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All About Risk, with Karen Finerman

All About Risk, with Karen Finerman

Episode 5: All About Risk, with Karen Finerman

As a hedge fund manager and “The Chairwoman” on CNBC’s Fast Money, Karen Finerman knows a thing or two about taking risks. In this episode, Karen speaks candidly about her career, mistakes she’s made, and how she knew at age 15 that she wanted to be a risk arbitrageur.

Episode Transcript

00:13 Sallie Krawcheck: Hello all. It's Sallie Krawcheck of Ellevate Network here again with Kristy Wallace, president of Ellevate Network. Hey, Kristy.

00:20 Kristy Wallace: Hi, Sallie.

00:21 SK: How are you?

00:21 KW: I'm doing fantastic. How are you?

00:23 SK: I'm good. I'm good. All right, today we are talking to someone I really like, actually someone who's a personal friend of mine, Karen Finerman. Karen was the founder of Metropolitan Capital, which is a hedge fund here in New York. One of the very, very, very few female hedge fund managers. In New York City, you can toss a stick down the street and hit a hedge fund manager. But you can't toss a stick down the street and hit a female hedge fund manager. Karen's been enormously successful at this. She's also a a panelist on CNBC's Fast Money so you can see her on TV several evenings a week. What time is that show on?

01:06 KW: 5 o'clock.

01:07 SK: 5 o'clock, okay. 5 o'clock, Eastern Standard Time and she's an author of "Finerman's Rules: Secrets I'd Only Tell My Daughters About Business and Life". This is interesting because if you are a money manager or a hedge fund manager, it is about risk and taking smart risks. And so, we have not asked our women at Ellevate Network in our polls about investing risks, but we have asked them about career risk.

01:35 KW: We have.

01:36 SK: Yeah, so what you got?

01:37 KW: Roughly 40% of our members or our community sometimes take risks when the stakes aren't too high, so a little risk averse. 36% take risks all the time. The more risk, the more reward. And 21% rarely take risks, only will take a calculated risk after much research.

01:58 SK: Kristy, you are an entrepreneur by nature and by profession both here at the Ellevate Network, but also you were one of the first, how many, five people at Zeel?

02:11 KW: I was, yes.

02:12 SK: Five, was it five?

02:13 KW: Founding team member. Four or five of us, yes.

02:15 SK: Four or five, which is the at home massage service... [chuckle]

02:18 KW: On demand massage.

02:21 SK: And you've got kids, you got a whole family, so how did you think about your career risk? Being an entrepreneur is a little nerve racking, right?

02:31 KW: It is very nerve racking, financially, security, particularly with the family, but it's exciting. It allows you to really tap into your passion, your professional mission, do things that you care about and you feel like you're having an impact, so you weigh it, the risk and the reward. It can certainly pay off more than a standard job with equity or just personal fulfillment. It's something I wouldn't say I fall in the camp of, "I sometimes take risks when the stakes aren't too high." I think I'm much more the, "More risk, more reward." But it does take some thought, and some comfort, and kinda putting yourself out there.

03:17 SK: I don't wanna take away anything from the interview, but one thing I'll tell y'all is that Karen tells us that she knew she wanted to be a risk arbitrageur at the age of 15. Most kids don't know what a risk arbitrageur is at the age of 15. A lot of grown-ups don't know what one is either. We'll talk about that later, but when did you know you wanted to be an entrepreneur? 15?

03:40 KW: Pretty young. I was a girl scout growing up which many people say is...


03:45 SK: Is a brownie. I was a brownie. [laughter]

03:48 KW: Many people will say that that is the earliest entrepreneurs. You have your cookie business and you're selling. And I started working the day I could work. And I was a waitress for many years which I think is... You're always selling things, you're owning your business if you will. It's something that's always been ingrained in me. I spent less than a year in finance until I realized, "No way, I need to work for a start-up." and quickly joined the start-up route.

