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This Is The Holy Grail For Trading And Investing In The Markets (Money Management) – Mike Swanson

I just read that ten million new people have opened up trading accounts this year. Last year a similar number did so and many of these people have done so via the Robinhood app. I know a few of these people myself.

They all are trying to get into a trade that can make them a killing overnight and many of them believe that a great stock pick (or crypto coin) can do it for them. On Youtube there are dozens of channels that talk about how some wonder technology is going to make a specific pick go up or how crypto collectible coins will change the world in order to feed these people what they want to hear and build an audience. It’s how Cathie Wood has attracted so many people into her ETF’s even though the stocks in it have wild valuations and most of them are companies that lose money and never will make a profit.

The financial newsletter industry also sells the masses picks. And even CNBC does it with “Fast Money” and Jim Cramer’s nightly show. You can say the newsletter industry is sleazy, but the reality is the newsletters have to sell picks to people, because that is all that sells.

When I started trading you’d go in a bookstore and you could find a whole section dedicated to trading books, all about how to pick stocks or how to read market trends and charts. Now the bookstores are gone, but the messaging of the financial industry remains all about the wonder pick.

The reality is, though, the true and real thing that determines one’s success in the markets is using a money management system that reduces risk while maximizing returns in the long run. Without that wonder picks don’t actually lead to success. You can buy three wonders picks and still blow yourself up if the fourth pick doesn’t work, and eventually there will be one that will not.

The problem is no one really wants to hear about money management, because it takes some thinking and work – and it means taking responsibility for one’s own success and failure in the markets. It’s easier to just believe in someone’s pick and put one’s hope in that, instead of one’s own ability to think and learn. This way you don’t have to do any work and thinking and if something goes wrong can claim blame the guru or the company for being sleazy – and there is a lot of sleaze in the crypto world and penny stock world, with the latter now facing September SEC action on thousands of penny stocks that will never become compliant, because to do so would expose the game they are truly playing.

No matter – it is money management that is the true key to success, even if no one wants to hear about it. They just want to get rich quick. You literally cannot sell a course or information about money management. It’s why when I was reading trading books in the 1990’s there was not even a single book for sale in the stores about it. No one would buy it.

But today, I am going to share with you my basic money management system. It’s been in my private group now for over six years. I created a module for several of my trading courses devoted to the topic.

Here is information from that module, even if only one out of one thousand people reading this post will go through it, here it is.

You can be one of the few.

Simply go through this and think about the best way to structure an investment portfolio and apply the ideas to your own investing and trading strategy:

We all focus on what to buy and when…. We seek to perfect that and think that is the solution to investment success…. But that is only step one. Step two few ever achieve and it is what leads to true market mastery.

Make sure you read:

Special monthly newsletter dated January 2015 on asset allocation and rebalancing strategies


More on rebalancing strategies and the field of “quantitative finance”:

Press release by Stanford University in April, 2000:

Tom Cover has the next-best thing to a time machine: He has an algorithm — a computational procedure — that uses the past to predict the future. It works as well or better than hindsight, outperforming a pretty good investment strategy: diversifying your stock portfolio and hoping that performance of superstars will more than make up for money wasted on losers. Cover, professor of statistics and the Kwoh-Ting Li Professor of Electrical Engineering at Stanford, described his investment strategy during an invited talk in Wash., D.C., at the annual meeting of the American Association for the Advancement of Science (AAAS) in February. The strategy uses an algorithm that mirrors universal data-compression algorithms to create the so-called “universal portfolio.” Each day the stock proportions in the universal portfolio are readjusted to track a constantly shifting “center of gravity” where performance is optimal and investment desirable. The result? The universal portfolio performs as well as the best strategies that keep a constant proportion of wealth in each stock would have performed in hindsight, “no matter how the market wiggles and squirms,” Cover says. …. A key feature of the algorithm is that the return on investment is exponential, like compound interest. A good way to visualize the tremendous growth potential of an exponent (a number “raised” to some power, like 23 = 8) is to know the legend of the king who unknowingly gave away his kingdom to a peasant who had done him a favor. “I’ll give you anything,” the grateful monarch is said to have promised. The peasant looked at the king’s chess board and asked for one grain of wheat on the first square, two grains on the second square, four on the third square and so on. The innumerate king agreed and unwittingly gave away all his wealth. With the universal portfolio algorithm, profit grows exponentially, Cover says, and the average of exponential growth rates has the same growth rate as the maximum. “This is an automatic investment algorithm in the stock market,” Cover says. “The portfolio rides the stocks and lives off the fluctuations. It essentially puts a little bit of money on every possible rebalanced investment algorithm, and the surviving algorithms ­ the ones that made most of the money ­ make enough so that your money grows at the same rate as if you had used the best algorithm to start with.”

For the full press release go here. In my opinion this is the closest thing to a perfect investing system in existence

Full Cover paper available here.   It is worth downloading and taking a look at the charts even if you do not read the whole thing.

Research Paper on Constant Rebalanced Portfolios

The work of Cover was inspired by Shannon and the Kelly betting system. Here are two lectures on them: This is Lecture 24 of the COMP510 (Computational Finance) course taught by Professor Steven Skiena [http://www.cs.sunysb.edu/~skiena/] at Hong Kong University of Science and Technology in 2008.

A book with all the major research papers in the field of computation finance is: Kelly Capital Growth Investment Criterion

James Harris Simons is an American hedge fund manager, mathematician, and philanthropist. In 1982, Simons founded Renaissance Technologies, a private investment firm based in New York with over $15 billion under management. Simons retired at the end of 2009, as CEO, of what is one of the world’s most successful hedge funds. Simons’ net worth is estimated to be $10.6 billion. Don’t expect to glean any market tips or trading secrets from James Simons, who steadfastly refuses to disclose the method behind his remarkable record in investing. Instead, listen to this mathematician, hedge fund manager and philanthropist sum up a remarkably varied and rich career, and offer some “guiding principles” distilled along the way.

-Mike

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