December 6, 2017
"How much money have you made?"
"Where did you get in?"
People think these questions are important because they stimulate hopeful feelings of celebration (we've made a lot) and intelligence (we got in before others were talking about it).
But these questions don't have anything to do with doing the right thing today.
November 14, 2017
Risk is like gravity — it always there, but you don’t always feel or see it.
Today, we’re in between market storms. People have become more and more comfortable and complacent during the 8-year bull market. The relatively painless uptrend has lulled people into a false sense of security.
Even Janet Yellen says she doesn’t believe there will be another financial crisis in our lifetimes.
Collectively, we’re getting used to the way things have been recently — rising stock prices, low and declining volatility and little to no need for protection investments like hedge funds and macro CTAs.
I’m scared we’re getting used to things just in time for everything to change again.
October 24, 2017
Lately, many markets remind me of the 2011–2014 U.S. Dollar — not really going up or down but oscillating in a sideways manner. Many currencies, precious metals, energies, bonds and agriculture markets have behaving similarly.
The past few years have been particularly frustrating and annoying. But I believe we’re at a point again where trend following traders and investors are feeling doubt about whether to take the next trade and stick with the system.
The risk of quitting during drawdowns is that you do not benefit from the next round of positive performance when trends come back. The risk of not getting back in exists in all investments.
Many investors are still living with the frustration of not getting back into the stock market when the trend reversed in 2009–2010. Those who quit on trend following now, I believe, will likely experience a similar frustration.
September 13, 2017
All fund managers have a system. Some have it in their gut and head while others code it into a computer. After coming to terms with a system, the manager must follow it religiously in order to maximize results and perform within investor expectations.
I believe the main reason why benchmarks outperform managers is due to their lack of discipline.
Medium post: https://medium.com/@mmelissinos/the-occasional-mistake-b1d02926fb95
August 18, 2017
Buffett suffered a 49% loss from Jun 1998 to Mar 2000. At the same time, the NASDAQ rose 140% and SP500 rose 28%. Despite heavy losses and public ridicule, Buffett stuck to his guns and wouldn’t touch internet stocks. Buffett’s ability to stay disciplined might be more admirable than his analytical skill.
At the time, I’m sure people were wondering if Buffett had lost his golden touch or if he would ever outperform the market again. A near 50% loss for a stocks investor during the biggest bull market in history doesn’t inspire confidence. But he had the last laugh after the bubble burst, gaining 80% over the next two years while the NASDAQ lost 72% and SP500 lost 28%.
August 15, 2017
As a copier, you cement your position of always following the crowd and competitors.
You forgo understanding how the product you’re copying actually works; the reasons behind it’s design; the problems it addresses; why it performs the way it does.
You blindly put your faith in the person or product you’re copying and, thus, give up your ability to develop and monitor expectations.
August 7, 2017
Reduce the rules in your investing strategy to make it more robust and easier to execute.
We all hear that simple is better; that complex doesn’t work as well and is harder to execute over the long run. Complex rules tend to promote confusion and second-guessing – things that can wreak havoc on any investing strategy.
Investors insist on making things too complicated. Many even believe that simple rules cannot make money over the long run; that the only way to win is be some kind of genius math whiz or have super-human intuition. No. No. And no. Simple and effective works.
August 1, 2017
When you take the road less traveled, you hear a lot of negative chatter from others and from yourself when you don’t perform well. But winners don’t give in or tell people what they want to hear; they stick to the process instead.
If you watched the Super Bowl, you saw two games — one where the Patriots sucked and one where they could do no wrong. The Patriots, unlike the Falcons, didn’t panic when the game wasn’t going their way. They stuck to their game plan and the rest is history. Bill Belichick (head coach of the Patriots) always says, “Do your job” and “Next play”. He focuses on process 24/7. Only the super committed can hear these soundbites, put their frustration aside and execute.
July 24, 2017
Apex predators don’t succeed all that often. Tigers succeed only 5% of the time; Polar bears 10% and Leopards 14%. All they need is one big kill every once in a while to stay atop the food chain.
Tigers, lions and other predators know their game. They balance persistence and knowing when to quit; hunting only for the home-run and conserving energy.
Investing is no different.
Trend traders lay low most of the time; expending little energy while waiting for a big trend to emerge. Most of the time, like lions and other predators, we come up empty. Frustration occurs, but it doesn’t distract us from the process. You keep at it and eventually you make a big kill.
July 17, 2017
Embrace cycles and use them to your advantage. Pretending they don’t exist and attempts to eliminate the part of the cycle you don’t like, the losing streak, doesn’t work.
The investing world doesn’t like cycles. It prefers investment strategies that produce consistent profits with little variation. I believe the collapse in interest rates intensifies this desire for consistent profits. One problem with investing in such strategies is that they’re likely curve-fit to the current market environment.
In the short-term, they can do no wrong; nailing the timing on every trade – buying bottoms and selling tops. The risk, though, hides somewhere in the future when market conditions inevitably change. As a result, the strategy no longer syncs up with the markets and performance comes off the tracks, often resulting in blowups.