1. You can't win.
2. You can't break even.
3. You can't get out of the game.
This would seem to wrap things up, for those without analytical minds. More careful consideration now leads me to propose a zeroth law, also ala thermodynamics:
0. You can't assign a meaningful numerical value to risk.
Since value of an investment is measured as assets minus liabilities, and risk certainly affects liability, this has implications for total value. (I've stated earlier that the largest risks are never made explicit on balance sheets.)
From a theoretical viewpoint, this is all well and good. Does it have practical applications?
Below is an example based on my latest reading When Genius Failed by Roger Lowenstein. This is the epic story of the hedge fund Long-Term Capital Management. The partners in this fund included top traders from Salomon Brothers and professors of economics. Two were Nobel Prize winners. Value-at-risk (VAR) was an important theoretical advance of theirs. Off-balance-sheet numbers were a practical aspect of the fund.
Here is a graph of the value of an investment in this fund over time.
View attachment 2997
From this we can deduce a number of things. My favorite inference is that "long-term" means about four years.
Most people I know were kept out of this fund by the requirement for an initial investment well over $1 million. I'll admit there are some details I don't understand, like how a firm with capitalization of $100 billion could end up with 100 to one leverage on this. One suspects lending requirements are different at that level.
My title? That is due to a line stolen from a rather old financial commentary concerning risk which has once again become topical. This market is neither a bull market nor a bear market, it is chicken.