04:17 SK: It took some of us longer. I was a brownie. I still can't wear brown, that 100%. Back when I was younger, it wasn't the really nice polyester we have now, it was that really scratchy, itchy, smelly; smelly like Nylon-y polyester. That's what we wore so I can't even look at brown any longer. Okay, one more topic before we move on to Karen. One of the things you hit on is the topic of wanting to do something passion for career success. Let us know what did the Ellevate Network tell us about career passion and how important it is?

04:55 KW: 48% of the Ellevate Network says that, "Passion translates to motivation and it's very important for career success." 43% found it to be extremely important, while 9% say, "It's nice to have, but there are many other important things."

05:12 SK: Yeah, so passion matters.

05:14 KW: It does matter.

05:15 SK: All right. Before we turn it over to Karen, for those of you who are new to the podcast or new to Ellevate Network, Ellevate Network looks to be women's essential resource for business. It is a network that is tens of thousands of women strong both in the United States and around the world. And we really work to help women close all those gaps: The gender pay gap, the gender achievement gap, you name it. We try to help women close those gaps because we have an underlying view that what women bring to business is very important, and closing those gaps is important for the economy and society. With that, let's throw it over, talk to Karen.


06:15 SK: One of things we talk about and think about a lot is professional mission. I think you knew your professional mission in high school, is that correct? Can you tell us about that? [chuckle]

06:25 Karen Finerman: I will tell you. It's an embarrassing story that yes, I will tell you about. I was 15 years old and I'm gonna date myself somewhat, but I read an article about Ivan Boesky which is how I thought you pronounced his name, because I had never heard it out loud and this was before he was convicted of insider trading. And I thought, "Wow, that is a fantastic job, risk arbitrageur and look at him. He's making all this money and that just seems great.

06:51 SK: You couldn't pronounce his name but you could pronounce arbitrageur?

06:53 KF: I could. [laughter] I don't know why. It was just innate. And then I said, "Alright, that's what I wanna do" when I was 15. And so I told my parents, "Listen, I'm applying only to Wharton. It's the surest way to Wall Street, that's what I'm gonna do." And they took me, thankfully 'cause it was a dumb plan. I had no backup plan and here we are.

07:15 SK: Did you go directly to that from school?

07:18 KF: Yes.

07:20 SK: Wow.

07:20 KF: A month later.

07:21 SK: Really?

07:22 KF: I was very committed. I knew what I wanted to do and I didn't realize it. That's a great luxury to know exactly what you wanna do.

07:28 SK: I don't know anybody who knew... Maybe a doctor knew what they wanted to do at 15 but not a future risk arbitrageur.

07:36 KF: Very few Jewish girls really know what they wanna be, a future risk arbitrageur. [laughter]

07:41 SK: Particularly, you grew up in LA.

07:42 KF: Yeah, so it was quite unusual, but it was just a certainty. That's what I wanna do.


07:50 SK: You come from a successful family. Your sister is successful as well. She's in film. What advice can you give to parents to form such successful kids?

08:02 KF: I think the message really came from my mom because my dad was a workaholic and we didn't see him that much, which I think was somewhat of the era as well as him in particular. But she really gave the message to us and there were four girls and one boy, that, "You absolutely have to make your own money." And one of my friends said, "Your mom was basically telling you, 'Don't come home 'til you set the world on fire.'" And so I think that she had very high standards. She was a tiger mom before the phrase became part of the culture of today but she insisted we make our own money, and that that was power and that you wanna be empowered.

08:47 SK: And you've got two sets of twins.

08:49 KF: I have two sets of twins.

08:50 SK: Two girls, two boys.

08:53 KF: Yes. Actually, each set is a boy and a girl, so it's like a scientific experiment with a control and then a retest to check the thesis.

09:04 SK: And do you pass that same advice onto your kids? Are you a tiger mom? No, I've seen you...

