When the analyst makes a bad bet, he loses his job. He is approached by a new backer: a continental gentleman named Lefevre, a devoutly quantitative man, a man who manages his money with math alone.
Lefevre offers an unusually generous salary. But the analyst is a straightforward stock-picker. A sifter of fundamentals yes, yet a self-confessed intuitive.
The market always balances, but through pain. Greed and fear are its instruments, and money is its eager scorekeeper.
An honest speculator is part investigator and part gambler. For such a man, losing money is a painful experience – else we would have to consider him a dishonest man. An honest speculator hates to lose money. When he is losing money he feels belittled, ashamed. He worries constantly – that he is wrong, or that he will be proven unlucky. Sometimes he is not able to bear it, and gives up on his wager before the denouement comes.
Sometimes, if he holds on to his wager, he is paid off handsomely. The opposite of pain being hope, when he is making money he is cheerful, he discloses his generous character.
These are the propensities through which the market acts. The man allows for excess to be rolled out through him, then is pulled back just as he expects to run free.
Some will protest that this is an unfair summation of our characters, but we have all been this man at some time or another.
I have been this man.
Last year I had a bet go wrong. I bet a considerable amount of the customer’s money, and from then on, at each stage of the bet, I felt loss in a different manner.
In the beginning, a little loss was welcomed, since the loss was seen as temporary, as an opportunity to add to the bet at a better price. But one day, after answering an innocent question about the nature of the bet, I was swept by a sudden doubt. What if I had read the future wrong? What if my confidence in the odds did not justify the sizable position I had accumulated? What if the loss was never to reverse itself?
The bet moved away from me. I could have closed it out, but then I thought of all those who have succeeded in my line of work. Risk, uncertainty, reward: these are all weave-linked, you could not have enough of the last thing without stomaching some of the other two. I called a friend who told me he had the same bet on, and he believed that I was about to be vindicated. His words comforted me.
I chose to stay in and the position moved against me yet again. My customer came to ask me what I was doing and I explained to him my thesis. He seemed indifferent but decided to trust me because that was what he was paying me to do. So from then I had staked my reputation to the bet as well.
One week the bet started to move back in my favour, and soon after it made back more than half of its losses. What relief. By then I had begun to question the basis for the bet, because that is what a sizable drawdown will do to you. I felt as if I had been escorted to the abyss-edge and was now being offered the chance to turn away from it. I trimmed my position considerably. Now, no matter what happened, I was likely to take a loss, but the loss would be a manageable one. I had prevented the wound from turning. Discretion, valour, etc.
But then, would you know it, the bet started to rise up, the thing wouldn’t stop, it kept going, well past the price I had originally bought in at, so much that the stub of my remaining position ate through the deadloss it had been saddled with, and I found that I had even eked out a small and unexpected profit. I thought about how happy I would have been had I not sold down too early. It is one thing to lose money on a bad toss – it is quite another thing to learn that you did not have the nerve to hang on to a winner.
My friend called to congratulate me on my success and I said nothing. Then my customer called in, he of course had heard the news, then he had taken one look at his accounts and known what I had done. Although he said nothing untoward, I knew that he now thought me to be a man with no conviction.
I re-examined the bet and came to the conclusion that the odds were still good, the bet had much more to go, even from this higher price. It was a reasonable conclusion for the time, and other men came to it too. I re-established my position and the bet moved against me almost immediately. I panicked and sold out, and then I watched the bet. It trickled down day after day, and every day that I looked at it, nothing else in the market looked as exciting. The odds looked to be returning ever more to my favour. I seemed to understand the bet, after all had I not been early to it? It was getting late in the year, and I was running out of time.
What was I waiting for?
So I was done for when I bought back for the third time. For weeks after, while on my deep way down, I kept thinking of all the times I could have extricated myself. I had been given enough chances. I kept remembering myself, as I had been on the day I had bought back in for the last time.
Why was I, now, paying for the mistakes made by that man, then?
I called my friend and asked what he thought of the bet, now available at a new low price. He said he had sold out a long time ago, for a tidy if unspectacular profit. After all, he did not like to swing as big as I did. He imagined I had sold too – surely, I must have? I could suddenly imagine what the sundry were saying about me: there goes that man who had the year in his hands, but he played into the whipsaw and got caught out. Now I know no one who actually said such a thing, they all had their own to worry about, but my mind still turned.
I began to ask myself: what was I doing? If the making of money was to have been my calling in this life, shouldn’t I have pursued it with more abandon? For example, there was the firm in Sutton County that had compounded at 30% for 20 years, and by all evidence had done it fairly. What a record. What idea had the firm uncovered and kept to itself? Instead of stringing together streaks from year to year, why had I not searched for the source like that firm had done? Why had I not sought out the formula? Because even if I had failed in such a challenge, so what.
I had burned through a meaningful portion of my customer’s capital, and still the customer had been patient with me. The bet started to show some promise. It began to recoup its losses and that was when the blow came. It never comes at the bottom when you are expecting it, but after, when you start to think you might make it back. My customer thanked me for my services. He would provide me with a severance, a reference and my track record that would read like my epitaph.
“This man made money for a time, then he lost much more.”