Thursday, April 08, 2010

Reflections on Dr. Brett's Blow Up

I've worked hard over the years on my trading, developing ideas, indicators, and ways of looking at markets. And making some money.

Today, however, I blew out and lost everything.

It happened so suddenly: one minute everything is going fine, then suddenly I'm falling to earth and my chute won't open.

I was sick to my stomach for much of the morning. It is not easy to see everything you've achieved suddenly wiped out.

And the worst part of all was knowing that it could have been prevented.

No, I didn't lose my money in big trades and oversized risk. What crashed was the hard drive on my computer and everything I had on it: all the writings, all the research, all the records.

So all day today, I've been restoring files and reinstalling programs.

If I hadn't prepared for a catastrophic loss with a good backup service, I truly would have wiped out.

And that's the lesson of all this: to succeed, you have to keep an eye on the ideal, but keep the other eye on what can go wrong. It's the tail risk, the statistically unlikely, catastrophic outcomes, that catch up to people over time and bring them down. That's because no one likes to think about negative outcomes, and it's certainly no fun to actively anticipate and plan for them.

But planning for catastrophe can be the difference between a day's setback and the setback of a lifetime. It's that seahorse vision that accounts for long-term surviving and thriving: one eye on opportunity, the other on threats. One perspective driving you forward, the other keeping you in the game. One plan for the future; the other for backing up and preserving what you have.

Hope and strive for the best. Plan for the worst. And make sure that life's fat tails of risk can't take you out of the game for good.