The Better Way to Invest

< Back to Main Index

A great truth

December 8, 2010
Be the first to like.

Many traders and investors, who have experienced the highs and lows of trading, regularly look for a method or system in the hope that they will discover a “new” hidden truth. A great truth is that there are no “new” hidden truths in the universe of the markets, just “new truths” to individuals that for the first time are discovering what already exists in the market universe.

During their search the investor usually and incorrectly focuses their attention on how much money can be made with the new system. They ask irrelevant questions that fail to qualify if the system is right for them and suited to their own personal needs and risk profile (assuming that they know what their risk profile is).

Many investors also make the mistake of trying to “shoehorn” a system into their own biases when what’s required is a shift in the investor’s thinking to be aligned to the system. The educated and experienced investor understands that a system that generates entry and exit signals from research criteria emanates from the market. So in order to create consistency and objectivity, the experienced investor aligns their thinking to that of the system. When this is achieved the investor is able to think from the markets perspective and has the ability to become one with the market.

Many investors focus too much on short term performance rather than basing their evaluation of the strategy on its own merits. More relevant questions include: is the system capable of making money over the long term, is the strategy capable of out-performing the market (All Ordinaries Accumulation index for ASX or JSE-ALSH index for JSE investors or S&P500 / Nasdaq Composite for USA equity investors), over what timeframe does the system trade, can risk be quantified on an individual trade and portfolio basis, is the risk acceptable to my skill level and personal risk profile, do I need to work on my risk profile to trade the system, does the system trade low, medium and high risk probability opportunities with different position sizes, does the system have definable exits, do the risk management measures handle increasing and decreasing exposure to the market depending on market conditions and does the system have sound money management rules?

Investors who ask irrelevant questions are typically in search of continuous security and comfort in all market conditions or even seek a guarantee that they will always make money. While it is a known fact that there is no such thing as a guarantee when it comes to the market, experienced and successful investors trust the probabilities of their system and the execution of their processes rather than focusing on individual trade outcomes.

By doing this they understand how to create certainty in an uncertain environment, over a large sample of trades. They accept and are at peace with the short-term outcomes of the system because they fully trust the probabilistic edge of the system and therefore trust that it will deliver according to its design objectives.

This is THE great truth of active investing.

If you have chosen a strategy or system that has a researched, proven and positive EDGE, do yourself a great service and shift your energy towards acquiring the skills to implement and execute its processes. If you skip parts of the process you will only harm your EDGE and thereby yourself by not growing your skills, learning from the EDGE and delivering the profits that the edge has proven to deliver.

If you are investing without an EDGE, which might mean that you are reading reports, reading newsletters, taking broker recommendations and stock tips or just working off your gut feel, I highly recommend that you build or buy one!

Like our blog? Share the love!
  •  
  •  
  •  
  •  
  •  
  •  
Be the first to like.

Comments

  • Chris Stolk says:

    Your comments are relevant except to explain how one determines the efficacy of a system when the sales person misleads you on the relevance of their system to your stated time frames for investing.

  • Graham says:

    Chris, no system can compensate for a promoter’s dishonesty. Sounds like you are just sour for not having fully researched the bona fides of the system’s promoter. In the case of Gary Stone, for example, any background research will lead you to an unequivocal judgment that he is consistent, honest, does not hide during periods of underperformance, and has a genuine passion for helping others.

  • BRIAN TREVAN says:

    The fundamental truth is out there but even observant people only enjoy brief glimpses of one or less of its facets or, in many instances, not at all. Complicating the matter is the existence of false truths of which there are an infinite variety.

  • Ben O'Grady says:

    Two issues arise for me;

    one- The market is always changing but between two fundamental states – trending and ranging. From most studies it ranges about 80% of the time. As the last few months have shown ranging markets or low trend high voliatility markets are best suited to something like stochastic indicators – selling at tops and buying at bottoms. Trending markets are best served by buying high and selling higher. The two methods unfortunately are incompatible. Get the indicator/s wrong and you will churn your portfolio for little return and perhaps even a steady loss. Knowing which type of market we have is perhaps the elusive key truth. {ADX has not been very helpful in this market either]

    two- calculating higher capital gains tax and loss of dividends and franking can make outperformance from buy and hold accumulation index harder to judge.

    Gary if you’d like to respond to these points I would appreciate it. I have included my email to make that easier. If you want I’d be happy to speak on the phone -just email me for my number. Cheers.

