knowing vs. doing

Sometimes (read: most of the time), I fall behind in reading the FT and the Wall Street Journal.  So I binge read to catch up.

During my last, snowstorm induced, round I came across last weekend’s WSJ article, “When a Giant Gain Causes Pain.”  It’s about a married pair of PhD economists from Harvard who both taught finance, while together running a consulting company that advised corporate clients on financial risk.

The husband taught a course on securities analysis, centered around the study of a single stock.  About eighteen months ago, the subject was Tesla (TSLA).

The professor had eschewed (a word my son Brendan favors) tasting his home cooking since having been wiped out buying naked options (as most people crazy enough to do this are).  He had never bought a student-analyzed stock.  But this time he backed up the truck and filled it to bursting with TSLA, at $38.  Not only that, he bought enough naked calls to make $30,000 in a week.  …all this apparently without his wife noticing.

Haunted by his previous options experience, he cashed the calls out, told his wife he was thinking of selling TSLA at $200   …and promptly died.

The wife had an immense amount of professional education and training–plus her husband’s notes and plan.  But she had no practical experience.  She’s quoted as saying she was “utterly unprepared for how difficult it would be emotionally.”  Unnerved by TSLA’s volatility, she sold the stock, apparently about as badly as one possibly could.

What I find instructive about the article is that it brings home the idea that investing is a craft skill.  It requires common sense and experience, which we only get by doing, not simply by book learning.  It’s kind of like the difference between reading sabermetrics and actually going to the plate to face a pitcher.

Everyone botches up his/her first trade–and usually much more than that.  If I have any fault to find in this situation it’s that the wife waited until she was 60 to take part in the game she studied, wrote about and taught for her entire professional life.

(A side note:  in this latest binge, I also read a sizable number of reflections on Mohamed El-Erian’s departure from Pimco.  It’s clear that Mr. El-erian is well-liked and well-respected.  He is a brilliant marketer, whose gimmick is that he’s an academic, not really a marketer.   Along the way, he has become fabulously wealthy as co-CEO of Pimco.

Everyone agrees he’s a very intelligent guy.  What’s striking to me, however, is that  in the extensive press reports I’ve read I can’t find a single comment to the effect that he is a competent investor.  Pimco seems to want to avoid the issue; anonymous grumblings come from Harvard.  Sad, although it’s hard to feel too sorry for the ultra-wealthy.)



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