A Money System That Is Actually Working For Me

[Tourmaline]

somebody on this forum has got to understand what you’re talking about.. I’m gonna randomly tag some smart money ppl and see if they comment.

@JScott @biophase @Tourmaline

I have not fully deciphered it into human language yet,

but in short,

the fine @thewalkingtemple here has seemed to,

or is seeming to,

create an anti-fragile investing system.

No matter what happens,

he wins,

without trying to predict the future.

It's like setting up a deal between the gold miner and the shovel maker,

while taking out insurance on both sides,

just in case things go very awry.

I have literally spent hours mulling over how exactly to create such a system,

So color me extremely enthused.

This is also a multi-disciplinary approach,

where the broad picture of humanity is considered,

and not just one aspect as is the tendency of many traders/investors.

 

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[thewalkingtemple]

I'm glad to see that the fun kids have arrived at the party

Why don't you provide us with an example of one of your profitable trades, maybe people can make sense of it.

I'm trying to outline a process, but you are looking for an event. In other words, you ask for Deus Ex Machina. Even if I were to entertain your request, it is very unlikely to help you, or in worst case, it might harm you.

Great posts and so are all your other posts in this thread.

LOL at people asking for examples of profitable trades. I think that's missing the point.

I'm working on avoiding intellectual distractions that take focus away from working to make money, and finance is definitely one of those topics that can get me totally engrossed, it is a huge waste of time, except, I guess, when it isn't.

Lots of respect for the work you've done putting your system together and I hope it keeps getting better.

I've read Taleb's popular books, but none of his academic stuff. I'm jealous of the studying you've done, but I'm forcing myself to wait until AFTER I've got a solid CENTS business running and then I'll allow myself to get back into nerding out full time.

To everyone that didn't understand the OP, I'll try to explain what I got from it: instead of just trading stocks or whatever like a noob, @thewalkingtemple is acting like a professional money manager, making full use of financial instruments such as options to minimize loses and profit on both bull and bear markets. Lots of small bets that work together.

He had some other considerations, but that's the gist of it (I think, lmk what I missed).

i.e. the better you are at math the more effectively you can hedge your bets

Thanks for the thread @thewalkingtemple , very fun to read

Thanks for your feedback and appreciation, mate. I'm glad to know that my posts have, among others, some entertainment value as well. My opinion is that you are doing it right. Having a solid CENTS business is the right priority. I am myselfplacing my studies to further my money system on the back burner in order to get a working business system in place first.

How did Khaneman and Tversky come into play?

Their research saved like decades of mistakes that I would have made.

I learnt, among others:
* Base rate thinking
* Awareness of the mental shot gun
* Active heuristics development - where I actively work on a mathematical problem to convert into a very approximate heuristic, whereby I need to just engage system 1 to get a rough, but extrememly quick calculation that enables me to evaluate real life scenarios quite efficiently. It's like a method that creates the ultimate tag-team between system-1 and system-2.
* The non linearity between objective value and perceived value --> a useful skill in any market (important to use statistical data to employ)

I have not fully deciphered it into human language yet,

but in short,

the fine @thewalkingtemple here has seemed to,

or is seeming to,

create an anti-fragile investing system.

No matter what happens,

he wins,

without trying to predict the future.

It's like setting up a deal between the gold miner and the shovel maker,

while taking out insurance on both sides,

just in case things go very awry.

I have literally spent hours mulling over how exactly to create such a system,

So color me extremely enthused.

This is also a multi-disciplinary approach,

where the broad picture of humanity is considered,

and not just one aspect as is the tendency of many traders/investors.

Thanks for the shortenned explanation mate. I think what you've described / understood is more than enough for anyone on this thread to start. The fact that you've spent time on trying to build such a system makes me very curious. What made you stop / pause?

 

[Dianne Cohen]

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):


View attachment 35593

View attachment 35594

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):

View attachment 35595​

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.
View attachment 35596

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):

View attachment 35597

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:
View attachment 35598
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View attachment 35600

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.

Your numbers are amazing! I don't get the details completely but the bottom line looks really good.

 

[thewalkingtemple]

Your numbers are amazing! I don't get the details completely but the bottom line looks really good.

Thank you. But I wouldn't be focussing on those numbers. To put things into perspective, ever since I launched my system 5 months ago, I've made enough to pay for just 4 months of my living expenses in a year. And ALL of it is unrealised, because I don't need any money at the moment. This means that the numbers paint a much better picture than what I actually get in the end.

The numbers are based on low cap input. Like I mentioned in the OP, the bigger the capital, the tougher (non-linearly) it is. I'm like a kid who's learning to drift a buggy. It's difficult, but I'm able to pull it off somehow. But with bigger cap, it's like powersliding a space ship.

The fastlane approach here is to generate large income from business activities so that they do not have to be a genius in investment, to have high recurring investment income (even with average investment return).

Unless someone is aspiring to be a professional money manager, in which they have the scalability of managing other people’s money, devoting a lot of time to “financial alchemy” according to my observation, is almost always a super waste of time and energy.

I know this does not sound like music to your ears, but I have seen too many men sucked into this.

Today morning, as I was running, I was trying to process Kevin's POV here. And a mathematical thought struck me. I thought I'd share that with you all.

