Ep671: Igor Yelnik – Think About Non-Market Risks

Andrew Stotz 00:01
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win an investing you must take risk but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives to join me go to my worst investment ever.com and sign up for my free weekly become a better investor newsletter where I share how to reduce risk and create grow and protect your wealth. Fellow risk takers this is your worst podcast hosts Andrew Stotz, from a Stotz Academy, and I'm here with featured guest, Igor Yelnik. Igor, are you ready to join the mission?

Igor Yelnik 00:40
Yes, I am. Hello, Andrew. Thanks. Thanks very much for having me.

Andrew Stotz 00:44
Yeah, I'm excited to bring you to my audience. And you know, you have a distinguished background, I want to just introduce you to the audience. Igor Yelnik founded.

Igor Yelnik 00:56
Oh, how do I say that owl offered us capital,

Andrew Stotz 00:59
finance capital in 2020, and holds the position of CEO and CIO. Alvin fence is a systematic macro hedge fund management firm based in London. Previously, Igor was the CIO for at GE Capital Management from 2013 to 2019. Prior to that, he spent nine years at IBM informed portfolio management, where he was a partner and head of portfolio management and research before this eagle, con co founded St. Petersburg capital, an asset management firm that specialized in the Russian securities market, and later universe uni base invest a Managed futures business based in Tel Aviv, so eager to take a moment and tell us about the unique value that you are bringing to this wonderful world.

Igor Yelnik 01:49
Well, I think that the thing which I'm doing is reasonably unique, we are in a strategy investment strategy, which is called systematic MACRA. And there are many systematic macro firms. However, we believe that the investment approach that we are using is relatively unique because we are using fundamental macroeconomic indicators to forecast asset returns. So you can think about it as macro quantified. So we're thinking about things which a discretionary macro manager would think about, but they would take their decision decisions on a discretionary basis. And we try to quantify them to build models out of those macroeconomic indicators and trade based on those models.

Andrew Stotz 02:39
were you when you started off in the business many years ago, were you already really models based, or were you doing in different way, and then you came to appreciate the value of models?

Igor Yelnik 02:52
No, when we started, it was very early days of the securities markets in Russia, because I'm originally from St. Petersburg, Russia, which is a beautiful city. But it was a really, very, very early days, Berlin Wall had just fallen, the Soviet Union lost the Cold War, and the securities market had just appeared. And we were one of the first firms in Russia to do that. And in those days, we didn't even hear about quantitative management. So everything we did was discretionary. And we started with discretion with fundamental analysis of companies and traded their stocks based on our discretionary views. And this was really valuable experience, which helped me a lot to form a systematic manager later on in my career.

Andrew Stotz 03:53
And when you say discretionary views, I guess what you're talking about is that you're forming opinions about something and saying, I liked the management of this company, or I like the way things are going or I think earnings are gonna rise or I like this particular market because of that, as opposed to a quantitative way of saying is that I'm neutral on this show me out of the quant. What is, you know, the way to go with this? How would you describe that?

Igor Yelnik 04:21
Yeah, I think you're right. In discretionary management, when you trade, single names, single line companies, you don't trade indices, you form an opinion about how this particular company is going to develop, or whether they're going to take on new markets, whether they're going to lose some markets. You think about whether this development is already reflected in price because you are not alone in the market. There are a lot of smart people around you and they say exactly the same things as you do, and maybe more. And you should always assume this You are not the smartest guy on the market. And some people have access to inside information, especially in the, you know, wild days of Russia or the 90s. So it was you analyze you make your forecasts, you control your risks. And you made you make your decisions based on that. And on top of that, we used to trade the Russian ruble. And we also used to trade Russian bonds, those infamous JIKI. Ours, which are short term bonds, all the way to Russia defaulted in nature. Ah,

Andrew Stotz 05:39
hmm. Yeah, remember that I was in Thailand in 1997 crisis, where the Thai currency fell by about 60% in 1997. And then 1998, we had what the default that happened in Russia, I remember was, but it didn't seem to shake the rest of the world at that point. But I think it had an impact. Certainly in Asia, we had a big impact from that crisis. So