  • Gary Stone says:

    Ben,
    1. Ranging markets:

    Markets do not range 80% of the time. Using the SPA3 rules for medium term trading market indices, they trend UP between 44% and 51% of the time. I stress that this is TIME. This leaves between 49% and 56% of the time for down trending and range trading periods.

    This is calculated from the SPA3 winning ‘trades’ on indices dating back to 1950 (for longer term systems the up trending time would be longer). The problem is that many winning trades start from within a ranging (sideways) market and we do not know which entry that is generated from within a ranging market will go on to be a winner or be a whipsaw loss when it reaches the range resistance level.

    The fact is that if we waited for a breakout of a range to confirm every trend (i.e. buy high and sell higher), the ‘edge’ would become too skinny to trade because entries would be too delayed on too many occasions. Hardnosed research proves this. This means that we have to take a risk when an entry signal occurs from within the range. Ranging systems face the same issues at the bottom and top of ranges. Risk is unavoidable for all systems whether a ranging system or a trending system.

    The question therefore becomes, am I able to withstand the emotional pain caused by losing streaks and drawdown that comes with investing, of any kind? The answer to this, as is discussed below, doesn’t necessarily come from the system, indicators or changing systems to try to align them to the type of market.

    2. Truths:

    With respect to all events that occur on our planet there is one universal truth. The universal truth with respect to the market is that there are up and down trends and sideways price action all occurring simultaneously in many different trading timeframes ranging from minute bars (or accumulated tick bars) to monthly bars. Therefore the market is simultaneously in many states across all trading timeframes.

    However, humans cannot perceive the universal truth so all we ever perceive is a subset of the universal truth. We need to find and focus upon a subset of the universal truth that achieves our desired trading objectives. To do this we need to create structure and order in our chosen trading timeframe such that we have an edge, or a positive mathematical expectation, that will deliver our trading objectives.

    Within that structure that is our edge we will have winning and losing trades and we will have portfolio run-up and we will have portfolio drawdown. The losing streaks and portfolio drawdown will occur when the structure of the edge and that of the market are not aligned. This will occur with EVERY edge in any timeframe. If the overall performance meets our desired trading objectives, inclusive of losing and drawdown, then why is it necessary to change indicators, rules, edges or whatever?

    Maybe it is our perception that needs to change. Maybe we need to re-define the way that we view drawdown and losing such that it doesn’t cause us the emotional pain that removes us from the endless stream of opportunities offered by the market and that urges us to try to find what you call the “elusive truth”.

    Inherent in trying to find the “elusive truth” is that the chopping and changing of indicators etc causes inconsistency and subjectivity, the very opposite of what is needed to be successful in the market and most things in life – consistency and objectivity.

    If you are not happy with your performance and / or drawdown then research an edge in the same and / or different trading timeframe that can improve performance and / or drawdown but be careful that you are not chasing something that does not exist.

    Most importantly, if you are ‘in the market’ being inconsistent in attempts to find the “elusive truth” you are enforcing inconsistency and if you are ‘out of the market’ searching for this “elusive truth” you take yourself out of the endless stream of opportunities on offer from the market. My suggestion is that you find or build a mechanical system with a proven edge and learn to execute it in all market types. Over the long run you will be way ahead.

    3. Measuring growth:

    It sure can. SPA3 also benefits from dividends that are paid whilst a SPA3 trade is open however most dividends received are from trades that are held < 45 days.

    The entity through which one invests is very important and should be researched before starting ones investing. In Australia, if active investing is conducted through a Super Fund then capital gains are taxed at 15% which is lower than the capital gains tax of 25% for buy and holders when shares are held in their own name for longer than 12 months and is much lower than the 30% tax rate of companies and trusts or personal marginal rates of high income earners. However, the phase of your life that you are in also comes into the equation as does the income levels of trust beneficiaries.

    Regards
    Gary

  • Ben O'Grady says:

    Gary,

    Thanks for taking the time to email me about the response posted above for the benefit of all readers of these posts.

    There is nothing wrong with your logic in replying to my comments. In fact while I have done well as a fundamental investor I have recently become interested in trading a mechanical trending system and of the many I have investigated your system is the most complete – including risk based size and position allocation. So well done for that and thanks again for the reply.

Leave a Reply

Your email address will not be published. Required fields are marked *