Our Own Gray Swans

  • Posted by
  • on June 4th, 2010

Imagine you own a BP convenience store.  Through no fault of your own, your business plan can be thrown out the window right now.  This isn’t a creeping death in which you have time to ponder and plan, like you would if you were a dealer for one of the Big 3 automakers.  By the time they announced dealerships were being slashed, the writing was on the wall.  This was a curveball out of nowhere.  In hindsight, he should have hedged his business with a BP short, right?  Yeah, sure.

I’m not advocating supporting the franchisees…I understand the backlash, and the lack of a plan B and incompetence in stopping this mess has me driving out of my way to avoid BP as well.  The lesson is to have contingency plans.  As speculators, we think about risk in terms of position size, correlation, drawdown, etc.  And those are the primary and obvious metrics we face on a daily basis.

One reason I’m an independent operator is because I don’t want my destiny dictated by anyone’s mistakes but my own.  I never felt safety in the concept of working for a company my whole life.  I suppose McDonalds will be here, but who else can we count on?  Even Budweiser is no longer Anheuser Busch, it’s InBev.  Why?  Because ego got in the way.  Again, my ego…my failure. Someone else’s? Not the bet I choose to make.

I remember sitting in a Van Tharp workshop a few years back, doing an exercise where we thought of all the things that could ruin our business as traders.  Nothing to obsess over, just something to think about for an hour someday, and some easy steps we can take to reduce our exposure.  Have a 2nd broker.  Have a 2nd Internet provider.  Own a generator.  Learn skills in other time frames in case Congress decides to pass a Tobin tax on stock trades.

We are so lucky to have the opportunity to apply our creative skills to a field as dynamic and lucrative as financial markets.  “Unknown unknowns”, by definition, will always exist, but ideas like those above are such obvious business risks that it’s our own fault if we’re not prepared.  And, yes…I was talking to myself this whole post!

If you can find the time, I’ll be interviewed by Charles Kirk today at 12EST for his “Strategy Session”.  He’s one of the pioneers that legitimized this “financial blogger” thing, so I’m honored to have a chance to chat for an hour and field his questions.  The link is here.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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