Quotes About Risk

This relates to how he approaches risk and uncertainty. With a 9 in Quick Start, he is "insistent" in this way, and that makes him like most people with ADHD or VAST. They jump right in without testing the waters first. Remember: fire, ready, aim.

In the abstract, life is a mixture of chance and choice. Chance can be thought of as the cards you are dealt in life. Choice is how you play them. I chose to investigate blackjack. As a result, chance offered me a new set of unexpected opportunities.

Lesson: Do not assume that what investors call momentum, a long streak of either rising or falling prices, will continue unless you can make a sound case that it will.

Too bad. Lesson: It doesn't pay to push the other party to their absolute limit. A small extra gain is generally not worth the substantial risk the deal will break up.

The problem was that the issuers of CDSs could issue them with no collateral other than their "full faith and credit," meaning that if their bets lost they might not have the money to pay.

Mathematically, interruptions didn't matter, because my lifetime of playing was just one long series of hands, and chopping it into sessions and playing them at various times and in various casinos should not affect my edge, nor the long-run amount I could expect to win. This principle applies in both gambling and investing.

As Keynes said, the market can remain irrational longer than you can remain solvent.

This plan, of betting only at a level at which I was emotionally comfortable and not advancing until I was ready, enabled me to play my system with a calm and disciplined accuracy. This lesson from the blackjack tables would prove invaluable throughout my investment lifetime as the stakes grew ever larger. Eddie

How can we prevent future financial crises driven by the systemic and scarcely regulated use of extreme leverage? One obvious step is to limit leverage by requiring sufficient collateral to be posted by both counterparties when they trade. That's what is done on regulated futures exchanges, where contracts are also standardized. This model has worked well for decades, is easy to regulate, mostly by the exchanges themselves, and has had few problems.

Our corporate executives speculate with their shareholders' assets because they get big personal rewards when they win—and even if they lose, they are often bailed out with public funds by obedient politicians. We privatize profit and socialize risk.

They also adopted a notion we rejected, called VaR or "value at risk," where they estimated the damage to their portfolio for, say, the worst events among the most likely 95 percent of future outcomes, neglecting the extreme 5 percent "tails," then acted to reduce any unacceptably large risks. The defect of VaR alone is that it doesn't fully account for the worst 5 percent of expected cases. But these extreme events are where ruin is to be found.

For the second time, the Ten-Count System had shown moderately heavy losses mixed with "lucky" streaks of the most dazzling brilliance. I learned later that this was a characteristic of a random series of favorable bets. And I would see it again and again in real life in both the gambling and the investment worlds.

Understanding and dealing correctly with the trade-off between risk and return is a fundamental, but poorly understood, challenge faced by all gamblers and investors.

Countermeasures included reshuffling the pack of cards by the time half or fewer of them had been played. This not only limits the card counter's chances to make favorable bets, but is also costly for the casino because it slows the game down, fleecing the ordinary players more slowly and reducing casino profits. If one likens a casino to a slaughterhouse for processing players, then more time spent shuffling means less efficient use of plant capacity.

I didn't expect to win, since the odds were slightly against me, but as I expected to build a device to successfully predict roulette and had never gambled before, it was time to get casino experience. I knew virtually nothing about casinos, their history, or how they operated. I was like a person who had glanced at recipes but never been in a kitchen.

This plan, of betting only at a level at which I was emotionally comfortable and not advancing until I was ready, enabled me to play my system with a calm and disciplined accuracy. This lesson from the blackjack tables would prove invaluable throughout my investment lifetime as the stakes grew ever larger.

The $32 loss was well within the range of possible outcomes predicted by my theory, so it didn't lead me to doubt my results.

The classic view of the correct price of a common stock is that it is derived from the value of all the future earnings. These earnings are uncertain and subject to unknowable factors. Could anyone have known beforehand how to allow for the impact of 9/11 on the future earnings, hence on the then current market price, of firms headquartered in the Twin Towers of the World Trade Center?

Portfolio insurance was designed to protect investors from large market declines. Ironically, the cure became the cause.

The lesson of leverage is this: Assume that the worst imaginable outcome will occur and ask whether you can tolerate it. If the answer is no, then reduce your borrowing.

Kelly Criterion are: (1) The investor or bettor generally avoids total loss; (2) the bigger the edge, the larger the bet; (3) the smaller the risk, the larger the bet. The Kelly Criterion, not having been invented by the old-line academic economists, has generated considerable controversy.

The next decision is whether or not to double down, which is to double your bet and draw exactly one card to the first two cards of a hand.

In counting cards, it's mainly the fraction remaining that matters, not the number.

First, you bought something you didn't really understand, so it was no better or worse than throwing a dart into the stock market list.