What You Can Learn From The Failed Genius Sam Bankman Fried

When FTX started to get into trouble, Sam Bankman Fried became even more central to its story. It soon became apparent that FTX was going to struggle to survive and a bankruptcy was looking likely. It then transpired that FTX has been run in such a manner that not only were clients going to lose their funds, but FTX did not even know how much it had. For anyone willing to learn, this episode can teach you how to avoid such firms in future. 

Takeaways

• Why you should learn from failure

• Are you behaving (badly) in this way

• It will happen again - just not to you!

What happened?

Over a period of 10 days in November 2022, FTX, which was seen as a bulwark of safety within the cryptocurrency space went bankrupt. Only a few months before it was valued at $36 billion. Although details are still emerging it looks like a sister company of FTX, called Alameda Research made some bad trades. The problem was that Alameda was using FTX's deposits to do so. The FTX founder was Sam Bankman Fried.

Lessons from Sam Bankman Fried's failure

No-one likes to lose money. The other obvious one, is that someone comes out of nowhere makes a lot of money selling something none of us understand, we should be suspicious. How often do we warn others about this, only to believe in it ourselves when something 'exciting' like cryptocurrency comes along?

Too few investors read about financial events from 10 or 20 years ago. Time and again we see investors egg each other on only to loose everything. History has taught us this before.

Do you understand this new 'space'?

Can you tell me what problem cryptocurrency solves? A good business is one which produces a solution to a problem and earns money in return. No one has yet managed to explain what useful purposes cryptocurrency has (except for money laundering purposes!).

Entering such as space where no-one can agree what it is for, means there is little chance for you to understand it. If you do not understand what the point of the investment is, you will struggle to understand the risks. If you struggle to understand the risks, you will not know when it is time to get out. (I.e. sell out immediately / save your money). Sticking your head in the sand and HODLing is not a solution.

The (Sam Bankman Fried) 'eye test'

Be careful with the following judgement (but do it anyway). Ask yourself if the person who is selling you something is believable. For starters do they live in the same galaxy as you. Someone who speaks in the abstract may not be interested in processes, controls, risk management and facing up to the facts.

https://youtu.be/uGZrZq6z-Ig

When I listen to Sam Bankman Fried speak (as above), I genuinely have no idea what he is talking about, and yet the whole point of an interview is to inform. In this example, count how many times he actually talks in facts. I appreciate this may be one interview, but too often in this decade we defer to so called geniuses, only for us to discover they were mortals. And not very good at their stated aims.

History has a tendency of repeating itself

I will probably be wrong on this, but we may be living through another example of this at the moment. Musk's takeover of Twitter and the carnage since he completed the buyout has led to a string of revelations, one of which is that he did little due diligence on it.

Investors who commit large amounts of money to something without actually focusing on what it is they are buying is a red flag. If you are investing your money you should be prepared to walk away. The word 'no' is not necessarily a negative one: it could save you time and money.

What is interesting with the FTX bankruptcy is how investors have defended their due 'extensive' due diligence process. Interesting, because no-one seems to be able to make sense of the FTX balance sheet.

How you can protect yourself

By not investing in the first place. This is difficult to achieve for the best of us. Remember if you do not lose money stupidly, you will be richer by default compared to the person who did. A contrarian investor will often profit from other's folly.

If you decide to invest in a high risk space, try and give yourself a margin of safety. The old adage of starting small springs to mind, and that even more boring one of diversification definitely rings true. Dipping your toe is not wrong, why not have a flutter... but do not get sucked in.

Conclusion

It is one of the hardest concepts for a new investor or trader to learn, but risk management should be your focus, not trading profit. Anyone can make a profit from a trade, but can you do it regularly? To do so regularly you have to survive over the long-term.

In the FTX example, there were numerous red flags, but were you looking for them? Did you place all your money in crypto? The basic rules of investing and trading are and always be the same: Diversify your holdings accross asset classes, understand what you are investing in and maintain discipline (do not over-reach / be prepared to walk away).

Follow these three rules and your unlikely to get caught up in the FTX debacle.