09:10 KF: No. I'm married to a tiger mom, is what it is. Yeah and I really am the dumb jock in the relationship for real. He is the tiger mom. He is all over them about working really hard, being prepared, that the game is won before it starts through preparation. He's not at all athlete so it's really a metaphor, it's not... It doesn't apply to any sporting event for him, but it is just in his DNA to plan and to teach them they absolutely have to plan to succeed and work hard to succeed. And I'm the fun one.

09:52 SK: You're the fun one?

09:53 KF: I know, that's terrible for my kids if I'm the fun one.


09:58 KF: Yes, I am.

10:00 SK: That's so interesting. You're also an entrepreneur or you are an entrepreneur, and you've had some ups and downs during the course of your career, although, I think looking at it from the outside in, it just seems like one string of success.

10:13 KF: That's funny, when you look at it from the inside out, it seems like a long string of failure. I don't know if that's...

10:17 SK: I don't think so.

10:18 KF: I don't know if that's just the perspective of being in a prism that it looks the opposite.

10:23 SK: But talk about some of those challenges, 'cause there were times when you really had some rough stuff.

10:28 KF: Yeah, we had some really rough stuff. The whole business has changed a lot since we started and it was really shooting fish in a barrel when we started, that just proves that timing is everything.

10:41 SK: Now, when you say we, you had a business partner...

10:43 KF: A partner, yep, who has since retired, Jeffrey Schwartz, who was just a fantastic partner. We were very good friends, still are very good friends, but having a partner who you absolutely feel like has your back all the time is tremendously valuable and so that was really important. We had some great success and then we had a annus horribilis, it was horrific. It was 1998. We had come off a huge run of big successes and we put a deal together to sell half our business, and it was the spring of 1998. And so we were gonna sell half, keep half, the business was valued at $80 million which was... I thought, "Wow, I had really made it." I was, at 32, just the queen of Wall Street in my mind only, but that's okay. And so right before, the day before the deal was supposed to close, the buyer got cold feet and backed out because we had had a very bad month the month before.

12:00 KF: And I was really okay with that because I thought, "You know what, the business is growing so quickly, we're gonna sell it for more later, so that's fine." I was a little upset to not be liquid 'cause I thought, "What a great time to buy a big apartment and to do an enormous renovation." And so the summer of '98 unfolded, we were just not positioned well at all. We thought that... Tell me if this is going too much in the weeds. We thought big cap stocks were way too expensive, names like Coke, and Pepsi, and Gillette that everyone knows, and small cap companies were really, we thought, an interesting value so we bought a lot of small caps and we hedged our book by selling basically... Well, actually buying puts but selling big caps. We had a mismatched book that was terrible. In 1998, Russia defaults on their debt in the summer, August, 1998.

12:56 SK: I remember.

12:57 KF: Yes, that was bad, bad, bad. And then long term capital blew up and the idea that this one hedge fund, which seemed so enormous at the time could take down Wall Street really felt that way. And now, when you look at it that crisis was really adorable.

13:19 SK: It was really a cute little...

13:21 KF: Yeah, cute little crisis.

13:22 SK: It's Fisher-Price is my first crisis.

13:24 KF: Exactly yeah, right, where the knobs don't really work but you think a lot's going on. And our small cap portfolio just was blown apart and the big caps came back very, very strongly after the fed cut rates. We had that broken deal from earlier in the year and then we had horrific performance, absolutely horrific and we did everything wrong and we realized, "You know what, we have got to raise cash to meet redemptions which were coming in every day." I really didn't wanna answer the phone because it would be another redemption. And so we raised a bunch of cash and sat on this pile of cash in the fourth quarter of '98 when the market went straight up. When the dust settled in 1998, we had underperformed the market by 44%.

14:13 SK: That, you gotta try, you gotta try hard.

14:15 KF: I know. It's almost mathematically impossible.

14:17 SK: It almost is impossible, but you did it.

