Bad Beats

1
Bad Beats Living to Tell About Them

• 7 Lessons in Risk Management

2
When Genius Failed

• The Fall of LTCM

3
Even the Best the Brightest

• 2 Nobel Prize winners
• Head of Solomans (Citi Bank) bond desk
• Head of Federal Reserve New York
• Raised 1.4 Billion in 1994
• Managing 4.2 Billion by 1998

4
Can Lose Money Too

• Bet that Russian bonds would go up
• Bought a ton
• Russian Bonds eventually did go up!!!!!
• Lost it all and bailed out by the Federal Reserve

5
Black Monday

• The 100 Year Flood

6
Black Monday

• Monday, October 19, 1987
• Dow was down big on the previous Monday
• Lost 25 on Black Monday

7
Lesson 1 Crowds Can be Irrational

• You never know what the markets will do
• Never say, This will never happen
• Taking a stand can be dangerous
• You have to be prepared for the 100 year flood

8
AMPEX

• Highs Lows are Relative

9
AMPEX

• Patents on all the digital cameras
• Would you like to make 100?
• Would you like to make 400?

10
Enron

• Fell from 80 to nothing
• People bought all the way down
• Used to be the 8th biggest company in the world
• The government would never let a company this
  big fail.

11
Lesson 2 Buying Low Is Not the Same as Buying
Value

• Low price doesnt mean its lower risk
• Buying Opportunity and Company Going to the
  Shit Hole
• If a stock is really going to 50, there is
  nothing wrong with buying it at 10 rather than 5

12
The Fall of Barings Bank

• The Story of Nick Leeson

13
Nick Leeson Baring Bank

• Oldest bank in England, aka. Queens Bank
• Leeson Superstar, head of global markets
• Shorted the Nikkei 250 at the early 90s
• Barings Bank went bankrupt and was bought by ING
  for 1.00

14
Lesson 3 Admit Your Mistakes

• Shorted the Nikkei
• Shorted more when the Nikkei went up
• Lost 1.3 Billion in total
• Lesson NEVER AVERAGE DOWN

15
Stop Loss

• Get out of the trade regardless
• Its not about how often you are right
• The size of the win/loss matters
• You Can Always Come Back Play Again Tomorrow!!!

16
Stanley Druckenmiller Spanks the Bond Market

• The Talented Shines Young

17
Stan is the Man

• Former right hand man to George Soros
• One of the youngest on the Forbes list
• Bought US Government Bonds a week from its all
  time low
• Lost all of his companys money and the fund went
  bankrupt.

18
Lesson 4 Position Sizing

• Time Frame Volatility
• Close enough that the losses are bearable
• Far enough that it wont be hit if you are right
• How often can you lose with your stop loss?
• Does the stop loss match your performance?

19
Google

• So your stock went up do you sell???

20
The Next Big Thing

• IPOed at 80, soon reached 120
• Was trading at 80x Earrings
• Sold the stock
• Google, is now trading at 400.

21
When do you get out?

• Most people only teach you about what to get into
  and when to get in
• How do you know if you are right?
• When do you get out?

22
Lesson 5 Trailing Stops

• An extension of your stop loss
• Moves-up as your stock rises
• Example 100 stock, stop loss at 95
• Stock goes to 125, trailing stop moves to 120
• You lock in profit as the stock moves up

23
The Old Boys Club

• Sorry, you are not invited

24
The Fall of the Yen

• The Yen rose 5 in one day on a Friday!!!
• On no news, nothing
• Next Monday Announcement that at the G7 meeting
  that pressure was placed on Japan to not suppress
  the Yen

25
Lesson 6 The News Comes Late

• People who know more than you would have acted on
  the information already
• The price is not falling for No Reason
• There is a reason, you just dont know it
• Note Differentiate b/w standard fluctuation and
  a real fall

26
Oil Went Through the Roof

• There is more than stocks

27
1970s

• The Dow lost 50 in the decade
• Commodity prices went through the roof

28
Past Two Years

• Dow stuck around 10 500
• Oil more than doubled
• Natural gas rose more than 100

29
Lesson 7 Expand Beyond Stocks

• Commodities run opposite to stocks
• FX is completely uncorrelated to stocks
• Intermarket Analysis by John Murphy

30
Recap

• Even the best can lose
• Crowds can be irrational
• Buying Low Price ? Buying Value
• Admit you are wrong
• Position Sizing Lose all your when you are
  right
• Dont cap your earning potential
• The news might be too late
• Diversify

31
Any Questions????