That’s Just Putting On a Nice Sweater

Kyle Broflovski: That’s not being nice. That’s just putting on a nice sweater.

Eric Cartman: I…don’t understand the difference.

Kyle: I know you don’t.

South Park, Season 7, Episode 11 (“Casa Bonita”) (In honor of the latest dumb Voxsplainer)

Around the office, and sometimes on phone calls, I refer to our clients as family. On what we call a new account…uh…client call, I often thanked a new client that we were so happy that you were joining our family. Dr. Steve, and wonderful wife in L.A., I’m happy to share with you that Chris’s ailments that we discussed so eloquently are gone. She’s feeling just great. Kurt and Grace in Michigan…<sigh>…I’m so sorry to say that we never got to go bass fishing. I wound up walleye fishing on Lake Erie, but that’s not nearly as satisfying as had I got to go with you. To a client in Kansas City, thank you so much for the barbecue sauce. I will enjoy it and think of you always in the future. Valerian Rex, looks like I owe you a Cuban sandwich. Our client in Marseilles, my wife and I were certainly looking forward to joining you in the French Riviera. It is so beautiful. Our clients on the Gold Coast in Australia, I was hoping to see that beautiful sunset that you spoke of so many times.  More locally, Troy, I was really hoping to become a boating enthusiast with you…that I will miss.

John…we talked about you a lot…in the office. Not sure you knew it, but your name was Boca…

This rogue wave that I was unable to navigate has likely cost me my hedge fund. And the reason why I had a hedge fund is you were clients. I promise you, every day when I woke up and I would check the markets, I was checking for rogue waves…I am so sorry that I was unable to manage the rogue wave that hit us this week.

James Cordier, President and Head Trader, from November 16, 2018 Update

We love process over answers here. But any honest discussion of process has to come to grips with a problem: process has become a right-sounding idea.

What does that mean? It means that telling people to value process over outcome isn’t novel any more. It means that we have all been browbeat into preferring process to outcome. It means that being acceptable – and in the mainstream – requires us to pay homage to process. And it means that raccoons who could not care less about process-based approaches to managing both risk and uncertainty will typically adopt the same language as those who do. The result is that this right-sounding idea is, perhaps, more often encountered in its cartoon form than in its real form.

If you want to see some process cartoons in action, take a closer look at what went down with last week. Well, don’t look into it at their current website, I suppose, which looks like this after they lost more than 100% of their clients’ money by selling options on natural gas and crude oil in managed account vehicles:

Instead, you need to go to cached versions of the site. You will learn that the principal was a regular on cable financial news networks. That shouldn’t be a surprise. You will learn – hopefully, again, without surprise – that the website used to look like a bad Cialis advertisement. I guess you really can’t come right out and say, ‘Are you a bored, retired white male with a ton of money who needs to feel alive again?’

But you might be surprised at how frequently “risk management” comes up.

Here’s a selection of blog posts you would have been presented with as a client:

  • Sleep at Night Risk Management for Option Sellers
  • 5 Rules for Surviving the Next 4 Years
  • Avoiding the Big Hit When Selling Options
  • The 2 Key Criteria You Must Use to Measure Diversification

Beyond these kinds of blog posts, you will see all sorts of allusions to Talebian concepts as well, like this one which suggests that selling deep out-of-the-money options is how to prepare for black swan events. If you are ever feeling guilty about your behavior, force yourself to read this again and again as punishment until you feel like the universe is in balance again.

Process and method words abound on the website’s materials, because they must. Lip service to the value of diversification and conservatism are everywhere, too, as are attempts to sell against the unpredictable volatility of equity markets. Because you can’t sell anything without this language in 2018, especially a risky strategy that is willing to bet the farm on huge exposure to notoriously idiosyncratic markets like natural gas. All of those blogs, all of that garbage about deep out-of-the-money options and black swans – is a cartoon of process. It’s a Nice Sweater.

Clear Eyes means looking for – and yes, maybe sometimes overzealously identifying – Nice Sweaters.

We’ve written about this before in The Grammar of Risk. This raccoon delivered its clients – I’m sorry, family – the Leverage, Illiquidity and Concentration Triple Crown. Not because they extracted premium from selling options, which can be a completely valid strategy in the right context, but because the structure of their trades was not built around limiting the extent to which leverage, illiquidity and concentration could take over control of the ship. Underneath the nice sweater of process was a strategy which was entirely dependent on an individual’s experience and discipline to navigate a process which was mathematically certain, over a sufficiently long period of time, but for such intervention, to achieve ruin. And it comes back to us as well: If we place trust in any one person, model or algorithm to ‘manage rogue waves’ which could bring us to ruin, we do not have a process, no matter what kind of sweater we put on it.

If you’re willing to spend some of a lovely Sunday reading more about ruin, time horizons and the matching of assets and liabilities, Epsilon Theory has you covered.

Cat’s Cradle

You Had One Job

Always Go to the Funeral


The Koan of Donald Rumsfeld

Things Fall Apart, Part 3 (Markets)

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  1. The easiest way to not lose money is to not believe in magic money-making machines, people or processes. That requires very little industry-specific knowledge and not even any searing insight into human nature, but it does require a normal allocation of common sense and a few years of adulthood.

    If you divide the world into two camps, those with that normal allocation of common sense and a few years of adulthood and those without, the test for which camp a person falls is - as it has been over the last ten years, as it has always been and as it will always be - if you are intrigued by this investment advertisement (any variation of it will do): “Ten Percent Yield Guaranteed - No Risk.”

    How many clients, family members and friends have asked you to “just look into” something like that for them - they heard about it from a friend who has been doing very well in it? The story of the money-making machine - is just another version - has been with us and will be with us forever.

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