April 20, 2010 – What Goldman Sachs Means for Your Portfolio

(SPECIAL BLACK SWAN ISSUE)

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3) What Goldman Sachs Means for Your Portfolio. This is an excellent time for me to remind readers what this letter is all about. I assume that only grownups are acting on the suggestions herein. That means that you are a financial professional or hedge fund manager who keeps in place effective risk control and stop losses. That is the only way to avoid runaway losses that can lead to you reading your obituary in the paper the next morning. I have been preaching buy cheap puts against existing longs, not just because almost all financial markets are over extended, they are the most over extended in history! Just check out the chart below of the recent rally, compared to other recent post bear market rallies.  Look at my own book. Before I strap on a new position, I first calculate how much in unrealized losses I am willing to ‘spend’ and place a standing stop loss order there. I have visited the trough shorting the yen countless times in the past month. When the GS news broke, the Japanese currency gapped faster than you could click a mouse. Yet my pre-existing stops were automatically triggered, limiting my own losses to pocket change. I now have the luxury to get back in when the dust settles, which could be in hours, weeks, or months. Use this move as a wakeup call to tighten up your own risk control procedures. Keep my favorite quote from John Maynard Keynes glued to your screen: ‘The markets can remain irrational longer than you can remain liquid.’

Rallys.gif picture by madhedge

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