If I were to write down Kevin's thought process as an equation, I would do so as follows:

0.9 U + 0.1 M 9 = 1 L ---------->(1)
where, U = Unscripted Business system,
M = Money System,
L = The Unscripted Life, and
the numbers 0.9 and 0.1 are risk weights.​

Basically, Kevin's experience has led him to use a system where he swears by a low risk weightage (0.1) to the money system, and this doesn't require him to be dabbling into "financial alchemy". He is then comfortable with letting his unscripted business system do the heavy lifting of income (0.9).

I don't know about you all, but what inspired me the most about MJ DeMarco is not what he achieved, but his orginial thinking clarity. That's what makes his work authentic and valuable to me (personally). So I infuse my own original thinking here. I start with generalising eq. (1)

(R1 * U) + (R2 * M) = (1 * L) ---------->(2)
where, R1 and R2 are generalised risk weights.
​

For a guy like me, who has a reasonably strong Money system, I can push R2 to much more than 0.1. Let's say I am okay with going upto 0.5. That means I can afford to work with a risk weightage of 0.5 for R1, meaning that I can go for safer bets with my business system (meaning lesser effort than, say, in comparison to Kevin) and achieve similar global results. My equation (just for illustration purposes) then becomes.

(0.5 U) + (0.5 M) = (1 L) ---------->(3)​

To proceed however, I have to acknowledge the following limitations of such a definition.

1. M cannot be sustained / exist without U. Therefore, M is a function of U, which makes the real equation more complicated than what I have presented above.
2. The real relationship between the risk weights is likely non-linear.

With such a setup, I could even go as far as building a dynamic system where I can dynamically change R1 and R2, and de-correlate U and M to such an extent that one saves the other in a tight scenario.

I believe there is a lot of room for flexibilty in approaches than just the one Kevin has expressed. So much for just a thought experiment. Thank you for your post @Kevin88660 It was the source of inspiration for this little post

EDIT: My Dirty-Alpha went live 5 months ago. The Virgin-Beta went live 3 months before that. So you could say that the whole system has been up for 8 months.

 

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[Kevin88660]

Thank you. But I wouldn't be focussing on those numbers. To put things into perspective, ever since I launched my system 5 months ago, I've made enough to pay for just 4 months of my living expenses in a year. And ALL of it is unrealised, because I don't need any money at the moment. This means that the numbers paint a much better picture than what I actually get in the end.

The numbers are based on low cap input. Like I mentioned in the OP, the bigger the capital, the tougher (non-linearly) it is. I'm like a kid who's learning to drift a buggy. It's difficult, but I'm able to pull it off somehow. But with bigger cap, it's like powersliding a space ship.


Today morning, as I was running, I was trying to process Kevin's POV here. And a mathematical thought struck me. I thought I'd share that with you all.

If I were to write down Kevin's thought process as an equation, I would do so as follows:

0.9 U + 0.1 M 9 = 1 L ---------->(1)
where, U = Unscripted Business system,
M = Money System,
L = The Unscripted Life, and
the numbers 0.9 and 0.1 are risk weights.​

Basically, Kevin's experience has led him to use a system where he swears by a low risk weightage (0.1) to the money system, and this doesn't require him to be dabbling into "financial alchemy". He is then comfortable with letting his unscripted business system do the heavy lifting of income (0.9).

I don't know about you all, but what inspired me the most about MJ DeMarco is not what he achieved, but his orginial thinking clarity. That's what makes his work authentic and valuable to me (personally). So I infuse my own original thinking here. I start with generalising eq. (1)

(R1 * U) + (R2 * M) = (1 * L) ---------->(2)
where, R1 and R2 are generalised risk weights.
​

For a guy like me, who has a reasonably strong Money system, I can push R2 to much more than 0.1. Let's say I am okay with going upto 0.5. That means I can afford to work with a risk weightage of 0.5 for R1, meaning that I can go for safer bets with my business system (meaning lesser effort than, say, in comparison to Kevin) and achieve similar global results. My equation (just for illustration purposes) then becomes.

(0.5 U) + (0.5 M) = (1 L) ---------->(3)​

To proceed however, I have to acknowledge the following limitations of such a definition.

1. M cannot be sustained / exist without U. Therefore, M is a function of U, which makes the real equation more complicated than what I have presented above.
2. The real relationship between the risk weights is likely non-linear.

With such a setup, I could even go as far as building a dynamic system where I can dynamically change R1 and R2, and de-correlate U and M to such an extent that one saves the other in a tight scenario.

I believe there is a lot of room for flexibilty in approaches than just the one Kevin has expressed. So much for just a thought experiment. Thank you for your post @Kevin88660 It was the source of inspiration for this little post

EDIT: My Dirty-Alpha went live 5 months ago. The Virgin-Beta went live 3 months before that. So you could say that the whole system has been up for 8 months.

The issue is less about risk. It is about diminishing return to effort after a certain point.

Beating an high income portfolio (dividend stocks and corp bonds) even by a few percentage point (without taking much higher risk), requires a serious amount of work. This has negligible impact on your wealth assuming you start with your own small capital.

The whole argument centers around the opportunity cost of your time. How would you best invest your non-sleeping hours to maximize the total expected increase in your net worth in the next 5-10 years?

 

[thewalkingtemple]

The issue is less about risk. It is about diminishing return to effort after a certain point.

Beating an high income portfolio (dividend stocks and corp bonds) even by a few percentage point (without taking much higher risk), requires a serious amount of work. This has negligible impact on your wealth assuming you start with your own small capital.

