Who should bear the risk? who should be the judge of value?

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If we have decied that our banks are too large to fail, then how about the following idea?

1. When an individual and a bank agree on a loan, its based on a shared estimate of the value of the home.

2. When a bank decides to underwrote a speculation then both the individual and the bank are betting that the price will go up and allow them to take on more downside risk

3. The individual takes the risk because they think they wont get stuck (greater fool theory plus tactical liquidity)

4. The bank takes the risk because they know there are greater fools to buy the house, tactically, or because the government (the greatest fool) will bail them out (strategic greater fool theory)

5. when there is tactical failure the individual loses all, the bank gets the cushion of the down payment or the property top resell

6. when there is strategic failure, all the risky individuals are crushed, and banks get bailed out with the money taken from prudent banks and individuals who didnt speculate.  This is the moral hazard problem.

7. Even in strategic failure, the banks dont lose, and cant lose, unless the entire world’s financial edifice is removed, but then we have total anarchy and bankers arent worse off than anyone else, plus they can live off the real assets they squirreled away along the wya. No real risk at all.

What we need is a way to put the risk on the banks up front, so that we shift the cost of failure from the prudent banks and individuals.

So, I am thinking that the bank needs to be the appraiser, and quote a price at which they guarantee they will repurchase the house from the borrower at any point in the lifecycle of the loan, at the individual’s demand. They can require a 20% down payment, so that they have a pool of capital to loan to others.  They will be conservative in their estimates of value, and will therefore be a brake on speculation.

This prevents individuals from eating all the cost of their own speculation alone.  banks wont let them speculate without skin in the game. Speculation will be inhibited. Banks will do a better job of appraising, since they will have to own their decision for the life of the loan. If there is a meltdown in housing prices, individuals, who are least capable of making those kinds of forecasts and judgments, dont get smoked on their loans because they can always demand the bank buy them out at the negotiated price. Now prudent individuals arent stuck with the cost of the bad speculative loans. Then if banks fail for having poorly estimated housing value, prudent banks get to buy their books at a discount.

This would serve to stabilize a conservatively priced housing market and prevent the socialization of costs  incurred by the worst risk takers at the expense of the prudent individuals and banks. Virtue will be rewarded

 

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Blended monthly rebalancing strategy

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Beginning July 1^st I will be shifting the 331, 631 and 333 strategies to a “Blended Monthly Rebalancing” strategy in this space.

As a result of the hard work and backtesting of many mastermind members I am satisfied that we have found a ruleset that offers improved reward:risk, and risk management.

The 3 systems we have been following here have done their job just fine, but by refining the list of ETFs to choose from,  incorporating a blend of the 3 and 6 month lookback period, and adding a  monthly moving average filter to the system I believe we have a significantly improved strategy.

I am writing up the rule set for distribution this weekend and will distribute it and a spreadsheet for implementing it to Gold and Silver members. I will continue to publish the current list of holdings in this space for the variation of the ruleset I will follow

Managed risks?

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The risks now?

• Risk of being left behind if the fear was an anomaly and there is now the mother of all buying opportunities: my strategy? Continue to trade intraday with no overnight risk, at my usual levels of risk, in large cap US companies, and broad index ETFs, in either direction based on daily directional momentum.

• Risk of being crushed in longer term positions. My strategy: honor the ruleset of ETF2, and take up to 2 signals per cycle in the mechanical ETF systems at usual risk levels.

• Combination of 1&2: this is what I ALWAYS do anyway; I conclude that the combination is robust and useful. Particularly when circumstances conspire like Wed-Fri to produce over 100R in 3 days will no overnight risk.

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Reflections on leadership and risk management

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Carol: as you develop experience with working for new and different bosses, you find yourself with a standard strategy of how to size them up and find out what makes them tick so that you can work with them and for them? Do you find yourself spending more or less time with that the more often your bosses change. How good are we had really reading peoples take motivations and personal preferences and how much time do we take to be certain of what our first impressions lead us to believe?

