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Once-In-A-Lifetime Happens More Than You Think

History reaffirms time and time again that, “Once in a lifetime” events are not reserved for only once in your lifetime. Consider this quote from Malcolm Gladwell taken from my first book, “Trend Following: Learn to Make Millions in Up or Down Markets”:

…[O]ne of the former top executives of LTCM [gave] a lecture in which he defended the gamble that the fund had made. What he said was, “Look, when I drive home every night in the fall, I see all these leaves scattered around the base of the trees…There is a statistical distribution that governs the way they fall, and I can be pretty accurate in figuring out what that distribution is going to be. But one day, I came home and the leaves were in little piles. Does that falsify my theory that there are statistical rules governing how leaves fall? No. It was a man-made event.” In other words, the Russians, by defaulting on their bonds, did something that they were not supposed to do, a once-in-a-lifetime, rule breaking event…[this] is just the point: In the markets, unlike in the physical universe, the rules of the game can be changed. Central banks can decide to default on government-backed securities.

Things happen. Whether you want to label these chaotic periods “Black Swan Events”, “Man-made events”, “Once-in-a-lifetime phenomenons”, etc… They will continue to happen, and they will continue to occur more frequently than you expect. Be prepared for the unexpected.

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Posted in Risk Management, Trading 101, Trend Following
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