>The difference is that futures and forex with few exceptions do not have a relatively hard bottom like the cash value per share
That is why we have options. I can’t seem to remember when was the last time I had a loss in trading options on futures and forex…
>you cannot get a margin call for an unmargined long position in stocks.
Don’t need a margin call. If the stock in question is going to take 10 or 20 years (maybe never) to recoup its loss, it is not worth it. Liquidate it. That is where again, forex or futures have a distinct advantage, it recoups its lossess remarkably quickly.
ps: It is commonly reported that the stock market averages about 10% per year return over the long term (decades). So the investor that buys and holds a diversified portfolio of stocks or mutual funds is led to believe that their portfolio will grow by 10% per year on average. You know the mantra, “Not to worry, I’m a long term investor. On average, I’m earning 10% per year.” There is only one problem here. The facts, as you will see in a moment, state otherwise.
Let’s assume for a moment that an investor could match the stock market average return of 10% per year (not likely, by the way, as most professionals (over 80%) fall short of this goal). Further assume the market averages 10% per year over a four year period:
(Year) (Account Size) (Annual Stock Market Return) (Average Stock Market Return) (Average Portfolio Return)
0 $100,000
1 $80,000 -20% -20% -20%
2 $72,000 -10% -15% -14%
3 $93,600 +30% 0% -2%
4 $131,040 +40% 10% +7%
From the above example, you can see that our investor who managed to match the stock market performance year by year finished with an average portfolio return of only 7%, not 10%.
Underperforming the stock market averages will always be the case, no matter what market period is selected - past, present, or future. So, can you expect to average 10% a year in a diversified portfolio of stocks and mutual funds (that you buy and hold) in a market that averages 10% per year? The answer is clearly, "No!"
This is one reason for considering alternative investments for a portion of your portfolio, such as a good trading system that has the potential to provide superior returns in non-correlated markets (forex, futures & stock/ETF options, inaddition to traditional stocks.)
The majority of investors in the world today are unwitting proponents of the buy, hold and hope strategy. They are heavily invested in equities on a “long term basis” and are not concerned about the daily (or weekly, or monthly, or yearly) ups and downs of the market because they rest easy in the knowledge that the market will go up over the long term. So they buy 'em, hold 'em, and are confident or hope that everything works out all right.
But how long is the long term anyway? 5 years? 10 years? How about 20 years? And how comfortable are these investors when the market is actually going down for extended periods of time?
Let’s look at some data to try and put this buy, hold, and hope strategy into perspective. The following table shows the major down moves for the Dow Jones Industrial Averages in the past 100 years:
(Period) (Time to Break-even) (% drawdown)
1904-1919 15 years 48%
1920-1925 5 years 36%
1929-1954 25 years 89%
1965-1983 18 years 37%
2000-? 3 years & counting 31% so far
The data shows four periods where the market fell anywhere from 36% to 89% and required 5 to 25 years to recover. Looks like the long term investor during those periods had to waitseveral years just to break even (and required a lot of intestinal fortitude as well). If you think this is a phenomenon of the past, look at the last row on the chart. We are currently at 3 years and counting, waiting for the market to get back to breakeven from the 2000 peak.
If someone told you that you may have to wait 5 to 25 years to breakeven on your investment strategy would you be a willing investor? I doubt it. But that is exactly what millions are doing with their buy, hold, and hope strategy - that is what you call a losing proposition and is not how some savvy investors potentially make money.
This is another reason for considering alternative investments for a portion of your portfolio, such as a good trading system that has the potential to provide superior returns in non-correlated markets (forex, futures & stock/ETF options, inaddition to traditional stocks.)
pss: small correction: 2000-2006 6 years and 31% or so…
So far the system, even including the recent losses, has better returns than the market, so I think we will have to wait and see. I have some other things to do now, so I will leave the discussion.
>So far the system, even including the recent losses, has better returns than the market,
I have to agree on that, but it is such a short period to evaluate any system that trades only correlated markets…
>so I think we will have to wait and see.
I agree, but don’t wait too long, because, it is not fun growing old and still being poor…
>I have some other things to do now, so I will leave the discussion.
I will do the same. All the best, wherever your endeavors may take you…
This will surely sound crazy to some,
A system goes up a little better then the market and this is considered good, the same system goes down a little less than the market goes down and this is still considered good.
The market tends to move so slowly, how can a system be considered good doing little more than that.
For the market to be the indicator for a good system makes no sense,
since the market moves so poorly itself.
A measurement is needed, but just because something is universally accepted does not make it good.
Maybe someone could explain this to me.
True in some ways I think.
I consider an interesting measure of a system’s outperformance, is how it does in both long and short trades.
Getting excited about a system that does well by leveraging a trend is a strange thing. How a system’s trades do AGAINST a trend is a fair measure about a system with an edge…
I will give it a shot at explaining… (for I know you are a honorable man worth responding to…)
One of the worst-kept secrets in the financial world, particularly the mutual-fund world is that fund managers have a tough time beating indexes like the S&P 500 or the DJIA. Still, hope springs eternal among small investors like you and me, and I consistently bet that my home grown arm-chair analyzed mutual funds will beat the odds.
