Guest Lecture: Career Lessons in Entrepreneurship.
I was honored to be a guest speaker at UCLA Anderson School of Management’s Entrepreneurship Leadership Development Program (ELDP), a mentorship program for MBA students.
I was honored to be a guest speaker at UCLA Anderson School of Management’s Entrepreneurship Leadership Development Program (ELDP), a mentorship program for MBA students.
The ELDP is a mentorship program for select UCLA MBA students to meet monthly with their CEO/Entrepreneur mentors in a format that resembles a YPO (Young Presidents’ Organization) Forum. A meeting typically consists of student updates on their projects and struggles, a guest speaker who shares his or her entrepreneurship journey, and several in-depth presentations by students. I was honored to be a guest speaker recently, and since it was not recorded, I thought I would share my presentation here.
Rather than follow the typical chronological lifeline format, I chose to present Ten Axioms that I’ve tried to live by—principles that have served me well throughout my career. I share them here.
Axiom 1: Stay intellectually curious and question, question, question!
I love to learn for the sake of learning. I have always been extremely curious about everything since I was a kid. I was that kid who constantly peppered teachers with questions, and the most common feedback from my teachers on my report cards was “Michael likes to keep me on my toes.”
Sometimes I can exhaust people. A good friend from business school observed that I once hounded a lecturer with question after question and then suddenly stopped at a certain point, and he asked me why. My response was: “I found the limit to his ability to answer.” He brought this up to me recently, and it made me realize that it was a subconscious pattern and that, depending on the context, I might sometimes need to censor myself.
My curiosity certainly got me into some trouble as a kid. Left alone at my parents’ business after school, I was often bored and tried all kinds of experiments. I nearly burned down my mom’s warehouse once because of my curiosity about fire. I think maybe that’s why my mom bought me an Apple II computer as a diversion to keep my attention, and that certainly succeeded.
As I detailed in "There And Back Again," I fell in love with computer programming at a young age because it was a source of constant learning and creative problem-solving, which absorbed my insatiable curiosity. I was sure I was going to be a video game designer when I was 11. But life works in mysterious ways, and I would find another source of constant learning and creative problem-solving through a career in financial markets.
I am still very much a “curious kid” today, and I still sometimes exhaust my family and friends, not to mention speakers and tour guides, but at least I don’t play with fire anymore. These days, I love doing deep-dive historical travel, and last year I wrote about three incredibly enriching experiences: Ruin Hunting In Tunisia, Musings From Oxford, Ruin Hunting In Roman Britannia (Hadrian's Wall). When I get into something, I really get into it.
Asking questions is more important than ever in the Age of AI. To me, AI represents an infinitely patient and inexhaustible resource for my insatiable appetite for questioning. Like the way the Apple II absorbed my attention when I was a kid, AI coding has similarly absorbed my attention lately with the development of UrbanKaoberg, which has been a fascinating collision between my original love of programming and ongoing love of financial markets.
Axiom 2: Luck = Preparation + Opportunity.
Everyone gets opportunities, but if you aren’t prepared to recognize them, they will pass you by. Since most of my subscribers are likely involved with investing or trading the financial markets, this sounds obvious. However, I first learned this lesson from a totally different perspective early in my career during my first job as a programmer at Goldman Sachs.
Upon arriving in NYC in 1992 for Goldman’s three-month training program for its IT hires prior to their official job start, I was thrust into a crash course in finance, covering all aspects of financial markets as well as how Goldman makes money in each of its divisions. A scant year before, I did not know a stock from a bond, knew nothing about financial markets, and had never even heard of Goldman Sachs or Morgan Stanley until I interviewed with both firms. My girlfriend worked for Bear Stearns at the time and taught me what the Dow Jones Industrial Average was and what “IPO” meant and really opened my eyes to a whole new world.
I had graduated with a degree in Electrical Engineering and Computer Science and only pivoted in my senior year away from pure Silicon Valley jobs because of higher pay opportunities that Wall Street provided. I took the job because I thought I could use my immediate coding skills and learn about “business” at the same time, and to me, I had equated “Wall Street” with “business.”
One thing I immediately learned during this training program was that the job function I was hired for was a support role and a cost center, not directly involved in the revenue/profit generation side of the business. More importantly, I learned from some other trainees that this meant my upside would be capped. I resolved to learn as much as I could about the “front lines” of the business and explore how I could move horizontally.
