Thanks for the kind words. It's nice to be appreciated. I'm in the business of finding those individuals and strategies with 'edges' and investing in them. It's a subject matter that is very near and dear to my heart. A few more examples just for fun (remember, an edge is an advantage, not a guarantee):
1- Corporate Bond of Firm XYZ has just been downgraded by Moody's and Standard and Poors out of investment grade. Bond is sold with reckless abandon because many bond funds are mandated to hold only investment grade paper. Bond is now too cheap based upon forced sales. Smart buyers may have an 'edge' to buy this type of paper (this strategy is similar to forced buying/selling of add/removes of S&P 500 names, etc.).
2- Stock ABC has a 30 year statistical history of trading relative to it's sector and more specifically a corresponding pair. Rocket Scientist Bob's model picks up an anomoly between Stock ABC and it's corresponding pair Stock XYZ. Seems that Stock ABC and Stock XYZ are trading 2 1/2 standard deviations away from their historical mean trading ratio. Bob's model immediately triggers a buy of $1 Million ABC and a corresponding sale of $1 Million XYZ expecting the 30 year statistical history to revert back to a more normalized relationship once the temporary/demand supply imbalance causing this anomolous deviation is satiated. Turns out the Sultan of Brunei was selling ABC because his brother Jeffrey told him to. This temporary supply pressured ABC down substantially relative to XYZ. Bob's model picked this up. As soon as His Majesty was completed, ABC rallied and XYZ stayed the same and the ratio reverted back to a more normalized historical pattern. Bob made a killing because he did similar over a universe of 5000 stocks and had about 400 similar pairs on at any given time.
3- Mike is an Environmentalist. He's followed the saga of the Kyoto Protocol and has been thinking about how to monetize the newly created market of EU Emission Allowances and Environmental Credits. Mike realized that companies that are operating in countries that are signers to Kyoto would be mandated to purchase pollution credits at any price to the extent that they had a short fall in the normal course of their business operations. On the other hand, Mike also realized that businesses with a surplus of Environmental Credits would not have a readily available manner in which to monetize these credits. As such, Mike (being a guy who loves an edge) decided to become the first non-end user to monetize and inventory credits. He made contacts, learned the space quickly and purchased cheap credits from companies who had surplus credits but had no alternative means of liquidating these credits for cash. In turn, he also stood ready to sell credits (at substantial multi-triple digit markups) to companies that desperately required greater pollution rights and were facing hefty fines if not complete shutdowns if they didn't secure these additional rights. Mike is now richer than many third world countries.
Does any of this sound like I practice good risk management? I cut my losses? I keep my emotions in check? I study technicals and fundamentals? All of those are important but are merely tools. Your primary business needs to have a positive expectancy to start with. If not, those tools will not turn a losing strategy into a winner. If you have a winning strategy with a statistically valid positive expectancy, those tools will enhance and improve upon your business. If your business does not have an edge, the greatest risk management in the world will not turn a losing game into a winner.
1- Corporate Bond of Firm XYZ has just been downgraded by Moody's and Standard and Poors out of investment grade. Bond is sold with reckless abandon because many bond funds are mandated to hold only investment grade paper. Bond is now too cheap based upon forced sales. Smart buyers may have an 'edge' to buy this type of paper (this strategy is similar to forced buying/selling of add/removes of S&P 500 names, etc.).
2- Stock ABC has a 30 year statistical history of trading relative to it's sector and more specifically a corresponding pair. Rocket Scientist Bob's model picks up an anomoly between Stock ABC and it's corresponding pair Stock XYZ. Seems that Stock ABC and Stock XYZ are trading 2 1/2 standard deviations away from their historical mean trading ratio. Bob's model immediately triggers a buy of $1 Million ABC and a corresponding sale of $1 Million XYZ expecting the 30 year statistical history to revert back to a more normalized relationship once the temporary/demand supply imbalance causing this anomolous deviation is satiated. Turns out the Sultan of Brunei was selling ABC because his brother Jeffrey told him to. This temporary supply pressured ABC down substantially relative to XYZ. Bob's model picked this up. As soon as His Majesty was completed, ABC rallied and XYZ stayed the same and the ratio reverted back to a more normalized historical pattern. Bob made a killing because he did similar over a universe of 5000 stocks and had about 400 similar pairs on at any given time.
3- Mike is an Environmentalist. He's followed the saga of the Kyoto Protocol and has been thinking about how to monetize the newly created market of EU Emission Allowances and Environmental Credits. Mike realized that companies that are operating in countries that are signers to Kyoto would be mandated to purchase pollution credits at any price to the extent that they had a short fall in the normal course of their business operations. On the other hand, Mike also realized that businesses with a surplus of Environmental Credits would not have a readily available manner in which to monetize these credits. As such, Mike (being a guy who loves an edge) decided to become the first non-end user to monetize and inventory credits. He made contacts, learned the space quickly and purchased cheap credits from companies who had surplus credits but had no alternative means of liquidating these credits for cash. In turn, he also stood ready to sell credits (at substantial multi-triple digit markups) to companies that desperately required greater pollution rights and were facing hefty fines if not complete shutdowns if they didn't secure these additional rights. Mike is now richer than many third world countries.
Does any of this sound like I practice good risk management? I cut my losses? I keep my emotions in check? I study technicals and fundamentals? All of those are important but are merely tools. Your primary business needs to have a positive expectancy to start with. If not, those tools will not turn a losing strategy into a winner. If you have a winning strategy with a statistically valid positive expectancy, those tools will enhance and improve upon your business. If your business does not have an edge, the greatest risk management in the world will not turn a losing game into a winner.