The lurid tale of the tape isn’t pretty though. In 13 of the past 20 years, the majority of actively managed funds trailed behind the S&P 500, according to Morningstar, Inc. (If returns of merged or closed funds are included, the figures are even more humbling.)
3 of the winning years for stock pickers were 2003, 2004 and 2005. Results were lifted partly because management fees and average trading costs dropped. At the same time, shares of small companies - missing from large-cap indexes but well represented in managers’ portfolios - were riding high.
But the good times might be winding down, at least for a while. The long-awaited rally by large-cap stocks seems to have arrived (and now stalled). Becuase indexes like the S&P 500 are weighted by companies’ market value, a rally for big stocks pushes the indexes up in a hurry.
There are reasons to believe the recent rise of big-cap stocks isn’t just a blip. Overall, shares of small companies look a little rich compared with those of big-company stocks that, broadly, are trading at lower P/E ratios than historically. And some of the biggest companies are paying dividends rivaling the income an investor might pocket from a T-bond after taxes. Fans of big-cap stocks argue that the excesses of the late 1990s have finally been wipe out of these once-lofty shares.
If the largest companies do the best, it will be exceedingly difficult for the vast majority of active managers to beat the large-cap, market-cap-weighted index.
To be sure, all big companies won’t perform well, and there will be stock pickers who beat the index in any given year. But money managers who routinely crack that theirs is a humbling line of work soon might be musing that a bit more often…
Thanks for the reply Palsun,
Ok, I get it for the fund managers but what is the answer for trading with a small account of 100,000 dollars.
Perhaps it is that we here at C2 are competing with the funds.
I think I just answered it for myself, thank you for moving my thoughts in the right direction.
I’m not sure that your post is directed to me. I wouldn’t say that a system is good just because it “performs” a little better than the market. My post was in response to Pal, who compared the system with the market.
BTW, I did not want to say that averaging down was a good idea in this trade. I said that I don’t agree with the term “implode” here, and that the consequences are different than they often are in a futures or forex system. If you want an example to illustrate the dangers of averaging down, which was what Ross suggested, I think there are much better examples.
Never mind.
> I believe that fundamentals had a major part in his decision to average down in this particular trade. I always called fundamentals, funny mentals.
Page 161 of Market Wizards. Ed Seykota said circa 1989: "I call them “funny-mentals”.
>Charts do not lie, just in case one needs a reminder…
Charts don’t lie, but sometimes people do…
> I see, where that fundamentals philosophy is coming from: WB. But, WB has enormous resources to ferret out the truth;…
This can work for the little guy (WB was once a little guy). One of my
buddies (circa the 1980’s) used to buy stocks in stuff he knew. He wore Reboks and liked the sneakers a lot. He bought Rebok. He owned an Apple. He liked his Apple. He bought Apple stock. Rebok and Apple went up a lot. He made a lot of money. Enormous resources required? None. Just a lot of patience…not something I suspect most C2 subscribers have.
>Page 161 of Market Wizards. Ed Seykota said circa 1989: "I call them “funny-mentals”.
Is that right? I didn’t know about that…
>Charts don’t lie, but sometimes people do…
You might think that, but I couldn’t possibly comment on that…
> I don’t think this is a scalping system.
Of course you are right. The average trade is 28+ days. About
twice as long as any of Pal’s systems…
I do have a concern about the system though. Nearly all of
the profit comes from 3-4 relatively big trades in relatively low
volume stocks (check CESI: hours or days can pass without
20K shares trading).
>>Page 161 of Market Wizards. Ed Seykota said circa 1989: "I call them “funny-mentals”.
> Is that right? I didn’t know about that…
Remarkable coincidence then … the exact choice of words.
> I couldn’t possibly comment on that…
Isn’t David Druz (one of Seykota’s students) someone you’ve
quoted here? Maybe you should read Seykota’s interview ;-).
I tried something new sometime back: I tried to be long term and followed a weekly system and got slaughtered. Every one of my trade was a disaster. Never again will I follow a weekly system without hedging with options. It is just not possible, atleast for me. Maybe fundamentals might work for the long term, if only people won’t lie, unlike charts…
I never knew that Ed Seykota was Dr. David Druz’s mentor until you mentioned them…
> I never knew that Ed Seykota was Dr. David Druz’s mentor until you mentioned them…
Hmmm…I thought you posted a link some time ago that mentioned this
fact. Anyway, you quoted Druz so I assumed you knew something about him.
Never read Market Wizards?
> Maybe fundamentals might work for the long term, if only people won’t lie,
Once again, if you have physical knowledge of the products or service
the only person you need to trust is yourself…and you don’t need to
camp out on a bridge.
That’s what I meant…have physical knowledge of the products or service … camp out on the bridge etc., conveys the same meaning…
I have read portions of Market Wizards book where I did come across Ed, but did not read the whole interview…You are more well read than me…