The whole argument centers around the opportunity cost of your time. How would you best invest your non-sleeping hours to maximize the total expected increase in your net worth in the next 5-10 years?

Notice how as soon as I just named an arbitrary variable as "Risk" your own tendencies immediately concluded that it doesn't factor time or opportunity cost of time (EDIT: please don't take this as a personal attack; I myself learnt about this tendency in myself from Khaneman). In fact I am surprised that you didn't question what "Risk" actually is. The fact is that the variable can be defined as subjectively as required, because risk is hugely subjective.

A money system has one prime disadvantage, which is that it requires capital. I am in agreement with you about the time drag that comes as a cost when you start with your own small capital. That is why I have been stressing the fact that I see this as a soluton for people with an established business system.

Apart from this prime disadvantage, a money system can be designed as a CENTS system. If your money system is taking a serious amount of time to meet your targets (which need not necessarily be beating any other high income portfolio), then it is a poor system.

To answer your question about my time investment in the next 5-10 years, I would initially spend the time on a business system (which I am these days), and then revert focus to my money system. Cumulatively, it is likely to be at least 50:50. But then again, I think everyone would have a unique answer. It depends upon personal preference.

 

[Bekit]

Awesome thread! Even though it's way over my head. It sounds like you've developed some keen insights due to the amount of thought and effort you've put into this topic.

Random question out of curiosity - how did you happen to start on Beta before Alpha? I'm guessing it's just semantics of how you chose to label your approaches, but it intrigued me.

Random question that's a little less tangential - Let's imagine I'm a total beginner and have no clue where to pick up even the basics of understanding this area, so I'm hesitant to start to invest because my understanding is so severely lacking. What resources would you recommend as a good place to start learning?

I had to google what Cliffs notes are. So, the short answer is no.
However, if there are enough people demanding, I'd happy to invest the time to look into it further.

Haha I think it's fair to say that the original post WAS the cliffnotes version. Did anybody SEE the whiteboard photos? Obviously, there's a ton of depth implied in the summary of the 7 stages you passed through on the way to where you are now.

I'm no genius mate; just another guy giving life his best. You are confused because what I have posted is not a how to guide. That's my mistake; I should have made that clear in the post. I've just tried to introduce what I consider as valuable concepts. Those need to be learnt. Depending upon someone's level, it could take a few months or a year or two. But anyone can get there.

Let me give you a fictional example (which I randomly came up with as I typed ) of the kind of thinking I'm talking about.

Let's say you have four neighbours:

a. Luca, who is a wheat farmer.
b. Sarah, who is an insurance provider.
c. Tom, who runs a bakery.
d. Rusty, who is just a wealthy floater.

Before you arrived, Tom used to buy wheat from Luca for his bakery. Rusty didn't give a f*ck about anything or anyone, whereas Sarah was selling random insurance coverages to all three.

You now arrive into the scene with your fancy cash. You have enough to buy three seasons' produce from Luca. You go to Luca first, and negotiate with him to purchase his produce exclusively and continuously for the next 3 years at a fixed rate. Luca agrees to it as soon as you promise him that you are willing to pay one half of the capital up-front.

You then go to Sarah and tell her that in case there is a poor harvest (pre-defined using a threshold number), you would like to cover your losses using a custom insurance package. You start working on a deal and come up with Y as the price of the insurance package.

You then go to Tom, and offer wheat for a fixed price for the next three years at a standard rate (with a profit mark-up). This price is 10 cents higher than what Luca offered it for (this ensures you a 130% profit during the first year, and 150% profit during year 2 and year 3, provided the minimum harvest target is met). So Tom is skeptical. But you question whether Luca had kept the same rate over a three year period. Tom realises that it was not the case, understands the benifit of a standard rate, and signs the deal. You setup Tom also with an insurance coverage with Sarah in case of a low produce year. You get brownie points from Sarah for helping with the deal.

You then go to Rusty, and offer a unique deal. You tell him that if your yield exceeds x (which is Tom's share), Rusty can have everything beyond it for his rich family. The only thing Rusty needs to pay is a small amount of Z per year (Z = your insurance cost owed to Sarah (y) + 0.5 of insurance cost owed by Tom to Sarah). Rusty is skeptical. But then you show him that 8 out of 10 times the last 10 years, your leased farm has produced much more than x, so Rusy is essentially making a favourable bet. Rusty finally agrees to buy the contract from you.

You then go back to Tom, and offer to pay one half of his insurance costs as sign of good will and continued business relationship for the future.

After one year Luca is happy and hard at work, Tom's business is doing reasonably well, and he is extremely thankful for your deal that enables him to sustain competitive prices, and Rusty is stocked with surplus produce you delivered. He treats you like you are his new best friend. You have made a handsome 130% profit on your intial investment. You now take 20% out of that and go back to Luca, and offer to pay for one half of his and his family's life insurance coverage costs (which starts to melt Sarah's heart). Luca is pleasantly surprised, and assures you of a long lasting continued business relationship. Sarah is so impressed with you, that she starts dating you (OMFG!!).

And they lived happily ever after.

Even though this was just a randomised story I made-up, there are some very fundamental concepts, and derivative instruments used intuitively without explaining what they are or how they work (i.e., the mathematics).

OK, yes you are a genius, because not everyone can put together such a clear, understandable, relatable analogy on the spot like that.

