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Trading Risk And The Risk Pyramid

Discussion in 'Shares' started by wdongli, 25th Jul, 2011.

  1. wdongli

    wdongli Well-Known Member

    31st Mar, 2010
    Risk, Risk Pyramid, & Strategical Thinking about Them

    Risk and Reward

    We all take risks in the stock market. In fact, great things are often accomplished by taking risks. However the risks must be managed toughly in the war place like market. To most of us, it is true that the higher the risk, the higher the possible return. But it is too general with too many rooms for anyone to put some biases into it.

    We could not identify the value, the margin of safety corresponding to what we have paid. The fact is in the market nothing could be always very expensive and extremely cheap. We don't know when and why the things could be bought cheaply! We don't know how to define a thing is cheap or expensive.

    We have not been trained to calculate the value accurately enough or at least not absolutely wrong. We focus on the high return but we don't know when we could buy so that we could get the risks affordable and be sure our portfolio is never in losses! We could not understand when the high risk thing could becomes low risk and how to increase the probability for good enough return. We don't understand that without matter how hard we try, we still have the probability to lose or lose all in in the market.

    So most of us take the risk we could not understand and sell the chances at discount we could not understand too. The stock market seems the place for people to burn the money!

    Popular views and uniqueness


    The chart above shows the most popular point of view about the risks in the stock market or any market where people could trade or invest. This so called risk profile is based on a wrong definition, that is the volatility is risk. However risk is the chances you lose the money under any conditions. The more chance you lose unaffordable money the higher you risk your capital.

    Volatility itself could not make anyone, who stay away from the market, lose the money. It always depends on what your buying price is, what the margin of safety of your buying is, what the selling price is, what your cash reserve is, and what cause the volatility. It oversimplifies what is risk and how to manage the risk for your direct and indirect profit goal for your business.

    Most of market players or investors don't have business senses, don't have their own market views or have wrong ones(I am one of them so far); they don't know what position at what time has high probability to win out: it is about time, quality, price, personal traits; they always expect too much and hope little in the time they should not; and they don't have plan B to deal with the unprecedented events and the losses due to human errors.

    We know we all have labor value. We know we should be businesslike investor. We know we have to be unique to service the market warriors. What's the volatility to wise market players and warriors? Volatility could be disasters to the warriors but it could be your friends to reduce the risks to affordable level for each buying and no losses to your business or portfolio! Have you put enough effort to increase your labor value in the market as you did for your career in the offices? Few of market players could say yes!

    As a businessman to service the warriors, you need to know what the warriors want and when they want; you need to buy what they want at the lowest price or reasonable price in the bottom channel which is much lower than their value and form the necessary margin of safety for your buying. You should know the volatility, buy at the price which much lower than the value, sell when the price swing back to the value or in the way towards to the bullish peak, and have cash reserve to avoid the sale on fire.

    Risks from the uniqueness

    We need to act uniquely which will separate us from market warriors. However we have to know uniqueness is few always. When we look for uniqueness for our business, we could make mistakes. There are risks to lose the money even we believe we are unique. I became over-confident since last October. I made a series of mistakes. All of our losses have seeds when we feel extremely good or hope more than the market and our capability allow.

    Each elements of the uniqueness has its own catches! Lowest price is great but it could be false one or the market could push the price much lower than your assumed lowest price or the market could extend the sale seasons with different reasons or you buy some falling knifes since their bad qualities. All of judgment have some assumption. Our assumption could be wrong. What can we do for these catches?

    We usually don't assume anythings could result in our losses. Most of time we are wrong or sooner or later we would find some assumptions are wrong. Since 2004 I always want to get high return with low risk or no lose to my portfolio at all; I always want my buying price to be much lower than the value; and I always want to keep the cash reserve big enough. However my mind just became hot and all of rules and guidelines gone.

    Uniqueness is great and could help you make some profit but the profit could lead your head into the bathroom and open the tap to fill your head with the water. Once this happen, you could put you at very risky position with the believe you are unique and market is in your hand until too late and the losses is too big. We need the road map and a plan to make our head cool after some big winning.

    In my view, I believe risk is our ignorance and arrogance, which would result in over-optimism, exciting, thrilling, and euphoria. Who would worry about the risks to lose money when we are enjoying the music in a grand party euphorically? It is your job, your business, and the market is not place for you to enjoy the party!

    You have to do your job. You have to know business is always business. Don't tell me it is someone else trap you there. Don't tell me the volatility increase the risks. Don't forget we are the people have to take the consequences if we make any mistakes in the market. Don't forget it is impossible we would never make mistakes in the market. Don't forget if you are too happy, you need to be alerted by the catches.

    Don't forget personal behaviors only could be changed after this behavior is ingrained into your blood.

    Popularity and uniqueness

    Don't ignore the chart above. It is popular among the market warriors and mediocre businesses in the stock market. We need to find when they are aggressive and when they are conservative. We need to find when the quality is assumed as rubbish or rubbish is assumed as gems by them.

    Why do we want a business plan? We want to be unique in the market or at least in our own circles and be alerted by the corresponding catches. We like the risks when everyone cries for them. We hate the high return when everyone sings for them! Why? Your business is a service one for warriors. It is your job to cure their pains to buy what they want to throw away desperately. It is your job to satisfy their euphoria to sell the ticket of the party.

