February 2, 2009


I’ve been a trader and an investor for half my life and have never found a time when it didn’t exhilarate me or a time when it sent me into fits of anger. This entry is about what I learned during those fits of anger. Managing money for individuals is not the same as trading for an institution. Individuals have little tolerance for losses, as do institutions, but the difference lies in expectation. All investors in their lifetimes will incur losses; you should avoid those that tell you they don’t. Risk is the probability that uncertainty, resulting in failure, is equal to its resulting in success. Harsh as it may seem it makes sense if you approach investing as a science that looks to navigate uncertain environments and thereby uncertainty. However uncertainty isn’t the problem, the problem is accepting the results arrived at when working to reduce the outcome of random events, and using those results to further avoid failure. Private clients, individual investors and nearly everyone else outside of the professional investing community are at a distinct disadvantage when it comes to investing. Reckless judgment and what academia has called behavioral weakness. Failure and success are inevitable in the business of investing.

Rule: No portfolio manager will ever succeed if those he represents view failure as cost to great to bear. Get past it.

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