For those of you who trade the market, this is an excellent article to read.
The 2 key things to note: 1) Survival, 2) Absolute price of a stock is unimportant. It is the direction of the price movement that counts.
The Risk of Uncertainty
This week I attended the Bloomberg FX 09 conference and the lessons learned last Thursday were immensely valuable, but none more so than the message from Jim Haskel from Bridgewater Associates.
Bridgewater is one of the prominent hedge funds in the world and Jim is responsible for assessing risk in the overall portfolio. He was clearly one of the sharpest guys in the room but his message was deceptively simple – above all else stay alive.
Haskel recounted how Bridgewater was able to weather the post Lehman financial storm by essentially not trading for a while. “It’s much better to miss an opportunity than to assume unnecessary risk.”
Listening to Haskel I suddenly remembered the great opening scene of Patton where George C. Scott stands in front of a massive American flag gently swaying behind him and barks at the camera, “No dumb son-of-a-bitch ever won a war by dying for his own country but by having the other dumb son-of-a-bitch die for his country.” I found this fascinating because even Patton, who was the most reckless military leader in WWII understood instinctively that self preservation was paramount for victory.
MacArthur, the other great general of the war, was also famous for never engaging the enemy at their point of strength. MacArthur’s philosophy was always to bypass the toughest Japanese military installations and attack only the weakest. Although the reality of these great military leaders contrasts sharply with our romantic view of “charge-at-all-costs” war hero it offers tremendous lessons to us as traders.
Whether in war or on markets the first rule of the game is to simply survive. For those of us engaged in the day to day combat with price action it is sometimes difficult to remember that winning is not always an option and sometimes just staying alive is good enough. I can’t remember how many times in my trading career, I’ve let my ego get the better of me only to be saved by stop losses (every trade I make automatically carries one) thus preventing a total blow up of my account.
In markets, there will always be tomorrow and there will always be chances to make fresh profits, but only if you have capital left to trade. From the best traders in the world to the greatest military commanders in history we learn that we must always pick our battles carefully and make sure to stay alive to fight another day.
“The absolute price of a stock is unimportant. It is the direction of price movement which counts.”
“During major sustained advances in stock prices, which usually occupy from five to seven years of each decade, the investor can complacently hold a list of stocks which are currently unpredictable. He doesn’t worry about the top because he knows he is never going to sell at the top. He knows that the chances are overwhelming in favour of the assumption that he will get far better prices by waiting until after the top is passed and a probable reversal in trend can be identified than he will ever get by attempting to anticipate the top, and get out on the nose.
In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top. As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price by hindsight your individual transactions will never look daring. But some of your profits will be large; and your losses should be quite small. That is all that is necessary for a satisfactory, enriching investment performance.”
“Stock Profits Without Forecasting,” by Edgar S. Genstein
I wanted to leave you with the above paragraphs to ponder. They are two of the most important paragraphs I have encountered in more than 40 years of studying markets. Do not read them just once. Go off to a quiet spot that invites contemplation and read them several times. Then reflect on all of the mistakes you have made in trading and investing. Bells will ring, and curses will be uttered, if you are truly honest with yourself. My advice is to keep this quote handy, read it over, and study it every time you get ready to make an important buy or sell decision; especially if your emotions are reigning.
Ladies and gentlemen, Edgar Genstein’s comments are as cogent today as they were when first written in 1956!
2 comments:
For those of you who trade the market, this is an excellent article to read.
The 2 key things to note:
1) Survival,
2) Absolute price of a stock is unimportant. It is the direction of the price movement that counts.
The Risk of Uncertainty
This week I attended the Bloomberg FX 09 conference and the lessons learned last Thursday were immensely valuable, but none more so than the message from Jim Haskel from Bridgewater Associates.
Bridgewater is one of the prominent hedge funds in the world and Jim is responsible for assessing risk in the overall portfolio. He was clearly one of the sharpest guys in the room but his message was deceptively simple – above all else stay alive.
Haskel recounted how Bridgewater was able to weather the post Lehman financial storm by essentially not trading for a while. “It’s much better to miss an opportunity than to assume unnecessary risk.”
Listening to Haskel I suddenly remembered the great opening scene of Patton where George C. Scott stands in front of a massive American flag gently swaying behind him and barks at the camera, “No dumb son-of-a-bitch ever won a war by dying for his own country but by having the other dumb son-of-a-bitch die for his country.” I found this fascinating because even Patton, who was the most reckless military leader in WWII understood instinctively that self preservation was paramount for victory.
MacArthur, the other great general of the war, was also famous for never engaging the enemy at their point of strength. MacArthur’s philosophy was always to bypass the toughest Japanese military installations and attack only the weakest. Although the reality of these great military leaders contrasts sharply with our romantic view of “charge-at-all-costs” war hero it offers tremendous lessons to us as traders.
Whether in war or on markets the first rule of the game is to simply survive. For those of us engaged in the day to day combat with price action it is sometimes difficult to remember that winning is not always an option and sometimes just staying alive is good enough. I can’t remember how many times in my trading career, I’ve let my ego get the better of me only to be saved by stop losses (every trade I make automatically carries one) thus preventing a total blow up of my account.
In markets, there will always be tomorrow and there will always be chances to make fresh profits, but only if you have capital left to trade. From the best traders in the world to the greatest military commanders in history we learn that we must always pick our battles carefully and make sure to stay alive to fight another day.
“The absolute price of a stock is unimportant. It is the direction of price movement which counts.”
“During major sustained advances in stock prices, which usually occupy from five to seven years of each decade, the investor can complacently hold a list of stocks which are currently unpredictable. He doesn’t worry about the top because he knows he is never going to sell at the top. He knows that the chances are overwhelming in favour of the assumption that he will get far better prices by waiting until after the top is passed and a probable reversal in trend can be identified than he will ever get by attempting to anticipate the top, and get out on the nose.
In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top. As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price by hindsight your individual transactions will never look daring. But some of your profits will be large; and your losses should be quite small. That is all that is necessary for a satisfactory, enriching investment performance.”
“Stock Profits Without Forecasting,” by Edgar S. Genstein
I wanted to leave you with the above paragraphs to ponder. They are two of the most important paragraphs I have encountered in more than 40 years of studying markets. Do not read them just once. Go off to a quiet spot that invites contemplation and read them several times. Then reflect on all of the mistakes you have made in trading and investing. Bells will ring, and curses will be uttered, if you are truly honest with yourself. My advice is to keep this quote handy, read it over, and study it every time you get ready to make an important buy or sell decision; especially if your emotions are reigning.
Ladies and gentlemen, Edgar Genstein’s comments are as cogent today as they were when first written in 1956!
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