Quote from zouy2000:
Hi Rol,
Your system looks to me like some kind of mean reversal system and the result is simply great. However, I have two concerns,
First, you seem to use 2x overnight buying power, can you handle some kind of black swan event which may be much worse than 9-11 and the market simply gapped down 30%. Do you have enough time to adjust your position to meet the margin?
Hi zouy2000,
A black swan event is obviously a concern, if not the biggest concern of a RTM strategy. Warren Buffett has a famous quote that goes: âBuy when there is blood in the streets.â Baron Rothschildâs was also quoted, âBuy when thereâs blood in the streets, even if the blood is your own.â They made a fortune having the guts to invest when others were afraid to. If you are looking for a contrarian opportunity, research shows that the most rewarding investments are made when the entire market is in the tank as it was right after the crash in 1987 and right after 9/11. The Whoâs Who list of millionaire/billionaires that have brought home plenty of bacon thanks to their investing acumen when most investors were cowering include the familiar, such as Warren Buffett, Benjamin Graham, Peter Lynch, Sir John Templeton and Martin Zweig.
While my style is not "investing", I believe it is just a matter of time horizon. My period is days, while with an investor it may be years. Nonetheless, the market patterns are quite similar between the two. I have a spreadsheet in Excel to perform various "worse case" scenarios to see the effects on buying power during extreme market drawdowns. I place limits on the maximum number of positions I can hold, so I won't get margin calls. Ideally, you want to have maximum market exposure at the bottom.
A gap down is actually superior to a slow bleed down, where you may be trying to scale-in slowly. I would prefer that the markets tank 30%. Individual stocks are having flash crashes and black swan events all the time. You cannot predict when they will occur, but you can predict what you will do after they have occurred.
Second, Is your system scalable? Suppose you have one million equity, do you have enough signals which you can enter? You may have some liquidity issues at some point.
Here are the number of buy signals I received recently just following slightly fewer than 1000 names:
That is 247 entry signals in 4 days. I could easily track closer to 2000 names, which would have put that number at around 500 entries. So for example, if I bought 1000 shares each of a $30 average stock price:
1000 x 30 x 500 = $15,000,000.
The trick is not to be in the market all the time, but wait for panic to set it. I liken it to doing a "drive by" on the market; get in and then get the heck out. Sometimes, I imagine myself as a well-prepared fire fighter. They run into a burning building when the public is running out.
Hi Rol,
Your system looks to me like some kind of mean reversal system and the result is simply great. However, I have two concerns,
First, you seem to use 2x overnight buying power, can you handle some kind of black swan event which may be much worse than 9-11 and the market simply gapped down 30%. Do you have enough time to adjust your position to meet the margin?
Hi zouy2000,
A black swan event is obviously a concern, if not the biggest concern of a RTM strategy. Warren Buffett has a famous quote that goes: âBuy when there is blood in the streets.â Baron Rothschildâs was also quoted, âBuy when thereâs blood in the streets, even if the blood is your own.â They made a fortune having the guts to invest when others were afraid to. If you are looking for a contrarian opportunity, research shows that the most rewarding investments are made when the entire market is in the tank as it was right after the crash in 1987 and right after 9/11. The Whoâs Who list of millionaire/billionaires that have brought home plenty of bacon thanks to their investing acumen when most investors were cowering include the familiar, such as Warren Buffett, Benjamin Graham, Peter Lynch, Sir John Templeton and Martin Zweig.
While my style is not "investing", I believe it is just a matter of time horizon. My period is days, while with an investor it may be years. Nonetheless, the market patterns are quite similar between the two. I have a spreadsheet in Excel to perform various "worse case" scenarios to see the effects on buying power during extreme market drawdowns. I place limits on the maximum number of positions I can hold, so I won't get margin calls. Ideally, you want to have maximum market exposure at the bottom.
A gap down is actually superior to a slow bleed down, where you may be trying to scale-in slowly. I would prefer that the markets tank 30%. Individual stocks are having flash crashes and black swan events all the time. You cannot predict when they will occur, but you can predict what you will do after they have occurred.
Second, Is your system scalable? Suppose you have one million equity, do you have enough signals which you can enter? You may have some liquidity issues at some point.
Here are the number of buy signals I received recently just following slightly fewer than 1000 names:
- 3/8 18
- 3/9 28
- 3/10 143
- 3/11 58
That is 247 entry signals in 4 days. I could easily track closer to 2000 names, which would have put that number at around 500 entries. So for example, if I bought 1000 shares each of a $30 average stock price:
1000 x 30 x 500 = $15,000,000.
The trick is not to be in the market all the time, but wait for panic to set it. I liken it to doing a "drive by" on the market; get in and then get the heck out. Sometimes, I imagine myself as a well-prepared fire fighter. They run into a burning building when the public is running out.
I have seen these terms used a lot in these forums. I am happy to say that my Account Net Worth is only down $173 from yesterdayâs high for the year, even after todayâs nearly 300 pt drop in the Dow, if that is what low alpha means.
.