By now you’ve probably heard of James Cordier who blew up his clients at optionsellers.com (full apology video).
If you need a recap: He Blew Up His Fund. Now He’s a Laughingstock.
“The firm lost all of its capital in last week’s volatile energy markets and, in some cases, left clients on the hook to settle trade balances.”
How This One Fund Blew Up Overnight – And What We Can Learn From It
“Mr. Cordier with his expert financial opinion thought it was wise to sell naked call options on Natural Gas. Nat Gas shot up nearly 20% in a single afternoon last week.
At the bottom of all this mess – it was his fault for setting up a negatively asymmetric (high risk – low reward) trade.”
“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. … 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.” (Epsilon Theory)
Perhaps the greatest irony is that optionsellers.com even used Taleb’s “black swan” concept in its marketing – and then proceeded to do the opposite (selling tail risk).
I think there is a broader lesson to be found here than “don’t blow yourself up writing naked options.”
Josh Brown touched on it in Yards After Contact:
“All around me I see examples of people, portfolios, strategies, messaging and business models that weren’t built to withstand corrections that persist for more than a month or so, as this one now has. Free asset management isn’t built for it. The phone banks won’t withstand the onslaught as millions of people learn that index funds aren’t any “safer” than the active funds they’ve exchanged them for.
Advisors who don’t charge any money for portfolio management aren’t built for it either.”
It has been some ten years since the last recession. Ten years since the last period of sustained volatility, widespread defaults, wrecked retirement accounts, and mass layoffs. During this long period of prosperity, new business models such as robo-advisors have been built. But also, new narratives, habits and expectations have been formed. Buy the dip. The next fund we raise will be bigger than the last one. The U.S. is the cleanest shirt in a dirty laundry. Shorting volatility is a license to print money. Markets go up, clients are happy, AUM grows every year.
The premise of Taleb’s book Antifragile is that “everything gains or loses from volatility.”
It’s easy to dismiss the optionsellers.com debacle as overconfident, foolish speculation. But remember that most of us in the business of investment management are also, effectively, short volatility. Not in the reckless way that optionsellers.com was, but still. Portfolio managers and analysts, allocators and financial advisors: most of Wall Street depends on the positive performance of risk assets. We get paid when times are good. We may benefit from short bouts of volatility that create mispricings. But long and volatile bear markets are deadly.
Rising markets have also mitigated the impact of a key structural shift: the rise of passive management.
The career risk of being short volatility is particularly severe if you are just a cog in a money management machine. If you just execute, analyze, implement. If you’re a cost center.
If you don’t own your track record.
If you don’t own the client relationship.
If you’re invisible, with no public brand or voice.
Or if you work for an organization that will eventually falter under the pressure of passive management. Maybe, after years of underperformance, even the ten-year track record is now lagging the benchmark. It’s getting impossible to hide this from clients and it won’t take much for them to bail.
How can you make your own career more antifragile?
Build call options that will increase in value when your main career asset becomes vulnerable.
Open up your days to randomness and seek optionality. Randomness is inefficient and can be stressful. But too much routine will slowly shrink your world and leave you with fewer opportunities.
Be a lifelong learner and invest in new skills.
David Ogilvy’s advice to young executives: “Pick a subject about which your agency knows too little, and make yourself an authority on it. Plan to write one good article a year. Once you become the acknowledged authority on any of these troublesome subjects, you will be able to write your own ticket.”
Either build your personal brand and voice openly, or at least utilize social media and fintwit to constantly expand your network.
Burn the midnight oil and start a side hustle.
Unfortunately, I speak from personal experience. For the past two years, I worked at the investment office of a very wealthy family. Our team managed an endowment-style portfolio, allocating to managers and private investments. There was no track record to be owned. There was no incentive or desire to build a public brand. There was no growth: single family offices don’t raise new funds or solicit new clients.
During that time, I became complacent.
Even though I was learning, I was not aggressively investing in new skills.
I was comfortable in my daily routines and randomness in my life decreased.
I shared some of my work on Twitter, but I did not fully commit to the idea of writing and sharing. I did not go all the way.
I thought about interesting ideas for side hustles and deals. But ideas are a dime a dozen. Only execution counts.
When circumstances changed at this firm, I experienced a rude awakening.
Don’t make the same mistake. Don’t board up your house in the middle of a hurricane. Prepare yourself well in advance. You don’t have to speculate like optionsellers.com to be caught short volatility at the wrong time.