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Tuesday, August 16, 2022

Say Less – The Reformed Broker

A man.

He is born in London, 1977. Smart. Diligent. Does everything right.

Winds up at the London School of Economics. Double major: History and International Relations.

Then he gets a job for one of the world’s largest asset managers in the year 2000, spends the next two decades focused entirely on Emerging Europe. Twenty two years of investing in Eastern European and Russian companies. Learning the players. The rules – written and unwritten – that hold sway over capital flows in the area. Who knows who. Who does what. The shit you can’t pick up from a Google search. The inside stuff where all the real value is. Repeated visits to companies, fellow investors and companies in the region. Among other pools of the “smart money”, he runs a dedicated long-short fund called BlackRock Emerging Frontiers. A billion bucks in the fund.

If anyone knows anything about investing in Eastern Europe, it’s this guy.

We’ll return to him in a moment.

***

Sometime around 400 BC, Socrates was quoted as having said “The only true wisdom is in knowing you know nothing.”

Twenty five centuries later, give or take, Albert Einstein says “The more I learn, the more I realize I don’t know.”

And in between, during the thousands of years from Ancient Greece to mid-20th Century America, this insight has occurred to countless learned men and women. It can take a long time to get there, especially if everyone in your life and profession insists on treating you as though you’re the leading expert in this subject or that. You may well be – but expertise over a single subject matter – say, infectious disease or pandemics or investing in Russia – will not ever be enough to stave off the inevitable curveball thrown at you by the universe.

There’s always something you cannot anticipate. There’s always some wrinkle or nuance that becomes a lot more important than you might have originally thought. Change is constant. You might be in possession of knowledge that is no longer applicable to the current state of the world. And sometimes, no matter how smart you think you are, know matter how highly prized your judgment is to other people, you just f*** things up.

It happens! Experts are not Gods! Experience helps, it does not guarantee anything.

All of this is especially true when it comes to war, the ultimate exercise in unpredictability.

***

Back to Sam. That’s his name, I didn’t share that before.

Sam is among the world’s foremost authorities on investing in Russia and in understanding the situation in Eastern Europe. Remember, he studied international relations and history prior to his multi-decade experience allocating capital there. His knowledge stretches far beyond the bounds of mere stocks and bonds. And he still f***ed it up.

Bloomberg:

Russia was one of the biggest long bets for the hedge fund at the start of February, with 9% of its gross assets invested in the country’s shares, after a research trip to the country in January, the document shows. Sam Vecht, head of the team that manages the fund, told investors he raised the bet further when the invasion began, one of the people said. The fund currently has zero exposure to Russia, after writing down all its positions, two people said.

“We travelled to Russia at the end of January to assess the situation on the ground given our large net long position there,” the fund told clients in a letter, sent before the war began. The letter cited Russia’s large current account surplus, attractive bond returns, cheap stock valuations and undervalued currency as reasons for the bullish bets.

Despite Russian stocks losing the most for the fund in January, exposures were kept and later raised. “We believe the risk reward of being long Russian equities is favorable relative to the risk we see of conflict,” the team said in the letter. The Emerging Frontiers fund has never lost money in a full year since launching in Sept. 2011, according to the letter.

Sam’s long-short Emerging Europe fund hadn’t lost money in a single year going back to 2011. Not easy to do considering the experience most investors have had in emerging market funds these past ten years. Brutal. But this guy did it as good as anyone has ever done it.

And yet, when the big moment arrived, he got it wrong. BlackRock Emerging Europe writes down all of its positions to zero, just a month after adding to them. Based on all of his wisdom, experience, research, connections, contacts, reading, listening, studying, his conclusion was that the risk was overblown and Putin was bluffing.

Nope.

And if he wasn’t in a position to have gotten this right, what on earth could make you believe that anyone else could? Sam missed it but your financial advisor at Raymond James, who works in the strip mall next to PetSmart has a view on when this might all blow over? Do you have any idea how abjectly absurd it is for anyone managing money to have a fully formulated view of what’s to come during this crisis? I hear the theories and gambits and propositions in the financial media and I wince. Is no one capable of embarrassment anymore? Have we all been vaccinated against shame? You’re “putting on a Russia bet here”? Are you kidding me?

They are not kidding. This is literally what we are surrounded by these days. Don’t succumb. Don’t buy in. The next time you hear an options trader or a guy who gives tours of the New York Stock Exchange musing on the resolution of an armed conflict on another continent, catch yourself before nodding or shaking your head. It’s a sea of worthless opinions based on an acute ignorance of the Dunning-Kruger Effect. I don’t know what’s scarier, the potential outcomes of the situation or the arrogance with which they’re being agreed upon or dismissed.

If Sam doesn’t know, you might want to say less.

Stop talking about non-financial events as though they can be quantified by glorified bookies running Excel models at an investment bank. Stop speaking in percentages when a misheard remark could change the course of a war and a stray bullet could change the world. Surely you must know better. Saying less is always a good option.

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