Does it smell of risk
Just watching a great TV show that looks at the crash in the financial system that we have just been through. It's called “The City Uncovered” with Evan Davies and I found it a very accurate and honest account of why it all happened. In essence, they used an old trader saying to explain why it happened.
‘Never let the perfume of the premium overpower the odour of the risk'.
It turns out that the financial markets had become so seduced by the perfume, they ignored the risk that was growing. The analogy was made that everyone focused on the sunny day, thinking even though they had investment risks; it was unlikely that they would all happen at once. They called it the occasional catastrophe.
Naturally, most traders didn't expect it, but it arrived one autumn day in September 2007. It had happened before and no doubt it will happen again. In fact, every decade or so the market corrects. Sometimes there are a few casualties. Sometimes there are a lot. This time it looks like we got lucky, and the correction will be relatively small.
Good rider or a lucky rider?
Let's say that you do a day's motorcycle training and during the day you don't fall off once. In fact, by the end of the day you get quite confident.
Obviously, there are two ways to look at your ability after that first day. First, you may think you're a good rider now. Or you may just see yourself as simply lucky. The truth of what happened to the current financial system was that everyone was riding the big financial motorcycle without having fallen off. This went on for far too long and eventually the inevitable crash happened: the occasional catastrophe.
Whether you're a banker, or you're a property investor it's important to remember the motorcycle and not ride too fast, too quickly. Build up your confidence at the same pace as your competence. That way, you'll develop your skills safely, and the odds of the occasional catastrophe are dramatically reduced.
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