Thursday, 5 March 2015
Risk Management vs Loss Management
When I was a purchaser with my previous company, there was this big Taiwan supplier that won my respect.
This supplier was reliable, makes good quality products, and their prices were competitive. So it was no surprise that many purchasing teams often compete with each other to source our products from this Taiwan supplier.
However, as part of their risk management, this Taiwan supplier will only offer us max 30% of their production capacity. Yup, its one of the few suppliers who will turn us away!?
Every time I visit this supplier, I have to turn myself into a "salesman" to convince this supplier to do more of our business! Talk about role reversal!
On the other extreme end, there are suppliers who have no qualms in giving us 90% of their production capacities. I felt like a king visiting these suppliers...
Guess who survived better during the 2000-2003 global recession?
Those who buy 4D may have this frustrating experience of being told your number is "sold-out"...
Have you wondered why Singapore Pools is turning away business?
It's risk management like the Taiwan supplier right?
Using the same analogy, those who trade spot forex will understand why some spot forex brokers have to be liquidated while some are able to weather the EUR/CHF storm without bodily harm to their reputation?
Those brokers that failed only practiced Loss Management - making sure clients have enough margin to support their trades.
But were there Risk Management to make sure the brokerage is not taking too big a position risk by accepting all the same number "4D" bets by clients?
And that's why I give people a queer look when they tell me they are well diversified with 100 stock positions - fully vested,
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ReplyDeleteLook at gh Chua. Is he well diversified?
CW,
DeleteYou tell me what you think of 22 "unlisted" counters ;)
22 (losses) vs XXX (wins)
DeleteYou say.
:-)
CW,
DeleteFunny you should say losses...
That's Loss Management ;)
yes sir! thats a very good example, well done!
ReplyDeletein trading, its position sizing, thats what we spend most of our time in studying and studying our position sizing. where is our optimum position size and limit size based on our equity and markets, as you might guess it already, it changes very often depends on your trades or system of trades when the market moves.
and that is to ensure we don't stray too close to the mother, i mean danger.
Deleteand ofcos there will be cut loss point, like the 4D example, where position size getting out of control, we over ride the system and cut down the positions so to speak.
Deletecoconut,
DeleteI am a "better" investor because of what I've learnt from trading.
There are many concepts in trading that are very applicable to investing.
But I must force myself to purge the "poison" from investing and never apply them to trading....
No. 1 investing poisonous idea: I'm investing for the LONG TERM.
Ya right. In the long term we are all dead. I want to SELL and enjoy the profits before I die!
LOL!
any possibility u will reveal your trading tactics?
Deleteu seem like those few doing well in trading
Jimmy L,
DeleteThe secret is there's no secret.
Only in the comments section will you find me talking shop with fellow veteran traders.
And if you noticed, we only 点到为之。 The rest is pretty much understooded.
I am a cheerleader of finding your own path.
I don't write "If you believe me follow me" posts.
I like to write "throw brick attract jade" posts :)
I don't give; I take. (I definitely not a bleeding heart)
LOL!
you idiot!
Deleteget yourself a wife, then have children then you can stretch your investment even longer term and i can assure you you will enjoy life even more la!
coconut,
DeleteOnly you can come out with this reason of having children - to extend our investment horizon even longer!?
Wait!
I think you are on to something...
I remember reading some surveys saying married couples live longer than singles... Choy!
Like that, in my old age, I move to a whorehouse. Then I will live forever and ever like Hugh Hefner?
LOL,
ReplyDeleteBest advice for this post:
"I want to sell and enjoy the profits before I die" and if the stock run and cheong after you sell, just think:
The fellow who got it from me is making money too! Win win!!
But if the person got it from u and crash, then ...
Sillyinvestor,
DeleteHey! Your outlook on life is getting brighter and sunnier!
Now you understand why I wrote my satire post asking the question to "Value Investors" ;)
Hi SMOL,
DeleteHow not to xi fu.
U know what, I think I "never shower" (bring bad luck). I think I mention before one of my colleague father blood cancer, MIL stroke and took leave. She came back skinnier, she got thyroid !
My best senior teacher Kena cancer.
Yesterday, another staff from my department wife miscarriage.
KNN! Happy can liao.
temperament,
DeleteFor me it's Amazing Grace.
