In the game of Russian Roulette there are 6 chambers and only one of them has a bullet but you don’t know which one. You put the gun to your forehead and pull the trigger. If you survive, you get a large reward of say $1 M. And if you don’t survive, you have lost. Math says, you have an 83% chance of success and a 17% chance of death.

The Russian Roulette is of course a metaphor for blind risk taking. The people who survive are going to be rich simply because they were lucky. The rich, lucky idiots. And if they play the game long enough, they would end up as just idiots.

I bet, you are thinking along the lines of: this is all very nice to read. Who would do that?

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Meet Gabe Plotkin. Who is that? Here is a verbatim excerpt from Wikipedia on Plotkin.

In 2014, with a $200 million investment from Cohen, Plotkin founded Melvin Capital Management, a New York-based hedge fund which he named after his late grandfather Melvin Plotkin. It had $3.5 billion under management by 2017. In 2017, with $300 million in earnings, he was one of the highest-earning hedge fund managers. This increased to over $850 million in 2020, placing him in the top 15 highest-earning hedge fund managers.

– Wikipedia

Part of the superlative performance that Plotkin earned was by shorting stocks. In shorting, you borrow shares from say your broker and then you sell it for say $10. And then when the share prices go to say $2, you buy it back and return the shares to the broker. Your broker is happy because by lending the shares to you, he earns a small rent. You are happy because you sold at $ 10 and bought at $ 2, earning you a gain of $8 per share or 400% in a very short time.

For companies whose fundamentals are good you would buy first and sell later or much later. This is called a long strategy. For companies whose fundamentals are bad, people like Plotkin would sell first and then buy later. This is called a short strategy.

Back to the main story.

So Plotkin employed both strategies: long and short to earn returns for his clients. According to a video that I watched, it said that Plotkin’s superlative performance came from his shorts, more than his longs. Superlative performance made him a star hedge fund manager. And of one of star hedge fund manager’s star clients was Michael Jordan. If you were Plotkin’s neighbor, you would die envying him.

However, there was a small problem in Plotkin’s plot.

Shorting stocks is like playing Russian Roulette. Why? Because, instead of the share prices going from say $ 10 to $ 2, it could go up, up and away. And then you would have to buy it back at a much higher price. Say you shorted it by selling it at $10 per share and say the price runs up to $ 100 per share. You would now have to buy it back at $100 per share (causing you a 90% loss) and return it to your broker. Sometimes, other market players may gang up and keep buying to push the prices up. And the higher the prices, more the losses. This is called a short squeeze. That is those who shorted get squeezed.

And our hero Gabe Plotkin who had successfully made money shorting many stocks (like JC Penney) in the past had been playing Russian Roulette successfully. Until now. Remember, if you are serial shorter, you need to be lucky every single time. His next short tuned out to be fatal; it was GameStop.

GameStop was a fundamentally a weak company and a dying company. But since Plotkin shorted it, a group of people on Reddit got together and decided to teach the Hedge Fund guys a lesson. And they started buying the shares in large volumes causing the price to go up (instead of down). And this got more and more people to join in causing the share price to go further up almost like a frenzy.

So despite a successful track record of shorting until now, Gabe Plotkin’s hedge fund lost $ 7 Billion (50% of investor’s money) and had to close down his hedge fund. You can call it a mistake or bad decision or bad luck but that one event meant it was Game Over for Gabe Plotkin. Just one event.

My own personal opinion is, if you play dangerous games, you may end up with unwanted outcomes. You can blame luck but the choice of game was the mistake to begin with. And if you play Russian Roulette or it’s real life variants, you need to be lucky every single time in Russian Roulette. Every single time.

There are two lessons here:

1. Don’t just think of probabilities. Like I said, even Russian Roulette has a high chance of success of 83%. Instead think of the consequences of failure: death in the case of Russian Roulette and massive loss of wealth and credibility in the case of Gabe Plotkin.
2. Avoid Playing Russian Roulette. Yes, a lot of people would get rich and successful playing the Russian Roulette but they are the lucky idiots. And you should worry for them, not envy them.
   • Bernie Madoff was also playing a form of Russian Roulette. When his charade was up, he was imprisoned and he died in jail. Soon after imprisonment, his one son died of cancer and the other son committed suicide because he couldn’t bear what his father had done. Most of their assets were taken away and his wife was living homeless. Do you want a fate like that?

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I can’t stress the wisdom of Charlie Munger here. He would say: I am not trying to be smart; I am consistently trying to be less dumb.

You may think that this blog applies only to those who manage billions of dollars. No – it applies to more common people too. Taking undue risks with your life, career, savings, health and relationships are equivalents of playing the Russian Roulette. If you do it enough number of times, you may end up on your face like Gabe Plotkin.

As Charlie Munger and Warren Buffett would tell you, you would want to think hard about the games you are playing. If you can’t afford one mistake or a even little bad luck, you are playing the wrong game.

I’ll leave you with this short video. You may think Buffett is a billionaire and you are not. But he has only one life and so do you.

-Cheers