Looking out the window toward the almost silent port of Hong Kong, I was waiting for my appointment to pitch to a multi-family office. My hedge fund had a solid three-year track record, having been short markets during the global financial crisis (GFC). It was April 2009. I had squared up my short positions in equities and was running a small long position in AUD/USD. It was only tactical. I thought the markets were oversold and that risk would bounce for a while, before inevitably selling off again.
The meeting was going well. Having been on the right side of markets during the GFC, everyone wanted to know what I was thinking. I was waxing lyrical about the debt crisis and how you can’t solve a debt crisis with more debt. I had strongly held onto the assumption that no-one was bigger than the markets, including central banks, so ultimately the Federal Reserve would have to eat its own dogfood. Then they asked me the killer question. “So Dave, given your analysis, why are you long?”. This threw me. I had built my identity as a macro guy and being long, given my macro views, suddenly felt as though I was out of integrity.
After another month or so, I considered the bounce was enough and started selling markets again. Not aggressively, but it didn’t matter in the end. I believed in myself as a macro guy and my macro views were unashamedly bearish. Initially, being short felt better. It was more aligned with who I believed myself to be. It didn’t feel good for very long however.
Later that year, I won the award for the Best Emerging Manager at the Australian Hedge Fund Awards. As it turns out, these are backward looking awards. My next few years were patchy at best, horrible in the end, with my hedge fund shuttering in 2014. Despite what was to come, my bearish macro persona took on some gravitas. I became a Thursday afternoon regular on Sky Business News and was able to sound intelligible talking about the woes of Europe and Central Bank folly, all the while missing the beginnings of the biggest bull market in history.
Identity as an impostor
I had built my market identity as a macro guy. The foundation for this persona was a little tenuous, having only scraped through a bachelor’s degree in economics, but that didn’t stop me from believing it. When I reflect on where I’ve made most of my money in markets, it’s been based on the study of human behaviour. More psychology and sociology, than economics. But that isn’t really the point. Identities are always built on shaky foundations. If we tie ourselves to the mast of our identities, there will always be a storm that sinks the ship. The trick is to recognize that we can use our identities to help us with what we are engaged in. If they are no longer serving us, then shift them. Identities are beliefs. They are not truths, regardless of what we tell ourselves. The stronger we hold them, the more they betray our insecurities.
Attachment and identity
We create identities for ourselves all the time. This isn’t a bad thing, for mostly we feel safest when we are acting in a manner consistent with our chosen identity. When we have a sense of congruence between who we see ourselves as and who others see us as, and are behaving in line with this, we tend to skip and dance through life with confidence.
The trouble comes when we become attached to our self-created identities, even when they no longer serve us.
What I know to be a truism as a trader is that if markets quickly retrace a selloff after bad news, then we’re probably in a bull market. Bull markets want to go up and bad news simply provides brief buying opportunities. But if your framing is bearish, then brief selloffs become confirmation. In the early years of this bull market, I had plenty of opportunities to get short. In fact, I didn’t miss any of them. But each time, I would square up my shorts as we moved to new highs, ignoring the reality that while the news was bad, the market kept grinding higher.
It was a bull market, but I was attached to my identity and the more I spoke to investors and the media, the more wedded to my identity I became.
Over recent years, I’ve learned to recognize when I’m holding too tightly onto a given identity. I can sense when an identity is being threatened, but instead, are now open to the opportunity that this sense of threat might offer me. I’ve developed a process for clearing attachments which leaves me more flexible in the face of changing circumstances. To have had this in 2009 would no doubt have been helpful. Now, all I need is another bull market.