With a bad habit of ignoring profound systemic problems, Federal Treasury officials are now securing a system that encourages the same careless risk-taking that originally got us into this mess. With this week marking the one-year anniversary since Lehman Brothers imploded, it is only appropriate to discuss the faulty system that protects and rewards failing financial institutions.

            The talking heads in charge of the world’s financial practices are on path to deliver more of the pain and suffering we have been experiencing over the past 20 plus months. The Lehman Brothers’ collapse last year showed us how brutal a large bank failure can be. Now, because of the mess caused by Lehman’s demise, it is unlikely that our government would again allow an institution of similar size to fail. This essentially gives big banks a free pass to misbehave. If you owned a business that was referred to as “too big to fail,” and you knew the government would do all they could to keep your doors open, would you not be inclined to take risks? It is like giving a six year old the keys to a candy factory and a set of cavity-resistant teeth. All risk is stripped away, so why not have some fun?

By receiving government funds, big banks are allowed to carelessly take on high degrees of risk, knowing that there is a safety net underneath them. This recession has been gut-wrenching. It has badly battered our economy and exposed wounds that will not heal in our lifetimes. No one wants to experience a downturn of this size again. But, if officials continue to foster an environment that rewards carelessness by major financial institutions, we will inevitably get more rounds of the same. While we should be demanding big banks to practice prudent due diligence, we are instead enabling them to write off any level of accountability. This recession should have been a major wake-up call for all businesses, but those institutions deemed “too big to fail” have also been allowed to be “too big to learn.”

Top Five of the Bad, Bottom Five of the Good

            Ravaged by the bursting of the real estate bubble, Nevada is among the states with the deepest wounds. Historically, our state has been in the top or bottom five of the most-unappealing statistically-compiled lists put out by major media. Unfavorable, sure, but we all choose to live here for one good reason or another. For instance, our tax structure keeps Nevada among the most business-friendly states in the country. For this reason, we have highly-competitive local markets and capitalism thrives here. Our state officials are somewhat handcuffed because of our demand to keep government out of our businesses as much as possible. By adopting and supporting this system, Nevadans have agreed to take on more personal responsibility when it comes to providing our own financial security—and we are now being put to the test.

            Across our country, state officials are scrambling for ideas that will simultaneously better their state’s situation and put them in the position of being quality leaders. In Nevada, our elected officials have considered bringing in a pricey third-party consultant to advise them on how to progress the state. This means not only are the individuals we put in office to make vital decisions not carrying out their duty, but now we will also foot the bill for a new position. We elected these authorities to represent us; not lead us, by way of expensive consultation, in an undesirable direction. With that said, when we elect them we do not, in turn, remove ourselves from the equation. We are not reduced to waiting on our state leaders to be proactive.

            These are extremely trying times for our country. The recovery is going to be led by us via our private capital and our private enterprise. The government does not have a weapon in its repertoire that comes close to matching the power of our collective private resources. Across the U.S., and particularly in our state, there is an abundant supply of quality projects that have been postponed due to insufficient capital. Because success requires both money and knowledge, every successful idea struggles with acquiring adequate funding at least once throughout the process. Every successful venture has to be properly backed and the majority of the backing comes from private capital. At the end of the day we, the people, are the engine that runs our country.

            Nevada is riddled with quality projects that could be going forward with proper capital and qualified management. We now have to be proactive in matching the two. Being among the top five states in the country in foreclosures, troubled institutions and bank closures does not mean we cannot also be among the top five states to emerge from this recession.

Survival of the Government-Backed Banks

            Even the banks that did not become entangled in the shaky investment strategies of Wall Street during the boom still indirectly had their knees taken out from beneath them throughout this meltdown. According to CNBC.com, 92 banks have failed in the U.S. through the first nine months of 2009; including three here in Nevada. As a comparison, in all of 2008 only 25 banks closed.

            In any meltdown, the government’s focus is on the big banks that have the potential to buckle our country’s financial system if they go under. But, that focus leads to a distinct advantage for big banks over their competition. Having government support allows the bigger banks the power to go out and collect the majority of the available capital, while smaller banks are forced to scavenge. This crisis has presented terrible obstacles for banks to raise the capital lifeblood needed to remain in business. Without liquid capital, smaller banks are consumed by their debts. With losses on commercial real-estate loans rising, the smaller banks that feed credit into our communities are drowning.

