Friday, October 31, 2014

Life's "Stop Loss" limits

When a soldier ventures into the battlefield to fight the enemy, at the command of his General, he hopes to win.  He knows he and his comrades may lose as well.  He is also aware that he may even die.  He has no luxury of settling for anything less. He cannot think of reducing his loss.  At stake is the ultimate sacrifice; laying down his life on the orders of his superiors. He cannot hope to cut his loss, come out of the battlefield and live for another day.  The General or his political masters are placed better.  They have the option of negotiating with the enemy, settle for something less and cut the losses. 

Dealers and traders operating in various markets are taught to use "Stop-Loss" or "Stop-Limit" orders.  These limits and instructions are to be meticulously followed to prevent the disastrous effects of steep fall or rise in markets, depending on the type of positions they hold while trading. A trader who does not follow such stipulated rules and enters into unauthorized trades is called a "rogue trader".  The story of Nick Leeson who made a loss of 1.3 billion dollars and brought down the Bearings Bank in 1995 is well known.  That another trader Jerome Kerviel made five times more losses (6.9 billion dollars) for his bank during 2006-08 and overtook him is also history.  Some of these episodes are shrouded in mystery as there are allegations that the concerned superiors turn a blind eye as long as the dealers violate the rules and make profit, but pillory them when losses occur. Nevertheless, sticking to rules like allocated prudential limits and following stop-loss boundaries is a sacred requirement for traders in various markets.

Is cutting losses or stop-loss concept applicable only to traders in the markets or does it have any relevance to real life?  Should we use the concept of "Stop-loss" in our lives or live like a rouge traders?  These questions beg for an answer.  For us in India, "stop-loss" is not at all a new concept. Ancient Indian wisdom has answered this question in the affirmative.  The references for using stop-loss limits are there for thousands of years.  One old saying goes thus:

सर्वनाशे समुत्पन्ने अर्धं त्यजति पण्डितः|  अर्धेन कुरुते कार्यं सर्वनाशं सुदुःसहः ||

Sarvanaashe samutpanne ardham tyajati panditah,
Ardhena kurute kaaryam, sarvanaasham suduhsahah.

"When confronted with a situation where probability of total loss stares at him, the wise man voluntarily surrenders one-half to save the other half. He then manages life with the saved half; it is impossible to bear total loss", is its summary. Many kings and rulers followed this meticulously and saved total washout.  Save whatever you can in a desperate situation and then build on on the remaining part of wealth or asset, is the essence of this saying.

A quote from "Hitopadesha"'s "Mitralabha" mentions:

त्यजेदेकं कुलस्यार्थे ग्रामस्यार्थे कुलं त्यजेत् |  ग्रामं जनपदस्यार्थे आत्मार्थे पृथिवीं त्यजेत्||

Tyajet ekam kulasyaarthe gramasyarthe kulam tyajet, gramam janapadasyaarthe aatmaarthe pruthiveem tyajet!

"One member of the family may be sacrificed for saving a family.  To save a village, an entire family can be sacrificed.  A village itself may be sacrificed to save a state or country.  But to protect oneself, the whole world may be sacrificed". 

Self preservation is the most important lesson even when using stop-loss concept and giving up other valuables.  What is the use of protecting anything if the protector himself is destroyed?  Save yourself even at the cost of everything else, says this well known verse.

There is a wonderful story that demonstrates the truth of this saying.  Once there was an argument between a king and his minister.  "A mother does anything for its offsprings", said the king.   "That is not true.  Even the mother believes in self-preservation", said the minister.  The king challenged the minister to prove it.  The minister got a monkey with its two infants captured and caged.  They were brought before the king.  The minister asked the cage to be kept in a tub and water to be slowly poured into the tub.  As the water reached up to the head level of the infants, the mother monkey lifted them and placed them on its head.  The king was elated and shouted that he was right.  As the water level kept on increasing and reached the nose of the mother monkey, she dropped the baby monkeys and stood on them to save itself.

Stop-loss limit is not just for traders.  It is for us in real life as well. As and when confronted with heavy losses, in any facet of life, we have to salvage whatever we can.  And then build upon what is salvaged and remains with us.

7 comments:

  1. If only the Pandavas had followed this! Of course then, the Mahabharata would not have been; and the Gita, and all the lessons they teach mankind.

    Wonderfully written as usual, starting from the well known Leeson and Kerviel episodes and explaining the relevance of Stop Loss concept in real life.

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  2. Very good lesson to be remembered.

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  3. Good one, nice link of stop loss not only for a trader but also in real life.

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  4. Good lesson. A concept on which living being is surviving for ages. But the concept has been given different meaning and commercialised leading to greed and conflicts among brotheren.

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  5. I don't know how i missed this wonderful piece till today!! Life's lesson learnt (or ignored?) through familiar happenings. The narration was superb.

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