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Före detta hedgefondförvaltare, partner och VD på Futuris som utsågs till Årtiondets hedgefond i Europa för perioden 2000-2009
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Take your losses without emotion or live with regret

The difference is in how you pick yourself up

I've experienced losses, big and small

This year, e.g., my girlfriend broke up with me after 10 years together.

A long time ago, my big brother drowned in front of me (I was 8), contributing to my parents' divorce soon after. At single digits those were big downers.

A few years ago I tore my left knee ACL when a friend (for fun) threw me into a wall at a party. I later tore my left hamstring as a follow up (weakened by the ACL surgery) when setting a new deadlift PB in the gym. I'm still struggling to come back from that. I've actually torn my right ACL too, but that was my own fault :)

My short positions on the stock market aren't exactly a rose garden either these days...

But, there is no need to dwell on the past. I just wanted to make sure you didn't mistake me for somebody with all the luck.


 

You will lose

Losses are a part of life. Some go as far as saying "without loss and death, life is not worth living".

In any case, you will experience losses.

These are my thoughts on how to mitigate their effects.


 

How to neutralize losses

First of all don't anticipate losses unnecessarily. Either actively avoid the risk, or disregard the losses until they materialize. Otherwise you'll only make sure you always suffer -sometimes twice (before and after).

Second, remember that losses are in the past. There is nothing you can do about the losses per se. However, you can learn from them - which happens to be the legendary portfolio manager Mark Spitznagel's motto in his "Dao of capital". I think he even goes as far as saying losses sometimes are good, "profitable" in a sense, since they educate you on how to be and do better in the future. 

Third, actively frame the losses differently than your immediate panic reaction:

  • Did you lose a leg? Nope, you got to keep one, as well as both arms.
  • Did you lose the final? Nope, you won second place.
  • Did you lose a partner? Nope, you avoided wasting more time in a relationship that apparently was destined for failure.
  • Did you lose money on that trade? Nope, you paid for a lesson and are all the wiser for it.

Research shows a typical human is about as happy 3 months after a severe loss as they were before the event. I guess it's given you don't bury yourself in regret, but accept the new reality. By the way, you'd better, since reality always wins over mere opinion anyway.

Two other important tools for handling loss is 1) focus on the future and 2) being active, taking the active choice in whatever lies ahead. Both remedies lie very close to the recommendation of distracting oneself mentally, i.e. the opposite of dwelling on past events.

Finally, don't take losses personally. They occur. Simple as that. It's got nothing to do with you (well, sometimes it does..., but you knew beforehand when you were out of bounds)

Actually, it's more than that; you should make losing a way of life, in order to gain experiences and knowledge - to live long and prosper. If you live laterally, if you follow my 1/50 advice on how to acquire a lot of complementary skills while getting to know yourself at the same time, you'll inevitably lose a lot of times in the process (albeit gain so much more). This is more than framing and learning, it's accepting reality for what it is - inherently unpredictable.

 

Financial losses - the stock market

Let's break it down to stocks:

Right now, you know the bid and ask prices for a particular stock (though they might change before you can hit any of them). But you just barely know the number of stocks in the company (due to staff options, acquisition plans etc).

You have a pretty good picture of past results (well aware that the numbers probably have been as dressed and manipulated as is legally possible. Wouldn't you?)

You have a fair guess as to what the coming quarter's and year's results may be (given it's a fairly stable company and industry, and no black swans fly in on the scene - the latter should be reflected in your discount rate or level of insurance). Please note... "fair guess", "given stable...".

Apart from that, the rest is guesswork. What valuation multiples will be the norm a few years into the future? What will competition look like? What about interest rates, inflation, trade and currency wars, real wars? History can sometimes offer a rough guidance, but mostly it just emphasizes the unpredictability of things. In the tech sector few advantages are sustainable and the rotation of leaders particularly high. Numerous are the companies claiming years or decades of head start, that are now found... nowhere. 

 

The most likely outcome can be highly unlikely

 

More on the uncertainty of reality

To most people the inflation of the IT bubble in the 1990s came as a complete surprise, as did Apple's rising from the ashes in the noughties.

Seven is the most likely sum of two thrown dice, but it only occurs 17% of the time, i.e., the most likely outcome is pretty unlikely.

Hence, you will be wrong

Thus, you must be ready to adapt

Make sure the losses that will occur always are acceptable. When they hit you, shake it off, look forward, distract yourself, be active, and use the lessons learned as a stepping stone for future success. 

You

Will

Be

Wrong

 

The uncertain story of Arcam and Fingerprint Cards

(two very small Swedish story stocks with 100-300m USD in 2015 sales)

If you are not Swedish you probably should skip to the summary section now. This is just a cautionary tale of certainty vs. uncertainty, framed round a couple of heated online stock chat rooms.


 

Arcam

I recently engaged in a chat room regarding the Swedish (additive manufacturing) company Arcam. The price was 230, which I thought was at least twice the warranted price. I started discussing the stock online and said it probably would fall below 100. I did it to help and warn anybody who had bought the stock without really knowing what they were getting into.

In the following months it rose to 311, but then quickly fell to around 130. Later, after some wild swings over more than a year, it dropped to 92.50. Don't think anybody thanked me for warning them. Nooooo, quite the opposite. I was even accused of orchestrating a short attack, possibly illegally, warranting an SEC investigation. LOL.

Around that time, I added that I thought Arcam's stock would bounce to around 150, unless the company committed serious errors during the fall of 2015.