Igor Yelnik 06:05
Well, I would probably disagree with you regarding shaking the world. And actually, whether we think about it, what happened in that time, was the Asian crisis in October 1997, I think I remember very well sitting in a hotel room and watching the US market, when things had just evolved in Asia. And I was sitting there just glued to the TV screen and watching. Watching Dora Jones falling, like, every minute, like there was no way, no way up. And then Clinton spoke something trying to sue the markets. And it was incredible. And I think this was the beginning of the Russian crisis. Because the oil prices started to go down. And this was a very significant pressure on the currency, and also on the equity market. And then when, when Russia defaulted, just three weeks later, we had the LTCM crisis. And you know, this, when people speak about the 98 crisis, people speak about it as the LTCM crisis, or as the Russia slash LTCM crisis. But LTCM followed directly from Russia, credit spreads, spreads, widened, and here we go. 16 come our mood just, you know, fails.

Andrew Stotz 07:50
You know, it's interesting to think about what's happening in the world these days, when I look at the risks that are appearing in the banking industry, you know, the Fed moved up interest rates so aggressively that it just seems like something's gonna break, and things are starting to break. And when you think about what happened in Asia, when we went into a recession, if the US goes into recession, then you know, the whole world gets impacted by that. I'm just curious, what are your from a macro perspective? How are you looking at the world today? Let's say we're recording this on March 16 2023? What's your outlook for the next I don't know, six months or three months or 12 months, or whatever it is that you look at?

Igor Yelnik 08:35
I think that the current crisis started in 2008. And the way central banks extinguished the fire in 2008, was injecting mega tons of liquidity into the market and keeping the interest rates at incredibly low levels. A couple of years ago, you would pay for the privilege to hold, let's say, German bonds for the next 50 years, which is incredible, right? This had never happened before in human history. And this was a situation where this was the environment where the assets were mispriced because the money was mispriced. And at some point, sooner or later, this had to surface and it surfaced. Now, of course, with high inflation. It was unclear when exactly it was about to go up. But it was very clear that it would go up. And you're saying that the central banks have been very aggressive and hiking interest rates. To be honest, I thought that they could probably do it a little bit earlier and a little bit more aggressively. But eventually it means that the bonds which seats on banks balance sheets and which are not marked to market. For some peculiar reason, I still don't understand when liquid assets are not marked to market. So this created a liquidity gap. Like if you have a bond, which matures in 50 years, which sits in your portfolio at par value. And you can't sell it at par value today, then, obviously, it's a problem. So, what's going to happen? In my opinion, it very well may be wrong about it. But I don't think that central banks are going to let any significant bank fail one way or another. Banks will be bailed out. Whatever the governments and central banks say, eventually it comes out of the taxpayers money. Even if the mechanism, the direct mechanism does not is not based on taking money immediately out of the state coffers. So this means more liquidity, this means more inflation. And I don't think that we are going to see inflation going down to 2%. Even next year, I can't see how this can happen. I think first we're going to see high inflation in Japan. And this is one of the countries where the mispricing has been tremendous. I mean, it's just out of the ordinary, the Bank of Japan owes more than 50% of all Japanese government bonds, which is sort of not normal. This is the government financed by the Central Bank, which means by money taken out of thin air. And one way or another, it will show up, it will somehow percolate into the real economy. And I don't think it's going to be in or turned up well, they are going to see like a major crisis. I don't know because a way out of each big crisis is injecting liquidity in the market. And if you're a government, then what is worse for you collapse of several major banks collapse or the whole banking system or a 10% inflation. Of course, it's 10% inflation. So

Andrew Stotz 12:51
lose your job immediately if everything collapses, because somebody will say you should do something.

Igor Yelnik 12:57
Yeah, exactly. Exactly. So the question is whether the they will be able to take timely actions and move the problem from sort of one shape where you have a crisis into another shape, where you have runaway inflation.

Andrew Stotz 13:20
It's funny, because when I grew up, Russia was us, USSR, and it was communist. And China was communist. And so when I thought about those countries, that's what I thought, I thought, okay, we're capitalists. And then I went to China, I haven't yet been to Russia, and I look forward someday to going there. I've been wanting to go for a while. But when I went to China, I was like, Oh, my God, they are deploying the weapon or the tool of capitalism here to develop their economy. And I just thought, in fact, China has become more capitalist, while America has become less capitalist. And I just wonder, when we look at like a macro type of trader or investor like you, how do you? How do you handle that? Because you have, like the typical rules of macro, that are then influenced by then you've got to predict central bank behavior. I remember when I started out 30 years ago, we didn't really try to predict central bank behavior so much. And I'm just curious, how can you do systematic when you're also trying to really think about, okay, could the Fed intervene here? Or in this case, let's just say we start to get some bank collapses. And then what happens is that the market starts tanking, we go into recession, all of a sudden, the Fed reverses, and they go back down to 0% interest rates. How do you handle that from a macro perspective?

