Poker Faces And Unreasonable People

(Editor’s note: Like so many of the articles published here, I started this piece with one idea in mind, but it ultimately went in a different direction. Over time, I’ve developed something like disinterested disdain for a community to which most people believe I belong. I don’t, in fact, belong to that community and to the extent I do, I’d rather not. Consider that some vague context for the following, which I hope is every bit as fun for you to read as it was for me to write.)

Are market participants too sure of themselves these days?

Probably. That’s the thing about most traders and investors — they generally can’t separate their emotions from the lines on the screens, which means they careen wildly from overconfident to despondent, almost never stopping to enjoy a serene, mindful middle ground.

People are terrible at hiding that psychological rollercoaster when it comes to markets. If you’re immersed in it too, you might think that “professional” gamblers traders and industry “legends” are quite adept at keeping their emotions in check. But it only seems that way to you, because you’re benchmarking the situation against your own psychological instability. Any nominally intelligent outside observer whose frame of reference isn’t solely based on investing could easily recognize signs of acute distress in various trader newsletters and in media appearances by iconic investors.

Read more: Gamblers

Last year, Stan Druckenmiller boldly proclaimed that “the risk-reward for equity is maybe as bad as I’ve seen it in my career.” That pseudo-prediction turned out to be almost as bad as Larry Kudlow’s famous December 2007 forecast, only in the opposite direction. Druckenmiller in May of 2020 saw a risk-reward profile that was asymmetrically skewed to the downside for stocks, and grossly so. In 2007, Kudlow saw an economic boom that was destined to continue. Both men were spectacularly wrong.

By September, Druckenmiller was so vexed by the situation that he went on television and called stocks an “absolute raging mania.” Hilariously, the investment world treated that as a wholly unbiased assessment. Druckenmiller being Druckenmiller, there’s little doubt that he was back on the right side of the trade by then and probably making plenty of money in the process. But if you didn’t know you were supposed to idolize the guy, the obvious question for him in September was this: “Sir, are you sure it’s stocks, and not you, who is doing the ‘raging’? Because it seems as though you might be attempting to rationalize what you said on this program several months back.”

Some icons of the investment world are famously good at poker. I’ll confess I don’t know how that could possibly be the case. My guess would be that it’s more to do with the fact that when you’re worth hundreds of millions or billions of dollars, it’s rather easy to remain calm at the table when all of the other players are, at most, worth $10 or $20 million. It’s the same way Michael Jordan didn’t mind losing $50,000 on a round of golf. While some tournaments do indeed hand out huge sums in total prize money, the “high” in “high stakes poker” is still an extremely relative term to a hedge fund manager.

Another caveat to bear in mind when you think about “legendary” traders, investors and prop traders is this: It’s easier to keep a poker face when the money isn’t yours. You might be a stone killer when you’re gambling $50 billion in other people’s capital or, better yet, the firm’s money, but what happens to that facade when you lose billions of your own money out of the blue? Maybe you can ask Bill Hwang. Consider the following excerpts from a new Bloomberg piece:

Before he lost it all—all $20 billion—Bill Hwang was the greatest trader you’d never heard of. Starting in 2013, he parlayed more than $200 million left over from his shuttered hedge fund into a mind-boggling fortune by betting on stocks. Had he folded his hand in early March and cashed in, Hwang, 57, would have stood out among the world’s billionaires. There are richer men and women, of course, but their money is mostly tied up in businesses, real estate, complex investments, sports teams, and artwork. Hwang’s $20 billion net worth was almost as liquid as a government stimulus check. And then, in two short days, it was gone.

As a quick aside, note how detached Bloomberg is from reality. They accidentally claimed that $200 million doesn’t qualify as a “mind-boggling fortune.” It was only “mind-boggling” once it hit $20 billion, with a “b.”

But also note the allusion to poker. Something tells me that to the extent Bill had a good poker face previously, there have been times over the past two weeks when it was impossible to hide the dismay at what his PR expert last month called “a challenging time” for his family office.

You can find all manner of books written by traders and market participants likening investing to poker. At least two of them are classics. And yet, generally speaking, these are some of the same people who, on social media, accidentally admit to being among the most gullible human beings on the planet by retweeting and liking 140-character bursts of total nonsense emanating from what they don’t realize are robots, sock puppet accounts and foreign influence operations.

For example, if you’re familiar with, or inhabit, “Finance Twitter,” you probably saw all manner of implicit support for far-fetched allegations of election theft late last year. Even if you don’t have a Twitter account, my guess would be that quite a few folks on the buy-side and sell-side were openly parroting their own versions of the same ridiculous “stop the steal” narrative to their colleagues and friends.

How unnerving is that? Large numbers of people who are responsible for managing other people’s money (or for advising other people on how to manage their own money) spent an inordinate amount of time in November and December quoting (directly or indirectly) the likes of Sidney Powell. And, yes, I can cite dozens upon dozens of specific examples.

At one point, I asked (aloud) how it was possible that people so gullible could manage money. Or play poker, for that matter.

Late last month, after Sidney Powell was sued for defamation, her lawyers wrote in a filing that “no reasonable person would conclude that [her] statements were truly statements of fact.”

I suppose if I were a lawyer for the finance community, I’d simply note that nobody ever accused my clients of being “reasonable” in the first place.