atans1

Keeping your head while all around you are losing theirs

In Financial competency on 17/02/2016 at 7:43 am

What does a rational man do when mkts are in free fall?

Here’s a very interesting tot from an FT reader.

The FT here takes seriously rather than trashing the line ‘rational people lose rationality in fast moving markets’. On the contrary rational people are hyper-rational in such situations. If the herd is running and you stand still, it is you the wolves will catch. There is a rationality to herding, and any multi-agent model will predict it. It is only the time-and-again discredited practice of peering obsessively at bell curves which is irrational.
The point of the game is not to lose money, not to have the cleverest portfolio if prices move as your models show they are supposed to do. If prices show that your portfolio is no good, then you are the irrational one!
Complexity theory has shown that market movements do not correlate to simple narratives, I know it is the pink sheets’ journos job to peddle such simple narratives, but it is nothing less than BS 99% of the time.

Coming back to the headline, keeping yr head means losing money if you are leveraged. But wait, keeping yr head means selling.

 

  1. Investing means having an exit plan. how much are you willing to lose? For dumbass investors (like myself), just follow an appropriate trend following system that doesn’t give you too much whipsaws, or a simple moving stop loss. Over the short term (can even be 1-2 years), you may not see much capital gains — maybe even losses. But over 5, 10, 20 years, the results really adds up.

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