SideBar: 4717's Artifical Intellegence Insight
If you are looking for quotes from Warren Buffet to post-it on your computer screen while logging into E*trade, you could do a lot worse than this gem: “To make money you must first survive.” It is obvious, straightforward and as such, very easily ignored.
The Oracle of Omaha undoubtedly has a brain hardwired to the intricacies of modern finance. You can picture the old bugger sitting with his steak and cherry coke (don’t laugh, it may be his secret sauce) sorting out P/E ratios, valuations and cost/benefit analysis. If it were that easy, though, the quants would billionaires, or at least get it right most of the time. Clearly, there is something else at play.
Buffet also said “The difference between successful people and really successful people is that really successful people say no to almost everything.” And so, about the same time that he was getting quoted saying that there really weren’t any outsized investment opportunities outside the US, he was busy unwinding a massive position in very American Apple only to sit on his heaps of winnings.
Does the Oracle know something that you don’t? Almost certainly, but it isn’t the future.. Essentially he sets a very high filter around tail risks – those not-terribly-likely outcomes that carry catastrophic outcomes – distilling as much of the technical information above as is available – never the entire picture – and them makes some hard won judgement calls. Essentially, the man plays aggressively with his winnings and much more conservatively on a bad streak.
Economists will tell you that from a strictly mathematical stand-point, that last bit about playing harder with “house money” irrational. And depending on your definition of the concept, perhaps it is. The fact remains that I’ve never met a trader of any experience who didn’t live by the strategy… first you must survive.
In short, it requires a slightly paranoid appreciation of tail risk to survive in the market. And that sometimes entails, when red flags are flying, to cash your winnings after a hell of a run - after it looks like the returns have peaked – and look out for the next opportunity.
