A Big House, A Nest Egg And A Few Triple Bypass

Past few weeks I was visited by many friends and relatives due to loss of my significant other. Many I have not seen for years. Some others, I have never heard of their existence until now. It is a very odd experience.

It still hurts inside and I am still grieving. Yet, I like to write down these thoughts about a guy I have not seen, like, for over ten years. He heard about what happened and called to offer his help. He is now a big time firm trader. He is at his mid 50s, not athletic but energetic. His white hair and aged face are giving him away as a man who has so much stress in his life.

From Assistant To Trader

Jim (fake name) was no genius in trading. He was an assistance to an older trader many years ago when he was at his early 20s. He worked in this capacity for like 10 years. Then one day, he boss had an heart attack and died couple of months later. The firm wanted him to take over. He was clueless and lost a sizeable chunk of money for the firm.

As oppose to firing him, one of the partners of the firm had him contact me to see if I could do something about it. I owe this firm partner much because he was the one to find me some of my initial backers. Even though I was very busy running my fund at the time, I took on the task and reviewed the situation to see what I could do to get Jim trading profitably.

The Missing Link

I can still recall vividly what I learned about Jim and his former trader boss. His boss was one of those traders who trade the price differences on the same stock across different exchanges and countries. At that time, it was still possible to manually conduct this type of trades profitably. Even now, it is still possible because the niche is too small for big hedge funds. The value to invest significant resources to computerize the complete process cannot be recouped in a few years. There is also the risk of sudden change in the landscape that can render the whole project worthless so the window of opportunity stays open.

So, what’s wrong with Jim then if the method is well defined and yet he was not able to capture the expected profits?

The problem was speed.

Jim was doing a job that took at least two men all by himself. The original workflow was that his boss spot the opportunities and shout the orders to Jim. His boss would then move onto monitoring other opportunities. Jim took over on the trading part and placed all the necessary orders and managed the trades. Should abnormal situations arise, Jim would notify his boss to see if they would cut the positions or make other changes.

My Suggestions

After learning where the problem was, I recommended to the firm partners that they need to do either one of the two things.

They could hire an assistant to help Jim doing what he did for his late boss but there was a risk. Jim had to train the new assistant to the proficiency level at par to himself while learning the rope himself to become the one calling the trades. Jim may not be a good trainer. The new assistant may not be suitable to work for Jim. In short, too many variables introduced and this was not likely to work out.

The alternative was to build macros and bots that automate at least majority of what Jim used to do. What I learned from the transaction records was that Jim put on about 1/3 of the positions his late boss did. If Jim’s order placement process was automated or partially automated, he would get the chance to do much better.

I did not hear from the firm since, although my friend (the firm partner) told me his partners were very pleased with the results.

Trading secrets, eh?

What Happened

Jim finally filled me in on what happened back then.

The firm did both of my suggestions. They hired someone to learn how to place orders for Jim and they also hired a consultant to build a macro system based on Jim’s specifications.

The hiring side was a disaster. Jim admitted he was no mentor material. Well, at the time he was under heavy stress to perform or face the consequence of losing his job. Not many people can be a good mentor when they are emotionally imbalance themselves.

The automation side was a huge success. According to Jim, he was able to outperform his late boss and the firm expanded the capital commitment making Jim one of the biggest traders in his firm. He has been making good money since.

The Impact On His Life

Jim married, have kids and doing great financially. He upgraded his house several times over the years. He has a reasonably sized nest egg in place. He should be pretty happy at this stage in life, right?

No.

The problem is that he is very stressed out. In fact, he is afraid that he will follow the footstep of his mentor, the late boss, who died after massive heart attack. Jim had more than one triple bypass over the past few years.

During the financial crisis, there were times he could not make a dime whole month. His performance has much higher volatility than before. The worse part is not pressure from the firm partners but from facing his family. He likes his current lifestyle yet he does not know what to do if he cannot make money from the market suddenly.

I told him it is time to down size his house, build a cash cushion and scale back his trading. To put things into perspective, I asked him to imagine one day if he is gone because of his trading, what he will miss. At that moment, he had a realization how foolish it is to cling on to what he is doing.

He is ready to change now.

Afterthoughts

I have the permission from Jim to write this piece. He’s actually warm to the idea that if others like him read his story and learned something, he has done a good deed for the trading community. He’s not sure if his wife will approve this hence the fake name for plausible denial.

There are many ways to make money in trading. Yet, we often glue ourselves to the same trading method or routine because that’s the one thing we know that has been working all along. It is alright to do that but you can always choose to reduce the overall risk exposure, not on the trading account basis, but on your life.