My Old School

Article by 
Roger Farley
Asked to address the students at my old school, my perhaps misguided advice to today’s students on such important topics as how to Ace the Interview, Get Straight A’s, SpecializeAcademically, and Be Competitive.
Published 
February 18, 2021
I

readily recall the only job interview anyone has requested me to sit in on and simply observe. My first boss at the Chicago Board of Trade suggested it because he thought the person being interviewed might be a friend of mine. I explained I had never met Denis, but had talked to him as the result of an introduction from my former professor, Steve Hanke, and had pointed him towards a job opening we had in NYC.

There was an urgent need to hire someone there for the bond basis brokerage desk. This was the same group whose insights eventually led to this book:

The Treasury Bond Basis book cover

Which had my enthusiastic endorsement:

Endorsement blurb from the back of The Treasury Bond Basis book

However, all of that happened years later, and deserves its own separate story.

So there it is, I’m sitting in on the interview between Denis and Bob, and the questions are mostly about background, interests, and academic record. Bob glances down at his interview papers, shoots me a quick look, and asks Denis something along the lines of:

So, you seem to be a fairly bright guy, but this job is about attention to detail, and your academic record seems a bit underperforming. What is it about all of these B’s?

Denis replied, you know what, that is a very fair question. It’s not that I couldn’t get an A, but I quickly realized that more important than getting a full understanding of the material was to be able to perform well under pressure. And so even with a class that I knew, if I worked, I’d get an A, I would deliberately wait…

After describing his approach to cramming, Denis then said Some of those B’s and B+’s and even an 80-minus, which you’re not asking about, are some of the things I am most proud of.

My boss couldn’t hold it in, and we both burst out laughing.  

Denis got the job. He performed spectacularly well, so much so that he caused a mini-crisis at bonus time when the CEO realized how much he had earned. Denis might be the first to attribute his initial success to the groundbreaking work that group had already done in basis trading. It’s a fair point. 

I’m going to ask him tomorrow. Professor Steve Hanke has invited me to address his Applied Economics and Finance students at The Johns Hopkins University. It turns out that Denis is assisting him. We’re going to close the circle on that and a half-dozen other stories. Denis and I became good friends. We don’t see each other much, and we’ve only had a few conversations in the last decade, but you tell me whether or not we are tight friends:

  • Five years into my career, my firm interviewed Denis, but delayed so long in making an offer that he turned it down. I was charged with calling him regularly to see what we could do to change his mind. He would just start laughing when he knew it was me on the other end of the line.
  • A year after that, I was in London, and Denis was in Amsterdam. We were both trading the German options and basis markets, and he was extending into the Dutch market while I was doing the same with the French and Spanish markets. He helped me out a lot by teaching me some heuristics he applied to volatility pricing and trading. 
  • When I was hired elsewhere to launch a proprietary trading group, my first attempted hire was Denis. His reasons for turning me down later proved themselves to be the central cause of the under-resourcing of that project. Insightful as always. 
  • When it came time for me to give up on that initiative, Denis offered me a great job. It represented a perfect match of all that we knew about each other. It confused me—the description sounded very much like an expanded version of his own responsibilities. When I asked him about it, he admitted that he was giving me his job plus a bit extra. That led me to ask him what he was going to do, and he replied I’ll figure something out.

He explained that since I had a wife, a three-year-old, and six-month-old twins, that I needed the job more than he did. 

Who does that?

We don’t live in the same cities, work in the same circles, or have much of an overlap anywhere in our busy lives. But I would walk through a wall for that man. 

Game of Thrones

One of the great things about launching this community is that we are already getting the old gang back together. However, Always Invert is still in its first iteration, and way too much of the focus is going to be on me for a while. You probably understand why I feel that attention is misplaced when people like Denis and Steve are coming aboard.

Which leads me to Professor Steve Hanke

My son told me that his friend thought it was remarkable that my former professor had given Always Invert a shout out on LinkedIn, both for the support and the simple fact that we had stayed in touch and remained friends. I mentioned that to Steve, and he immediately replied:

Roger,
This is what it’s all about.
Steve

Most people know Steve by his professional accomplishments, although they might not be aware of his recent knighthood, in addition to the extraordinary series of research conducted by him at the Institute for Applied Economics, Global Health, and the Study of Business Enterprise. These are among my favorite of the Working Papers:

  • #153: Prof. Dr. Steve Hanke’s Five Part Exclusive Interview with Petia Minkova, Deputy Editor in Chief of 168 Hours
  • #133: “Commodity and Foreign Exchange Trading — Some Notes and High Points” by Steve H. Hanke [PDF]
  • #55: “Remembrances of a Currency Reformer: Some Notes and Sketches from the Field” by Steve H. Hanke [PDF]

That last paper is far and away my favorite. Here is a representative passage, which concerns the period in which Steve assisted Montenegro’s President in formulating an economic strategy for full independence:

In 1999, Montenegro was still part of the Federal Republic of Yugoslavia, along with Serbia. Strongman Slobodan Milosevic was the President of Yugoslavia and had control of the Yugoslav army. On November 2, 1999, President Djukanovic made a daring and decisive move that would set Montenegro on a course towards independence: Montenegro granted the mighty German mark legal tender status. This all but eliminated the hapless Yugoslav dinar from circulation in Montenegro. It also infuriated President Milosevic. Although he refrained from unleashing the Yugoslav army on Montenegro, he was reported to have given serious consideration to the idea.