Those who found their seats early for the Bloggers seminar would have heard me singing a few lines from Amazing Grace as part of me testing the mic ;)
Wow, I never really looked at it that way. What a great outlook! Must change my point of view from time to time.
Deleteckw-I99,
DeleteI guess this is my little contribution to the community.
I am naturally drawn to the Money Management and Mind parts of the 3 Ms of Trading.
When we you reach my age, the spiritual and philosophical aspects of living becomes more interesting than the pursuit of goals ;)
Hi SMOL,
ReplyDeleteI had to apply some trading risk management and cut loss techniques to my tuition as well. I've a free rein on what level of students i'm taking in. The ones that brings the most are the graduating students. But I can't have more than a certain % of my total students under that group, because I'll have continuity problem. Once they graduate, the following year will see me taking some time to fill up those empty slots, so that's not wise.
That's risk management.
Loss management is when students didn't pay me and I'll drop them straight away. I had bad experience with this and would never want to have unpaid work again.
For new students, I usually ask for payments twice a month too, so that's also risk management built in for loss management lol
In the stock market, I believe if our risk management is tight, we can avoid situations where we hesitate to cut our losses. Why? Imagine we just risk 5% of our portfolio...no emotions, just cut. On the other hand, if we risk 50% of our portfolio in one single trade, fear and greed will get a hold of us.
LP,
DeleteHaving 100 stocks in a portfolio may limit the loss 1 individual counter can do to our total portfolio., but it does not mitigate the risk of an 1997 or 2008 event can do to our sanity....
It's the same with relationships ;)
temperament,
ReplyDeleteWe are after all humans.
I guess that's the fun part - knowing when to bend the rules; and knowing when to break the rules ;)
Very interesting, to see how traditional trading concepts are actually applicable to other aspects of life like you guys have pointed out. This post gives me a new insight!
ReplyDeleteRetailTrader,
DeleteIt's web 2.0 ;)
It's a collaborative effort like playing in a Jazz band.
I play a tune, and others chime in if they feel like it.
Do join in the fun and share your opinions whenever you are comfortable.
We definitely need more traders here to talk "male chicken", sing song, and have fun!
And most of all, challenge coconut!
I one person cannot handle him.... Half the time I am wondering is he smoking me?
LOL!
many good points here especially LP.
ReplyDeleteone thing i must add is in life we live in slow motion, everything went so slow we usually have time to adjust our so call risk exposure, things didn't change much from yesterday til today til next week, everything looks almost the same.
in trading however that perception will quickly get yourself into trouble very quickly.
i'm not saying i'm very the fast, i have system to help me out. but most people, me included came into trading arena can never be fast enough, never!
Deletei'm talking about changes to their risk exposure, depends on your trades, that they are unable to adjust to the changes when markets moves in different speed.
a good risk management will enable you to reduce the volocity (volatility) of your equity movement and a good strategy will enable you to profit based on that volocity.
Deleteso cutting your losses fast and short is but one of the many ways you can reduce the volocity but it does not means anything to your profitability of your equity.
Deletein another words, your equity movement can go either trending up, which is what you are hoping for, or it could also be trending down!
coconut,
DeleteYou prefer to be fast? Snigger, snigger.
That's not something most men want to hear from their partners ;)
I prefer to be like the Energizer battery - I go on and on...and on. LOL!
Sorli, sorli.
You lost me there with velocity...
I knew I should have paid more attention in physics class!
i'm no physics also, what i mean is the changes of speed when it moves. quiet different from volatility.
Deleterecently in comology, becos of the increase in the universe exceration expansion theory, they predict the universe will end up in a big rip! like a bubble keep increasing in size until it tear the space and the universe bust.
you don't want that to happen to your account when you trade size.
ok la, yours very lasting, but can you make use of your Energier battery in good use?
Deletecoconut,
Delete1) Yes Sir! I'll still within my circle of comfort zone when it comes to trading size.
No beating my face up to look bigger ;)
2) My Energizer goes into a vibrator :)
Oh shut up Jared!
It's all about risk attitudes and risk management. I think that a strong heart and clear mind to do trading/investing really helps... If you don't have it...trust me.. Mr Market will throw a few surprises or shocks and then after a while... We all either get it or get out!
ReplyDeleteJoyce,
DeleteHence I never tell others they must invest or else the inflation monster will bite or something...
I noticed some of us can be a bit cavalier when dishing advice...
