It would work even better if he took sizeable risks all year regardless. now it could be that hes got so much money that he doesnt think its worth the pain and stress to add that +5-10% a year he could and I guess thats a good reason. but as far as we(trading our own capital with no clients) are concerned if we cant tolorate 25% drawdowns then we belong to a psycologist chair not a trading room
The 'George Soros' Position Sizing method
- Thread starter Daal
- Start date
It would work even better if he took sizeable risks all year regardless. now it could be that hes got so much money that he doesnt think its worth the pain and stress to add that +5-10% a year he could and I guess thats a good reason. but as far as we(trading our own capital with no clients) are concerned if we cant tolorate 25% drawdowns then we belong to a psycologist chair not a trading room
The calendar thing was from another interview when he said he gambled a portion of the years gains to date on a big trade.
"Gains", once made, are capital. A fund that has 10 million all in one stock, 5 million of which are "gains", and a fund that has 10 million, all of which is "capital", has an identical position, identical equity. If the stock falls 50%, they both lose $5 million. Both funds go from being worth $10 million to being worth $5 million. How then are gains different to capital?
If you're up 70% (from when?) and risk 20%, you have a 20% drawdown if wrong. If you are up nothing (again - from when?) and risk 20%, you have a 20% drawdown if wrong. A 20% drawdown is a 20% drawdown - they are identical. Losing 20% does not financially hurt you any more or less because you made, or didn't make, money on your last few trades/weeks/months/year.
Logically they are, psychologically there is a major difference.
What do you think about my point of getting into a "good run"? He talks about starting tentatively, constantly reexamining mistakes, and then if he gets on a good run with decent profits, he becomes more aggressive. Could this refer not so much to a psychological issue about the gains/principal fallacy, but rather the extent to which Soros feels "in the zone" and in tune with market moves and developments? If he is analysing things accurately, and trading well, profit will accrue - thus he can use profit as a signal that he is trading well, and thus to trade much bigger than normal. Equally, if he sucks and is making bad trades, it's best for him to be trading small.
I don't know if Soros does this consciously or subconsciously (e.g. by using the gains/principal fallacy as an accidental way to trade his own hot streaks more aggressively), but it seems to work and make logical sense.
I'm not sure it so much a matter of tolorate as one of prudence. Why risk a 25% drawdown on capital if you don't need to?
I would much prefer to make a few small trades and small gains, then add those gains to my 1% initial risk and increase the size of the next trade etc etc etc. My trade size increases but my initial risk to capital doesn't.
I agree, but doesn't that mean we should focus on improving our psychological fortitude, rather than knowingly trading sub-optimally and using "psychology" as an excuse for doing so?
The question is what is the best way to trade. Treating gains and principal identically is the theoretical ideal. If it's limited by our own psychology, fair enough - but improve the psychology, and only allow it to degrade our trading to the minimum possible. Don't glorify that weakness and propose it as an acceptable way to trade.
Human frailties need to be compensated for, we are but mere mortals, not machines
I agree with you, improving our psychology to near perfection would be the ideal but everyone is made differently.....now I feel maladjusted, inferior, and in need of some couch time
because you make more money. if you have $50,000 to play blackjack couting cards, you make more betting $500 a hand, than betting $100 a hand. of course there is a limit to how high you can go(probably a little less than the Optimal F) and because we are humans and not robots there is a human limit to drawdowns, it might be probably around 75%, but this could not be prudent because of black swans.
but cutten makes a good point that it is logical if it lets you trade better
Some more interesting points in the interview:
1) Soros was saying that it was excessively provocative to bring the former Soviet satellite states under the NATO umbrella, and that some kind of economic zone would be better, to avoid antagonizing the Russians. Fast forward to 2008, and we see in Georgia the consequences of that policy. Nice prediction by Soros there, especially considering this was 1995 before the rise of Putin-style authoritarianism.
2) The variance of his returns. He was saying he averaged 35% for 26 years, but rather than being consistent, it was made up of mediocre years of maybe 5% or 8%, and stellar years of 60% or 100%. So perhaps this suggests that going for steady investment returns is not compatible with making really high returns - you probably have to gamble for big wins and spectacular results if you want to return 30%+ for a long time.
3) Q. "The internet in your judgement, the world wide web, is as important as the printing press?" a. "Yes. I think it will change many things - the way we do research, the way we do shopping, the way we communicate with people. To a large extent it will replace television, it will replace the newspapers." Pretty good prediction for 1995!
4) He says speculation is a very painful, very stressful occupation. Rather different to all the trading "positive psychology" babble you read about.
1) Soros was saying that it was excessively provocative to bring the former Soviet satellite states under the NATO umbrella, and that some kind of economic zone would be better, to avoid antagonizing the Russians. Fast forward to 2008, and we see in Georgia the consequences of that policy. Nice prediction by Soros there, especially considering this was 1995 before the rise of Putin-style authoritarianism.
2) The variance of his returns. He was saying he averaged 35% for 26 years, but rather than being consistent, it was made up of mediocre years of maybe 5% or 8%, and stellar years of 60% or 100%. So perhaps this suggests that going for steady investment returns is not compatible with making really high returns - you probably have to gamble for big wins and spectacular results if you want to return 30%+ for a long time.
3) Q. "The internet in your judgement, the world wide web, is as important as the printing press?" a. "Yes. I think it will change many things - the way we do research, the way we do shopping, the way we communicate with people. To a large extent it will replace television, it will replace the newspapers." Pretty good prediction for 1995!
4) He says speculation is a very painful, very stressful occupation. Rather different to all the trading "positive psychology" babble you read about.
More money would be nice but it usually comes at a price.
Bottom line, isn't it what we feel comfortable with that counts, we can be far more productive when we feel comfortable and confident.