At the end of the training program, I was placed into the J. Aron Currencies and Commodities division (the infamous 5th floor of 85 Broad), so I resolved to learn as much as I could on my own about these areas. I read numerous books, took courses, and started visiting HR on the 18th floor to see how I could break into trading. The HR representative gave me more books to read; I dutifully followed up, and he would do the same thing again, sending me on endless “wild goose chases.” I was impatient, frustrated by the apparent lack of horizontal mobility, but I was learning a lot in the process.
Two opportunities presented themselves over the course of the next several months, but I did not know they were opportunities at the time.
My first lucky break came a couple of months into the job. I was called into a planning meeting between the senior programming team of the J. Aron IT department and the FX sales and trading team for the upcoming project to design a new Currency Options sales and trading interface. The senior programmers presented a plan that made sense from a programming efficiency perspective; the sales and trading team presented their needs, which seemed to be much more complicated.
The two groups weren’t speaking the same language. The problem was that the senior programmers didn’t understand the core workflows that the trading desk needed, and the trading desk didn’t understand what could or couldn’t be done from a technical perspective. Rather than lock the traders into pre-programmed templates (the original proposal), I suggested an open, extensible framework that could allow any combination of options to be linked as part of a single ticket. The FX folks loved my idea, and my proposal won out. The “wild goose chases” had paid off by preparing me, unknowingly, for this moment, and the Currency Options project became my responsibility.
Several months later, as my Currency Options module was rolled into production, I was called out onto the trading desk to debug a problem with the rollout. The senior FX salesman Jon was yelling at me about the bug when his biggest client, George Soros’ Quantum Fund, called with a request for a two-sided market on a USD/DEM (Deutschemark) options strategy for $500 million notional size (a pretty massive trade at the time). The entire trading floor went silent, as the traders were trying to figure out whether Soros was a buyer or seller.
I wanted to understand the trade mechanics, so I asked Jon to explain it to me. He sketched it out on a napkin and accidentally got it backwards, and I corrected him. He acknowledged his error, and I didn’t think any more about the conversation until two days later I got a phone call at my cubicle—from my boss’ boss’ boss.
It was Richard Witten, who co-ran J. Aron with Lloyd Blankfein. Apparently, Jon mentioned our interaction to Richard, and Richard asked if I would be interested in interviewing for a job on the sales and trading desk; my answer was a resounding “YES.”
This was my second lucky break and the one that led me down the path of a finance career over the next several decades. I’ll be forever grateful to Jon and Richard for giving me that shot, but had it not been for the “wild goose chases” and the learning that went with them, that interaction would never have happened.
Axiom 3: Be dependable and “scrappy.”
The first post-IT role I was hired into was a junior analyst position supporting the Precious/Base Metals group right on the trading floor. It was my first time working full-time on a trading floor, and the J. Aron trading floor was every bit the rough-and-tumble Wall Street portrayal you see in movies—a football-field-sized floor with rows and rows of trading desks filled with shouting traders, traders letting off steam by throwing tennis balls at each other across 100-foot expanses (while buzzing the noses of unsuspecting Partners), traders sometimes smashing their monitors when emotions ran high. The energy was electric.
It was organized chaos (or dare I say KAOS), but it was also pure, unbridled meritocracy in action as traders lived and died by their P&L. It didn’t matter how young or old you were; if you had a good idea that had money-making potential, people listened. I was hooked.
“Jimmy” Riley was the Partner who ran Metals as well as the newly formed GSCI (Goldman Sachs Commodity Index) product, which was created in 1991. Jimmy was a trading legend who ran the desk like a football coach/drill sergeant. He was the most aggressive and instinctive trader I ever met, and I learned all of my “street smarts” during my time with Jimmy.
As the single junior analyst in this group at the time, there was no shortage of project requests coming at me from all directions, and I never said no to any of them. Although my first responsibility was to help the Precious Metals team, I found myself doing a lot of side projects for Base Metals as well as GSCI. I learned early on that when anyone asked me to jump, the correct answer was “How high?”
A few months later, a third lucky break happened. One of the two GSCI traders was transitioning to a sales role, and I was invited to fill the vacancy as a junior trader. I wound up trading GSCI for the next several years, which turned out to be an incredible learning platform.