"The definition of genius is taking the complex and making it simple." Albert Einstein

Thank you. But I wouldn't be focussing on those numbers. To put things into perspective, ever since I launched my system 5 months ago, I've made enough to pay for just 4 months of my living expenses in a year. And ALL of it is unrealised, because I don't need any money at the moment. This means that the numbers paint a much better picture than what I actually get in the end.

The numbers are based on low cap input. Like I mentioned in the OP, the bigger the capital, the tougher (non-linearly) it is. I'm like a kid who's learning to drift a buggy. It's difficult, but I'm able to pull it off somehow. But with bigger cap, it's like powersliding a space ship.


Today morning, as I was running, I was trying to process Kevin's POV here. And a mathematical thought struck me. I thought I'd share that with you all.

If I were to write down Kevin's thought process as an equation, I would do so as follows:

0.9 U + 0.1 M 9 = 1 L ---------->(1)
where, U = Unscripted Business system,
M = Money System,
L = The Unscripted Life, and
the numbers 0.9 and 0.1 are risk weights.​

Basically, Kevin's experience has led him to use a system where he swears by a low risk weightage (0.1) to the money system, and this doesn't require him to be dabbling into "financial alchemy". He is then comfortable with letting his unscripted business system do the heavy lifting of income (0.9).

I don't know about you all, but what inspired me the most about MJ DeMarco is not what he achieved, but his orginial thinking clarity. That's what makes his work authentic and valuable to me (personally). So I infuse my own original thinking here. I start with generalising eq. (1)

(R1 * U) + (R2 * M) = (1 * L) ---------->(2)
where, R1 and R2 are generalised risk weights.
​

For a guy like me, who has a reasonably strong Money system, I can push R2 to much more than 0.1. Let's say I am okay with going upto 0.5. That means I can afford to work with a risk weightage of 0.5 for R1, meaning that I can go for safer bets with my business system (meaning lesser effort than, say, in comparison to Kevin) and achieve similar global results. My equation (just for illustration purposes) then becomes.

(0.5 U) + (0.5 M) = (1 L) ---------->(3)​

To proceed however, I have to acknowledge the following limitations of such a definition.

1. M cannot be sustained / exist without U. Therefore, M is a function of U, which makes the real equation more complicated than what I have presented above.
2. The real relationship between the risk weights is likely non-linear.

With such a setup, I could even go as far as building a dynamic system where I can dynamically change R1 and R2, and de-correlate U and M to such an extent that one saves the other in a tight scenario.

I believe there is a lot of room for flexibilty in approaches than just the one Kevin has expressed. So much for just a thought experiment. Thank you for your post @Kevin88660 It was the source of inspiration for this little post

EDIT: My Dirty-Alpha went live 5 months ago. The Virgin-Beta went live 3 months before that. So you could say that the whole system has been up for 8 months.

This post reminded me of the following post that @MJ DeMarco shared a while back post where he boils down his money making system into an equation. You two seem to be thinking along somewhat of the same wavelength. Love it! (I also echo ZF's recommendation that you'd enjoy the INSIDERS post on selling options. Look for "The Printing Money Thread.")

GOLD! - MINDSET - How to create monetary wealth in just 5 years. (Or less!)

Asked on Quora which I answered... https://www.quora.com/How-can-I-create-massive-monetary-success-in-five-years/answer/MJ-DeMarco-1 Create yourself a mathematical equation that scales, then work that equation to death while acting, assessing, and adjusting along the way. Few people...

www.thefastlaneforum.com

 

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[Mutant]

Random question out of curiosity - how did you happen to start on Beta before Alpha? I'm guessing it's just semantics of how you chose to label your approaches, but it intrigued me.

In finance beta refers to what the market does. So if you have an FTSE tracker fund, you will follow the market exactly. If it rises by 7% in a year, you too will gain 7%. You did not outperform the market. You only achieved beta. This can obviously be done passively.

Alpha refers to what you achieve over & above the market index. It’s what actively managed strategies strive to achieve.

Hence:

my passive strategy (codenamed Virgin Beta) ... and my active strategy (codenamed Dirty Alpha)

Now I aim to be helpful, but I must confess answering this was merely a ruse to post one of my favourite memes.

 

[normalfree]

Random question that's a little less tangential - Let's imagine I'm a total beginner and have no clue where to pick up even the basics of understanding this area, so I'm hesitant to start to invest because my understanding is so severely lacking. What resources would you recommend as a good place to start learning?

I think that the Antifragile way of dealing with risk in investing is interesting, at least in theory. I don't know much about the actual math behind doing it and how hard it would be for folks to pick it up, amongst other mathematical concepts or calculations that you use.

Perhaps OP can share more in regards to how can people start learning this, as echoed by @Bekit ?

 

[thewalkingtemple]

Awesome thread! Even though it's way over my head. It sounds like you've developed some keen insights due to the amount of thought and effort you've put into this topic.

Random question out of curiosity - how did you happen to start on Beta before Alpha? I'm guessing it's just semantics of how you chose to label your approaches, but it intrigued me.

Thank you for your positve feedback, Bekit! Yes, to a certain extent, I agree with you. These days, I am able to see opportunities, where folks around me see danger. It's a weird feeling, but I try to be wary of other intellectuals' intuition/opinion that differs from mine, as those usually lead to binary results. One of us is usually right.

