"You take the blue pill - the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill - you stay in Wonderland and I show you how deep the rabbit-hole goes." - Morpheus, Matrix, 2000
This week I have learned a thing or two about managing risk in a zero sum game and like good old Morpheus I am realising that I want stay in wonderland and I do want to see how deep the rabbit hole goes. Anyway, let's take a breadth, I am coming to that...But before hand I need to cast my beady eyes on today's prophetic risk managers or should I say grave diggers.
Yes, I am talking about Donald Trump, who believes managing risk is bailing out big corporate firms to protect jobs or leaving an aircraft carrier at sea with sick sailors or better yet pretending New York seceded from the union. Yes, I am talking about BoJo who thinks herd immunity is better than quarantine and what the hell anyway?... It's just the flu, right? Yes, I am talking about the French scientists who think managing risk is about testing potential vaccines on Africans because they are just animals, yes that's what risk management looks like today, or should I say grave digging.
Okay, so back to my lesson on risk management in a zero sum game. Trading is a zero sum game and better yet, it is a zero sum game full of grave diggers. Traders who go long the Vanguard or like your garden variety super market shopper, just keep putting stocks in their basket because guess what? Markets can be overbought longer than you can stay solvent and thus the grave digging starts... Now the S&P DT Tweets are over and the market is down 30% and now you wake up in your bed, the story has ended and you believe what you want to believe. It's Covid-19, it's Mexicans or better yet it's the liberals and that damn 5G. Well, I say, if you follow the grave diggers you get just that, a fucking grave.
As I keep thinking of the "test it on Africans" narrative, I start getting goose bumps and a trip down memory lane develops. Yes, the 2008 and financial crisis. "Let's test bad mortgage bonds on those stupid Chinese and German investors" narrative and that worked out so well that once again, we ended up with a fucking grave and once again, we woke up in our bed, the story ended and we believed what we wanted to believe... It's the bankers, it's immigrants, it's the damn Jews or better yet it's the Muslims. Once again, you followed the grave diggers so you got a fucking grave.
So as my time in wonderland continues and the rabbit hole gets deeper, I say to traders, throw out everything you think you know about the markets, trading and managing risk; start to think about whether you want to end up in a grave or above land. Risk management is not having a super wide stop loss because markets rarely trade there, it's not about having tight arbitrary stops because you think markets are random, so who cares? Risk management is not about 3R take profits because the market is obliged to mitigate your risk. No, it's about knowing risk is not a constant and to avoid digging your own grave, you need to decide everyday what the entire market risk on that day is and decide whether this kind of risk environment is one worth trading in or what kind of risk you want to put on the table because in the long run, you will be digging your own grave or walking above land. You decide.
So what's it going to be? Will you wake up tomorrow in your bed believing what you want to believe or do you want to see how deep the rabbit hole goes? You already know what my answer is... Wonderland feels so good in a zero sum game, no graves on this side.