1. The Efficient Markets Hypothesis (EMH) was created to capture the assumptions required to make the math
work: every price is independent of every other price; information flows instantaneously and without
distortion to every market participant; and all market participants are rational investors.
These assumptions ignore asymmetry of information between one group of investors to another. While
assumptions like these may work for physical objects, they are not credible when describing human market
participants.
Although the assumptions may be questionable, the model itself produces results that work well some of the
time. It works well enough that there are plenty of example of success to stave off the critics. However, it also
fails often enough to question its validity.
Today most models of market dynamics, including those used in risk management, continue to be based on
the EMH. They rely on the fundamental assumptions of equilibrium and they therefore miss the mark
whenever ‘normal' market conditions are not being experienced.
Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of
risk must never take a backseat to return. Conservative positioning entering a crisis is crucial: it enables one
to maintain long-term oriented, clear thinking, and to focus on new opportunities while others are distracted
or even forced to sell.
When excesses such as lax lending standards become widespread and persist for some time, people are lulled
into a false sense of security, creating an even more dangerous situation. Correlations between asset classes
may be surprisingly high when leverage rapidly unwinds.
Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as
risk. Do not trust financial market risk models. Reality is always too complex to be accurately modeled.
Attention to risk must be a 24/7/365 obsession, with people – not computers – assessing and reassessing the
risk environment in real time.
Do not accept principal risk while investing short-term cash: the greedy effort inevitably leads to the
incurrence of greater risk. A broad and flexible investment approach is essential during a crisis. You must buy
on the way down. It is almost always better to be too early than too late, but you must be prepared for
price markdowns on what you buy.
Ratings agencies are highly conflicted, unimaginative dupes. Investors should never trust them. Be sure that
you are well compensated for illiquidity – especially illiquidity without control – because it can
create particularly high opportunity costs. At equal returns, public investments are generally superior
to private investments as they are more liquid and amidst distress more likely to offer attractive
opportunities to average down.
Having clients & or brokers, intermediaries with a long-term orientation is crucial. Nothing else is as
important to the success of an investment or a financial firm. The government – the ultimate short- term-
oriented player – cannot withstand much pain in the economy or the financial markets. Bailouts and rescues
are likely to occur, though not with sufficient predictability for investors to comfortably take advantage.

2. Shamik Bhose
Executive Director
Commodity & Currency & Interest rate futures Markets
Microsec Commerze Limited
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