            When governments support the behemoth banks and allow the smaller banks to sink, they essentially help eliminate the competition needed to improve our financial system. Without intervention, smaller banks are generally able to pose a competitive threat to the large firms because they are more apt to find ways to be faster, smarter and more strategic. It has always been a staple in American capitalism to save a place in our economy for smaller businesses because they push against the bigger corporations and keep them honest.

            Competition in the banking industry leads to a financial system that operates more efficiently. By helping to eliminate competition, our government is essentially allowing the largest banks to monopolize the industry. By supporting the large and abandoning the small, our government is positioning us to face a much weaker economic recovery than if the innovative smaller firms were allowed to compete fairly. We are essentially heading in the same direction as Europe, which has long had its bank assets heavily concentrated in massive firms. The tactic may make it easier for governments to regulate financial systems, but it also eliminates the capitalistic nature that has made our banking industry the strongest in the world.

NEXT WEEK: Banks as Intermediaries

All my best,

Thomas J Powell

Tags: Add new tag, Bernanke, economy, ELP Capital, Investment, markets, nevada, Real estate, recession, Risk, tax, Thomas J. Powell, to big to fail, tom powell, Treasury

Comments feed (RSS 2.0), comment or trackback from your site.

We received an interesting question from one of our members earlier this week:

“I was wondering if someone could give me an idea of where hedge funds are on the totem pole as far as risk with intangible investments. My guess is that they rank with growth mutual funds and are less risky than stocks but I would like a more descriptive census of where they stand amongst stocks and mutual funds.”

Hedge funds are uniquely difficult to assign risk profiles because they employ many different strategies. Some hedge funds buy up illiquid assets when liquidity is at a premium, and these assets are selling at pennies on the dollar. In some situations, the fundamentals are still very sound, but the hedge funds are purchasing the assets at a deep discount further lowering the risk and raising the potential return on investment. When done properly, this strategy is low risk and similar to a corporate bond fund. Other hedge funds will invest in highly speculative strategies, specializing in risky assets like distressed debt and emerging market equities, or risky derivatives like commodity futures. These strategies tend to have risk profiles similar to investing in individual stocks, but better managers will be able to reduce risk and stabilize returns to a degree.

To develop an accurate risk profile for a specific hedge fund, investors need to gather as much information about the underlying assets and fund strategy as possible. Usually, investors only have access to the types of assets used, but increased transparency in hedge funds is the current trend, and hedge fund managers will probably start disclosing more and more information about their trading positions. For each strategy, certain levels of risk are inherent, and remember that leverage increases risk just like returns. While strategy will tell investors a lot about the hedge fund’s risk profile, implementation of the strategy is another important piece to hedge fund risk.

Therefore, investors have to develop a risk profile of the hedge fund manager. This profile should include information about the manager’s historical performance for all his funds, including statistical analysis that measure standard deviations, maximum drawdowns, downside deviations, and all the risk-adjusted return ratios like Sharpe and Sortino ratios. Particular attention must be paid to the hedge fund manager’s performance in similar strategies to the fund of interest. Investors need to identify how the fund manager performed when using a “low risk” strategy or a “high risk” strategy.

Lastly, investors need to inspect the fund’s infrastructure. Check to make sure the hedge fund is using high quality third party administration, legal advice, auditing services, and brokerage services. Performing due diligence on a fund’s infrastructure goes a long way towards identifying counter party risk and preventing fraud

I’m pretty sure my answer to the above question is a little more technical and in depth than what was asked for, but the point is that hedge funds can’t be fitted to neat little risk profiles or mutual fund style boxes. However, hedge funds were originally designed with the intention of preserving capital for the ultra-wealthy. Because the hedge fund manager ultimately has control of the fund and can utilize in style he deems appropriate, he is the key differentiator in measuring risks of hedge funds and risks of other investment vehicles. So, my short answer is hedge funds are as risky as the hedge fund manager wants them to be.

Tags: Counter Party Risk, Downside Deviation, hedge fund, Hedge Fund Manager, Hedge Fund Risk, Hedge Fund Strategy, Identifying Hedge Fund Risk, Not Categorized, Risk, Risk Profile, Sharpe Ratio, Sortino Ratio, Standard Deviation

Comments feed (RSS 2.0), comment or trackback from your site.

We all have heard about the importance of risk management and how crucial it is to our success.

However, nobody really talks about all the elements of the risk management. The most talked about risk management is market risk. Then credit risk. After that, you hear about counterparty and operational risks.