Haha before I started, I just viewed investing as pocket money. Now it's more than that but for some people, their jobs /& businesses are even better investments! Advice is a very funny thing I feel and yes thanks for reminding me how I must remember not to anyhow give advice in my blog!
DeleteBeing 100% vesting in stocks may not be as bad. It depends on which side of the trade you are at (either buying or selling). But most important would be how the risk management is being implemented.
ReplyDeleteWelcome to this watering hole investing wolf!
DeleteI never said being 100% vested was bad - I use my words with care.
All I said (and implied) was that don't tell me you have diversified your risks away by being 100% vested with 100 stocks in your portfolio ;)
Of course there are other alternative strategies than being partially in cash.
We can have a long/short strategy like being long 70% and short 30% in our equities portfolio. CFDs anyone?
Or hedge with the Simsci futures on the long side of our equity holdings.
SGX no put options yet, but if you invest in the HK market, we can use warrants to hedge the HSI part of our portfolio.
And of course the more orthodox asset allocation way for those who are financially trained in University - spread our portfolio across DIFFERENT asset classes ;)
8 immortals cross the Eastern Sea.
Hi SMoL, thanks for the wonderful post,
DeleteHaha, I know you use your words with care. :))
Hi SMOL,
ReplyDeleteI view risk and loss mgt as being strategic and tactical respectively.
SMOL Mar5, 5:43 pm,
"Investing for long term" is more often than not bundle/blunder with
1. buy and forget
2. buy and prove that I'll be right someday
3. mental accouning, anchoring, being too cosy with a counter etc
Other than that I concur many concepts in trading that are applicable to investing.
My 2 cts : )
Hey! Welcome calving777!
DeleteIt's always nice to see a new face to this watering hole where dragons and snakes mingle ;)
I see you use the western lucky 7s as part of your nick. Jackpot!
Please make yourself at home and feel free to make a comment or poke. Must have fun!
I long time no play jackpot machines liao....
err.. .I made my first comment in your
Delete"Here's a question to Value Investors " post. Must be the long day you had? (ok, understandable, out of hundred comments)
Have enjoyed reading your blog for sometime, but stayed in the background.
Don't think I have the gambling disposition. Triple 8 taken, so 777 loh.
calving777,
DeleteOpps!
I was thinking most Chinese would choose numbers with 8.
You chose 7, which is the western version of lucky numbers :)
Can add extra 8. More huat!
Delete:-)
CW,
DeleteYa lor. Somebody got don't know how many 8s behind their nick....
You huat ah!
Idiot. $12 million Toto I no strike.... There goes my "instant" landlord dream... Now must do it the hard way - earn it myself ;)
Oh well...
Monday ToTo $3.8m is already good for me. Buy a small yacht for fishing. :-)
ReplyDeleteCW,
DeleteOK, I give way to seniority on Monday.
I'll hoot the big snowball draws, Stand clear OK?
Give your junior a chance ;)
you guys still in your dream land?
Deletei had stop dreaming already, its dangerous for my business which is hard truth reality.
coconut,
DeletePrecisely why once in a while we engage in a bit of fantasy mah!
There are serious people, then there are not so serious people ;)
But I hear you.
When I trade, I am serious.
Wow! Today Simsci very active in the pre-market. Who the hell sold it down to 369.8???
STI finally broke through 3400. Now we are talking! Let's see got follow-through or just another head-fake ;)
love this kind of market, big chaos.
Deletecoconut,
DeleteI knew you would be happy ;)
And we were talking about fat finger trades the other day...
However, this one feels like someone were on the wrong side of the Non-Farm-Payroll and had to get out quick and triggering stops along the way. Ouch! Now that's not fun!
Kwan Im Ma is smiling on me. I'm on the right side of the NFP trade again :)
congrat,
Deletei hope market would have this kind of volatility everyday, not too strong not too weak, just right for survival.
Sama-sama.
Deletewatch the 10 year yield, if its spike, short whatever you can short!
DeleteHi SMOL..
ReplyDeleteI am confused. sometimes people take risk to
incur losses... sometimes people get lost opportunities without taking risk...
so take risk, cut loss... maybe also need to cut earnings and stop risk... confused..
Rolf,
DeleteI focus on what I can Control, only after maybe on what I can Influence.
If only setting goals and action plans can prevent what you talked about above...
;)