A reader writes:

“Hi Michael, First off, I wanted to thank you for your outstanding books (I have read and own both) and your site and regular newsletters and podcasts. I really am a big fan, and appreciate the knowledge that you’ve dedicated yourself to sharing with us all! I’m hoping to get my hands on a copy of ‘Broke’ next time I’m in the US (I live in South Africa, but travel extensively internationally on business). Though I have a huge interest in trading, and I trade a small account of my own capital, I work in the information security field, and my day job entails leading a team of penetration testers - essentially, ethical hackers. We get paid to assess security controls in networks and applications, among other things. So I’m paid to find holes and break stuff. After many years in this industry, as a leader (I’ve spoken at many international conferences, and provided hands on training to Fortune 500’s, government, military), I see us getting worse, not better. I believe the fundamental issue is a similar one to that affecting investors and traders - a very poor understanding of risk, and a tendency to want to over-complicate and obfuscate everything, and an overflow of false “experts”. Without getting into too much detail in this email, I recently gave a 20 minute keynote at a local information security conference, discussing the psychology of risk and why we are inherently wired to fail. In this talk, called “Getting Punched In The Face” I drew parallels from my experience with competitive combat sports, gambling, trading and finally, information security, to demonstrate why many of our natural inclinations and assumptions are flawed. You may be interested in this talk. I’d be interested in your thoughts - as a keynote it was very high level and for the 20 minute slot I couldn’t delve into much, but the talk was fun.”

His video:

ZaCon09 - Getting Punched in the Face - Nick Arvanitis from ZaCon on Vimeo.

Feedback in:

As a long-time professional in the futures industry, I was greatly impressed by both of your books and the wealth of information on your site. Job well done! I have recommended your materials to our clients. In August of 2008, we published a white paper to send to our clients. At the time, markets seemed to be breaking out to new all-time highs every week. We are a commodity brokerage firm and we noticed that many of our traders/clients, drunk on a lethal combination of adrenaline and large paper profits, were leveraging up to their eyeballs and disregarding the risks they were assuming. It was very much like the tech stock bubble of the late 90s! So we decided to write a little article on risk management (Read PDF). It proved timely as it coincided with the reversal of the commodity bubble, although the principles of risk management are universal truths that apply regardless of market conditions. I hope you enjoy a copy of our ‘white paper’. The bottom line is this: always take you trades based on the probable, but manage the risk based on the possible!
Regards,
Jason Pearce
Managing Director
Pearce Financial, LLC

Some wise views from Larry Hite:

“We don’t really trade silver…we don’t trade the S&P…we trade the differences. We really are risk managers. We take on risks, try to exploit them and we leave when they turn against us. That is what we get paid for. Basically we are in the risk transfer business. We take on what people want to sell, sell what people want to buy and hope to make a profit. The reason why one goes to a portfolio is because there are real limits to perfect knowledge. I’ll give you an example. Say you knew which commodity, stock or currency would appreciate the most in the following year, and you knew exactly what its price would be. We did this experiment looking backwards in fact in our database. The question of when you take a position is how are you going to trade the line…how much of a position are you going to leverage. Now, if you have perfect knowledge, would you leverage 5 to 1, would you leverage 10 to 1, 2 to 1? Well it turns out that if you leverage more than 3 to 1 that you are a loser. Because we found that if you did 3 to 1 you would have, even with perfect knowledge, you could go down a third. So that, the only perfect knowledge you could have, would be if you knew every wiggle on the line. Then you would know exactly how much to leverage. But you don’t.”

This is a longer 8 minute plus interview excerpt that I have never posted before. How many great lines does Howard Lederer throw out?

From Ritholtz.com:

The California Public Employees’ Retirement System (CalPERS) clearly had a rough go of it in the last 6 months. They lost a great deal of money. Now they seem intent on solving their “problems”. As this document (PDF) shows they are putting in place new rules for how they deal with and select hedge fund investments.

What are some of the big new rules? Well, CalPERS is worried about how much a hedge fund makes. Normal people might be worried first and foremost as to whether a fund returns ‘after fee’ positive performance or perhaps be concerned with the trading strategy employed, but CalPERS is worried about appearances. Clearly, CalPERS is only worried about politics. Does anyone think the great money earners in this world ask the questions CalPERS asks first? Of course not.

I would love to a list of the hedge funds and strategies CalPERS lost money in over the last 6 months. That would tell us a ton about the brain power in charge of all of those pension account monies.

PS. The “confidential” part is great. This is the freaking government!