As a previous risk manager, I can tell you that all of these are important to your success. You need to look at your process and make sure that you have a great risk management system in place.

There is one element of risk management that is seldom talked about and often overlooked. This element can make or break your trading success.

Often, it is forgotten as part of the stress tests.

Have you guessed what it is?

If not, let me give you a hint. Depending on how you look at it, it can be consider part of counterparty or operational risk.

Some examples are as follows:

1. Do you have occasions when you know what to do but you don’t do it? Then you wonder what happened. You get angry and frustrated. You start losing money. If you don’t stop yourself, before you know it, you are in a deep hole.
2. Do you know of traders who have a system and know that their success is based on probabilities? However, they start picking and choosing which signal to pull the trigger on. Then they wonder why they are not making money consistently.
    
3. Have you ever put a trade on and immediately started doubting yourself? You move your stops, and you realize if you had just left it alone, you would be more profitable?

Have you figured it out yet?

If you have guessed that it is your mindset, you are correct.

All the above examples have one common thing – the human factor. Unless you have a completely automated system, you are the operator. Your results depend on you.

It does not matter what happens. It matters how you react to the event and where you put your focus on.

You can have the best systems in place. However, if you don’t develop your Mental Edge and are not in the zone, you are not going to execute your trades properly and thus you will lose a lot of money.

This element is so important that JP Morgan has a group called the ‘Behavioral Finance Team’ which deals with how mindset influences the execution of their trades.

Your action plan for designing your risk management system is:

1. Counterparty risk: Make sure your business plan matches who you are
2. Operational risk: Put yourself in a supportive environment
3. Counterparty and operational risks: Develop your Mental Edge

Risk management is vital. To ensure more successful execution of your trades and a consistent way of making money, make the above action plan part of your overall risk management system.

Here is to making trading success your habit™,

Tags: market psychology, mental edge, Nazy Massoud, Personal Risk, Psychology, Risk, Risk Management, trading emotions, trading success

Comments feed (RSS 2.0), comment or trackback from your site.

That’s Mr. Risk to You, Real-Estate Investor

Whether you are looking to invest in commercial property or a new primary residence, the opportunities in the current real-estate downturn are nearly everywhere you look, even Detroit. The pressure to lock in low mortgage rates has many investors champing at the bit. Plus, the approaching December 1^st deadline for obtaining the American Recovery and Reinvestment Act tax credit is pushing first-time home buyers off the fence and into the game. But, as investors return to the real-estate market and the inventory of existing homes shrinks, a race to capture the last of the low prices may soon inhibit investors from executing adequate risk management.

With all of the current real-estate investment opportunities, it is crucial to not become blinded by the seductive home prices and appealing tax incentives. Investors with all levels of experience can protect their investments by recognizing and preparing for risk. While some precautions may be required by your lender, such as homeowners insurance, many others are going to be your responsibility. There are three primary ways you can help to prepare yourself for the majority of risks that come bundled with real-estate investing.

First, examine the current market in which you are looking to purchase property. Assess what is available and for what price. Also, what is the current level of buyer interest in the area you are considering? These questions will help you get your bearings within the local market and also increase your negotiation power later on in the process. Only a few cities are investing heavily in improving their infrastructure, but this might help persuade your decision if there are finalized plans for improvements in your considered property’s vicinity. Remember, since real-estate is a long-term investment, it is important to consider the area’s future. With adequate research you can identify some signs that can help you make a wise investment decision.

Second, aim to understand the laws and regulations involved with your considered property. I am not suggesting you become an attorney to make a wise investment, but being well-versed in the legal documents that are involved will behoove you. No matter how seasoned of an investor you are, few things can help you better prepare for risk than understanding the rights and requirements of your property’s regulations.

Third, consider your payment options. When considering your funding options, consider how long you intend to keep the property. The days of no-documentation loans and 100-percent financing loans are behind us, for now. So, thankfully, the trickery exercised by lenders in the middle of the decade should no longer overwhelm you or persuade you into signing something you do not understand. However, it is still crucial to do your homework. Knowing which type of loan you are comfortable with and which is most affordable will help throughout the loan-approval process.

When treating real estate as a long-term investment, it proves to be one of the least-risky options. However, real-estate is still not immune to risk. By taking the precautions mentioned in this article and continuing to be proactive in minimizing risk after you acquire the property, you will allow your investment to work for you. More importantly, you will avoid the tense, nerve-racking roller-coaster ride that comes when you are sideswiped by costly risks you could have prepared for.

