Friday 10 January 2014

Ultimate Risk Taking - Your Life

What's the worst that can happen to our trading or investment account?

What's the worst consequence if we quit our job and embark on the path of a freelance existence?

What's the worst case scenario if we start a business and it fails miserably despite we putting vision, mission statement, and lots of goals into it?


Last night, 2 men made the news after a big "trade" they made went horribly wrong...

If the trade had went their way, each of the men will walk away with SGD 1 million. But the ultimate downside risk to pay could be their lives...


The risk/reward setup just isn't there.

Bad traders. Even worse gamblers...
 

32 comments:

  1. you call that a trade?

    what does the counter party got to gain from the traders?

    ReplyDelete
    Replies
    1. coconut,

      The counter-party VALUED this trade so much that he is willing to fork out SGD 2 million and more importantly, seek expert counsel and reinforcements. No superman go it alone ego here.

      The "traders" had the initiative; the counter party had the edge in resources and who you know network.


      coconut,

      In some other "trades", it has been known by some counter-parties to walk away from the "trade".

      That's when you know "where's the love"?

      Delete
    2. wow, i got nothing to add haha.

      Delete
    3. If we take care of the downside risks, the upside will take care of themselves.

      These 2 "traders were around my age. There must be a catalyst for anyone to "capitulate" and take on a risk your life kind of "trade"...

      Delete
    4. smol, when we trade, it has to be the same item that we disagree on.

      here is a case of different items with different values, how to trade? in this case the traders life has no value (or negative value) as far as the counter party is concern.

      Delete
    5. hey, i found some video that will help you understand a lot more about trading professionally, check them out.

      although they cover mainly option trading, ideas are the same, and its good to know option trading in details too though not so much applicable to our stock market.

      Delete
    6. ops, here it is

      https://www.youtube.com/user/bullzandbearz/videos?view=0&sort=p&shelf_id=3

      Delete
    7. see these guys use multiple of strategies, not just a strategy.

      even with multiple strategy, i like to call it multi-diamension, there is no guarantee of success.

      Delete
    8. coconut,

      A sure win strategy is only when you have personally rigged the game ;)

      I wonder whether options is still "popular in Singapore? Now don't see Options courses or seminars like during the days of "Dr Options"....

      Thanks for the Options link.

      I think it's good to balance with the discussion at this forum on how a big time Hedge Fund manager blew up by selling naked options:

      http://www.valuebuddies.com/thread-4383.html

      From my past self-study and research:

      Buying option - high probability to lose the premium for the low probability to WIN a lot of money.

      Selling option - high probability to earn "income" by collecting the premium for the low probability to LOSE a lot of money.

      Spreading - limit profit; limit loss. Grind out profit day-in, day-out. What you call multi-dimension? Beautiful names! Iron Condor, Butterfly, etc

      Delete
  2. Hi SMOL

    Didn't the original figure was $20 Million or something? At least the tradeoff sounds more reasonable. Either way they get a death penalty now, maybe they bought a life insurance package just in case they are caught, covering for covering.

    ReplyDelete
    Replies
    1. B,

      True. But life insurance is you lose when you win; and you win when you lose.

      The $20 million is like unrealised profits. Its just a figure until you put them as realised in our pockets.

      It also shows lack of conviction in this "trade".

      Delete
  3. Ha! Ha!
    coconut not only you are funny but brilliantly crooked. You taught the 2 how to cover their "crooked trade" by buying life insurance package. At least their kin will be rewarded no matter what is the result of their trade.. Brilliant.
    By the way which dumb insurance company? i want to buy too.

    And Smol, you can think these 2 are trading their life for money are certainly true no matter how one looks at it. The problem is counter party is forced into the trade.

    ReplyDelete
    Replies
    1. temperament,

      With Central Bank artificial suppression of interest rates, how many conservative non-investor retirees were "forced" to seek higher yields in riskier instruments like stocks?

      When all they have planned their whole life was to work hard, saved, and lived on their savings via fixed deposit interests.

      Now reported inflation is relatively tamed. You have lived through the high inflation during the late 70s. How many ordinary citizens were "forced" into this trade?

      Asset price inflation benefit us investors and speculators; cost of living inflation destroys the savers and poor.

      Delete
  4. To me, the 2 are beginner traders trying to do Enron, or Lehman.

    They do not have sophistical trading strategies, or big bank/bokerage house backing.