I share your concerns about the trade-off between reward and risk when it comes to taking on experiments. As you have seen in my commentary on Heifetz, I don’t think they give this important judgment enough treatment.

Regarding Brenda’s comments about leaders and a willingness to take on risk. The most successful risk managers that I know, and I work with many on a professional basis in the world of both finance and defense, all share a quality of a finely tuned ability to compare rewards with risks and a sense of how close to the edge they can navigate safely or relatively safely. An unwillingness to approach the boundary condition limits leaders abilities to move to the highest levels of an organization where complexity and uncertainty dwell but conversely where the greatest rewards and risks also dwell. It is precisely the ability to successfully navigate uncertainty for the highest of stakes that distinguishes the qualities of successful senior leaderships in my experience.

Regarding cameras comments about the risk-averse boss: you can see here a case where the boss is overcome by his vision of risk that he can’t see the reward and cannot figure out how to successfully integrate the two into actionable decisions while at the same time providing protection for the consequences of the actions for the rest of the organization. He’s been promoted beyond his ability based on what you’ve described. An unwillingness to act to seize opportunity is a natural response to overwhelming uncertainty. A friend of mine who is one of the most successful commodity traders in the world has a program of recruiting talent which examines this ability. Carefully and it is clearly one that is affected by the size of stakes. He has traders who can trade million-dollar accounts professionally but who cannot trade a $10 million account because they get overcome by the number of zeros. It is the context of the consequences of our decisions which make the decisions more difficult on the inside than they may seem to the outside observer.

This is why I think Heifetz is discussion on creating a sense of false confidence to be so dangerous. I am much more interested in examining what the basis for a feeling of confidence is than trying to convince yourself through the power of positive thinking to go beyond your skill level

Carol: as you develop experience with working for new and different bosses, you find yourself with a standard strategy of how to size them up and find out what makes them tick so that you can work with them and for them? Do you find yourself spending more or less time with that the more often your bosses change. How good are we had really reading peoples take motivations and personal preferences and how much time do we take to be certain of what our first impressions lead us to believe?
I share your concerns about the trade-off between reward and risk when it comes to taking on experiments. As you have seen in my commentary on Heifetz, I don’t think they give this important judgment enough treatment.
Regarding Brenda’s comments about leaders and a willingness to take on risk. The most successful risk managers that I know, and I work with many on a professional basis in the world of both finance and defense, all share a quality of a finely tuned ability to compare rewards with risks and a sense of how close to the edge they can navigate safely or relatively safely. An unwillingness to approach the boundary condition limits leaders abilities to move to the highest levels of an organization where complexity and uncertainty dwell but conversely where the greatest rewards and risks also dwell. It is precisely the ability to successfully navigate uncertainty for the highest of stakes that distinguishes the qualities of successful senior leaderships in my experience.
Regarding Tamara’s comments about the risk-averse boss: you can see here a case where the boss is overcome by his vision of risk that he can’t see the reward and cannot figure out how to successfully integrate the two into actionable decisions while at the same time providing protection for the consequences of the actions for the rest of the organization. He’s been promoted beyond his ability based on what you’ve described. An unwillingness to act to seize opportunity is a natural response to overwhelming uncertainty. A friend of mine who is one of the most successful commodity traders in the world has a program of recruiting talent which examines this ability. Carefully and it is clearly one that is affected by the size of stakes. He has traders who can trade million-dollar accounts professionally but who cannot trade a $10 million account because they get overcome by the number of zeros. It is the context of the consequences of our decisions which make the decisions more difficult on the inside than they may seem to the outside observer.
This is why I think Heifetz’s discussion on creating a sense of false confidence to be so dangerous. I am much more interested in examining what the basis for a feeling of confidence is than trying to convince yourself through the power of positive thinking to go beyond your skill level

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