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What I Learned from Losing $200M (2015)
- xstartup 9y agoThe 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.
- tixocloud 9y agoI'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?
- sillysaurus3 9y agoIt's speculation. It can always go badly, no matter how much transparency there is.
- tryingagainbro 9y ago2 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
- nathan_f77 9y agoYou 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.
- ChuckMcM 9y agoApropos 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 :-)
- tryingagainbro 9y agopeaked 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.
- ChuckMcM 9y agoIts 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.
- pdimitar 9y agoI 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.
- noonespecial 9y agoHaving 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!
- xstartup 9y agoI 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.
- IAmGraydon 9y agoI'm loving the humblebrag in this post.
- trophycase 9y agoI 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.
- CalChris 9y agoI 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.
- rb808 9y ago> 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."
- softwarefounder 9y agoHaha, brilliant point. Fortunately, it's probably a lot of VC money instead of individuals, or publicly traded companies; at least one would think.
- whitepoplar 9y agoPlease, where can we read more stories about this? I'd love to hear! :)
- CalChris 9y agoRead Liar’s Poker and basically everything by Lewis.
- whitepoplar 9y agoNo, I meant personal stories. Any other surprising behavior that they had in common?
- anonu 9y agoAs 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.
- ryandrake 9y ago> 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.
- Danihan 9y agoYour 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.
- samatao 9y ago"What I learned from losing someone else's $200M" would be a better title :)
- supermdguy 9y agoYeah, that's what I was thinking
- Goopplesoft 9y agoThis 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.
- lordnacho 9y agoAs 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.
- yellowstuff 9y agoAgreed. 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.
- TuringNYC 9y ago>> 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_loss https://en.wikipedia.org/wiki/2012_JPMorgan_Chase_trading_lo...
- yellowstuff 9y agoGood 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.
- blackholesRhot 9y agoI 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.
- blackholesRhot 9y agoAlso, 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-b214-00144feabdc0 https://www.ft.com/content/ccd87f9e-9bd9-11de-b214-00144feab... https://www.bloomberg.com/news/features/2017-04-04/uncovering-the-secret-history-of-wall-street-s-largest-oil-trade https://www.bloomberg.com/news/features/2017-04-04/uncoverin...
- throwaway613834 9y ago
- nicholas73 9y agoInteresting 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.
- imron 9y agoWhat I Learned from Losing $200M - of other people's money.
- purplepotato 9y agoI 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.)
- Bromskloss 9y agoPlease tell us stories, if you have some.
- beiller 9y agoI 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.