How to Live Safely in a Wall Street Universe

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Everyone on Wall Street … every guy of a certain age, anyway … loves Mafia movies. The Godfather is the gold standard, of course, but we can all equally quote lines from The Sopranos or Casino or (my fave after GF 2) Goodfellas.

In this crucial way, a life on the Street is a lot like a life in the Mob:

Now the guy’s got Paulie as a partner. Any problems, he goes to Paulie. Trouble with the bill? He can go to Paulie. Trouble with the cops, deliveries, Tommy, he can call Paulie. But now the guy’s gotta come up with Paulie’s money every week, no matter what. Business bad? Fuck you, pay me. Oh, you had a fire? Fuck you, pay me. Place got hit by lightning, huh? Fuck you, pay me.

Wherever you’ve worked in financial services, whether it’s for a big bank or a wirehouse or an asset manager or a hedge fund or an RIA, you’ve worked for your share of Paulies.

It’s not about the money.

IT’S. ABOUT. THE. MONEY.

We all gotta kick up the chain. We all owe. it’s a performance business. No matter what.

My favorite scene in Goodfellas isn’t a single scene at all, but is the progression of the Lufthanza heist, from Ray Liotta giving Robert De Niro the idea, to De Niro and crew pulling off the huge score, to De Niro getting paranoid as his crew pressure him for their cut and show off their wealth, to De Niro systematically murdering everyone in the crew.

These are the guys Jimmy put together for what turned out to be the biggest heist in American history: the Lufthansa heist. Tommy and Carbone were going to grab the outside guard and make him get us in the front door, Frenchy and Joe Buddha had to round up the workers, Johnny Roastbeef had to keep them all tied up and away from the alarm, even Stacks Edwards got in on it, all he was supposed to do was steal the panel truck and afterwards compact it with a friend of ours in New Jersey. Only Morrie was driving us nuts – just because he set this up, he felt he could bust Jimmy’s balls for an advance on the money we were going to steal. He didn’t mean anything by it; it was just the way he was.

That’s Frankie Carbone who meets his end in the meat freezer.

But Ray Liotta doesn’t get whacked.

Why not?

Because even though it was his information and connections that made the heist possible, he never asks De Niro for a cut of the money.

It’s the most valuable lesson I’ve got for any smart, young coyote embarking on a career in the Mob or on Wall Street.

Never ask for a cut on an existential trade idea.

I wrote a long-form note last week (The Epsilon Strategy) where I talked about my experience co-managing a long/short hedge fund as part of a larger asset manager, in particular the crucial lesson about money flows and the business of asset management I learned from the firm’s co-founder and PM of the company’s large-cap fund (about $4 billion in AUM).

Well, here’s another lesson. This one from 2008.

Now 2008 was a career year for me in the hedge fund. We were up 20-something percent, running slightly net long for the year. In Mob movie parlance, I made my bones in 2008. But we didn’t have a ton of assets in the fund. That would come later. So it wasn’t inconsequential to me from a financial perspective if I could help out with a good trade here and there for one of the other, larger funds at the firm.

One afternoon in early 2008 I sat down with the co-founder/PM and laid out the entire story … how all of the $10 trillion in non-agency Residential Mortgage-Backed Securities was one big inverted pyramid, with its upside-down apex resting on the thin assumption that it was impossible to have a nationwide decline in home prices … how Credit Default Swaps worked and how they were intentionally sold as insurance on the same security over and over and over again, creating something like a $10 million fire insurance policy on another guy’s $100,000 property … how Collateralized Debt Obligations could be constructed out of Collateralized Debt Obligations to make CDO-squareds, where magically the whole was rated higher than the sum of the parts … what Citi was doing with its Structured Investment Vehicles and how ALL of the Wall Street banks had taken a page from Enron’s fraud playbook to use one form of off-balance sheet accounting or another. Yes, ALL of the banks.

[Author’s note: When was I radicalized?

When Dick Fuld walked away scot-free from the wreckage of Lehman after getting half a billion dollars in cash comp and stock sales during his tenure.

But that’s another story.]

