It can be worse

It has never happened to me in the past 20+ years but it occurred two weeks ago. I got a car accident and it was due to my fault! This year, I got 3 car accidents and in the two previous ones I was the victim, hit by someone in the rear (quite mild though). But this time I hit someone from behind and was somewhat more serious for the damage of both cars. Since I started to drive over 20 years ago, I had never hit anyone before but I did it this year. Quite a terrible and depressing experience for me obviously. However, I'm quite grateful for this bad incident for a couple of reasons:

• It could be much worse but at least no body injury was involved although both cars were seriously damaged superficially. So I still could drive back for two hours without any problem instead of being totaled and needed a towing. 
• I was fully covered by my insurance for the damages I caused except the small amount of deductible that I need to pay. More importantly, given my impeccable driving history in the past, I got a forgiveness for this incident, meaning my insurance premium should not increase due to the accident. 
• What is even more beneficial for me is the fact that I was apparently too complacent in my driving after such a long time of no accidents. In hindsight, I was apparently too relaxing while closely following the car in front and could not stop when he suddenly stopped for a yellow light. A big warning sign for me that I really should always be prepared for the worst in my life regardless how comfortable I'm for my current situation. 

This very last point is also very relevant to investing and trading actually and hence the reason I'm sharing this accident with you today. You see, people can become enormously complacent from time to time, especially after a long time of gains again and again, which will make them feel this is the norm of investing and nothing bad could happen. I share the chart below with my group, asking if anyone could tell what it is for. No one could (for all fairness, I couldn't myself without the explanation for it). 

It is called Investment Turkey. Ironically my car accident happened the day after the Thanksgiving when I was driving back home from our vacation home!  It was first described by in Nassim Taleb's bestseller, The Black Swan: The Impact of the Highly Improbable. As Taleb wrote about the life of the Thanksgiving turkey...

Consider a turkey that is fed every day. Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race "looking out for its best interests," as a politician would say. On the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. It will incur a revision of belief.

Imagine you found an investment that generated steady, predictable returns with no drop in the value of your portfolio. (This is the promise that attracted investors to a fraud like Bernie Madoff.)
As it turns out, there are legitimate investment strategies that offer just that... until the day they don't. Then panic will hit and everyone is running for safety but more often than not, most people will suffer due to being too late, just like the turkey to be slaughtered.  

Let me share with you another real story. Heard about Seth M. Golden from Florida? He was a former Target logistics manager and he managed to grow his net worth from $500,000 to $12 million in five years by shorting the CBOE Volatility Index (VIX) using various exchange-traded funds, primarily via XIV, the VelocityShares Daily Inverse VIX Short-Term ETN, which has ceased to exist now.  This was an enormous gain with an annual return nearly 90%. He was so successful year after year that he planned to launch a hedge fund based on this impressive five-year track record. But in hindsight, he was apparently too complacent with his long term incredible success without knowing that his turkey moment was coming. That was on February 5, 2018, XIV lost 15% of its value during regular trading hours and lost an additional 96% in the aftermarkets.  Instantly Golden's five years of gains were wiped out and some more....Golden's "short VIX" trade turned out to be a real-life version of the turkey problem.

Lesson we can all learn from Golden's real life investment turkey? 

As Taleb puts it..."Consider that [the turkey's] feeling of safety reached its maximum when the risk was at the highest!"
Just because what you've been doing has brought positive results for years, don't read that as a guarantee it will continue to do so. Situations change - in an instant, sometimes - and what was working like a well-oiled machine can suddenly become a ticking time bomb. Or a hatchet that turns a well-fed turkey into Thanksgiving dinner.

My car accident has definitely reminded me of this investment turkey risk that we may all face, not only in our daily life but also very well relevant to our investing life. That's why I try to be more bearish when there is widespread euphoria and more bullish when there is abundance of pessimism. As I alluded to yesterday, I'm never solely bearish or bullish in any situation. Even when I'm very bearish for the market, I'm still buying but just very cautiously and selectively. I'm trying all my best to not become an Investment Turkey! Hope you too!!