Igor Yelnik 14:45
Well, I think that the first thing which you do as a systematic manager, you decide what you can model or what you can't model. And there are certain things we can't model. We can't model earthquake Next, we can't model wars. And when they happen, it's more or less a toss of a coin. For us, we may make money or lose money, on average, on such unpredictable unmodifiable events, let's assume that our result is 5050, but you take it as noise. Now, central banks, central banks is a slightly different story, because part of the decisions, which are made by central banks are irrational. They are actually very smart people. Of course, they have their own agenda. And they will always protect their backs. But they are rational people, and they have a mandate. So, in many cases, what central banks do, is dictated to them by the state of the economy. And this is modifiable, at least to a certain degree. But in general, I think what we recognize is that, we try to find a precise a weak signal in a very noisy environment. And the best you can hope for is that you have a collection of independent or at least uncorrelated weak signals, which, when you combine them into a portfolio, are going to give you positive investment returns, it doesn't mean that you're always going to be positive that there will be winning, winning periods of time and losing periods of time. But basically, you just know your limits. It's a collection of weak predictors, which you put together. I don't have a crystal ball, I have no idea what is going to happen tomorrow. I don't know what is going to happen in the next hour. But I know that over time, this collection of weak signals put together is hopefully going to work.

Andrew Stotz 17:10
That's a great way of putting it weak signals. Because you know, it's just, it's just impossible to ever find a super strong signal in the market, because everybody's going to trade that away. And it's a combination of weak signals, which I think is a really great way. And we know that those signals can change and sometimes lose their effectiveness. How often do you like, rethink about your structure or your model? Is that something that you're doing every day or every week? Or is that something you do once a year?

Igor Yelnik 17:41
Well, I think about my model all the time. This is the process, which never stops. However, I did not reshuffle my model all the time, it's very stable. And when I put things into the model, I do not try to time them, I try to put things into the model, because I believe they are going to be good predictors. In the next I don't know, 510 years, whatever. They're just good predictors. And one, so, as I said, the model is very stable, and we remove components from our model. There, rarely, we add more than we remove. And the reason for it is that if you have those a week predictors, you need to spend a lot of time making sure that they have stopped working. If you have a very strong or you believe that you have a very strong investment strategy, or a very strong predictor, and for some period of time, let's say for a year or two, it didn't perform in line with your expectations. Yeah, sure. You can just remove it. When you trade high frequency. Sometimes it may, it may be enough to have like three months of experience to say no, this thing doesn't doesn't work anymore. In our world, we trade very slowly. And one or two years is not going to give you enough information about the performance of your individual predictors. You may look at it you may think, okay, it's not working. Should I remove it? And then you give it the benefit of the doubt and you wait for another year and all of a sudden this factor becomes the best strategy.

Andrew Stotz 19:50
Yeah. That's, I have a stock selection model I've developed over the last 15 years and in one perfect to the market, it underperformed, or let's say neutral perform for about three years. And given that I'm a bit lazy, I just just kept going with it and just kept following it. And then in year four, it took off. And it was like, and I always worried when I was in the middle of it, that if I start fiddling with the mark with the model, I'm going to create a new model that attempts to outperform in a flat market, which we were in a flat market, there wasn't really any strong momentum. And then if I then modified the model to try to get it to outperform in a flat market, then when the market started to rise again, I'm now going to have a model that does not outperform in a rising market. And that's why I felt like I just stick with it. You know, I made some small changes, but I stuck with it. And in the long run, it ended up working. Of course, your clients aren't always that patient. They're not, but I have to be. Yeah. That's the point. Because they're not and other people aren't. And I think that's one of the big values that someone like yourself brings is the focus on the model, the stability of the model and sticking with the model. So yeah, that's that makes sense. And one last question I have for you, before we get to the big question is, what's your prediction about where this whole thing ends with what's going on with Russia, Ukraine, us? I mean, it's sometimes I get pretty darn scared. And I haven't lived in the US for 30 years. So I have a very different view upon it than a lot of my American friends. But I'm just curious, like, what, where do you think this is gonna go?