For training, I clerked on the floor of the COMEX Gold Pit at the World Trade Center for a couple of months, where I served as the go-between for the “upstairs” trader on the J. Aron trading floor (usually Jimmy) and the “downstairs” floor-trader in the COMEX Gold Pit. I learned to gauge market sentiment by listening to and watching the actual flows and emotions in the pit.
When I got back “upstairs,” my main job was to make markets in all underlying GSCI products, including futures, options, swaps, and structured notes. I then had to arbitrage the index against its 22 underlying commodities, which in turn forced me to trade with all of the other trading desks within J. Aron, including Oil and products, Natural Gas, Grains, Metals, Softs, and more. The only commodities we didn’t have internal desks for were Meats and Cotton, so I had outside brokers for those. Because GSCI was a nascent product that didn’t have much in the way of market-making flows yet, we had to add value by taking proprietary positions in the underlying commodities. I learned to “always have a view” in everything I touched.
To thrive on my desk, traders had to go through “trial by fire” with Jimmy. Early on, I entered a Live Hogs futures long position because I was convinced of an impending technical breakout; I convinced Jimmy of the merits of my position, and he tagged along at 10x my size. The trade worked out after a couple days and Hogs closed limit-up one day. I was very proud of myself and even prouder that I got Jimmy into a profitable trade. After the market closed, Jimmy called me up from his office and asked me to make a market on his whole size. I said, “Jimmy, the market just closed.” Jimmy: “I don’t care if the market is closed. Your job is to make markets. Make me a market!” I figured that because I was the proponent of the long, I had to stay bullish, and I quoted him the closing bid plus a tight spread. Jimmy sold me his entire 10x position at the highs of the day after the market close. The next day, the market reversed and closed down significantly, as I struggled to offload the position Jimmy sold to me. My P&L was in tatters, and I learned a valuable lesson from Jimmy: Never let your ego get caught up in a trade, and always try to read the intent of whoever is trading against you.
Jimmy tested me like that several more times, but I learned to read him and not get scalped by him again. He called me into his office one day, and I was bracing for a tongue-lashing because I thought he was pissed that I didn’t let him off the hook on another trade. Instead Jimmy said: “You know what I like about you, Mike Kao? You’re scrappy, and you’re a fast learner.”
Eventually, I was lucky enough to be the GSCI market maker in charge when one of the largest pensions in the US made a GSCI allocation. I had to provide and source the liquidity for what felt like an “elephant moving through a mousehole.” It was an incredible time.
Being a trader at J. Aron was one of the most intense and exhilarating rides of my career, and the only reason I got the opportunity was because I never said no to any requests for help, even though many of the side projects weren’t part of my “job description.” It was a very intense “baptism by fire” experience, but it taught me how to be dependable and “scrappy” in the face of high pressure—two qualities that would help me throughout the rest of my career.
Axiom 4: Creating “Franchise Value” is what gets you Equity in a business, and getting Equity in a business is where the upside is.
What I loved about being a trader was the pure meritocratic nature of it. At the end of every trading day, the accountants would distribute hard copies of every trader’s P&L for the day for all to see. I now had my own line, and it was both exhilarating and terrifying. It was like getting a daily report card. There was no place to hide.
Over time, I made two critical observations.
First, there was tremendous Franchise Value in certain seats, and those traders who were fortunate—and capable—enough to fill those seats received outsized rewards. If you were the head Gold or Oil or USD/DEM trader (remember this was pre-EUR days), for instance, given the dominance of J. Aron in those markets, the institutional flows alone were worth a lot of money to capable market makers filling those seats. It was almost guaranteed P&L and a near-certain path to Partner.
The second, more surprising, observation came when the Natural Gas trader, who had been posting large, consistent losses, made Partner. How did that happen? He created an entirely new Franchise for J. Aron. I filed this important nugget away.
Years later, after I had left J. Aron and finished my MBA, I landed a position at Canyon Partners, a credit-oriented hedge fund that primarily invested in directional credit strategies. I had turned down multiple hedge fund offers from shops like Citadel and HBK because I wanted to get back to California after five years on the East Coast, and Canyon’s founders, Josh Friedman and Mitch Julis, were highly respected financiers from Drexel.
From a strategy and skillset standpoint, I felt like a fish out of water at Canyon initially, because my previous experience at J. Aron had been more trading and arbitrage oriented. Now, I had to learn fundamental Credit and Capital Structure Analysis. Furthermore, I was the first MBA hire Canyon made, and there were several seasoned High Yield and Bank Debt analysts on the team already; I knew it would be difficult for me to stand out in those areas. I needed to carve out my own niche.
