Over the past week, the name Optionsellers.com has been in the news. This fund, based in Tampa Bay, was wiped out, virtually overnight and lost $150 million dollars of client assets. Here is the link to the apology video - Link here. A ‘rogue wave’ that spiked Natural Gas by 45% over a matter of days was the reason. Without going into technical details, what is clear is that greed, in an inherently volatile market, compounded by applying leverage, magnified a ‘rouge wave’ into a Tsunami for OptionSellers clients.
But there are two important lessons for all investors in this misfortune. ‘Rogue waves’ are part of life and markets. They are more common than you think, and they happen at the most inopportune time. While unpredictable in timing, they can be avoided with basic common-sense decisions. Let’s take a simple example.
A traveler by foot is on a journey and reaches a point where he must decide. In order to cover a lot of ground fast, he can either cross a river in front of him or play it safe and take a bridge that is farther away. He is six feet tall, and a poor swimmer at best. He tests the waters, talks to nearby folks and figures out that the average depth is three feet. The depth doesn’t seem to be a problem for a six-footer. But basing a decision on the average depth has a fatal flaw - parts of the river could be much deeper than three feet. What if the deepest part is ten feet? To compound problems, what if a ‘rouge wave’ hits while crossing the most vulnerable part of the river? Since survival is at stake, the simple alternative here is to take the bridge. Surprisingly, investment strategies with green-tinted glasses make the wrong decision based on hubris and greed.
The lure of a small profit that can be achieved repeatedly is an enticing one. But at what cost? The hardest part is to wait for investments or trades where the reward is many multiples of the risk. In other words, if you are risking $1, your reward should be $5. Simply put, you can be wrong four times out of five and still break even. Implicit here is that opportunities this good are few and far between, require incredible expertise, and almost super-investor patience and discipline.
Being in a hurry to get rich can lead one into a heap of trouble. If you don’t take anything from the rest of this, I hope you take with you the following message:
Use of derivatives and leverage in commodity markets magnify rogue waves into financial tsunamis....
This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment.
This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future.
I am an investor and these are my personal thoughts on investing, behavioral finance, markets, and sports viewed through the prism of a Latticework