Anyway … this large-cap fund had a 30% weight in financials. I know it’s hard to believe today, but financials were, in fact, the largest sector in the S&P 500 back in the day. And this fund owned every piece-of-shit large-cap financial imaginable … Bear Stearns, Fannie Mae, Citi, Lehman … you name it, he owned it.

The next day he started selling, and over a three-day period he took his financials sector weight down from 30% to 5%. In a $4 billion fund. Never seen anything like it. Probably never will again.

It saved the fund. Maybe saved the firm.

I mean, don’t get me wrong … 2008 was an incredibly crappy year for any long-only manager. There was nowhere to hide. But the difference between down 35% and down 25% in a year like 2008 is the difference between life and death in our business.

No one is too big to not get whacked if they can’t pay. Everyone’s got a Paulie.

Ask Bill Miller if you don’t believe me. He went the other way on this trade and was professionally whacked.

My capo went the right way on this trade. It was totally my idea.

And I never asked him for a dime.

Why? Because the genius of this 2008 trade was NOT my idea. The genius of this trade was the PM’s courage to act. The genius of this trade was in not just taking the financials exposure down from 30% to 25%, which is what 99% of PMs and investment committees would do, but in taking it down to FIVE FREAKIN’ PERCENT.

This was an existential trade. The sort of trade you make two or three times in a career.

In an existential trade, the COURAGE TO ACT is the thing. It’s the only thing.

In both the Mob and the Street, you have to recognize the difference between an ordinary-business trade and an existential trade. In an ordinary-business trade, yeah, you can and should get paid for ideas. You should push to get paid, even if that means getting in your capo’s face. After all, our business IS. ABOUT. THE. MONEY.

Except when it’s not.

When the trade is a matter of identity … when the trade is a matter of survival … when someone has the courage to act on an existential trade, it’s THEIR trade. Win or lose, it’s all theirs. You must give them that complete ownership. You must give them that distance.

Because if you treat an existential risk-taker in an instrumental way, as a means to an economic end, they will resent you for that treatment. Win or lose, subordinate or superior, they will resent you. And that resentment never fades. It only grows.

Ultimately you will be whacked.

On the other hand … you can treat the existential risk-taker as an autonomous human being, as an end in themselves. You can be their partner. You can be part of their pack. You can still benefit materially if their existential trade is a success. They’ll never forget what you did for them.

They just won’t pay you for the idea.

And that’s okay. It’s how to live safely in a Wall Street universe.

In 2008 I had an idea on what was coming down the pike. I shared it then, one-to-one, because it was the smart, self-interested play for the metagame of Our Thing.

In 2019 I’ve got another idea on what is coming down the pike. I’m sharing it now, one-to-many, because it’s still the smart self-interested play for the metagame of Our Thing.

Sharing the idea, not to get paid directly but in hopes you will join the Epsilon Theory pack? That’s on me.

The courage to act? That’s on you.


Post Script

Yeah, it’s a weird title for this note, stolen from How to Live Safely in a Science Fictional Universe, a novel I love by Charles Yu. Here’s a quote:

My father built a time machine and then he spent his whole life trying to figure out how to use it to get more time. He spent all the time he had with us thinking about how he wished he had more time, if he could only have more time.

We are all our own Paulie.

We are all taking Paulie’s cut, not from others and not from what we earn, but from our OWN TIME here on Earth.

And that’s okay. That’s the life we have chosen, to paraphrase another great cinematic mobster. That’s the price we pay to put food on the table for our kids and renew that BMW X5 lease every three years.

But then again, maybe it’s not okay. Maybe we get so caught up in being Paulie for ourselves that we forget where our internal Paulie ends and WE begin.

I see this a lot in our business. I see this in myself more than I’d like.

More quotes …

Life is, to some extent, an extended dialogue with your future self about how exactly you are going to let yourself down over the coming years.

How many times have I failed before? How many times have I stood here like this, in front of my own image, in front of my own person, trying to convince him not to be scared, to go on, to get out of this rut? How many times before I finally convince myself, how many private, erasable deaths will I need to die, how many self-murders is it going to take, how many times will I have to destroy myself before I learn, before I understand?

Maybe we spend most of our decades being someone else, avoiding ourselves, maybe a man is only himself, his true self, for a few days in his entire life.