    Don't forget your job and your responsibility if you want to open this service business. Don't forget giving what they want. You could not change your customers and you could not become part of them as I did since April 2011. We need our plan to identify their needs and stop us to be part of them. We don't look down them. We just want to do our job and realize our labor value. They could go back to their offices and workshop, but we could not after we open the business even it is probable we may fail in our business but the consequences would be much worse than our expectation.

    We have to control the time and position for what we want; we have to invert to the opposite direction against our assumption and guess; so we could put the risks into the box within our sight; so we would be able to plan for our profit since no loss to worry; we have to keep our cash reserve to buffer our mistakes to calculate the probability.

    If we don't give up and would like to realize the value and see our margin of safety becomes the profit, we must be patient to wait. We must know we could be wrong and the probability we are wrong is quite high before we have the proper behavior in the market. We need some ways to protect us when we are wrong.

    Please understand diversification and time average are not to filter the risks that make all of warriors lose their shirts. We are little boys who run a little Casino houses to entertain the market warriors. We have to calculate the winning probability, do all to increase our winning probability, and prepare to protect the damages from our honest mistakes when we calculate the winning probability.

    We don't win over anyone else but ourselves. We want to give out our best service! Are we qualified?
    Last edited by a moderator: 25th Jul, 2011
  2. wdongli

    wdongli Well-Known Member

    31st Mar, 2010
    Circuit breakers to get out from fear and greed

    There are risk from success

    There are always some risks in the market. Risks mean the probability to lose the money in future. Any probability means the odds to fail or success for what we want. Both of failure and success could result in problems financially and psychologically. The incurred problems could result in complete failure in the market.

    Naturally we are warriors in the market. We don't plan to achieve our direct goals with the possible maximum winning probability and take all of measures to limit the risk affordable. There are always risks there but we could not see until some consequences is bad enough. No one like to lose the shirts. If we could see and feel the risks, we would not take the unaffordable risks.

    The problem is we tend to react to the risks we could see and feel and actually we could not see and feel them in the market. We don't have this kind of instinct, experiences, and knowledge. In most of time we only could see and feel the damage of the risks, which has played their parts. Damages have been done.

    Winning's catches

    Winning tends to make us over-optimism. Once we are over-optimism, we would lose the capability to see the reality and ignore the potential risks. We would develop our optimism bias, which is the demonstrated systematic tendency for us to be overly optimistic about the outcome of planned actions. This bias would reinforce itself and drive us to find any data to make the bias sound and look rational and logic even the fact is that

    1. Over-estimate the likelihood of positive events and under-estimating the likelihood of negative events.

    2. Along with the illusion of control and illusory superiority, it is one of the positive illusions to which people are generally susceptible.

    3. Excessive optimism can result in cost overruns, benefit shortfalls, and delays when plans are implemented or expensive buying are executed one after another until the cash reserve are used up.

    So once the outcomes are worse than our expectation, we would be trapped there and follow the market warriors to start a new bearish sentiment cycle. We are anxious, deny or ignore the real risks ahead since we hate to lose the money, fear, be panic, capitulate, be despondent, depress and despair.

    Once we go through this process above a few times in the market, we could be completely defeated in the market. We need the hope and see we are not useless and hopeless on what we are trying to achieve even we could change and find the way to avoid over-optimism.

    Circuit Breakers to protect damages from overoptimism

    We need a conservative and prudent mechanism to stop the overflow or the tendency to be over-optimism. Some lessons to build this kind of mechanism in our trading/investing business could be got by understanding the functions of a circuit breaker and make the functions as basis of our trading/investing business.

    A circuit breaker is an automatically operated electrical switch designed to protect an electrical circuit from damage caused by overload or short circuit. Its basic function is

    1. to detect a fault condition and,
    2. by interrupting continuity,
    3. to immediately discontinue electrical flow.
    4. to be reset once the fault is removed manually or automatically
    5. to resume normal operation.
    6. to be sized by reality for economically viability

    Are there the chances for us to extinguish any fear or greed by devise some circuit breakers for our trading/investing business? It is impossible when we are alive. However it is possible and could be done to let them very short life within ourselves before they make the damage in ourselves.

    Simple or sophisticated circuit breakers?

    The difficulty comes out from what we really know and don't know. Just designing something as fuse, which may stop the flow of the over-optimism is fine at the first step since we need the time to know more about ourselves and environment. Where should the fuses be put in our business? Before we get confident to protect us from into the unknown fields.

    Logically we should put the fuses at the places where the over-optimism starts to go; define the corresponding fault conditions, and set up the functions to stop us emotionally doing things so that we could check and remove the fault conditions, which would contribute the necessary changes in behavior. They could not be done in one days and would be a trial process, but we could be benefited just because we realize the importance of the fuses!

    So what's the most vital fuse should be designed? How to make the first fuse effective and efficient? I have made a series mistakes since April 20111, which took a long time to know and the damages forced me to check. What fuses with what fault conditions to stop me to behave emotionally and give me the chances to correct the mistakes before the damage done?

    Fault conditions

    The events to trigger the overoptimism, careless buying, and cash reserve misused:

    1. big profit locked in August but most of them moved up after the selling

    2. big paper profit and the bullish market sentiment for XAO to challenge 5000

    3. passed through GFC without losses but quite good profit

    These events were good as the results of my mind updating and extremely cautious to play the dirty-cheap fishes, but it did call the catches of the winnings, the overoptimism about myself, market, and future. What I felt, did, and got in overoptimism?

