Steve,
I read this:
Quote:
Invest in dividend-generating companies (mixed with REITs, MLPs, royalty trusts etc) and when everyone hates bonds, buy them up so they can perform when equities take a dive.
, and thought you were stating to buy bonds when everyone hates them so they can perform when equities take a dive. Hence I was speaking directly about such an assumption.
Yeah, I guess we're not communicating here too well. I've spent the last 20+ years of my life trading financial markets with mostly mechanical trading systems I designed. I had to create a terminology to figure out how to equate risk with reward in a non-dimensional (with respect to a given market) way which yielded what I called an R-multiple. Van Tharp wrote a whole book on the subject with some chapters from me years ago in the late 90s.
In a nutshell, I was referring to robust over long term strategies based on their inherent design as opposed to common beliefs projected onto the masses by every "financial adviser" and brokerage firm under the sun.
The 10 year period in equities we just finished is an outlier over the entire history of equity markets in our nations history in numerous ways...enough of one that it has resulted in state pension funds, insurance annuity exposures, and the vast majority of "retirement accounts" vastly undershooting their expectations. 10 years ago, "prudent" managers were being "conservative" by expecting only 8%/yr returns (and we're talking trillions of dollars managed this way) over the next 10 years. None would have ever allowed thinking that would tell them they would have a negative annual compounded return. It's not cherry picking, it's pointing out how trillions of dollars of people's real money was invested with no true understanding of risk and how to manage risk.
None of what I'm referring to here implies anything with respect to a trading methodology. One of the most successful traders I've ever met has a system with a very short holding period, but it is designed in such a way that it is very robust over the long term. I'll give you an example of one that isn't but sure appeared to be.
The late Ray Kelly who was one of the founding members of the CBOE told me this incredible story many years ago about this guy, one of the very first members of the exchange, who created a great options trading system. After a few years, he had never had a losing month. He solicited investors and kept trading the system he designed. More than 10 years later he was still trading the same system and still making consistent profits and only rarely ever having a losing month. On the Friday before the Oct 87 crash, he had system signals the likes of which he'd never seen before signaling enormous opportunity shorting volatility (his system traded option volatility, either go long or short vol).
He took on those positions just like every other signal he had taken for 15 years. On Monday he woke up to monster increases in volatility "nobody" ever believed could exist. Of course "everyone knew" that the huge down open would stabilize and snap back. He closed some big losses at the open and held the rest as now his system was signaling to short more volatility. Over the ensuing hours into the afternoon, he lost more than he ever made the prior 15 years in total, and he and his investors went into debt by millions of dollars. Options sold short at 1/8 and 1/4 were trading at 15, 20, 30, some even higher.
The net of it was that even though he almost never had a losing month, had an equity curve the envy of everyone on the floor, he was trading a negative expectation system. Most successful traders are trading negative expectation systems -- they just don't know it yet. Just like Long Term Capital Management with all their Nobel prize winners, etc, which blew up in 1998 requiring the Fed to step in.
Hence what I was referring to are commonly held beliefs, sometimes backed up enormous historical support, are the ones most susceptible to huge outliers (massive negative R-multiples) once they break and their non-linearity is exposed. The vast majority of "risk managers" couldn't be bothered with such fact over the years until recently.
Login
Register
FAQ
Search
