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Subject:  A Very Humbling Trade Date:  7/10/2013  10:39 AM
Author:  just1trader Number:  35009 of 35593

Take a look at that price chart for Ultrapetrol’s 9’s of ’14 and ask yourself this question: At what price would you like to have bought that bond? Right at the bottom, of course, somewhere around mid-70s. Now ask yourself this. Where did you actually buy it? I don’t know about you. But I have to confess that I did what --retrospectively-- was a poor entry. I got in 02/09/12 on five at 92.219 instead of the 20 points lower that subsequently became available, which raises a whole bunch of questions about how one runs one’s game.

#1, Why did I buy when I did, and in the size I did?
#2, Why didn’t I average down when prices moved against me?
#3, When prices did recover, why didn’t I average up?

Permit me to work through those questions one at a time.

Currently, in a whole bunch of TMF’s forums, there are multiple threads focused on guessing the direction of interest rates. Some are thoughtful. Some are sloppy. But all of them are bullsh*t, because no one can predict the future. They are attempts to model things that cannot be modeled with enough accuracy to make trades based on them, much less leveraged trades, as the idiots at LTCM and other quant shops found out. A model that offers precision, but is based on bogus assumptions, blows up accounts.

Faulty models can work well if you know that the Fed is backstopping you, that you can privatize profits and socialize your losses. But if you’re just a small trader/investor, you have to eat your losses, and if they are too big, you’re out of business. So you have to bet in such a way that you will never get yourself thrown out of the game. No single position, nor any group of positions, can ever be permitted to be so large --or so correlated-- that you are ever at risk of suffering losses from which you cannot recover. On a mid-sized, $500k bond account, a five-bond position on a spec-grade issuer might be a bit conservative, given that ‘exposure’ isn’t the same thing as ‘risk’. But, also, you won’t get yourself into too much trouble if you do cap your exposure to any single, spec-grade issuer at