Re: How I'm making $ in the Stock Market NOW
Just to throw a Monkey's wrench and over-simplyfiing
You are betting on stuff that have 95% odds that are in your favor i.e you are making money 95 out of a 100 times. In fact, basic distribution theory will note that with such odds, it is not uncommon to see a huge streak of winning (making $) for a very long period of time.
But, this is exactly the strategy where the term,
"Picking Nickels in front of a Road Roller" was termed.
In fact, by now everybody has heard of the famous Black Swan event.
The basic fundamental is this
"Stock Returns (or any Asset returns) are not Normally distributed. They have
i) Fat Tails (i.e extreme events occur more than what the model says)
ii) Jumps (i.e Stock price will go from $20 to $40 more easily or $40 to $2 as easily)
If you assume normal distribution, these events should occur once in every Billion years. But stock price movements are anything but normal distribution
Plenty of Hedge Funds use this strategy and it is not uncommon to make multiple years of profit and lose it all in one single year because a Black Swan event happened.
Just read about this guy
http://en.wikipedia.org/wiki/Victor_Niederhoffer
http://caps.fool.com/Blogs/ViewPost....10973180217446
Bottomline:
Avg Returns of Derivatives: 0%
Avg Returns of Commodities (incl Gold): 2%
Avg. Returns of Risk-Free Assets(Tips, long term Gov Bonds): 4%
Avg. Real Returns of Stocks: 10%
If you figure in inflation, only Stocks and Long Term Bonds have given you +ve returns
When Indexing offers free lunch why not take it?
Another from the most brilliant thinker of the current century
http://www.gladwell.com/2002/2002_04_29_a_blowingup.htm
Re: How I'm making $ in the Stock Market NOW
ahhh, Taleb ! My long time risk management mentor ! I suspect that his Black Swan theory is going to be proven beyond a shadow of a doubt as the result of yesterday's passage of the 'bailout package' ! And by coincidence, I actually posted a new thread in the Members Area based on Taleb's Black Swan principles a few hours ago.
Re: How I'm making $ in the Stock Market NOW
funny thing Mel, that Black Swan is a required reading in a risk course I'm in.
and ironically, my father uses a saying in his investment motto: to search for Beautiful Black Swans.
Re: How I'm making $ in the Stock Market NOW
Re: How I'm making $ in the Stock Market NOW
correct xanfiles, the laws of probability state that there is bound to be a blow-up somewhere. Hence the reason proper position sizing is imperative to recover losses. The key is following rules and taking the next trade. If I'm wrong, it will take me 4 trades to recover my losses, which is still an overall profitable model over time.