@Mutant has answered your question about beta and alpha naming conventions. They come from the academia. Originally, they were variables used in equations that solved for optimising portfolios. But it's all FUBAR now, and they've grown to mean entirely different things in different circles.

Random question that's a little less tangential - Let's imagine I'm a total beginner and have no clue where to pick up even the basics of understanding this area, so I'm hesitant to start to invest because my understanding is so severely lacking. What resources would you recommend as a good place to start learning?

I think that the Antifragile way of dealing with risk in investing is interesting, at least in theory. I don't know much about the actual math behind doing it and how hard it would be for folks to pick it up, amongst other mathematical concepts or calculations that you use.

Perhaps OP can share more in regards to how can people start learning this, as echoed by @Bekit ?

In my perspective, there is no "starting" to investing. You guys are already investing. "What are you currently investing? (time? money?)", and "In what are you currently investing? (job? relationships? health?)" are two questions you have to ask yourselves and dig deep to find honest answers (it's amazing how much we lie to ourselves). In my case, I had to build a proper tracker system for all my incomes and expenditures (both in terms of time and money, and what it revealed (the truth) shocked me). Once you figure that part out, you could choose to write down questions and answers as to what is stopping you from making better decisions. Then, you could search for time-independent literature (think books that are hundreds of years old, for instance) that answers these questions (time usually weeds out noise, and is an excellent filter for true value). I have learnt through experience that text books offer more value/noise ratio (which is preferable) than scientific papers or blogs or instructional videos. Once you answer your initial questions, new and better questions start popping up in your head, and from then on, it's a spiral in growth of knowledge. What is key is to execute in parallel, and not become tied down into theoretical space (my weakness, which I'm actively working on). I would be arrogant and stupid to say that this IS the way to go about it, but this is what I would recommend, based on my experience so far, of course. It's an old school approach, and ensures CONTROL and ENTRY, to say the least.

EDIT:
Mathematics is an entry pillar here. I cannot sugar coat that any further. But if it helps, I was never good at math. I just love it, even though I'm bad at it. Even my aging dad is able to do mental calculations faster than me, while I usually have to write it down. Having said that, my love for the subject has taken me far through sheer execution. I have a math heavy degree behind me, and am able to use math tools many don't learn in their lives at all. Math is like a vision filter that lets you see phenomena that normal people don't. It's a pity how math is taught in school. I hated how it was taught in school, and am now spending a lot of time unlearning all of that shit, and am re-learning math (even grade school level stuff) the way that suits me better.

Now I aim to be helpful, but I must confess answering this was merely a ruse to post one of my favourite memes.

View attachment 35635

Thanks for that! I've never seen that meme before :O

 

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[thewalkingtemple]

Haha I think it's fair to say that the original post WAS the cliffnotes version. Did anybody SEE the whiteboard photos? Obviously, there's a ton of depth implied in the summary of the 7 stages you passed through on the way to where you are now.

Thanks for revealing something I never realised!

OK, yes you are a genius, because not everyone can put together such a clear, understandable, relatable analogy on the spot like that.

"The definition of genius is taking the complex and making it simple." Albert Einstein

Thanks again for the compliment! I like Einstein's definition of genius; it implies that one can develop the skills to be come a genius.

A person well versed in these concepts would have spotted a tonne of loop-holes in the story I narrated. To save time, I didn't make it perfect, just sufficient enough to convey the message across.

This post reminded me of the following post that @MJ DeMarco shared a while back post where he boils down his money making system into an equation. You two seem to be thinking along somewhat of the same wavelength. Love it! (I also echo ZF's recommendation that you'd enjoy the INSIDERS post on selling options. Look for "The Printing Money Thread.")

GOLD! - MINDSET - How to create monetary wealth in just 5 years. (Or less!)

Asked on Quora which I answered... https://www.quora.com/How-can-I-create-massive-monetary-success-in-five-years/answer/MJ-DeMarco-1 Create yourself a mathematical equation that scales, then work that equation to death while acting, assessing, and adjusting along the way. Few people...

www.thefastlaneforum.com

Thanks, I'll be sure to check the thread out. I don't find it surprising that there's thought allignment there. MJ DeMarco represents an extrapolation of my half developed concpets (someone who has taken it all the way, while I am still developing). That's how I landed on this forum. I realised that no one around me (physically) thinks like me, and I shouldn't be the only one in human history with thoughts like these. After a bit of search for literature, I came across MJ's name a couple of times, and that's how I landed here.

 

[thewalkingtemple]

Hello all,

I just thought I'd post an update on this topic / situation. I closed 2020 very strongly. I'm not going into numbers as they are irrelevant for this post. After a tonne of experimenting with other possible ventures for 2021, I came to the realisation that this money system is the only real profit earning CENTS based system I have in my arsenal (everything else is still under development). My job, sure as hell, is not.

At some point, I took the plunge, and decided that I will be switching to investing using my money system as a prime source of income in 2021. The two reasons for this decision: 1. It's a CENTS based system 2. It gives me time to develop other CENTS based business systems. I'm most probably not going to cover my entire year, but I plan to take oddjobs to cover the exposure there.

The business model here is to invest the largest portion of my capital into this venture, thereby funding my daily expenses, and then bootstrap any future business ventures that I am working on. And I am very serious about the bootstrapping bit. The only thing I'm willing to spend money on is improving my own skill-set, nothing else.

