I had already gained at least 20 lbs. and had only been on the desk for a year. I could feel the additional weight with each step, but it didn’t stop me from walking across the street to the gas station for a candy bar and soda. It was 9 am but I didn’t care and just needed some space. “We’re down a million dollars.” I told my wife on the phone as I crossed the street “and I have no idea how we’re going to survive the day.”
A year earlier we had made the leap of faith, pressing pause on a calm and peaceful advisory practice, to join one of the greatest stock traders of our day, as a junior co-manager for a newly formed long/short equity fund. We were managing around $60 million or so as we were still new and by all accounts were crushing it. We worked non-stop, putting in 60, 80-hour weeks, trading before, during and after market, with constant research outside market hours. It was an amazing experience and what I attribute one of my great ‘edges’ to this day; however, on this particular day, the clouds were dark.
We had built a large position in some sort of a small-cap tech company. Unlike our normal, hit and run style of trading, we had taken a deep dive on this one, even paying considerable sums of money for outside research to confirm our thesis. Whether we were early in our thoughts or not, on this particular morning, the company had missed earnings by a mile, guided lower and was off 20% in pre-market. It was a bloodbath and my first real experience being taken behind the proverbial ‘woodshed’ as my partner would so often mention.
Clients were calling and the pit deep in my stomach was a feeling every trader who’s been around the block is all too familiar with, regardless of whether it’s their own capital or OPM. “So what will happen?” my new bride asked on the phone with anticipation, since we had just come off one of the best quarters and subsequently largest payouts we’d ever seen. “I have no idea. We’re in survival mode now.”
By the time I got back to the office, a mere 10 – 15 minutes later and highly caffeinated, my partner had already sold down around half the position, throwing a good chunk into the fire. Being my first real big loss on a position, I was zombie-like and wasn’t quite sure what our next move would be.
The general market had been weak and, as luck would have it, this was not the only position getting dinged that morning. We had been on the lookout for some sort of oversold bounce, which did not change despite the manhandling we were dealing with that morning. By around 10 am or so we had booked the entire loss and at that precise moment I’ll never forget something happening that changed my life forever. Making the loss real and moving out of the frozen state allowed us to completely accept reality and refocus our efforts. With a clean slate we were ready to go.
The market that day was particularly brutal, with red across the screen and breadth notching levels not seen in weeks. It was clear that a wash out was taking place. Despite having just booked the biggest loss of our short funds career, we began slowly reallocating that capital into other areas that were extremely beaten down, but some of our favorite plays. Small nibbles to begin with as we tested the waters. While the selling continued a strange thing began to happen in that, at some point, our daily P&L stopped going down. I remember it as if it was yesterday and similar to a scene in some movie where in the midst of chaos the lead character looks up to see a clear line of sight into the blue clouds reminding him, it will be ok.
My partner turned around in his swivel chair from his 16 monitors simply said “we’re going to turn up, let’s buy” and at that moment we began allocating all the cash we had raised from the sale of our crushed company, as well as any additional capital we had on hand. We added to our favorites and as we did, we saw not only that they began to stop going lower, but that a few had actually turned green. As the market turned, our buying became more intense and eventually we went well beyond our allocated capital and into margin, taking full advantage of the capital we had at our disposal.
When our individual names had hit our max amount per position, we bought ETFs and indices, gaining broad exposure to what would end up being one of the biggest oversold rallies we had seen in months. Somewhere along the way, believe it or not, our $1MM loss for the day was erased and, in the midst of the activity, I stopped watching our P&L altogether and focused only on the portfolio at hand.
When the bell finally rang, I sat back in my seat and was absolutely exhausted. I hadn’t left my chair since walking across the street 8 hours before, but for some reason I felt as if I had run a marathon. My partner turned around in his chair with a big smile and said something I’ll never forget to this day: “We always keep trading.”
I glanced at our P&L for the day and it was just over $3MM, notching one of our best days ever.
After a few hours reconciling positions and our books, I made it home and walked through the door with a fresh bottle of wine. My wife came around the corner and with a very sheepish tone asked, “How bad was it?” to which I replied, “It was one of our best days ever, let’s celebrate.”
The only way I was able to navigate through the Covid crash of 2020 was through the experience of difficult times in the past. Just when you think it is the darkest is just about the time the light will begin to shine. While I am a long way from the hectic long/short hedge fund trading days, the lessons learned are what make me who I am today.
Until next time,
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