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Why The Golden Child of Credit Got Sacked

By Dr. Steve Sjuggerud
Tuesday, October 16, 2007

Richard "Chip" Bierbaum, age 26, was fired last month from a French bank.

It's tough to get fired from a French company. But Chip showed us how it's done...

He was fired for "alleged unauthorized trading" that led to a $350 million loss for his bank, Credit Agricole. Chip was trading derivatives linked to credit-default indexes. When the Fed cut rates, credit-default swap contracts tanked.

Chip, in his defense, says he did nothing wrong. "I was the golden child of credit trading in New York," he said in an interview.

The French bank says it's taken the appropriate corrective measures. We hope it puts in a measure to keep 26-year-olds from risking hundreds of millions of dollars.

Chip wasn't the only trader with bad luck...

Morgan Stanley just reported that the traders on its quantitative trading desk lost $390 million during a single day in August. The group lost a little less than half billion dollars in total for the quarter.

When will these investment banks learn?

In the book Fooled By Randomness, author Nassim Taleb says he only gives money to guys with grey hair because they've survived.

"We tend to think that traders make money because they're good," Taleb writes. "Perhaps... we consider them good just because they make money.
One can make money in the financial markets totally out of randomness."

In the book, Taleb lists the traits of traders fooled by randomness:

- They overestimate the accuracy of their strategies.
- They tend to "get married" to their positions.
- They have no precise game plan for how to deal with losses.
- They have no stop losses, or they revise them on the way down.
- They suffer from denial.

How do you stack up? Longtime subscribers know that in my newsletters, we never hesitate to exit a losing position, and we religiously follow our stops. Unfortunately, most others don't...

Trader Chip says he would like to get back into credit trading. Chip's previous job was as a trader for a Bear Stearns hedge fund. It collapsed in June, making bad bets on subprime securities. If this kid is honest, he is incredibly unlucky. Would you hire him?

Taleb describes how "older people have been exposed longer to the rare event and can be, convincingly, more resistant to it."

The rare event hit in August. One young trader cost a French bank $350+ million. A young department at Morgan Stanley cost that company half a billion.

When a bright, young money manager comes knocking on your door, remember the story of The Golden Child of Credit. Stick with the manager with more experience. Chances are you'll be glad you did.

My latest recommendation in Sjuggerud Confidential is a fund run by a manager who apprenticed under Peter Lynch at Fidelity and has since run his current fund for more than a decade.

That's the kind of guy I want managing my money... and you should look for guys like that, too...

Good investing,


Market Notes


Seabridge Gold is one of the world's great examples of why you should buy low and sell high.

Near the bottom in gold prices years ago, Seabridge management bought a pile of uneconomical gold assets from companies that wanted cash more than they wanted properties. With gold trading for less than $400, buying these properties wasn't big news. Now that gold is north of $700, the news is gigantic... and Seabridge is sitting on, well, a gold mine.

At gold's current price, Seabridge owns more than $10 billion of reserves. But the company’s market cap is a bit more than $1 billion... and as our resident geologist Matt Badiali described last month, that market cap is likely to get much bigger. Since Steve's recommendation in July 2005, Seabridge has gained an astounding 1,300% for Sjuggerud Confidential readers.

The bull market in gold shares is in full swing, and Seabridge is leading the way.

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