My worst investment mistakes

This post exists in audio format in English here.

This post, however, is in Swedish (and it’s actually just a few excerpts from the real thing here). Try this post in English instead — about economic stimulus.


Lärdomar från mitt värsta investeringsmisstag

Trots att jag agerade moderator på en nyckelpresentation för Prosolvia i samband med börsnoteringen, och blev lite av en andra talesperson för aktien, efter deras huvudfirma Carnegie, så lyckades jag missa Prosolvias bokföringstricks och kommande konkurs ända in i det sista. Eftersom jag hade hunnit fylla 25 år och jobbat som professionell och högt rankad finansanalytiker i flera år fanns inga ursäkter.

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Men, min absolut sämsta investering på alla sätt — och där jag har absolut ingenting att skylla på — gäller en blankningsposition i ett europeiskt bankindex andra halvåret 2013. Misstaget kostade omkring en miljard kronor

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I korthet så hade jag det globala ansvaret för investeringar i bankaktier. När mina blankningar förlorade pengar på grund av en serie myndighetsåtgärder sommaren 2013 kunde jag inte förmå mig att stänga positionen utan drog på mig allt större förluster ända tills mina kolleger kunde övertala mig om att jag antagligen inte förstod läget så bra som jag trodde; och därför behövde täcka positionen.

Den miljarden lärde mig en hel del om min egen psykologi, om stop-loss-åtgärder och om att ta reda på vad man vet och vad man inte vet i vanskliga investeringslägen.

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Vad lärde jag mig av den här historien och hur kan du eller jag använda de insikterna idag? Några av de viktigaste punkterna gäller kommunikation, förenkling och ifrågasättande:

  • När förlusterna börjar stiga i en position, utgå från att…
  • Skapa en trovärdig bild av hur motståndarsidan…
  • Även om en bank är insolvent och tekniskt konkursmässig så…
  • Tyvärr utgick jag istället från att…
  • När förlusterna börjar stiga i en position, utgå från att du faktiskt inte förstår hela situationen eller har tillgång till all väsentlig information. Försök istället ta reda på vem som kan sitta på viktiga pusselbitar och kontakta den personen.

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The shocking reason the market crashed this week

Summary: stocks tumble as investors update their models of policy rates, inflation, buybacks, bond yields, DCF models, refinancing hurdles, italian banks, Emerging Markets worries and trade wars

Thought of the day: how nimble and smart they are, investors!


What the pros are saying

WSJ, CNBC, Reuters and other news outlets have explained in detail the last two days why the stock market is crashing:

-Investors realized inflation is gaining momentum, and that the US Fed and other central banks will have to counter with rate hikes. Higher policy rates and less QE (money printing) feed into higher market yields for bonds, which in turn acts as both an alternative investment in a TINA* world, and a higher discount rate in investors’ Discounted Cash Flow models. The latter is particularly important for tech stocks that are expected to make most of their profits far into the future (if ever).

Not least investors took just 24 hours to realize that with inflation looming and interest rates rising into the low single digit space (the horror!) will become more difficult to finance the outlandish projects that warrant current double digit P/S valuations, as well to re-finance the already hugnormous piles of debt lingering from past stock repurchase programs — not to mention future stock buybacks that might very well have to be cancelled.

Can you imagine a world where corporate investment budgets shrink from year to year, and where dividends and stock purchases have to be financed with free cash flow stemming from profits rather than free bank money?

Finally, many models were swiftly updated with new currency prices and trade tariffs, as well as the endgame result of recursive doom-loops (government-bank insolvency and runaway financing rates), triggered by recent Italian bank bankruptcy jitters.

  • TINA = There Is No Alternative To Stocks

TINHIW

That Is Not How It Works!

No, no, no! No!

That’s emphatically not what happened this week. That’s not how the market works. There are hardly any investors left that take time off their days to think about thing s like that, and certainly not in that manner.

There are but a few fundamentally inclined outfits that do meet once a week to discuss similar things. However, A) they have not had their meetings yet this week, and B) they are quite few compared to passive funds, momentum investors, CTAs, daytraders, index huggers etc.

Ask yourself: Do you know anybody who claims they sold for the reasons listed above? That they updated their models and sold due to inflation gaining steam and all or any of the variables and repurcussions? I didn’t think so. There probably are quite a few talking about why the market sold of, why others sold, whether it’s thoughtful and smart of others to sell for those reasons, but just about nobody went through the calculations above and concluded it was time to sell this week. Nope.


The butterfly effect

If you stretch conditions far enough, e.g., with debt upon debt, derivatives upon derivatives, ever higher valuations on ever higher adjusted, manipulated numbers, based on unsustainably low costs for debt and wages, and resulting unsustainably, historically perverse margins…; then any little flap of the wing can set off an avalanche.

