Blinking Lights

Last month’s investor meeting merely confirmed what I have long known: financial decisions are rarely made based purely on (or even primarily on) financial merit.

I remember learning this lesson at my very first investor meeting, when I was barely six months into the industry. But we have to rewind a bit. What was I, fresh out of university and ignorant as the beasts that perish, doing at an investor meeting? Surely no rational investor would trust an obviously clueless 22-year-old with their hard-earned moolah?

Ah, but investors are not rational. And this particular 22-year-old had a secret weapon up his sleeve: Das Blinkenlights!

It all began when Professor Q, our head quant, came to me with a new model he wanted implemented. The model was of the type called ‘Monte Carlo simulation’ in the finance jargon. You simply did a large number of trials, and took the average value (of some variable of interest) over all these trials. Nothing particularly original or revolutionary, and a piece of cake to implement.

I programmed the model in about 20 minutes, put it into a friendly-looking spreadsheet, and was all set to show it to the powers that be, when inspiration struck. I added a cell that showed the trial number. As the program cycled through the trials, this cell ticked upward rapidly. It was a trivial little addition, and it slowed down the computation considerably, but it had this advantage: it made the spreadsheet look very NASA-as-imagined-by-Hollywood-esque. Positively cool, as a matter of fact.

I demoed the spreadsheet to Prof Q. He liked it. He called the Big Boss over; the Big Boss liked it as well. So did assorted mid-level bosses. None of them would admit it, but I could tell that the thing that impressed them the most was the rapidly flashing trial counter, which fostered the illusion that they could actually see the program crunching its numbers. All bow to the power of Das Blinkenlights!

I got more plaudits and “good jobs” for my 20-minute spreadsheet with its 2-minute trial counter addition, than I did for the many hours of complex coding and tedious debugging that went into creating our core analytics system.

And that’s not all. I was asked to make my Monte Carlo spreadsheet the centerpiece of a presentation to some potential investors. Yes, this same spreadsheet that was hacked together in 20 minutes by a rookie programmer with zero financial expertise, was now being touted as the super-secret, ultra-splendid, and utterly unique core of our trading strategy.

I was a bit hesitant initially, but that only goes to show how young and naïve I was. In retrospect, I don’t know what I was worrying about. In the years following that original meeting, I attended other presentations by other fund managers which made my spreadsheet look like rocket science. Incompetence, it seems, was not confined to Sopwith. The funny thing is, many of these other funds raised billions of dollars; some of them are still going strong.

But I digress. Let’s return to my first investor meeting. I’m afraid it was a bit of an anticlimax. Oh, the investors said all the right things, oohed and aahed at all the right places, asked a few perfunctory questions, and were unfailingly polite. But I got the impression the entire process was just an elaborately choreographed dance: the true investment decision had already been made. Looking back, I can’t say I’m surprised. At the end of the day, you have to trust your fund manager. If you don’t trust him then all the models in the world are no good; if you do trust him then that trust will remain even if his trading tools are a wind-vane and two fridge magnets.

The lesson for fund managers, of course, is that their single most important task is to establish trust. I was to learn this lesson again and again in the ensuing years, in the context of investor relations, in the context of trading desk politics, in the context of risk management, and especially in the context of position sizing. Once you have people’s trust, you can get away with anything.

That wasn’t the only thing I learned that day. The second lesson, and perhaps the reason why trust is so important, is that nobody knows what they’re doing. Sure, there are folks who can talk the talk: academics who spout jargon, traders who flourish track records, investors who brandish due diligence questionnaires. But nobody really has a clue. That’s why they’re willing (and indeed, eager) to be taken in by a dodgy spreadsheet and a few blinking lights. All you have to do is say the magic word – money! – and their cupidity will do the rest.

The third lesson was the simplest but in some ways the most useful: I learned that, no matter what the task, the important thing is to look good while doing it. From that day on, all my programs and spreadsheets have had flashing lights, blinking digit counters, sexy graphs and slick production values. I’ve never looked back.