Episode # 3: "Unintended Consequences"

Transcript

Today I’m filming live on the road again driving from Los Angeles to Colorado. I thought this was a beautiful spot, and I wanted to share with you. Today on this 3rd episode, we’re going to talk about:

1. Unintended consequences

2. Mark to market

Unintended Consequences

Let’s talk first about unintended consequences. What I wanted to discuss there is sometimes you do things that you think are right, for the right reasons, then in retrospect with the benefit of hindsight, you recognize that what you thought you were going to accomplish didn’t actually materialize. It’s really important to study the effects and understand what you learned and rectify it.

For example, we just closed down our LA headquarters. The intention behind opening Brilliant’s LA office a few years back was to grow the business and have multiple satellite offices in key geographies with management and staff. That was a challenge, more challenging than I would’ve thought to be perfectly honest. We found good people at various times, we had culture problems so the assimilation was difficult. In the end, the unintended consequence was that we were sending a signal to our clientele that we were based in New York and Los Angeles only. We have world class global clients that produce events all over the world and yet, they would contact us only for work in NYC and LA. Likewise, Google viewed us as a New York and Los Angeles company and not a global company. So the unintended consequence was

1. We spent an awful lot of time and energy trying to assimilate multiple satellite offices and that was a distraction perhaps at best. I mean, we’re doing millions of dollars of business in LA, and we continue to have operations there so it wasn’t all bad.

2. That we were sending a message to our clientele and our employees that we are geographically and fleet based and nothing could be further from the truth. We’re a global company and we operate everywhere, we have capabilities and great partners, you let us know what it is you would like to do and we can do that.

So in hindsight we thought physically closing that location would send a message not only to our employees but also our clients. Also, to help us mentally get our arms around the fact that we’re not geographically constrained.

Mark to Market

The second message is a concept of mark to market which traders live and die by. Basically at the end of every close every liquid position is marked to the market at that point in time, so on a daily basis you’re having P&L. The point of that is so that you’re not taking outsized risk and you’re recognizing the losses and risks on a daily basis. What that does psychologically is you ask yourself, “Would I put this position on at this level today?” If the answer is no, then you get out. It’s really easy to change your mind and get out, you’ve already taken the losses or gains. So the concept there is to really evaluate what you’re doing on a daily basis and make the difficult decisions. Some of the best traders I know take the losses the quickest and that differentiates them. While they put on great winning trades and let their winners ride, in many cases the best traders are the ones that reduce their risk quickly, efficiently, and without emotion.

Closing down this California office, as much as I try to be devoid of emotion, was very challenging. It wasn't fun, it wasn't pleasant, I didn’t enjoy it at all. Looking at it now with a mark to market perspective, the absolute right thing to is to move forward. We still have employees, vehicles, and operations out there, but we’re now doing it in a more intelligent fashion based on what I know now.

Which is really the point of mark to market.

Now that you know more than you did when you put the position on originally,

• Do you still like it as much as you did?

• Is it doing what you thought it should be doing?

• Are you going to continue with the position? If not, EXIT.

The single largest thing that has caused more trader's downfall than anything else isn’t lack of ideas, or the inability to generate money, it’s risk control. Hubris steps in, they want to proven correct, they know they’re right, the market is wrong, they put on more positions, they get married to their position. It takes down individuals and entire institutions.

Risk control is critical to success and longevity and mark to market is something that helps individuals not get married to their positions.

Thank you very much for joining us on this 3rd episode of Simply Brilliant. I hope you’re enjoying it and I would encourage you to subscribe and tell your friends and colleagues.