Tuesday, May 15, 2007

Take the time

and read this article from Gladwell.com

It's about the one thing we usually avoid to think about: Blowing up

and it's worth reading.

My conclusion: Invest some time to think about the unthinkable, about the catastrophic event and find a way to hedge yourself.

What is the catastrohic event? You are long, something happens and the exchange closes. No stops triggered, the exchange is simply down and you have no way to get out of your position.

Yes I know, you could hedge on another exchange, but imagine that not working either or out of the question, because the unthinkable happened and all markets are down huge.

You think I'm crazy?

It doesn't take great imagination to come up with ideas, which would cause a shut down of the exchanges in New York or Chicago. And one of these doomsday theories will come true one day. The one, who has written about it, will then be questioned if it was a man made event causing it.

I only want to drive a point home, so I just deleted my idea from the article and leave it up to your imagination to come up with an idea, which would cause a shut down of the exchanges without triggering any stops.

It really might be a good idea to hedge myself against the unimaginable.


Anonymous said...

hi croc,

A truly interesting article and a fascinating 'investment' strategy to boot.

However is there not perhaps a 'middle road'? Surely one does not have to bet the 'entire farm' on our trades which is what Niederhoffer seems to have been doing?

Anyway, thanks for bringing the article to our notice.



Globetrader said...

Of course there is a middle road and I'm looking for some real out of the money options on major indexes to hedge against my usually traded size (value of the usually traded contract size in USD). I look at it as an insurance. You pay your insurance company a monthly or yearly premium hoping that nothing will happen, but glad, that if it gets ugly you are at least covered (partially).