Douglas Tengdin – The Government Can Take Anything Away

Douglas Tengdin, CFA, is the chief investment officer (CIO) of Charter Trust Company, where he has worked since 2000. He graduated magna cum laude from Dartmouth College in 1982, and received his CFA Charter in 1992. He was the founding president of CFA Society Vermont and remains an active volunteer with the CFA Institute. His first job in the investment industry was as a mail boy and securities runner in 1974. He has also worked as a bond trader, currency trader, mutual fund portfolio manager, bank treasury analyst and manager, and private wealth portfolio manager before becoming a CIO. He began to produce a monthly market commentary in 1993, and started blogging in 2007. His daily blog is called the Global Market Update and he produces a one-minute podcast and radio spot that accompanies it. He has been married for 35 years, has six children whom he and his wife have homeschooled, and is active in church and outdoor activities. He currently lives in Hanover, New Hampshire, with his wife, their youngest son (about to enter college), and his mother-in-law.   “The government can take anything away. They’re not predictable. You may think you have a way of predict them but they’re not.” Douglas Tengdin   Support our sponsor   Today’s episode is sponsored by the Women Building Wealth membership group, the complete proven step-by-step course to guide women from novice to competent investor. To learn more, visit: WomenBuildingWealth.net.     Worst investment ever Douglas says his story was not as much a terrible investment as it was memorable. It was 1988 and he was in his late 20s and a bond trader for a mid-sized US bank. He sat on a desk with other bond traders, and bought and sold United States Treasury securities during trading day hoping to speculate on price movements, which are relatively random on any particular day. He had built a lot of financial models, without all the great software we have today, just Lotus 123 spreadsheets, but he had created a lot of them, and they have macros built into them and macros that built other macros, and they were continually processing the price activity, looking for clues. Built models used to help his bank trade in treasuries He had had considerable success with these models and had been hired to help manage the bank’s Treasury department. He was then invited to do the same thing for the traders and so he started doing that and making predictions. Then his leaders suggested he put a “paper portfolio” together to see what he could do, so he used his models and put the paper portfolio to work, with some success. Bank puts him trading real funds and he makes early wins Then they put him to work trading live funds (real money). He was invested in two- and five-year treasuries. He would buy and sell those securities, going short or going long, but he would always be ahead by trading day’s end. Suddenly, Greenspan’s Fed raises discount rate He remembers the day well. It was August 1988. The market had recovered from the 1987 crash, and the economy was moving along. There was speculation about the future of oil prices, which had crashed in 1986 and they were starting to climb out. There were of course doing okay. But there were always “squiggles and giggles”, always turnarounds. So he had purchased the four-year Treasury bond, had watched the price move up and it was close to his return target, when the Dow Jones newsprint machine sounded three “dings”, which meant there was a news item. Immediately following that alert, the machine dinged twice, which meant the US Fed has raised its discount rate. Modest profit in four-year Treasuries turns to big loss Alan Greenspan was new to the Fed, and at the time the central bank was engaged in a policy of “creative obfuscation”. So he had been chairman for a year looking at the economic landscape and instead of adjusting monetary policy through the Fed funds rate, or through the money supply, which was what they were doing at the time, they occasionally changed the discount rate. That was a surprise. And his modest profit in the four-year Treasury turned into a more than modest loss. He recalls seeing that happen and thinking: “How can they do this? Don’t they know that I’ve got a financial model that’s working and it’s working really well.” Besides that, it was the first part of the month and he yet to have his monthly profit and loss statement made. “And my modest profit in the four-year Treasury turned into a more than modest loss. And I remember seeing that happen and thinking, ‘How can they do this? Don’t they know that I’ve got a financial model that’s working and it’s working really well.” Douglas Tengdin   Trader has severe instant emotional response Mind racing, brick in the stomach, wind sucked out of his lungs, numbness in his limbs. All the issues at hand flashed through his mind. The thought of being in the hole despite his risk-controlled position in four-year Treasuries to the tune of US$4 million made him feel like a brick had fallen to the pit of his stomach, the wind was sucked out of his lungs, and he felt number in his limbs. All this and it could have been worse. He had not lost someone’s retirement savings, he hadn’t risked his institution’s capital, it was not a massive loss. But it was a very memorable moment. Despite all planning, the news, especially government action, can destroy you What was striking to Douglas was that despite all kinds of planning, all kinds of models, all kinds of fancy algorithms to understand what was happening, the news can and did hijack him and it can happen immediately. This applies particularly to the government, which has unquestionably a massive responsibility regarding monetary policy, financial policy and fiscal policy. They play a huge role with every modern economy. The government can change what it is doing and announce a change, and that announcement can have massive and instant effects on your financial position. Position closed but colleagues cheered him saying ‘it’s early in the month, you can make it back’ Douglas closed the position right away and watched it. If he had the insight and experience to reverse it, he would probably ended up positive on the day. But someone told him once that “your first loss is your best loss”. He simply looked at the market to try and understand what the next dynamics were. The next dynamics were going to be price down, which followed through that day. The next day, he took a short position and started earning his way out of the hole that he had made. Some of his friends in the market said: “At least it’s early in the month, Doug, and you’ll have a chance to make it back for your monthly book. And they were right.” “Someone told me once that your first loss is your best loss.” Douglas Tengdin   Some lessons The government can take anything away It is not predictable and you may think you have a way to predict it, but you can’t. Size matters Douglas’ position size was manageable, and he hadn’t taken an outsized position and for that reason he was able to earn it back. We don’t know the future We invest based on forecasts, but we have to be humble about those forecasts and remind ourselves continually that we don’t know the future. If you think this will never happen again, get out of investing As the disclaimers say: “All investment carries risk.” As Douglas said: earlier, we simply don't know the future, there's all kinds of things that can happen.   Andrew’s takeaways That’s the way investing goes One thing an investor can say ask themselves is “how can I structure my next investments so I will not be exposed and this will never happen again”. The answer to that is such a structure would cost so much in costs or possibility of return that it would never make sense. So sometimes, you just have to be prepared for these types of losses. Sizing your position is protection again major <a href=...