Too Old For Risk?

We have all heard the old rule of thumb that states 100 minus your age should be the percentage of your portfolio that is comprised of stocks. This is meant to serve as an attempt to keep your amount of individual stocks manageable. After the recent market meltdown, however, many experts are recommending that even that number may be too high … and major stock funds are adapting.

With the onslaught of baby boomers set to retire, fund managers at major firms have been aiming to develop a stable stock program for older investors. The idea is to keep baby boomers investing in stocks instead of in a safer alternative with lower returns, such as Treasury bills. The various funds have been trying to develop an investment vehicle that combines the stability of T bills with the higher returns offered, sometimes, by stocks.

Older investors are primarily interested in a steady stream of income. Therefore, mutual fund managers have been designing funds that will occasionally hold more bonds to ensure they protect their ability to keep providing an income even in down markets. For example, last year Deutsche Bank created a series of mutual funds aiming to turn volatile stocks into stable investments. Deutsche’s fund managers spent more than a year developing the mutual funds for retirees. However, in the midst of the market meltdown, the fund was forced to abandon all of its stocks for bonds. They were then buckled by poor market performance. Plus, because of a warranty they gave their investors in order to originally entice them, they were then unable to switch back to stocks and had to return their investors’ money.

If an idea is too good to be true, it usually is. A number of mutual funds are aiming to provide stable investments with high returns. Furthermore, they are looking to do so while not tying up the money for years. Alright, so maybe by applying gigantic up-front costs, these fund managers may be on to something. However, they are also attempting to provide investors with the perk of low costs, which renders the creation of such a fund outside of the fundamentals of investing.

While taking on high risk rarely equates to high returns, no risk never translates to high returns. Markets fluctuate and any fund that guarantees high returns all the time cannot survive. Eventually, down markets will affect the fund and the guarantor will be forced to pull the plug or significantly cut returns. Older investors may not have the same appetite for risk that they had in their 20s, but that does not make it any easier to create the world’s first no-risk, stable-income-producing mutual fund.

Come On Risk, I Can Take It

After the recent positive signs presented by stock and bond markets, herds of investors have been lining up to sink their money into what could be the beginning of a rebounding market. Fed up with national performance, many investors have started looking to foreign stock markets for an opportunity. Eager to recoup the massive losses experienced over the last 18 months, investors are anxious to have financial markets, either domestic or foreign, once again work for them. Investors are also impatiently waiting for the bottom of the market to rear its head in order to purchase assets at their lowest possible price. The two schools of behavior have investors opening their arms and welcoming more risk, even if their money has to perform overseas.

Risky emerging-market mutual funds have attracted eager investors in massive swarms. According to Morningstar Inc., investors have dumped $4.9 billion into emerging-markets mutual funds over the first five months of this year, after only pulling out $2.6 billion in all of 2008.[i] While some foreign markets have been on a significant rise as of late, pouring loads of money into any one type of investment still brings about significant risk for investors. Doing so takes investors’ concerns off of their long-term investment goals and they become caught up in chasing short-term performance.

Thanks to positive performance in the stock markets of developing countries, investors are becoming more optimistic about dedicating a larger part of their portfolio to emerging-markets funds. According to The Wall Street Journal:

Not only do investors have a greater appetite for risk these days, they’re also more optimistic about the economic outlook for some of these countries. In China, the world’s third-largest economy, the government’s massive stimulus is starting to take effect. While exports are still down, internal growth is gaining strength. Meanwhile, commodity prices have been on the rise, improving confidence in Brazil and Russia.[ii]

While emerging- markets funds have experienced an average of 33 percent returns, experts are predicting a bumpy ride ahead. Many financial experts are predicting that emerging-markets economies will grow at a faster rate than the U.S. for the next several years. But, the recent rally by investors in emerging-markets funds is not expected to continue for long, which will calm the spike. Therefore, investors should continue to keep a well-balanced portfolio and calm the urge to shift large portions of money into emerging-markets funds in an effort to quickly recoup last year’s losses.

Tags: Emerging Markets Funds, Real estate, Recovery, Risk, Risk Management, Thomas J. Powell

Comments feed (RSS 2.0), comment or trackback from your site.

One of the things that I am hearing more and more these days is that traders are not making money consistently.

