In 1990, Ken Griffin established Citadel when he was just 22 and a student at Harvard. With initial funding of $4.6 million from acquaintances and family, he commenced trading options from his dorm room.
The company achieved significant success by 1994, exhibiting exceptional returns and amassing an astounding $1 billion in assets under management. Subsequently, Citadel broadened its operations, evolving into one of the world's most extensive hedge funds with approximately $62 billion in assets under management. Moreover, the firm is the most significant equities trader in the United States, functioning as a market maker and accounting for one in four trades. Griffin believes market making is a vital part of the financial markets as it “lowers the cost of capital” for firms.
In an April 2023 interview at the Yale School of Management, the investor discussed his success secrets, both in investing and in life.
How to be successful
Griffin believes it makes sense to “take risks” when you are young as this is usually before you have lots of responsibility and the experience gained is invaluable. This was a key philosophy that drove him to start Citadel.
The guru also believes that a key part of career success comes from both “mentorship and apprenticeship” and thus, finding those people with a “vested interest” in how you do can be valuable.
In his youth, Griffin also learned indirectly from Wall Street traders, brokers and even salespeople. He spent many hours each day on the phone, “like a sponge,” learning about finance from those with up to 30 years of experience.
Paraphrasing his friend who started one of the most successful internet companies of all time, he said, “Great entrepreneurs have the right toolkit to solve a problem at that particular moment in time.”
In Griffin’s case, this was an understanding of software engineering, mathematics, a background in economics and a passion for finance. He believed you could use quantitative analytics to gain a competitive advantage in the financial market. Back in the 1980s, he noted, this was still a “novel thought” and many of his friends were skeptical.
Bringing this forward to today, the investor believes it is best to assess what your own “unique toolkit” is for the modern world. The most successful people he knows in finance are “lifetime learners” and are “passionate” about the field they work in.
He quoted the historic book called "Hardball": “Don’t just play to win, but play to win by a landslide.”
Investing success
Today, Griffin noted Citadel's goal is to “understand what moves the prices of assets more thoughtfully and quickly than our competitors.” He said the “glory is in the research” and “trading is the monetization of the research,” especially in “deep liquid markets.”
Citadel also focuses on the use of alternative data. In 2018, the firm hired a trading team from Cumulus, a company that specializes in weather forecasting.
Given Citadel trades commodities such as power, they “care deeply” about understanding “cloud cover, wind, temperature” in a small number of geographies. For example, the firm cares about these factors in Germany where renewable energy makes up about 46% of total energy production. By forecasting the weather in these regions, the company can trade on forecasted energy demand changes.
In general, Griffin believes it is best to think in terms of a probability distribution, whether buying a stock or building a plant. Since very little in business is straightforward, leaders and investors must acknowledge they are making a “decision under uncertainty.” The key, according to the investors, is to be both “psychologically” and “financially flexible” to deal with the “evolving change.”
With regard to a forecasted recession, Griffin believes “tough times” reveal the true character of a company and which ones are well run by leadership teams. These times also help with producing wise and well-grounded people.
Dealing with challenges
One quote Griffin likes is: “History is written by the winners.” For example, Citadel is dubbed as the “most profitable hedge fund of all time.” However, he highlighted that the firm nearly went bankrupt in 2008 after losing half of its equity in just 16 weeks.
“It has not been an easy march to success,” he said. Further, his firm has “probably lost more money than perhaps any other firm in existence,” equating to over $100 billion.
However, it is only because the net has been so overwhelmingly positive that success is talked about. Any loss is used to reflect on and learn from, which Griffin jokingly said is his “tuition” and that he has the “most expensive education in American history.”
This helps him to keep major losses in perspective as opposed to getting angry when money is lost. “When walking through hell, just put one foot in front of the other…just keep going,” he said.
He noted it also makes sense to “push decisions” to those who are in the right state of mind as some people can be like a “deer caught in the headlights” during a crisis. This is why it makes sense to surround yourself with the “right team,” who will help each other through each day.
Self-awareness is also key to understanding your “stressors” and if they are based on external factors you cannot control or internally generated self-pressure.
Learning from mistakes
Griffin believes it is best to be “continually extracting lessons” from situations, asking what you got right and wrong.
He also likes to learn from the mistakes others have made. For example, he went to visit the leaders of Long Term Capital Management (LTCM) in 1998, when the company had lost close to 90% of its equity in the levered financial services industry, as he wanted to learn from its failure.
Another example is Enron, which was the largest energy trading comany in the U.S. before it filed for bankruptcy in 2001 after committing fraud. The day the company filed for bankruptcy, Griffin charted a jet and flew his team out to interview former employees of the company for several days. He said topics included “what worked, what didn’t work, how they ran the business, competitive advantages, etc.”
After that, he hired the leadership of the quantitative research team at Enron. Since that point, Citiadel has made close to $30 billion in commodity trading.
This speaks to the ability of seizing opportunities at the right time and really filtering out the signal from the noise.
On artificial intelligence
Griffin believes artificial intelligence platforms such as ChatGPT are both “incredibly powerful” and “incredibly terrifying,” as it could take a number of white-collar jobs. An example he gives is the writing of “better” legal contracts than first and second-year lawyers.
The guru believes the ability for AI to transform or “port” dead software languages into more modern languages is also extremely powerful and could help clean up vast “technical debt” in industries such as banking.
Zooming out, the investor commented that AI is not new and is a branch of machine learning that had the term coined back in 1952. Another landmark moment was the launch of TensorFlow by Google in 2015, an open source framework for ML.
Griffin believes these AI technologies have already had major positive impacts on the economy, but mostly “under the hood.”
Final thoughts
Griffin is an incredible investor and intelligent thought leader in the world of financial markets. He has generously shared his wisdom on both how to be successful in the markets and in life and for that we should be incredibly grateful.
