Personal Faults, from Jim Sogi

December 12, 2009 |

 One of the great things about trading is that it brings you face to face with many of your personal faults and shortcomings. With maturity should come recognition of personal faults. Unfortunately, some or most of these personal faults are not easily fixed and are real limitations. Of these limitations, some are psychic but others are physical, such as hearing loss. Psychic faults are anger problems, narcissism, etc. These faults can be damaging to your life, your loved ones, to your bank account, and to your health.

It is important to recognize and deal with these faults. Faults are easy to see in others, but almost impossible to see in yourself. Very very few can recognize their own faults and limitations. The most common response is denial and shifting the blame to others or outside forces. Many elderly people have hearing loss, but for odd reasons, deny it. They blame others for mumbling. Alcohol addiction is a prime candidate for denial. The list goes on.

It's difficult to deal with the realization that you have faults and limitations. People can be unbelievably obstinate in denying faults that seem so obvious to others. It makes it hard to perform and live on. Who wants to live with the realization that you may not be as smart or as tough as you think? That is why the easiest solution is denial. In many cases even if the fault is recognized, it is hard or impossible to cure. It may be hardwired in, or it might be caused by a physical limitation. The answer is creating some sort of workaround that minimizes the damage caused by the personal fault or physical limitation. A simple fix for hearing loss is a hearing aid. Other faults present greater hurdles to find a solution or to even to recognize.

Nigel Davies writes:

There's still room for self-deception in markets regardless of the bank balance; you can lose when playing well or win when playing badly. And this may be especially pronounced with methodologies which have a high percentage of winners plus a few big losers.

Chess tends to have less of this because your results contribute directly towards a published rating and each win or loss has a fixed value. But if someone really wants to kid themselves they can do it there too.

Sushil Kedia adds:

Markets produce the same series of prices, volume, open interest etc. for each participant, yet the individual performances off the market are so different. I thus conclude that none makes any money off the market and each makes money off themselves utilizing the market as the proverbial touchstone where the self is rubbed.

It is the different speculations originating from the unique anticipations that differentiate each performance. The attitudes, beliefs and convictions that form the a,b,c of any personage reflect in the choice of systems, choice of methods, actions taken, actions avoided etc etc.

This could well be true of any profession, yet the instantaneity with which a mind interacts with the financial markets makes for the most expeditious feedback system. Marked to market is an idea that is most easily implementable in a trading / investing career. Like a mirror the market reflects you only. For all the cosmetics that is around it is still said that the mirror never tells any lies. So for all the cookery and creativity that can be and is, the P&L eventually never lies.

At a recent past when the credit marts were being forced into dispensing away from the MTM requirement because all the mirror was displaying was a sad requiem of the dead bodies, the dyeing bodies, the destructed youth and vigor it was an ostrich burying the head in the sand act. Hope, free markets will never again give up the reality check and fault facing device ever again but have the courage to give up the dyeing or dead that are so horrified to look at themselves in the MTM mirror.

Russ Sears writes:

What this analysis is missing is that many marked to market advocates miss are many markets are not liquid. Further, many markets even liquid markets quickly can become illiquid. The policyholder does not choose what bank to use based on market forces, nor the bank what to invest in based solely on market forces.

Because your neighbor trashed his house, and then let the bank take over may suggest that you personally lost some value to your house.

When several of your neighbors do the same… you have lost even more on paper. Have you lost any real wealth? Should you be forced to sell it, if your marked to market nearest neighbor model put you underwater?

Likewise, when there was too many buyers,not liquid enough seller and your price doubled. Did your wealth really increase, if you stayed put?

Taking out the collateral, and accepting the inflated prices as Marked to Market prices on home equity loans got alot homeowners an banks in trouble. Should the banks be forced to lend if they believe the house price is inflated long term?

If you want to have Marked to market to determine "death" then you must have true market forces determining if a bank is dead… not some regulator who will be forced to jump the gun to give the organs to those on life support. The markets would if allowed, no doubt determine how close a bank really is to death by a very broad flexible array of models, not some fixed regulators model. And these models will limit who and how many of these potentially illiquid loans a bank would be willing to hold, not some regulator.

Currently death is determined by marked to model… so there is enough left in the company that FDIC can survive. If policyholders where forced to make this decision themselves, Without regulators setting up an arbitrary marked to regulatory model cushion of protection, the policy holders and the banks would be forced to be more conservative and transparent to gain the policy holders trust. And the process of a death would be much more gradual, with a risk premium limiting how much of these potentially illiquid assets it would hold.

Marked to market is only good if you can tell me the liquidity premium. In a market set up for marked to model then forced to switch to marked to market, this premium is bound to jump.

In a market full of few buyers and a forced domino effect of sellers, this premium must to be very high. If you do not trust the models, it is not estimable.

In short, you can not have a clear picture using regulatory forced markets and models at the front and then switch to marked to market forces on the the Death bed. Policyholders with the moral hazard blurred vision using regulators simple marked to model glasses at the beginning of the process (which bank to invest in), regulators telling banks what they can successfully invest in using simple capital model and then using a comprehensive marked to market process on the death bed. They would all fall together.


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