    1. I felt extremely happy first. The more is the profit the more happy did I feel. It was fine and normal but I allow my feeling going too far. I started feeling I got tight control on my dirty-cheap fishes, I held the truth of the value investing and probability and I really knew the black swans, and I felt I was able to get the profit which I want if I had enough resources even I didn't say so. I did want more not for this year but the profit for next year too. I got the symptoms of over optimism.

    2. I unintentionally swamped the direct goals or hopes with expectation without thinking viability and my affordability with higher profit target. What was my direct goal? No losses of any paper profit if big enough. I over-estimate the likelihood of positive events and stop to question myself inversely. It was I learned from Charley Monger: as a investor you have to invert, invert, and invert between extremes and then you could get the sense in the market.

    3. I jumped forward to grip the goals next year. I started worrying the profit not about how to lock them but held them with the hope that I could hold and sell in July or after that. Market doesn't follow us and the paper profit could be temporary. I knew that but I didn't care about!

    4. I broke the rules and guidelines to buy without necessary probability analysis, ignore the falling knife effects, started to believe I could make more 10 baggers without any checking of the viability allowed by the market reality.

    5. I bet on IMI with over allocated capital. I didn't go through the process to pick up the dirty-cheap fishes since January 2011. I did not use the time averaging I had used for more than 4 years including in GFC crashing.

    So, I got all of the results from overoptimism and its biases.

    1. cost overruns
    2. benefit shortfalls
    3. delays when plans are implemented or expensive buying are executed
    4. cash reserve used up and
    5. serious financial consequences: trap or burning on fire.

    Just need a break

    I had a lot of chances to find the changes of my emotions and behaviors but without a mechanism to stop the flow of overoptimism, I failed. I didn't realize I was overoptimism. I still believed I did wise and rational things when I made the mistakes one after another until the consequence and most of paper profit gone

    For a few weeks, I just hate myself and feel hopeless. If I really didn't know, it was fine but I did know I should have not done things this way. I just needed to be enforced to stop or cool down for just two weeks! Damages have been done! Could I stop overoptimism when it grows from inside? I believe I can.

    It seems I should I have to make a rule as a fuse: everyday I just need to ask some questions to myself: what I want from my trading/investing business? What is my direct goal for my business? Am I overoptimism or over-conservative? Am I prudent or ignorant or arrogant? Why? Feel very happy or very bad? What causes are? Am I overoptimism, exciting, thrilling, or euphoric for what I have got? Yes? Stop doing anything!

    I still could not fully figure out how to trigger a fuse automatically but know it is the job I have to do if I don't want to stop as a full-time student in the market. I believe we need the hope and would like to be optimism for life and my market business. I appreciate the guarded optimism. Environment will keep to change.

    As an individual, we could not change the market movement but we could find the value, find the discount, find the trend, so that we can find the right time for right position. Don't be pessimism and don't overoptimism. We need a lot of fuses to break the flow of our ignorance and arrogance so that we could be wise, intelligent, and prudent in the market.
    Last edited by a moderator: 27th Jul, 2011
  3. wdongli

    wdongli Well-Known Member

    31st Mar, 2010
    Strategic tasks for better business performance

    To be guarded optimism, you have to be alerted by the risks caused by our over optimism. To stop it flow or reduce it flow rate and impact within our business, we need a control mechanism with fuse functions before each critical analysis, judgment, decision, and action in our operational process when we are small market business people. It is critical to guide our behaviors while we have to do all by ourselves as small business people and could be used to develop our own business model, which is profitable, ambitious for chances, prudent and conscious to take the necessary risks.

    Roughly the tasks to get the right decision to buy and sell for a trading/investing business, are those as shown below, based on my experiences and knowledge, each of which should have a fuse to identify the possible fault conditions and force us having a break to double check: strategic and operational tasks for better business performance

    1. Right cash reserve

    Reasons based on value investing approach are those in the followings:

    • We could be wrong partially or completely wrong for our holding time horizon.
    • Market could lower the price far more away from the value; Price will regress to value or means
    • Business needs to reduce the costs, which would increased profit and improve performance if other conditions and status keep no change.
    • Market could be on sale for the time period longer than we expect.
    • Family and business needs the bloods, cash, to keep them going on.
    • Never and ever sell on fire!

    2. Right diversification

    It is to protect the damage from your miscalculation of the probability to get the margin of safety of each asset or stock.

    It is not to protect the crash in one sector with another bullish one. You have to know the market sentiment and economical fundamental to avoid joining the euphoric party. The party is to enjoy the market life, which is the time to reward the warriors before the cruel war between bull and bear. The party is not for the servers of the warriors.

    We are small business. We could not cover the damage if we are in the eye of the hurricane or tornado. We should be prudent when we feel extremely good and the market is thrilling. We should sell in the bullish or sunny days to let the warrior happy. We are happy only if we could provide the best services and get our labor values from our efforts and time to wisely and responsibly provide the best services.

    It is to be sure our portfolio as a whole would be bought at around the lowest average price as we target each stock for its lowest price in the historical bottom channel. It is to average the effects of falling knifes. It is the necessary measurement to be sure no loss in our business as a whole. It is very important strategically and tactically.

    3. Right time averaging to buy

    Time is not important but everything for a business. It is the one of two very basic elements to win and lose: the time and position.