Do you know anyone with this challenge? Do you know them intimately?

So, what can you do to make money consistently?

1. Deal with your trading as a business

If you think of your trading as a hobby, then you produce the results of the hobby and making money becomes secondary.

For your trading to be successful, it is imperative to create a proven process to make it a success.

2. Have a written plan that matches who you are

This is a very important step. We want to have a proven plan that succeeds. However, if it does not match who you are, you are setting yourself up for failure. It will work for a while, but because it goes against who you are, after awhile you find reasons not to follow it.

3. Have a money management system in place

When you have a system in place, it enables you to manage your risk better thus allowing you to preserve and grow your capital on a more consistent basis.

4. Create your own daily routine

Everything we do is a routine. If you think about it, when you get up, you follow certain routines. However, most of us are not conscious of our routines. So, create one that serves you and sets you up to make money consistently.

5. Be patient

I know that some traders love the excitement of trading and once the excitement is gone, they get bored and start sabotaging themselves. Does this sound familiar?

If you are looking for excitement, find a hobby that can provide you the excitement.

This is one of the most important skills of your trading success.

6. Don’t focus on the money

By focusing on the money, you get hooked on the trade that you have placed in. Therefore, you are less likely to be in the zone and really noticing what is happening in the market.

You need to detach yourself from the result of your trade. This does not mean that you don’t care. Of course you do, and that is why you have placed your trade. It means that you are not married to your position. You are free to be in the zone and really notice what is happening versus what you hope and wish to happen.

7. Develop your Mental Edge

This is a crucial step. Stephen Covey has a 90-10 principle. He mentions that 10% of your life is determined by what happens to you. 90% of life is decided by how you react.

Events happen to us. What differentiates the super stars is how they react!!!

“Any fact facing us is not as important as our attitude toward it, for that determines our success or failure.”
~Norman Vincent Peale

Remember, this is a process. Any step in the right direction moves you closer to your goal.

“Continuous improvement is better than delayed perfection”.
~ Mark Twain

Here is to making trading success your habit™,

Tags: market psychology, mental edge, money management, Nazy Massoud, Personal Risk, Psychology, Risk, trading emotions, trading success

Comments feed (RSS 2.0), comment or trackback from your site.

Yes, spells, you heard me correctly. You may wonder in this day and age, why are we talking about spells?

What are spells? In today’s culture, it is called subliminal messages or going one step further, it is your own beliefs.

Spells are beliefs/thoughts/actions that we follow without really knowing why.

A simple example is when you go to supermarkets. They use scents to encourage us to shop for the things that we probably would’ve not bought otherwise.

Another example is media. On a daily basis, we are bombarded by negative messages. So, we tend to focus on what can go wrong and are constantly waiting for the other shoe to drop.

Read the rest of this entry »

Tags: emotional risk, market psychology, mental edge, money management, Nazy Massoud, Psychology, Risk, trading emotions, trading success

Comments feed (RSS 2.0), comment or trackback from your site.

We hear staggering statistics that approximately 95% of traders fail in their ability to consistently profit from the markets.

What are the 10 major mistakes that these traders make that cost them dearly?

1. Having no trading plan

When you don’t have a plan, you don’t have a template to follow. It becomes very costly when your emotions are high and you have to make decisions on the fly.

2. Using strategies that do not match your personality

You hear of a trading strategy that has worked very well and you are anxious to follow it. One important factor to consider is: does it match who you are and your lifestyle?

3. Having unrealistic expectations

Most traders assume that it is very easy to make money in trading. They have unrealistic expectations with regard to their initial capital, their risk profile and how much money they can expect to make.

4. Taking too much risk

Usually when traders are down, they want to make their money back very quickly. Therefore, they increase their position size without thinking about the risk/rewards.

5. Not having rules to follow

Most traders think if they have rules to follow, they are restricting themselves. It is on the contrary. Having rules allows you to be more flexible since you have thought about lots of issues beforehand.

6. Not being flexible to market conditions

It is very important to see the markets as they are and not as you want them to be or as you assume them to be.

7. Failing to take responsibility for your results

When the results are not in your favor, the tendency is to blame the markets, circumstances, advice of others… When you blame things outside of yourself, you become a victim of circumstance. When you take responsibility, you can react differently to your circumstances and become the success you know you can be.

8. Being addicted to volatility

One of the reasons that people get into trading is because they like the excitement of it. If there is no excitement, they create it. This is one of the reasons that traders sabotage themselves.

