Aug

19

BarnfireIn an agricultural society this was akin to a financial heart attack, or at least a very large setback. Today it is still an event that causes great loss and trauma to livestock, goods, as well as property.

I bring this up in connection with speculation because I heard an interesting behavioral aphorism: "The horses escaped from the burning barn and then turned and ran back into the barn and perished". This was in reference to a dollar entry/exit and subsequent re-entry where a trading group was totally burned, but the point is why would smart animals (specs/traders) run back into a burning barn?

Lightning strikes, hay bale combustion, electrical and other reasons are the general causes for a barn fire. What happens to horses in barn fires is quite unpredictable. Some horses, once the doors are opened, just run out, some must be led out, but some willfully refuse to leave and are totally scared by the flames and smoke. These horses will need to have their eyes shielded so that they can be led out. Still this method does not work for some.

Also, the number of horses in the barn may influence the group behavior. If one begins to panic, they all might panic. If they can get free they may be able to get out, but others, even though able to get out, may just shut down and not run–this in turn influences others to stay. It's been said that entire packs have been rescued by the owners, unhurt and let out of the barn; the horses run to some other familiar area of the farm — and then re-panic and all run back to their known place of safety — right back into the fiery barn.

When a trader finds himself or herself in a burning barn, a trade that is totally blown up: a market crash experience, an exchange delay or closure, maybe an event after hours which is going to light things up like a gasoline fire the next day — how will that person react? The horse relies on the owner to help provide rescue; the trader must rely on gut, action plans or some other learned procedures in the event of a "trading fire". Do you know yourself? Are you the type of personality that needs your eyes covered (turn off all TV's) and then quietly follow a preset plan, trusting this to survive?

Seemingly the caregivers of the horses know their traits and behaviors and play to these during emergencies. The shy horse can be coaxed, the excitable one must be eye-shielded. Even then there is panic in the smoke. When panic hits, will the trader naturally cover all positions, buy treasuries and sit-and then upon some internal or external signal, reset with 50% positions, 200% long (but for only x amount of time), or some other volatility trade? Do traders know enough about their learned habits that they can determine not to run back to their trade of safety-can they tell if the barn is still aflame and its too soon to go there?

Regardless of what happens-horses that are in a burning atmosphere suffer a lot of internal damage and can develop disease later on and succumb to wasting effects from being in smoke. Likewise, after a trading fire its best to get yourself fully checked out, re-set your emergency strategy and go over the reasons why you were caught in a burning barn.

Note: Most livestock-killing barn fires occur at night.

Victor Niederhoffer remarks:

This beautiful post reminds me of one of the five things I learned from the Palindrome in our 16 years of very intimate connection: "don't try to make it back." Three of the other four were "always use two cans of tennis balls," "never marry a woman you wouldn't want to divorce," and "never trust anyone." He has a magnificent instinct for survival.


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3 Comments so far

  1. Steve Leslie on August 20, 2009 9:39 am

    I was taught years ago by a mentor "There are good people in the world and there are bad ones and to be successful you must be able to figure out who is who." Reagan said "trust but verify."In poker the greatest lesson I ever learned is play each hand on its own merits. The past is over the future is yet to be decided all you have control over is today. Tiger Woods is the greatest example of this. I believe this is the #1 reason for his incredible success. Jack Nicklaus also exemplified this. They do not let the last shot affect their next shot. You see this all the time with Woods. Rarely does he three putt but it happens on occasion. On his next shot, he is just as likely to stripe a 300 yard drive right down the fairway. Or his an iron within 6 feet of the cup. Mickelson despite his enormous success has become erratic after an errant shot. Lendl, Borg, Connors Sampras and Federer characterize this in Tennis. They never went back to the burning barn. They could start out by dropping the first two sets and then sweep their opponent in the next 3. The Wimbledon final with Federer this year is perhaps the most incredible last set in men's tennis. Barry Bonds, Reggie Jackson Ken Griffey Jr. display this in baseball. They might look foolish chasing a curve but on their next swing they could just as easily smash one out of the park.

  2. Steve on August 23, 2009 9:50 pm

    So much of this website is devoted to lessons. Here is one I observed today.

    The PGA tour was in Greensboro for a tournament that boiled down to a playoff with three men. On the first hole of the playoff, Jason Bohn hit his second shot into the greenside trap and shot himself out of the playoff by leaving his third shot in the bunker. He made the playoff by shooting the low score of the day of 62.

    This left two golfers. On the third playoff hole. Kevin Stadler hit his second shot over the green after a poor drive. He hit a poor chip and was left with a long putt that he missed. Ryan Moore hit his second shot to within 10 feet and then needed two putts to win. He proceeded to sink his putt for a birdie and claim the trophy.

    In my view, Moore put himself in position to win the tournament with consistent play during the playoffs, while the other two put themselves in a position to lose through erratic play. In golf, as in most things in life the difference between success and failure is very thin. How one performs when the heat is on is the litmus test.

    One final note. Sergio Garcia finished one shot out of the playoff after leading going into the final round. He shot a very average even par while others were shooting in the low sixties. Once again he shot himself out of a win by erratic last round play.

    The commissioner of the U.S. Open was once asked why they set up the course to embarrass the world’s best golfers. His reply ” we didn’t set up the course to embarrass them, we set it up to reveal them.”

  3. Matt Johnson on August 28, 2009 3:36 pm

    Individually, humans are bright, they can make smart decisions. Group them together, and they make terrible decisions - like running into a burning barn - happens all the time in the markets. Now, I look for the pyromaniacs at the barn, they’re usually disguised as institutional traders. It took me a long time to become an objective trader, I still work on it. Great post, Thx.
    Vic – “never marry a woman you wouldn’t want to divorce,” and “never trust anyone.” I wonder if this person trusted themselves. For me, trust is a major component in my trading – I can’t control the markets but I trust that I will execute my trading plan – the thing that came to me after I learned to trust myself is, I began to commit myself completely to things, trading with uncertain outcomes, and in marriage. To me, “never marry a woman you wouldn’t want to divorce,” and “never trust anyone,” are two characteristics I wouldn’t want in a trader – I think eventually, they’d blow up.

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