Originally published on June 21, 2011
There’s a major test coming up this week for denizens of the financial blogging complex…we’re going to separate the tourists from the locals, the chattering classes from those who’ve actually seen combat.
The news is out that hedge fund giant John Paulson has “taken a bath” in shares of Chinese über-fraud Sino-Forest ($SNOFF). Estimates put his loss for investors in his fund at $720 million. Even for a $37 billion manager this is an epic disaster, the fund in question is said to have lost 13% just in the last month.
This is a huge story with one very obvious angle that will be difficult for the clickwhores to resist:
Is John Paulson, who emerged from the financial crisis with $30 billion in gains, a one-hit wonder?
How bloggers cover this debacle will be very telling.
There’s an unwritten rule amongst those who trade that we never mock someone who’s just been shredded in a losing position. We’ll be sure to mention it, as part cautionary tale, part trading folklore – but sneer at the guy on the losing end? Trader Heresy, the real guys just don’t do it.
This is because every one of us has been killed in a trade. This one (at least one) disastrous trade becomes the one that defines us in many cases, the lodestone that forced us to learn things like position sizing and risk management and discipline. My friend JC was so annihilated with me in a Jamba Juice position once upon a time that he went out and earned his Chartered Market Technician (CMT) designation over the course of the next three years – “I figured I’d better learn something”.
No, the real guys won’t be mocking Paulson or sneering derisively at his “lack of due diligence”. The real guys keep index cards tacked to their bulletin boards with the ticker symbols of disasters past. The real guys keep their worst losers on their quote screens, a daily (hourly) admonition. The real guys remind themselves constantly of their big errors and that the next blowup could always be right around the corner.
When Caesar strode through the streets of Rome, amidst the throngs celebrating his latest triumph, he had a slave just behind him whispering in his ear. The words were “Memento mori – Remember, you are mortal!” Chanted again and again, this reminder dissuaded the rising consul of the Republic from declaring himself Emperor…at least for a little while.
Traders know this lesson all too well. Those who have won big have also lost big and when they see a fellow player immolated by a stock, there is no mirth or schadenfreude.
While Paulson will be just fine ($30 billion buys a lot of solace), the real guys will be filing away the details of how he got killed and what he could have done differently. Not to ridicule the man as many childish sideline bloggers will do, but to remember: We are all mortal, even the best of us.