    They also did not do their homework, look at all the mistakes made.

    Most probably, they had wanted to abondoned trade but too bad, order is keyed in and market is on, orders is filling but direction of trading wrong. There is no getting off.

    They might have even chicken out on the possible commission at the last minute. They have returned the colletral earlier

    Lets hope they dun lose their life.

    If u can't outsmart the system, don't even try.

    ReplyDelete
    Replies
    1. sillyinvestor,

      Dang! You are good with metaphors!

      I guess all of us have our own capitulation or breaking point. Let's hope we will never be tested...


      Delete
  5. Ha! Ha!
    Most people think they are smarter than the system that's why.

    ReplyDelete
    Replies
    1. Maybe not that they think they are smarter. For all we know, the two probably started out forgetting there is a system in the first place, after all, it has been quite a while since the last significant kidnapping case. Keke.

      Interesting conversation - we have really hardcore investors here, kidnapping also can link to area of interest. haaha!

      Delete
    2. Henry Tiong,

      Welcome to this watering hole (bring your own drink)!

      We have only 1 hardcore trader here, the rest are mostly softporn investors and traders - you know, gentle people with some flowers in their hair.

      Free join us in shooting the breeze together again!

      Delete
  6. The fastest way to get rich by trading retail forex. Leverage at 400:1 and hoot tua tua.

    The two non typical Singaporeans who are not kiasi type leverage their life to get super rich in days.



    ReplyDelete
    Replies
    1. Uncle CW,

      Your metaphor too chim for me, what is retail forex and what is leverage 400:1??

      Sorry huh, I mountain tortoise

      Delete
    2. CW,

      Indeed. Equities 3:1; properties 5:1; futures 15:1.

      Spot forex is one of the few vehicles where anyone with zero credit history can get 100:1 leverage and beyond. Talk about generosity and trust the broker had in you ;)

      Ah long and casinos never so generous!!!

      Delete
  7. Ha! Ha!

    SHORT SQUEEZE (Extract from a book)

    Have all read {one of the most infamous cases of a Short Squeeze happened in 2008. The company was Volkswagen. Going into 2008, the auto industry was having major problems because of the recession. Yet the stock price of Volkswagen continued to increase steadily, so the hedge funds-like SAC Capital, Greenlight capital, and Glenview Capital-started to take a large short position in the stock. However because of quirk in the German securities laws, Porsche had been buying up the stock in Volkswagen. By October 2008, Porsche said it owned roughly 94.2 % of the company's outstanding shares.

    The problem was that short sellers had shorted a whopping 12 %. In other words, there were not enough shares to cover the position and the stock price of Volkswagen surged.The market cap reached $456 billion, making the company the most valuable in the world. The losses totaled in billions. And most tragic case was Adolf Merckle. At 74, he had a fortune of $9.2 billion. But because of his short position-and the onset of the credit crisis- he had a liquidity problem. So he was forced to sell all his assets and saw his fortune evaporate. In his home town of Blaubeuren, he stepped in front of a train and committed suicide.}

    Unquote:-
    Imagine one person's $9.2 billion fortune went out in smoke because of "short squeeze". How come he didn't believe in long position meh?
    Err..... what is short selling

    ReplyDelete
    Replies
    1. temperament,

      It's the same as why people in their 80s still buy Toto?

      Why still make big bets in the market when you have $9.2 billion?

      I guess its as silly as asking why people with millions still go to work?


      Delete
  8. SMOL,
    i can understand why people in 80s still buy Toto. i can even understand why people with millions go to work.

    It blows my mind to understand why a person with $9.2 billion went shorting all the way? Unless his 9.2 billion was from shorting in the first place.
    So shorting was the only way he believed to go?

    ReplyDelete
    Replies
    1. temperament,

      It's not shorting per se,

      He could have easily went all in on a long bet that went all the way to zero like Lehman Brothers.

      To build up to $9.2 billion wealth, he must have been more right than wrong in the past; only too late he had been fooled by randomness...

      There's a Chinese saying that if you go up the mountain too often, sooner or later you will meet the tiger.

      When to walk away from the table is something I ask myself too...

      Delete
  9. SMOL,
    "To build up to $9.2 billion wealth, he must have been more right than wrong in the past; only too late he had been fooled by randomness."