Igor Yelnik 21:42
Well, first of all, I hope that it will end sooner rather than later. Because the most important thing about this conflict is that people die every day. And this is what I absolutely hate about. So to me, this one, it's, it ends, the better. Speaking about it, from purely sort of sort of investment perspective, trying to understand how the integration or this conflict is going to pan out in the securities market, in the financial markets, I think that the markets won't pay much attention to how exactly this conflict ends, the important thing will be that it will end. And this will be a positive forum for the market as a whole, it will be most likely, much more positive for Europe than for the US. Because Europe has lost a lot because of this war. And nobody really knows how things are going to develop. I don't think Putin knows, I don't think that Biden knows. I don't think Zielinski knows. And I think a lot of decisions are made on the fly. Yeah, basically, as we get, and I think that Russia will remain isolated for a long period of time, which is very bad for the country. Sanctions are going to stay for a long time. Maybe some of them were relaxed, a little. But in general, sanctions do not relax very quickly. This is what we know from history. I think that the union with cooperation or whatever you call us with China is becoming like paramount for Russia, it's hugely important, it has never been as important in the past. I think that this whole thing may be quite problematic for the dollar as the global reserve currency, because eventually any currency is just you know, any currency is based on trust. And if people cannot trust that they can freely be in US dollars, for whatever reason, for example, because they oppose the US politics or policy or the wage the war, even they wage the war and Okay, now you can't pay using your money. I think that this issue of trust, is becoming quite significant. And it's not very easy. It's not going to happen overnight, or even five or 10 years. But I think that people will take note of what has happened. Russia is not going to be a winner in this conflict long term, regardless of how much territory they gain in Ukraine, Ukraine is going to be a winner in this conflict, because they have lost so many people, and it's not unlikely that they will have to see the part of their territory, then. So I think that the US elections next year, are going to have a very significant impact on when and how this conflict ends. Because we all know that Ukraine needs help from the US and from Western countries. And if the time when this is held, stops, it will be very problematic for Ukraine to continue. So there are a lot of things which are here, at interplay, and as I said, nobody knows exactly how and when this conflict is going to end. And to me, the most significant thing is to have it finished as soon as possible. Yep. Yep.

Andrew Stotz 26:40
And I think, you know, the fact is, my view is if the US being the strongest power in the world, has the ability to commence talks immediately. And, you know, the US could do that. And I feel sad that the US is not doing them. And so, ultimately, that's something that I wish to see, I think, one I went out to my clients about a year ago, I told them that we are in World War 2.5. And it just finished. And it was America against and I always asked my clients to guess who was America fighting? And they say, Russia, China? And I say, No, they were fighting Europe. Yep. And my argument is that the long game for the US is there on a warpath for China, in order, and the world is not going along with it, the global south is not going along with that. India is not going along with that, and many other nations don't want to see that. And in order for America to be successful in that war, they've got to make sure that Europe is on their side and not connected to China. And I would say that the US has capitalized on the situation in Ukraine, to make sure that Europe is subservient to America's desires. Now, it's very hard now to break free from America militarily, politically, economically, you know, you know, for sources of energy and all that. And my prediction, is that World War Three is China, in us in Africa.

Igor Yelnik 28:29
Well, Africa, certainly very recent resources, I'm not sure about the actual military conflict between the US and China. One thing which is absolutely clear, and you have just said is that the US is a winner in this conflict. Because geopolitically, they now have Europe, at the, at the knees and losing a lot of industrial power to the US. So the US is a clear winner. Turkey is a clear winner of the situation because a lot of goods traffic has been rejected by Turkey. Some former Soviet republics, like Armenia or Georgia or Kazakhstan could be clear winners, because a lot of the competent Russian people, competent professionals moved there. And they are basically building their IT industry is now using Russian programmers. And so there are a lot of unintended consequences from a geopolitical perspective, if you think about it, China, Russia and Europe are the same continent. And the US is a little bit you know, far away. So Just imagine the union of China, Russia and Europe, it would be a major force. So the US did have a geopolitical reason to do what they did. So if you leave aside any moral considerations, think about what's the next 100 years, then there might be some, you know, some use in what we have done here. Well,

Andrew Stotz 30:34
I took that extra long time to talk with you for the intro because of your excellent experience and knowledge as well, as you know, you've got a clear view, I would say on what's going on having, you know, come from different backgrounds and lived in different places that I think give you a perspective. So I appreciate you sharing some of your knowledge on that. And now it's time to share your worst investment ever. And since no one goes into their worst investment thing he will be tell us a bit about the circumstances leading up to that and tell us your story.

