Tuesday, July 28, 2009

Risk/Position Management <> Prescience

Tim Knight has a terrific post regarding Paul Tudor Jones. I'd recommend your watching the videos if you've not seen them already. You can find them at Tim's post below.


What I enjoyed about watching these videos is the re-enforcement that any of this 'stuff' we call investing/trading is still based on managing uncertainty and managing risk.  We’ve a tendency, I think, to believe that some people have a remarkable prescience about what the market will do.  To see PTJ nervous and uncertain was comforting.  So here is ‘a great one’ uncertain as to which way the market is going , and it struck me that he is no more prescient than any other.  Rather, it emphasized the importance of market participants to distinguish success as DIFFERENT from prescience (which implies some certainty). 

There’s really no such thing a prescience. Success is simply a result of good risk management. (That applies to most things in our lives).  For every stock you buy or sell short, you are making some decision using some criteria about the future direction.  You’ll be wrong a good portion of the time.  So long as you manage (curtail) your losses and manage (optimize) your gains, your failures will be minimized and your optimized gains will look like prescience.  The curtailed losses, because they are managed, make the winning positions look like prescience. 

Don’t confuse good position management with prescience.  And be careful not to ascribe super abilities to your favorite market pundit.  I believe that if more people understood that success comes from good risk management v. some ‘special foresight’ that, particularly given the prolific proclamations of so-called stock gurus, there would be less misery and more investor education.

While I’m much better and picking winners and jettisoning losers, I’ve a long way to go in BETTER management of my positions to optimize gains. 

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