9. Not having a process to keep track of your performance

If you don’t keep track of your results, how do you know what has worked and what has not? How can you tweak your process to get the best results that you can?

10. Not dealing with your Emotional Risk

When dealing with money, there are lots of emotions involved. Emotions are part of everyday life. What separates the successful traders from others is how they react to their emotions.

So what can you do to become a more consistent trader and increase your profitability?

1. Think of trading as a business and have a trading plan.
2. Make sure that the strategies you select, match your personality so you can follow them.
3. Have a realistic expectation of what your returns are. Include all the costs associated with your trading business.
4. Have an idea for your risk/reward ratio. Don’t confuse trading with gambling. If you are increasing your position, make sure that your strategy warrants it.
5. Have trading rules and follow them. Think about them as contingency plans. Because when your emotions are very high, the tendency is that you make very poor decisions that can cost you your account!
6. Be flexible to the market conditions. When you see the market as it is, you have a much better chance of managing your portfolio and increasing your profits.
7. Take responsibility for your results. Taking responsibility does not mean that you have control of everything that happens. It means that you have a choice of how to react to the things that happen.
8. Find out why you are in the trading business. If it is for the excitement of it, find other hobbies or activities that you can get your excitement from.
9. Keep track of your performance. This is a way of objectively looking at how you are doing, what you did right and what you learned. Be gentle with yourself.
10. One of the most important things that people don’t handle is their Emotional Risk. When emotions run high, the quality of decisions goes down. It is very important to learn how to react to your emotions and thus increase your profits.

“At first, something seems impossible. Then it becomes improbable. But with enough conviction and support, it finally becomes inevitable.” Christopher Reeves

Tags: emotional risk, market psychology, mental edge, Psychology, Risk, trading emotions, trading success

Comments feed (RSS 2.0), comment or trackback from your site.

How are you feeling in the midst of all these changes?

Are you calm and collected or are you overwhelmed?

These times are challenging for most people. We are constantly bombarded by the negative news. We are hearing about massive layoffs day after day. We are hearing about budget deficits and turmoil in the markets.

So how can we deal with all of this?

There is good news and there is bad news. The good news is that there is a way to get ourselves off this rollercoaster. The bad news is that it is not comfortable.

So what can we do?

Embrace the change.

Are you still using your old strategies? Do they work in this environment? If not, staying with them is like hoping and wishing. That does not get you any favorable results. The more you try them, the worse your results get, and you put yourself even more in despair.

This does not mean that you have to change everything. The tiniest changes yield massive results!!!

If you want to be successful in the markets, adjust and adapt. Look at new opportunities. Identify the little changes you can make today that will have an incredibly powerful impact on your business.

Remember, small steps are OK, and as a matter of fact, they are encouraged. That way, you dip your toe in the water and have a better way of knowing whether the new strategy that you are testing works for you or not.

Have you heard the story about the Swiss watch?

For most of the 20th century, the greatest watchmakers in the world were the Swiss. A Swiss wristwatch was the finest in the world and they dominated the market. They set the standard.

It was the Swiss who came forward with the minute hand and the second hand. They led the world in discovering better ways to manufacture the gears, bearings, and mainsprings of watches. They even led the way in waterproofing techniques and self-winding models. By 1968, the Swiss made 65% of all watches sold in the world and laid claim to as much as 90% of the profits.

Do you know which country sold the most watches in the 1980s? If you guessed Japan, you are right.

In the 1980s, the Swiss had lost most of their market share and had to lay off thousands of watchmakers. Between 1979 and 1981 (in only three short years) 80% of the highly skilled watchmakers lost their jobs. They slipped from 65% to 10% of the world market.

What happened? The Swiss refused to change. They would not embrace the new technology of the quartz crystal, which was ironically invented by the Swiss, and they clung to the ways of the past. “This is the way we have always done it” became their battle cry and they lost.

Do not be afraid of change – Embrace it!!!

Ask yourself:

1. What tiny shifts will lead me to the changes that I want?
2. How can I apply these changes so I can get the result that I want?

You’re not going to change your results unless you change what you’re doing!

Here is to making trading success your habit™

Tags: emotional risk, market psychology, mental edge, Psychology, Risk, trading emotions, trading success

Comments feed (RSS 2.0), comment or trackback from your site.

