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Hello everyone,
I've had a weird journey where I've actually managed to work out an effective money system before I've established a money engine (process) to feed the money system.
Regardless, I thought that I would document this journey as a post for anyone to benefit from my knowledge so far. As a new member here, I've been reading and benefiting from a wealth of knowledge. So this is my way of giving back to the community that is currently helping me.
Disclaimer: Before you get super-hyped or completely turned-off (the two possible extremes), I'd like to clearly state that this involves actual mental effort, and a certain level of mathematics to understand and appreciate.
TLDR Takeaways:
* Whenever you wish to get into a market (trade), look at the top and bottom most quartil performance. You basically look for the top most performer and the bottom most performer and calculate how much market percentage each holds. This will enable you to see which markets are monopolised (a negative), which ones are too tight and over-competitive, where there is room for arbitrage, etc.
* Find ways of gaining regardless of what the market is doing. For instance, my system works like this (idealistic definition): When the market is booming, I gain linearly at around 70-80% with the market. When the market is moving sideways, I gain pennies from the market. When the market is tanking, I lose pennies until a certain point, beyond which I gain geometrically (very big numbers).
* Start thinking second and third order consequences. The price of an equity for instance can go to infinity or zero without stopping (theoretically), but the volatility has mean reverting tendencies (known as regression to the mean in statistics). This can be used to your advantage.
* Learn to define risk. This means you pre-define how much you wish lose in the worst case, and by doing this you pre-define how much you are willing to win if things go best case. Think in extremes.
* Always think about your portfolio as a whole unit (thank you Khaneman and Tversky). Never look at a trade as a single entitiy. Think about it as one element of the whole portfolio (like literally your entire existence). This is a game changer.
* Achieve uncorrelated movement between the different components of your portfolio.
The System (narrated via 7 checkpoints):
Checkpoint 1: I started out as any other naive guy would: buying into mutual funds. Within a couple of months, I smelled something wrong and bailed.
Checkpoint 2: Then I ended up with the next best thing I could find, which was investigating and researching ETFs (yikes). But hey, at least there was one middle man out of the window by now. I actually never trust anything very easily, and try and rework the mathematics myself. I picked up PhD theses in the field of investing, and started studying papers published by Nobel Prize winners in the field of economics. In the end, I figured out what a basket instrument is capable of (potentially), and realised this is probably not the immediate solution I am looking for. But I parked part of my savings into such a vehicle anyway because it was at that point of time (given my lack of better knowledge) better than my local bank account. A couple of images illustrating my journey and thought process during this period (apologies for the mixed English-German; I'm a bit weird like that):
Checkpoint 3: I worked out a TER equation that was low enough whilst injecting a factor (small cap) premium into the mix. After I spread the money, and parked it into the vehciles as planned, the thought that I could do better than this didn't let me go. A simplified version of the equation below (example calculation; not actual sum ivested; I'm skipping gold and bonds because I'm still young and have a relatively low net worth, where bank balances are covered by state insurances):
Checkpoint 4: By this time, COVID happened, and my portfolio got a nice boost. However, I was still not convinced if this was the way to go. I was getting more and more dissatisfied with my job by the day. Therefore, I decided to take action, and started learning active methods. In this space, there is a lot of bullshit to evade (B schools can go to hell; all those wasted lecture hours :/ ). Eventually, I worked my way to the beautiful work done by Nassim Taleb. The math was/is hard, but the potential of the thought process started to blow my mind. I got into understanding random variables.
Checkpoint 5: I continued studying Taleb, and in parallel, incorporated psychology from Khaneman and Tversky (two of the most awesome minds I've come across). By this time, I started to understand the math of risk taking, and figured out ways of pre-defining how much I was willing to lose to define probabilities of how much I could gain. Later, I would learn that this concept is known as static hedging. Below, you can see a very simplistic, yet very powerful model that I came up with, after it came to me as a dream when I was half asleep during the night (yes, I was that deep into the subjects back then). I scribbled it in such a hurried manner with goosebumps, and didn't sleep for the rest of that night due to sheer excitement (M.K.V. = Max. Cumulative Loss / P.S. = Position Size):
Checkpoint 6: As the journed continued, I started learning dynamic hedging. This is literally one of the hardest things I decided to do; very difficult mathematics, at least for me. I convinced myself to jump into an active model without perfecting my knowledge in this area. I knew very well back then that this is gonna take years. I didn't want to stay theoretical for years without any practical experience. Besides, I realised that I didn't enjoy working with my boss anymore. As a stop-gap solition, I started learning the work done by Tom Sosnoff. A few images illustrating my struggles with derivatives, and the mathematics behind them:
Checkpoint 7: As of the date of this post, my passive strategy (codenamed Virgin Beta) was up 15%, and my active strategy (codenamed Dirty Alpha) was up 48.89%
A few caveats here: These numbers are before taxes and before inflation. Plus these numbers are from relatively low cap investments (less than 50k USD). As the capital increases, the mathematics does not scale linearly, meaning, the numbers will most likely come down with larger capital inputs. However, I am proud of the knowledge I have been able to accumulate over such a short period of time. Even in its incomplete form, my knowledge is giving me such a significant advantage (especially in its Apha form). I have now quit my job, and am working on my unscripted money engine to feed my money system. While I will be turning to you guys for advise and suggestions for my money generation engine process, feel free to benefit from the money system knowledge I've been able to build until now.
P.S.
I am still continuing to learn Dynamic Hedging. This takes years to perfect. However, by now I have realised the importance of a money generating engine, and am focusing on solving this problem first before I dive full length into dynamic hedging back again.
