Between Curiosity and Caution
Recently, Megan and I had the rare opportunity to join a research boat for a day and watch humpback whales from afar. We wore face masks, used hand sanitizer, had our temperature checked, and then social distanced. COVID realities aside, we got to see a mother and a calf, a male whale breaching again and again, and a pod of whales doing circles around the bay sometimes heading straight towards the boat only to dive under us at the very last moment. We had close encounters with big sea life before, but this one was in a category of its own. Witnessing the mother and a little one made me think of the curiosity and caution that guide us in life and investing.
On the back of my two books, I share how I’d like to swim with humpback whales one day. This was as close as I have gotten to realizing that dream. The female whale we saw hardly came up to the surface, but she was comfortable enough with our presence that she let the calf come up to catch some air. The researchers on the boat told us how the adult whales can stay underwater longer, while the newborns have to come up for air every few minutes.
The little ones want to play, and they are very curious about the world around them; everything is new and exciting. They are unaware of the risks and dangers. The mother, though, is much more cautious and keeps an eye out for any threat to her offspring. There is an incredible level of communication, acceptance, and trust that develops between them and us that allows us to get a little closer and witness those magnificent sea mammals.
When I first got into investing, I was more curious than cautious. Luckily enough, my early mistakes weren’t too costly. I spent many hours reading books and listening to stories of my senior co-workers. I instinctively wanted to know about the worst of times. I remember asking my partner and mentor François Sicart how he knew not to invest in Enron (which went bankrupt twenty years ago after an accounting scandal of historic proportions). He actually took a closer look at the company before it imploded, and the numbers and the story didn’t make sense. He wisely chose to pass. I made a mental note to myself: if it’s too good to be true or something doesn’t add up, it’s ok to say no, and move on. I have done it many times since. This lesson alone probably saved me a small fortune already.
I often say that the best lessons come from your own mistakes, but it’s equally helpful, if not better, to learn from other people’s experience. As a young analyst, I thought that if I could somehow scoop up the essence of the learnings of half a century from all the senior managers around me, I’d save myself a lot of trouble. I think I have.
In my first few years, I remember looking at our firm’s daily trade sheets. I’d watch what all the managers were buying and selling. I’d check the stocks, the price charts, the fundamentals. Being only a junior analyst, I’d get my facts straight and build up the courage to walk over to one of the managers, and with a bit of youthful audacity, knock on their door. I’d ask them if they could spare a moment and tell why they were selling this particular stock, when they bought it, and why.
With my own little capital at the time, my curiosity took me to the world of derivatives, options. I learned the basic math behind them at school, and I thought they were very intriguing. With a small amount of money, one could make a bet on the prices rising and falling. Let me emphasize that it was more of a bet than an investment. If I bought the underlying stock, my potential upside was decent, but with an option with a lot less money, I could make many times that. It was a thrilling idea for a curious young mind. I’d pick oversold stocks and choose options that expire in the next few weeks. I naively thought I discovered a sweet spot to satisfy my curiosity.
I soon learned my lesson. I realized that I’m increasingly good at finding stock investment opportunities where others aren’t looking, but I have no control over the timing. A good number of my stock picks eventually performed, but rarely on my schedule. That hasn’t changed since. With options, the timing was everything; otherwise, they expired worthless – a total loss.
I remember traveling to Italy at the time. I had a single options contract that I bought. There were no smartphones at the time, and finding a price quote wasn’t easy. It was the era of internet cafes. I was on a train to Florence, and I saw someone with a recent copy of the Wall Street Journal. I kindly asked if I can take a look. The fellow passenger was baffled but obliged to my request. I quickly skimmed the paper for the price quotes. I could more or less figure out where my options would be trading depending on the stock price. I didn’t like what I saw! I couldn’t wait to be back in the office to sell my contract and cut my losses.
I got back, the price recovered, and I actually made money on this trade. It turned out to be enough to cover the cost of my Italian trip. I learned a lesson, though; this time-sensitive curious speculative bet ruined my trip. It was the only thing I could think about, and probably the only thing I remember from the entire trip! At least, it makes for a good anecdote to share now and then.
Recently, the markets have been rattled by a prominent family office taking massive losses unwinding elaborate trades in derivatives. Apparently, they had a stock exposure that exceeded their capital many times over. Some say it might be one of the biggest losses of personal wealth in history. They were trying to turn tens of billions into even more and do it quickly. Warren Buffett often reminds us that in investing, “it does not pay to be in a hurry” and that “it’s insane to risk what you have for something you don’t need.”
Between watching the whale with her calf, reminiscing about my youthful curiosity, and learning about a family office investment demise, I have to say that I’m grateful for the caution imparted on me over the years by mentors and co-workers many years my senior. I was fortunate enough not to have lost much in the process, but I gained some invaluable lessons that continue to guide me many years later. I’m still curious but cautious at the same time. I’m in no hurry. Megan tells me that I have the patience of an elephant. It might be true today, but it wasn’t always the case.
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