American Consequences - February 2019

TALES OF emotional investments

‘It’s time to short the whole market...’ When I worked on Wall Street, I used to take a walk around the office on slow days when portfolio managers and analysts had their guard down. When the office was quiet, people felt a little more at ease and often talked stocks casually. What they didn’t know was that I was secretly taking notes... These guys weren’t emotional when their screen flashed green or red... When I would ask them about a particular stock, they focused on fundamentals, not price. It was these unfiltered ideas and thoughts that were the genesis for some of my best trades... They’d give me their dream scenario for stocks they loved. And yet, whenever those stocks drifted to those prices, they wouldn’t pull the trigger. They became emotional and often questioned their own logic and research. When this happened, the first thing I would ask is if anything changed fundamentally. If not, I was ready to pull the trigger and start buying or selling based on our prior conversations. This came in handy during the summer of 2007. Scrolling across the tape was an announcement that a nine-year-old Daimler Whenever those stocks drifted to those prices, they wouldn’t pull the trigger. They became emotional and often questioned their own logic and research.

Chrysler merger was falling apart because of financing. Remembering my notes, I stood up and screamed, “It’s time... It’s time!” My portfolio manager had no idea what I was talking about... Earlier that spring, we were in the midst of a flurry of merger and acquisition activity. It seemed like every morning we came into the office there had been four different takeovers the night before. I’d never seen anything like it. I knew my portfolio manager wanted to be short the market, he just didn’t know when. That afternoon he made an off-the- cuff remark, “You know, the next time one of these deals falls apart because of financing, it’s time to short the whole market...” Standing up at my desk, I reminded him of his earlier prediction. Surprisingly, he wanted to dismiss it. The market was just “too strong.” In hindsight, we were fortunate enough to start the process of getting rid of lukewarm holdings and finding some new stocks to short... Months later, the Great Recession had begun and the market was anything but strong. Did his off-the-cuff remark predict the inevitability of a coming crash? No... But it motivated us to re-evaluate our holdings – without emotional bias – several months in advance. 8YVRI])YǺ&YXLSVERH+SVQIV;EPPXVIIX Trader

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