Not About Math and Financial Formulas.

The Wall Street Journal describes the rise and fall of the AIG financial services division. AIG is the insurance company that was given a $156 billion bailout , 10 times more than the auto companies. AIG was an innovator in derivatives strategies. They made a lot of money with this.

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The firm developed innovative solutions for its clients, including new methods to free up cash, get rid of debt and guard against rising interest rates or currency fluctuations………

At the end, though, the story of Financial Products is not about math and financial formulas. It is a parable about people who thought they could outwit competitors and market forces alike, and who behaved as though they were uniquely positioned to sidestep the disasters that had destroyed so many financial dreams before them.

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Why do I write about the mishaps in large companies ? Because many of their people behaved as if they were God. Finally, their pride destroyed them.
Traders must prevent their egos from taking over their sense of judgment. If a trade is not going your way, review it, if neccessary take a loss and close it. Do not say “This will work out eventually” or “The Market will do what I want”.

Always understand that risk can be more than anticipated. Therefore, protect yourself from losses. Always undertrade. (No over trading, ever!)