One Bad Trade

As traders, or even as human beings, we basically have one job; don’t fuck up. Put more delicately, we strive to avoid that one bad trade.  The deal killer.  The one where you buy the farm.  The one that takes everything you have worked and strived for and rips it to shreds, throwing you out on the street in the process.

The irony is that no matter how much wealth you amass and no matter how much of a rainmaker you become, the tail risk of bad judgment, intransigent ego, and the inability to take a loss can shut you down.  Case in point, Marv Adelson.

Though the name may not be familiar to you, Adelson was a giant in his time–real estate developer, mobbed up Vegas visionary, husband of Barbara Walters, and founder of one of the most successful independent television studios in history.  The shows that came out of his company, Lorimar productions, read like a list of “must watch TV” from most of our childhoods.

The Waltons, Eight is Enough, Knots Landing, and Dallas were just a few of the vehicles produced by Lorimar.  When Adelson sold his company to Warner Communications in 1989 he was worth a cool $300 million.  At sixty years old that should have been it.  Done.  Check please.  Congratulations, you have won at the game of Life.  Feel free to relax in hedonistic comfort for the remainder of your days as the toughest decision you will have to make will be whether to have the cracked crab or lobster for dinner Winthorp.

Merv and Baba Wawa in the halcyon days.

Merv and Baba Wawa in the halcyon days.

But one bad trade took Adelson, who used to golf with Bill Clinton and rub elbows with Hollywood’s biggest stars, down so far that at age eighty-three he now lives by himself in a tiny one bedroom apartment.

Warner Communications eventually became Time-Warner, which as we all know made one of the most disastrous mergers of all-time when it bought AOL.  Warner Communications had bought Lorimar in an all-stock deal.  That stock became Time-Warner stock which was at a high of $58 prior to the merger, and as AOL Time-Warner stock eventually hit a low of $7.00.

And Adelson didn’t sell one single share.

In the process his net worth dropped by over 90%.  In theory that should have left him with $30 million dollars, a nice haircut to be sure, but more than enough for most people to live out the rest of their life in luxury.

Unfortunately Adelson had used his AOL Time Warner stock as collateral to fund other ventures, none of which were particularly successful.  At the end of the day, when his highly leveraged stock position collapsed, he was in debt to the tune of $112 million dollars.

In the course of a few short years, the man who once by his own words could “pick up the phone, call my private pilot, and be in Paris for breakfast the next morning,” was broke.  And it only took that one bad trade to undo fifty years of wealth creation.

And why didn’t he sell his stock when he was down 20%?  Or 50%?  Or even 75%?  His friends say that it’s because he “never believed that the stock wouldn’t recover.”

For another angle on that same bad trade read my post “I’m A Lawyer. No, I’m A Trader. Damn, I’m A Lawyer Again.”

Former TV Macher Merv Adelson Talks About Financial Ruin and His Las Vegas Mob Ties (Vanity Fair)

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  • Marko Graenitz

    I understand the “need” to outgrow the other guys in terms of wealth but he clearly could’ve made the choice to play it safe at the same time.

  • Jeff Watson

    One of my best friends, the world champion squash player, hedge fund manager, lost 300 million in one day, and ended up losing close to 800 million overall in less than a week. It humbled him but later, he still lost 40% of his remaining stake in 2007-08. Still, it is a humbling experience to take a big hit.. I had one of those once. Back in 1982, I discovered an ATM trade with the Mexican Peso which had me long at a certain place during the day and was making money 95% of the time.. I was trading that program with 20 lots of Mexican Pesos as my default size on the IMM when they devalued the Mexican Peso. 14 days of lock limit down and I lost over a half million bucks, and this was me, a 26 year old kid. However, that loss made me fight it out harder everyday in the wheat pit, made me a better trader, and certainly taught me how to handle losses. I have no problem taking a loss.

    • Fullbrightandfullmoons

      Is the first trader Niederhoffer?

  • http://www.andrewmenaker.com/ Andrew Menaker PhD

    A great lesson, for sure.

    Most people will interpret his decision to not retire after hitting 300mm as ‘greed’. But I think there’s something else at work – the desire to ‘beat the other guy’, or to compete, or to gain status in the eyes of others, can appear as greed. This occurs all the time with high net worth individuals – after you get your gulf stream, the proprieties, the toys, etc, what motivates you to accumulate more? Its often so they can feel big and/or to gain social status.

    I’ve once talked with a billionaire who said on the way to the billion he anticipated that he’d retire once he got there. But now he wants to be a ‘multi-billionaire.

    I’ve seen this first-hand in many variations in my work with traders and money managers.

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  • http://www.linkfest.com/ StreetEYE (@streeteye)

    Ouch. Interesting contrast to another Adelson, Sheldon, who sold his company to a conglomerate and bet the farm on a startup at an age most would retire.

  • Sarge986

    Great article. Very interesting.

  • jbraica

    Thanks, great article.

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