Double Your Return … What I Learned!
Posted June 3, 2016on:
On May 27th, 2005, I started MZ Capital Management as a hedge fund with “Double Your Return” as my first marketing tagline.
Shortly after the Enron debacle, Congress passed the Sarbanes-Oxley Act, which requires company insiders to report their trades to the SEC electronically within a day of the trades taking place. I created a computer program to query the SEC’s database in real time. So as soon as, for example, IBM’s CEO reported that he bought 10000 shares of IBM, I would know it right away.
On a typical working day, I would be half naked lying on the beach of Palm Beach and I would get a text on my dumb cell phone (sent to me by my computer working hard on my desk.) I would call my broker right away to follow the trade. Then the news would get to the WSJ one week later, the price of IBM would pop and I would sell for maybe a 5% to 10% gain.
Just like that I was making 20% to 30% return every month!I calculated that at this rate of compounding, I would become a trillionaire in about 10 years. I was so confident, I started the hedge fund to share the wealth.
Lest you don’t know yet, I did not become a trillionaire hack, not even a billionaire. So what went wrong?
A few months into my hedge fund, I noticed a small website, where for a $20 a month subscription, you could also get insider information in real time. To find out if the website was as good as my software program, I signed up to become its first paid customer. I even become friends with the founder, Josh Hong, a young man from Korea.
I found out the website is only one second slower than my program in getting the insider information. This had the potential of killing off my hedge fund business, because previously I had had one week of advanced knowledge. Suddenly, it was only one second, not nearly enough time to place trades
So I called up Josh, because by then we were friends. I told him his website was slower than my program by one second. I asked him to slow his website down by a single minute to give me time to place advance trades.
A week later, he called me up saying excitedly, : “Michael, I found out why my website is one second slower than your program! Now I can shave that second off!”
Josh later introduced me to his sister. He wanted me to date his sister but he wouldn’t let me have any information edge.
Within a year, websites like Josh’s proliferated. A lot of times, prices would have jumped before I could place trades. I lost whatever information edge I had.
This experience taught me an important lesson: No money manager or hedge fund can have a permanent edge since the market is in a relentless drive toward efficiency. I removed the “Double Your Return” tagline and never look back since.
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