Igor Yelnik 31:09
Yeah, well, I was thinking about which of my investments to call the worst. And interestingly enough, when I was thinking about them, none of them were investment where I lost money. Not interesting. And I would probably say that the definition of the worst investment is the investment from when from which you learn the most. And because if you don't learn from your bad investments, then you should be doing something else. So, my worst investment in this in these terms wasn't related to the topic, which we discussed in the beginning of this conversation, which is the Russian crisis, though, Asian prices, oil prices go down, stock prices go down, the ruble is going down, I was still working in Russia at that time. And the Russian Central Bank established a cap it was called currency corridor. So they set the ranges for the herbal, but the lower part was not really interesting. The interesting part was how much you know dollar can appreciate against herbal herbal can fall against the dollar. And everybody understood that session macroeconomic environment, ruble was doomed to depreciate, however, there was a promise of the central bank. And the most popular trade of summer 1998 was the currency foreign trade, where Russian banks believed the central bank and bought the ruble. And all the foreign banks played against them, and so durable. And just to explain, maybe not all listeners know how the currency forward market works. Basically, a form of trade is a trade where you promise to buy or to sell a certain amount of in this case, currency at a certain price on a certain day in the future. And if buy on that day, for example, you have sold the currency, and on that day, the currency is really cheaper, then you make money. If the currency has happened to be more expensive than the price you fixed and your contract, you make money. Sorry, you'll lose money, because you've sold it has become more expensive. So you lost money. And so it was like a Russian banks believed that it was a money making machine for them because they had central banks behind them. And all the foreign banks. Were just okay, that's just not going to happen. That's unsustainable. Russia didn't have any currency reserves to think of, to speak of, and I think the foreign reserves were in single billions of dollars, like $2 billion, or $3 billion. And for a country like Russia, to have $2 billion in reserves, it's like for you to have $5 in your pocket. Exactly. held up.

Andrew Stotz 35:01
So in that case, just to explain it to the listeners out there. So here we have Russian banks, believing that the Russian Central Bank will support the currency, but also knowing that the amount of foreign reserves that they had available to support the currency were limited. And the foreign investors were looking at that situation and saying, No, that currency is going to eventually collapse. And I'm going to make a bet. On that collapse. Is that correct?

Igor Yelnik 35:30
Yes. Okay, exactly. And to add to this picture, at that time, the ruble was already trading in Chicago on Chicago Mercantile Exchange. So we had practically two markets. And the foreign price of the ruble on the over the counter market, sort of out of exchange markets in Russia was higher for the ruble than in Chicago. So in principle, you could say sell the ruble in Russia buys in Chicago, and this was like free money. So what we did, we we entered into a forward contract with a Russian bank, under the Russian law. It was one of the biggest Russian banks, it was one of the biggest, it's still one of the biggest. And we sold a very significant amount of the Russian ruble against the US dollar with the delivery on the 15th of September 1998. And this, this trade, I think, was entered into in July or something like this, of 98.

Andrew Stotz 37:07
And then it would have made sense because the Asian crisis happened on July 3, roughly the first week of July, at the end of the second quarter. And then maybe you went into that trade then and then in September, it was coming. Now, when when this trade, was it, you were expecting that the ruble would get stronger or weaker, relative to the dollar,

Igor Yelnik 37:30
weaker, weaker? Yes. So at that time, the price of our trade was, I still remember it's strangely enough. It was six herbal status, seven Kotex for $1. So at that price we sold. So if if ruble was let's say 10 or 15, or whatever, higher than six, digit seven, on the 15th of September, we would have one. Cool. So the seventh, the 17th of August, the beautiful, warm, sunny morning, and 10am just a few minutes before 10am Russian time well, Moscow time. Russia defaults. What Russia did at the time was quite, quite extraordinary. Because Russia defaulted on its debt, denominated in the national currency and rubles, and at the same time, they stop supporting, they're almost so devalued. You don't do such things at the same time, you do either one or another because you can print an unlimited amount of verbal so you could pay your bondholders or you so just one of the two things you don't do the two together and this was a little bit unexpected. But nevertheless, this is what they did. And without okay, how smart we are. It's really great. So genius. Absolute Absolutely. And by the middle of September, herbal goes down to around 16 rubles per dollar. So we want for the

