The Primacy of Fixed Downside Risk

Defense Readiness meets Algorithmic Trading Systems

CONTINGENCY PLANS FOR CONTROLLING LOSS

The property of Fixed Downside Risk is one of the defining characteristics–if not the defining characteristic–of my investment methodology.

Furthermore, when it comes to Fixed Downside Risk, I’d go so far to say that 99% of all the retail stockbrokers I’ve met–in the Philippines and in the United States–received zero training in how to do this–nor indeed, even know what I’m talking about.

Don’t believe me?  Ask them yourself.

“We focus on risk before we focus on return. The best investors do not target return.  They focus first on risk.”

–Seth Klarman

Robert Merton: Observations on the Science of Finance in the Practice of Finance | MIT World

There’s much to learn from Nobel Laureate Robert Merton, both what to do and what not to do.

Hailed as the Newton of Modern Finance, in academic circles he’s perhaps most famous for the Black-Scholes-Merton options pricing formula, for which he shared the 1998 Nobel Prize for Economics.

In 1998 Merton was partly to blame for the collapse of Long Term Capital Management–a hedge fund which failed spectacularly by losing $4.6 billion in less than four months.   In January 2009, his financial advisory firm Trinsum Group, filed for bankruptcy.