The more I practice the luckier I get...

I saw this week that a chap by the name of John Meriwether, a bell-weather name of the hedge fund world, is about to embark upon his 3rd attempt at running a hedge fund. Incredible really. This guy's "ability" required the Federal Reserve to establish the entire precedent of "too big to fail" in 1998, when they were forced to rescue his first hedge fund, Long Term Capital Management (and the banks that lent to it). He then had another cut at punting other people's money, which ended 3 months ago - investors in JWM Partners were handed back 56% of their initial investment. And now, like a Phoenix from the flames, he's back again with the collection bowl out raising money for a 3rd fund. The most wonderful point is that the fund is expected to use the same strategy as both LTCM and JWM Partners to make money: so-called relative value arbitrage. If this guy succeeds in raising any meaningful size of funds, he really should turn his hand to selling something easier - like ice to eskimos.

Meriwether, will undoubtedly justify his past failures as having been so-called "Black Swan" events - i.e. that the circumstances that led to these funds' demise were epoch making events, which could not possibly have been foreseen. In the first case "irrational" market movements following the Russian crisis in 1998, and in the most recent case a credit market that lost its "rationality". The common theme being a basic lack of human rationality when it mattered - wow, never would have seen that. This guy must be the unluckiest guy on the planet if he has been hit by 2 once-in-a-millenium events in the past 12 years. Surely third time round he can't possibly be as unlucky?

I can only hope that those managing money in pension funds and insurance companies around the world will see this guy for what he is - not "unlucky", but just someone who isn't actually very good at understanding financial markets. To quote George Bush: "Fool me once, shame on you - shame on you. Fool me - you can't get fooled again." You get the picture.

In all likelihood Meriwether will manage to raise a goodly chunk of money for his 3rd fund, from another round of deluded asset managers and high net worths with more money than sense (I can't believe any original investors will go back for a 2nd or 3rd roll of the dice - but who knows). Here's how the conversation will go: "No way he can be wrong a third time!! We have a rare opportunity to add this really smart guy to our stable of fund managers. Let's give him $250 million."

If you compared Meriwether to an airline pilot, or a doctor, or any other profession that I can think of, he would be struck-off whatever register of professional standards existed for that industry, as would the asset managers who chose to bet their funds on such a track record.

The fact that he can raise a second or, now third fund, helps demonstrate to me that the world is fundamentally pretty poor at analysing luck, good or bad. A fact which I think applies in all aspects of life - from financial management, to health, to relationships. In Meriwether's case, investors who are willing to invest money with him have obviously accepted that he had a decent strategy, but was just tremendously unlucky (twice).

In other worldly situations, we might think someone was lucky when their achievements have been the result of real personal impact and talent, and conversely, there are situations where someone has been affected by luck, but observers put it down to their own personal impact and ability. In other words, we get a bit confused when it comes to judging where luck does or doesn't exist. Usually success is a combination of impact and luck. (I've stolen that from here: http://docs.google.com/View?id=dgrdmfgk_33d42brbs5 - thanks bro!)

When Rudy Giuliani became mayor of New York, for example, the crime rate in the city dropped precipitously in the following couple of years. Observers put this down to the "zero tolerance" attitude that he had adopted to crime, which was widely lauded. It's been suggested recently, however, that he may just have been lucky - 18 years prior to Giuliani's election, the ground-breaking Rowe vs. Wade abortion case meant that abortion became legalised in some US states, New York included. The unobserved "luck" for Giuliani was that many of the would-be criminals had not been born 17-18 years previously - many of the aborted children would have been born into broken homes, or family environments where care would have been difficult; which statistically would have increased the probable propensity towards crime in later life.

All this led me to think of two books - one that I'm currently reading, and one that I read recently. Both address the analysis of our notions of success. In Outliers (currently reading), by Malcolm Gladwell the idea is that success is a lot more haphazard than people would tend to think. Similarly in Fooled by Randomness, a former options trader - Nassim Taleb - presents an account of the role of chance not only in personal life, but also in theoretically quantifiable spheres, such as making investment decisions - and further how much it costs society to underestimate the probability of the sort of "Black Swan" events that John Meriwether was hit by. Taleb hammers home the point that the rich (as one measure of success) are frequently just lucky rather than smart.

If you have enough participants flipping a coin, 1 of them will flip heads 10 out of 10 times. There are plenty of successful hedge fund managers who've flipped heads 4-5 times and been hailed as geniuses, and like Meriwether (before his 'bad luck' set in) have raised vast sums of money on the back of it. The truth is that many of them have been lucky, and they have a 50-50 chance of flipping a tail the next year.