During business school, I had done an impactful internship at Harvard Management Company where I had been exposed to Relative Value strategies like Convertible Arbitrage and Merger Arbitrage. That internship helped me land job offers with Citadel and HBK as well as a startup named Rose Glen; the founders of all three firms cut their teeth in Convertible Arbitrage, so I figured there must have been something special about that asset class to produce so many successful hedge fund managers. I resolved to teach myself the craft and become the expert of that domain within Canyon.
With the J. Aron lessons about creating Franchise Value in mind, I wrote a white paper entitled "Alpha With Asymmetry" which outlined my vision for a business within a business at Canyon, which combined Convertible and Event Arbitrage into one sub-strategy.
I spent the next several years building out a team and a portfolio that would become the firm’s top profit center for multiple years. I was made a Partner in a standalone Canyon Capital Arbitrage Fund in 2000–2001. I had created Franchise Value for Canyon and was rewarded for it.
Eventually, I left Canyon in 2002 to start my own firm, Akanthos Capital Management, which focused on a similar hybrid multi-arbitrage model. I relished in the creative problem-solving aspect of taking disparate pieces of a company’s Capital Structure and crafting asymmetric trades out of the combinations. I saw opportunities for creating Alpha through complexity, and Akanthos became known for its uniquely creative trade expressions. I ran Akanthos for 17 years before retiring from active fund management in 2019.
Throughout this entire adventure, it was the original observation at J. Aron about creating Franchise Value that guided my thinking.
Axiom 5: Know your worth, and don’t be afraid to make it known when it matters.
I think sometimes there is a fine line between confidence and arrogance, but there is definitely a difference. Although it’s certainly possible for people to be “justifiably” arrogant because of extraordinary capability, in my opinion, no one likes a bombastic asshole. More often than not, the arrogant ones are imposters who are bluffing with more bluster than substance.
Confidence comes from knowing your worth and making it known—not from being an asshole, but from being unafraid to make justified requests.
At the tail end of the Goldman Sachs IT Training Program, the class of 60 trainees was given an aptitude test in coding ability. I ranked at the top of my class, and in my naïveté, I was initially disappointed with my assignment to J. Aron. I had all of three months of finance training, I had just read Liar’s Poker, and I thought based on my ranking that I deserved to go to a “sexier” department like Equities or Bonds. I knew very little about Currencies or Commodities.
I asked for a sit-down with the IT Partner, and she entertained my request. You might think this was borderline arrogant, but I was simply watching out for my interests and, knowing my worth, I respectfully asked for another assignment. She proceeded to explain that J. Aron was the most profitable division within Goldman at that time and that they had hand-picked me from the roster based on the test rankings. I decided to shut up and take the assignment.
Throughout my career, I would repeatedly demonstrate this principle and make respectful requests. Sometimes I got what I wanted, and sometimes I didn’t.
When I was interviewing at Canyon with cofounder Josh Friedman, I surprised him at the conclusion of the interview by asking him for references. Again, it was out of naïveté and not out of arrogance; I had a number of other offers in hand, and I wanted to make sure I made the right choice. Josh gave me not one but three references, and I called every single one. To this day, I joke with him that he probably hired me because of my chutzpah that day!
Years later, when my group delivered a blockbuster performance and I was negotiating my bonus, I made a request that was multiples of what I got. Again, it wasn’t out of arrogance but rather the mathematical reality of what I would have gotten if it were my own firm, with a healthy discount applied because it was not my firm. This time, I didn’t get quite what I requested. I understood their reasons, but I resolved to start my own firm someday where I would own all of the economics.
I would learn later, however, that economics aren’t everything and that there is always a give and take. I remain good friends with Josh and Mitch to this day, which brings me to my next rule…
Axiom 6: Always do the right thing, and never burn bridges.
Leaving Canyon on good terms was very important to me, because I learned very early on that it’s never wise to burn bridges—especially in an industry where reputation is everything. Furthermore, Josh and Mitch had been tremendous mentors to me and gave me the opportunity to run with my “Alpha With Asymmetry” business within a business in the first place.
When I resigned in the summer of 2002, I stayed on for an extended period to ensure a smooth transition and that my remaining team was well-equipped to take over. I did not poach anyone, and I did not steal clients. I think both Canyon as well as my new seed investors respected this decision.
