve Worked for) flip coins in the order of 1,000,000 times a day, and have had less than 30 days of losses in 15 years; if you believe that this is pure luck then I suspect we cannot reach any agreement.

If that student flipped 200 heads in a row it isn't survivorship bias. That student has a two headed coin.

If you think 200 heads in a row is practically possible on a random flip, I have a bet to make with you.

Flipping heads 200 Times is definitely possible, I can do the math to prove that. It is just greatly improbable to happen in the space or lifetime of the universe.

Probabilities can be so small they are only possible in a mathematical sense, but impossible practically speaking. When faced with such small probabilities we can use Bayes theorem to infer a better explanation than chance, such as a two headed coin.

lol @ u spouting nonsense. i think your trying to say you can use bayes to adjust for small sample sizes, like with beta-binomial models, or comparing posterior distributions for different models and params.

Two sequences of coin flips:

HHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

THTHTHHTHTHHHHHHHTTTHTHHHTHHTT

Which was generated by fair coin, which by 2 headed? How did you decide?

HHH.... is possible from a head fail fair coin, just improbable. If it happened, I would be astounded, but I wouldn’t feel like logic or the laws of the universe were being violated (I would look for a reality reset button though to pick out the improbable but not impossible occurrence).

assuming you want a bayesian approach? take a flat prior and look at the MAP? though you know its just going to be the observed rate. if you know you only have a fair coin or a double head coin just compare their likelihoods? what is the point you are trying to get at?

Solomonoff induction and universal probability.

how about something specific. how would you answer the question you proposed used bayesian methods?

P(all heads|double headed coin) = 1

P(all heads|fair coin) = 2^{-L}

Applying Bayes gets P(double headed coin|all heads) >> P(fair coin|all heads) for a long enough sequence.

thats what i suggested originally, essentially

You were a bit ranting in your previous response, but let me try to answer this. It is actually impossible to tell, given your sample, because we do not know the sample size. Given infinite samples, it is guaranteed that both of these runs are going to happen for a fair coin. On the other hand, if both are representative of full sample size, the later is clearly the fair coin because it more closely approximates 50/50.

Both sequences are equally improbable, but they're two outcomes among 2^30 others. What you want to be comparing is the sequence consisting entirely of heads to all the other potential outcomes. If it is a fair coin toss, the chance of getting all heads in a sequence of 30 is 1/1073741824. So is the chance of getting any one other sequence, but not any other sequence.

Even if the class had 200 students the winner didn't need to flip 200 in a row. On average, half the students of the class would get Heads in each iteration, which means that this experiment would go on only for lg(200) iterations, which is only 7. Flipping 7 Heads in a row is not all that difficult to imagine.

My point is large enough amounts of success cannot be attributed to survivorship bias.

Yeah, I hear ya. My "systematic profits" comments was in reference to a few firms and individuals I've observed over time. These people have some sort of structural or informational edge in the markets.

There are commodity trading firms that are such substantial players in the markets they trade that they control that market. Certain High Frequency firms have scale and breadth of resources to get higher quality data, faster connections and hire guys that rewrite Linux process schedulers in assembly. Warren Buffet's secret weapon is that he never sells (so you never realize a loss!).

The point being - anything else is gambling. And these guys - who look at a market structurally instead of some sort of casino - will eat your lunch in the long run. Their "edge" is actually orthogonal to price fluctuations.

Just my 2 cents.

> Warren Buffet's secret weapon is that he never sells (so you never realize a loss!).

That's not how mark-to-market accounting works.

Roughly speaking - if you mark an asset lower than its purchase price you have an unrealized loss. You still hold the asset and - if you're taking the super long-term investment horizon view as Buffet does - eventually your asset will go up. In addition, Buffett gets into investments that probably wont have their business models disrupted anytime soon - and are tied to the success of the USA as a country: railroads, insurance, housing.If he does his stock picking right, he doesn't need to sell...

That's not correct for public companies - the unrealized mark to market losses will be reported as losses via correctly (mark-to-market) valuing the asset on the balance sheet.

The stock market is not random though. If you have a person who previously worked at the fda specializing in kidneys for example, having that person analyze which kidney drugs/devices they think will get approved is not luck.

People can have an informational advantage and use it to make intelligent trades.

You would be right if the stock prices actually 1:1 tracked business success. The reality is that they do not. The are an approximation of future growth, and that adds a great deal of uncertainty, sometimes enough to even make your anecdote moot.

So he is falling for a myth, yet what you're referring to is the Efficient Market Hypothesis, does the word "hypothesis" ring any bells for you? Even more so, does the fact that a theory that originated in the 1960's, still bares the name EMH. Almost 60 years on and it still hasn't been proven.

Your thought process seems incredibly flawed, the idea you have about coin flipping being at all similar to stock picking is laughable. And this to me would indicate that whilst you may believe that your analogy is a good indication of survivorship bias, it is clear to me that you are suffering from confirmation bias. You're looking for examples that suit your belief, and ignoring some basic elements. Let's look at this one seriously, coin-flipping is an statistically independent event, whilst if we apply even some fundamentals of finance and EMH (which I don't agree with, btw), we will quickly find ourselves in the realm of correlation. I never stuck around Uni long enough to get deep into this stuff, but you could do with some reading on the CAPM model. To quote from wikipedia on the CAPM model:

"Financial correlations play a key role in modern finance."