    We could not win if the buying time is wrong. We could not be sure we always buy at the best prices even we know we could be roughly right. We could not be sure we could be roughly right for each of our buying. We could not allow our own mistakes in calculation would destroy most of our capital and paper profit.

    We have not to depend on any lucks for no loss and the viability of our business. We don't want to challenge financial death. We don't want to heroes as warriors want. We just hope our business could service them better and some of the warriors could be heroes.

    So we want to use time average to filter out our errors from our time calculation that we believe it is the time the warriors would want our services, get them out of the traps. It is very important to average the production or service cost down. So we could provide reasonable price for best services for these brave warriors.

    4. buy at worst time and sell in bullish days

    This should be linked to the time horizon your could hold with the acceptable cash reserve. Worst time can be relative or absolute. We should target the absolute worst time. It is because a absolute worst time is the time for absolute lowest prices.

    It is not easy to achieve but has to try all of measure to be sure the high enough probability. It is low probable for a quality share or stock would be priced ridiculous low but it is sure some times it will. Don't use any excuses to loose this requirements. Don't buy a $1 more than $0.05. Not worthwhile. You could not get the profit. You should not provide services without profit. If you buy anything expensive, you are not doing business but the customers to consume the capital without return!

    Why do you stop losses for your business as a whole? You fail to be a good business people. You fail to know your business, the market for your business, and necessary protection for your business. When you always try to stop losses how could you be sure you could focus on the profit and extension of your business. You fail to do your job. You will lose your business and your labor value!

    Could you see any business people could make excellent money without unique ideas which is hard to achieve but be able to do if manage properly. You have to fight against your laziness, the gambling instinct, carelessness. Luck could give us one or two killing but we could not hold locks in hand always. Trading is ok but if your trading is to trade yourself in, it is problem!

    5. No losses for business as a whole at any time

    This is the goal of a trading/investing business at worst times in its investing time horizon. It is the rule to buy any assets and bottom line of the business. It is about survival in worst time and revival in sunny day. If this bottom line is broken, the business would be in danger. It is the discipline to be a business people rather than warriors in the war place, market.

    This goal needs all in your business to support. You could not get it without good vision, good mission, good strategy, good operation, good market senses, good risk management, and good cash reserve and asset allocation. It is the flag which you have to consolidate your business and all in your business under. It is a strategic and tactical goals. You have to be sure low chance to make loss for each action you take. You have to be sure any ideas would not have the biases to cut this flag down.

    Market is a war place. Any looking little risks could cause domino effects to crash your business down. If you and your business could be no loss in worst time, you should be revive since Sun will raise and storm will pass by. If you could get this goal in long term, you have to behave in the way which is organized, disciplined, self-reliant, and analytical. If you could be organized, disciplined, self-reliant, and analytical, you have to hold this bottom line goal always.

    What if we are warriors without this bottom line goal? 85% of market players are warriors and you would be one of them. Why do you cry for so many disasters? You are fearful since you could not be no losses! You lose too much even sometimes you could stop the affordable losses but you could fail since your own errors to calculate the losses and turn little losses to be big enough losses.

    We need absolute protection mechanism for no losses. No loss doesn't mean you stop the service business for warriors. For example what if China tips off or US is in full default? How to deal with it? Could be no loss if your business is big enough or at least your business could be survival since your castle is very strong and the moan around it is very deep with a lot of secret protection devices?

    Don't try to know anything to cry for your death but to be survival in the worst time! Could you change your behavior as a business people? No loss but profit for anything you do. Why do I talk about no loss nearly everyday? We need to break all of barriers in our mind for no loss actions for our business! We need it in our blood and ingrain it in all of mental layers in our mind. If so we would enlighten ourselves while the warriors struggle in the ruins and depression!

    Don't try to know anything to cheer for your euphoria. Don't allow your optimism becoming over-optimism. When you feel very happy, you need to think about the protection and insert more measures to be prudent. You need to be ready to break the fuse manually if it fails to work. We tend to pay high price when we feel good. All of us have the similar instinct. We all want to be happy even it could be 10 second one. However this 10 second could be extended to too long for too much damage since you pay too much and your hard work later still could not compensate your loss!

    6. Buying for margin of safety

    Business needs to provide services to its customers profitably. No profit, no business. No protection no business. No protection no self reliance and no business could last too long. It is another bottom line goal and need to be realized in each buying and selling. Buy for the margin and sell when the margin is gone. Buy more if margin has been increased much more, which is happen often than not.

    In business points of view, it is absolutely right. Why do you buy a property house if you believe it will make losses? Why do you open a Pizza shop and open every night? Why do you come to your office and workshop? Don't tell me you do so just because it is your desired job even a desired job could let us dance on tap to work. You have to get the money your feel acceptable.

    Why do you buy this fish or swan? Just because we love swans since they represent exceedingly high quality to life and our high style appetites? You buy for profit. But do you know the value? Could it be discounted? Could you sell it when you need the cash without losses? It sounds ridiculous that a lot of market players or warriors don't care about the price but the fads and their feeling and tastes only.

    • Gold bugs like gold and desperately find anything which could support their craziness and insanity for their desired monetary standard, the cause why they should be in this market.
    • value bugs like value and desperately find anything they believe is valuable but they don't care about the price. They would like to pay the premiums which sometimes need 10 years profit of the business to compensate. They hold the valuable shares and don't know they could not get the profit without matter how long they hold.
    • quick bugs like quick money but they never try to find when the market allows them to get the quick money and they don't care about the train could leave the station after they jump down from the board. If no quick money, they just stop the losses even the losses just last for 10 seconds!

