Challenging ShinyThing assumptions.

[ExtremeWays]

It's normal for students who just graduated. They tend to apply what they learn in theories.

It's not just a theory. Speculators like Dalio, James Simon, Thorp use Kelly Criterion.

Even Warren Buffett also use the same idea:
Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1

You cannot reverse your losses.

 

[SpeedingBullet]

It's not just a theory. Speculators like Dalio, James Simon, Thorp use Kelly Criterion.

Even Warren Buffett also use the same idea:
Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1

You cannot reverse your losses.

HAHAHA u just proved his point.

Anyways, this is a lousy job at trolling. Dark84 in EDMW is still better, nice try though, you put in some effort at least.

 

[Mecisteus]

It's not just a theory. Speculators like Dalio, James Simon, Thorp use Kelly Criterion.

Even Warren Buffett also use the same idea:
Rule No. 1: Never Lose Money. Rule No. 2: Never Forget Rule No. 1

You cannot reverse your losses.

If you don't invest, you don't lose.

I don't know WTF are those speculators. I don't read alot about other people.

But I can still make money though.

PS I don't read ST book also. But I understand the methodology.

 

[ExtremeWays]

Peters and Gell-Mann found that this shift in perspective changes everything, particularly when it comes to risk management. “If you look at the organizational chart of an investment bank, you will find groups whose job is to make money (like trading desks), and individuals or groups whose job is to manage risks,” Peters said. “What our work says is that you can’t separate the two issues. Growth management and risk management are the same thing.”

Asking how fast your money will grow over time, in just one world line, will give you an optimal leverage. “The answer may be ‘keep 80 percent of your money and invest 20 percent,’” Peters said. “Under the parallel-worlds perspective, the answer is always invest as much as you can, either long or short—no optimum exists. More risk is always better.”

 

[ExtremeWays]

Take a simple case: toss a coin repeatedly, and whenever it comes up heads, add 50 percent to your wealth. When it comes up tails, subtract 40 percent of your wealth. If the sole criterion were expected value, you should play the game. In fact, you should borrow money and bet more than you have.

But you exist in just one of those worlds
“If a small investment increases my expected wealth, then a large investment increases it even more,” Peters said of this faulty reasoning. “Result: it looks as if I should leverage as much as I can, borrow 100 times the money I have, (or even better 1000 or 1,000,000 times), and invest it all. This mathematically naive perspective would fool me, and I will be bankrupt pretty soon.”


The problem is that the expected value is typically averaged over parallel worlds. But you exist in just one of those worlds.

Plot this coin-flipping game out over 1000 or 1 million iterations using the parallel-worlds approach, and gradually the random fluctuations smooth out, showing a clear overall upward trajectory. Sounds great, right? But when Peters and Gell-Mann took just one world’s average over time, their models showed the opposite conclusion. Instead of ending up with a clear upward trajectory, they saw a pronounced downward trajectory in the resulting plot.

That’s the disconnect. Crunch the numbers in aggregate (the parallel worlds, or ensemble method) and we all collectively appear to win. Do the same with the trajectory of a single world line using the time-centric method, and we lose as individuals.

 

[3dfxplayer]

Optimal leverage for very long time frames is zero due to tail risk events, although stocks tend to move higher over very long time frames, they can, very rarely, fall drastically, you don't want to be force sold when the market falls 40%-50%.

 

[frenchbriefs]

So basically..bankroll management...to be honest time spend in market is a form of diversification too,it gives time for the Monte Carlo simulations to play out,for the mean probability to be reached.

When u talk about one world line,that's a very long world line, decades,consisting of hundreds of thousands of instances every day,the aggregate of each and very day added up over weeks,months,years and decades will come up positive.

 

[frenchbriefs]

Optimal leverage for very long time frames is zero due to tail risk events, although stocks tend to move higher over very long time frames, they can, very rarely, fall drastically, you don't want to be force sold when the market falls 40%-50%.

Those events are quite rare though...once every twenty or thirty years,even the worst crash back in 2008 the market only fell by 40%.maybe there's a way to hedge against these tail risks while leveraged using options or something?

 

[unhinged_loon]

Take a simple case: toss a coin repeatedly, and whenever it comes up heads, add 50 percent to your wealth. When it comes up tails, subtract 40 percent of your wealth. If the sole criterion were expected value, you should play the game. In fact, you should borrow money and bet more than you have.

But you exist in just one of those worlds
“If a small investment increases my expected wealth, then a large investment increases it even more,” Peters said of this faulty reasoning. “Result: it looks as if I should leverage as much as I can, borrow 100 times the money I have, (or even better 1000 or 1,000,000 times), and invest it all. This mathematically naive perspective would fool me, and I will be bankrupt pretty soon.”


The problem is that the expected value is typically averaged over parallel worlds. But you exist in just one of those worlds.

Plot this coin-flipping game out over 1000 or 1 million iterations using the parallel-worlds approach, and gradually the random fluctuations smooth out, showing a clear overall upward trajectory. Sounds great, right? But when Peters and Gell-Mann took just one world’s average over time, their models showed the opposite conclusion. Instead of ending up with a clear upward trajectory, they saw a pronounced downward trajectory in the resulting plot.

That’s the disconnect. Crunch the numbers in aggregate (the parallel worlds, or ensemble method) and we all collectively appear to win. Do the same with the trajectory of a single world line using the time-centric method, and we lose as individuals.

I suggest you read some literature about the stock market, rather than theoretical mathematics written by theoreticians.

