Lessons Learned in a Tulsa Steakhouse
In the spring of 1995, no one knew what the internet was, the Netscape IPO was still months away and I wasn’t planning on a career in media.
Nevertheless, it was then that I learned precious lessons that have sustained me through a career that has spanned booms and busts, various countries and multiple media platforms.
Some of the most valuable lessons I learned one night in a steakhouse in Tulsa, Oklahoma.
At the time I was working in finance, on a natural gas trading desk. I had no idea about GRP’s or CTR’s or anything of the like. I was trying to learn the intricacies of basis swaps, options and the Black-Scholes pricing model.
Even more importantly, I was trying to get clients to trust me enough to do their multi-million dollar trades through me and not some other broker. I got lucky one day when a prospective client I had been calling found out that I had been a competitive wrestler. (Oklahoma, besides being rich in hydrocarbons is a fanatical wrestling state).
Trades started to come my way and on the strength of that (certainly not my trading ability), I was off on my first business trip with my boss to Tulsa, Oklahoma. It was there that I heard a tale that has shaped my outlook ever since.
The Gas Trader’s Story
We met at a steakhouse that was popular with the oil and gas crowd, where I was introduced for the first time to the concept of a “quadruple” cocktail (good training for my future Eastern European adventures). As we settled in to our drinks and enormous slabs of beef, the trader told us his story.
Apparently he had been in oil and gas since he was a teenager. He started first in the fields and eventually worked his way up to trading “physical gas.” A little more than a year before I arrived, the NYMEX exchange started trading financial “paper” gas contracts. Tulsa soon became inundated with traders from New York offering big money for long term deals.
My client was ecstatic and determined to “show those New York boys a thing or two.” He took all the business that he could get that winter and “lived like a pig in slop all spring.” Unfortunately, “then came the fall” and he was nearly wiped out.
What Had Happened
The New York traders were not speculating on the price of gas,as my newfound friend had assumed. In fact, they weren’t betting at all. They noticed a discrepancy in pricing and took advantage of it.
They had found that they could buy separate months of the year cheaper than the entire year. It was arbitrage, plain and simple. There was no risk involved.
Of course, my Oklahoma friend didn’t know that. He thought he was taking advantage of some naive city slickers with fancy suits and slide rules. He was sure that his greater experience and gut instinct would win the day. After all, he had grown up in the business, lived it, loved it. He practically had gas in his veins.
In his own words, “We thought we were gonna show those New York boys a thing or two, but they showed us instead. They just gave us a shellackin’!” (Shellakin’ is Oklahoma-speak for a beating).
Instinct is an Illusion: My friend’s years of built-up experience actually hurt him rather than helped him. He thought he understood the situation because it looked familiar. However, he was dealing with something wholly different than his previous involvement led him to assume.
The new, paper market allowed for a much more efficient and transparent informational environment. The New York traders weren’t betting against him, or anyone else. Their profit was locked in as soon as the trade was completed.
I later studied some neurology and discovered what we experience as “gut instinct” is really the effect of synapses in our brain being built up over time. These learned responses can be quite useful because they allow us to act quickly in situations with which we are familiar.
The amygdala region in our brain alerts us to danger when our experience is violated, but when something seems familiar, we feel comfortable, calm and confident. When the facts on the ground change, these same instincts can prove fatal. Knowing this beforehand was especially valuable as my work took me from one country to another.
Be Data Driven: There is no substitute for good data and hard analysis. Data allows us to test what our gut instinct is telling us and see if there are facts to support it. Even more importantly, it allows us to experiment with counter-propositions and see if a strong case can be made for the opposite of our presumption.
Over the years, I have found that whenever I really analyze the facts well, there is something that doesn’t fit my mental picture. Almost always, this out of place data alerts me to something very important and I can make adjustments.
Arbitrage Pricing: As I learned on the trading desk, if you want to know the value of something, you need to “do the arb.” Many markets are inefficient. You can find price discrepancies and profit from them just like the New York Traders.
Usually, there is more than one way to buy something, either directly or by way of substitute goods. Having some trading experience under my belt has been an asset for me as both a buyer and a seller.
Healthy Skepticism: Whenever someone in an expensive suit tells me that they want to make me a lot of money, I hold on to my wallet!
That night in a steakhouse in Tulsa, I not only learned how to drink “quadruples,” but gained some important lessons offered by a few wizened old oil and gas men from the plains who had the generosity to share their wisdom with one more trader from New York (albeit with a less expensive suit).