My First Million
00:01:43 · Shaan Puri, Sam Parr, Bill Perkins
[00:01:43] S1: Sam, when he when he says and when he says energy, he's an energy trader, commodities derivatives. What does that mean to you, Sam? How much of that do you understand? [00:01:53] S2: Yeah, not much, frankly. We create websites that like people come and they either buy something or we make money via ads. So when I hear that, I'm like, are you buying barrels of oil and and and selling it to someone else who needs it? I'm kind of an idiot when it comes to that. [00:02:08] S0: Yeah. You're basically just betting on price go up, price go down, or vol go up, vol go down with spreads, etcetera. [00:02:14] S1: How did you get good at knowing if the price would go up or or down when every other smart guy is also trying to figure out if the price is gonna go up or down? How do you win that game? [00:02:21] S0: Well, know, there's we're really not in competition with the other smart guys. We're kind of glorified insurance agents. Like we don't want to trade, we get induced to trade based on what the market is doing versus what we perceive for fair value. And so that's kind of like what an insurance agent does, right? It's like, okay, this is the distribution of outcomes, here's fair value, here's my theoretical edge, right? I'm gonna charge you x for this insurance product. [00:02:47] S2: Can you give like an even more dumbed down example? So like for example, a company needs to acquire a bunch of oil. Are you the middleman who would go and acquire it and you try to get
00:02:47 · Sam Parr, Bill Perkins
[00:02:47] S2: Can you give like an even more dumbed down example? So like for example, a company needs to acquire a bunch of oil. Are you the middleman who would go and acquire it and you try to get [00:02:59] S0: stock Yeah, let's say the winter's coming and people are afraid prices are going to go up. And generally, was always short, right? Because people are always afraid prices are to go up in a winter for natural gas. And we'd be like, okay, we'll sell you futures contracts. They... They've locked in a hedge from it going up, and I'm exposed to it going up. But, you know, by and large, prices generally went down. The winter risk premium usually bled out and the prices would go down. And most of the most of the money I made was from being short natural gas over his time. [00:03:29] S2: Being a trader like this, it's one of the few gigs where you can get pretty rich as an employee working for someone else. I think I read that you made close to a billion dollars in profit for the company that you were working for. Were you personally making any money?
00:03:29 · Sam Parr, Bill Perkins
[00:03:29] S2: Being a trader like this, it's one of the few gigs where you can get pretty rich as an employee working for someone else. I think I read that you made close to a billion dollars in profit for the company that you were working for. Were you personally making any money? [00:03:43] S0: Yeah. I mean, had I been smart or smarter about it, I would have made a lot more money by having a lot of my money invested in the fund. But we had this theory back in the day, which was absolutely wrong because I was younger when I look back, that it's okay to have no money in a job, and it's okay to have no job and money, but it's not okay to have no job and no money. And so, we were like, okay, if I get blown up here trading, you know I mean? I don't want to have all my money parked in the fund as well. Now, what I didn't take into account is that I was very young and maximizing risk at that age is probably the way to go, and I should have been fully concentrated and just bet the farm because I was always going to be able to get another job. So, yes, as a trader, most traders at independent hedge funds, not necessarily the banks, etcetera, you eat what you kill. So you don't really get anything if you don't make money, and then you get a percentage of the money that you earn when when you do well. [00:04:42] S2: And you were saying, you said, well, I initially made this this pool capital by trading. Were you sort of broke and then you just had like a killer year or a killer deal and it just... You had a windfall, or were you making it as you went?
00:04:42 · Sam Parr, Bill Perkins
[00:04:42] S2: And you were saying, you said, well, I initially made this this pool capital by trading. Were you sort of broke and then you just had like a killer year or a killer deal and it just... You had a windfall, or were you making it as you went? [00:04:56] S0: I was kind of climbing the the earnings tree first as a broker. I was an OTC broker, which I hated. I was good at, right? But you're going to make 6 figures, you know? You can make more if you like start a firm and be part of a firm. But it's the analogy I would use is somebody who buys and sells houses versus somebody who's a real estate agent. I hated being a real estate agent. I wanted to be a guy who bought and sold houses, right? And so I wanted to be the trader. And so, you know, I was well off as a broker and got rich as a trader.
00:05:30 · Shaan Puri
[00:05:30] S1: Now we've had a couple of different types of investors on the podcast in the past. We've had like the Howard Marks, Ray Dalio types, And I would say a lot of what they talk about, there's kind of three ways to win that I've picked up. So one is superior temperament. So, you know, the kind of Buffett model of, you know, be greedy when others are fearful, be fearful when others are greedy, people who can handle swings better than others, and that led to superior returns. The second one was like an informational edge. They understood something about a technology or a market and where the puck was going, and they understood the implications of it better than others did. And then the third is just straight up arbitrage. You know, I'm buying a ETF, and I realize that the underlying 100 stocks underneath it are not priced exactly in, you know, in sum to the ETF price, and I could just kind of with no risk make a spread here, and I'll do it until that arb disappears. Were you one of those three, or were you a fourth way of making money?
00:06:23 · Bill Perkins
[00:06:23] S0: I would say we were one and two. We weren't the arbitrage. We were one and two. So the idea is is that, you know, the market is comprised of a lot of people who who are, you know, some people punting around and just just straight gambling. People that need to hedge, and then people who really, really understand the market very well, study every single aspect that drives supply and demand. Right? And then what may happen, and then we'll have a position based on that irrespective of your superior knowledge. If you are not stoic about losses and can handle that, your prefrontal cortex will not work while your amygdala is going crazy. Right? Or you're thinking about, wow, I lost a bunch of money, or you're that type of person that needs five wins for every loss because that doesn't exist in trading. And so no matter how how bright you are, you need to have that temperament, that stoic temperament, that ability to handle losses, or be robotic about trading.