The Five Investing Lessons from The Movie Rogue Trader

The movie Rogue Trader, directed by James Dearden, came out in 1999. This 101-minutes crime drama is based on the life story of Nick Leeson, a futures trader, and his book, Rogue Trader: How I Brought Down Barings Bank and Shook the Financial World. Leeson was one of the top-performing traders in Barings, Britain’s oldest investment bank, but lost billions of dollars carrying out unauthorized derivatives trading, aka rogue trading in Singapore exchange. 

Leeson’s rogue trading venture had bankrupted Barings. Besides, there is an irony: founded in 1762, Barings Bank’s clients included Royal family members, and it has survived the Napoleonic Wars, the American Revolution, the Great Depression, and World Wars; but it couldn't recover from the greed-fueled trading of one rogue trader based in Singapore.

In the movie, while describing futures trading to his new team, he says, “The truth of the matter is that we are not buying or selling anything real. It’s just numbers.” By the climax of the movie, he opines, “That’s all the market is, one giant casino.” 

The five investing lessons below are derived more from Nick Leeson himself than from the movie itself.

1. Learn to Differentiate Luck from Skill 

Trading is a game of skill, not luck and Leeson’s story simply displays that fact. He started as a very successful trader and was frequently promoted to higher career positions at a relatively young age. During 1992, Leeson’s trading contributed 10% of Barings' revenue.

Owing to his success, Barings and Leeson began to think that he was a gifted trader. Consequently, he has been given more responsibilities, fund allocation, and the freedom to make more trades without supervision.

In reality, Leeson's trading success owes more to dumb luck than fundamental investment skills. He was simply betting on the bull market. “A bull market is a fool's paradise; anyone can make money out of it," is a common saying, and it perfectly fits Leeson’s life and career. 

2. Never Add to Losing Positions

Nobody wants to be a loser, especially a trader or an investor. So an investor doubles down in an attempt to lower the average cost of a loss-making investment. This is carried out in the hope that if the price of the investment recovers, it will be easier to get back the losses at the lower average cost.

When the investment’s price recovers, it satisfies an investor's ego, and they feel smart as if they knew clearly what they were doing. However, suppose the price goes down further without showing a sign of recovery. In that case, an investor usually keeps doubling down until they own an investment that values much lesser than the initial investment. Ultimately, the investor's ego gets hurt, and they may look foolish.

Doubling down or adding to losing positions in the market is common among investors and traders. Nick Leeson was no different. He kept doubling down on investments that didn't go back up in price, and it costs billions for his firm, Barings. 

3. Always Place a Stop-loss.

Stop-loss is a preset price point at which an investor must sell his positions to avoid further losses in an investment. It is an essential risk management strategy in trading and investing. But implementing and executing stop loss is not as easy as being said. Leeson's career taught us the same. 

By 1995, the losses of Leeson's trading on behalf of Barings had climbed to more than $350 million, and as an ordinary trader, he decided to take that money back soon. In January 1995, Leeson took larger trade positions in Japan's Nikkei index, anticipating a bullish trend. Unfortunately, soon after Leeson took positions, the Kobe earthquake wreaked havoc in Nikkei – a classic Black Swan event.

The Nikkei plummeted, and Leeson's positions turned into loss-making investments. But he wasn’t ready to give up and never had a stop loss in his trading plan. He began doubling down Nikkei futures until the investment totaled $7 billion, an amount Barings couldn’t afford to lose. 

In markets, the word 'hope' has never been a 'hopeful' word. Nikkei keeps on plummeting, and Leeson's losses keep mounting. Eventually, Barings declared bankrupt, and Leeson was sentenced to prison.  

4. A Sensible Strategy Works.

A sensible strategy should be realistic to the investor and to the market. Unfortunately, most strategies appear rational to the investor most of the time but not to the markets. That is why only a very few investors make money from the markets. 

Similarly, Leeson thought he had a great strategy and kept doubling down using leverage. Leeson's strategy was sensible to him but not to the markets. Even Barings failed to keep a check on Leeson’s trading.

Leeson should have placed stop loss, but he thought he could do no wrong. Investors should never make this mistake in their investments. They should know what to buy and when to buy it and how to cut their losses and how much leverage they should use. Barings wouldn’t have gone out of business if Leeson had a sensible strategy at hand.

5. Always Keep Helpful Acquaintances 

While Leeson was risking all the Barings' money, he was most likely working alone with no one to share what was really going on. Leeson was young and high on early success and had the freedom to take huge risks with his company's money. 

If Leeson had someone to open up about the trouble he got in, perhaps the investment might have turned out differently. So, investors should note that they should keep acquaintances with someone to share their investment or trading ideas. Or they should keep a reliable source of investment insights to keep them on the right track. This helpful acquaintance will save them from making expensive investment decisions.

The Climax of Leeson’s Story

By the end of February 1995, after turning Barings bank bankrupt, Leeson and his wife fled to Singapore. Eventually, he was arrested in Germany and taken to Singapore to stand trial. He spent four years in jail, battled cancer, and survived. His wife left him.

Today, he settled in Ireland by working for an investment advisory company. He left behind an incredible story that could give valuable investment lessons for businesses and individual investors.