WTF Wall Street Word: “Overstaying Our Welcome.” Bye


Chelsea Clinton’s husband (he has a name but it’s much more fun calling him that) is a hedge fund manager who just lost boatloads of money in one of his hedge funds in 2014. This was a hedge fund that made a big bet on Greece and, well, he was wrong. Not kinda wrong, almost 50% wrong.

The Greece-focused fund was down -48% in 2014.

How do you not see the bleeding before you get to 50%? When you get to a -15% loss, wouldn’t you think that would be a red flag and you might say to yourself “hey yo, we are losing our shirts on this investment let’s cut our losses and get out of here!”

No. It doesn’t work that way. Especially for hedge fund manages. You remember the hedge fund manager who just lost nearly all his clients money and then sent a letter to his investors saying “sorry,” we will be returning ummmm zero dollars back?

He did the same thing. He got so attached to his investment ideas that he couldn’t pull the ripcord and in fact kept adding more risk until it was gone.

That latest culprit is hedge fund manager Dan Loeb of Third Point. The Third Point investor letter just came out and three words jumped out as a great lesson for all of us…..

Third Point’s mediocre 2014 results, +5.7% in Offshore and +6.8% in Ultra, were due to a combination of poor trading during market volatility and bad judgment in exiting positions for reasons ranging from “overstaying our welcome” to impatience seeing our thesis through in choppy markets.

“Overstaying our welcome”

We all suffer from two psychological traps when it comes to investing (and life): cognitive bias and the consistency principal.

Cognitive bias is when you have made a decision about something and you look for information that supports whatever decision you’ve made. If you’ve made your decision about an investment (buy, sell, hold) you’re probably going to focus on information that supports either your buy, sell, or hold decision because your brain is lazy and likes to take shortcuts.

The consistency principal is similar to cognitive bias. We trick ourselves to keep thoughts consistent with something we’ve already done. It’s like when you’re dating someone and you tell everyone they are amazing. Then you’re like OH WAIT HOLD THE BUS, NO… THIS PERSON SUCKS. It’s harder admit that because you already declared how awesome they are to your friends and now you’re switching your stance which makes you look kind of psycho.

This is the most hilarious thing about investing, people get so focused on finding their next big win or convincing everyone that they have some sort of investing edge. Just listen to any asset manager on CNBC for five minutes, that’s all they talk about. “Our top-down bottoms-up analysis says we should do another top-down bottoms-up analysis. Invest in our fund, we have proprietary research.”

What? Stop.

It doesn’t even matter how good your research is or whatever investing edge you think you have if you always overstay your welcome. Being good at and knowing what to do when you’re losing money is actually a much better (and more difficult) investing and life skill to master.