You only have to look at the fact that many companies have been put out of business by companies like Amazon, which means that at the very minimum, you have at least ONE external factor that has an influence on the performance and price of other securities.

And this is all without even starting on the even more hilarious notion that information across the market is symmetrical, that's right, I as a lowly consumer exchange peasant, have the exact same information available to me as Jim Simons and the team at RenTec. Who's Medallion Fund, by the way, returned a 35% CAR over a 20 year period. You have to be mental to believe the shit they teach in undergraduate Finance.

You got a nice story out there. Random, bla bla bla...

How instead you come up with real numbers? Like you pick a stock or say an index like the Nasdaq and analyse if its movements are truly random or not?

Also you are aware that true random might mean perfect distribution? You don't know whether the tick is up or down but you know you'll have a distribution that is 50/50 up or down. So you can market make based on it (buy and sell on the same time).

There are more to trading than day trading: Collecting premium on futures or options, arbitrage, collecting interest on bonds, etc...

> But only to the select few who are in the right product or looking at the market in the right way.

like RenTec/Medallion... who sometimes look too good to be true, then again, if they were doing something illegal for 30+ years, you'd think by now they'd be caught. The only alternative explanation is they indeed have a unique model of the markets they continuously refine that allows them to outperform most everyone.

Most money in Medallion is from employees with a bit from friends and family. You can't invest in it at all, because they don't need or want your money. If they're fooling anyone, they're just fooling themselves, or maybe using it as marketing for their other funds.

In absolute terms Renaissance isn't even spectacular. There are capacity constrained traders whose Sharpe Ratios and return on capital are multiples of RenTech's. What's impressive is that they manage to do it with a billion dollar AUM. That's small compared to some of the biggest HFs, but far more than a typical high turnover strategy can put to use.

I crewed on a sailboat in YRA races leading up to and during the 2008-9 crash. It was mostly people from Lehman and Barclays. I was the only SV guy on the boat.

No one partied harder than those guys but then they really only partied with themselves. It was kinda like Boiler Room. The Dot Com boom is the stuff of legends but these guys left nothing on the table.

Barclays had a riff and ordered a string of cabs to take people home. One of them stepped into the cab and said Vegas.

For all that they were wrong about everything. Highly paid, quite sure of themselves but wrong. Basically they were poker players (and they played a lot of poker) but they weren’t very good. It was just other people’s money so who cared.

They didn’t learn anything.

> It was mostly people from Lehman and Barclays. I was the only SV guy on the boat

And now its mostly SV guys on the boat and the occasional trader? :)

"Highly paid, quite sure of themselves but wrong... It was just other people’s money so who cared."

Haha, brilliant point. Fortunately, it's probably a lot of VC money instead of individuals, or publicly traded companies; at least one would think.

Please, where can we read more stories about this? I'd love to hear! :)

Read Liar’s Poker and basically everything by Lewis.

No, I meant personal stories. Any other surprising behavior that they had in common?

Someone from Korea (S. Korea of course) told me this story that he read in a South Korean newspaper.

When Lehman was trying desperately to sell themselves in order to get more funding in 2008, one place they tried it was in S Korea. Lehman's ex head of Korean office was in a high place in Korean banking industry at the time.

Supposedly some local press was painting it like it was going to be a great chance for a Korean bank to own the famous Lehman. Probably due to well placed phone calls.

So Lehman's ceo and his management team came to S. Korea to work the deal. Like 10 guys.

Guess what, the CEO and his entourage had NOT 1 piece of paper to show during the negotiation. For a deal that was to involve billions of dollars, the seller had not prepare even 1 piece of paper to show to the potential buyer/funder about anything.

To me this suggests

1. Lehman management was really full of it and thought they could swindle S. Korean to throw money into a black hole, despite not having done any prep work on their part.

2. Lehman management was just going through the motions, while fully knowing they were doomed.

3. All of the above.

I mean if you know that your company is worthless, that is probably not a good thing to print out in the first place. But it is quite absurd nonetheless.

There should be a special place in hell for Dick Fuld. It is amazing to me that he, above anyone else, didn't go to jail considering he directly lied to shareholders regarding Lehman's leverage.

And all the movies about those folks show the same right? We, the norms, get to live vicariously through their partying, dishonesty, stupidity, etc then the fall comes and we get to laugh at them too. But secretly, we all think we can beat the fall part and have the fun, right? Or at least, in the US.

This reads like a case study in one of Nassim Taleb's books.

> stress, competition, and choice involved in trading financial instruments naturally give rise to illusions of control

> I’d never really experienced the extreme tail of a probability distribution firsthand. And that experience disabused me of more than one illusion.

> But what’s the alternative to estimating probabilities?

The implied inevitability of another crisis over the new-ish stress tests is very saddening. I wonder what can be done.