My Negotiations professor from business school taught me years earlier that when you do the right thing, it shows you’re coming from a position of strength and confidence.
When I decided to leave J. Aron for business school, I had already made up my mind that I wanted to end up at a hedge fund. At J. Aron, I saw how the smartest money tended to be the hedge fund clients, and I respected how they lived and died purely on the merits of their ideas without the benefit of trading flow.
I underestimated how difficult it would be to break into the hedge fund business. Few of my classmates knew about hedge funds back then, and almost no hedge funds recruited on campus. I managed to get a copy of a hedge fund directory from one of my old J. Aron contacts, and I wrote to almost everyone in the directory, with non-responses being by far the most common outcome.
By the time most of my classmates had already landed job offers at the beginning of the second year, I still had no prospects. Imagine my excitement when I finally landed an offer from Citadel to do Convertible Arbitrage after meeting Ken Griffin and his then small team in the spring of 1997 (Citadel’s AUM at the time was only $500 mm). The catch? It was an exploding offer, and true to their option-savvy ways, they didn’t want to be “short a call” to me for more than two weeks.
My problem was twofold: 1. I hadn’t yet heard back from any of the other shops I had applied to, and 2. I desperately needed an offer in hand for leverage, because I really wanted to get back to the West Coast.
I went to Professor Shell with my predicament: Should I just accept the offer and potentially renege later? Or should I decline and risk having nothing at the end of the day? Graduation was only two months away, and all of my friends had accepted their offers months ago.
Professor Shell taught me about the hidden leverage in saying no to Citadel and in so doing, demonstrating to other firms that I not only knew my worth and had confidence in myself, but that I would be doing the stand-up thing with Citadel.
He turned out to be right. I declined Citadel’s offer, and by graduation, I had three more offers, including the Canyon offer which I accepted. Harlan Korenvaes of HBK in particular was impressed by my confidence, and he was the first one to give me the nickname “Kaoboy”—a nickname that has stuck to this day!
Axiom 7: Know when to stay in the game and when to get out.
Getting out at the wrong time can truncate your financial upside, but staying in too long can be even more expensive in other ways.
Up until this point, I’ve been telling you about career wins. Now I’m going to tell you about some of the toughest challenges I’ve faced in my career and how I navigated through them.
The Great Financial Crisis (GFC) of 2008-2009 was, without question, the most challenging period of my life, but my problems actually started two years earlier when the proverbial butterfly flapped its wings in one corner of the markets and would have far-reaching ramifications on my business.
In September 2006, a multi-strategy hedge fund called Amaranth Advisors, another firm that originally cut its teeth in Convertible Arbitrage, blew up from Natural Gas trading, losing over 65%.
Akanthos had just finished one of its best years in 2006, so you can imagine my surprise and frustration when my anchor investor (which made up almost 50% of my AUM at the time) submitted a full redemption request in early 2007. Unbeknownst to me, this $5B Fund of Funds (FoF) had significant exposure to Amaranth; worse, it had promised monthly liquidity to its investors but had been investing in quarterly and annual liquidity managers like Akanthos. This was a classic Asset/Liability Mismatch—the source of almost all financial blowups.
Because this FoF was not able to meet its redemption requests, it put the entire FoF into liquidation and gated its redemptions while submitting full redemption requests with all of its managers, including Akanthos.
I spent the next several months negotiating a staggered redemption schedule to give me time to replace their capital. At the same time, in June 2007, two Bear Stearns structured credit hedge funds blew up and began to roil the credit markets. I was vacationing with my family in Palau that summer and remember spending every night from 10 p.m. until 4 a.m. in the business center because of the volatility in the credit markets.
By the summer of 2008, as the first of my FoF staggered redemption payments was about to come due, one of my three prime brokers increased their margin rates. Because I ran a 3.5x levered Convertible and Capital Structure Arbitrage strategy (which actually was low compared to many of my comps who were running 5-8x levered), I was very sensitive to margin rates and promptly fired Prime Broker #1, preparing to transfer balances over to Prime Broker #2, who had been pressuring me for years for more market share.
The response shocked me—not only could they not take my balances, they told me I had to either transfer everything out or completely delever within the month.
By then, credit markets were falling apart, but I had significant portfolio tail hedges in place. I had a massive short position in Fannie Mae subordinated debt (which was underneath a mountain of Fannie Mae senior debt) as well as a substantial amount of CDX credit hedges. Thankfully, I also had a third prime broker that was willing to take some, but not all, of the displaced balances from the other two, who were clearly on the ropes.
