Friday, March 11, 2016

Teaching my readers how to fish

In the past week, I had discussions with several different people about the operating philosophy of Humble Student of the Markets, The objective of the website can be summarized by a variation of an old adage:

Give a man a fish, he'll eat for a day.
Teach a man how to fish...he'll want to get a boat.

I don`t want to just give my readers a fish for the day, I would rather help them build their own boat.

Why my boat is different from yours
Think of a building a boat as like building a portfolio. The portfolio management process consists of the following steps:
  1. Deciding on what to buy and sell;
  2. Deciding on how much to buy and sell; and
  3. Deciding on how to execute the trade.
While we discuss step 1 endlessly in these pages and elsewhere, the other steps are equally important. Step 2 is also a reason why what I write in these pages is not investment advice, namely I know nothing about you:
  • I know nothing about your cash flow, or spending needs;
  • I know nothing about your return objectives;
  • I know nothing about how much risk you are willing to take, or your pain threshold;
  • I know nothing about your tax situation, or even what tax jurisdictions you live in; 
  • And so on...
If I know nothing about any of those things, how could I possibly know if anything I write is appropriate for you? I was asked recently why I don't post my portfolios and their performance. While posting my trades represent a disclosure of any possible conflicts in my writing, my own portfolios are a function of my own cash flow needs, my return objectives, my own pain thresholds, etc. How could any portfolio that I post be appropriate to anyone else? Your mileage will vary.

Don't look for a fish
Here is an example of what I am talking about. I had been recently bullish on stocks and both my investment account (inner investor) and trading account (inner trader) got long. My trading account sold and got stopped out of its long position as a result of my risk control discipline, which is a function my risk profile and pain threshold. Subsequent market action indicates that my inner trader got faked out and the market rallied. In that case, it appears that my inner trader was wrong by getting stopped out of his position, while my inner investor was right.

This incident also illustrates the point of the do's and don'ts of reading the content on this website. Anyone blindly following my trades is in effect looking for a fish. But there is no fish. The markets are not easy. You have to build a boat that's right for you.

I have two boats (used by my inner investor and inner trader). Taking a ride on either of mine by blindly following my trades means adopting my investment objectives and risk profile, which you know nothing about.

My two boats
The chart below shows an example of how my inner trader thinks about the stock market. He isn't always right, but he has been more right than wrong. His portfolio turnover averages 200% per month, which is not appropriate for everyone.

By contrast, here is an example of how my inner investor thinks about the market. The time horizon is longer. Turnover is much lower, but drawdown risk and pain threshold is higher.

For full details, see:
Neither of those boats may be right for you. The purpose of Humble Student of the Markets is not to give anyone detailed trading advice, including the specific timing of trades. I can only make suggestions, but you have to decide if those suggestions are right for you.

I am not here to give you a fish. I am here to teach you how to fish and help you build your own boat. That way, you can eat for a lifetime.

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