Yesterday I was speaking about the unrealistic expectations of some of the advertising material. Today I want to illustrate the points I was making with a personal example.
Figure 1 is my VAMI (Value Added Measurement Index. The index measures the value today of an investment of $1000. As at October 31 2008, the VAMI stood at just over $370,000.00.
Last year, I had third best year; but for an error brought about by the fact that I was rushing back to Sydney (Mom was taken seriously ill, it could well have been my second best year. (She is fine now).
I tell you all this as a context to my comments below.
After closing out all positions in October 2008, I re-entered the markets this month. Heading towards the last week, I had six open, non-correlated positions (well as uncorrelated as you can get nowadays). Some of the positions had a small profit, others were carrying a small loss. My loss to that date was a little under 4.5% of capital. This was nudging the top end of my normal monthly-loss range.
Then all six positions were stopped out, making the loss for March 2009, the largest single loss since 1990, coming at over 21%. This was for me, what Nassim Taleb, calls a Black Swan event.
And, it is the Black Swan events that put paid to the assumptions that somehow knowledge of the markets coupled with ‘new technology’ will make it different this time.
At the end of the day, the key to success is the consistent execution of our risk management and trading strategies and tactics - in short, the consistent execution of our trading rules.
To forestall the e-mails, let me answer this question: How do I handle Black Swan events?
Answer:
- Firstly, I take some days off. In this case, I took off 3 days.
- I then re-assess my position size. I went to half normal size as my ‘normal size’.
- Finally, I formulate new short-term goals: to trade to recover the losses. In this case, I aim to recapture the losses over the next 7 to 8 months i.e. by year end. If I do it earlier, it’s a bonus. But I certainly won’t be pressing my trading just to quickly recover the losses.
So, here’s the point to my story: by accepting the hype thrown at us, we ensure our own lack of success. There is no magic; there is no quick way to success.
To succeed, we need to:
- Put in the work in understanding our tools and ourselves;
- Manage our risk;
- Create contingency plans for Black Swan Events;
- Be patient in seeking to build our wealth and recover losses. Profits and losses, they too shall pass.
FIGURE 1: VAMI
Refer this blog post to a friend or colleague…