14:19 KF: But we did it and that was a unbelievably difficult time and I really felt like I was just done. That my career was over and that I was failure and that everybody knew it. And I couldn't sleep, couldn't eat and really was beyond stressed. And then remember, going back to the apartment story, so the renovation is running 100% over and I'm no longer as liquid as I thought, and I'm no longer nearly as wealthy as I thought.

15:00 SK: Everything happened at once.

15:02 KF: All at once, it was really a very, very, very difficult time.

15:06 SK: I remember, by the way, I was a research analyst then and I remember that crisis. I was in Asia, it happens fast, or the acute part happened fast. I remember when I was in Asia, I got on a plane, everything was fine. I landed, I got off the plane, the world had almost... The financial world felt like it had ended. I was like, "Can I go back to Asia?"

15:26 KF: Right, it's fine over there.

15:28 SK: Yes, it seemed okay, tough time.

15:30 KF: That was a very, very difficult time.

15:33 SK: And then the lesson, just keep going to work.

15:35 KF: Keep going to work. I always talk about... My mom always said, "Make your bed every day. I didn't ask whether you felt like it." And that was sort of the lesson, just plod along every day whether or not you feel like it. And very, very slowly we ended up rebuilding the business back but it took us years to surpass where we had been. And one of the other lessons we learned was we made some really bad investments. Aside from being caught wrong-footed and all of that, we really suffered from some hubris. We hadn't been wrong before then, and one of the things I really learned about investing was don't buy the cheapest, buy the best.

16:18 KF: Because the cheapest is usually cheap for a very good reason and we didn't appreciate that fully enough. That was an expensive lesson. And another one was, when you wanna buy something, buy it. And you wanna sell it, sell it. Don't kind of sit there and dance around and offer it. At the time, stocks traded an eighth. Don't offer it an eighth higher. If you wanna sell it, sell it. That was a very, very expensive lesson. And then I often talk about this notion of the "Thank God trade" where you have your cost bases in mind, and you're not gonna sell it until it gets back to your cost. So you can say, "Oh thank God." and just get out. It is the most irrelevant piece of information and yet it guides us psychologically.

17:00 SK: We all anchor, we all anchor in these things. Another interesting theme through your career has been, you mentioned your partnership with Jeffrey Schwartz. Talk about that. How did the two of you find each other? Was it just it worked?

17:18 KF: It just absolutely worked.

17:18 SK: 'Cause we talked to so many people who have bad business partners, right?

17:21 KF: I know and I really didn't appreciate the sort of how serendipitous it is and how random to have a partner like that. He had known my sister. They were at Wharton together and I was really interested in risk arbitrage. He was a risk arbitrageur, really one of the big firms on Wall Street at the time. He was the wonder boy there. And so he got me a summer job for another risk arbitrageur and he guided my career. And then when I graduated, he was coincidentally setting up his own firm and he said, "Why don't you come work with me?

18:00 KF: I did that for three years. We ended up... We worked for a family called Belzbergs. They were Canadian Raiders, they blew up and I got to see the lesson of leverage. And you surrender your control when you're levered. That was an interesting big lesson. I went to DLJ, and Jeffrey and I were still friends. And then we decided in '92, "Let's start this." And he really taught me so much about the business but one of the greatest things about him is he is the first to take blame and the last to take credit. And it's really a very gracious way to be but aside from being gracious it allows... You get past whatever the disagreement is and you can just focus on the issue instead of, "Well, that was your fault, that was my fault."

18:55 KF: You don't waste any time talking about that and it really fosters an environment of camaraderie. He's an extraordinary guy, and this will sound very naive, we did not have any written partnership between us until the time we set up the deal to sell half of our business because we needed to have that in writing, what the structure of our business was. We had basically a handshake deal for years and never felt a need to have it be any other way, which is so naive to hear that now. But it always worked for us. We just knew we had each other's back.

19:38 SK: And he retired some time ago?

19:41 KF: He retired a couple years ago, slowly.