Let us see where this takes me. I have fear and my emotions are quite high, as uncertainty mounts, but I'm giving it my best.

 

[Tom H.]

The business model here is to invest the largest portion of my capital into this venture, thereby funding my daily expenses, and then bootstrap any future business ventures that I am working on. And I am very serious about the bootstrapping bit. The only thing I'm willing to spend money on is improving my own skill-set, nothing else.

It's very cool to hear about how you're going to commit, you've put a lot of work into your finance system and built up a real skill set there.

I want to share some of my feelings about bootstrapping, in case it helps you formulate your own plans. Bootstrapping doesn't necessarily mean sweat-equity longer you're implying here, it just means avoiding outside investment.

You're willing to invest capital in your finance system because you designed it and you have confidence in it. If you end up designing a business system that you have confidence in, then you may find it better to invest capital in the business rather than doing the work yourself.

In my experience, I really prefer hiring people to work in my business, rather than doing the work myself. There are a lot of magical qualities in paying someone to work for you, but the bottom line is that if I can't afford to pay someone else to do the work, then I certainly can't afford to do the work myself. I'm investing in the skill sets of hiring and managing. These can sound like bullshit skills, but done people really do suck at these things and they do make a difference.

I still believe in gaining hard skills myself. I think I'm better at hiring programmers because I am a good programmer. I can't afford to be ignorant, it's just that I also can't afford to work for myself.

Maybe there are opportunities in the areas where you already have a high level of hard won skill? I don't know what opportunities might be in the motorsports world, but that's the point, you have a unique position that you can build on to get rich.

I can't wait to see what comes next!

 

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[thewalkingtemple]

It's very cool to hear about how you're going to commit, you've put a lot of work into your finance system and built up a real skill set there.

I want to share some of my feelings about bootstrapping, in case it helps you formulate your own plans. Bootstrapping doesn't necessarily mean sweat-equity longer you're implying here, it just means avoiding outside investment.

You're willing to invest capital in your finance system because you designed it and you have confidence in it. If you end up designing a business system that you have confidence in, then you may find it better to invest capital in the business rather than doing the work yourself.

In my experience, I really prefer hiring people to work in my business, rather than doing the work myself. There are a lot of magical qualities in paying someone to work for you, but the bottom line is that if I can't afford to pay someone else to do the work, then I certainly can't afford to do the work myself. I'm investing in the skill sets of hiring and managing. These can sound like bullshit skills, but done people really do suck at these things and they do make a difference.

I still believe in gaining hard skills myself. I think I'm better at hiring programmers because I am a good programmer. I can't afford to be ignorant, it's just that I also can't afford to work for myself.

Maybe there are opportunities in the areas where you already have a high level of hard won skill? I don't know what opportunities might be in the motorsports world, but that's the point, you have a unique position that you can build on to get rich.

I can't wait to see what comes next!

Thanks a lot for your positive and encouraging feedback Tom. I really do appreciate it!

Thank you also for sharing your views and experience about bootstrapping. I'm taking some points out of your input, and I'll have to evaluate how to incorporate into my own systems and thinking / working style. The reason why I am not willing to spend any money outside of my skillsets at this point is that everything else that I am doing is in the evaulation phase, where the I'm just market testing or evaluating demand / feedback from the market. And spending money without market approval doesn't sit right with me. But as you say, it might be that my perspectives would change if I have a system that has market approval and my confidence going for it. I've never had this experience before, so I'm drawing some perspectives from your experience here. Let's see how it goes there. I'm giving it my best

*****Apologies in advance: The following is a segway into another venture of mine. I don't wish to make a separate execution thread for it, as it is nothing unique, and we have already many powerful exectution threads around the same topic. I simply am not able to offer any new value to justify creating a new thread around it.******

Let me give you a tangible example of one of the things I'm currently doing (other than this money system of mine). I love to write, and write in my own blog, which has a very small, yet trusty following. They often give me feedback around the lines of "Your thinking is unique and profound." Now I'm not convinced that I'm either, but I see the value in such comments. Apart from this long term project (where I'm trying to incorporate MJ's advice), I decided to repurpose one of my recent articles into a script that I can use to make a short documentary. The idea is to use it as a means to develop my brand further beyond just my website. Now, I have no experience with media / video / voice over / youtube, etc.

I started taking some video editing courses (coupon code powered free subs), and just started with it, learning every bit as I was doing it. When I was looking for helpful information here, I got really inspired by @Valier and read his execution thread fully. I'm eternally thankful to all the valuable information this guy has offered in his thread. Again, a testament to why this forum is such a powerhouse. While @Valier chose to use Adobe Premier Pro, I chose Davinci Resolve, purely because it's free. I didn't even want to spend $200 (or whatever Adobe charges) on software to make my frickin documentary. That's in direct reference to my stingy nature before seeing market approval. So, without any skill sets, and armed with a wealth of knowledge from @Valier, I just went ahead with my first documentary video. After 20 or so long days and poor sleep, I published my first video a couple of days ago:

View: https://youtu.be/kC-aWuWKfLk


Now, the video looks like it's gonna bomb. In hindsight, I chose the wrong topic, but heck, I started reading @Valier 's thread when I was halfway into making my video...too late to back out then. But I'm in it for the long run and will continue making documentaries, and continue improving. It makes sense to me to invest more capital into this venture, and start outsourcing only after I start earning from it (my definition of market approval).