In the first week of September, the US Treasury put Fannie Mae/Freddie Mac into conservatorship and arbitrarily guaranteed all of their debt while wiping out its preferred, rendering my tail hedge largely ineffective (even though I made money on a Fannie preferred capital structure arbitrage). If you’re interested, you can read in detail about the Fannie/Freddie saga.
Lehman Bros. filed for bankruptcy on September 15. Remember my CDX protection? Unfortunately, my main counterparty was Lehman—not only was most of my portfolio-level credit protection gone, even the cash collateral supporting the hedge was gone.
To top that off, my redeeming FoF investor decided to renege on the negotiated paydown schedule and put in for full redemption, which then prompted many of my other investors to submit protective redemptions.
I was staring into the abyss. I was facing 85% in redemptions, I had lost all of my credit protection, I was forced to gate and deleverage, and I was in the worst drawdown of my career.
A large number of my competitors went out of business during this period, especially the more levered ones. Ironically, some of the more levered (5-8x) pure-play Convertible Arbitrage funds, which theoretically hedged away all their credit risks, blew up first because the extreme stresses of the GFC created massive intra-capital structure basis risks that had nothing to do with fundamentals and everything to do with forced liquidations. Many firms that relied on a single prime broker received “the call,” as I did and were unceremoniously dropped as clients at a time when there was nowhere else to go. It was “every man for himself,” as the financial fabric of the system was unraveling amid spreading contagion and the risks of perception becoming reality due to haphazard and inconsistent policy responses.
I remember having a conversation with one of my beleaguered competitors during that time, as we watched competitor after competitor drop like flies. He asked me, “Do you have the heart of a warrior? Because folding now would mean leaving huge value on the table.” I decided to fight despite seemingly impossible odds.
I rallied my team and told them to ignore the mark-to-market, because I knew that we had extraordinary latent value in our portfolio. I put together a deck detailing my top 10 positions and started pounding the pavement aggressively for a strategic investor to buy out the large FoF that was threatening to topple my business.
We were turned down repeatedly, but eventually we found a mid-sized multi-family office that was highly contrarian and liked what we pitched. They had raised an opportunistic vehicle, and the opportunity set we presented fit perfectly. We introduced them to the redeeming FoF and told them they could negotiate their own discount to an already beaten-down NAV for Akanthos. I further sweetened the offer by granting them the high-water mark of the redeeming FoF (which is almost never done) to signal the high degree of confidence I had in the forward opportunity set. My only stipulation was that they had to lock up their capital for two years so that I could stop worrying about the stability of my AUM and focus on playing offense.
This was a game changer. Once I was able to stabilize my AUM, I was able to confidently buy distressed paper at unprecedented levels: General Motors unsecured bonds at 4c, General Growth Properties convertibles at 4c, Fannie/Freddie preferreds at 1–2c, and so on. I also convinced the rest of my investors to rescind their redemptions.
In 2009, Akanthos was up nearly 300% and was the top-ranked hedge fund in the world. We had not only survived nearly impossible odds, but we had absolutely crushed it. Over the next several years, I returned capital to my new multi-family office investor well ahead of their lockup expiration because I never wanted to be in that position again. I knew that our outsized performance would lead to inevitable portfolio rebalancing at lockup expiry, and I wanted to get ahead of it on my own terms. They ultimately became one of my longest-standing LP relationships, and I remain good friends with them to this day. In an ironic twist of fate, I am now an LP in several of their funds.
The GFC experience certainly taught me the importance of staying in the game during a crisis, and I would have left a considerable amount of money on the table had I capitulated. But the experience also took a significant emotional and spiritual toll. Unlike private equity or venture capital where capital is locked up, hedge fund liquidity mismatches and investor focus on short-term performance made it the ultimate “what have you done for me lately?” business.
When I started Akanthos, I was 100% focused on the economics of the business and chose not to take on partners. Having lived through the GFC, I came to understand that having the right partner or partners to help shoulder the stress would have been invaluable.
Although I had only been in business for seven years at that point, I had borne the pressure of investing OPM (Other People’s Money) for over 15 years at that point including my time at J. Aron and Canyon. I had lived and thrived through other crises like LTCM in 1998 and the Dot Com Bust in 2001, but everything paled in significance compared to the Perfect Storm I encountered during GFC. I felt as though I had aged ten years alone in 2008. I would end up running Akanthos for another ten years before shouldering the burden of managing OPM without partners became too tiresome for me emotionally and spiritually.
