No, you think you are presenting arguments based on math and logic... I am presenting no arguments, but rather suggesting that we defer the discussion.
Global Macro Trading Journal
- Thread starter Daal
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Given that you usually criticize people on the forum for making faulty replies, I got to say, I expected more of you
I am sorry to disappoint...
The reason I posted that wasn't because I was randomly looking for rationalizations. My daytrading is a more significant part of my income, investing/macro is mostly a fun thing I do on the side.
I was actually thinking "what is the optimal way to manage a concentrated stock portfolio if you are a good stock picker?". I did some calculations and reading on position sizing and was wondering if anyone would have some good arguments pro/against sizing positions at 10%/20%/30%/40%
As far as I know you can do those things and still be well within mathematical limits of the most one should bet. But there are other factors, like the chance of a 50% drop in the stock index averages. So one needs to take that into account. On the other hand, if you consider the indexes mean reverting (as they have been historically in the US), you shouldn't overplay that factor. The multiple bets at the same time need also to be taken into consideration
If anyone got any ideas on that, let me know
I was actually thinking "what is the optimal way to manage a concentrated stock portfolio if you are a good stock picker?". I did some calculations and reading on position sizing and was wondering if anyone would have some good arguments pro/against sizing positions at 10%/20%/30%/40%
As far as I know you can do those things and still be well within mathematical limits of the most one should bet. But there are other factors, like the chance of a 50% drop in the stock index averages. So one needs to take that into account. On the other hand, if you consider the indexes mean reverting (as they have been historically in the US), you shouldn't overplay that factor. The multiple bets at the same time need also to be taken into consideration
If anyone got any ideas on that, let me know
If there was a perfect computer that would take into account those factors and tell you the perfect amount fo bet, I'm sure the answer would be 20%+ for some positions quite often (not for every position, obviously). the reason I know that is because the Kelly/Optimal F a lot of the time is far higher than that, so even after you handicap it down to take into account for errors/other factors, it would still be quite high.
Now, most HF types don't manage money that way, they are far more worried about drawdowns because of their clients and their own risk tolerance. Its good for then but what they miss is that its not a mathematical error if you have a higher risk tolerance and care more about wealth compounding. But boy, do they have fun criticizing others when they see that. They underbet and they think the entire world should be like them
And its not just me who is saying that, guys like Munger say that if you are not willing to lose 50% as an investor you will be destined to have mediocre returns
Its something to consider
Now, most HF types don't manage money that way, they are far more worried about drawdowns because of their clients and their own risk tolerance. Its good for then but what they miss is that its not a mathematical error if you have a higher risk tolerance and care more about wealth compounding. But boy, do they have fun criticizing others when they see that. They underbet and they think the entire world should be like them
And its not just me who is saying that, guys like Munger say that if you are not willing to lose 50% as an investor you will be destined to have mediocre returns
Its something to consider
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Here is another finding
The vast majority of the reduction in volatility of a stock portfolio is obtained from the jump from 1 (100% size per stock position) stock to 6 (16% size per stock position)
The authors of the paper note that while a lot of the bang for the back is obtained at the 6-10 level, incremental returns can be obtained by leveraging and diversifing further
https://www.wiso.uni-hamburg.de/fil...mber_of_stocks_in_a_diversified_portfolio.pdf
The vast majority of the reduction in volatility of a stock portfolio is obtained from the jump from 1 (100% size per stock position) stock to 6 (16% size per stock position)
The authors of the paper note that while a lot of the bang for the back is obtained at the 6-10 level, incremental returns can be obtained by leveraging and diversifing further
https://www.wiso.uni-hamburg.de/fil...mber_of_stocks_in_a_diversified_portfolio.pdf
The authors find that is better to own 30-40 stocks instead of 10 because the additional diversification allows you to lever up on the broader basket while keeping the same overall standard deviation in both portfolios. But the reason for that is because they assume every stock has the same expected return (efficient markets). If you think your 10 best ideas will have a much higher return than your 30 best ideas, then it makes sense to stick to a 10 stock portfolio than a leveraged 30 stock portfolio (unless you can borrow money for free or something)
But this idea of leveraging in a broad diversified stock portfolio is a tempting one for someone who is young and wants to get rich. I can see it making sense for a lot of people. In the US, that is easy to do because of stock index futures
If you are 22, can save $20K a year, you can probably retire a lot sooner if you invest everything in S&P500 futures with modest leverage (say, no more than 110-120% long, using SPY when another futures contract would breach that). You will only need to catch a couple bull markets and probably have already have good money for early retirement
I wouldn't be comfortable doing that now because I just believe its just far safer to go into this sort of risk-seeking mode (especially when it involves leverage) when risk premiums are high, there is widespread fear, margin calls, etc.
Yes, it will involve big drawdowns (prob as much as 60-75% at some point) and people will call you crazy but the odds are hugely in your favor that it will work. If you have good work skills/qualifications (college diploma, stable industry etc) then its even better because you always got that plan B in case something bad happens (a deflationary depression)
If you are 22, can save $20K a year, you can probably retire a lot sooner if you invest everything in S&P500 futures with modest leverage (say, no more than 110-120% long, using SPY when another futures contract would breach that). You will only need to catch a couple bull markets and probably have already have good money for early retirement
I wouldn't be comfortable doing that now because I just believe its just far safer to go into this sort of risk-seeking mode (especially when it involves leverage) when risk premiums are high, there is widespread fear, margin calls, etc.
Yes, it will involve big drawdowns (prob as much as 60-75% at some point) and people will call you crazy but the odds are hugely in your favor that it will work. If you have good work skills/qualifications (college diploma, stable industry etc) then its even better because you always got that plan B in case something bad happens (a deflationary depression)
Maybe tax wise that plan would have to be tweaked, I'm not sure what people can do with those retirement accounts and what they can't but I definetly can see the wisdom of being young and loading up 100% in stocks in order to become financially free. While that involves risks (like a depression), early financial freedom will remove far higher risks (like injury/illness in the 40's 50's that prevents one from working, loss of relevancy in the labor market, industry is gone, among others)