We are all our own Ray Liotta and Robert De Niro.

We are constantly giving ourselves tips and ideas for the next trade … the next score … the next move up the ladder.

And for those ordinary course of business ideas, it is right and proper that we ask ourselves for our cut … that we think in terms of economic success and economic failure … that we treat ourselves in an instrumental way.

But when we give ourselves the idea for an existential move … when our Identity is at stake … for those two or three times in a lifetime when we just might have the COURAGE TO ACT in accordance with our true selves … the failure is never in the outcome.

The failure is in our thinking that it is.

The failure is in the instrumental bargains we strike with ourselves when we should be acting with full hearts … when we should be speaking our I AM.

The failure is in the resentment we feel towards our instrumental selves. Because that’s when we murder ourselves. Over and over again.

There’s a better way. Even in the Mob. Even on Wall Street.

Clear Eyes and Full Hearts, Can’t Lose.


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J
Member
J

For me, the best part of sharing a winning idea is getting the opportunity to see who has the class to say “thank you”; not only does it give you the knowledge that it made even the slightest difference in someone else’s life, it gives you the knowledge of who you should give a damn about.

Thank you for sharing, Ben.

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Andrew Meyer
Member
Andrew Meyer

Thank you for explaining the difference and providing the terminology to articulate different types decisions. The fact that there’s a difference between tactical decisions, for example, what language should we write this piece of software in; strategic decisions, like what company should one partner with and existential decisions, which market segments will survive in the 21st century.

In my case, four years ago, I made an existential decision to leave a comfortable management position at a consumer retail company and make myself a developer in startup. My thinking was/is that CPG, Automotive, Retail, Consulting etc. market segments are full of zombies that when the economic winds change, will almost all be wiped out. So, if I wanted to succeed in the 21st century, I had to work in a company designed and built for the 21st century. Understanding wasn’t the problem, executing differentiated it as existential rather than strategic.

It took a couple years and a lot of retraining, but I am now a Sr. DevOps engineer in a Series A Startup. From this vantage, I can give you a second example. In any startup, there are lots of tactical decisions, what capabilities do we create, who writes them, etc. Two months ago, we made an existential decision to change our monetization strategy. Executing and leaving a comfortable paradigm are the issue, not understanding the decision.

Thank you for the definition and terminology to articulate what differentiates an existential decision.

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William Petersen
Member
William Petersen

So the 2019 idea is……..?

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damon33
Member
damon33

Sadly this comment sums up my limited experience with ET. I consider myself part of the pack intellectually but am not a professional money manager and cannot afford the attendant fees that go along with full access. I have been trying to read between the lines on what the 2019 call is but it appears only accessible in the pro subscription. I harbor no ill will and understand the need to paywall the intellectual property rights but am disappointed in that I enjoyed access to Ben’s unfettered thoughts and those days are behind us. I will likely continue in a similar vein to what I do now with Doug Kass. I cannot justify the RealMoneyPro fee so I follow his twitter feed to keep up with his thoughts. He is pretty good about trying to articulate his thinking and trades there for folks like myself. The one downside is he is a bit obsessive on politics and gets frustrated with trolls leading to long twitter timeouts.

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Redcat
Member
Redcat

I understand this completely, damon33. Incomplete thoughts are frustratingly frustrating. Generic advice is available everywhere, but I’m here to hear ideas that might be relevant to my/our life and investment approach. Our primary authors come from a community not my own and they carry attitudes, biases, and intentions that need to be seen by the rest of us and evaluated as useful to us. I’m seeing, apparently not alone, the value decrease over time – but I will soldier on. Hang in there a bit longer and let us see how this unfolds.

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William Petersen
Member
William Petersen

I miss David and Harold.

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Redcat
Member
Redcat

Uhhhh – I miss my ex-wife, daughter, the old SF Chronicle, funded pensions, meaningful labor laws, taxation of all financial exchanges (oh, wait, that hasn’t happened yet), and my many Republican and LIbertarian friends who have left this damned domain before me so that I have no one else with whom to discuss or argue or fight over this stuff. Oh, well – sorry W.Petersen, miss whomever you miss. But if this isn’t your spot or mine, we need to think about what else might be.

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