August 29, 2011- Are we goldfish traders? via Psy- Fi Blog

Psy-Fi Blogger recently wrote about how many investors and most markets are like  goldfish, continually forgetting the recent past as soon as we swim around the corner of our cute seaweed festooned castles.
It often seems like people have a switch in their heads marked “Risk”. While this is in the “OFF” position they’ll happily fill their boots with any old rubbish stock as long as enough other people are buying it. Yet as soon as life’s rich uncertainty rears its ugly head the switch gets set to “ON” and they head for cover behind the seaweed in the hope that their tiny castle can protect them. Memo to markets: risk is always with us, no matter how bad your memory – and castles in goldfish bowls don’t have defensive moats.
I liked the analogy so much, I’d probably include this in illustrative trading arts as soon as I have time.
Other quotable quotes from the article:
1.) To invest on the basis that something is always about to go wrong is the sign of an intelligent investor.  To figure out that the time to really invest is after everyone else has got scared about this and headed for the hills is the sign of an intelligent and wealthy one.
2.) Instead of looking at stock fundamentals and a margin of safety people look at the price (see Quality Signalling for Quality Stocks). It’s a common way for people to judge the quality of something that they don’t know a lot about and, in fairness, a lot of the time a stock’s price does signal something useful about its quality. Unfortunately there are also times when it doesn’t and these are usually in periods of increased uncertainty and forced selling due to margin calls and liquidity problems.
3.) The non-expert groups ranked nuclear power as the number one risk in the world, yet the experts put it at number 20. Despite Japan’s attempts to prove them wrong the truth is that you’re much more exposed to radiation danger through having X-rays than you are from a nearby nuclear power station: but that’s not the way people perceive it. Risk is subjective not objective: and that’s true even when experts measure it.
4.) Dread risk is always with us but we should not shy away from this at the point the rest of the world recognizes this. The very awareness of the possibility of global catastrophe lessens the likelihood.  But the risk is never, ever zero. Which is why investors should get a friend to superglue their risk switch so that it’s permanently set to Risk := “ON”.
– The Faceless Trader

About Abc

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