President Milosevic’s operatives did engage in a great deal of mischief, however. For one thing, I became a marked man. The Yugoslav Information Minister, Goran Matic, produced a steady stream of bizarre stories about my alleged activities. These were disseminated via the Yugoslav state news agency, Tanjug. Among other allegations, I was accused of being the leader of a smuggling ring that was destabilizing the Serbian economy by flooding it with counterfeit Yugoslav dinars.

The most spectacular accusation, however, was that I was a French secret agent who controlled a hit-team code-named "Pauk" ("Spider") and that this five-man team’s mission was to assassinate President Milosevic. In addition to this comedy of the absurd, there was a serious side. I knew this was the case because, although we were kept in the dark about the specific nature of the threat, Mrs. Hanke and I were always supplied with proper security from the President’s office when we traveled to Podgorica—a difficult destination that often required a flight from Zagreb to Dubrovnik, Croatia and then a long, but beautiful, trip through the mountains of Montenegro.

The reference to Dubrovnik, the filming location for King’s Landing in Game of Thrones stuff, is quite fitting. While it was the first, this episode wasn’t the last time he was the target of a state-sponsored assassination attempt. 

Photo by Hans-Jürgen Weinhardt on Unsplash

None of which I knew, of course, on the afternoon of January 18th, 1987, when I used my last semester at JHU to enroll in Economics of Commodity Markets:

Semester schedule outline

Steve, a.k.a. Sir Pauk, a.k.a., Sir Spider—has asked me to illuminate the lessons and path I took from Hopkins to now, and to address the idea behind my newsletter about the power of inversion with Jacobi and Munger and how I apply this in thinking about markets.

One quick aside: there is no possibility that any of his students can even imagine addressing him as anything other than Professor Hanke. Steve is old school, and when I addressed his class several years ago, he very much wanted me to emphasize what I was told on the first morning of the first day of my career. Here is how I explained it:

After I graduated, I went down to the Chicago Board of Trade, got my start down there where I was just simply a clerk. I had a master’s degree from Johns Hopkins. I was told that if I made an error, I was fired. If the error doesn’t lead to a monetary loss, doesn’t matter, I’m fired. If there is an error on the desk or in the pit and I’m a witness to it and I don’t intervene in somebody not reporting that error—I’m fired.

So I said, wait, the best case I can do is fire myself or fire the guy next to me so that all of us don’t get fired? 

Exactly. So I would walk to the train in my old neighborhood—because for fifteen grand a year you’re back living in your parents’ basement, and I would practice my hand signals to no one, speaking aloud, gesturing dramatically, because this is how you count on the trading floor. I had one week to become perfect at it, pass a simulation, or I would be fired. 

Good timing, because by the fifth day, the world had fallen apart in the October 1987 stock market crash. With futures markets frozen and up-or-down-limit trading halts cascading around the world, the bond options pit became the center of the financial universe. The ensuing weeks frequently made the climactic scene of Trading Places look like a walk in the park. 

Philosopher Kings

What would you say to a group of students from your old school, taking the class you used to take, knowing what you know now?

The guitarist Leo Kottke tells the story about how when he was in the Navy, stationed at the old whaling port of New London, he rarely got weekend leave. On Saturday nights, he would trudge to the mess hall for movie night, sit in a metal folding chair, cross his arms, and wonder what kind of garbage or old Elvis movie they’d try to pass off as entertainment that evening.

Many decades later, his agent calls him, full of excitement. It was the middle of winter, and the Navy had reached out with an offer of two free airfares and weekend accommodations for veteran performing artists who would perform for the troops. Kottke’s agent started talking about how the trip would be a good time for the two of them to catch up, and what the weather was like in Hawaii. Leo interrupted him to tell his agent to pack his bags. They were going into the heart of winter.

He gets there, and sets up at the end of the room where the movie screen would have been back in his day. Sitting on small riser, paying attention to getting his rig set up, and just before he starts, he looks out at the small group assembled. He realizes that they looked just like he used to be, wondering what the heck the Navy was going to serve up now.

That’s the way it will be tomorrow. I’ll be honest. I can’t stand listening to people who with a bit of success in one area, suddenly can’t refrain from spouting their wisdom on any and all subjects. Self-appointed philosopher kings. There seems to be a high correlation between expertise in one area and confidence in all others. You wouldn’t think that should be the case.

