In Chapter Five of Fooled by Randomness, the reader is introduced to Carlos, a walking contradiction as Taleb describes him, for he is an economist-trader.
Carlos was the “emerging markets wizard.” He specialized in bonds issued by foreign governments, such as Russia, Mexico, Brazil, Argentina, etc. Before the 1990s rush into such instruments, these bonds traded in pennies. However, being in vogue helped, quickly turning pennies into dollars and early investors into millionaires.
Carlos, the economist-trader, went to Harvard in pursuit of a Ph.D. in economics. Although he was a good student, the topic for his dissertation eluded him. So, he “settled” for Wall Street, where he thrived for a while as the emerging markets Mr. Know-It-All.
Carlos truly believed there was sound economic reasoning for lending money in the emerging markets. During most of the 1990s, Carlos did extremely well, buying on dips and selling into rallies. But then came the summer of 1998.
Carlos got caught in the unwinding of a now infamous hedge fund that specialized in mortgage securities (sounds familiar?). The fund’s holdings included a number of Russian bonds, which started losing money rapidly. Carlos’ thing was averaging down, so he jumped right in. The only problem with this particular dip was that no rally ever came.
He was known for his tempera tantrums, yelling: “Stop losses are for schmucks! I am not going to buy high and sell low.” By the time it was all over, Carlos’ bellwether Russia Principal Bonds dropped from $52 to less than ten bucks. Carlos’ net worth was decimated. He lost his job, his boss also lost his job, and the bank’s president was demoted.
Taleb ends the story about Carlos by saying, “At a given time in the market, the most successful traders are likely to be those that are best fit to the latest cycle. This does not happen too often with dentists or pianists-because these professions are more robust to randomness.”
