The 800 LB Gorilla
I recently saw an 800LB Gorilla scare the living daylights out of a Corporate KingPin.
Here’s what happened.
The other day I’m sitting in Panera Bread Bakery, enjoying a hazelnut coffee and chowing down on a “power breakfast” sandwich.
I like it there because it is usually pretty quiet. So it is a good place to escape and really dig into the charts to find that “buried treasure.” If you’re an options trader, you know exactly what I am referring to.
That sweet juicy premium that can be all Yours by selling calls or puts… Properly of course.
So I’m sitting there alone, when two men approach and sit at the table right in front of me. One is wearing a monkey suit (Dark suit, Starched white shirt, Red power tie)…
( I can poke fun at the professional getup because I had to dress that way for years. Don’t hold it against me if you have to dress that way now.)
Anyway, the other guy was just a normal dude. You know, casual. Blue jeans, polo shirt… pretty ordinary.
I don’t like to eavesdrop, but since they were so close, I could easily overhear what they are talking about. The “Monkey Suit” guy is a newbie Financial Planner who is waiting for his boss to arrive. Seems to me they are going to explain to Blue Jeans guy how well he did in the Market last year.
Of course when anyone starts talking about $$$ being made in the Market, I’m all ears!
A few minutes later, in walks Mr. KingPin… newbie Financial Planner’s (aka “Monkey Suit” guy) boss.
Like all KingPins, he controls the conversation and skips the small talk. He’s ready to get down to business.
Since Blue Jeans guy is sitting right across from me, and I see his lips move with these words coming out….
“So how much did we make back in this rally?”
KingPin: “You portfolio is up over 30% this year (2009)!”
KingPin: “You and your family should be ecstatic, this is the best year that I can remember!”
Blue Jeans: “But what about the 60% I lost in 2008?”
WOW. I am hanging on every word at this point…..
… Eager to see how the KingPin will to handle this. Everything about this situation is becoming clear.
Newbie Financial Planner (aka “Monkey Suit” guy) must have been getting hammered with this question from Blue Jeans and had no idea how to address the question.
No one wanted to talk about the 800LB Gorilla in the Room. Not even Mr. KingPin.
He immediately busts out a series of charts and graphs to get Blue Jeans focused on the 25 year plan…
…You know the drill… “if that happens and this happens and you get this and then we apply the rule of 72 and botta bing botta boom…you retire rich…”
(He left out the part: “…of course you have to work like a plow horse for the rest of you life”…. A conversation for another time).
Now here’s the scary part…and the part that really gets my pulse racing and turns my face red with anger (sorry kids, dad does get a little upset sometimes)!
(What follows may be too upsetting for some of you… so read on at your own risk.)
The 800LB Gorilla that KingPin does not want to talk about is called Drawdown Recovery. Here is how it works in a nutshell.
If you loose 20% of your account value, it takes a 25% gain to recover the loss and get back to breakeven.
If you loose 30%….it takes 42.85% to recover
If you loose 40%…it takes 66.66% to recover
If you loose 50%…it takes 100% to recover
If you loose 60%…it takes 150% to recover
If you loose 70%…it takes 233% to recover
If you loose 80%…it takes 400% to recover!!!
So let me ask you this?
How long will it take Blue Jeans to get back to just break even?
Here’s the reality. Fortune Magazine reported that since 1985, only 4 percent of all fund managers beat the S&P 500 index, and the few that did, did it by a small margin.
Provided we don’t see a repeat of 2008 or a double dip, how long will it take Blue Jeans…a guy who busts his rear end with hopes of someday retiring… with more than a “hog-dog-for-dinner” lifestyle… to get back break even?
Do the Math…it’s not pretty considering an 8% per year return if he’s extremely lucky from this point forward.
Wow…that sounds like a lot of fun!?!
No wonder KingPin doesn’t want to talk about the 800LB Gorilla in the room!
I’ll mention this too…. I believe that diversification only works if you have 30 years to put away your money and you’re ok with living just above poverty level when you retire.
Not me…I make the decisions on my portfolio…and soon it’ll be my boys who are being trained to take over for Dad when they have proven themselves in “battle.”
As for my retirement plans…..well, let’s just say that poverty level isn’t going to cut it!
Now, please bring it on…love to here your comments about Drawdown Recovery and your retirement plans.
Signing off for today,
Jeffrey
4 Responses to “The 800 LB Gorilla”
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Hey Jeff,
I don’t know much about trading, but this was one heck of a post. There are far too many “so called investment advisors” who are doing this kind of thing.
This sure does make you think.
More importantly, it reminds us of the importance of due diligence.
Good thoughts Jeff! Drawdown recovery is the MAIN issue for anyone trying to rebuild an investment portfolio.
Jeff B.
Hi Jeffery,
I like this piece because I often think I am unable teachable by others do to my rogue nature. I have traded the stock market and the forex market. So considering how big my opponent is for part of 2009 and 2010 I have had to stick to my style of trading. Which I call chip and go. I don’t hold on to anything in life except family. So far I have seen a little profit consistently. But I am comfortable. I watched my friends tank boat loads of money during the recent crash. But my style of trading saved me and my son thousands of dollars. Why? We considered our opponent the cooker of books on wall street and some of the unscruplous forex brokers.
This piece makes me feel good for attending webinars and reading since I don’t watch t.v. in regards to the market as a whole. Because nothing is as it should be.
thanks for hearing me out
This topic makes for great debate. This ties into Jeff’s first posting about “Change or Transformation.” While making permanent change can be difficult I would disagree that it has to take time.It just takes enough reasons.Let me explain; Say 2 people are trying to give up smoking, we’ll call them smoker A and smoker B. Why is it that smoker A can put the cigerette down and never look back while smoker B puts the cigerette down but constantly struggles between the addiction, in and out of rehab, and tries all of the gimmicks available? Well, the answer is smoker A changed his/her “identity” while smoker B only changed his/her “behavior.” This is what Jeff was talking about when he refered to people going to the gym early in the year but giving up shortly after. To make an identity change, a permanent change, one has to relate more pain(reasons) into not changing than to the pain of staying the same. If you look in the mirror and say to yourself,”I only have an extra 10 pounds of “love” to lose, then that 10 pounds will always be there. Now if you look in the mirror with your shirt off and grab the 10 pounds around your waist and mash it together so you can really take a good look at it and say,” look at this!, this is disgusting!, repulsive!, and not sexy!”, then you are creating in your mind more reasons (pain) into not changing, then to your present state. Our minds are programmed to seek pleasure and avoid pain in everything we do. So it’s what we link to pleasure and pain that makes the difference. If one is trading options with only a behavior change and not an identity change, that trader will forever struggle and will eventually disappear. (sorry for the length of this posting Jeff)