Right now it's bounced back to 168. I, however, have stopped discussing Arcam and I never held any positions in it.

I learned a lot during that 2-year process, both about the company and about human nature. Not least, I learned about the resistance to hearing 'the other side' or the capacity for observing and accepting reality as it is, rather than how you want it to be - and anybody who claims otherwise is an idiot! :P

 

Fingerprint

This year, I stumbled upon the stock FPC, Fingerprint Cards, and thought its stock price trajectory looked unsustainable. I hardly knew anything about its business or valuation but made a hilarious video squatting and talking about the stock at the same time. The few people who saw it thought it was a bit stupid, some even laughed. I mean, come on, a retired money manager in the gym, talking stocks, while actually squatting ass to the grass.

The story should have ended there, but some people owning the stock took offence (yeah, I know...)

Thus, I made a crude valuation model and realized two things: 1) The company was growing extremely quickly, winning a lot of important orders for mobile fingerprint readers (and in the future possibly many other products, including smart cards), and 2) I nevertheless couldn't come to grips with the stock price and valuation.

The story really should have ended there, but being Europe's most heavily traded stock a lot of people were already upset - and others just liked a good virtual fight on Twitter and in other media. So, I kept getting questions regarding the company, and as a good sport, I answered, despite having a very limited interest in the matter myself.

I never asked for the attention, but the FPC:ers kept dragging me back into the "fight", by calling me names and in general making fools of themselves. Some sensible people came around and saw the humor in it all. But, there are always a few truly hostile retards in every population that are intent on building straw men and then attacking them with all they've got, no matter what.

Finally, after being called an idiot a few too many times, as well as asked to once again explain why I thought that the stock might have gone too far too fast, I tweeted a picture of how a simple P&L model could be fashioned, and encouraged others to change the numbers to their liking.

I also once again openly admitted to being highly uncertain regarding my assumptions and forecasts, and ready to change them as data pours in - most notably the upcoming official company guidance for 2016, and later the actual numbers for the fourth quarter of 2015.

The numbers are uncertain (since they are part of reality), and so am I. In addition, I have no intention to trade the stock in the current "fluent" situation. I'm not trading much at all, and if I were it wouldn't be FPC.

I however did make one single trade in the stock: I was short the stock for less than a day, booking a 25-30% profit. When I closed the trade, I sent a bottle of Krug champagne to the guy who told me how I could go short FPC.

Oh, how I shouldn't have... Just as with Arcam, suddenly I was the 'evil' guy who profited from others' misfortune, rather than the guy who had warned about the risks.


 

Summary

Anyway, no matter how the story ends (I hope both Arcam and FPC succeed and become Sweden's new industrial giants. I just don't think so), including where the respective stock prices go the coming year(s), the lesson here is to face reality (including any loss) for what it is, not what you want it to be.

I personally should learn not to play chess with pigeons.

(no matter if you win or lose, they will shit all over the board..., read the rest here)

 

As for losses in general:

They will occur, accept it, but don't think to much about it beforehand.

Losses are in the past, learn from them, then distract yourself, frame your situation positively, look forward and take action. Research shows you'll be right as rain in no time.

Oh, I almost forgot, my Hublot Big Bang Rose Gold got stolen the other week. The current list price is some 40k USD.

My reaction? Too bad..., but a good thing is I don't have to worry about it getting stolen or my hand being cut off in the process. Also, I don't have to think about not scratching it when playing with my dog. Actually it's quite a relief not having to carry that chunk of gold around all the time. Nota Bene, I actually forgot to include it in this article until the very last minute, despite the theft occurring just a few weeks ago.

Losses are in the past.

 

On stocks, again

A final word on stocks and stock market research. Never "marry" any case. Actively look for chinks in the armor. There is no need to stumble upon losses on account of laziness and groupthink. In addition, never, ever, go all in unless you truly have to, or if losing all actually is acceptable.

The future is unknowable. Just because most losses can be handled doesn't mean you should hoard them.

The best money managers in the world keep repeating "If you think investing is easy, you are stupid". There is a reason for that.

High risk doesn't promise high reward. It just promises high risk*, i.e. a wide range of outcomes. Low risk on the other hand promises low (positive or negative) returns; if your style of investing is "easy", you've made sure to rule out any large outcomes.

As for FPC, I'm not ruling out a billion dollar sales number for 2016 (my guess is a little more than half that). I just don't know. But if you are ruling out less than a billion, you'd better sit on some very solid information.

*a case of facing reality head on with a tautology: A is A, high risk is high risk.

 

Keep trying, keep losing, keep adapting, keep moving forward. Always. Be. Investing.

 

 

 
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Anonymous's picture
Mads Friis (ej registrerad)

What an interesting piece of text. You got me. I don't really care much about the story itself regardring FPC, what I do like, is your aproach and the way yo write. Sounds like profound knowlegde, experienced in loosing (and winning)  and most importantly I believe in you. I read an article regarding market psycology, not regarding FPC or how you've overcome loses. Can I ask you a quistion, by whom are you inspired?  

Anonymous's picture
Mads Friis (ej registrerad)

What an interesting piece of text. You got me. I don't really care much about the story itself regardring FPC, what I do like, is your aproach and the way yo write. Sounds like profound knowlegde, experienced in loosing (and winning)  and most importantly I believe in you. I read an article regarding market psycology, not regarding FPC or how you've overcome loses. Can I ask you a quistion, by whom are you inspired?  

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