Lessons From When a Star Trader Steps Away

I recently came across a Peter Attia Drive Podcast featuring John Arnold, the famed natural gas trader.  It is a wide-ranging discussion about John’s background, his career at Enron, his fund Centaurus, and his philanthropic work after closing his fund.  I highly recommend listening to the podcast.  Through this candid discussion you can sense John’s uncanny clearness of thought, his intense focus on maximizing returns, and his values that drive his new goals.

John and I worked at Enron and are acquaintances.  We graduated from college the same year, joined Enron within months of each other, traded energy there, started hedge funds around the same time, and ultimately, we both walked away from trading.  There are (obviously) major differences, as he is regarded as the most successful energy trader of all time and has funded a multibillion-dollar foundation which grants $400 million dollars a year (!) tackling some of the biggest issues facing our society.  

While the whole discussion is fascinating, I wanted to dive into a one area in particular-- his decision to walk away from trading when he closed his multibillion-dollar fund.  Even though John had made more money than he would possibly spend, leaving such a profitable firm was incredibly hard.  He talks about how he had seen other traders retire, only to regret leaving the fast pace and short-feedback loop. He knew he would be facing a challenge of maintaining focus and interest, as his new foundation could spend 5-8 years researching an area to fund a program, without knowing of any progress for many years after that.

John discusses at length how he came to the decision. Here are three main points:

First, as word of his success bred competitors, the market became more efficient.  The lower risk arbitrages that were his bread and butter were harder to capitalize on and he was forced to make more market calls to generate above market returns.

Second, he discusses the all-encompassing nature of his career as a trader, thinking about a singular topic during all hours, waking and unconscious.  He discusses the physical drain and stress of the lifestyle and that his only job, from literally days after graduating, was dealing with the grind and stress of battling the markets.

Third, and maybe most importantly, he was looking to make a difference in society.  He candidly describes that while trading helps create a well-functioning market for companies to hedge and make business decisions, he saw little benefit to the world from this activity. 

I grappled with some of what John was feeling.  I wanted to be more engaged with my community and be of service to those who needed help.  My path after trading led me to start a financial advisory firm focused on commodity traders and brokers. 

I thought there was a need to help people, especially in the industry, to navigate their financial lives.  As I have written before, investing and trading are different. One distinction, that John discusses in the podcast is that unlike a natural gas contract there is no delivery date for a share of stock.  This and other biases can lead to massive underperformance.  Also, the relatively short careers and volatile earnings from year-to-year makes for critical planning and investing decisions.  Furthermore, I feel it benefits traders and brokers to have a trusted advisor who knows the industry to help with the day-to day grind, maintain the focus needed to excel, and who understands the challenges that they face.  

Hearing about how John and his wife Laura started Arnold Ventures and about their efforts to make real changes in the world through fact-based research, is inspiring.  The industry should be proud that so many traders and brokers find personal fulfillment in supporting and starting charitable causes.  I am fortunate that this new role allows me to give back to the community by providing pro bono services to people in my community who are facing financial or personal hardships who need guidance and advice.  I would encourage others needing additional fulfillment to take John’s lead and find worthy causes to support.  Maybe there are more benefits to our roles in the market than we give them credit for.

This material is provided as a courtesy and for educational purposes only from APG Capital Asset Management, A member of Advisory Services Network and should not be construed as investment advice. All views/opinions expressed are solely those of the presenter and do not reflect the views/opinions held by Advisory Services Network, LLC. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

Making the Most out of your Year-End Bonus

It’s that time of year when many companies are paying out their year-end bonuses.  Hopefully “congratulations” are in order and all that hard work from the last year paid off.  Now the real decisions begin.

In some fields, like energy trading, your bonus can vary widely from year to year and are only maximized when the stars align -- you have a great year, your group meets their goals, and the company hits their profit targets.  Even the most successful may only get a dozen or so of these big paydays in a career, so it is critical to be thoughtful about how you allocate your bonus.   These are the payments that ought to support you and your family’s hopes and dreams for a lifetime. 

What is your plan?  Upgrade the house, pay off an existing mortgage, invest in the market or just sit in cash?  How much should you save versus spend?

·         Working through the hierarchy of how to allocate new capital can be challenging.  A good place to start is making sure to maximize your employer’s matching 401-K plans, Health Savings Accounts and any other tax advantaged account that is underfunded, like an education 529 Plan.

·         While it is tempting to ratchet up your lifestyle with a big payday.  Be careful when adjusting your spending habits that even when there are years when the bonus is sub-par, you can handle your bills.  One way to keep your spending in check is to imagine: what if I had to find a new job?  What kind of salary could I earn in the current job market?

·         Finally, as there are no one-size fits-all decision-making tools, consider working with an independent Register Investment Advisor.  RIAs typically do not market products or have outside pressures as to where these funds go plus as your fiduciary, have an obligation to put the client first and develop solutions that align with your risk appetite and long-term goals.  Even when an advisor’s pay is a function of the amount of assets they manage, your advisor should acknowledge this and determine the best course, regardless of this conflict.

We hear of athletes or actors going from rags to riches and end up having financial problems later in life.  Many other careers can have volatile earnings streams. Careful and thoughtful planning during the heady years can help to minimize the impact of the lean years.

Three Reasons Why Traders Should Hire an Advisor

Why would a commodity trader, a master of buying and selling some of the most volatile markets need to hire someone to help manage their wealth? Actually, there are some very good reasons an independent advisor can benefit you and your family in the long run:

Focus on What You Know: With a demanding profession, the burden of managing your assets may be a secondary concern. With an independent advisor, you are hiring a fiduciary who is looking out for your best interests.  An effective advisor will construct and manage a portfolio consistent with your objectives, allowing you to focus on the markets that should matter most—the ones you are trading—without worrying that your long term goals are at risk.

Harmful Myopia and Impulse Trading: While you are focused on your particular market, it is easy to extrapolate the fundamentals of your niche to the broader markets, even when that correlation may not exist, thus clouding your judgment. This may lead to rash “dump it all” or “buy everything” moves in your portfolio. Instinctual moves may be appropriate for your trading book, but may do irreparable harm to your longer term goals of paying for your children’s college and funding your retirement.

Make Lemonade from Lemons: With a volatile-earnings profession, there are tactics you can employ to take advantage of your lumpy income. For example, during low earnings years, consider Roth IRA conversions or opportunistically take long term capital gains on appreciated assets. On the flip-side, in high income years consider contributing to a Donor Advised Fund to lower your taxable income.

Separating the goals and risk profile of your job from that of your general overall wealth is critically important. Hiring a professional wealth manager for the bulk of your nest egg makes a lot of sense, for both your peace of mind and your wallet.

Advisory services offered through APG Capital Asset Management, a Member of Advisory Services Network, LLC.

Phone: 713-446-3233  Website: www.apgcap.com