> The danger is that the financial system and its regulators are moving to a narrow risk-model gene pool that is highly vulnerable to the next financial virus,” he wrote. “By discouraging innovation in risk models, we risk sowing the seeds of our next systemic crisis.

The same thing happened to me. I had lost 2M in bad deals. "The illusion of control, overestimate your risk" and failure to understand "probability", the tail risk was responsible for my ruin.

I'm sorry for your loss. It must hurt pretty bad.

Would you say lack of transparency around what the markets are doing has been a contributing factor not being able to assess risk appropriately?

It's speculation. It can always go badly, no matter how much transparency there is.

2 mil was all you had, more or less? Must've been devastating.

You could live like a king in a lot of places with $2mil...almost for life. Not in NYC but the world has a lot of countries

You can retire comfortably almost anywhere with $2M. 3% is an extremely safe "withdrawal rate" if you invest the money in index funds, and that gives you an annual income of $60k. That's a solid middle-class income anywhere in the US, and luxury in South-East Asia.

Apropos of nothing, health care before age 65 in the US (prior to the ACA, and possibly again) peaked at about $36K/year (age 64). That leaves you with $24K of your $60K to live on. Not saying it isn't doable, but it isn't as much as it once was.

All I'm saying is that retirement planning is a bit weird because if you do it when you're 20 you might miss some expenses that older people have that you are not yet aware of :-)

peaked at about $36K/year

So leave USA for a while or forever, if you need to pay $3000 a MONTH for insurance. WTF?

Unless you have a very, very specific disease everything will be solved in many other countries, at a lot less. By paying cash if needed.

Its one of the options that people talk about, in particular moving to Canada. My in-laws moved to Brazil not only for lower health care costs but it was less expensive to hire in home care giving staff.

That makes visits from the grandchildren and family more difficult though. Something that can be important in your later years.

I can tell you that most Europe will fix you up for much lower rates than USA -- heard that from people in the Baltic countries, Netherlands, Belgium, Poland and a few others.

In my country -- Bulgaria -- I recall somebody on the news saying they pulled their US cousin in here and they got a complex multi-phase operational treatments (not good with medical English, sorry!) with 3 months of hospitalization... for a sum of money that would equal 1 week in hospital in USA plus only the first operation (out of 4-6).

Medical tourism is becoming a thing here in Europe.

Having to pay $3k per month for health reasons sounds like the very disaster buying health insurance was supposed to guard against.

If that $3k were paying a mortgage debt, it would be servicing more than $600,000!

If that $3k were paying a mortgage debt, it would be servicing more than $600,000!

Sadly, $600K is nothing in healthcare costs, at least retail price. A snake bite can cost $153K https://www.cnbc.com/2015/07/21/hospital-appears-to-charge-1... https://www.cbsnews.com/news/rattlesnake-selfie-results-in-a...

Healthcare in Estonia is provided to you by your employer (which is required by law, so every employer will have to pay the healthcare tax on your behalf) which will include everything you would need from healthcare. Once you reach the age of retirement, healthcare is free. In fact if you don't have a job, and I've been jobless, then it has cost me only 5 euros (a fixed fee at the registration) in a hospital to get fixed up (broken leg, broken toe, infections ..)

I'm more and more convinced that U.S simply hates its people.

>>> That leaves you with $24K of your $60K to live on. Not saying it isn't doable, but it isn't as much as it once was.

Depends if you have to pay a rent or not.

True enough, but could say more about what a housing situation without cost would look like?

A trader who made millions of dollars would diversify his assets, especially if he lived during the last 2 decades and thus had access to cheap properties.

It's morbid, but why even have insurance at that age? Any major accident or stroke or whatever could be close to the end for you anyway and you still have the 2M if you absolutely need to pay

I went into serious depression for a month after that. That was not all money. I've more in saving which I don't touch. Honestly, I don't know what 2M buys because I've never spent any significant amount of money on anything. I don't know how much 2M is, all I know is that I had worked 2 years for that money. Whenever I remember that 2 years worth of my efforts has been flushed down the drain, it makes me sad.

I'm loving the humblebrag in this post.

I can relate to this. Getting liquidated early on in my career taught me a lot about risk management and a lot about myself. I kept throwing good money after bad, sure that I was correct and that it was only a matter of time. It wasn't... and I wasn't as smart or clever as I thought I was.

Nowadays I put much less confidence in any one position. Leaving room for being wrong is the most important thing.

Interesting that for all of his clever derivatives idea/sale and post-crash fortitude/rebound, he overlooked the size of the market he was playing. That was a pretty newb mistake.

What I Learned from Losing $200M - of other people's money.

I am on a roll. This article plays this out like poor investor lost his money in a market downturn. My view is this; they are trading derivatives. This is known to be very risky. It just goes to show how a shiny education was hired, when in reality nothing was known / gained here other than a market bump. Sad waste of an education IMO.

I was working in the crude oil / nat gas options pit at the NYMEX during the summer of 2010 when these trades went down (where much of Mexico's hedge was traded but not necessarily the author's portion.)

Please tell us stories, if you have some.

"What I learned from losing someone else's $200M" would be a better title :)

Yeah, that's what I was thinking

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