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When God Failed at Trading
This week marks a rather embarrassing end to one of the most illustrious careers in trading. Andrew Hall, a long time legend in the oil markets better know as “God” has to shut down his Astenbeck Master Commodities Fund II Ltd. after suffering a -30% loss in funds.
Mr. Hall achieved a great of notoriety when at the absolute nadir of the financial crisis he insisted that Citibank -- his then employer -- make good on his $100M payment even though the company was effectively bankrupt. But let’s set aside the fact that Mr. Hall collected 100M via a taxpayer bailout and promptly lost 500M of investors money this year before he finally shut down the fund, and just look at his departing statement.
In explaining the reasons for his failure Mr. Hall noted that “Algorithmic trading systems have increasingly come to dominate” and the trajectory of prices is chaotic, he said. “Investing in oil under current market conditions using an approach based primarily on fundamentals has, therefore, become increasingly challenging. It seems quite likely this will continue to be the case for some time to come.”
This is, of course, utter nonsense. Hall misread the power of technology and the ability of frackers to compete at ever lower price points, which completely destroyed his thesis that the OPEC production cuts would work. In other words, Hall was trading the market with 1990’s-2000’s mindset while the market completely changed in front of him.
This, I think, is the absolute key lesson for anyone who trades. Markets are not static environments. Their structure changes all the time and it is the trader’s job to constantly question his underlying model of analysis to make sure it’s in alignment with the current reality of trade. The single most dangerous word in trading is -- ALWAYS. As in market’s always do this…etc. That is a straight path to failure.
This is also perhaps the market’s greatest gift to us. Aside from the financial remuneration, markets teach us to be humble and mentally flexible -- gifts that pay lifelong dividends way outside of the financial arena.
Reading about Mr. Hall’s demise, I’ve thought about all of my own “God-like” moments of sheer arrogance that ended up in disaster and this led me to look back the most popular column I ever wrote -- Don’t Trade Like Tony Montana. So I will end with just a few paragraphs from that piece which are always worth re-reading.
I’ve been thinking about the Tony Montana character lately, realizing that I sometimes do a bizarre imitation of the “say-hello-to-my-leeetle-friend” scene when I fight the tape in FX. Did you stop me out as tried to short the top? No problem I can take it. Here is another order to sell. Another stop? Give it to me. More? Go ahead I’ll take it all — I am stronger than the market, I can take it all. In any case, you get the idea. After a while, your trading account starts to look like Tony Montana’s body and you begin to realize that maybe this is not such a good idea.
Sun Tzu once said, “He who knows when he can fight and when he cannot, will be victorious.” This is perhaps some of the greatest advice that we can absorb as traders. Very often we trade not to win but satisfy our ego. Taking on the world, or the market is a romantic idea that we’ve all been taught, but in finance, that is a very expensive way to conduct your business. As guys, we may all yearn for our inner Tony Montana, but as traders, we should wise enough to know better.