From The Mercenary Trader:
“I beseech thee, in the bowels of Christ, think it possible you may be mistaken.” – Oliver Cromwell, to the General Assembly of Kirk
It’s interesting when traders (and investors) blow up. Sometimes you can see it coming, based on telltale actions or statements.
For instance, I remember reading Vic Niederhoffer’s “Education of a Speculator” in the mid-1990s and telling multiple friends and colleagues: “This guy is definitely going to blow up.”
In various spots, Niederhoffer bragged about his near-death experiences – wearing them as a weird badge of pride – including a story in which George Soros tells him point blank: “Get out… You’re in over your head!”
Soros was right. Niederhoffer’s bragged-about almost-blow-ups later became actual blow-ups – more than one, for more than one trading fund – in a multi-year sweep of self-fulfilling prophecy…
Another well-telegraphed example is Bill Miller of the Legg Mason funds. At one point Miller was a mutual fund superstar, famous for having beaten the S&P 15 years in a row. His reputation was built on long-side contrarianism – taking positions at odds with the general consensus.
But Miller was also terminally arrogant. He considered himself a student of poker, latticework, and multidisciplinary study – and was even a supporter of the Santa Fe Institute – yet proceeded to completely ignore every risk control lesson these pursuits had to offer.
When convinced he was right, the chance of being wrong never crossed Miller’s mind. On being asked how long he would keep adding to a position going against him, the reply was: “Until there is no longer a price quote.”
You can’t invent that kind of hubris… which helps explain why Miller loaded his funds with black-box financial positions, then plunged headlong into the abyss.
And then, of course, you have the Long Term Capital Management guys. As the old joke goes, LTCM had not one, but TWO Nobel laureates. With one they might have had a chance… with two they were doomed from the start.
Smart traders and investors take a keen interest in blow-ups for a simple reason: They don’t want to blow up themselves…
This discussion comes about in relation to the Herbalife spectacle. In case you haven’t been following it, Herbalife (HLF) is a publicly traded multi-level-marketing company with a slightly dodgy business model…