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Be Aware Your Ego, Be Humble And Open Minded In Trading (Case-Study: Okumus Capital)

Once in a while, I grab one of my about 100 trading/investing books. This is mainly to get inspiration and perhaps one or two ideas to test. The best books for inspiration are the Market Wizards by Jack Schwager. Over the weekend I read the chapter about Ahmet Okumus from The Stock Market Wizards. He really caught my interest with his arrogance.

Make sure you are humble and open-minded in trading. Even the most infallible plan can go wrong! This article contains a reminder of the importance of being prepared for the unthinkable. Ahmed Okumus and Okumus Capital performed badly after an arrogant interview in Jack Schwager’s Market Wizards.

Why be aware of your ego and why be open-minded

Ahmed Okumus seemed to have a lot of self-confidence in his trading strategies. Perhaps too much, in my opinion. A lot about what he said in the interview was quite arrogant and he had an infallible attitude. At least he didn’t show much respect for the black swans.

Just read this (Schwagers’s questions is in bold):

  • ….but my main goal is to make money on every investment, not necessarily to catch every trade. I don’t have to make a lot on each trade, as long as I make something. Since 1992, 90 percent of my trades have been winners (page 156).
  • “Buy low and sell high” is something a lot of people say but very few people do. I actually do it (page 156).
  • Also, I was a finance major, and my teachers knew a lot less than I did about the stock market and investing….They teach you theories, and theories don’t work most of the time (page 161).
  • I never go for home runs. That’s why I should do well in a bear market—-I hope we get a bear market. All the momentum players will get killed; all the internet players will get killed; all the growth players will get killed; the value players, however, will do ok. The companies that I buy are already in bear markets. They are trading at five to six times earnings. They don’t have room to go much lower. Remember, the stocks that I buy are already down 60-70 percent from their highs (page 162).
  • But what happens if a company goes bankrupt? It will never happen. I don’t buy any companies that have even a remote chance of going bankrupt (page 163).
  • What is the maximum amount of your portfolio that you would allocate to a single stock? At this point, the maximum I would hold on any single stock is about 30 percent of the portfolio. It used to be as high as 70%. That sounds like an extremely large maximum position on one stock. What happens if you are wrong on that trade? I make sure that I know the fundamentals and that I am not wrong. But there may be some reason for a stock going down that you don’t know about? No. How can you be so sure? Because I know the companies I buy. For example, if I buy Viasoft at 7, a company that has 5 per share in cash and no debt, what is my downside – 2? (page 163).

In addition, the interview reveals he uses puts writing extensively (if the stock goes up he collects the premium, if it goes down he risks owning the shares at the strike price.)

His answers caught my interest. To me, he seemed like he thought he was infallible, which of course no one is, not even Buffet.

I googled his company, Okumus Capital, and it seems he closed his funds in 2008. He suffered deep losses and an enormous decline in assets under management. It seems like his fund couldn’t stay “solvent” longer than the market was “irrational”. Okumus finally got his bear market! It turns out he was fallible after all.

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