19:46 KF: Now he would just come in a little less and then you see, "Yeah, I can't do this anymore." And I said, "Okay." I felt like I was ready and I still very much care about his perspective on the world and interestingly, one of the few things that happened of note was over the life of the partnership, we would have occasionally a big fight over position, a very big fight. And we have this mandate either of us could veto a position. But we'd have these very, very big fights and those were very helpful actually in clarifying each of our positions. And a little bit towards the end, we didn't wanna fight, so we didn't get to that clarity point so that was maybe when we knew it was time. It's his choice.

20:47 SK: It's interesting 'cause I'm the co-founder of one of the businesses I'm involved in. On purpose, we partner together in part because we have very little overlap in terms of our skill set, and so, we have a very active and vibrant series of disagreements. It was actually very energizing because we bring such different perspectives to it and we always come out to, I think, where we're suppose to, but I started to think about this false comfort of agreement, where everybody agrees you feel like you've got a low risk initiative. And then you think, "No, that was actually high risk because we weren't really exploring all of the facets of the problem."

21:28 KF: Right. If you were on committees, which I know you do a lot of philanthropic stuff, so you know the dynamic of a committee where everyone wants to get to a consensus to agree and then, of course, nothing gets done or the worst possible thing gets done.

21:42 SK: Right. [laughter] Or you agree to some kind of mediocre solution or whoever speaks first wins just because you don't wanna disagree.

21:48 KF: Right, yes. Right. Or the loudest to agree... Yeah. And...

21:53 SK: There's that. And so, speaking of disagreeing and loudness, you also are on CNBC? [laughter]

21:58 KF: Right. That is a good segue, nicely done.

22:00 SK: Oh, thank you. Thank you, Karen. Thank you. You've been on Fast Money for...

22:06 KF: Eight years.

22:07 SK: Is it been eight years?

22:08 KF: I know. It's crazy.

22:09 SK: And do you love it?

22:11 KF: I love it. I actually...

22:11 SK: And what makes you do it? It's an interesting twist for you.

22:15 KF: I know. People ask...

22:16 SK: 'Cause most risk arbitrageurs tend to be very private individuals, right?

22:20 KF: Right. Yes. People ask, "Why do you do it?" And the answer is, "It's really fun", and it allowed me to get a little bit... Not a little bit, a lot, away from... Everyday I would just look at our P&L. How did we do? And how did we do relative to the market? And that it was such a cross to bear every night. Years and years of doing that, I felt like, you know what, it's not helpful. It doesn't improve performance to carry that around but I thought, "Well, here I can really just shift gears and do something entirely different for a few hours that's still market-related." I find that interesting and it's fun.

23:08 SK: And get your hair and makeup done.

23:09 KF: And I get my hair and makeup done.

23:11 SK: Every night?

23:13 KF: I know. And actually, yeah, I used to absolutely hate that.

23:16 SK: What?

23:17 KF: I know. Because I have two looks. I have the fully made up look and the wet ponytail look.


23:23 KF: Those are my only looks. I have nothing in between. And now as I get a little older, the wet ponytail, not that it ever worked for me, but it's working a lot less now, so it's good. The hair and makeup is good and I actually got to admit I tried to schedule my things around my hair and makeup. "Oh, I can meet you for drinks on Tuesday. I'm on, yeah. I can do it."

23:44 SK: I have to say, I think CNBC does the best job of hair and makeup.

23:47 KF: They've got some really talented people.

23:48 SK: They've got some really talented people.


23:51 SK: You know what I find when I write for social media or when I speak to reporters on TV, is it actually can help focus my thinking. That if I'm sometimes in business day-to-day, you sort of slosh around. You have a lot of information come in. But when you know you've got 15 seconds or one minute, it helps to give me a certain clarity to things, and I get my hair and make up done.


24:16 KF: See, so there you go! It's win-win! But also if you can't clarify your situation, you know if we have a stock, and we can't tell why we own it in a very brief way that's clear, maybe the story is not so good.