Do you know anybody

who claims they sold for above reasons

I’m not saying the last few days is an avalanche, an earthquake, a tsunami, the beginning of the big one. I mean, the small correction, which isn’t even a correction, let alone a “crash”, is hardly visible in a stock chart.

I’m just saying the conditions are already there for a massive re-set of stock markets and bond markets alike. And that means no other reason is needed for stocks to fall… or crash for that matter.

So, no, investors aren’t cooly and rationally updating their excel models with new assumptions and recent data publications, or discussing said inputs during partner meetings. Nope, they are selling because somewhere in the market someone’s sell order pushed one stock below a level that made somebody else sell – on a hunch, as a stop loss, a machine learning model, some esoteric and spurious correlation between normally unrelated instruments; I don’t know and it doesn’t matter – and that in turn made somebody else sell that or some other instrument.

Enough debt, enough leverage, enough trend following and passive investors, high enough valuations, too few short positions, too little cash reserves in big mutual funds and so on mean at a certain point there are no value based buyers left to mitigate the selling.

Again, whether this proves to be just a two day mini downturn, or the beginning of the worst bear market since the 70’s, doesn’t matter. The point is that nobody really knows what set off the selling. It wasn’t Powell, Trump, treasury yields or cash flow models. It was simply one eager seller too many — and that seller was baked in the cake since several years back, just being temporarily on hold due to increasingly deranged central bank policies.

Happy trading!


P.S. Bookmark my site, subscribe to my newsletter by entering your e-mail address, and finally DO CHECK OUT my recent podcast interview with the one and only Erik Townsend of Macro Voices (you can find the interview and Future Skills podcast on any podcast platform… and here).

Everything happens for a reason in finance

Topic: There is no God

Summary: You are responsible for everything; you are your own god

Inspiration: Everything doesn’t happen for a reason. Actually nothing does. Things just are. You, e.g., just are.

Conclusion:  in investing, you are the one throwing all the pitches at yourself. Any impossible financial curve ball coming your way was originated by you, no matter if it’s a Japanese Tsunami or a subprime meltdown. The core of the problem always lies with your own risk management.


Things affect other things, governed by mindless laws

Yes, things are connected, but not governed, not controlled or pre-ordained. I mean, if they were, by whom would that be, and more importantly why? What would be that force’s motivation and ultimate goal?

RANT BEGINS ON GOD’S LACK OF ACTIVITY

Who that is mighty enough to be worthy of the “God” title (presumably creator and governor of all matter and energy in all time and space, and everything outside the time and space we humans think we understand) would go through the trouble of spending time in the infinitesimally limited light cone that includes the fate of humans on little insignificant Earth on the outskirts of just one unremarkable galaxy out of hundreds of billions, if not trillions of galaxies in just the universe we humans can observe?

OK, if said being could circumvent the lightspeed limit, bend time and so on, maybe governing Earth might make sense. But then think about everything else to govern. Can a single “mind” do that, given the laws of the universe as we understand them? Sure, if nothing we have mapped out with the scientific method holds any water whatsoever… If we assume anything goes, then anything goes. But then again, what’s the matter of pure unscientific speculation about something we can’t measure, have never seen a single shred of evidence of, that apparently couldn’t care less about our existence, that for billions of years and billions of lightyears has been content with letting a few simple constants control everything without a single identifiable instance of interference?

RANT ENDS

OK, so nothing happens for a reason. However, you can take any situation and make the best of it, make it “yours” — as if it were meant for you.

For example, you didn’t miss the bus in order to meet that old friend. But you did miss the buss, and as a consequence you did meet that friend you otherwise wouldn’t have. It had a lot of other less tangible consequences too (all without governance or externally imposed purpose), but you get to choose which unexpected and “new” events to focus on — good or bad:

If you always focus on good outcomes and opportunities from chance; to you it’s as if everything has a purpose. In reality as we know it, however, and the one that God has never interfered with in any outside-the-system-way (laws of nature), you are the one deciding to experience purpose (and thus it’s you who create the purpose).

If you’re well prepared, skill-wise and psychologically, you can make use of unexpected and random events. But if you just think things are laid out for you with a plan in mind, you risk not making the most of them.


God – what’s the utility?

What is God? Here is one way to think about it that has been suggested to me:

Everything; as if humans were the neurons of a galactic-sized brain — we are God and God is us; just like our brain is us and we are our brains. Everything is everything, and that is God. In other words we are God, we are the decentralized hubs of the all-encompassing being that is God: We created all this from nothing, and our objective is to understand ourselves and become whole again.

Oh, baloney!

Sure, there was a big bang, everything came into being from nothing. All matter and energy stem from a single dimensionless point, where notions like space, time and matter aren’t even applicable. 14 billion years later humans appeared on Earth, and according to Einstein most of the Universe can’t reach or affect us and we can’t affect it. Even if everything has the same origin, almost nothing is causally connected anymore.

