Who Got Last Year's Financial Crisis Right?
I found a new investment blog over the weekend that posted an interesting article on the financial crisis. Since it dove tails into something about market crashes that I want to cover in the coming months, I thought I would excerpt it with a comment @ the end.
Being Right is Overrated:
Tadas Viskanta
06.06.09
Joe Weisenthal at Clusterstock points out today an interesting (long) piece by Holman Jenkins at Hoover.org on the financial crisis. The gist of the article is that the financial crisis was by and large a massive financial accident that was unforeseeable.
Jenkins notes that even investors like John Paulson, who many claim to have foreseen the meltdown of the global financial system, did not in fact foresee the crisis. If they had they would have invested quite differently:....
...those who bet successfully against subprime did so through elaborate, expensive, negotiated deals to purchase credit default swaps or buy “put contracts” on subprime indexes. Had they really seen what was coming, they would saved themselves a great deal of expense and bother by simply shorting Citigroup, Bank of America, Lehman, Bear Stearns, etc. Their profits would have been huger, their workload and hassle factor much less.
The point of the above quote is not whether the crisis was foreseeable, nor is it a criticism of Paulson.....If Paulson had foreseen the collapse of the global financial system there were much easier ways to profit from (and express) that viewpoint.....
Much too much is made in the media about who is right, and who is wrong. (Not that these thing are well tracked.)......The funny thing is that for investors, being right is greatly overrated.
Investors and traders need only worry about one thing: profitability. Are you generating requisite profits from your portfolio for the risks assumed? Everything else is just noise.
The need to be right is a common error for beginning investors. Any one who has ridden a stock down for a large loss can attest to this. Behavioral finance experts have a term for this: the disposition effect. Investors tend to sell winners too soon, and losers too late. You could even think of this as ‘get-even-it is.’ Investors do not want to admit that they made a mistake.
The fact of the matter is that all investors make mistakes. It is simply a part of doing business.....
Stated another way: For traders, {or I might add for investors} being right is overrated. It is far more important knowing when you are right, and when you are wrong, and acting accordingly.
In summary, being right may be a necessary component of trader profitability, but it is not sufficient. Proper money management techniques are required to turn trading decisions into trading profits.
Jenkins notes that even investors like John Paulson, who many claim to have foreseen the meltdown of the global financial system, did not in fact foresee the crisis. If they had they would have invested quite differently:....
...those who bet successfully against subprime did so through elaborate, expensive, negotiated deals to purchase credit default swaps or buy “put contracts” on subprime indexes. Had they really seen what was coming, they would saved themselves a great deal of expense and bother by simply shorting Citigroup, Bank of America, Lehman, Bear Stearns, etc. Their profits would have been huger, their workload and hassle factor much less.
The point of the above quote is not whether the crisis was foreseeable, nor is it a criticism of Paulson.....If Paulson had foreseen the collapse of the global financial system there were much easier ways to profit from (and express) that viewpoint.....
Much too much is made in the media about who is right, and who is wrong. (Not that these thing are well tracked.)......The funny thing is that for investors, being right is greatly overrated.
Investors and traders need only worry about one thing: profitability. Are you generating requisite profits from your portfolio for the risks assumed? Everything else is just noise.
The need to be right is a common error for beginning investors. Any one who has ridden a stock down for a large loss can attest to this. Behavioral finance experts have a term for this: the disposition effect. Investors tend to sell winners too soon, and losers too late. You could even think of this as ‘get-even-it is.’ Investors do not want to admit that they made a mistake.
The fact of the matter is that all investors make mistakes. It is simply a part of doing business.....
Stated another way: For traders, {or I might add for investors} being right is overrated. It is far more important knowing when you are right, and when you are wrong, and acting accordingly.
In summary, being right may be a necessary component of trader profitability, but it is not sufficient. Proper money management techniques are required to turn trading decisions into trading profits.
*Long Citigroup and Bank of America in certain accounts.
Comment: The beauty of ETFs is that the largest component that you need to get right is money flow analysis. Valuation and an overall fundamental approach are extremely necessary but it is also very important to know if liquidity is being added or taken away from a market or a stock. Money flow analysis helps spot trends and takes away much of the predictability aspects that many investors look to find. To put it another way. People might lie but charts never do!
posted by CR English at 7:19 AM
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