The Cuban Missile Crisis Trade (or How to Strategically Play to Win)

In a former life, I spent time working for Threadneedle Asset Management in London.

As part of my role at Threadneedle, I worked closely with one of their Global Currency Hedge Funds – supporting their fund managers with data and analytics.

It was the Summer of 2008 – oil and commodities were growing to levels never seen before, inflation was rampant, and the general economy was straining under the costs.  The airline industry was preparing for a wave of bankruptcies, the US-based automakers couldn’t sell any cars, and consumer spending was way down due to inflation and the cost of living increases.

Every morning in the all hands meeting – the main question was: “What do you do when the market’s out of control?”

I remember very vividly having a beer with my mentor on a warm Friday afternoon outside in the City of London – asking questions to try and understand how to think about how to invest when everyone believes the world is going to end.

He took a sip of his beer and told me a story that his first boss had told him about a trader and his protege during the Cuban Missile Crisis.

From history, for 13 days we lived in fear of the being bombed by the Soviets from their base in Cuba.  It slowed the market and prices were irrational as no one really knew what was going to happen.

As the story goes, the young protege went to the trader and asked what he should do if the country was attacked.

The old trader looked over and told his young trader protege:

“Buy as much as you can.  If we’re attacked, prices are going to go into a freefall due to fear in the market and is going to create an opportunity to buy in at a discount before prices come back up.”

The young protege thought for a second, still confused and followed-up: “But what if we’re hit or something goes wrong?”

The older trader looked over again and followed up:

“If we are hit and things do go wrong – it won’t matter anyway and you’ll have much bigger problems to worry about than your last trade.”

A few months after I left the firm, Lehman & Bear Stearns collapsed and everyone believed the world was coming to an end. I ended up at a lunch with my mentor and asked him what his strategy was for the next six months.

He just smiled at me and said “Buying.”

It’s a lesson thats stuck with me ever since.

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adam

I work for True Ventures, an early-stage venture capital fund with offices in San Francisco and Palo Alto. We partner with promising entrepreneurs at the earliest stages in the technology market providing hands-on management support to guide our portfolio companies through the challenges of early growth.

  • From a personal finance perspective, individuals should not fall victim to neglecting Cash. Despite low returns, the Cash permits buying when everyone else is scared allowing those dollars to more than makeup for periods of stagnancy.

    Also, never, ever neglect family and friends.