The bastards who make billions

HOLBURN, ABERDEEN – Felix Rohatyn was quite a character.

He possessed what he called a “refugee’s sense of value”, which he picked up while on the run from the Nazis.

When France was invaded in 1940, his family fled from Paris and embarked on a multi-year trek to get to the US, paying their way in gold coins he’d hidden in toothpaste.

Following that experience, he said you should only truly value that which you can carry in your head, or in a toothpaste tube.

He went on to become a very accomplished investment banker, most famous for bailing out the New York City in 1975 when it went broke. He passed away at the fine age of 91 in December 2019, right before… well, you know.

I wonder what he would make of our current state of affairs. The lockdowns, the surge in indebtedness. As the man who stood between state and market when bailing out New York, I’m sure he would have had a lot of wisdom to share.

To be clear, Rohatyn was not one of the “bastards” I refer to in the title – those are further down. Before we get to that, there’s one line of his, a pearl of wisdom, which I believe is especially relevant today:

“The ultimate power is the absence of desire. I believe the most powerful man is a monk, because he is not corrupted by power.”

While central banks like the Federal Reserve are built to look like temples, those that inhabit them are not monks.

If you give a man the ability to print money, he will find an excuse to exercise that power. It doesn’t matter what the excuse is, the itch to intervene will be scratched. That’s one of the primary reasons I own gold (all the central banking talk of ending their money printing measures does not convince me) but I bring that quote up again for another reason.

Is the most powerful investor one who does desire profit? For one who does not desire profit, is immune to greed – that which ruins so many investment and trading decisions. Similarly, one who does not desire a profit is immune to fear, which also ruins even the best laid plans of investors and traders.

It would certainly appear that many investors have abstained from desiring a profit this year. That might explain the spectacular performance of certain bankrupt companies (Hertz), “memestocks” (GameStop) and cryptos created as a joke (Dogecoin). Though lacking fundamental value, those buying these assets don’t care if they make money or not. Which ironically, has generated enormous returns for them.

This has been termed “financial nihilism” (I believe this was originally coined by Demetri Kofinas), which isn’t quite the same thing as the “monk” approach.

But perhaps we should aspire to be monks when it comes to managing our investment portfolios – but without donning the cloth. Removing emotion from the equation, cutting losing positions quickly, and letting the winners run for all they’re worth.

That’s why I’ll speaking to one investor about later this week, who used a certain emotion-free strategy to sell almost all of his stocks right before the crash last year, and buy back in as soon as the smoke had cleared to buy them right back on the cheap. We’ll be broadcasting the interview on Thursday this week – don’t miss it.

But of course, it’s not only monks who are immune to pressure of certain emotions…

What makes a killer investor?

Don Novick was so successful as a trader that he retired aged 46 in a castle in the Scottish Highlands. He now spends his time filling his wine cellar and collecting antique watches. When he was asked what made a great trader, he said this:

“I would say that one of the biggest differences when it comes to separating out the really good traders is how they seem at close of play, when trading has finished and they’re turning it in for the day. You know, trading is a profession that, if you’re the least bit vulnerable mentally, can completely undo you. I’ve seen traders crying, and being physically sick, at the end of a hard session. The pressure, the environment, the people… it’s all pretty brutal.

“But what you find with the guys at the very top is that, at the end of the day, when they’re heading out the door, you just don’t know. You can’t tell by looking at them whether they’ve raked in a couple of billion or whether their entire portfolio has just gone down the pan.

“And there it is in a nutshell. Therein lies the fundamental of being a good trader. When you’re trading, you cannot allow any members of your brain’s emotional executive committee to knock on the door of the decision making boardroom, let alone take a seat at the table. Ruthlessly, remorselessly, relentlessly, you have to stay in the present. You can’t let what happened yesterday affect what happens today. If you’re prone to emotional hangovers, you’re not going to last two seconds on the trading floor.”

As we noted earlier, emotions and investing make very poor bedfellows. But how does one actually separate the two? Novick goes on:

“… once a trade has been executed, the really good traders… will have no compunction at all about getting out. About the whys and wherefores, the pros and cons: about whether it’s right or wrong.

“… Exiting a trade will be a cool and clinical decision that has no subsequent emotion, no lingering psychological after-effects attached to it whatsoever…

“I think the idea of killing professionally, be it in the market or elsewhere, demands a certain ability to compartmentalise. To focus on the task at hand. And, when that job is finished, to just walk away and forget it ever happened.”

You may have clocked by that last paragraph that Novick is not exactly normal. In fact, he’s a psychopath. Both self-confessed, and diagnosed.

That excerpt is from The Wisdom of Psychopaths by Kevin Dutton, which explores how some psychopaths end up becoming so successful in their fields. Novak’s lack of emotion and attachment made him extremely effective, albeit in a disturbing way.

Now of course, I’m not recommending you try to behave like a psychopath. But it is possible to distance your emotions from your investing decision making – if you make the decisions ahead of time, before emotion can play a role.

Provided you’re not a day-trader, and are investing over the longer term, you can set clear stop losses and/or targets for each position in your portfolio as soon as you acquire them.

That’s why knowing exactly where to place your stop losses and position sizes ahead of time is key. And this cannot be done on a one-size-fits-all basis. But it can be done relatively simply – if you know how.

And that’s what we’ll be exploring at this event on Thursday. Don’t miss it!

Until then,

Boaz Shoshan
Editor, Capital & Conflict

PS Did you catch last week’s Fortune & Freedom podcast with Nigel Farage? He had quite a lot to say about our new health secretary…

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Category: Investing in Gold

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