Smooth Sailing With Options

When I wrote “Smooth Sailing with Options”, I tried to talk a little bit about the fact that the ways we think about money is perhaps more important than trying to apply technical skills.  The big firms with their quants lose money too, as do the traders who live by technical/fundamental indicators and who follow the latest news on CNBC.  I wrote about research that showed that the distribution of returns for stocks demonstrates that something like 40% of all stocks lost at least 70% of their value and never recover, and that only 7% of stocks actually generate the returns that lift the entire index.  I said that if the quants and the experts can’t find that 7%, why should we, as small traders, even try?  We shouldn’t, which is why we’re better off selling options on etfs.  (Or, for non-trading investors, just owning a few well-chosen Vanguard funds) I’ve always thought that the soft skills are more important than the hard (technical) skills.  It’s more important to make better financial decisions than it is to spend hours trying to analyze fundamentals or technical indicators.  Soft skills means things like living below your means and saving the extra, downsizing the huge house, paying attention to the numerous and small things that bleed away funds every month, that list is endless.  Most people pay zero attention to any of it, or they are masters at justifying why they continue to make those decisions.  (Like pets.  People spend fortunes on pets and wow, are they adamant in their justification!) Managing our emotions and biases about money may be more difficult than managing our trading positions.

At least, that was my theory, based on simple observation, and confirmation from a few books and a few like-minded people like Mr Money Moustache, all very informal. 

However, I just read a book that backs me up with research.  Quote from the back page:
“Money – investing, personal finance, and business decisions – is typically taught as a math-based field, where data and formulas tell us exactly what to do. But in the real world people don’t make financial decisions on a spreadsheet.  They make them at the dinner table, in a meeting room, where personal history, your own unique view of the world, ego, pride, marketing and odd incentives are scrambled together.”

The author, Morgan Housel, says that how you behave is more important than what you know.  Sherlock Holmes said “The world is full of obvious things which nobody by any means ever observes.”

Ah, yep, that’s what I see.  So anyway, I have to recommend this book, it’s easy to read, interesting, and I really like his viewpoint.

0 replies

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *