2019 has been an eventful year for me and I hope it has been for you too.
I’ve learned a great deal, made new friends and grown both in professional and personal capacities.
As the year winds to a close, here’s a list of articles that I’ve read this year and found to be insightful:
The oil whale’s illusion of control
Bob Henderson shared his experience back in 2015 in ‘What I learned from Losing $200 Million‘. This is a gripping piece from a physicist turned hotshot oil trader who learned the hard way that market movements do not always fit in as what the models of physics suggest.
Here’s an excerpt:
‘The most stressful part of my 2008 experience taught me how to guess.
The day after Lehman fell I lost $20 million, and the day after that $30 million—enough in two days to wipe out all the profits I’d made the previous year. (And that had been a pretty good year.)
But worse was that I felt trapped. My models showed I was destined to lose far more money in the coming weeks, no matter what I did. All roads seemed to lead to an unavoidable abyss. I could practically feel that hot hole breathing under my desk. I actually got dizzy, and lost my ability to think. When my boss stopped by to warn me that Goldman Sachs and Morgan Stanley looked likely to fall next, he seemed almost amused when he told me that I looked green.
I stumbled home early that day, mentally incapacitated for the first time in my career.
But stress had other effects too.
Psychologists say that the illusion of control can be adaptive, in the sense that it encourages a focus on problem-solving behaviors as opposed to emotional response. So once I got past flight and started to fight, I may have had a dose of delusional thinking to thank for the guesses I made next.
The Sunday after Lehman fell, pacing my empty trading floor, I realized once and for all that my models and reports could no longer tell me what to do. The one unmistakable fact was that my risks would increase if oil continued its decline. I decided that when I came in on Monday, I’d place a big bet that WTI would do just that.
And on a Saturday morning bike ride up the Hudson, it occurred to me that Mexico might be willing to restructure its deal—selling us back the option it owned, and buying a new one—in a way that would lock in billions of profits for the country, while giving me a much needed windfall too. I dropped my bike in a bush and texted our salesperson about the idea.
There were many other decisions and guesses, some made alone, others with help from my team, and still others made by my boss. All were guesswork, none could I have anticipated in stress testing, and all involved abandoning my original strategy along with the illusion of control it gave me.’
Markets are complex adaptive systems. To trade and invest well in markets, you’ve got to accept that there will always be unknown unknowns, and that the illusion of control can be detrimental to your P&L.
The art of the contrarian investor
My friend Alex Barrow wrote this well-written piece on how investors can learn to identify market consensus. Identifying consensus beliefs and narratives is crucial for market out-performance as it allows you to avoid crowded trades and to identify opportunities. This is a very important and underappreciated skill, and it usually takes years of experience in order to master it.
Here’s what he has to say about it:
‘It’s incredibly difficult to identify the consensus and act as a contrarian in markets. A good first step is to acknowledge that you suffer from the same base cognitive impulses that drive the rest of the herd — we’re ALL part of the Dumb Money crowd.
As soon as you accept this, you can then go about learning some tools to help you step back from the crowd and better understand the popular narratives and emotions that are driving prices. Doing so is more art than science and it takes a lot of work. But it’s better than standing on the edge of a precipice…’
Do yourself a favour and give it a read.
Why non-mainstream mavericks succeed in markets
This is an earlier piece from hedge fund manager Lyall Taylor, writing about why advice from economists and mainstream investment professionals and advisors cannot be trusted. The ugly truth is because many of them ‘have not learned to fight’, in the words of Taylor.
He dives into the gist of what it really takes to be successful in markets, titling his piece ‘Martial arts & the UFC; Michael Lewis; and why rogue punters predicted the GFC, not the mainstream‘.
Here’s my favourite portion from Taylor’s piece:
‘Investing successfully, like being a successful UFC ring fighter, is hard (in different ways), because like the UFC, it is a highly competitive arena where it is not enough to be good – you have to be better than your opponents to win. That is not the case for many professions. If you’re a good engineer, that’s enough. If you’re a good doctor or lawyer, that is also enough. Good is not enough in markets – you have to be great – because not everyone can win. Consequently, it is not enough to go to the right schools, get the right degrees, and work for the right brand-name institutions. It won’t help you make money in the markets or correctly understand real-world economics any more than learning fancy TKD patterns and kicks will help you win a UFC fight.’
The Morgan Housel articles
Morgan Housel is one of my favourite writers. He blogs on the Collaborative Fund’s website. If you haven’t subscribed to it yet, I assure you that you’re missing out.
Housel writes broadly, commenting on life, business, psychology and the stock market, and has a knack of breaking complex topics down into simple terms.
In ‘Where Big Leaps Happen‘, Housel suggests that success and breakthroughs do not come from just being good at one thing, but rather a combination of talents and circumstances. Here’s what he said:
‘Few talented people get all their value from being great at one thing. Being so good at one thing that it’s enough to make you extraordinary is rare. More likely are people who are pretty good at a few things and combine those things to make a big leap into something great. Steve Jobs was a pretty good technologist and a pretty good designer. Neither on their own was exceptional. But the combination of the two was extraordinary, creating the bronze of our time. Same with Einstein, who mixed good math skills with a good imagination to create pure genius.’
He adds on that for creating wealth, it requires not just good investment acumen but good financial discipline (my emphasis in bold):
‘Cornelius Vanderbilt was worth the equivalent of $200 billion when he died in 1877. And then:
Forty-eight years after his death, one of his direct descendants died penniless … When 120 of the Commodore’s descendants gathered at Vanderbilt University in 1973 for the first family reunion, there was not a millionaire among them.
This had almost nothing to do with philanthropy and everything to do with absurd, almost unbelievable, spending.
You can be great investor and still spend yourself broke. Ego is easier to develop and maintain than alpha, so good returns without the psychology necessary to hold onto those returns where money can continue compounding can be defeating. The math of compounding ensures that neither those who earn big returns but spend them quickly, or power savers who settle for low returns, will build meaningful wealth. There are many good investors. There are many good savers. It’s the intersection of both that compounding rules wild and big leaps are made.‘
In the other article ‘You Have To Live It To Believe It‘, Housel argues that our personal experience has an overwhelming influence on our beliefs and actions more than what we realise and dare to admit.
This piece is long and epic, and makes the same main point from a variety of topics and life aspects. I particularly love this segment:
‘Two years ago Marc Andreessen said that tech stocks have been undervalued for most of the last 15 years. It partly explains why they’ve produced great returns. The cause of undervaluation, he explained, was the mental scars left by the dot-com implosion in 2000.
“If you live through one of these scarring crashes, you get psychologically marked,” he said. It scarred investors, founders, journalists, regulators, everyone. Investor Tren Griffin wrote:
I have a lot of muscle memory that resulted from the Internet bubble. There is no way you can fully convey in words the experience being in the lead car as an investor in that roller coaster. Looking at the cycle after the fact is nothing like looking ahead and not knowing what will happen next. The experience still impacts the way I think and act.
That last point is important, because something began changing in Silicon Valley over the last few years. Andreessen again:
One thing that’s happening is now enough time has passed that enough kids are coming to the Valley who don’t have a memory of the crash. They were like in 4th Grade when it happened. We get in these weird conversations where we’re telling them cautionary tales of what happened in 1998, and they look at you like you’re a Grandpa.
We have a new generation of people in the Valley who say, ‘Let’s just go build things. Let’s not be held back by superstition.’
This new generation might help explain why Silicon Valley risk-taking grew over the last five years. The number of VC funds, the number of VC-backed deals, the valuations those deals fetch, and the number of college grads to get into startups has surged. The typical Silicon Valley founder in your head might look like a 21-year tinkering in their dorm room, and some are. But the median age of a startup founder is actually 40. Yet even a 40-year-old was likely in college during the dot-com rise and fall. They avoided the carnage. So they think about risk and reward in totally different ways than a 40-year-old founder did five or 10 years ago.’
The differences in our formative experiences creates different worldviews, and that plays out in the way others live out their lives.
The consequences of the Information Age are here
Monsieur Louis-Vincent Gave, who runs research firm GaveKal, wrote this insightful piece ‘The Knowledge Revolution and its Consequences‘, whereby he pointed out that political systems are undergoing changes because the economic infrastructure of the world has evolved. This happened due to the ‘knowledge revolution’.
‘One of the most obvious consequences of the internet has been to cut out the need for middlemen across most industries, or at the very least, to force middlemen to justify their existence. Why should politics be any different? After all, what are politicians if not the middlemen (and women) between a population and a required political outcome?
The knowledge revolution should spark a shift towards direct democracy. Yet the beneficiaries of representative democracy are fighting this transition as it threatens their livelihoods and their social status. This much has been clear through the whole Brexit debacle; an episode through which the people’s representative body fought hard to cancel a decision taken by the people as a whole. As a result, proponents of representative democracy had to twist themselves into ever more pretzel-like formations. Their argument was that people should be trusted to elect representatives, but not trusted enough to make direct decisions, as it could devolve into mob rule. This condescending stance is increasingly challenged by the fact that:
- The birth of the internet, combined with the reach of the smartphone, is akin to the birth of Gutenberg’s printing press on steroids. Today, anyone can get information on almost any topic within a few minutes.
- An increasing share of the global population not only graduates from high school but goes on to university.
- For a fairly modest cost, one can now go almost anywhere in the world within roughly 24 hours (one or two months of minimum wage in most Western countries).
- Most of us now get to meet people from very different backgrounds, with different beliefs, lifestyles and outlooks. The end result of this population mixing has broadly been more tolerance and greater open-mindedness.
In short, the knowledge revolution has dramatically changed the economic infrastructure, but our political superstructure has barely evolved. This is problematic and the logical political progression should be for direct democracy to take over from representative democracy. Meanwhile, the proponents of representative democracy increasingly find themselves in the uncomfortable position of the British aristocracy at the time of the Corn Laws, defending abhorrent privileges for themselves. Ironically, Marx would not be surprised by this turn of events: the “representative democrats” having conquered the State, have become the system’s most conservative force.’
With this lens, the social turbulence of the current world we live in makes sense. And this is just a start as more populist politicians will ride on the trend and be voted into power in western democracies. For macro investors, this is one crucial trend we are all watching.
Empires rise and fall based of what high value-trade they produce
Economic history buffs will love this one. Written by Ligaya Mishan for the New York Times, it explores the history of the spice trade and the colourful interactions of geographies and cultures over time.
‘Spices were among the first engines of globalization, not in the modern sense of a world engulfed by ever-larger corporations but in the ways that we began to become aware, desirous even, of cultures other than our own. Such desire, unchecked, once led to colonialism. After Dutch merchants nearly tripled the price of black pepper, the British countered in 1600 by founding the East India Company, a precursor to modern multinationals and the first step toward the Raj. In the following decades, the Dutch sought a monopoly on cloves, which once had grown nowhere but the tropical islands of Ternate and Tidore in what is today Indonesia, and then in 1652 introduced the scorched-earth policy known as extirpation, felling and burning tens of thousands of clove trees. This was both an ecological disaster and horribly effective: For more than a century, the Dutch kept supplies low and prices high, until a Frenchman (surnamed, in one of history’s inside jokes, Poivre, or “pepper”) arranged a commando operation to smuggle out a few clove-tree seedlings. Among their ultimate destinations were Zanzibar and Pemba, off the coast of East Africa, which until the mid-20th century dominated the world’s clove market.’
Here’s the link again.
Thank you for reading. I wish everyone a Blessed Christmas and Happy New Year!