I Don’t Give Timely Advice

23Sep08

I have some new geekery coming out later today, but first, I wanted to take a step back and talk about one of the philosophies behind my own trading and this blog.

Readers have probably noticed that I never give timely advice – I don’t comment on what’s going on in the market now – I didn’t discuss how I’m reacting to the recent gut wrenching volatility or to the Treasury’s ideologically-disgusting, but perhaps practically-necessary bailout.

It’s not that I don’t care mind you. I think that sort of very near-term discussion is necessary, and taken as a whole, it’s the noise that drives the market undulations that drives my trading (be sure to visit the fine folks on my blog roll for some of my own favorite pundits).

The reason I don’t give timely advice is that I don’t trade based on what this market is telling us about this market – I trade based on what the market has historically told us about this market.

How will the market react to the Treasury bailout? I haven’t the slightest clue. But I do know how the market has reacted historically to the downside volatility we’ve seen this week and I know how I’ll be playing that volatility in my own portfolios.

That’s why you’ll rarely see observations on this blog that don’t apply to at least 10 years worth of historical data. I want to find quantifiable edges that have existed consistently and significantly over a very long period of time and then I want to exploit those edges when they occur in the future.

Now, the obvious flaw with this approach is that markets do change – they evolve – and this time (every time), is different.

That’s painfully obvious if you look at how our older static MarketSci models (-8.2% month-to-date, click for graph) have handled these blood-thirsty markets compared to our newer adaptive YK Strategy (+20.0% MTD, click for graph). And that’s why we’re moving to adaptive strategies across the board that “learn” from market history as it is changing rather than static models that assume that the market always does what it does.

The point of all of this is NOT to say that trading based on fundamentals or what’s happening today is bad – that approach is what still (thankfully for us guys picking up the nickels) drives the bulldozer that is this market, and there are a handful of folks who do it very well.

The point is to say that for my own money and the money folks trust us to help them manage, I want to be thinking about quantifiable edges that have existed over long periods of time, not opinions or discussions about what’s happening at this very moment.

Happy Trading,
ms

P.S. Apologies to the real Quantifiable Edges (a member of my blogroll and a fellow empirically-minded guy) for using your namesake – just couldn’t think of a better way to say what I wanted to say.

 

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