    All of these bugs are warriors in the market and bugs would destroy the asset and value at least for themselves. They like euphoric party and don't care about the traps and hells. You could not attack them personally and just because there are them in the market you could have your customers in the war place.

    All of the market have the right to buy high and sell to stop the losses. But not you! All of the market have the right enjoy the music in the grand party. But not you! It is you, the owners of the warrior service businesses, must take the responsibility and pay the time and efforts out! Do you see any chiefs for any party would join the clients or customer and be drunk!

    You have to buy when they desperately want to sell and sell when they become extremely exciting, and sell and sell and sell all when all of the people start to talk about the marvelous party and the cakes in the sky.

    7. Clean up the portfolio in sunny days and buy for it in worst time

    Trading/investing business as any business need to reduce the service cost, need to remove the dead or poor assets for its health, need to lock the profit which is good enough for the direct goals to get the incomes for income, overlay expenses, and necessary expansion capital as the market allow.

    You have to service your family, your cost to stay in the market as a full time business, your rational profit target, and support the betting on extremely probable 10 bagger targets. It is about the asset allocation, time averaging, taking the chip away from table, and reduce the cost and then the risks to break the rule, no loss.

    You need to do all in order and plan to do so in sunny days. Have you assumed what happen if you would live in Russia where the winter could frozen anything and try to clean up your houses completely in winter? My home town is quite close Russia and we never try to do any big house clean up in the winter. We even never try to do so in the raining days of summers!

    However somethings are never useful for you and hold the capital, which waste your money; in worst conditions make damage to you since you could lose the chances due to tight hand and you could be trapped there without enough room to move; you could be forced to sell when no one want to buy or no interests to go out for shopping.

    It is not the exclusive tricks of the canny business people to get unfair profit but it is about the life logic and how to make the scant resource for best economic results!

    Could you see the importance to rebalance the portfolio for your business in good time? In the market there are few people could see it. They are not idiots but just insane in most of time for the party.

    By the way, the winder could last longer than we hope. If you don't clean your house in the summers and keep the necessities with enough cash reserves, you could be forced to sell on fire. What about the summers? You may have a few rainy days but you could hold your sell until the people go out for shopping, which usually don't cause any problems.

    8. Objectives driving rather than moving around for nothing

    Generally speaking a goal or objective is a desired result a person or a system envisions, plans and commits to achieve. This objective is personal or organizational desired end-point in some sort of assumed development. Why do you get up everyday and drive away from your home? We have the goal for this driving otherwise we could not get anywhere we desire.

    Business is to provide services or products for their customers and get the revenues to cover all of expenses and capital for future extension. It needs the goal and should not allow it runs for nothing for long term let alone just driving away desperately to burn the money.

    Business has to be driven by objectives not anything else. Do you have the goals which have to be achieve directly and indirectly. Do you know your goal for your investing/trading business today, tomorrow, this year, next year, or 10 years later?

    Goals could not be reached by themselves. They have the time and distance from what you have got. You could not set the direct goals far away from you could touch even you try all you could. The market and your capability just don't allow. You have to do feasibility analysis for the viability. You could not spend too much time to wonder what goals in your 70s if you are just about 55. You need to be roughly right for your indirect goals but more importantly you have to set up your direct goals for your business based on your visions and missions your knowledge and experiences tell you could be done.

    So if you could not sort out the direct goals you could not do your business well. After your sort out your direct goals if you could not focus on the plan, operation, and move yourself toward your direct goals, you will fail. The process to get your goals need resources and consume the very important resource, time, too.

    Don't forget the business goals are not to enjoy but to get the economic and financial benefit, the profit, which is the base you could be self-reliant. So is your direct goal could be defined with the direct financial terms? How much could you add into the outcome of your business if you could finish your direct goal?

    Not all of good things could be your business goals. Goal driving means you have to get the right goals to you, you have to focus on to approach the right goals, and all of the direct goals would add value and could result in profit in a year, get the necessary capital for the direct goals next years, and so on! So you could get your indirect goal some years later.

    Goal is not about best result immediately but achievable and affordable ones with your practical and rational judgment and decision. Most of warriors since their duty and position could not think about the goals in strategy and they have to get the goals designed or set up by someone else. You have the responsibility for your business. You could not follow others' goals since in most of time you could not have the same goals as that for anyone else. You have to get your unique goals which would make the warriors would like to pay for your services.

    It is most hardest part in any business. If you don't have the goal, you don't know where you go. If you have vague goal, you would run in the darkness or ruins without necessary protection. If you have goals but could not focus, you could be distracted and get lost in the ways!

    9. Just around our own corner for safety and chances

    In war or high disastrous place, without matter you are warriors or civilians or business people for the necessary services, you have to find the safe places. The logic is obvious that if you could not protect yourself, nothing is useful and worthwhile.

    If you could find your corners, the first thing is to check itself is safe. Once you are sure the corners are safe, you need to be sure you have the necessary supplies with you and you could buy anything you desperately need in cash. In the high risky places, cash is king.

    Once you know your corners are safe, you have to check every things around you. You could not be careless since any errors could hit you down. You have to learn how to find the business chances with great protection over yourselves. You have to know you could not see all of risks. So sometimes you have to crawl around for chances.

