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Dan,

Thank you for your reply, which suggest the tone this discussion should have, a level-headed discussion of a very complex matter, risk-management, in which personality is going to be the chief determinate of the path chosen and the chief judge of the appropriateness of that path.

Numbers, schmubers. They don't matter a fraction –-pun intended— compared to what a person feels about those numbers. If the numbers scare a person into inaction –-or if the person is unrealistically confident about those numbers-- the result will be the same: losses. Markets are a mind game more than anything else.

Rule number One: “Know thyself.”

Rule Number Two: In markets, if you have to the stones to attempt it AND the skill to manage its risks, you can get away with things conventional “wisdoms” say can't (or shouldn't) be done.

Rule Number Three: Risk cannot be avoided. It can only be managed.

Rule Number Four: Decisions have to be made under conditions of uncertainty. (Thus, information risk can only be reduced by suffering price disadvantage.)

The mistake “average” investors commit is accepting two sorts of falsehoods, and, dysfunctionally, they generally hold both beliefs both at the same time

(1) Investing is easy, and markets owe them the kinds of returns they can see others achieving.
(2) Investing is difficult. Therefore they should be content with such crumbs as fall from the tables of the lords whom they serve.

Due to their lack of self-awareness, and their lack of imagination and courage, “average” investors are damned if they do and damned if they don't. But the prison of the mind in which they have locked themselves is their own creation. If they are content with the bowl of gruel that can be achieved from almost exclusively owning cash-management vehicles such as CD's and TIPS, then that is their karma.

What is happening here is an envy issue. I can report returns that exceed what my chief critic has ever accomplished for himself. Because he is too scared to risk failure, he wants to argue that no one should manage such risks, because it makes his achievements look pathetic. There are investors whose returns regularly trounce mine. But I don't begrudge them their achievement. I study their achievements and ask whether I'm willing to work as hard as they do to achieve them. That's the only question investors need to ask themselves and the only benchmark that is a meaningful measure of their performance. “Am I willing to do the work that will be required?” There is no shame is saying that life is short and there are other things to pursue than investment excellent for itself own sake. Once perceived physical needs are met, all else is life is a discretionary choice. Some people engage markets; some people avoid them. Some people are honest about their choices; some aren't.

Charlie

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