Organic Chemistry Lab

Thus, I’m going to start with my low point at Johns Hopkins. My third semester, still a teenager, I decided that I would rejoin the swim team for two-a-day practices, take every math, science and computer class under the sun, including lengthy labs, while working at a pace that would let me graduate a year early since the jobs I was working would only fund me long enough to get that far. 

I got crushed:

Semester report card

Note, however, the one lonely A in Organic Chemistry Lab. The course had a brutal reputation. Grades were determined strictly by results, with each week assigned a score based on a complicated sum-product of the quantity and quality of output. A few hours before the first lab, I ran into a friend of mine who had taken the class the previous year. He was in a bit of a rush, but stopped to ask me how I had prepared. 

I told him that I had read the lab instructions and notes, and it seemed straightforward enough, somewhat like reading a recipe, and I’d approach it that way, as if I was cooking something in the kitchen. Which got a big laugh out of him until he saw I was serious. No, really? Uhhh, really? 

He responded to the bewildered look on my face, saying I know you are just kinda kidding, and you’re probably like me, thinking along and questioning steps as you were reading. Wondering why they’re instructing you to do something in a certain way. Right? Anyway, got to go, good luck.

That conversation changed my life. I went back and reread the recipe. I thought of all the places it could go wrong. I took special note of what the lab proctor told us—the penalty for a catastrophic failure of the experiment would be repeating the experiment on a separate date with a 20% penalty applied. When people cringed at that, he off-handedly remarked that it wasn’t as bad as it seemed. People generally improved at least 10% on their second attempt. I took note. 

You might be seeing where I’m going with this—reverse engineer for a successful outcome, invert the problem to figure out how to avoid calamities. For example, if the instructions described flashing the open flame heat source over the test tube, it meant that there was a low boiling point involved. You could look up the compounds in the textbook and see that was the case. Or you could simply pay attention to any anguished yelps coming from the direction of an experiment gone awry to realize that a similar sensitive point was about to happen in your own experiment. 

Of course, everyone did variations on that level of preparation. I went just one step further. I thought about how useful it was of my friend to pushback a bit on my comments. I set out to find the most vital yet unobvious parts of the lab experiment, and then while people were setting up, I would share my insights with a few of them. 

Realizing that I was the only one doing that, I checked in to make sure it was allowed. The old man who ran the lab, and who seemed to have been around forever, said absolutely, that was a perfectly fine thing to do. He also cautioned that no one does it, because you are all competing with each other, but I was free to do whatever I wanted to do as long as I got out of there on time.

That was all I needed to hear. I went to three or four people, told them my insights, and went back to my lab station. The next week, with a bit more time to prepare, I had figured out two separate insights to share with others. That time around people listened a bit more closely because they noticed I had a top score the previous week. I walked around for ten minutes chatting, went back to my station, and started the experiment.

Thirty minutes later, someone came up to me, obviously conflicted about something, and then said, Hey, I’ve got to tell you something. I really appreciated what you shared last week, and I know it made a big difference for both of us. I thought of something that would help you this week, but then I saw you walking around sharing your ideas with people and decided not to share mine with you.

He continued: but then I started feeling guilty, and seeing how it was in the back half of the experiment, I thought I’d wait, but I just have to tell you… He then gave me his insights, and said he felt bad for asking, because I had been generous, but if I would please not share it onwards.

I guess that I gave him a very serious look, because he started to backtrack a bit about how maybe he should be more generous, but I interrupted him because I really wanted to clarify. “That’s your idea, and it is not mine to share. I appreciate you trusting me with it. I never even thought of it going any farther.”

He said he was wondering about that, and I could see he still had some doubts. I explained further:

“Look, if I come up with an original idea, I’ll probably share it—and even that is not a one-way street because I like the questions and pushback I get from discussing these ideas. But what you share with me is not raw material for any of that. The boundary is strict. Your idea is not mine to share.”

Small Group Versus Large Group

The question on my mind today is how do we replicate that trust and those boundaries? How do we use the large group to surface content and resources, while enabling small collections of individuals to work as each other’s sounding boards? Should these groups grow and compound this relationship continuously, or does the nature of discovery require more of an ad hoc formation? Since I believe it to be a lot of both, how would that even begin to work?

How much trust is required within a community or group before people commit to sharing resources and perspectives? What drives the development of these relationships?

The funny thing is that I’m asking these questions while knowing at the outset that Always Invert is going to fail in dramatically more ways and places than it will succeed. The ratio is going to be really ugly. That is going to be so much fun. You know, in the way that we love to watch crazy wipeouts—as long as nobody gets hurt. And in the way the younger generation seems to revel in sharing bad selfies of themselves—as long as there is a disappearing option. 

Tomorrow, I want to immediately initiate the Q&A. There is a lot we can learn from each other’s questions.

In the meantime, I hope those students get the chance to reverse engineer some of these episodes and examine the outcomes that so influenced my life. These are such important topics for university students and I hope that they have gotten some insights on how to Ace the Interview, Get Straight A’s, Specialize Academically, and Be Competitive. We will have a lot of fun reviewing those lessons and more at my old school.   

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