Have you ever compared yourself to someone else? Maybe it was a friend, neighbour, or workmate. I know I have. And it wasn’t always helpful.
You see, I thrive on feedback. It’s one of my strategies for getting better at something. I like to know as much as I can about how I’m going.
But not all feedback is useful. Some can be downright dangerous.
A mistake I’ve made in the past is using the progress of a peer as a yardstick for my own success.
The problem with these self-evaluations is imperfect information. I simply didn’t know the whole story. What you see, is not always what you get. I often found myself chasing a mirage.
Last week I told you about trade size and the need to spread risk. These are key factors in reducing volatility. It’s the best way I know to avoid a wipeout.
I’m going to reinforce this today with a story. You’ll see why managing risk is so important. It will also show you why benchmarking yourself against someone else isn’t always wise.
So let’s begin…
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An alternative reality
My archrival during my twenties was a guy we called Axe. Everything he did was full on. It was either crash through or crash. Axe wasn’t one to do things by halves.
I first met Axe during my university days. We were both studying economics related degrees — Axe at the University of NSW and I was at Sydney Uni. But that wasn’t all we had in common.
Axe and I were both runners. But he was always a little bit faster than I was.
We also drove the same make of car. I had a 1960s MGB, while Axe got about in a 1950s MGA.
Even our jobs after graduation were similar. I was a trader at Bankers Trust. Axe had practically the same role at a rival Wall Street titan. Our worlds were seemingly in lockstep.
I remember a conversation with Axe in the mid-1990s. It was about the pending release of American employment data. This was a market moving event. The right trades could make a lot of money.
Axe and I were both trading interest rate futures. And we had the same view about where the market was heading. The difference was our trade size — Axe’s position was ten times larger.
I felt like a small player. Axe and I began our careers at the same time. But he was now trading much larger positions. It made me question how well I was really doing.
I went back to my desk and did some calculations. But no matter how I adjusted the trade, I could not justify any more risk. I didn’t understand how Axe was able to take such a big position.
We both made money on the trade — although Axe made a lot more. This stuck in my mind. Again, I thought about trading more aggressively. But my need to contain risk overrode this.
Axe got a promotion a few months later. He was off to the bank’s New York trading desk. But all was not as it seemed. Axe was using a high risk strategy to determine his trade size. It was similar to a parlay system that rolls all the winnings from a past trade into the next.
This type of strategy can quickly turn a small stake in a fortune. The problem is you need to keep winning. It explained why Axe was trading much large positions than me.
Axe could do no wrong for years — he rode a long wave of mostly good trades. Then, 18 months after reaching the Big Apple, it all began to unravel.
You see, Axe had a series of bad trades. This isn’t unusual — many traders have a rough patch. It’s only a problem if you have too much risk. Axe’s losses quickly snowballed. He was soon on a plane home without a job at the other end.
Axe still had a good reputation back home. He was able to land a trading role at a large local bank. It was business as usual. Axe was trading as if his recent meltdown didn’t happen. History was about to repeat.
It was all over in a few months. I’m told Axe’s losses were so large that the dealing room lost much of its bonus pool that year. He was not a popular guy.
Axe and I had many similarities. It was like looking at a slightly different version of me. That’s probably why I would compare myself to him.
But there was one key difference. I was more conservative with risk. Axe was a risk taker…I was a risk manager. This single variation would ultimately lead to drastically different outcomes.
I last heard that Axe was a labourer in central Queensland. The stress of taking on too much risk finally broke him — mentally and financially.
Risk has a way of catching up with people. It can extinguish even the brightest of stars.
The best feedback relies on an analysis of the facts. You rarely have these when comparing yourself to others. Your situation may be entirely different.
Fortunately, I resisted the urge to trade big positions like Axe. It turned out that his success was due to a risky gambling strategy. Excessive risk taking never seems to end well.
Until next week,
Editor’s note: Axe is like many people. He took big risks in the hope of getting rich quickly. The result was nothing short of a disaster. People can get away with risky ways for a while, but it eventually catches up with them.
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