In my musings about oil over the years, I’ve often referred to the Trump Rug-Pull of Q4’2018 as a classic example of a geopolitical black swan risk that was fundamentally unhedgeable. The details are in the article so I won’t rehash them here, but suffice it to say that when one conducts exhaustive macro-level analysis and micro-level fundamental due diligence and still gets blindsided because of an unexpected policy reversal by Trump (sound familiar?), it made me question whether one can have any proprietary edge in this new regime.
That winter vacation, I had signed up for my first skydive—yes, that’s the type of thing I had to do to “relax” and divert my attention away from market volatility. We had just reached jump altitude, the plane door opened, and I was second in line to jump. The guy in front of me looked at me and asked if I was nervous. I stared at him blankly and said, “Huh?” All I could think about was the oil market and my P&L. That was the moment I realized that my amygdala had become so accustomed to being in “Fight or Flight” mode that I had become inured to even intense stimuli and could not even be present in the moment until I was in freefall out of an airplane! Something had to change.
This was a major wake-up call for me, and I realized that it was time to change my life. The hedge fund business had been good to me financially, but it had taken a serious toll on my emotional and spiritual well-being over the years. I was exhausted after 17 years of bearing the burden alone and almost 30 years of being responsible for OPM (Other People’s Money).
This is how I knew it was time to quit the hedge fund business and cast off the burden of managing OPM without partners. It was time to just focus on my family and my wellbeing.
I will always love the financial markets, but between managing my family office, blogging and talking about the markets on UrbanKaoboy.com, and now creating UrbanKaoberg.com, I still get to enjoy the creative problem-solving aspects of the markets without the stress that comes with managing OPM.
Axiom 8: Stay humble — it’s good advice for markets, and it’s good advice for life.
I am a huge fan of Greco-Roman history and mythology. You may have heard the story of Icarus:
Icarus and his father Daedalus were imprisoned in the Labyrinth on the island of Crete by King Minos. To escape the Minotaur, Daedalus fashioned two sets of wings made of feathers and held together with beeswax. He warned his headstrong son not to fly too low (for fear of seawater weighing down the wings) or too high (for fear of the sun melting the wax).
Carried away by the exhilaration of flight, Icarus ignored his father’s advice and flew too close to the sun. The wax melted, his wings fell apart, and he fell to his death. (Bonus points for anyone who can name the album and band below.)
Moral of the Story: Stay the middle course, and stay humble!
Having spent most of my career in financial markets, I would say that while this axiom may sound somewhat generic, it is one of the most important.
I like to think of Four “Meta” Knowledge Categories:
Things you know that you know
Things you know that you don’t know
Things you don’t know that you know
Things that you don’t know that you don’t know
Category 1 is what most of us rely on day to day. Category 2 can become Category 1 through targeted questioning and learning. Category 3 can be thought of as intuition developed through experience. Category 4, however, is a dangerous blind spot—and that is where hubris can cause real damage.
My examples of challenges in 2008 and 2018 both presented different versions of Category 4 blind spots; both highlight the importance of staying humble and respecting the fact that we sometimes don’t know what we don’t know.
Axiom 9: Have confidence in your ability to “connect the dots” after the fact.
If you haven’t watched Steve Jobs’ Stanford Commencement Address from 2005, it’s one of the most inspirational speeches I’ve ever heard, and I’ve probably watched it more than 20 times.
The part that resonates most with my own life experience is the idea of “connecting the dots”—trusting that seemingly random and unrelated events will eventually come together and form a cohesive whole.
There is no possible way I could have known that taking a coding job in Goldman’s IT department would lead to a trading role, which would lead me back to business school to study finance and complete an internship at Harvard Management, which would plant the seeds for starting a Convertible Arbitrage business within Canyon, which would lead me to start Akanthos and run the firm for 17 years and eventually retire as a private investor, which would bring me to starting my own Twitter/Substack persona as UrbanKaoboy (because I missed interacting daily with smart financial folks) and now developing UrbanKaoberg…
Who knows where the road leads next—but more importantly, who cares as long as you’re having fun?
That leads me to my final Axiom…
Axiom 10: ALWAYS HAVE FUN!