Why aren't there more long term investors?
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Mathemagician
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Most of what I do is inherent in the design of the risk management system. Beyond that, resampling and VaR are key tools along with different ways of stressing a portfolio.
jj
jj
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It's fully automated but proprietary. When designing yours, the best advice is to consider as many different kinds of risk from as many different angles as possible. Also, make sure you have a clearly specified goal for the trading program, as this will guide your decisions. (I'm not talking about 'maximize return and minimize risk' as those are vague and empty -- and therefore useless. I mean actionable goals like 'ensure that no market-system dominates the portfolio' or 'the probability of a drawdown exceeding 30% is less than 1% in any 10 year period'.)
One thing to consider is that study after study shows a high correlation between risk in one period and risk in subsequent periods, while there is no statistically significant connection between past returns and future returns. In practical terms, this means you can actually use past risk levels to predict future risk levels and therefore it carries useful information as a design criteria whereas absolute returns do not. While absolute returns are not predictive, though, there is a statistically significant correlation between past and future relative return rankings. This means that given two programs of equal risk, the one with the higher past return is likely to have the higher future return as well -- even if those returns are negative.
There is also strong evidence that the skill difference between managers is not evident in times of positive returns for a style, but rather in tough times. In a nutshell, this says that all investors make money in bull markets but only the highly skilled ones hold on to it in bear markets.
I don't really want to ramble on any further, so the upshot of these studies is that there is a stronger relationship between past (or honestly backtested) risk and future risk than past (or honestly backtested) returns and future returns. Thus, it is more constructive to expend energy studying and managing risk expectations than return expectations.
These thoughts are supported by evidence, but others are free to disagree as always.
jj
One thing to consider is that study after study shows a high correlation between risk in one period and risk in subsequent periods, while there is no statistically significant connection between past returns and future returns. In practical terms, this means you can actually use past risk levels to predict future risk levels and therefore it carries useful information as a design criteria whereas absolute returns do not. While absolute returns are not predictive, though, there is a statistically significant correlation between past and future relative return rankings. This means that given two programs of equal risk, the one with the higher past return is likely to have the higher future return as well -- even if those returns are negative.
There is also strong evidence that the skill difference between managers is not evident in times of positive returns for a style, but rather in tough times. In a nutshell, this says that all investors make money in bull markets but only the highly skilled ones hold on to it in bear markets.
I don't really want to ramble on any further, so the upshot of these studies is that there is a stronger relationship between past (or honestly backtested) risk and future risk than past (or honestly backtested) returns and future returns. Thus, it is more constructive to expend energy studying and managing risk expectations than return expectations.
These thoughts are supported by evidence, but others are free to disagree as always.
jj
luckyd1976
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I have found this to be SO TRUE. (Tech Bubble, Housing Bubble, etc...)
To many people come into the trading industry with tunnel vision, only seeing % signs and $ signs. "Is 5-20% a month real?" "How much money can I make?"
For Newbs out there:
Focus in on Money Management, Risks involved/limiting of, and Diversification strategies.
Returns will come.
JJ,
This is not a comment on your whatever it is ,but I can't read what you have posted without saying this.
Studies on correlation are fundamentally flawed as they actually don't have anything to do with making money and managing risk.
how dare he say that !
The studies do show what appear to be stable relationships and this is no secret at all. In fact plenty of funds of all varieties have done lots of research on this. This very stability in fact leads them to go away and develops systems for asset allocation based upon diversification. Can and does actually work most of the time ,BUT not because of the findings of the studies. It actually works ,because most of the time there is still real serious diversification in the way in which particpants are applying this and this means that the success is actually still attributable to the 'differences' in tactics rather than the findings of the studies. ...how can I say that !
Because ,the fact is that making money sustainably and reducing risk comes from doing something that is actually really uncorrelated.
Where studies on correlation fall down is they don't account for what happens when lots of money starts to do the 'same' thing and in fact where there is simply more money chasing opportunities than there are viable opportunities to chase. In other words they crowd each other out. When that happens the correlations they thought existed no longer exist. They don't have the edge they thought. Example of this is two of the largest most successful hedge fund managers of all time are nursing their largest losses. What worked when there were only a few hundred of them doesn't work so well when there are nearly 10,000 of them.
Real risk reduction from diversification comes from reducing allocations to crowded markets in favour of uncrowded markets. Ironically one of the very least crowded markets in recent times has become cash hence why regardless of central bank monetary easing it is still costing more to get cash/credit access to cash than the markets expected.
At times when asset groups become as crowded as they have in recent years the only really uncorrelated asset groups are equities ,bonds and cash and we've seen that since last year.
This is not a comment on your whatever it is ,but I can't read what you have posted without saying this.
Studies on correlation are fundamentally flawed as they actually don't have anything to do with making money and managing risk.
how dare he say that !The studies do show what appear to be stable relationships and this is no secret at all. In fact plenty of funds of all varieties have done lots of research on this. This very stability in fact leads them to go away and develops systems for asset allocation based upon diversification. Can and does actually work most of the time ,BUT not because of the findings of the studies. It actually works ,because most of the time there is still real serious diversification in the way in which particpants are applying this and this means that the success is actually still attributable to the 'differences' in tactics rather than the findings of the studies. ...how can I say that !
