When Opportunity Knocks…

I remember, towards the end of my college “career,” a classmate gave me a chance to go in with him to get some Red Hat IPO shares at their initial offering price (around $15 I think). I don’t remember how he managed to get that arrangement, or why the subject even came up; I wasn’t in the markets back then. Still, I knew this would be a good deal. The problem was how to raise the money in time. This was especially complicated because I would need to find money that my parents wouldn’t know about…. they were (and are) very anti-stock market. So, the next day I decided it was too much trouble, and turned the guy down.

Well, the first day RHAT traded, the stock closed at $54. Exactly one month later, it closed at $120. Wow! I told the guy he was crazy not to get out (assuming he was allowed to sell his shares that quickly… I didn’t know enough to ask, back then). But, as a fellow linux geek, he said that he believed in the company and that this was a long term position for him. I had no trading experience, but even I knew something didn’t feel right about holding through a 1000% 1 month return.

Well, I graduated soon afterwards, and for all I know that guy still owns his shares. But, I can only assume he was kicking himself when the stock traded for $7 a few months later. oops!

Worse, though, I was also kicking *myself*. Because if I weren’t so lazy, I could have pulled together the money and made a huge profit. Just by chatting with the right classmate at the right time. Think about that! Damn, a quick $150k right when I was trying to choose a post-college job could have changed the course of my entire life… at the very least, it could have gotten me into active trading right then, instead of seven years later.

An American Hedge Fund

Anyway, that college story is what I think about when I read the first half of An American Hedge Fund. Here was a young guy (Timothy Sykes, who you may recall as the only entertaining cast member of Wall Street Warriors: Season 1, although I liked the blonde chick, too). He had some capital, some market interest, supportive parents, and free time… all at the perfect moment in recent history to play in the markets. And more importantly, he took advantage of it. From 1999 to 2002, while finishing high school and continuing to college, he turned $12k into $1.65 million.

If you spend any time on elitetrader forums, you know that this story makes a lot of people on the internet insanely jealous. It’s actually kinda sad to watch.

It’s also hard to blame them… I’m jealous, too! Everyone likes to think that they could have done the same thing, in the same circumstances. Then, they would be the one on TV eating sushi with the model chick. But, that doesn’t really matter. I didn’t do it, and they didn’t do it, but Sykes did. At least he had a couple sensible strategies, mostly involving questionable news releases on penny stocks (and the tell-tale volume patterns that follow). I had no such market savvy in college. And, anyone who’s traded knows that trading consistently is hard, no matter what year it is, anyway.

So, for the first half of the book (maybe not in terms of page count, but conceptually), you get this incredible account of a college life that all traders wish we had lived. It must have been awesome. Timmay and I both skipped a lot of classes to stare at computer screens, but he was making thousands of dollars in the markets and I was just looking for the best free porn. Then, while I cooked macaroni and cheese, he took his entire dorm to a nice restaurant.

It’s fun to read, and you hear about some interesting triumphs and mistakes along the way. If you are reading blogs like this one, you must like to hear about trading stories. So, I’m not going to try to sell you on why I found them entertaining. It’s not a book about how to trade like Sykes did… they are anecdotes, and not recipes. Times have changed since then, anyway.

The Cilantro Fund

The second half of the book covers Sykes’ hedge fund, the Cilantro Fund. So, you’ve made literal millions during college trading your own money… now what? Sykes decided the next step would be to trade OPM. The book describes the troubles you have attracting capital as a small hedge fund. I was reminded of Marty Schwartz’s Pit Bull at times, because they both complain about the amount of time you have to spend finding and coddling the investors you do get.

Sykes goes into a lot more first-hand detail than any other book I’ve read about the process of starting and building up a small fund, though. I think most small traders with vaguely big ambitions would find this section enlightening and entertaining, if not a little disheartening as well. It turns out, like every other part of Wall Street, this too is a hard game…. even if you have one of those media-friendly stories about making a fortune in college. The book covers the details, so I won’t repeat them here, but the chief complaint is all the non-publicity regulations leveled against hedge funds. You need publicity to attract money (and give the public an accurate picture of the risk involved with hedge funds compared to, say… mutual funds), but that publicity is exactly what you are not allowed to have.

Aftermath

Turns out, the Cilantro Fund was not a spectacular success, and while it didn’t implode, I think it is now closed. A lot of people seem hung up on that fact, but I don’t think it hurts the book. I ask myself: would this be a better book if it said that every choice Sykes made was perfect and he made billions? Of course, the answer is not one bit. I loved that movie Rogue Trader, and it’s about a ridiculously bad trader. Doesn’t matter. This is an autobiographical book, and what happened, happened. If you are a trader, you probably relate to most of the story on some level, and that’s what’s important.