 

[arigatoast]

how abt rule nber 1 " buy low sell high'' ,
rule nber 2 '' always follow rule nber 1''

LOL

 

[Shiny Things]

ST strategy encourages people to invest their money frequently since they cannot beat the market. This is generally good enough for people. However, we need to find a way to optimise how much leverage and ratio of our savings used on investing.

OK, I'm not gonna lie, I had to read through your thread a couple of times to understand what you were saying. You were throwing around "leverage" and "risk of ruin" a lot when I've never advocated leverage. And you were invoking the Kelly criterion to talk about long-term buy-and-hold investment.

In fact, I've said multiple times that borrowing to buy stocks is a pretty dumb idea; a buy-and-hold-and-rebalance portfolio, with no borrowing, has zero leverage.

The point of Kelly betting is to optimise the payoff of a series of bets, which, I'm a bit unclear how that applies to long-term buy-and-hold-and-rebalance; one is a short-horizon strategy with repeated plays, and one is a long-horizon strategy with no repetition.

And the "risk of ruin"—the risk of going bankrupt—of an unleveraged, diversified ETF portfolio is zero.

It got a bit clearer when you started talking about investment vs savings. Am I right that your argument is that people shouldn't invest 100% of their funds—that they should invest less than 100%? And that when you say "leverage" you mean "negative leverage - leveraging less than zero by keeping some funds in cash"?

 

[ExtremeWays]

OK, I'm not gonna lie, I had to read through your thread a couple of times to understand what you were saying. You were throwing around "leverage" and "risk of ruin" a lot when I've never advocated leverage. And you were invoking the Kelly criterion to talk about long-term buy-and-hold investment.

In fact, I've said multiple times that borrowing to buy stocks is a pretty dumb idea; a buy-and-hold-and-rebalance portfolio, with no borrowing, has zero leverage.

The point of Kelly betting is to optimise the payoff of a series of bets, which, I'm a bit unclear how that applies to long-term buy-and-hold-and-rebalance; one is a short-horizon strategy with repeated plays, and one is a long-horizon strategy with no repetition.

And the "risk of ruin"—the risk of going bankrupt—of an unleveraged, diversified ETF portfolio is zero.

It got a bit clearer when you started talking about investment vs savings. Am I right that your argument is that people shouldn't invest 100% of their funds—that they should invest less than 100%? And that when you say "leverage" you mean "negative leverage - leveraging less than zero by keeping some funds in cash"?

Have you backtest your strategy? If so, how long?

 

[ExtremeWays]

Buy and hold is a well known strategy. But the significant question is how much of your savings should be placed in investment? Seems like ShinyThing think this ratio is arbitrary?

 

[Geeezz]

i would say that the ratio depends on individual. we dun live in a world where everything is uniform. hence i dun think there’s an optimal ratio where i can tell others, hey! put this percentage of money into investments every month and you can get the optimal return fr ur money.

 

[steven_cong]

do we need to leverage? i guess we just need to invest base on what is the best we can afford, no leverage should be done.

 

[frenchbriefs]

do we need to leverage? i guess we just need to invest base on what is the best we can afford, no leverage should be done.

i would use leverage.....if its possible to borrow money at a low interest rate like 1.5 percent......i would start off with 200 percent margin at first if possible so total 300 percent.....then as time goes on and the stock market appreciates,i will use any profits or gains to pay off the margin,until gradually the ratio of margin to equity gets smaller and smaller until its totally paid off....this will provide greater growth when my portfolio is smaller and the chance of ruin is smaller,and greater stability when the portfolio is bigger.

 

[alocacoc]

Buying a house with bank loan is equivalent to leverage. Even if its an investment house, most people will do bank loan.
If you can find an investment as worthy as you deem as your house, you might want to use leverage?

Maybe using Govt TDSR 60% as your guideline for investment leverage will be a start ?

Say $100,000 in ES3+A35, leverage and make it into $160,000 in ES3+A35 ?
(But make sure your cost of borrowing is low enough for it to make sense.)

Anyway, just my 2 cents.

 

[frenchbriefs]

Buying a house with bank loan is equivalent to leverage. Even if its an investment house, most people will do bank loan.
If you can find an investment as worthy as you deem as your house, you might want to use leverage?

Maybe using Govt TDSR 60% as your guideline for investment leverage will be a start ?

Say $100,000 in ES3+A35, leverage and make it into $160,000 in ES3+A35 ?
(But make sure your cost of borrowing is low enough for it to make sense.)

Anyway, just my 2 cents.

actually borrowing 60 percent while paying 40 percent means u are taking out 250 percent leverage......

which is a pretty good idea,that is the sweet spot between too little leverage 100 percent and too much 200 percent.

 

[happykapy]

Good idea. However a lot of banks do not allow leveraging on ETFs.

You can try asking around.

Buying a house with bank loan is equivalent to leverage. Even if its an investment house, most people will do bank loan.
If you can find an investment as worthy as you deem as your house, you might want to use leverage?

Maybe using Govt TDSR 60% as your guideline for investment leverage will be a start ?

Say $100,000 in ES3+A35, leverage and make it into $160,000 in ES3+A35 ?
(But make sure your cost of borrowing is low enough for it to make sense.)

Anyway, just my 2 cents.

 

[frenchbriefs]

Good idea. However a lot of banks do not allow leveraging on ETFs.

You can try asking around.

i think IB is the only stockbroker that offers margin rates below 3 percent up to 500k....not sure how it works though.