Daniel Lacalle
Life in the Financial Markets
This edition first published 2015
© 2015 John Wiley & Sons, Ltd
Translated and updated from the Spanish edition Nosotros, Los Mercados published in 2013 by Ediciones Deusto, an imprint of Centro de Libros Papf, S.L.U.
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ISBN 978-1-118-91487-8 (hbk) ISBN 978-1-118-91496-0 (ebk)
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To my sons, Jaime, Daniel and Pablo, who are my pride and joy and the best thing that ever happened to me.
To Patricia, my love.
To my parents, Ángela and José Daniel, who raised me to think independently.
To my grandfather, who taught me to believe in myself.
Preface
In this book, I begin by trying to show the human side of the markets and the day-to-day joys and difficulties that they produce. Then I offer my general take on the economy and its crises and, lastly, provide a technical analysis of investing in the stock market based on my experiences as an investor.
It has been an immense pleasure for me to draw together several years of ideas, observations and analysis in a work that I hope the reader will find enlightening and to their liking.
By the time you have finished reading this book, the financial environment will have completely changed, the economy will be continuing to evolve and, with any luck, we will have the opportunity to continue learning something new. Remember that crisis is opportunity – as long as you also have a fair bit of luck.
The opinions expressed in this book are personal, and do not in any way reflect the opinion or philosophy of the company for which Daniel Lacalle works or its investments, nor do they constitute a buy or sell recommendation. The people described are composite characters composed of real and fictional people. Likewise, the companies and investment funds described are fictionalised and based on elements taken from a range of organisations.
Acknowledgements
Special thanks to:
Antonio González-Adalid, Emilio Ontiveros, Ken Griffin and Bernard Lambilliotte for everything I have learnt from them.
Roger Domingo, my editor Thomas Hyrkiel, Wiley, and Ediciones Deusto (Grupo Planeta), for their support.
Lorenzo Gianninoni, my first reader, for his invaluable feedback.
Part I
The financial markets: Who they are, what they are, how they work
Chapter One
“Thinking against the box”
We'd be delighted to make you an offer.
Liverpool Street, London, winter of 2005. They called me on a Thursday morning at my desk in an investment bank: “Daniel, I've spoken to my associates, and they'd like you to come over to meet them and have a chat with some of the team.” The voice at the other end of the line was Toby, a client and friend who was managing $1 billion for one of the world's biggest hedge funds.1
“Of course, no problem,” I replied, both intrigued and excited. “When?”
“You have a reservation on the eight o'clock flight. So you'll arrive here tomorrow morning and you can make the most of the day,” Toby said. “We'll grab something to eat if you have enough time. Good luck.”
“If I have enough time?” I wondered. What does he mean by that? “Good luck?” Well…
I told my wife, gave the bank an excuse for taking the day off on the Friday, packed my bag and headed for Heathrow.
The flight wasn't bad. I'm lucky enough to be able to sleep anywhere, and I wasn't expecting too much from the interviews, so I watched an inflight movie called Lord of War, by Andrew Niccol and starring Nicolas Cage. I read a bit of Steven Levitt's Freakonomics. And I went to sleep.
A car was waiting at the airport to take me to the offices.
The building was impressive. A huge glass tower, in which the investment fund occupied four floors: one allotted to meeting rooms; another to the operations departments, otherwise known as the “back office”, where the accounting, legal, human resources and other services were located; and two floors for the managers, analysts and traders. No hierarchies, no committees, no eternal meetings. Almost 1,500 people to manage tens of billions of dollars, and one boss: the owner.
The founder of this investment fund was one of the few people I would dare call a genius. Like other renowned managers of large hedge funds, he was known for his passion for mathematics and rigorous analysis, and his tendency to question established dogmas. He could absorb information like no one else, and he listened to everyone. His weapons were his obsession with work, and being alert 24 hours a day. And when something led him to make a mistake, he would get back on his feet, learn and become stronger. He began in the nineties while at university, with a little money loaned to him by his relatives. Instead of devoting himself to the big stock market party of those years, he went from bank to bank trying desperately to open short positions – that is, to borrow a high-price share in order to sell it and return it at a lower price if stock prices fall (also known as short selling).
At that