    Unquote:-
    If that was the case, that's why i can't grasp what happened to him; SHORT SQUEEZE. Broke all the basic principles of investing and money
    management??? Greed???

    i understand the brokerage houses have it's own regulations and rules that "protect" short sellers from short squeeze situation if they can.

    ReplyDelete
    Replies
    1. temperament,

      I notice your selective perception of short squeeze quite interesting...

      Your brain is trying to find as many reasons not to touch shorts; while your heart is itchy...

      1. When you borrow shares to short, the original owners have every right to ask for their shares back. That's when it gets dicey when there are no offers for you to buy your shares back to return to broker...

      2. It's just like the BAL penny stock saga. Bank can lend you leverage to go long, but they can also withdraw this credit line at short notice. Try selling when the bids disappear....

      3. Protection by others? Maybe it's best to stay out of the kitchen. Or read the fine print!

      LOL!

      Delete
  10. SMOL,
    Yes i understand, but one of the worse case for short sellers to get short squeeze was 9.2 billion's incident article.

    No!
    My brain is trying to understand normal long position investing is not easy already how come some people specialsed in short position investing especially in a Bear Market of 2008 type? And some made a lot of money during this time.

    Even if i never short a penny in the market for my whole life i still think i have to learn something from those "shortists".
    Who can tell if i really understand what they are doing then i may short a penny or two, too. Only in a bear market i am interested to short. Until now i still can't bring myself to try do what they do (i think shortists are real professional specialists) It is not for "Long Kang guppies" like me.
    Besides in a normal market times, Shortists will alert us which company has been 'hanky panky". Some of the times if not most of the times they are right. Sometimes of course it's for thier own lunch and dinner
    By the way....
    Have you take a 2nd look at Olam, Noble, or whatever stock the shortists highlighted?

    ReplyDelete
    Replies
    1. temperament,

      The shorts in Volkswagen were not "wrong" - they were based on deteriorating fundamentals. What they didn't expect was a bigger fish in Porsche was accumulating on the price weakness and turned the tables on them...

      It's the same with Olam and CMZ. Shorts have one opinion and they express it with their own money. Longs may have a different opinion and they too voted with their money.

      And that goes on every day. I buy; you sell. I sell, others buy.

      It's all about betting the direction the market or instrument is going - nothing more; nothing less. Be it short term or long term.

      Our own independent thinking matters more.

      My retort to your question:

      1) Did you buy Olam, Noble, CMZ based on fundamentals?

      a) If yes, you either believe your own homework or switch camp and follow the shortist. That''s the test of our own convictions.

      b) No, you follow the fundamental research of others. Well, you can continue to follow others mah. Why stop now? We often find ourselves in a man, son, mule situation....


      2) If you bought stocks based on technicals, shouldn't you be listening to the price action? Who is winning - shorts or longs? It's all in the price ;)

      3) Not vested in any of the counters attacked by shorts? Then it's all quite academic. The learning here may be superficial...

      Delete
  11. SMOL,
    Another way of saying is 9.2 billion guy would have made a lot of money on shorting Volkswagen unfortunately for him Porsche with such deep pocket came into the picture that created a Short Squeeze.

    Learning from others' mistakes may be superficial....
    Learning from your own may be ouch... very painful....
    Besides, (quote):-

    “Learn from the mistakes of others. You can’t live long enough to make them all yourself. ”
    Ha! Ha!

    ReplyDelete
  12. SMOL, coconut
    i think writing put option (quite dangerous if not done probably) is better to hedge a stock or portfolio for Fat Tail investment. The most Fat Tail just lose the premium * x% of portfolio hedge.
    The problem is the time factor in option and ???

    ReplyDelete
    Replies
    1. temperament,

      Writing or selling options means you take a similar role of an insurance company. You pocket the premium as the time factor works in your favour - most options expire worthless. But like you have said, if not properly hedged, a fat tail event would bankrupt you.

      That's what happened to AIG when they were happily underwriting all those profitable Credit Default Swaps for years. Then came the Lehman event, all AIG shareholders were wiped out...

      Those who buy options are either speculators or investors buying protection - just like if you buy travel insurance and nothing happened during the trip, your premium is "lost".

      The most important in options? Understanding the Greeks. Having said that, even AIG and Long Term Capital Management got their "modeling" wrong - both undone by fat tail events.

      What more can be said of us "retail" wannebes?

      Delete

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