Premium Market Analysis


Eight Investment Lessons I do not Need

Another “lesson” list I do not agree with. 

This one was reported by Pragmatic Capitalism and it was attributed to Bruce Berkowitz of Fairholme. I have not checked the original source but here are my replies:

1. You always have to have cash, especially when no one else has it. (John Burbank of Passport Capital has said the same: “Cash is most valuable when others don’t have it.”)

I see this as common sense, not as a lesson. Whoever had to learn this lesson is in trouble.

2. No free lunch- it’s not free, or it’s not lunch.

Most retail traders are free lunch for the professionals. Some professionals are free lunch for the central bankers (Do I need to mention names here?)

3. You can’t change people! You can change yourself, but not others.

You should never try to change yourself because it will lead nowhere. Try to change others and that is what corporations, States and other power centers with manipulative power do all the time.

4. You only see reality under extreme stress- you want to get to know someone, you need to see them under extreme stress.

Extreme stress is something that you should avoid under all conditions. If you reach extreme stress, the notion of reality is useless. 

5. Volatility is not risk!

Volatility is risk but not all risky situations involve volatility.

6. Always assume you will have bad luck.

Assumptions have the tendency to turn to concrete facts with human nature. Always assume that you are lucky but manage your risk well.

7. Few variables to win. Once you have to think about more than 3 variables, your odds of winning are low.

Let us think about the “simplest” of all possible trades: You buy in the future 100 shares of AAPL @ $1,000 and you set your stop loss at 5%. You already have 7 variables:

– Market can go up
– Market can go down
– Your stop-loss
– Your profit exit
– Your timeframe – possibly daily
– The risk percent based on bankroll
– The particular stock you bought

Thus, even the simplest investment/trading decision involves 7 variables at minimum. Most more complex startegies, like covered call wrtting for example, involve more that 20 variables.

8. If you have to use more than 6th grade math, you’re in trouble.

I see, is that why HFT (High Frequency Trading) is in trouble? Yes, you are in trouble because you had to learn more than 6th grade math and people just hate that.

Investment lessons? No thanks. Just follow the bubble markets and that is enough if you are lucky to get out at the top. A few are under development at this time.