If a week is a long time in politics, as British Prime Minister Harold Wilson once observed, then 25 years in the markets is a veritable lifetime. Just ask George Herman, Citadel Director and Chief Investment Officer. With more than a quarter-of-a-century’s experience under his belt, Herman has seen it all, from booms to busts, and everything in between. These are the events which punctuate his career and, in turn, reflect the environment in which Citadel has operated for the past 25 years.
Walking down memory lane is an enjoyable experience for Herman, as it highlights the evolution of his thinking as a professional. Herman is a firm believer in the importance of experience and drawing on lessons from history as well as those which still seem close enough to touch.
Having started out in the markets in 1988, as a young bond trader with a passion for derivatives and an appreciation for risk mitigation, Herman is a veritable textbook when it comes to market highlights. Each insight and each experience has shaped his professional life and his attitude towards the financial markets; and they continue to serve him well in today’s uncertain world.
A CASE OF MARKET JITTERS
In many respects Herman’s career – like that of Citadel – walks in step with the emergence of a new South Africa. It was 1995, and he was a proprietary trader on the JSE, when he recalls learning one of his most profound lessons: Whenever the news is focused on a single event then the chance of irrational behaviour accelerates.
“It was the infancy of our new democracy and everything revolved around Mr Mandela,” he recalls. “On a specific day in 1995 I had a positive and constructive outlook on the market and quite a big position in the financial markets and then a news article came across the wires that the flag was flying at half-mast and there was an ambulance parked outside Tuynhuys. The markets took that to mean there was something wrong with Mandela and they sold off in one of the biggest moves I’ve experienced in such a short time. I experienced a massive loss until an hour later when the news came out that he was fine and the markets rallied back.”
SMALL FISH, BIG POND
The next big learning curve came just two years later, in 1997, when the Asian Financial Crisis hit. This was the first time that the implications of being part of the world became really apparent.
By this point in his career Herman was now working for an investment bank, dealing in government bonds. He recalls getting a call from his boss in London, asking if he was aware of this whole emerging market crisis. What? “I didn’t have the faintest idea so I started digging. That phone call changed my life because it taught me the value of the global context, about global risk. It taught me South Africa is part of a different peer group and a universe of emerging markets.” And that was way before acronyms likes BRICS, CIVETS and MINTs became part of the market’s lexicon.
OUT WITH THE OLD, IN STEP WITH THE NEW
Keeping up with technology, with market trends and with evolving philosophies has punctuated Herman’s career, but perhaps the most stark and game-changing shift came on 7 June 1996 when the JSE closed its open outcry floor. In one fell swoop the complexion of trading changed, removing the emotion from the transacting point entirely and sterilising the process through the introduction of electronic trading. “The open outcry floors were unique, I had fantastic experiences trading on international floors in London, Chicago, New York and the JSE. It was the best form of organised chaos. Actually, open outcry is more efficient and faster at moving volume, plus you could see the emotion in your counterparty’s face. But there was an unfairness built into the system which can’t exist with electronic trading.”
Today, of course, traders have to find new ways of assessing the heartbeat of the market. Recalls Herman: “I learnt to change with the times and stay updated of developments in technology and learn to interpret silent, sanitised data by developing a gut feel and through the assessment of risk, rather than relying on the person on the other side of the floor.”
KEEP YOUR FRIENDS CLOSE
While digital continues to reshape the financial markets, relationships still have a crucial role to play; especially during a crisis.
The best illustration of this, notes Herman, came during the 1998 Russian financial crisis. “It was my first experience of a country defaulting on its sovereign debt,” he recalls. “I’d been taught that government bonds were risk free, so my brain couldn’t understand that a country had defaulted. But that memory of the 1997 crisis prepared me so well. Our bond market had its biggest move in history, from 13% in 10 year bonds to over 21%. That is more than a 50% drawdown in terms of the value of bonds and it happened in days. It was astounding.”
Learning from the past was a crucial advantage when the news broke. “I was attuned to international events. We were sensitised to it and prepared for it, and I had a spectacular performance over that period,” recalls Herman. But, on the other side of the coin, South African markets broke down as some global players withdrew their participation in the market. “Suddenly only the local banks would provide liquidity,” he recalls. “As an investor a lack of liquidity is always your biggest problem, so ever since then I’ve had an enormous focus on liquidity and trusted counterparties.”
This lesson reared its head again in 2007, with words like subprime mortgages and securitisation beneficiation opening the door to another global recession. “The first casualty was Iceland – interesting that, again, it was a country that fell over,” says Herman. “Again this was a wake-up call to the power of financial risk and the consequences if it was not handled properly. Then Lehman Brothers fell over and the whole banking system came to a standstill. So again, my views on trusted counterparts came into play.” Herman, who was the Investment Manager at a large South African pension fund at this point, was able to apply the lessons learnt during his career to steer this ship past the icebergs. The experience proved invaluable. These lessons came in handy again in 2008 when Greece toppled over amidst the European Debt Crisis.
IGNORE THE SNAKE OIL SALESMEN
As 2000 rolled around it heralded in the DotCom bubble, Y2k, the DotCom crash and global recession. “People were saying that this time was different and that valuing a company on profit was considered old school,” recalls Herman. The Sage of Omaha, Warren Buffett, was being made out to be a fool. But, as events unfolded, this thinking proved flawed.
Herman was now 12 years into his career and had a healthy dose of scepticism for the new and the fancy. So he dipped back into his roots as a risk manager: “Although I had respect for technology I began to think about how technology affects business plans and process and the deliverables towards clients. In 2000 I realised that technology was just the enabling tool, and the business case behind it still had to be solid.”
THE FUTURE WILL SURPRISE
More recently the United Kingdom’s Brexit vote and the election of Donald Trump to the United States presidency have proved to highlight one of Citadel’s core philosophies: That the future will surprise. “Both were against-the-odds outcomes and both brought me back to my focus on risk management,” says Herman. “If you were investing by only following high-probably outcomes then you’d have been wrong. This is why we try not to be definitive in our prediction of the future. We seek to create portfolios that are robust, even if different scenarios play out. Trying to predict the future is a mug’s game and that keeps us humble and keeps us looking at all the options and at the risk.”
It’s this shared philosophy that has created the perfect synergy with Citadel, which Herman joined in 2010 as Head of South African Portfolios. “I have a healthy dose of respect for risk; my philosophy is to lose less over time to end up number one. Citadel looks after people’s long-term wealth. So we are talking the same language: the preservation of wealth.”
Wealth management is not a short-term game, it’s a long-term strategy. And it hinges on insights, understanding, planning and perspicacity. And to craft all those together you need experience.
LESSONS BASED ON 30 YEARS OF EXPERIENCE
- Your word is your bond – “In the early days of trading on the floor nobody ever reneged on a transaction. Remember that.”
- Success in the markets is 99% graft and 1% talent – “If I train 90% of my days I’ll never beat Usain Bolt but many 60-year-old traders will beat him day in, day out in the markets.”
- You have to have a niche skill or specialty – “As a young guy I thought I was talented, but it took me 20 years before I knew what exactly it was that I was good at and began to focus on that.”
- You have to keep learning, growing and improving as the world changes – “If you are standing still it’s the same as going backwards. I just finished a Fintech course at Oxford because I know that you have to understand the major impacts on your industry and keep retooling and learning.”
Live a balanced life – “These words would never have come out of my mouth 20 years ago, but you need to work as hard on your health and your family as you do in the office. This job is rated the second-most stressful on the planet so to stay sharp you have to ensure you live a balanced life.”