[Insert ad hoc reasoning about quantum entanglement, wormholes in space-time, the simulation hypothesis, and AI-sophons (3-body problem) here; to try to save the idea of a single, all powerful, God, that can and does take action with a purpose directed at humans who occupy one single planet of hundreds of billions in a galaxy that is one of hundreds of billions of galaxies — and that’s just in our visible universe. And then stop to see if you’re really adhering to the God you started out believing in (God is a data nerd? God is the Universe? God listens to our prayers through wormholes and entangled quantum particles?)]


Back to the one God – no equals, no parts

Let’s get back to some sort of external, system-outside God with a mind of its own, and the power to change the laws of nature.

What could such an idea be used for? Where is there room for such a super entity? In what form, energy or dimension can it exist; since our current day instruments can’t detect God?

Well, there is a huge amount of dark matter in the universe. Could that be considered “God”? It still sure doesn’t seem to do anything — not for billions of years, let alone the mere tens or hundreds of years humans would care about.

What criteria should we require for something to be considered the “God”?

  • That God started it all? That he started just this universe? Or does the God title require starting all the other universes too?
  • That God can and does work outside the laws of nature as we have mapped them?
  • Would it be enough if there were lightcone local, super powerful AIs or aliens, that don’t care to show themselves, since we are so far beneath them — either because we are boring, or they don’t want to scare us, confuse us, or disturb our evolutionary trajectory. My guess is they just wouldn’t care at all. Such beings would be busy trying to understand and control the fate of the universe.

It seems to me, the lightspeed speed limit, lightcones and all that, would make it very hard for any kind of within-laws entity to be interestingly and meaningfully powerful. Oh, and then there’s that thing again; that it at least hasn’t exercised such powers in any identifiable way for all of time.

If God is local, it’s not powerful enough to be the God, he’s just a community sheriff. If on the other hand God is all encompassing, he has no way of knowing or governing (not to mention reason to) — it would take tens of billions of years just to hear some prayers and at least as much additional time to do something about them.


What’s the meaning of all this?

I just want you to use the same type of reasoning, as I did above, in all aspects of life: relationships, work, investing, love. Is your view logically consistent? If you assume A, what does that say about B; are A and B compatible?

Try to see the whole picture; try to understand what can be known and what can’t; what matters and what doesn’t; and perhaps most important of all; what you can influence and what you can’t. If you ignore everything you can’t change and focus on the things you can, your daily life will become much more enjoyable.

When you see platitudes and clichés like “Everything happens for a reason” or “You only get challenges you can handle“, as if there were somebody orchestrating your life; call bullshit! Things just happen. And you just happened to be there.

The challenges you “get”, i.e., that happen to you, they can kill you too. They can damage you for life — irreparably. They aren’t tailor made in order to make you grow as a person.

However, that doesn’t mean you don’t owe it to yourself to rise up as best you can to all events; or to grab opportunities that come your way by chance. Just know that no supernatural being threw them at you with a purpose in mind, or fine tuned them perfectly to something they knew for sure you could handle.

In life that is. In investing it can be a bit different.


Conclusions: Investing implictions of the No God Hypothesis

Come to think of it, in particularly in investing, you are the one throwing all the pitches at yourself. Any impossible financial curve ball coming your way was originated by you, no matter if it’s a Japanese Tsunami or a subprime meltdown. The core of the problem always lies with your own risk management.

You shouldn’t give yourself tougher challenges (when it comes to investments) than you can handle. In that respect, you actually never do get challenges you can’t handle (unless you are stupid enough to wade neck-deep into cow dung by your own volition).

No, wait for the right opportunity. Size correctly. Never go all in. Do the math and take all the responsibility yourself for your actions. Adapt and improve your strategy over time, using your hits and misses wisely. Try to understand and strike preemptively at your human biases. Create systems of habits and checklists to check your emotions, and prevent easy mistakes. And most of all, stop both blaming and praising supernatural beings for what is ultimately your own doing.


God is dead! Long live God!

Please note I don’t have anything against being spiritual, mindful, and searching for context or meaning.

Believing in some kind of personal or consequential God is ill-informed and illogical, but that doesn’t mean it can’t be comforting to some.

God doesn’t hear your prayers, but you do.

In that respect you are your own God; by putting words to your thoughts, by making room for silent contemplation, for appreciation, for making plans, for preparing for future action; if done thoughtfully you are setting yourself up for reaching your goals. Football players praying to God to make them score and win against another team full of players doing the same are of course not really asking God to indulge their crass wishes. They are praying to themselves, reinforcing the idea that their training will be enough, visualizing the shot and goal. After the score they raise the index finger as if emphasizing “I am the one God, my prayer to myself was heard“.


You do the math

Just to be clear, the one single message of this post is that I am God you have to take full responsibility for your own actions, for your success, for your happiness, for your investment risk management.

In short: You. Do. The. Math (do the math, devise/revise your strategy, wait, implement it unemotionally, repeat)