@Valier, I took a lot of inspiration from you, and so did my channel. As a thank you, I've linked your law of attraction (part 1) as the only end card in my video. I'm a beginner, and my video doesn't have any views, but still, I just want you to know that I am thankful, and am trying to do something for you in return.

@Andy Black Thank you for your youtube subscribe logo, and the thread you made for it. I use it in my channel, and found it helpful!

 

[Ronak]

Just came across this thread.
I like the simple village explanation and think I see what you mean.

2 questions:

1) have you back tested your approach to see if it works in varied markets?

2) Ultimately, doesn't it come down to the price/cost of your hedging? If the cost of insurance goes beyond a certain limit, theoretically it would wipe out returns, no?

I'm not even a pre-noob when it comes to investing, but if the options are priced correctly in a perfect market, wouldn't they be cost prohibitive?

 

[thewalkingtemple]

Just came across this thread.
I like the simple village explanation and think I see what you mean.

2 questions:

1) have you back tested your approach to see if it works in varied markets?

2) Ultimately, doesn't it come down to the price/cost of your hedging? If the cost of insurance goes beyond a certain limit, theoretically it would wipe out returns, no?

I'm not even a pre-noob when it comes to investing, but if the options are priced correctly in a perfect market, wouldn't they be cost prohibitive?

Glad the simple explanation was able to give you an idea.

My answers to your questions:

1. No, and yes. I do not do back testing, as this leads to a phenomenon called data mining (models tend to go into superstitious behaviour based on curve fitting). My system uses systemic mathematics, and therefore, given pre-defined boundary conditions (you could understand these as scenarios), I know the system's behaviour (to be honest, this is where my mathematics is currently most limited, and I'm actively improving upon it). Having said that, if I choose to back test my apporaches, they would work, as I actively study macro-economic history, and take scenarios into account beyond our life times. Instead of back testing, I run mone-carlo simulations. I find them more useful and practical.

2. Yes, your fundamental understanding is correct. That's where one's level of systemic understanding helps a huge lot. If done cleverly, one does not have to spend a lot on insurance. Market players don't even realise that it is insurance in the first place.

When you are talking about options, how do you define a correct price (do you refer to Black-Scholes)? And how do you define a perfect market? I'm not saying that these exist or do not exist. But how do you define these terms in the first place?

 

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[Ronak]

Glad the simple explanation was able to give you an idea.

My answers to your questions:

1. No, and yes. I do not do back testing, as this leads to a phenomenon called data mining (models tend to go into superstitious behaviour based on curve fitting). My system uses systemic mathematics, and therefore, given pre-defined boundary conditions (you could understand these as scenarios), I know the system's behaviour (to be honest, this is where my mathematics is currently most limited, and I'm actively improving upon it). Having said that, if I choose to back test my apporaches, they would work, as I actively study macro-economic history, and take scenarios into account beyond our life times. Instead of back testing, I run mone-carlo simulations. I find them more useful and practical.

2. Yes, your fundamental understanding is correct. That's where one's level of systemic understanding helps a huge lot. If done cleverly, one does not have to spend a lot on insurance. Market players don't even realise that it is insurance in the first place.

When you are talking about options, how do you define a correct price (do you refer to Black-Scholes)? And how do you define a perfect market? I'm not saying that these exist or do not exist. But how do you define these terms in the first place?

My crude understanding of both definitions:
All information is taken into account by the "market" in order to arrive at a price that results, in effect, in no upside.

So, the cost of insurance would cancel out all returns by this definition.

Another question: does the insurance only cover price volatility, or all risks, whether it be weather, fraud, etc?

In your example, you prepay for supply, what if the farmer takes the money and absconds? What if the farm floods? Etc

 

[thewalkingtemple]

My crude understanding of both definitions:
All information is taken into account by the "market" in order to arrive at a price that results, in effect, in no upside.

So, the cost of insurance would cancel out all returns by this definition.

Your line of thought / understanding originates from the efficient market theory. And I have to point out that this is a theory. Markets largely 'tend' to be efficient, and are 'never' perfectly efficient. Some of the prime reasons: human nature, subjective value, time delta effects, and geographical delta effects.

I don't know of your background. Mine is engineering, and we have an engineering meme that goes along the lines of 'assume perfect gas' in order to solve thermodynamic problems. Any good engineer would realise that even though the problem can be solved effectively using this assumption, the solution would deviate from reality. Depending on the nature of the problem, the solution could end up fatal. In other words, while it is generally 'okay' to assume that markets are efficient, it's not prudent to do so 'always'.

It is the designer's skill to get his positions insured a fraction of the cost. Understanding non-linearity is key here. I see that you are thinking linearly (most people do).

Another question: does the insurance only cover price volatility, or all risks, whether it be weather, fraud, etc?

In your example, you prepay for supply, what if the farmer takes the money and absconds? What if the farm floods? Etc

It is completely upto you as the designer. You bear the responsibility of insuring your foreseen and unforeseen risks. It is useful to acknowledge the fact that there will always be improbable unknowns (aka grey swans) and unknown unknowns (black swans). Your question, and your line of thought about the farmer absconding is a thing of beauty. This is precisely the kind of thinking that you need for starters.

Let me up the game and pose an even more demanding question: Since the whole scenario is set in a village. What if the entire village burns down, and the farmer, the rich dude, you, and the insurance company burn down altogether? What then? It is your responsibility to handle foreseen and unforeseen risks (you define your risks), and by bearing this responsibility, you contend to earn money. You create value by bearing this responsibility.