    That is why we buy for margin of safety. That is why we buy in diversification. That is why we buy in time average. That is why we have to keep the cash reserves. Don't run if you fee not safe but don't stop to get the gold into your corners or sell the services to the warriors for cash or buy the gold as the price of stones!

    We don't want our corners are hopeless. Once we have enough money we could make it more comfortable; we could dig into underground for more room and more enjoyable working environment.

    Don't be bored around corners. You could get the goals to make more money with the uniqueness to service the warriors. Not all of warriors are the same. Some are still ambitious in their desired causes even their causes are not ones for themselves. Some of warriors have lost all of hopes and just want to get out of the hell! They want different services.

    You could make your life around your corners much more exciting, thrilling, and profitable even the requirement is you could not do the same things warriors do!

    10. Be alerted by overoptimism, exciting, thrilling, and euphoria

    We don't have too many enemies in the market. China tipping off? If you could get the necessary services for the warriors who would be hurt by this tipping off, China is not your enemies but a important thing in the market environment. US default? The sky will be there and life has to go forward. People would need your services to take flight to the safe heaven and if you have the ticket for heaven, they would like to pay for your services. EU collapse and so on? All could hurt you or reward you. The question is if you could get your services for what the warriors want. So you just have one enemy, which is yourself.

    We all, as human being, need optimism and exciting, and we all need to be thrilled and euphoria time by time without risks to pay the price too high. It is true for business people too. Have you seen the business people just cry or pessimism in all of the time to do the business. They feel happy to fix the problems in the business. They feel exciting for the achievable indirect or direct goals. They feel so thrilled for their future and they have to dance on tap for their work. But good business people have to know when and what they could not be excited for.

    Don't be excited or thrilled by the bullish market trend. Don't be euphoric when the whole market is so. Don't be overoptimism and then ignore the risks and chances to lock the profit into your vault. You have to do your job first and after you lock your profit and do all in the sunny day to clean up your house, you could have a few days for holiday and wonder how great you are and how genius you are. Dream something possible or impossible when you cut off the linkages with your business.

    If you are too happy, you have to be alerted; you have to ask some serious questions such as:

    • why am I so happy?
    • is it the market bullish sentiment or some internal causes for a share to shoot up?
    • if it is caused by market sentiment, you should seriously check what stage of the market sentimental cycle now; you have to sell, sell more, and sell all you have to sell for cash.
    • If it is a internal causes, is it enough for your bottom line and direct goal of your business?
    • do I have enough cash reserve for the possible or high likely correction or crash and then I could buy things at their lowest price. It is the best way to lower your business cost.
    • have I started the rebalance of my portfolio? Why don't I do so? I need to clean up the houses and sell the fishes which could not be survival in market winters; I need to lock the paper profit which would be destroyed in the winters.
    • Any sign of overoptimism? Cash reserve is increased or reduced? Do I diversify as I have to do? Any overcapitalized buying? Am I too excited for the unprecedented paper profits and then I give up the time average? Do I sell for my direct goals and bottom line goals?
    Last edited by a moderator: 27th Jul, 2011
  4. wdongli

    wdongli Well-Known Member

    31st Mar, 2010
    Operational tasks to achieve strategic goals

    Operational tasks are the direct business goals. The direct business goals should be set up to align with the strategic tasks or goals.

    Operational tasks are used to identify:

    • The goals of the functional parts
    • The process the goals will be achieved
    • What resources are required to meet the goals
    Generally business need the operational plan to specify

    • Specific goals to a specific business function
    • Actions required to achieve goals
    • Human resources required
    • Physical resources required
    • Budget required
    • An indication of how long goals will take to achieve
    However since we usually start our trading/investing as single people matter, we don't have all of resources, knowledge, and experiences to put everything into the paper. We have to sort out the strategic tasks and operational tasks directly. It doesn't mean we don't think they are not important but we just need to follow the logic, first thing first do.

    We have been unique among the market warriors or traders since we have start to learn business plan. We have our market views. We have put the time to know human sentiment and emotional. We have got the bottom line rules, guideline, and strategic goals and tasks. If we could sort out the necessary operational task, we would be more unique in the market.

    Once we get the ideas of the operational tasks we would have more fuses in our business operation to protect us from unaffordable risks and get the chances. So we could get our bottom line objective, no loss!

    Operational tasks of buying

    1. direct goals
    • Low risk high return for time horizon: 6 months - 2 years
    • margin of safety
    • no loss to the business as a whole
    2. actions or tasks to get the goal

    buy high quality values at lowest price
    buy in diversification and time average
    buy with affordable capital

    3. support actions

    • Identify the high quality value through probability analysis and value evaluation
    • Update the skills to evaluate the value and cash flow issues
    • Identify the time when the value is priced with low probable and extremely negative market price corresponding to the time when market is optimism

    4. Reasons or the rationality of the actions

    Share price has the trend to regress to means
    Share price has the trend to regress to value

    5. Allocated capital for each buying

    It should be 1/20 to 1/30 of the total capital of business

    6. Recheck the fault conditions

    Could the market sentiment be worse? Could the price lower? If so how could it be lower? Could the price be lower due to lower market sentiment as a whole? Has the bargain hunters become despondent or indifferent? Does the warriors around the target shares have been in depressed disorder for long enough time? Could the fundamental reinforce the sentiment and push price lower?

    What do you feel? Do you buy your second time? Is the price lower than 40% than the first buying? Why is it lower than your paid price? Is the market sentiment affecting the value negatively? Any sign is there that the underlying business burns the cash too quick? Could it get the necessary cashes from the market or financial institute?

