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The Problem Is Not the Market, The Problem is You

Posted by Larry Doyle on November 19, 2009 12:14 PM |

Trading on Wall Street is fascinating. Picture yourself surrounded by individuals within three to four feet on every side, a manager at the end of the trading row, and salespeople screaming to get your attention. In what may appear to be bedlam, one must be able to properly manage significant levels of risk.

What are the key character traits necessary to manage risk? The ability to calculate quickly while maintaining exceptional levels of poise, focus, and discipline. Why do so many competitive athletes make their way to Wall Street? These trading floors are the equivalent of locker rooms and athletic fields.

As with any athletic atmosphere, there are also some very healthy egos on Wall Street trading desks. The very nature of the enterprise attracts those who have strong belief in their own abilities. Competition promotes ego. That said, throughout my career I witnessed varied levels of success inflate individual egos to the point where the ego became unmanageable, the risk outsized, and the subsequent losses fatal. That scenario repeated itself at every shop on Wall Street.

Having witnessed it, I kept a short cutout from a trader’s magazine. The magazine item addressed the topic of losses. I wish that I saved this clip, but I distinctly recall its message. In so many words, it said ‘the problem is not the market, the problem is you, the trader. You need to accept that the market and its participants are not wrong, but that you and your ego are not willing to accept initial losses so they grow to the point where the losses become fatal.’

Why do I bring this topic up today? The thought of this concept of outsized egos and losses crossed my mind as I read The Wall Street Journal’s report on Ken Griffin of the hedge fund Citadel, A Hedge-Fund King Comes Under Siege:

In a September interview in his Chicago office, Mr. Griffin expressed exasperation at investors’ desire to keep dissecting last year’s disaster, comparing their fascination with people’s inability to look away from a car crash. “I’ve told the story of 2008 many times,” he said.

Citadel’s biggest mistake last year, Mr. Griffin said, was putting too much faith in regulators’ ability to deal with the global meltdown.

While Mr. Griffin, unlike many of his counterparts, is a hedge fund survivor and did express a measure of human fallibility in another part of the WSJ article, the fact remains Citadel was brought to its knees in 2008 by excessive risk within its funds across a wide array of asset classes. That excessive risk position was neither the fault of the market nor the regulators, but rather Mr. Griffin himself and those working at Citadel.

He may get exasperated by those who continue to bring that experience up. He also may want to check his ego in the process.


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