Penny Hersher tries to analyze hedge fund ethics and how they affect regulation over on Huffington Post. There are a a couple things wrong with the assumptions that she makes, but I’ll wanted to discuss something that is taken for granted in this post.

Penny assumes that the hedge fund has a high water mark and is down 20% from their HWM. The options she give are:

a) stay with the fund until you have recouped the losses and made your investors whole – working for “psychic income” as Kenneth Griffin of Citadel fame told the New York Times or
b) leave – retire, switch to a new fund, start a few fund – basically start again? If you had many years of excellent performance before this one terrible year you may well be able to raise another fund.

The third option that I’m putting forth (just for the record, it’s a BAD option so don’t try it at home):

c) Increase Risk. Your basic hedge fund strategy (which you’ve documented in your offering documents and pitched to your investors) is a conservative low-risk strategy. If you are down several months and you see that using this conservative strategy isn’t going to work, there is the temptation to increase your risk tolerance to get you back above your hwm.

Increasing risk is very tempting as it is a short term solution which could potentially get you out of a bad slump. The downside is that if the increased risk causes increased losses the manager is likely to raise the risk again and dig themselves deeper. The fact that there were so many Madoff feeder funds was exactly because of this. A fund was struggling through the economic downturn, so to balance the losses they invested in a vehicle which under regular circumstances they would not invest in.

So, why do I bring this obviously bad “solution” up? Simply to make the point that while high water marks sound like a good thing for the investor, they can have catastrophic side effects.

If you’re down 20% and have a fund with a HWM, close the fund, start a new fund without a high water mark and get back to business.

Tags: high water mark, huffington post, hwm, madoff, Not Categorized, Risk

Comments feed (RSS 2.0), comment or trackback from your site.

These are uncertain and confusing times. Everywhere you look, any conversation you listen to, it is about the economy and its impact on our lives. We hear about deficit, raising taxes, unemployment and lack of liquidity. It is enough to make everyone enter a negative emotional spiral.

How can you deal with these uncertain times?

1. Manage Your Emotional Risk 

• Limit your input – Be conscious of how much time you spend talking / listening to others about the negative impact that these markets are having on our lives.It reminds me of a quote that I heard: “Worrying does not empty tomorrow of its troubles, it empties today of its strength.”

• Separate your results from who you are – Yes, I realize the majority of us define ourselves by what we do and how much money we make. This is the time to rethink that.

• Reduce your stress – This allows you to be more creative and enables you to plan rather than react.

It is crucial to manage your emotional risk, and yet it is challenging. What are some ways that you can manage it?

Napoleon Hill says: “If you don’t control what you think, you can’t control what you do. “

1. Manage Your Expectations

Be realistic with the goals that you are setting for yourself. When you have unrealistic expectations, you set yourself up for real pain…

Remember, tough times don’t last forever. To thrive in these situations, you need to be resilient, strong and flexible.Roger Crawford says: “Being challenged in life is inevitable, being defeated is optional.”

1. Recalibrate Your Skills and Strategies

This is the time to think about how you can reposition yourself to make it in these markets.Look at your strategies objectively and see if they still apply. Don’t be attached to how things were. These times are like nothing we have experienced in our lives.

If the old strategies don’t work, come up with new ones and see if you need to develop new skills so you can apply them to the new strategies.This is the time that you need to think and act differently.

Napoleon Hill says: “The majority of men meet with failure because of their lack of persistence in creating new plans to take the place of those which fail.”

1. Give Yourself an Emotional Stimulus Package

This is very important. It is about coming from a place of gratitude. Yes, I know when we are hearing all about doom and gloom, it is challenging to be grateful.

Ask yourself, how can I find more meaning in my life?

My challenge to you is to find at least 3 things that you are grateful for. It can be as simple as, you have your family, your health and people who care about you.

William Arthur Ward has a quote: “The pessimist borrows trouble; the optimist lends encouragement.”

To summarize, the 4 steps we can take to succeed in the current market conditions are:

1. Manage Your Emotional Risk
2. Manage Your Expectations
3. Recalibrate Your Skills and Strategies
4. Give Yourself an Emotional Stimulus Package

There is a quote by Yoda that says: “Train yourself to let go of everything you fear to lose. . . The fear of loss is a path to the Dark Side.”

Tags: emotional risk, market psychology, mental edge, Nazy Massoud, Psychology, Risk, trading emotions, trading success

Comments feed (RSS 2.0), comment or trackback from your site.