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Subject:  Re: good time to get rid of some stuff & TLT/SHV Date:  1/17/2013  11:48 AM
Author:  globalist2013 Number:  34699 of 37111


You're being stupid. Really, really stupid. Forget the fundamentals of that bond. Look at the technicals. The YC is inverted. That's the fact you need to explain to yourself, and that's the fact you are betting against. At best --assuming the issuer doesn't file-- what's your upside? A crappy 14%-18%. And for that, you're willing to put major capital at risk?

You're being reckless and irresponsible. Yeah, maybe, you'll be able to get away with it this time. But never over the long haul of making those kinds of bets. Not a chance. Not a single chance, especially when the alternative histories are run another 10,000 times. That's the risk game you need to be playing and where your head needs to be. Under no scenario can a money manager ever put her or himself at risk of getting thrown out of the game. If that means having to bet smaller than --retrospectively-- would have been optimal, then so be it.

What's Rule #1? Capital Preservation (NOT capital appreciation)
What's Rule #2? Never, ever think you can bypass Rule #1.

Let's say you do decide to put on the trade, albeit in a far more appropriate size, something where 'risk' (the difference between your entry-price and an adverse exit-price) is no worse than 2% of AUM. What's your average upside at best? Now compute the likelihood of each outcome. Now mentally do that same trade over a basket of trades and then compare the result to actual historical results. Do you have an edge or not? Where does that edge come from? Does the edge obtain in this case? Obviously, you can't know that, because that depends on making predictions that cannot be made. "What cannot be predicted must be protected against."

Walk away from that trade no matter how good it seems. You're in no emotional state to make a good decision. Turn off your computer, and take couple days off. Walk, run, ski, play with the kids. Then, when you're regained a bit of calm, re-write your investment plan. You should never not know what to do about a trade, and none of them should require any more effort --or evoke any more emotion-- than laying out 30 feet of fly line to a trout rising to a bug that drifted in its feeding lane. Good investing/trading is no different. You water-load your rod as you lift line off the water, pause as the loop unfolds behind you, and then power forward, redirecting your fly toward your next target. 1-2-3. 1-2-3. 1-2-3. That's how the water is covered and how fish are caught. That's how markets are covered and how profits are caught.

Give me a call if you want to talk. But I'd argue you're already got plenty of resources. "Risk is risk", no matter where it is found. Forget the buzz-word people and bullsh*t like 'beta', 'VAR', 'covariance'. They haven't a clue what they're talking about. Instead, find someone who really understands risk-management --NOT the pseudo-science of "risk-measurement" -- and failing that, start working your way through Taleb's books and technical papers.

What you cannot predict has to be protected against. Said another way, There are old money mangers, and there are bold money managers. But there are no old, bold money managers. If you doubt that, work your way through Schwager's interviews and figure out of the best of the best survive to trade another day. Appearances to the contrary, they're working from a very rational plan, and exactly same plan in its essentials. They know their "uncle point", and they don't let themselves cross it.

QUES: What's the definition of a superior yachtsman?

ANS: A superior yachtsman is someone who uses his superior judgment to avoid getting himself into situations that he would have to use his superior skills to get himself out of.

Walk away from that trade. Take the time to center yourself, and then get back in the game.

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