Andrew Stotz 39:28
listeners there. When we say the ruble goes down, you mean the ruble depreciated relative to the US dollar. And when that depreciation happened it went from 6.37 up and it rose in value, which means the depreciation it rose to what

Igor Yelnik 39:44
to around 16 Okay, got it. So, it meant that on every dollar we one terrible's great. Not so fast, because this is not how the The price of the currency is determined for the sake of settling for a contract, there was a special mechanisms and only the Russian banks were allowed to participate in the trading, which led to setting the price. So it was like pre market session on the 15th of September where all the Russian banks could trade. And as I said before, all the Russian banks stood in exactly the same position, they needed a stronger ruble. And guess what, on the 14th of September, we have the robots are on the 16th. And that morning session ends up setting the price of the ruble at 825 and a half, eight to two, five. And then, of course, when the actual trading starts, ruble goes down again. And the price just you know, goes, goes up to around 1516. Again. So the price at which our foreign contract was about to settle? was not a 16. It was a 25. Still very good. Not as

Andrew Stotz 41:22
a eight. Why because it was based upon the pre market or pre opening price set by the Russian banks. Yes. Okay. Yes.

Igor Yelnik 41:31
So, we hear the difference between 637 and a 25. multiplied by the size of the contract, we for one. Okay, so 825 is worse than 16. But still, still, okay. still profitable, still profitable. And then the most interesting part begins. Because we didn't get paid. And then we realized that other Russian banks were not in the mood to pay either. And we thought, okay, what are we doing today?

Andrew Stotz 42:19
And they they weren't paying these types of contracts are specifically you guys, these

Igor Yelnik 42:25
types of these type of contracts? Okay. And here, I think we made we didn't understand what was going to happen. And we decided that, okay, we still have a legal system. And we should just go to court. So we went to court. We won. The appealed. We won. The, there were two levels of courts of appeal in Russia, if at that time, I haven't been doing business in Russia for over 20 years. So I don't know how it works now. But at the time, before you come to the Supreme Court, you have two levels of courts of appeal. So they come to the second level of the Court of Appeal. And that one sends the case to the lowest court again, we won the appeal, we do it to the first level or the Court of Appeal, we win. And at that time, the most interesting thing happens, because at that time, the Supreme Court takes a decision. In the similar case, where one of the major Russian banks was sued by one of the major French banks because of a non payment on a similar contract. And guess what, the Russian Supreme Court decides that a currency forward transaction should not be protected by the law, because it's akin to betting. So betting in Russia is not protected by law and currency forward, which is a very legitimate transaction, which I don't know, probably trillions of dollars, change hands in currency, foreign transactions every day. And at that time, they decided that it was like knitting. And then we decided, Okay, enough is enough. We've been very clearly told what to expect if we continue this recertification. So we just dropped our hands and that was it.

Andrew Stotz 44:37
And were you able to close the position? Or was it all a loss or how did it end as far as the final transactions?

Igor Yelnik 44:44
There was no payment. It ended up in zero payments. We lost legal fees. And it was not a huge amount of money. But basically, it was zero. Nobody paid anyone

Andrew Stotz 45:00
and how long was the legal process?

Igor Yelnik 45:01
It was around a year? I think it was pretty fast in Russia at the time, just just over a year, I would say. And we were lucky, because as I said, ruble was at the same time trading in Chicago. So you could, you could have this arbitrage transaction, where you buy a cheaper ruble in Chicago and sell the more expensive ruble in Russia. And I know people who have done this. And they had massive trades, buying ruble in Chicago and selling it in Russia. And guess what, when you have to legs in such a transaction, in order to actually make money, you need both legs to work. Now, of course, in Chicago, there was an enforcement mechanism. So they had to page Chicago, they had to actually buy the ruble in Chicago. But in Russia, they didn't get paid. They bought this worthless currency, which went from six to 16. In Chicago, and they will not get paid in Russia. And that was a really massive loss. This was one of the arbitrage trades, which blew up spectacularly. Yep. And many people lost a lot of money on that trade, while being absolutely right, about the direction of the currency.

Andrew Stotz 46:45
What an interesting story, and I love the history of it and all of that, how would you describe what you learned from it?

