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Money management turned upside down

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  • First Post: Nov 5, 2013 2:48pm Nov 5, 2013 2:48pm
Hi,

I was recently reading some new books about warren buffet, george soros and some other really successful traders / investors. In one regard most of them seem to have the same opinion: money management / position sizing.

When they are really sure of a trade / investment they create a position that represents a substantial part of their portfolio / net worth, at least 15% - 40%. Of course, unlike most traders here, they don't care about technical indicators, but rather care about fundamentals and sentiment. And they only build such large positions when they are dead-sure that everybody around them / the market is wrong.

I must say I find the idea of creating huge positions rather intriguing. If it wasn't for these great traders / investors, I would have dismissed that idea right away. But since they are successful in the largest way possible with billions of dollars of net-worth, I want to explore this idea further.

So this is a thread for discussing the idea: 1. if you like it, 2. when it makes sense to build really big positions, and 3. your opinions in general

I personally think, this kind of position sizing is not possible if you are only using technicals and / or news from the ff calendar. You would really have to do a lot of deep thinking about your investment and / or the fundamentals of the market you want to trade. But once you have a perfectly reasonable theory, that is built on sound data, then I think risking a substantial part of the account makes sense. Because of the deep understanding / study of the market, you will also know WHEN your theory is wrong / not valid anymore and it is time to get the hell out.

So, let the discussion begin (and please no side-tracking to other topics, thanks in advance)

cheers
Interesting topic.

First of all there is a difference between a investor and trader. In my understanding, an investor is always fundamental driven and see that in his opinion value and price are not matching (buffet very famous for that as u know).

A trader also see that value and price are not in balance, but its more technically driven.

I think its key to find quality in your trading, that you only trade A+ setups. And if you are so damn sure, you can bet a lot. Just like a poker player with a royal flush would go "all in".

A lot of traders want to outperform the market over the long run with low risk. I think it wont make you rich. Almost all successful people took huge risks. If you are sure about an investment/trade you should risk more than 0,25%.

I think it doesnt really matter if the entry is technical or fundamental driven, as long as you are having very high probability trades.

One should also keep in mind, that these big investors like soros, dont have a high trade frequency, if they do a handful of trades per year (or less) betting just a small amount wouldnt get you very far.
I'm very much thinking/trading along these lines - subscribed and look forward to an interesting discussion.
I think the keys is whenever you have a high probability trade that also comes with low stop loss range i.e monthly double or triple tops, strong trend lines, strong fundamental bias etc, then you should always increase your lots size and lot number. If you always take the same lot size i.e 2% even on the high probability trades then you will always be relying on your systems W.L ratio and the average R.R ratio. You have to know when to break your rules and increase your risks as long as your comfortable with the loss if it happens and you have done your homework.
Quoting Custos
Hi, I was recently reading some new books about warren buffet, george soros and some other really successful traders / investors. In one regard most of them seem to have the same opinion: money management / position sizing. When they are really sure of a trade / investment they create a position that represents a substantial part of their portfolio / net worth, at least 15% - 40%. Of course, unlike most traders here, they don't care about technical indicators, but rather care about fundamentals and sentiment. And they only build such large positions...
In many of Jim Rogers' interviews, his argument for investing in commodities is that, if times are good, demand for commodities will increase and drive prices up. If times are bad, money will flow into real assets such as commodities from financials. In a situation like that where no matter what happens to the world, you are likely going to make money, I would too, build a large long term position. But most likely using dollar cost averaging.
The times we are sure and objective yes.Lets trade on higher risk.But again.Theres always the possibility of our order going tits up.
Personally ,a separate "you never know" account is kept and withdrawn from after every high risk win, leaving enough to justify the account growing.
Problems begin when one feels invincible."Nah , maybe ill withdraw tommorow , one more trade....whoooosh!"
I have always loved this idea. In to order to open large positions or carry out a huge trade, our analysis must be on a broader scale. In this case, there should be no room for error. One must be at least 80% sure of his analysis before opening a huge position that can double or triple his account. I have made some strategies on scalping that is consistent, but the profit is rather low per trade. If I can device a very good technique for hug trades, then I would really love it.
Quoting aiyahmarklah
If times are bad, money will flow into real assets such as commodities from financials.
Depends on the commodity, you could easily get money flowing out of them due to expectations of reduced demand for said commodities during economic downturns.
http://www.cot-futures.com/

this might help you. the only fundamental tool that works.
Quote
create a position that represents a substantial part of their portfolio / net worth, at least 15% - 40%

Net worth != net risk
But they don't use high leverage and the chance that they will loose 15% with this trade is really really small. How high is the chance that a blue ship looses 50% of it's value? almost none. So the risk isn't 15% probably more towards 5...
Quoting Custos
Of course, unlike most traders here, they don't care about technical indicators, but rather care about fundamentals and sentiment. And they only build such large positions when they are dead-sure that everybody around them / the market is wrong.
soros is a lucky bastard. he's a gambler.
buffet is not a gambler. he has a valid theory and it's closer to science and i think it can be replicable.
but both of them have a small number of transactions and different analysis. but finally the gut instinct will decide how much.

if i knew nothing about the market i would try and beat the casino with the kelly criterion.
@Custos: I don't think there's a right or wrong answer. It probably comes down to personal factors like:

1. How confident you are that your forecast is correct.
2. How you mentally weigh capital preservation against income goals and expectations (which in turn probably depends on your personal valuation of your account size, relative to your total net worth).
3. Existential qualities like nerve, stomach for risk, etc.

