Big Picture: market risk and memory

Discussions about the psychology of the markets and the masses as it relates to trading.
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Roundtable Knight
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Big Picture: market risk and memory

Post by damian »

Flipping the pages of the July issue of Risk I found their quote of the month:

"Look at our revenues compared with our VAR and calculate our Sharpe ratio. If we were a hedge fund, we would be the best hedge fund in the history of the world by some huge multiple"

Attributed to the global head of risk (management) at Goldman Sachs in response to accusations that the firms prop trading has grown so large that Goldmans now resembles a hedge fund. The quote is part of an article which discusses the soaring VaR levels at the top tier financial services firms which resulted from, among other things, a shift towards prop trading as a revenue substitute.

Certainly I am having more casual industry discussions recently where I hear interbank market participants using phrases like "... we are seeing a return to the BT days of anything goes in search of revenue". Poor BT are now a distant memory. (Note: this refers to the market in general, not GS as a firm).

I cant help but get a mild impression that people have already forgotten the last Asian/Russian/LatAm 'banking' crisis.
Forum Mgmnt
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Post by Forum Mgmnt »

I just finished reading Jesse Livermore: The World's Greatest Stock Trader. This is an okay book but not nearly as good as Reminiscences of a Stock Operator.

It was nevertheless interesting because it reminded me of how little has really changed in trading and human nature despite everyone's protestations otherwise on a frequent basis.

Remember, many of today's prop traders and managers were in High School during the "Asian/Russian/LatAm 'banking' crisis".

It reminds me a bit of the mid 90s when I was smiling to myself and shaking my head as all the 20-somethings kept talking about the "New Economy" and how the internet changed everything. They had never seen anything other than a Bull Market.

It's a good thing there's not much study of history going on, otherwise we might have to take up another business :wink:

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Post by richard »

It's a good thing there's not much study of history going on, otherwise we might have to take up another business
How true.

Reminiscences is truly a deserved classic. Every time I read it, different sections jump out at me. So speaking of memories...

There is a chapter about the '07 panic that hit home recently. I have some strong fundamental beliefs about the economy and I trade on those beliefs but have lost money doing so. The chapter I am talking about describes how Larry Livingston was right but went broke because he was right at the wrong time. When he finally realized how to use his fundamental analysis with his tape reading, he borrowed money and pyramided to a great fortune when he was short during the huge drop in equities in the Panic.

I think it is essential to read history going over several hundred years. The recent past is quite an anomaly due to the fiat Dollar as the world reserve currency, so it could be fatal to make risk judgments based upon the recent past (30 years or so).
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