Get An Emotional Margin of Safety
by ilene - August 25th, 2009 9:40 pm
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Get An Emotional Margin of Safety
Courtesy of Tim of The Psy-Fi Blog
Businesslike Investment
Warren Buffett states, quite frequently, that the most important investment statement ever made was that of his mentor, the father of value investing, Ben Graham:
"Investment is at its most intelligent when it is most businesslike"
Now if you’ve ever wondered exactly what that means you’re not alone. But it’s really one of the most important business lessons any of us can ever learn. It encapsulates the idea that investment isn’t about individual subjective feelings but about general objective rationale. To be good investors we need to learn to control our emotions. Unfortunately it’s got a bit more difficult since Graham first wrote those words.
Unemotional Investment
We find Graham’s statement difficult to understand because we don’t understand Graham’s – or Buffett’s – viewpoint. Although both men are amongst the best communicators the world of top-class investment has ever thrown up they still sit in the rarefied atmosphere of that elite group of investors who are able to step away from their own emotions when they come to investing.
By “businesslike” Graham meant “unemotional”. At the root of all good investment, he believed, was a focus on the underlying numbers. Graham, far more so than Buffett, was focused on the investment ratios and balance sheets of his investments. To be “businesslike” the individual investor needs to ruthlessly focused on the numbers, not the stories associated with them. Thus Graham and Buffett aim to remove the behavioural biases that affect most investors.
Of course, there’s no doubt that there are a select group of people who are more easily able to ignore the impact of group psychology than the rest of us. It’s possible – even probable – that the great investors of the world are simply psychologically unusual people who are capable of ignoring the impact of normal behavioural biases. These people are so rare that it would be interesting to take one of them and wire up their brain to a computer to see whether their responses are different from that of normal humans. Only trouble is they’re so rich that they can employ really big bodyguards and generally reckon their brains are their own concern.
Emotionless Delusions
Antonio Damasio has conducted lots of research…
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Money Management: The Key To Survival
by ilene - August 4th, 2009 11:37 pm
Excellent Money Management Advice, via Karl Denninger at The Market Ticker
Money Management: The Key To Survival
Many people have had some horrifying punishment meted out to their accounts the last couple of months (and especially in the last month), just like many did in late 2008 and early 2009 (on the other side of the trade.)
This is what happens when you don’t use sound money management:
As you know, during the crash of 2008 I was away from trading due to an accident and I was fortunate to have someone like Atilla to take care of my account which was worth about 350K at the end of August 08.
Market crashed and the person I trusted my account when I was away turned out to be one of the very few in financial world who called and traded the crash of 2008 timely. Later when I reviewed my statements I saw ES and option trades that made more than 70 points in less than 20 minutes on September 30 or October 1.
When I was back, I had an account worth near 4M and I decided to open a restaurant in NYC. I quickly found out that even Manhattan wasn’t immune from financial tsunami, so I was back to trading. With a larger than ever account. With a gross confidence, with a pride to be in the other class. A new player in a new game. However learning process became expensive.
When I switched from short term to intermediate term trading, I thought the only thing that matters is time frame. No I was wrong. This was completely a new game.
Yesterday was the day I could not hold on to my mistakes. I called the person who made me millions during the crash, who I tried to follow after the crash.
That’s $350,000 -> $4,000,000 -> $0
Look, we all take losses as traders. I don’t care how right you are today, some day you will be wrong. Badly wrong.
Leverage + too big of a bet + failure to segregate speculative accounts from core capital = you will eventually die.
Every time.
Not some times.
Every time.
Jesse Livermore blew himself up more than once, failing to protect fortunes he made trading that reached as high as $100 million during…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.