Where is risk hiding (or is it plainly visible?)

Cullen recently provided a great ‘food for thought’ post. You can read the complete post at Pragmatic Capitalism.

Exceprts below.

My mother tells me I predicted the housing bust. My father tells me I predicted the market crash in 2008. Readers believe I predicted the flash crash last year. None of this is true. I don’t predict anything. The intelligent investor does not need to be able to predict the future. He/she merely needs to know when to fold ‘em and know when to hold ‘em. In the investment world, nothing is more important than knowing when to fold ‘em.

housing bubble

When I review the housing bubble I didn’t imagine the crisis that would unfold. I knew a trend in US housing prices was unprecedented, inconsistent with underlying fundamentals and unsustainable. But my conclusion was not of the magnitude of “genius.” No, my conclusion was far simpler. I just stayed away.

Playing with bubbles is a dangerous game. I would argue that the truly intelligent investor simply pulls his chips back and steps away from the table in the midst of such irrationality. Warren Buffett is probably the best case of “don’t mess with what you don’t understand”. And in the case of bubbles, I would argue that no one understands the market’s behavior.

playing with bubbles

Market bubbles make for a market environment that can be highly rewarding, but astronomically risky. What appears like a perfectly stable system can very quickly devolve into a nightmare.

With that said, are there examples of this in today’s markets? Are there markets that warrant a “do not enter” sign? I believe so. And if I were an investor in the following markets I would merely pull my chips off the table: (details in original post)

1) China

2) Municipal bonds.

3) Silver

4) European equities (particularly periphery nations)

I take a similar stance. I don’t know what investment action to take when the market seems irrational, but staying on the sidelines is one reasonable action. Some love to go with the trend and others are born contrarians. If you don’t have a successful track record of following or fighting trends, or do not have patience (good traders must have patience) to sit it out, you can compromise by trading half your regular size.

It’s good advice, but not easy to follow. If you are playing with the bubble and not taking a contrarian position, then you have been making loads of money and it’s very difficult to stop playing that game.

This post is merely one additional reminder that risk management is the single most valuable skill a trader can possess, other than an accurate crystal ball.



8 Responses to Where is risk hiding (or is it plainly visible?)

  1. Steve 04/22/2011 at 9:32 AM #

    Bubbles and manias always burn the bears during the boom, and the bulls during the bust.

  2. Larry 04/22/2011 at 8:18 PM #

    Mark, where can I get a list of all optionable stocks listing their dividend and conference call dates coming up? It would make things so much easier to have that. I can’t seem to find this information on Google or anywhere else.

    • Mark D Wolfinger 04/22/2011 at 11:24 PM #


      I have no idea, but Briefing.com has a lot of dividend information. I don’t know whether what you seek is free. Take a look at their site.

      The best source is the OCC. Ask them via e-mail : options@theocc.com

      Hope they can help you.

    • Howe 04/25/2011 at 11:01 PM #

      You can go to http://www.earnings.com to view the conference calls and dividends information for free.

      • Mark D Wolfinger 04/26/2011 at 7:16 AM #

        Thank you

  3. Robert D. 04/22/2011 at 11:42 PM #


    dividends: http://www.dividend.com/ex-dividend-dates.php

    earnings: http://biz.yahoo.com/research/earncal/today.html

    conference calls: http://biz.yahoo.com/cc/

    Hope this helps.

    • Mark D Wolfinger 04/23/2011 at 8:18 AM #

      It helps Robert,

  4. Larry 04/24/2011 at 6:43 AM #

    Thanks, Mark and Robert D.!