Because ,the fact is that making money sustainably and reducing risk comes from doing something that is actually really uncorrelated.
Where studies on correlation fall down is they don't account for what happens when lots of money starts to do the 'same' thing and in fact where there is simply more money chasing opportunities than there are viable opportunities to chase. In other words they crowd each other out. When that happens the correlations they thought existed no longer exist. They don't have the edge they thought. Example of this is two of the largest most successful hedge fund managers of all time are nursing their largest losses. What worked when there were only a few hundred of them doesn't work so well when there are nearly 10,000 of them.
Real risk reduction from diversification comes from reducing allocations to crowded markets in favour of uncrowded markets. Ironically one of the very least crowded markets in recent times has become cash hence why regardless of central bank monetary easing it is still costing more to get cash/credit access to cash than the markets expected.
At times when asset groups become as crowded as they have in recent years the only really uncorrelated asset groups are equities ,bonds and cash and we've seen that since last year.
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chump,
We're talking about two different things, and I agree with you completely!
jj
We're talking about two different things, and I agree with you completely!
jj
I get your point and you're absolutely right about having clearly defined objectives when building any system. I just disagree that the statement below which I think you misquoted me on from another thread, is vague, empty and usless:
"Maximise Size, Minimise Risk"
These 4 words are on a piece paper and on the desk of one of the greatest fund managers of all time, Paul Tudor Jones. That piece of paper has been there for nearly 30 years.
The essence of the statement simply reminds you to seek out the best opportunities made available to you by the markets. Kind of like putting huge size on with a very tight stop when a high probability play comes along. Price woun't have to move much against you in order to figure whether you're wrong or not.
Thanks for the information though jj. Much appreciated.
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Let's say T2W, started a fund (you can all stop laughing now). Would it not be better to use the 'full spectrum' of ways and means to take the most out of any markets deemed viable by the fund? By this i mean, the fund used stock, options and futures on whatever. The fund would also use different TFs to maximise on 'speculation' or 'decrease' risk.
Would, in a perfect world, long term and short term not work in harmony?
Would, in a perfect world, long term and short term not work in harmony?
mp6140
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Long term and short term work perfectly in normal institutional trading, where one side of the ledger is involved in a longer term trade, and the other side is being run with daytrading traders.
BOTH are methods used by any company working in the business !
while hypothetical at best, the ideas of total diversification as you have stated is recommended for investors, certainly possible and inherently profitable, BUT i look to the original hedge funds which made money because they could SHORT where mutual funds COULD NOT !
had the funds simply stuck to what they did so well and NOT get involved in trading hither and yon, they would not suddenly be bankrupt and while, for an investor, diversification is a good thing as one situation is hedging against another, IF A FUND STICKS TO WHAT IT DOES, be that options, futures, forex or (well, not so sure) equities, it is capable of producing some really startling gains --- its kinda like the jack of all trades vs. the master of one --- will the master earn more ?
I believe you do one thing and do it well and that will work nicely. Of course, if you have seperate departments, all expert, than diversification is a plus, simply because its offering SO MANY MORE opportunities.
me --- im just a one man shop which im happy to remain, so "diversifying" would probably be a death knell !
enjoy and trade well
mp
How would the head of the fund organise? How can a manager of a fund, who has no intraday experience, tell his 'traders' what to look for?
mp6140
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considering were only beng hypothetical here, you could spread it into various methods -- the easiest being ONE fund manager with TWO presidents or asst fund managers, each with the responsibility of handling one side of the ledger, or TWO fund managers, each one concerned with his/her particular side.
the organisation is relatively simple -- its the talent that matters !
mp
"the organisation is relatively simple "..not for as long as people have conflicts of interests and a tendency to think with their balls first and their brains second.
mp6140
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being hypothetical here, i couldnt come up with hypothetical gonads in my post
LOL
mp
If there is no such thing as a trend, and nobody knows what the market is going to do next,...where does that leave the 'long term investor'? Fundamentals? Is fundamental guaranteed?
Are long term investors the biggest risk takers?
And if long termers feel so confident about their outlook,.... why not take advantage in the short term?
The arguement is falling to pieces, it's got more holes than a piece of swiss cheese....
Investors,....you are so wrong!
Give me your arguement.
Are long term investors the biggest risk takers?
And if long termers feel so confident about their outlook,.... why not take advantage in the short term?
The arguement is falling to pieces, it's got more holes than a piece of swiss cheese....
Investors,....you are so wrong!
Give me your arguement.
mp6140
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Paul
i see that youre a veteren member ---- youre questions appear a bit "inexperienced" for one with that title, so where is this heading ?
mp
mp6140
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Explain please, sir!
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"where would a trend begin on an intraday basis ?"
simply stated, this is a kindergarten question and not one a veteren trader would ask, therefore I look for a "reason" as to why you ask this rather simple question, thats all !
mp
