Most of you’ve seen Wolf of Wall Street I’m sure. I actually know a guy (or two) who used to work in a Boiler Room. They have great stories. It’s amazing what a skilled salesman can actually accomplish.
Good post on position sizing techniques of qualitative managers. Good quantitative managers spend a lot of time on this, but their strategy with robust historical data lends itself to it. By now I’m sure most people have heard of kelly betting? I think most qualitative PM’s utilize some form of fixed position sizing based on trial & error….I think there is room for improvement.
It’s somewhat reminiscent of “The Checklist Manifesto“, the authors argue that simple rules can enhance process in complex systems such as medical care, sports nutrition, online dating, poker, and stock market investing. I don’t think there is anything groundbreaking but it’s an interesting read, especially the examples and stories.
Some highlights as it relates to trading/finance:
A simple 1/n rule in portfolio allocation outperforms traditional mean-variance optimization. Some light reading on the subject can be found here but let’s just say 1/n provides more robustness over optimal when the future is uncertain.
Raghu Shukla become a professional-level poker player in under 2 years and used the following simple rules:
1) Limit loss per game. He only had enough cash at the game he was comfortable losing.
2) FOCUS ON PROCESS OVER OUTCOME. I LOVE this rule, if he played hands well and even if he still lost money he would buy an Oreo Milk Shake. If he played poorly, even if he won money, he couldn’t eat fast food for two weeks. Process > Results.
3) He only wanted to play ‘easy’ games so he would bet small for about an hour at the table to find out if he was the shark or the fish. This is a bit tougher to do in investing but I could see some value when it comes to certain special situations, distressed, or merger arbitrage situations. If an insider or judge controls the fate of a situation, perhaps it’s best to pass…
There’s a lot more interesting examples of rules in the book from a wide variety of sources. I would recommend it for light reading.
This is another trading tale I’ve heard over the years, Japanese day traders that make millions that started off with a huge fat finger fade trade in J-Com. Trades a momentum strategy, treats trading like a video game rather than an intellectual endeavor.