Risk Avoidance

For
future reference, the financial crisis under discussion occurred when George Bush's Secretary of the Treasury, Henry Paulson, requested a minimum of $700 billion to buy a basket of possibly worthless
mortgages.  In addition, short selling has been prohibited in (at
first) 799 financial stocks and brokers have begun prohibiting
customers from exercising put options, or selling call options, on those
same stocks.  Other countries around the world have also begun prohibiting short selling on financial, or all, stocks traded on their exchanges.


Thank you Dr. Bruce Hong.  In discussing the current financial crisis, Dr Hong refers to the CEOs Guide to Derivatives published in 1994
, in which it's mentioned that derivatives were invented to reduce risk.  And that's something I've been saying again and again.

"Greed and fierce competition for performance, blinded them to the
risks. If you don't understand the risk, or how much you are
undertaking, then the concept of risk management and risk aversion is
meaningless. These "financial wizards" didn't have low risk aversion.
They had a total ignorance of, a blindness to risk. If you don't see
the precipice, or won't even admit to its presence, then what do you
think the logical outcome will be?"

If financial collapse happened to some of the smartest traders in the world (remember Long-Term Capital Management?), it can happen to you and me.  Please be aware of risk – especially in these very volatile times in which 4% market moves have become ordinary occurrences.

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