Higgenbotham wrote:
> What I mean by that is when I pop up and say I'm short that is a
> lot more meaningful than being out of the market and giving an
> opinion. If I'm out of the market, particularly if I've put
> myself in a position that I can't be in the market (which I have),
> that means I consider my opinions or maybe more accurately,
> impulses, to be potentially dangerous to myself and my future
> survival.
I have a similar two-tier prediction process.
If you have a serious prediction, then you bet on it in the
market. If you're out of the market, then it's an opinion,
not a prediction.
If I have a serious prediction, then I put it into a World View
article. If I just post it in the forum, then it's just an opinion,
not a prediction.
In Market Wizards, a guy named Monroe Trout was interviewed and he stated some hard rules that are similar. It's been over 20 years since I read this, so the numbers won't be accurate, but it was something like if he lost more than 1% of his equity in a day, he shut down for the day, more than 2% in a week, he shut down for the week, and more than 3% for the month, he shut down for the month. What I'm doing is constantly evaluating my level of confidence and shutting down indefinitely until my level of confidence improves. Reading all my posts in the month of January prior to going short, my predictions were really horrible, even though I sold very close to the high twice, because the market did not drop anywhere near as much as I thought it would. Therefore, it was time to shut down.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.
Hedge-fund managing may rank alongside crocodile wrestling in job stress and burnout, but success has its rewards. Few may know that better than Monroe E. Trout, manager of the $3 billion Trout Trading Fund, who started it when he was 24 and is about to take a very early retirement. ''After a 15 1/2-year successful run, it seemed to me that 40 is a turning point in life and time for me to move on,'' said Mr. Trout, who reaches that milestone on Tuesday.
Not that the onetime Harvard basketball captain, who stands 6 feet 8, shows much sign of wear, having never missed a day of work at his Bermuda-based Trout Trading Management Company, according to an aide who called him ''the Cal Ripken of hedge funds.''
Trout Trading also never suffered a losing year, posting an average annual return of 21.5 percent.
Higgenbotham wrote:
> Reading all my posts in the month of January prior to going short,
> my predictions were really horrible, even though I sold very close
> to the high twice, because the market did not drop anywhere near
> as much as I thought it would. Therefore, it was time to shut
> down.
Sooooooooooo, you made wrong predictions, but made a lot of money
anyway. So you're shutting down.
What would you have done if you had made the right predictions, but
lost money anyway?
In The New Market Wizards, the second book in the series, Schwager interviewed Monroe Trout, who started his trading career as a floor trader. He left the floor when he discovered that the trading systems he had developed after market hours were consistently making money. Trout achieved one of the best return/risk records of any futures trader. At the time Schwager interviewed Trout, he had averaged an imposing 67% annual return during the prior five-year period. What was particularly impressive, though, was that he achieved this high return with a maximum drawdown of only 8%. Trout continued to compile an exceptional return/risk record until he retired from money management in 1993. The following excerpts from The New Market Wizards begin with a question about a long S&P position Trout held on a day when an announcement by Secretary of State James Baker caused the market to abruptly plunge.
What eventually happened on that day? Did you get out of your entire S&P position?
Yes. We basically phased out of the position over the rest of the day. There was no question about what to do because one of my risk management rules is that if we lose more than 1.5 percent of our total equity on a given trade we get out.
What are your other risk management rules?
If we’re down 4 percent on a single day, we close out all positions and wait until the next day to get into anything again. This rule has been activated only twice in the last two years, one of those days being January 9. I dumped my whole portfolio because I was down 4 percent.
So far you’ve mentioned a 1.5 percent maximum loss limit on a single position and 4 percent on the entire portfolio for any given day. Are there any other risk management rules you use?
We have a maximum loss point of 10 percent per month. If we ever lost that amount, we’d exit all our positions and wait until the start of the next month to begin trading again. Thankfully, that has never happened. We also have a fourth risk management rule: At the beginning of each month, I determine the maximum position size that I’m willing to take in each market, and I don’t exceed that limit, regardless of how bullish or bearish I get. This rule keeps me in check.
Higgenbotham wrote:
> Reading all my posts in the month of January prior to going short,
> my predictions were really horrible, even though I sold very close
> to the high twice, because the market did not drop anywhere near
> as much as I thought it would. Therefore, it was time to shut
> down.
Sooooooooooo, you made wrong predictions, but made a lot of money
anyway. So you're shutting down.
What would you have done if you had made the right predictions, but
lost money anyway?
The scenario where I can think of that happening is you basically make the right prediction in the bigger picture, but it's the wrong prediction in the short run. And, in the case we're talking about, you get out with a loss before the market collapses. So, for example, let's say the S&P was at 2860, I went short, it went to 3000, I got out, then it immediately collapsed to 1800 like I said it would.
I don't think there's much that could be done except to accept the loss and move on.
While the periphery breaks down rather slowly at first, the capital cities of the hegemon should collapse suddenly and violently.
Higgenbotham wrote:
> Reading all my posts in the month of January prior to going short,
> my predictions were really horrible, even though I sold very close
> to the high twice, because the market did not drop anywhere near
> as much as I thought it would. Therefore, it was time to shut
> down.
Sooooooooooo, you made wrong predictions, but made a lot of money
anyway. So you're shutting down.
What would you have done if you had made the right predictions, but
lost money anyway?
The scenario where I can think of that happening is you basically make the right prediction in the bigger picture, but it's the wrong prediction in the short run. And, in the case we're talking about, you get out with a loss before the market collapses. So, for example, let's say the S&P was at 2860, I went short, it went to 3000, I got out, then it immediately collapsed to 1800 like I said it would.
I don't think there's much that could be done except to accept the loss and move on.
Another example of the Fernando Lamas Principle: It is better to LOOK good, than to FEEL good!
There's a question I was first asked by a bond trader who traded in the CME pit. He took me on the floor one day as a guest. He said, "Would you rather be lucky or smart?"
The correct answer, I was told, as it pertains to the markets, is lucky.
Then, for those of rare talent, which I don't have, the answer may be otherwise.
