I was reading some quotes from Charlie Munger tonight. This one struck me.
He said that the ordinary investor "underestimates the number of possible outcomes for unwanted events. Includes underestimating the probability and severity of rare or extreme events."
Here’s what he just said: he said that we tend to ignore that we could blow up our account trading the Non Farm Payroll account. We just simply don’t ever get a grasp on how dangerous and risky trading can be even after a bad trade! We think about how much money we are going to make and we don’t think about what could happen if it all goes wrong. This is what got Long Term Capital Management into trouble in the late 1990s, and it was run by Nobel Prize winners. This is what got Bear, Stearns into trouble in 2007 in the subprime market. And Merrill Lynch. And Morgan Stanley. And UBS. And the list goes on.
