Endurance – making sure you’re there for the next round

Never go all-in on an investment. No matter how good a trade looks, always prepare for being wrong. There are no absolute truths, so you can never know enough , even theoretically, for all-in. You should always be uncertain. Mind surroundings, black swans, corrections. Make sure you keep reserves good as gold for the next round

 

I am not uncertain

-Bobby Axelrod


n my book about 15 years at the best performing hedge fund in Europe over a decade, I list 50 rules of investing.

This post is one in a line of articles detailing and explaining some of my most important insights from that time. Taken together I believe they will make for a useful and inspirational reminder for evolving and consistently improving your investment habits.


Endurance means making sure you are still around to play the next hand. And the one after that. If you play your cards right, total time in the market works in your favor.

Endurance is purely about survival, about protecting the downside, about never being wiped out completely, whether struck by a 1930’s like collapse, the Nifty Fifty surge, the 4000 per cent gold spike in the 1970s or gold’s subsequent collapse, the 1987 Black Monday event or the IT and house bubbles and their bursting.

Endurance means investing in a way you never lose all, never risk all. Endurance is not about the alluring upside potential or triumph of hitting the jackpot.

Endurance means fully internalizing the inherent uncertainty of the future, thus understanding you can never know enough for an all-in position. People lie. Earthquakes quake, tsunamis hit, politicians change their mind, other people lose their nerve… If you lose all on an absolute certainty that turns out to be wrong, there is no way back. That can never be allowed to happen, if you actually want to predictably move forward rather than just gamble for kicks.

 

It ain’t what you don’t know that gets you into trouble

It’s what you know for sure that just ain’t so

-Mark Twain


Endurance is the bricks and mortar version of the psychological rule of Resilience. If you lose all, no amount of resilience is going to help you recover.

I often say Patience is the most important thing in investing, but if there’s nothing left, patience won’t help you. And if you wait and wait and wait, being patient to a fault, and eventually bet all on a 99.99% probability of success… and still lose, what good did that patience do you?

If you aren’t familiar with the Kelly criterion for linking probabilities and warranted (optimal) positioning, google it. However, bear in mind that the good Dr. Ed Thorp advocates halving the bets for ordinarily risk-averse individuals, thus capturing some 75 per cent of the upside while significantly reducing the amplitude of drawdowns.


Shit happens

Make sure it doesn’t affect your entire portfolio at once


Endurance

If the downside is unacceptable, don’t do it.

Alright, I know, I know; airplane crashes and whatnot… You still need to fly, right? On the other hand, the risk of death really isn’t unacceptable – you won’t know you’re dead anyway.

I’m referring to avoidable financial risk with a non-trivial likelihood of total loss. All-in at the poker table; or all your savings, plus debt, on one single options position, fit that bill perfectly. No amount of upside is worth risking all. Whenever feeling cocky, referring to “real men”, “gun-slingers” or “all-in”, make it a reflex to back off and perform an objective post-mortem analysis of your situation: Pretend the worst has happened, i.e., do the opposite of dreaming of hitting the jack-pot, of showering in gold coins, of being revered as a player and master risk-taker.

Talking of poker, I’m excited by the news about the AI DeepStack beating a few of the very best poker players there are. Chess, Go, Poker… AI is taking over anything remotely quantitative. Investing is definitely at risk, but with the right psychological traits and mental tool set, I think humans can prevail for some time more.

 

Risks of unacceptable losses are unacceptable

 


This was the fourth installation in my 12-part series of TAOS – The Art Of Sprezzatura. You can buy the artwork here. If you missed the previous three articles you can find them here: Strategy, Patience and Resilience. Next week I’ll publish 5 more.


Subscribe

Occasionally I will offer subscriber-only material in my newsletter. Please sign up (it’s free, and it includes my book about hedge fund investing), if you want to make sure you don’t miss out on freebies, offers and subscriber-only discounts on special products.

admin

6 Comments

  1. Mikael, where were you when I gambled out my savings playing on stock index in 2009? :D
    It was a psychological hit that hurt for years.

  2. Det kan inte vara lätt för dig Mikael nu. Lider med dig.

    “Fullinvesterad” i Xcat Bear i ett av tidernas största börsrallyn (varför bara inte stå på sidlinjen med likvida medel om du inte tror på börsuppgången?).

    Portföljen i övrigt fullsmetad med förhoppningsbolag. Nu tänker jag inte bara på Peptonic (varför köpa stort i ett bolag som redan misslyckats med samma studie en gång tidigare?) utan även företag som SimrisAlg (algodlingar har amerikanerna försökt sig på sedan 60-talet utan framgång). Inte ett enda portföljbolag redovisar faktiska vinster.

    Privat investeringar i form av lån på flera miljoner till vänner till låg ränta för att de skall spekulera i fastighetsbranschen? Även om projekten lyckas är din uppsida bara 10% då du bara tar räntan men hela nedsidan.

    I övrigt en del innehav i fysisk olja….

    Ibland undrar man vad som hände med Europas bästa hedgefond förvaltare. Hur kunde det gå så fel?

    • Tack för sympatierna :D

      Du har inte riktigt hela bilden, men visst svider spekulationen i peppan och visst finns det risker med privat utlåning (men vad ska man göra med pengarna om inte hjälpa vänner?). Jaghar ingen fysisk olja, däremot optioner på fysiskt guld och platina.

      Ja, det där med XACT bear blev inte så bra. Som tur är har jag en obelånad lägenhet på 200 kvm mitt i city som naturlig hedge. I simris har jag tagit hem mer vinst än jag har kvar i investering så du behöver inte tycka synd om mig där. Dessutom har jag prickat flera 50+ procentare i år i GIG och NGE samt ligger plus i Studsvik så jag klarar mig.

      Fortfarande surt med BEAR ändå. Känns riktigt ointelligent; jag fick nog hybris helt enkelt. Nåja, inga kunder som skadas iaf och personligen har jag mer pengar nu än när jag slutade, så du behöver inte vara orolig.

  3. Känslan när man inser att Peptonics nya affärsidé är att sälja Placebo-salvan “då många kvinnor upplevde färre symptom med den”.

    Man tar sig för pannan….

Leave a Reply

Your email address will not be published.