    Have you being made the cost run and most of your buying price higher than current market price? Don't hurry but take time to check and think all of the scenarios from your purported buying.

    Have you filled your report to list why you should buy? It doesn't need to be done before buying. All of the above are to be sure we are not absolutely wrong and break the strategic goal, no loss!

    7. future tasks relative to the buying

    Reread three books from B. Graham and change the tasks and actions by using better ideas.

    Operational tasks of rebalancing portfolio

    1. Things not to do

    It is the hub to complete the task for the strategic goals. It is to identify what should not do by following the logic: if knowing where is valley of death to change the behavior.

    • no loss of business as a whole
    • no cost run in bullish time
    • no unaffordable paper profit with overoptimism biases
    • no damage to the cash reserve
    • no action without fuse functions at any time
    • no action without roughly right sense of the margin of safety
    • no action when market is euphoric and swinging to the worst
    • no buying without business cost reduction and time average
    • no buying with undue capital allocation
    • no buying with overoptimism
    • no buying without high probability to be profitable
    • no buying with cash reserve for one year expenses and overlays
    • no buying with confidence that the price is lowest
    • no buying when market is thrilling, euphoric, anxious, panic before becoming indifference
    • no selling on fire when street is full of bloods
    • no selling since fear and panic
    • no holding of big enough profit
    • no holding of no margin of safety
    • no holding without good enough diversification
    • no holding if price shooting up vertically without internal good black swans
    • no holding of hopeless losers
    • no action when wish too much, fear too much, and exciting too much
    No action means no change of portfolio structure and components.

    2. Goals

    It is to identify the signs that our business could be in danger and the chances for the profit market and our own capability. It is to get a safe hub in our mental system and our corners.

    The list above should be used as fault conditions to trigger the fuses, identify the problems, find the solution, increase the profit, and reduce the risks to lose capital and paper profit so that the behavior would be more prudent, less ignorant and arrogant.

    It will contribute the form of personal traits which is organized, disciplined, analytical, and self-reliant. We need to ingrain the wisdom, intelligence, prudence, and necessary knowledge and skills into our bloods.

    So that we could be cheerful in a party without risks; move around our corner for chances; get the resource and rebuild our corners in the war place.

    3. Support actions

    • Inverting what we see, hope, fell, wish, and believe to get full picture of risks and chances.
    • Learn probability theory with market reality and context
    • Finishing the first draft of business plan for road map of business operation
    • Getting deep understand the bubble market psychology
    • Learn value, growth, and margin of safety with market reality by reading three classic books from B. Graham and align the learning with the business business plan.
    • Learn the process to change my behaviors in the market
    • Write business diary to increase self-awareness, necessary prudence, and try to extract good ideas to make better judgment and decision
    4. Schedule to rebalance the portfolio

    • Review all of operations for rebalance the portfolio each 6 months.
    • Be sure all thighs which should not do, be reinforced not to do.
    • Be sure cash reserve is healthy. Be sure no cost run.
    • Be sure behaved in a way which is organized, disciplined, analytical, and self-reliant.

    Operational tasks of selling

    1. direct goals
    • Realize no loss to business as a whole
    • Getting the bottom line profit
    • Cutting off the hopeless losers
    • Locking the ripe or enough paper profit when market turns bullish or exciting or thrilling
    • Recovering used cash reserve in worst time
    • Locking the profit from unprecedented and extremely good profit spike due to fads
    2. actions or tasks to get the goal
    • check if no loss is a sure things to business as a whole: no something wrong and cash run is possible
    • check cash reserve: avoiding over-conservative and overoptimism based on reality for balance in sentiment and reality
    • check sign of cash run: if so, holding all and check all for solution
    • check paper profit of portfolio as a whole with the bottom line profit goal: sell to lock the bottom line profit
    • check if margin of safety has been consumed by bullish market sentiment: if market turns to be thrilled or euphoric, sell in the way of the up trend and sell all in euphoria and anxieties!
    • check what make the losers lose: if hopeless to recovery sell with the winner in sunny days.
    • check shooting up shares: if no internal reasons and fundamental support, sell
    3. Support actions for sale

    • If buying is hard because we still could not have the skills in value to buy margin of safety and errors to calculate the probability for the low probable and lowest price, selling is more difficult since it could be a quite emotional process. Be warned no perfect selling often than we guess and few could sell at the peak but trapped in the crash.
    • check your feeling and compare it with the market sentiment. If you and market as whole both feel hot, you should plan to sell in the way to the peak.
    • In the bullish market, we could be very excited, thrilled, and euphoric, but we could be fearful too since the train could leave away without us. However we usually don't try to check if the engine has filled with fuels.
    • check the reasons why the price of a share could move up. If it is caused by wind of fads, you have to sell if it is good enough. If it is caused by some internal value explosion or potential, you have to check it carefully and cautiously. Some sectors just make some new stars due to some unprecedented discovery, such as mining. But you have to know great discovery is few if not absolute impossible.
    • check if a share or market is moving into stagnation. It is extremely dangerous to most of market players since we have limited resource to attrite. It is the valley of death for most of bargain hunters. The best way is to avoid this kind of sectors.
    • know how to get the value roughly right and take it as your reference to sell. It is very important if we want to run market business for long term which would force us to behave rationally rather than just guess what is going on.
    • Know your goal of the bottom line profit, which is one you have to achieve otherwise you would be in great pressure and could force you to behave irrationally and illogically in the market.
    4. Reasons or the rationality of the goals and actions above

    • Share price has the trend to regress to means
    • Share price has the trend to regress to value
    • but market would be underpriced or overpriced much longer than our expectation. So buy is about value but sell is the art.
    • Good selling is profit locking selling. Worst selling is that on fire
    • Don't sell for pennies while risking $10; Don't hold $10 for more profit in pennies.