Igor Yelnik 46:53
Well, the first lesson is that being a right and making money are two very, very different things. The second thing is that infrastructure risks mattered. It's important where you buy and where yourself and who is your counterparty, you may have a winning trade. And this winning trade may actually turn out to be a losing trade, if you have around counterparties around infrastructure. And this was one of those situations. The third thing is that if your your part, if your trade is a part over of a trade, which presents a systemic risk, then it's not the fact that you're going to get paid. Because it's pretty clear what would have happened if the time if a Russian banks were to pay according to their forward contracts, there would be no banking system in Russia at all, and probably no Russia at all. And, of course, the government and the central banks and the legal system did everything they could to avoid this. So if your trade is so bad, that when you're when it presents a systemic risk, there might be non market ways to deal with you. Yeah.

Andrew Stotz 48:43
It's interesting, I would say the lesson that I learned is, government makes the rules. And now, we're also in kind of a hostile situation with war going on, and all that that is the US government, also that's making rules. And you may think that you've made a good bet. But you know, there's no telling what can happen. And I think that's really such a big lesson. I think people forget about that, particularly in the foreign exchange markets where there's a sovereignty issue, you know, that you know, that governments and banks are going to take, you know, sometimes extreme actions that you're just never going to be able to predict.

Igor Yelnik 49:23
Yeah, absolutely. And we have just seen it in the US, right, this whole situation with Silicon Valley Bank. What the Fed did was against the rules, right? They just created the rules on the fly because they couldn't afford the banking system collapse, right. So on one hand, it's good to that. People who deposited their money in SBB did not lose the money. Or the other hand, this introduces new risks. Basically, it just kicking the can down the road. Somebody will have to pay eventually.

Andrew Stotz 50:02
So based upon what you learned from this, and what you've learned, you know, continue to learn in your career, let's kind of go back in time. And let's think of a young person who's kind of facing a similar type of trade. They see an opportunity, you know, going on and in a unique place. And it's, it seems like it's, they really got it, right, what's one action that you'd recommend they take to avoid suffering the same fate?

Igor Yelnik 50:29
Well, in a situation like this, you need to think about non market risks. This is what people often forget, non market risks are really paramount in transaction like this. And I would say that this is in experience. This is one of the most important lessons from this particular trade. In general, I think that it's hugely important to understand who you're in business with, who your business partners are. And these have to be honest and dependable, dependable people. I was extremely lucky to have very good partners earlier on in my career, and I'm very grateful to them for the experience I had, you know, being a business with that.

Andrew Stotz 51:36
Yeah, it's so many great lessons here. And what is a resource either of yours or any other resources that you recommend for our listeners that you think would be good for them to learn from or to gain from?

Igor Yelnik 51:52
You know, I'm quite old fashioned, probably, but I will recommend a couple of books. One of these books is Market Wizards by Jack Swagger, which is a book of interviews with top traders. And I personally learned a lot from this book. And another one is reminiscences of a stock operator by Edwin LeFevre in other classics. I think that there is one more book which is worth reading. It's Rick's Bookstaber, a demon of our own design. What is it is a demon of our own design. The author is Rick Bookstaber. Okay. Yep. So these are my recommendations.

Andrew Stotz 52:51
Excellent. Fantastic. All right. Last question. What's your number one goal for the next 12 months?

Igor Yelnik 52:57
Well, I'm a hedge fund manager. So my goal for the next 12 months is to have good performance. Perfect.

Andrew Stotz 53:05
And I think with your experience, you

Igor Yelnik 53:08
will well thank you very much. I hope so.

Andrew Stotz 53:11
Yeah, listeners there you haven't another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. And this story, I think, really helped us. If you've not yet joined that mission, just go to my worst investment ever.com and join my free weekly become a better investor newsletter reduce risk in your life. As we conclude, Igor, I want to thank you again for joining our mission. And on behalf of it, he started to get me I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Igor Yelnik 53:46
Thank you very much, Sandra for hearing me, it was a great conversation. Thank you very much for it. Well, you know, last 1213 months have been very difficult for many people. And I really hope that the next 12 months will be much much much, much better for all of you.

Andrew Stotz 54:05
Amen. And that's a wrap on another great story to help us create, grow and protect our wealth fellow risk takers, let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your words podcast, those Andrew Stotz saying I'll see you on the upside.