Last week I shared some thoughts on our trading tool called MAE / MFE (maximum adverse excursion / maximum favourable excursion). This week I will introduce you to a new tool Kelly Calculator. You can visit the blog article to learn more how to use it. What I would like to share about this tool is how it is more than just the standard Kelly criterion formulae. The Optimal f (fraction) allows you to modify the bet size after analyzing the effect the parameters have on Max Drawdown. I am sure that you have all done a backtest that produces an outstanding end result. The question we need to ask ourselves is how much DD can I realistically withstand. In our model we apply 1,000 monte carlo simulations to help us fine tune the appropriate bet size taking the random effects of the order of the payoff profile of our strategy. I highly recommend playing around with this tool to get a realistic idea of how much you should be betting on each trade.
The above chart is is an interesting look at the rate of change of the supply of money market funds comprising retail and institutional funds. This chart suggests there has been a significant decrease in money creation with actual money being sucked out of circulation. This fits in quite nicely with the current pullback in equity markets. What we are seeing from this chart is the stock markets “addiction” to money supply expansion. Take it away and there are withdrawal symptoms.
The chart below is quite shocking. Going back to 1913 we see the destruction of the US Dollar’s purchasing power. I believe this is going to be a major theme for decades to come as we still have to pay for the unprecedented monetary expansion over the past few decades. [side note (1): I am super excited as a friend just dropped off James Rickards book – Aftermath. side note (2): I spent the last week playing around with the purchase of small amounts of Bitcoin and learning about wallets and exchanges. I still think it is too early but I want to be informed about this asset class.]
I think the equity markets are currently on a knifes edge. The bears(?) are currently in battle with the buy the dip momentum players. I actually don’t believe the battle is with the bears as there are so few bears out there. I believe its an internal battle. I think the buy the dip army are starting to turn on themselves they are saying, “the markets are crazy, we have had such a good run maybe its time to cash in”.
Does this story sound familiar (h/t Andy Kessler from the WSJ):
Smart guy owns a stock in March at $200, sells it in June at $600, but then buys it back in July and August for around $1000. By September its back at $200.
That was the inventor of momentum Sir Isaac Newton 300 years ago dusting $3 million (today’s money) investing in the South Sea Co. Last week the poster child for momentum investing Dave Portnoy lost 3 of the 4 million dollars he made on his wild day trading ride from the start of the pandemic. By the time the market is done with Portnoy he will have no doubt blown a lot more than the $4 million of trading profits.
I am proud to say that I speak to my mom every day.
I am proud to say that I speak to my wife, almost every day ?.
A friend of mine told me that speaking to your mom every day is like adult breast feeding.
We have a cleaner who works for a number of wealthy families, present company excluded. She says that it amazes her that the men of the house are captains of industry, but at home they are often bossed around and are meek and mild compliant foot soldiers.Wise women.
I think there is a lot to a Mother and Wife relationship. A son in his mothers eyes is perfect. From our mothers we are taught that we can be anything we want and that when we fail it will be ok. A mother doesn’t always help us find our blind spots, that is because a mother is often blind to her sons faults. Please believe me your wife knows all your faults including ones that don’t exist.
On a serious note, if I bring this back to trading it is really important that we seek to find a mother and wife figure in our lives. It doesn’t have to be an actual mother and wife, it can actually be the same person. We all need to be “breastfed” at times when we are feeling fragile. Importantly we also need to be told when our behaviour is inappropriate and reckless.
Mom, is the spare bedroom ready, I may need some shelter tonight ?.