    Operational tasks of holding

    1.Holding is the pause between buying and selling for hopes.

    • We bought and don't want to sell and then we hold.
    • Hold is to make the profit or losses.
    • we hold something for sometimes with the hope of profit
    • we hold something for sometimes with the hope to reduce the losses

    2. Holding for break-even?

    It makes a lot of us laugh! Break-even? We work for our market business for break even?

    How could you get your hope to be true?

    Hope means some efforts for better results in better probability. Holding is most important action in a service business. It is a value realization and destroying process even break even is possible if we really want. Most of market players hate break-even, which is boring!

    However no loss is the bottom line objective. It is exactly what break even is, right? Nearly all of us want to get the profit only. So we fight to be not in break-even. Market is a war place. If you could not fight to win out, you would lose completely!

    Holding for break-even strategically in the business scope. Break-even is the position you could find the chances to move forward. If the worst is break-even, you just need more time for reviving!

    If buying is to reduce the business cost and safety in roots, the value, the margin of safety, and right capital allocation, holding is the bridge to your hell financially or the place to show your business services to the desperately market warriors, and selling is the time to reckon the past, close the business door slowly or absolutely, or move your business as your plan.

    Holding too long without profit, you would be wore out. Holding too short, you would struggle to jump left and right of your fence. The bridge is the result of efforts, wisdom, good plan, and great patience with creative methodologies or creative application of what is available.

    So holding break-even and never let the cost run and loss become true is the only goal for holding. Have you heard the black swans? We have tried to buy anything in lowest price. If we don't put the money into the stagnant sectors, we could have chances.

    Chances and lucks favor the prepared hands!

    3. Tasks in the holding

    Check everything to be sure no loss. It is the key to survive and base to be revive.

    Check the holdings' margin of safety and set alarm if it is gone for a single fish of portfolio as a whole. No margin of safety you would be in danger since you could not be no loss or break even.

    Check you are not ignorant, arrogant, and careless about yourself, family, the expenses or overlay, that is you have to be budgeted properly for what you holding and what you should unfold.

    Check the market sentiment. It doesn't just affect the herd's feeling but it move the negative power of the herd to destroy the value. In long term I don't know the destroying effects of the herd sentiment. Price swings to the extremely low has its fundamental reasons, which is exaggerated by the herd and make the people scared and fearful. It is a reflexive process.

    Check you business plan and find how you could change to make thing have chances better than break-even.

    Could the holding leave enough cash reserve when market turns into bullish and accumulate more cash reserve.

    Could the holding be sold before the market euphoria? How the holdings become so profitable and then you have to lock the profit?

    4. Make analysis and judgment in context when holding

    Don't waste the time to add value in holding. It is the time to plan, do analysis, strengthen the control mechanism in operation.

    Have you found price is moving into the worst range? Have you set up the threshold for buying, which will make your buying is absolutely bargain? This is very important since you act to find the time for lowest price and be sure less falling knife in hands.

    Worst cases are not in one format but ever changed and shown in different faces. Could you find the validity of the worst cases? Why sometime our buying become extremely expensive? When you hold, you have to prepare to buy for lower business costs.

    As we said before, the value could be lost partially or completely. It is because the business management team could miscalculation the cost, the operational challenges, could not make creative way to make the operations become the bridge to their business success.

    Do you fully understand the goals and tasks in the holding? Never forget the bottom line objectives of business. It is patience and discipline in a organized and analytical way to achieve.

    Holding for selling and best selling without the risk to get the losses of our portfolio. Don't forget you have to sell some day later for your living and overlay expenses.

    Don't forget the black swans. We have bought something for shooting up probability. Do you know when you would sell! Selling if wise, it has been got its bridge which starts from buying, are built in holding, and reckon in selling.

    5. Words about long term view

    Holding or not actually could be a strategic or tactical matters.

    To herd, the riskier is the market or share, the greater its volatility or price fluctuations in short time, so if time horizon to view the market and holding is short we would not hold patiently. The quicker we run the more capital we need and more cash reserve for safety. We could be forced to sell at a significant a loss. Who could win in fire shale?

    With a longer time horizon, we will be forced to think the possible lowest price which much lower than its value; we will have more time to recoup any possible losses due to our mistakes and then theoretically our business would be more tolerant of higher risks and sell at the price when it closes around the value.

    6. Business affordability

    Determining the amount of money we can stand to lose is another important factor. This might not be the most optimistic method to our warriors' service business; however, it is the most realistic.

    By pay out only money that we can afford to lose or afford to have tied up for some period of time, we won't be pressured to sell off any because of panic or liquidity issues.

    Furthermore, if we face a liquidity issue and require cash immediately, we will have to sell off to get the cash. If we have enough cash reserve, we could hold to let the market settle the thing down.

    How could we ingrain these we have known into our bloods and behave as a true businesslike people?
    Last edited by a moderator: 29th Jul, 2011