Good judgement comes from experience. Experience comes from bad judgement. —Bruce Lee
I have just returned from a high-status holiday that my professed investment expertise presumably affords me. My resolution this year is to be more vulnerable. I heard Gwyneth Paltrow, founder of Goop, say that leaders must show their vulnerable side. If vulnerability is a new thing people are going to compete on, I am going to go at it hard.
Let me begin by telling you about a huge mistake I made, that informs everything I do now. In 2007, I was trading on my own and chatting with market acquaintances. I was pretty much talking about the same topics as I do on OPM Wire, except through cumbersome one-on-one human interactions. Which seems terribly inefficient now. One such acquaintance was impressed that I knew a lot about other fund managers. This man was himself a portfolio manager and had a lot of family wealth. He suggested that I could pick funds for his family holding co, to diversify away from his main firm.
This was an entirely unsolicited suggestion - I would have preferred to do the investing myself, but didn't yet have a Canadian fund structure. So I went along since, naturally, I did think I had insights into picking funds. How hard could it be? I had been following funds, especially hedge funds, since the late 90s. I had been trading since 99. I had worked for a hedge fund. Among other academic credentials, I was in the elite group of people who had completed the Canadian Securities Course with HONORS.
After a period of reflection, I called him up and confidently told him that small caps were the way to go. Because I had studied history and apparently, small caps outperform. And of course, the portfolio was going to be all hedge funds - none of that boring, old-school plain vanilla stuff. Only "with it" hedge fund managers had the tools and acumen to sidestep bear markets. I also studied track records. In those days, there were many Canadian hedge funds compounding at over 20% over a few years. After considerable analysis, I was ready to make recommendations. My first three picks were Northern Rivers Capital Management, Jemekk and this one really hurts, Salida Capital. If you were around back then, I don't need to tell you much more.
All three funds experienced severe drawdowns during the crisis. Two of the firms are no longer around. Jemekk Long/Short lost 60% in 2008, and still continues to operate with about $45m AUM. Northern Rivers lost 66% in 2008 and would then suspend redemptions for two years (we got out before). Salida's flagship lost 67%. It had offshore funds that held assets with Lehman Brothers. Salida was a Canadian money manager but appears to be no longer active in Canada. Its principal Daniel Guy appears to now operate out of Bermuda, still running a fund called Harrington Global, which may well be the continuance of a Salida fund, with only a cosmetic name change. That may be because, incredibly, they managed to make a full recovery on the assets held at Lehman - by launching and winning 8 lawsuits. To be clear, we didn't experience the full brunt of these losses, because I panicked early and got us out of the funds. We were never stuck in a frozen fund. My best estimate for the loss is 30-40%. I would revisit all the gory details, but in this particular instance, my records are deficient, all too conveniently. And the principal has passed away.
I think only stupidity can explain my decisions, but I'd like to say one thing in mitigation. At the time, I was very trading-oriented. My formative experience was being up and down during the Nasdaq bubble and crash of 1999-2000. From that point on, I figured the only real job of an investor is to be alert to market downturns and sell everything at the first sign of some trouble. Believe it or not, this plan worked beautifully for me personally. I think during the 2003-2007 bull market, the first big market pullback over 15% (in 2007) turned into the BIG ONE. And so, a stop loss mentality worked perfectly. I could not have imagined that these other professional managers did not have a similar contingency plan, when they were compounding at 20-30%. In hindsight, I realize that their perspective was probably more informed by the strong 90s bull market, where it paid to ignore adversity and stay long and strong. Incidentally, buy and hold is the right way, I now believe - just not of crappy small caps with low-quality businesses.
It gets worse: I was also chasing after Lawrence Partners, run by Ravi Sood. Another blow-up artist - down 81% in 2008. The main thing that prevented us from investing in that was a waiting list. I was also waitlisted for K2 - a more respectable arbitrage fund, though they probably also had a steep drawdown in 2008. To my credit though, it's not like I invested in Sextant Capital - run by a certain Otto Spork who invested in icebergs or water rights related to icebergs. Otto was a dentist turned hedge fund manager turned fraudster. He then fled to Iceland, which probably doesn't have an extradition treaty with Canada. I read a story not long ago about someone who tried to hunt him down there but was unsuccessful.
Daniel Guy still appears to be an active market participant. I read of a court case where Harrington Global sought information in relation to a position in Concordia International (a sort of Valeant Junior play). Apparently, that position declined $150 million for them between 2016 and 2018 due to the actions of a "cabal of short-sellers". The infamous cabal of short-sellers, responsible for so many company failings. Daniel Guy and his former Salida partner Courtenay Wolfe are also involved in some plant science thing called FB Sciences. They say right on their homepage "We're not talking about snake oil here". That's great, I have always believed in the power of redemption.
Personally, I take responsibility for these gigantic misjudgments. There was no cabal of short-sellers, it's not Lehman's fault or the Fed's. Warren Buffett says that if you are a know-nothing investor, you should index. I am not even sure that he needs to qualify it as applicable to "know-nothings". I still remember that the CSC teaches you that the three important parameters in any investment are return, risk and liquidity and that there are tradeoffs between them. I hope the CSC people don't read this story, I fear they might rescind my HONORS standing. I think, knowledge-wise, a novice could learn all the basics of investing, accounting, etc. in 6 months. But judgement-wise, it's a whole other story. I think I was a pretty slow-learner on that front. Some people get "buy and hold", Buffett-like investing way quicker. And that's because they are unimaginative, handbag-clutching old ladies. Or cane-wielding old codgers. (I am committed to gender-neutrality). But I also think making these mistakes is a great foundation. Today, I am very interested in manager selection. It's the most important thing for me, as I have lost interest in picking stocks myself in public markets. That's why I like the Ron Mock story - who better to put in charge of manager selection than a guy who saw his own hedge fund blow up? Ironically, this is the key experience I eventually used to get my portfolio manager's license.
The wealthy man I was "helping" was very gracious about the whole thing. We had collaborated on a lot of things before and after this episode. Once we got the money back, we never discussed it again. I have thought about these events often and I was always grateful that he was so serene about the losses. The main reason is that he was just like that. But then, one day, I remembered that in focusing on my own mistakes, I overlooked one crucial detail: most of his money was tied up in a firm that was super-exposed to energy and had a drawdown of about 80% during the crisis. His goal, as I said, was to diversify away. Because I panicked early, I actually didn't do nearly as badly as his main firm. So there you go, I have been adding value through manager research since 2007.