Understanding markets is tough. Creating adaptive strategies generating excess returns year after year is even tougher. CoverRisk does it. But because most managers, most investors, are so bad at understanding risk and how to play it, there has been an industry created in constant vigil to protect the market's upside. This reaction to every downside event, fretting and worrying the market may have a pathetic 10% correction shows how fragile long term investors truly are. The horror of a 50% correction is beyond all comprehension.
A companies stock performance now more than ever is protected through buy backs and market gaming analysts complicit in creating an illusion of value. Legions of retirement portfolio participants are sucking onto the side of the great float boat provided by Greenspan to Yellen, Paulson to Geithner. All holding on to notions of a comfort zone lugging stock portfolios dependent on strategies which require only that you wake up in the morning and pray great acts will appear from the Fed and Treasury.
I talk about risk all the time to a lot of people. Most don't get it. Most don't believe it. Many have watched year after year of astounding gains simply complacent to be emasculated by missing great returns.
There are two rules in life as you probably well know.
Rule number one; it is always about the money.
Rule number two; it is always about the money.
Understanding risk is not just owning an investment knowing it might go down. It is the probability that an investment will succeed compared to the probability its substitute will not. Risk is balancing the uncertainty of an outcome with a utility comparing one thing to another. Finding a measure where they are both equal and then looking at the probability of returns.
