The Story So Far: Acting on the advice of his outside counsel, King Ahasueres arranges an investment contest to determine the successor of Queen Vashti as head of his Investment Committee.
There was a sage, veteran portfolio manager, whose name was Mortimer (“Morty”) Kai, who had been through countless bull and bear markets, had seen numerous asset bubbles inflate and then collapse, who had witnessed the destructive effects of the unencumbered use of leverage. He had a particularly promising trainee by the name of Hadassah (known to her Facebook friends as “Esther”), to whom he was giving over as much as he could of his vast investment knowledge.
Esther had been making something of a name for herself in certain investment circles, having proved adept at deriving profits from the currency markets by using options to construct synthetic baskets of otherwise illiquid currencies.
Still, she was quite new to the managed money game, so it was something of a surprise to her – and to her mentor Morty Kai – when she was asked to join the king’s portfolio manager contest. At first, she protested, fearful that she would only end up making a fool of herself. However, the king’s people made it clear that this was not really an optional invitation. “Besides,” they said almost dismissively, “At least you’ll provide some liquidity.” Her ears still stinging with this most heinous insult, Esther was practically dragged to the designated office building.
Morty Kai was gravely concerned for his protégé’s well-being. He was well aware of the rules of the king’s portfolio contest, and he feared that the short-term nature of the six-month performance assessment period would cause Esther to take undue risks. Sure, Morty Kai could day trade with the best of them, if needed. How could he forget the profits he had made in Consolidated Silk within a couple of frantic hours so many years ago? Still, his experience had taught him that the really big money was made from positions that sometimes took years, not weeks or months, to establish. A six-month contest was nothing more than a spin of the roulette wheel.
Another problem was presented by the king’s insistence that the money managers all describe their investment style, allowing him to lump a bunch of them into one category or the other, such as “growth” “value,” “growth at the right price (GARP),” “momentum,” “contrarian,” and so on. Morty Kai had instructed Esther to avoid this trap, and to resist allowing anyone to boil her investment style down to a single word or phrase. Ever loyal to Morty Kai, Esther in fact resisted these canned descriptions of her investment style, and refused to tell anyone about the specifics of her investment approach, no matter how often they asked.
As she put her model portfolio into place, Esther went about things in a curiously low-key manner. She hardly ever used her Bloomberg terminal, nor the sophisticated charting software on her laptop. She didn’t bother watching the financial news or reading the various financial periodicals, dismissing it as so much “noise.” In fact, she even put together her own spreadsheets. Unlike the other participants in the contest, she did not update the value of her portfolio on a continuous basis, or even daily. From the standpoint of an outside observer, it almost appeared as though she had no interest whatsoever in winning the contest.
Amazingly, as time went on, Esther’s hands-off portfolio management style worked like a charm. As the contest neared its end, her portfolio was ranked above the 95th percentile. In her investment interview with the king, she carried the day with her simple, down-to-earth explanation of her investment philosophy. This proved to be a great relief to the king, who had spent months meeting with a bunch of professional investors who threw enough charts at him to choke a McKinsey consultant. Just the other day, he had half jokingly concluded that the next money manager who showed him a chart overlaying the 50-and 200-day moving average of three currencies, two commodities and four major stock indices on a single chart would promptly be escorted to the royal gallows.
King Ahasueres found himself completely taken by both Esther and her investment style. He chose her as his new Queen and Chief Investment Officer, and arranged a celebrity pro-am golf tournament in her honor, drawing A-listers from every corner of the kingdom.
With Esther now settled into her new position, Morty Kai decided that he needed to get an office near the king’s palace, where he could better monitor Esther’s progress. He rented a small office a couple of blocks away, swallowing hard as he signed a one-year lease at $60/square foot (and that didn’t include utilities!).
One day, shortly after the market closed, as he was getting a coffee from the Starbucks located about a block from the royal palace, Morty Kai overheard two somewhat obscure portfolio managers he knew, XM and Sirius, discussing some inside information they had received. Apparently, one of the region’s largest wine manufacturers was about to report absolutely disastrous earnings, owing to disappointing sales volumes and significant cost overruns at their largest plant. They would also reveal that their pension plan was woefully underfunded, and that they were experiencing difficulty in refinancing their substantial debt load. Without question, this stock would absolutely tank.
Not content with simply shorting the stock in question, and collecting an easy-if-illicit profit, XM and Sirius were going for the really big score. Why short the stock at its current level, if they could generate rumors to drive the stock higher, then short it at those levels, and make an even larger profit when the inevitable crash came? Their plan was rather simple. XM would call up a college fraternity buddy of his, who happened to produce the “Market Rumors” segment on the Empire’s most widely-watched financial news network. During the early afternoon of every trading day, this guy would go on the air, and discuss the latest hot rumor in the marketplace. Without fail, these rumors, bullish or bearish, moved markets up or down, respectively. In addition, Sirius had once worked as a junior analyst at the same firm as a guy who was now one of the king’s biggest portfolio managers. This guy was a real sucker for tips, and would undoubtedly bite on this rumor. With a large portion of the king’s portfolio behind him, Sirius’s former coworker would certainly push the stock higher. Sure, the king would lose millions in the process, but who cared? He had more money than he knew what to do with anyway.
Hearing this plot, Morty Kai knew immediately what he must do. Alert the king, to prevent him from potentially massive losses, and report the two rogue portfolio managers to the authorities. Certainly, Morty Kai could have simply waited a while, and even taken advantage of this inside information. In fact, he was already bearish on the stock of this particular wine manufacturer, based upon his own independent research. However, his actions had always been governed by what was right, not necessarily what was most profitable, and he wasn’t about to change his approach now.
Morty Kai texted Esther about the plot, and she immediately reported it to the king’s compliance department, giving Morty Kai credit for having given her the heads-up. She let the compliance folks report it to the authorities, knowing that the king would be pleased with the positive exposure it would give his administration. He’d now be able to refer to his efforts to clean up the markets. The compliance department investigated the matter, and alerted the regulatory authorities, who banned XM and Sirius from the securities industry for life. The king asked his compliance manager to record the fact that Morty Kai had served as a whistleblower in this case, and that he should eventually be rewarded.
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