Episode 289: What Type of Companies Make the Best Long-Term Investments?

by robbooker on September 15, 2014

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In Episode 289 of The Traders Podcast, your host Rob Booker begins with an update on long-term investments by discussing Amazon’s war with the publisher Hachette. Rob talks about the bright future for companies that support the rights of individuals to conduct commerce with the public at large. Next Jason the producer asks a question about hedging (trades, not bushes). Then we move in to some listener feedback comments and questions from Calvin, Jerry, Reggie, Jonathan, Don and Allan. Thanks for listening!

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{ 2 comments… read them below or add one }

Brian F. September 15, 2014 at 5:11 pm

Jason’s developing his own trade ideas. I knew we’d ruin him sooner or later. I’ve got a bed in the basement if you get tossed out Jason (lol).

The way I view hedging is a little bit different, because I view all my trading backwards. Start at the end of a winning year with the tax man, and think your way back to January. In one trade, your focus is on the offensive side of the game. Build a better offense or you go hungry. However, trading isn’t about taking one trade, it’s about making money over 1000 trades. In a game where you flip a coin 1000 times, you’d expect to finish the year with 500 winners and 500 losers, but that’s only if you play fair. Change anything back in January, you change the odds, and your December results WILL be different. Here’s the exciting part. You can change the odds through a better offense OR a better defense, it doesn’t matter which, either will manifest itself as profits at the end of the year. Here’s the problem. Trading is counterintuitive, and we insist on doing things the hard way. Building a better offense is very difficult, but building a better defense is not. So what do we primates spend most of our time doing? Trying to build a better offense, of course, because that’s how it’s done, right? The low hanging fruit is on the defensive side of the house, take it and stop trying to prove yourself as a trader.

A lot of this comes back to complexity. Trading is full of useless, and sometimes harmful distractions. In some ways, you have to re-learn ignorance in order to progress. That’s where the above paragraph originated, I stopped thinking about the details. As another example, let’s examine the baseline nature of trading, and then return to the issue of hedging. Aside from falling in quicksand, trading is the only endeavor where you start within arm’s reach of success and just get further and further away from your goal. In Episode #184, we learned that a truly random system shouldn’t make or lose any significant money. If that didn’t blow you away, it should. It means we all start out nearly profitable. Make one small change to a random system and you’re in the green. Unfortunately, we thirst for complexity because we think that’s what trading is about, so we foul it all up. Anyone who has ever trained a Little League baseball player to hit a ball knows too much complexity leads to failure. Everything begins with simplicity and a good foundation. But trading is different, right?

In Episode#163, John Verbrugge told us that Trading Systems, by Emilio Tomasini is pretty much the bible when it comes to automated systems. In automating systems, Tomasini advises to take a random system, and slowly add complexity, measuring the results over hundreds of trades. Tomasini understands how easy it is to make money from simple systems that exploit the imbalances you can create in 1000 coin flips. He also understands you need to flip that coin ALOT to be able to measure what’s really going on. Over hundreds of trades, you will see that slowly adding complexity to a random system will increase profitability. You will also see that continuing to do so after you pass the sweet spot makes things LESS profitable. Those of us who listen to traders, have no doubt noticed the winners constantly telling us to keep it simple. Now you know why.
I view hedging as an easy way to unbalance the results of 1000 coin flips. Hedging is offense. Hedging is defense. Hedging is easy money over the long haul. This can be done in numerous ways that are beyond the scope of this post. I can place a trade with the hopes that my hedge will not trigger. If it does, it limits my outliers to the downside, and my 1000 trades become unbalanced because outliers in my favor have no cap. On the other hand, I can hold an open hedge, but one long trade and one short trade confer no benefit, right? Wrong, they work well if they are on different time frames. Knoxville Ryan described buying an eight hour bull spread and scalping in the opposite direction, knowing he can use the hedge trade to offset a mishap in his ES scalping. This works for three reasons. First, his losses in the hedge are limited by the spread itself. He knows exactly how much he can lose, but there’s no limit to how much he can gain scalping the underlying (inbalance). Second, he can close the hedge to realize gains if he has a large scalping loss to offset (inbalance). Third, his gains in repeatedly scalping are not realized losses in the hedge. Because of the difference in time frames, the hedge losses are noisy, he won’t realize all those losses, but he is locking in the gains in his scalping account (inbalance). Ryan expressed it in terms of defense, but now you know there’s no difference between offense and defense. Alter the balance in your coin flips, and provided you’ve prepared to survive through position sizing and drawdown rules, you’ll see the difference in the form of year end profits.

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Desi February 18, 2016 at 4:29 pm

It is always paunfil to cut loss. However when the trend turns against you, it is necessary. If you wont cut at 10%, the subsequent 20%,30% and even 50% you will still let it drop. In the recent earthquake in Pahang, Indonesia, a man has to sever his limb in order to survive as it is trapped by a heavy object. I really admire his courage & determination.

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