If you have a small positive expectancy per setup, but the setups occur frequently enough, then you might be able to outperform a trader who has a higher positive expectancy — and can therefore afford to risk more equity per trade — but whose setups occur less frequently. But of course it depends on the numbers involved. Casinos are a successful example of the small edge, high transaction turnover, low transaction risk model; high turnover removes the need for high transaction risk, which serves to mitigate overall risk (risk of ruin).

Or viewed another way: if you have a demonstrable edge, then you can afford to be more conservative with your staking; but if you have no edge, then your only chance to win is to place a low number of big bets, and hope to get lucky.
Quoting hanover
@Custos: I don't think there's a right or wrong answer. It probably comes down to personal factors like: 1. How confident you are that your forecast is correct. 2. How you mentally weigh capital preservation against income goals and expectations (which in turn probably depends on your personal valuation of your account size, relative to your total net worth). 3. Existential qualities like nerve, stomach for risk, etc. If you have a small positive expectancy per setup, but the setups occur frequently enough, then you might be able to outperform a...
Well said Hanover. I would add that one might want to have some type of objective criteria that creates the certainty of your position. The best positions are usually contrarian in nature when you enter and having a high degree of confidence and/or certainty of your opinion is a very difficult thing to cultivate.

The risk of ruin model is far more dependable and does not require any degree of confidence or certainty, rather a proven edge that is consistent over time.

In my humble opinion it is far more efficient to use your edge to build into a larger position as each larger time frame aligns with your original entry. Start small and keep building into the position until you have accomplished the task you seek. This both limits risk and maximizes returns as the investment (or trade) continues its path in your favor.

For my part, every time I think my trade (or investment) is a sure thing and I am highly confident, I end up with a loss. In fact, for me I consider it a danger sign when I am "confident" of my entry....just because I am rarely correct. Thus I use an edge and enter no matter how I "feel" about the entry...the edge does the rest.

Just my opinion...
Quoting deltatrade
{quote} soros is a lucky bastard. he's a gambler. buffet is not a gambler. he has a valid theory and it's closer to science and i think it can be replicable. but both of them have a small number of transactions and different analysis. but finally the gut instinct will decide how much. if i knew nothing about the market i would try and beat the casino with the kelly criterion.
Sorry, but I just can't believe that a person can have luck over decades. He must be doing something very very right, otherwise compounding your money into the billions is not possible or extremely unlikely
Quoting hanover
@Custos: I don't think there's a right or wrong answer. It probably comes down to personal factors like: 1. How confident you are that your forecast is correct. 2. How you mentally weigh capital preservation against income goals and expectations (which in turn probably depends on your personal valuation of your account size, relative to your total net worth). 3. Existential qualities like nerve, stomach for risk, etc. If you have a small positive expectancy per setup, but the setups occur frequently enough, then you might be able to outperform a...
You make some good points. And yes, obviously not risiking much, makes much more sense over the long-term. I am just amazed that these two really famous investors/traders did it by risking a lot on only a few sure-fire bets, and made it really big.
It is pretty amazing indeed. But I kinda think it's all about luck. They got LUCKY, so now they're famous and great and everyone discusses them. Well, I'm quite sure that there're lots of people who did bet BIG and risk BIG.... unfortunately just lost it all. Of cource, no one's gonna talk about THEM, though I bet the percent is much bigger.
I was re-reading New Market Wizards lately, and also noted quite few of them vary position size and get heavy then they think market is going to move heavy.
tv show that closely represent us is "wheel of fortune" and "who want to be millionaire"

same question will be harder to answer when we put bigger bet. although we already know that we didn't know the answer
Quoting Custos
{quote} Sorry, but I just can't believe that a person can have luck over decades. He must be doing something very very right, otherwise compounding your money into the billions is not possible or extremely unlikely

that's my view on soros. read his books and you tell me what you think.
Quoting squawk
I think the keys is whenever you have a high probability trade that also comes with low stop loss range i.e monthly double or triple tops, strong trend lines, strong fundamental bias etc, then you should always increase your lots size and lot number. If you always take the same lot size i.e 2% even on the high probability trades then you will always be relying on your systems W.L ratio and the average R.R ratio. You have to know when to break your rules and increase your risks as long as your comfortable with the loss if it happens and you have...
Agreed , well said . Flexibility on your own rules is key imho
All systems of divination, like music itself,work through patterns.
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