clarkkent, page-21

Hi Poyndexter,

I would point out that prior to my defence of Taleb's book, I had provided a way in which one could be involved in investments while using the principle of The Black Swan.

Clark Kent says the book is of no practical value. Yet I had already shown a way in which it can be put to practical use. (I might add, that I had been using that way before I read the book.)

A Black Swan can be both a positive and a negative event. To revisit that ground I'd make the following points:

1. To avoid the unforeseeable, unknowable negative event, keep most investable assets in interest bearing accounts.

2. Look for situations where possible positive black swan events might occur by using technical analysis to pick breakout events in volatile stocks.

3. Use a tight stop loss. Exit losing trades quickly - thus protecting yourself against loss of capital in the event of a negative black swan event occurring in the chosen break-out candidate.

4. After entering a trade which has broken out successfully, i.e., has risen quickly, place a written call option deep in the money. This protects against a sudden reversal and locks in a double profit - the rise in the stock and the time premium of the option.

This is an investing methodology I used successfully for quite a long period of time.

Yet, Clark Kent says the book has no practical value.

As I said - Clark just doesn't get it. Any method outside his own is to be rubbished, derided, dismissed.

Can one plan for the positive Black Swan - yes - of course - by looking out for the break-out candidates.

The principles set up by the Turtle Traders, some of the most successful traders in history, are based on looking for Black Swan events. Its been calculated that only about one third of trades entered by the Turtle Traders are successful trades. So how do they do it?

Easy - Four main principles:

1. Use certain tactics which are good at picking break out candidates.
2. Use tight stop losses.
3. Let profits run on successful break out candidates.
4. Use rigid money management principles which use protective guidelines for the amounts of money to be invested in any one trade.

Let's have a look at the biggest one day drop in the history of the American stock market - Black Monday, October, 1987.

That day was so far outside any previously known cataclysmic event on the stock market that, statistically, it was impossible. Yet it happened. Many people lost fortunes. Clark, of course, would say that those who held on have now made up all that money and are sitting pretty. That may be true if you bought the index. (Which is what Warren Buffett advises everyday investors to do - not use the value method of investing.)

However, many of the blue chip stocks which were in the 50 leaders at that time, no longer exist. Wiped out. Buy and hold for those investors in "sound" companies was, to say the least, unfortunate.

Could Black Monday have been protected against? Of course. Before Black Monday, many savvy investors exited the stock market - or had severely reduced their holdings. The market had had an exponential rise and had already fallen 10 percent before Black Monday. No body that I know of could have known the extent of Black Monday's drop. It was statistically "impossible". But those people who protected themselves avoided the fate of the self-satisfied turkey who was fed, watered and protected for one thousand days. Nothing in his experience could possibly affect his good fortune. He had one thousand days of good fortune to prove it. Until the axeman arrived the day before Thanksgiving.

I personally know of one person who made a fortune on Black Monday - using a relatively small amount of money. On the Friday before Black Monday, he took out some deep out of the money puts. By Tuesday, his deep out of the money puts had turned into deep in the money puts. He has not worked since.

Recently, I've written about three stocks on HC threads.

One of them was IAG - which I nominated as a possible best candidate from the 50 leaders for investment for the next three months. It was - according to principles I follow - a candidate for a breakout trade. Bingo. QBE made their take-over offer. Positive Black Swan event.

Another was CNP. On the CNP thread I was warning people not to put money into CNP at that time. I copped so much stick it wasn't funny. One guy said to me, that I'd be sorry when CNP got to two dollars. So I wrote down the criteria which needed to be met for entering CNP as a trade. I entered that trade some weeks later using the prescribed criteria. The stock, two days later, jumped from thirty cents to fifty cents. A positive black swan event.

The third one was CDU. I write a daily technical analysis of CDU calling the trends - short term, medium term, long term and very long term. The record is there. I won't belabour it now.

So - I think there is enough positivity there?

But I do object strongly to someone saying that a certain book which warns against the self-satisfied use of certain taken=for=granted ideas is of no practical use. Especially when that book is written by a person who has worked in a practical capacity in the investment industry at the highest levels possible.

It just seems to me that Clark doesn't have enough imagination to see how the principles can be extrapolated and used in practical situations.

He is, I believe, blinkered by his devotion to the value investment ideology. I have nothing against value investing. I respect the choice of those who use it and wish them well in their investment careers. I'm sure many people make lots of money using those principles.

But to deride others for suggesting some other methodology is, in my opinion, beyond the pale.

Simply, Clark doesn't get it.

Cheers
Red