Time for a little nuance.
If you want to work as a credit trader you should know that credit derivatives are mostly used by institutional investors to hedge their debt portfolios these days.
These are the same institutions that also sell that same sort of protection to other institutions to earn income or tailor their net position as the underlying changes.
Thanks for your feedback, I certainly appreciate you sharing your knowledge with me. Do you have anymore information or anything else you would care to share with me? I am quite eager to learn more.
This is where I hoped we’d end up. To me synthetic credit seems like the best way to manage risk, how much money you can lose worst-case scenario versus how much you can make, assuming you can find risk that has been mispriced. It is a bit of a contradiction; I don’t believe synthetic credit should exist, for if you want to manage risk a thorough analysis of the financial statements should be conducted. Otherwise you can have lenders who lend recklessly and then buy protection to cover their ass because buying protection is easier than a fundamental analysis, and society ends up with disastrous results. But yet I want to use it to maximize my returns.
Speaking of prop trading is anyone else concerned about JPM’s massive $8 billion, last number I saw rumored, loss? For what concerns me is not the gross amount, for it is pocket change to JPM, but the fact it didn’t manage risk properly and what the implications are for Bank of America or Citi Group? The thought makes me shudder.
Forgive me for confusing you and allow me to elaborate further. I believe the efficient market hypothesis, like the mainstream economic paradigm, to be so unrealistic I’ve never taken the time to study it. So when I say, “All markets are irrational however at any point in time the price is always right” I am acknowledging the market's irrationality while also realizing the fact the individual doesn't know the true price either. For example say you receive a margin call from your broker, or an investor requesting his money back, while you are all in because you found an glaring inefficiency in the market. However your broker, or investor, won’t care if you are right and the market is wrong in long-run, they only want their money now. So you are going to have to liquidate assets to raise money and if the trade went against you at all you will have to realize losses even though you were right in the long run. This framework prevents me from being self-indulgent for investing is not an activity that rewards those who are self-indulgent.
Originally Posted by Nereis
If you want to talk directional betting, that is the realm of hedge funds (unless you're in the JP Morgan CIO).
I'm not sure if you believe in the efficient markets hypothesis, but from your general remark on that point I'm inclined to believe so. If so, you will have to explain the returns of value portfolios and successfully argue against Fama and French.
As for Fama and French, I see is nothing contentious there. I actually want to be a value investor, however it is my contention that debt and value don’t go together. And while you may find a company that offers a significant margin of safety, it will not prevent you from losing money in this environment (there are outsiders of course like AAPL and RGR) for while there are a diverse number of asset classes there is no diversity in price movement. It is either risk on or risk off as the markets try to figure out whether there will be deflation or inflation. But that being said I am looking for value, this does not mean I am going to buy just yet, in Europe, where we could realize the mother of all bull markets if the situation plays out the way I think it can. There just needs to be the spark that lights the fire....