AllTheseThings

Time out

The financial markets are in meltdown, and what am I doing? I’m sitting on my couch, drinking my coffee and watching the morning news, just like any other day. What am I thinking? I should be running around and screaming with my head in my hands! Hmm…..maybe just one more sip of java……

I am pretty financially conservative, which helps to keep me calm. My job is safe, my car is paid for and I’ve got a fixed rate mortgage with one of the few banks still standing. But I still feel a little guilty, walking around as if nothing is happening, when everyone else is running around like chickens with their heads cut off.

I found some reassurance on the news this morning. One of the financial experts described the cause of the plunging stock market like this: we have been used to buying things we can’t afford, using credit cards and bank loans etc. Now these things are less available, we are forced to live within our means. We don’t like it, and, like a 4 year old with his popsicle taken away, we are having a tantrum. The tantrum is manifesting itself in us taking all of our money out of the stock market and stuffing it under the mattress. (So there!!). His advice was, as every good parent knows, just to ride out the tantrum until it subsides. I like to translate this as “sit on the couch and enjoy your breakfast”.

So I guess it’s OK to be calm in the middle of the storm. I do feel terrible for the people who were planning to retire soon. For them, "riding it out" wasn’t in the plan and may not even be an option. But for the rest of us, we are being asked to do one of the hardest things imaginable: keep our eyes fixed on the long term and wait patiently.

Does that sound familiar?!

Philomena

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Mine, all mine!

You’ve caught me at a bad time, as they say. I’m in New Home Ownership hell, and it ain't pretty. Having spent an embarrassing number of years hiding out in rented bedrooms in other peoples’ houses, I finally decided to grow up and get my own place (aided by a much-needed cash influx). My friends and colleagues spurred me on, extolling the virtues of being able to “do my own thing” and share my home with guests which I’d never done before (possibly an ulterior motive?!). I completely agreed with them. Although I’d got quite comfortable in my little bedroom, I knew there was probably more to life.

So, here I am, 2 and a half months into the whole deal. And what a deal it has been: shady Hungarian contractors, incompetent mortgage brokers, poorly installed laminate flooring (don’t get me started), a negative mortgage with a monthly adjustable interest rate and I’m living in a home improvement work-in-(very slow)-progress. “But isn’t it nice to know it’s YOURS”, asks a friend recently. Frankly, no. I couldn’t care less whether it’s mine or someone else’s, as long as I can settle down and eat and sleep and see my friends and stay out of trouble. I’m wondering what on earth I have done to my nice, simple life.

I just read a blog prompted by a predicted increase in the interest rates in the Fall. The blog posed the question: Are young people rushing to buy property too soon and overextending themselves financially? (Repossessions are at an all-time high, apparently). In Europe, renting is much more accepted as the norm. It carries obvious benefits like more freedom to move around and much less responsibility for sustaining and maintaining a home. 

I’m sure life will settle down eventually (wishful thinking) and my momentary light afflictions will be something to look back and laugh about. But, I still have a question, based on my friend’s original comment. Apart from financial incentives like the tax breaks for home-owners and the general good of the global economy, is there a philosophical reason why owning something just “feels better”?

Philomena (hoping to feel better…..) 

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Cut Losses Short...

Philomena's recent post brought to mind a key principle from another life setting.  Even those with no experience in the financial markets may recall hearing, "Cut your losses short, and let your profits run."  Sounds great, but very few people understand and apply it correctly.

If you were offered two systems with the following characteristics for trading in a financial market, which would you choose?  System #1 wins (makes money) 60% of the time.  The average loss on losing trades is $600, while the average gain on winning trades is $400.  System #2 wins (makes money) 30% of the time.  The average loss on losing trades is $500.  The average gain on winning trades is $2,500. 

If you're smart, you'll choose system #2.  Over the average ten-trade sequence, it makes $4,000.  System #1 only breaks even.  You'll notice, however that system #1 wins ("is right") more than half the time, and twice as often as system #2, which "is right" less than 1/3 of the time.  Psychologically , it is very difficult for people to execute system #2.  Losing streaks of 8, 10, or 12  trades in a row are not uncommon.  One must "book" losses more than 2/3 of the time overall.  Each such booking amounts to an admission of having been wrong about the direction of the market.  System #1 feels more like success in the short term.  Being right more often than being wrong feels like success.  The pleasantness of this feeling leads most traders to book many small gains quickly, while letting losses run in the hope that they will eventually turn into gains.  Notice how this amounts to standing on its head our original principle.  That would be, "Cut your profits short, and let your losses run."

All this is a major reason why the great majority of traders (in the futures markets, for example) lose money.  They have not reckoned with the fact that their aim should be to profit, rather than to be right.  That these two are not the same amounts to a very great stumbling block.

Back to Philomena and her internal debate as expressed at the end of her post.  I want to enthusiastically affirm her resolve to be "a dumb blonde," if that be necessary.  For that simply involves booking a number of small losses, making several admissions of having been wrong in her initial perceptions.  Dating systems are probably a lot like trading systems; most of the best ones book many small losses, but lead to great profit in the long run. 

The next post will highlight a biblical principle that parallels this trading principle.  It offers us great hope (profit), but only if we will book our losses promptly, rather than letting them run.  Future posts will include further trading principles, examples of biblical principles which parallel these trading principles, and the application of both to other real-life situations.

Albertus

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