Why 'star' traders may not be what they seem
The two phrases you should always bear in mind
In the mid 1990s I learned a very important lesson as well as two phrases, that I always keep in mind when I hear about ‘star’ traders or investors.
I was at a major Investment Bank and my bank had just recruited two very well known traders from arguably the most admired trading desk in the world, the Salomon Bros proprietary desk. These guys had huge reputations and had worked alongside other ‘star’ traders such as John Merriweather.
I will say at this point, that they were both really nice blokes. Even though our trading philosphies particularly regarding options, were very different, they were always polite when telling me I was wrong! 1
A colleague at my bank who was an excellent trader was asked to join this new team; moving from his position as a bond trader. The ‘stars’ were creating a new proprietary trading desk, separate from all other trading desks in our firm. They had their own small trading room to the side of the main Treasury trading floor.
The new traders struggled from the start. After several months, my colleague called me and suggested we go to lunch. He was one of the funniest men I ever met in the City of London, so I was more than happy to meet him for lunch at an up-market Indian restaurant in the City.
Over lunch and jokes, discussion turned to the ‘star’ traders. They were on huge remuneration packages including guaranteed bonuses, far exceeding what my friend and I were earning. Yet my friend and I were were far more profitable for our firm.
That’s when my friend told me two things that will stay with me forever. He was astonished by some of the trading decisions of these ‘star’ traders.
“Gary”, he said “It’s all smoke and mirrors”
“You and I are playing the wrong game. While we are trading the markets, these guys are trading their careers”
It took a minute for it to sink in. Essesentially the aim of these traders was to build reputations for themselves so they could move around for large and guaranteed bonuses. Their reputations were based more on where they worked and the size they traded rather than their P&L. They spent almost as much time and effort talking to headhunters and managing their careers as they did managing their trades
Indeed after a year or so at our bank and having suffered significant losses, the ‘star’ traders were sacked. Yet, they were still able to negotiate big deals at others large banks, based on their ‘reputations’.
Whenever I hear about ‘star’ traders or investors I always bear this story in mind. In fact, during my time in the City of London I worked with other traders who had huge reputations yet were actually awful traders.
There are people who are making small and large fortunes in this industry based on media profile, raher than trading or investing ability. Some have been clearly shown to be consistantly wrong in their ideas or investments (I’m thinking about one well known CNBC host and a leading innovation ETF manager), yet they continue to attract huge interest and have built powerful and lucrative careers.
Think about all the hedge fund managers who have blown up spectacularly yet were still able to start again with large injections of new capital.
I have often thought about the fact that I supposedly played the wrong game. I focused on trading the markets while others were trading their careers. However, for me, this is not the wrong game. I’m simply not comfortable playing the other game.
My warning is to be careful of the ‘stars’ - they may not be what they seem.
As always, Keep Well and Keep Grinding
Gary
They were adamant that options should only be sold while I was an advocate of buying options. Their former colleagues subsequently lost signifcant sums to my desk from selling us options! While the ‘star’ traders at my bank didn’t sell to me, they consistantly told me I was wrong about the trade even as the trade was making exceptional returns
Thanks for the important REMINDER, Gary! I am quite surprised that these 'star' traders firmly acted as selling the options which brought them indefinite risks when markets moved against them. They mainly focused on attracting eyeballs rather than how the market. There are still a lot of them everywhere around the globe! In China, there is a fast increasing number of 'rising' private fund managers who are strong advocates of investing in U.S. stocks. They are not P&L based. They try to impress the knowledge-lacking Chinese investors by their CV such as the top western universities they have attended, the investment firms they have worked for, but not their P&L. They brag about how NICE the U.S. stock market is. But they seldom talk about their strategies and risk managements. In fact, though they seem to be professional, they are not capable investors. When the market is against them, they act like retail traders. For example, in the crash of China Concept Stocks in 2021 which led Archegos Capital to suffer from huge loss, many of these pro-U.S. stock fund managers failed as well. There was a shocking news that a famous fund manager in Guangzhou, China from the CORNERSTONE CAPITAL which started their business in 2017 refused to take stop loss of their heavy investment in the China Concept Stocks during the crash and ended up with a huge loss of around 70% of the fund. Interestingly, when his fund investors came to his office, this guy did not show up and his secretary told the investors to wait for further news. He moved his office to another place several months later and kept absorbing new capitals. In China, the western markets are generally considered 'better' but most retail investors lack knowledge and experience. These 'star' fund managers fill the void. They looked professional. They dress well in suit. They make great English-Chinese bilingual advertisements and websites which make them look and sound 'professional'. But they are just NOT P&L based.
CORNERSTONE CAPITAL website
http://www.cscapital.cc/
It is fortunate for me to learn from you, Gary! Thanks for keeping reminding us of the importance of longevity in the market.
Great article! Thank you for reminding about what's actually important in trading & how reputation can mean more than actual performance. We can get blinded very easily.
Had same experience - when one starts asking around about actual profits, margins etc., people around tend to shy away from answering important yet inconvenient questions.