24:29 SK: Right, maybe it's not so good. Any horrible, on TV... I think I ask you this all the time. I never get anything great from you. Come on something horrible on TV?

24:39 KF: Okay, so it's a very juvenile environment. [laughter] We've got four big guys there and then they listen... We were getting a handoff from an earlier show and there was a CEO coming on, and one of... I truly do forget who it was. Oh no, I don't.

25:00 SK: Okay, don't say it! [laughter]

25:00 KF: I do remember. She handed off and his name was Hugh Johnson, and she introduced him as Huge Johnson. [laughter] That was an amusing moment. [laughter] You can decide whether or not to leave that in if you want, but that really was good.

25:24 SK: But I would think there's a certain resilience you learn when you're on TV. I mean you've got some good shows and some bad shows, right?

25:31 KF: You do. You got some good shows and some bad shows and you also learn that our show, we do make recommendations and we do put our opinions out there in a way that leaves us vulnerable. I have learned, nobody's paying as much attention to you as you. You think everybody, you know, knows good and bad. They don't really remember. Occasionally, you get some not nice ones who do remember, "You said this and now look!"

26:04 SK: Get a life. Other advice for taking risks because you take risks for a living, and we hear so often from women about our risk awareness, someone said risk aversion, but risk awareness. Do you have any secrets for us?

26:18 KF: I really think that... I thought about this a lot, and if I can go into a little detail about one of the things I've noticed. So I had this very interesting conversation with a male hedge fund manager and I said, "Why don't you have any women analysts on your team?" and he said, "The reason is because when a male analyst comes in to pitch an idea for us to buy in the portfolio, he pounds the table about how much money we can make. And when a woman comes in, she tells us all the things that could go wrong." And he said, "So I've got this limited amount of capital. I'm a sucker for the upside every time. What do I need the woman for?" And I knew he was right, that is the way women present. I think the reason they do that is they wanna lay off some of the risk on the portfolio manager who's the one who pulls the trigger, and it's usually a he, so that she can feel like, "Alright, if we buy it and it goes south, I told him all the risks." That lays off some of her risk on to him. However, that's really misguided. The way you move forward is to take the risk and to be right, not to try to lay off the risk. There is no such thing as risk aversion in couching your positions. You have to be out there. You have to take the risk for the chance to be right. That's really important.

27:44 SK: You have to recognize you're not gonna be right every time. I work on the, "Well, I was wrong today, wrong yeah, but I was right. I was right last week." [laughter]

27:54 KF: Right. And you hang on to that. When I suppose that's what...

27:55 SK: I do. I was right one time.

27:58 KF: I think that's what golf is about, right? You're just remembering that one shot? Apparently, yeah, I don't know how to play golf, but...

28:03 SK: Well that's why I stayed on the sell side, and you were on the buy side, because I was a terrible, terrible [laughter] analyst.

28:11 KF: But you had great individual style.

28:12 SK: Well, but it was actually a different skill set, right? For the sell side analysts is what was the reasoning? How did you write it? How did you communicate it? But I'll be honest, my first year, everything I said was gonna go down went up. Everything.

28:28 KF: Really? Well that brings me to one point that I do think is interesting. When I have a position and I hear of an analyst who has the opposite position, the first thing I wanna know about that analyst is, how old are they?

28:42 SK: Interesting.

28:43 KF: Because if they've never seen a cycle, it's hard to imagine that things change, that things can either get better if things are terrible or worse if they're great.

28:53 SK: Is this why you still call me on the banks?


28:56 KF: Yes, I did.

28:57 SK: Like, "Oh, she's old? Call her." [laughter]

29:00 KF: She's as old as I am!

29:02 SK: Yeah. Well, there is that, isn't there? All right, I'm afraid we're out of time. I've loved having you. Thank you so much.

29:08 KF: Thank you for having me.


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