Jan

20

"the bottom is always 20% below my bleakest worst case scenario". Author Unknown.

I am thinking of this saying and I am gazing at some metal stocks at the moment.

George R. Zachar comments:

I was explaining short selling to my teenage son last night, and had difficulty communicating the idea of asymmetrical risk. I settled on this: a long stock position can only go to zero. A short position can go to whatever your capital can withstand…plus 10%.

Craig Mee writes:

I was too considering quotes today, and feel that there is no better quote for markets , trading , p and l, the whole spectrum of speculating then the fairly well worn ..'the darkest hour is just before the dawn".

It seems to cover every area that needs to be covered.

The English theologian and historian Thomas Fuller appears to be the first person to commit the notion that 'the darkest hour is just before the dawn' to print. His religious travelogue A Pisgah-Sight Of Palestine And The Confines Thereof, 1650, contains this view:

It is always darkest just before the Day dawneth.

The source of the proverb isn't known. It may be Fuller himself, or he may have been recording a piece of folk wisdom. In 1858, much later than Fuller of course, Samuel Lover attributed the notion to the Irish, in Songs and Ballads:

There is a beautiful saying amongst the Irish peasantry to inspire hope under adverse circumstances:- "Remember," they say,

"that the darkest hour of all is the hour before day."

T.K. Marks writes:

Back in the pit trading days they can recall at times not being entirely above resorting to such folklore logic when the clearinghouse's margin call police came a'callin' about a half-hour or so before the open.

Ken Drees comments:

darkest before dawn always good–agreed.

I like the x% below the worst estimate because it illustrates that the market usually over punishes and it also amplifies the fact that markets have the ability to humilate my best and well thought out assumptions of value—knocking me off kilter. In this flash crash world –the markets can now pulverize any stock, anywhere, anytime.

Maybe an updated version would be:

"The bottom is usually a jaw dropping amount below my worst case scenario, intraday"


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3 Comments so far

  1. Andre Wallin on January 20, 2011 2:52 pm

    Probably the same for most endeavors: 20% more work, 20% more time, and 20% more pain than your wisest most conservative estimates are. In fact I believe you probably hit points where you think things can’t get any worse and then they do, but you’re almost there.

  2. Abstractor on January 20, 2011 5:28 pm

    Lognomal distribution is how the universe expresses its bias for growth. It also makes life easier when you are aware of the special edges in life that exist naturally around us. I just wish I could figure out a 3-D trading agorithim that utilized points in space instead of points that can be percieved congruently by a herd of people. Maybe there would be an edge there, if I could figure it out. Don’t worry I will keep it to myself.

  3. Andre Wallin on January 21, 2011 7:38 pm

    Which is why scaling in (martingale) exponentially into your position is best especially if you tend to be early. this optimizes your eventual price, however, it gives you a lighter position if you’re more accurate. a generous stop should be given according to your initial entry.

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