What you are missing is how much fun these two guys had. And that one horse could have been an outlier, the results from it don't count
On a serious note, luutzu, a lot of you posts come across as advocating ignorance as a strategy. While many things are unnecessarily complicated, it doesn't make all that is complicated wrong.
All these reminds me of a story I heard somewhere. It goes something like this:
Two country Gentlemen at a bar were having philosophical debates and somehow it got to them debating how many teeth does a horse in the barn outside have.
One said that horses are of that genus, related to this and that; and this and that have this many teeth... horses being bigger and eat grass and at certain age it have this many teeth;
The other argued that it depends on the origin of the horse in question... Arabian horses would have this many teeth, factor in the climate and this and that, it would have this many teeth at this and that age, depends on age and birth and health blah blah.
They debated back and forth, back and forth into the early hours... still keep going until a lowly, uneducated bartender told them...
The barn's unlocked, why don't you guys just go out there and open the horse's mouth and start counting.
---------
With investing, you don't have a lowly, uneducated bartender telling you... you got at least two self-made multi-billionaire investors telling you to go and open the horse's mouth and start counting. But somehow real, smart, investing just doesn't work like that.
Please count how many teeth there are on this horse and let us know what the answer is oh worldly one.
View attachment 60708
Hint: The answer might be on YouTube.
Please count how many teeth there are on this horse and let us know what the answer is oh worldly one.
View attachment 60708
Hint: The answer might be on YouTube.
Getting on to risk - do stop losses reduce risk in a highly diversified portfolio? I would expect that they change the shape of losses, but not the final outcome.
KTP
Can you please resubmit the result for the last six months per the attached spreadsheet with internal working so I can understand how you came upon the numbers you have mentioned for the most recent period. I'm not sure how I get from that spreadsheet to the figures you mentioned. It would be good to get aligned with you.
On the binomial tree, it is the simplest toy possible, but it has all the features needed to make this point. However, should you wish a fuller explanation, please refer to the exchange that I had with Artist. Both of you have raised the same, perfectly reasonable, issue. Bottom line, no matter what the distributional properties you select, as long as the average outcome is zero (representing no insight on directional prediction) and the stops are not directionally informed, you can whack stops anywhere you like. It will not change the expected return outcome. It will change the distribution shape.
If you start with the simple binomial tree, the point should become evident. No movement of stops changes expected outcome. No additional complexity will change the outcome.
If you are talking about individual stock stop losses then a portfolio of these will be affected.
Here's one way of thinking about it.
We are in a fake world where each stock performs independently. Each stock has a normal distribution. There are ten equally weighted stocks. The portfolio will have a normal distribution.
Now, change the stock distributions to something positively skewed. Anything. That is what happens when a stop loss is in place. The same equally weighted portfolio will have a positive skew, though less so than the skew for each individual stock because of diversification effects.
If the stocks become more correlated, the skew of the portfolio increases.
If one of the stocks is massively volatile relative to the rest, the skew of that will dominate and result in a skewed portfolio outcome which is greater than the previous scenarios.
No matter what the correlation is other than it being less than 1, the more stocks you have, the more evenly their risks are distributed, the more normal the portfolio looks whatever the degree of skew you put in place at the individual stock level. In that situation, if the overall portfolio matters most, it is better to hedge this with an option like payoff over the whole portfolio.
What if stop less help to increase or reduce the number of instances of fat tails and outliers?
We should always challenge theories with reality but it needs to be done accurately lest we deceive ourselves
Hmm, I think we talked before about Mandelbrot and his criticism of using bell curves for share prices distribution.
What if stop less help to increase or reduce the number of instances of fat tails and outliers?
So in the case of attempting to increase frequency of trading by (I wont call it a stop) exiting when you believe you have it wrong and re entering when you believe your right again.
So in the case of attempting to increase frequency of trading by (I wont call it a stop) exiting when you believe you have it wrong and re entering when you believe your right again.
Think this applies a bit to fundamental investing too. Often my intuition picks up on the warning signs earlier, but my rational / thinking function needs more confirmation / logic (both on entries and exits). I'm still playing around the edges with it (mostly still in the latter camp), but I have a feeling the former intuitive "hunch" might have more value than I give it currently. There's a fine line between "I might be wrong but still need proof" and "****, I'm wrong" sometimes.Its a subtle difference to when 'you have it wrong' the main difference at least with stocks, is that a not right exit will generally be less congested than a 'wrong' exit spot so you get less slippage and more opportunity because not right generally tends to be a shorter hold period then waiting for confirmation of wrong.
That’s exactly what you will do (but maybe in the reverse of what you are thinking). You have by design an asymmetrical risk/reward. You can lose 0.7 book value – you can win 1.3 (2-0.7) of a ‘growing’ book value. introducing the stop will reduce your 0.7 loses down to ~ 5% of 0.7 but give you many more loses and in the process will also remove your exposure to the stocks that dip and then go on to be 2xbook exits. The stop will also however increase your opportunities (you will churn through many more stocks) – which will give you more chance of picking up something that goes straight on with the job like RDG (if its actually tradable).
RDG (profit $74,847) is only in the stop loss sample. You have it down as purchasing $20,429 on the 11/7
It traded $1,120 on 2/7 and $2,400 on the 16/7 – nothing in-between.
Haven’t checked any further – don’t really need to because with just this one data point the back tests is nothing like reality – so it’s useless trying to draw conclusions from the results.
RY has covered the theory pretty comprehensively.
We should always challenge theories with reality but it needs to be done accurately lest we deceive ourselves
Outstanding quality of debate in this thread, a fine example of what really makes ASF such a great site. I wont pretend that I even understand some of the more escoteric and mathematical points of discussion but it sure as hell has been a fascinating read!
Think this applies a bit to fundamental investing too. Often my intuition picks up on the warning signs earlier, but my rational / thinking function needs more confirmation / logic (both on entries and exits). I'm still playing around the edges with it (mostly still in the latter camp), but I have a feeling the former intuitive "hunch" might have more value than I give it currently. There's a fine line between "I might be wrong but still need proof" and "****, I'm wrong" sometimes.
I agree, and the participants were really well behaved!
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