Posted on February 20, 2010 - by Alvin

Illusion of Winning

Photo from BigFatPurse

I have a fear.

It is more frightening than not having enough money.

Yet it is unknown and undeterminable. I do not know if it is lurking and waiting somewhere in the future and eventually haunt me one day.

I have a fear – the possibiliy of having a black swan that kills me in the end.

More about the black swan later.

Why is this fear frightening? Simply because it gives you the false illusion that you are right for a very long time, say 20 years, and then one day, something opposite happens and take away whatever you have. And you did not know the existence of this thing.

Lehman Brothers existed for 158 years, crashed and burnt in one mortgage crisis.

Long Term Capital Management armed with 2 Nobel prize winners collapsed in 4 years.

Victor Niederhoffer, a successful trader for 17 years, averaging 35% annual returns in 1996, went bankrupt in 1997.

The illusion of winning is scary. A string of successful winnings feedback to you that you are “right”, and naturally, you do what you always do to continually reap the benefits. I do not want to be the turkey. I do not want to be misled that my farmer will feed me forever, only to find out that I am killed before christmas. I fear having a successful investment journey for 20 years and getting my capital wiped out in one single event. It is not that I am negative or fearful of the future. The point is that I know about the existence of this problem and I am trying to protect myself against it, so that I do not suffer like the turkey. In other words, I am trying to find the vulnerabilities of my investment strategy. Read more…

Related posts:

1. Perception
2. Recycling and Reallocating Capital
3. A capital question: how much to have or how much to use?