 

[Ronak]

Are you using a combination of on market and off market instruments to achieve this money system?

 

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[thewalkingtemple]

Are you using a combination of on market and off market instruments to achieve this money system?

No, not yet. Ideally, I would like to do this, but I'm simply not big enough. It will have to wait for the future.

Having said that, it is pretty inexpensive to simulate similar effects by diversified existence in discrete markets, being markets themselves, and not being available in any market all at the same time.

 

[WowVisible]

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):


View attachment 35593

View attachment 35594

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):

View attachment 35595​

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.
View attachment 35596

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):

View attachment 35597

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:
View attachment 35598
View attachment 35599

View attachment 35600

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.

Do you have some results to show? I hope you can share screenshots.

 

[Ing]

The fastlane approach here is to generate large income from business activities so that they do not have to be a genius in investment, to have high recurring investment income (even with average investment return).

Unless someone is aspiring to be a professional money manager, in which they have the scalability of managing other people’s money, devoting a lot of time to “financial alchemy” according to my observation, is almost always a super waste of time and energy.

I know this does not sound like music to your ears, but I have seen too many men sucked into this.

I think the fastline approach is in writing that dammed book, selling it beneeth a payed email list!

 

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[Ing]

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):


View attachment 35593

View attachment 35594

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):

View attachment 35595​

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.
View attachment 35596

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):

View attachment 35597

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:
View attachment 35598
View attachment 35599

View attachment 35600

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.

very interesting write up!
I did similar 30 years ago, but idiotic I didn’t follow money managing in any way for a decade and than made your first mistake CP1 for next 10 years.

 

[thewalkingtemple]

Do you have some results to show? I hope you can share screenshots.

I'm trying to build a company out of this, so I've currently completely closed down Alpha (still continuing to develop it).
However, in the OP, you'll find a beta portfolio. Take that portfolio, and run the numbers over whichever time period you'd prefer. The data is available on the web. Having said that, the purpose of this post is not to give anyone advice, instead to share knowledge.

very interesting write up!
I did similar 30 years ago, but idiotic I didn’t follow money managing in any way for a decade and than made your first mistake CP1 for next 10 years.

Glad you liked it. I can imagine that you would have had a significant advantage 30 years ago, with all the relative scarcity of information back then.
Could you clarify what you mean by "your first mistake CP1 for next 10 years" ?
I couldn't understand it.

 

[Tom H.]

Good to see you post @thewalkingtemple I was thinking yesterday to come bump this thread to check on your progress.

What are the plans for getting a company started?

 

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[thewalkingtemple]

Good to see you post @thewalkingtemple I was thinking yesterday to come bump this thread to check on your progress.

What are the plans for getting a company started?

Thanks for your interest, @Tom H.

I'm going through the tough and boring phase of setting up the paper-work and shit in order to set this thing up as a company. It's no fun; there's no glamour about it, but it has to be done. One of the most difficult things that I am faced with is working with competitive professionals who don't cost a fortune - case in point: tax consultant. And the german structure isn't the most friendly for the kind of company I'm trying to setup.

The govt. changed a few tax laws regarding trading that make my system handicapped when I operate as a retail client. Having said that, I've worked out some other means of still executing, which is far from optimal, but better than nothing.

If there's anyone from Germany here who has setup a company before, I'd be most grateful for some guidance.

Also, just a question out in the open to anyone reading this: are there any quants on this forum?

 

[thewalkingtemple]

Update:

One of my very first posts on reddit attracted some attention, and led to an interesting technical discussion.
If anyone's interested, I'm leaving the link here:

https://www.reddit.com/r/options/comments/mw8hmp View: https://www.reddit.com/r/options/comments/mw8hmp/black_swan_strategy_short_gamma_on_the_whole/


P.S.
I'm not so active these days, as I'm researching / working full time on independent and original solutions including the topic of this thread. So I may not be able to take part in any discussion that follows. However, I will try to.

Cheers!

 

[Guest-5ty5s4]

Thanks for your interest, @Tom H.

I'm going through the tough and boring phase of setting up the paper-work and shit in order to set this thing up as a company. It's no fun; there's no glamour about it, but it has to be done. One of the most difficult things that I am faced with is working with competitive professionals who don't cost a fortune - case in point: tax consultant. And the german structure isn't the most friendly for the kind of company I'm trying to setup.

The govt. changed a few tax laws regarding trading that make my system handicapped when I operate as a retail client. Having said that, I've worked out some other means of still executing, which is far from optimal, but better than nothing.

If there's anyone from Germany here who has setup a company before, I'd be most grateful for some guidance.

Also, just a question out in the open to anyone reading this: are there any quants on this forum?

When you say you are trying to start a company with this, do you mean a money management company? An investment fund?

 

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[thewalkingtemple]

When you say you are trying to start a company with this, do you mean a money management company? An investment fund?

It is a investment firm, and works like a hedge fund in its operation, but it's not open to external funding / investment for now.

 

[Guest-5ty5s4]

It is a investment firm, and works like a hedge fund in its operation, but it's not open to external funding / investment for now.

What's the benefit of creating such a company if you don't get any outside investment?

Couldn't you do all the same stuff in your own account then?

Or you are planning to later get investors?