I've had a weird journey where I've actually managed to work out an effective money system before I've established a money engine (process) to feed the money system.
Regardless, I thought that I would document this journey as a post for anyone to benefit from my knowledge so far. As a new member here, I've been reading and benefiting from a wealth of knowledge. So this is my way of giving back to the community that is currently helping me.
Disclaimer: Before you get super-hyped or completely turned-off (the two possible extremes), I'd like to clearly state that this involves actual mental effort, and a certain level of mathematics to understand and appreciate.
TLDR Takeaways:
* Whenever you wish to get into a market (trade), look at the top and bottom most quartil performance. You basically look for the top most performer and the bottom most performer and calculate how much market percentage each holds. This will enable you to see which markets are monopolised (a negative), which ones are too tight and over-competitive, where there is room for arbitrage, etc.
* Find ways of gaining regardless of what the market is doing. For instance, my system works like this (idealistic definition): When the market is booming, I gain linearly at around 70-80% with the market. When the market is moving sideways, I gain pennies from the market. When the market is tanking, I lose pennies until a certain point, beyond which I gain geometrically (very big numbers).
* Start thinking second and third order consequences. The price of an equity for instance can go to infinity or zero without stopping (theoretically), but the volatility has mean reverting tendencies (known as regression to the mean in statistics). This can be used to your advantage.
* Learn to define risk. This means you pre-define how much you wish lose in the worst case, and by doing this you pre-define how much you are willing to win if things go best case. Think in extremes.
* Always think about your portfolio as a whole unit (thank you Khaneman and Tversky). Never look at a trade as a single entitiy. Think about it as one element of the whole portfolio (like literally your entire existence). This is a game changer.
* Achieve uncorrelated movement between the different components of your portfolio.
The System (narrated via 7 checkpoints):
Checkpoint 1: I started out as any other naive guy would: buying into mutual funds. Within a couple of months, I smelled something wrong and bailed.
Checkpoint 2: Then I ended up with the next best thing I could find, which was investigating and researching ETFs (yikes). But hey, at least there was one middle man out of the window by now. I actually never trust anything very easily, and try and rework the mathematics myself. I picked up PhD theses in the field of investing, and started studying papers published by Nobel Prize winners in the field of economics. In the end, I figured out what a basket instrument is capable of (potentially), and realised this is probably not the immediate solution I am looking for. But I parked part of my savings into such a vehicle anyway because it was at that point of time (given my lack of better knowledge) better than my local bank account. A couple of images illustrating my journey and thought process during this period (apologies for the mixed English-German; I'm a bit weird like that):
Checkpoint 3: I worked out a TER equation that was low enough whilst injecting a factor (small cap) premium into the mix. After I spread the money, and parked it into the vehciles as planned, the thought that I could do better than this didn't let me go. A simplified version of the equation below (example calculation; not actual sum ivested; I'm skipping gold and bonds because I'm still young and have a relatively low net worth, where bank balances are covered by state insurances):
Checkpoint 4: By this time, COVID happened, and my portfolio got a nice boost. However, I was still not convinced if this was the way to go. I was getting more and more dissatisfied with my job by the day. Therefore, I decided to take action, and started learning active methods. In this space, there is a lot of bullshit to evade (B schools can go to hell; all those wasted lecture hours :/ ). Eventually, I worked my way to the beautiful work done by Nassim Taleb. The math was/is hard, but the potential of the thought process started to blow my mind. I got into understanding random variables.
Checkpoint 5: I continued studying Taleb, and in parallel, incorporated psychology from Khaneman and Tversky (two of the most awesome minds I've come across). By this time, I started to understand the math of risk taking, and figured out ways of pre-defining how much I was willing to lose to define probabilities of how much I could gain. Later, I would learn that this concept is known as static hedging. Below, you can see a very simplistic, yet very powerful model that I came up with, after it came to me as a dream when I was half asleep during the night (yes, I was that deep into the subjects back then). I scribbled it in such a hurried manner with goosebumps, and didn't sleep for the rest of that night due to sheer excitement (M.K.V. = Max. Cumulative Loss / P.S. = Position Size):
Checkpoint 6: As the journed continued, I started learning dynamic hedging. This is literally one of the hardest things I decided to do; very difficult mathematics, at least for me. I convinced myself to jump into an active model without perfecting my knowledge in this area. I knew very well back then that this is gonna take years. I didn't want to stay theoretical for years without any practical experience. Besides, I realised that I didn't enjoy working with my boss anymore. As a stop-gap solition, I started learning the work done by Tom Sosnoff. A few images illustrating my struggles with derivatives, and the mathematics behind them:
Checkpoint 7: As of the date of this post, my passive strategy (codenamed Virgin Beta) was up 15%, and my active strategy (codenamed Dirty Alpha) was up 48.89%
A few caveats here: These numbers are before taxes and before inflation. Plus these numbers are from relatively low cap investments (less than 50k USD). As the capital increases, the mathematics does not scale linearly, meaning, the numbers will most likely come down with larger capital inputs. However, I am proud of the knowledge I have been able to accumulate over such a short period of time. Even in its incomplete form, my knowledge is giving me such a significant advantage (especially in its Apha form). I have now quit my job, and am working on my unscripted money engine to feed my money system. While I will be turning to you guys for advise and suggestions for my money generation engine process, feel free to benefit from the money system knowledge I've been able to build until now.
P.S.
I am still continuing to learn Dynamic Hedging. This takes years to perfect. However, by now I have realised the importance of a money generating engine, and am focusing on solving this problem first before I dive full length into dynamic hedging back again.
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