"spirituality" videos - Part II

Obviously most wealth management firms promote the belief : if you want more returns, you need to be a higher risk taker.
And this is called "conventional wisdom", specially when deciding the profile of investor.
""Risk and Return are related: All investment carries risk. We believe that returns are related to risk. Investors are rewarded with returns on their money because they are willing to take these risks. We also believe that, over the long term, the more risk an investor is willing to take, the greater the potential returns.
"
http://www.aspiringwealth.com/investment-approach/

People say they invest in higher risks because they want more returns.

 

For traders, the belief certainly comes from first hand experience :

- see someone trading big size, and making a good win : automatically one associate the wins to the position size, and not necessarily to other factors ( such as pip size, ...)

- experience a huge win when doing a huge size. One remembers the huge win ( adrenaline) and associates this to the huge size.
The losses are often forgotten, except when these are so huge that one can not forget these!

 

Now the part of the belief of interest is :
-> bigger position size will lead to bigger rewards.

let's gather the facts facts facts

 

proponents of huge sizes :

"Came across this last night, nothing new here other than Goldman screwing up but a good account of what happened:

Soros - new CIO comes in and his first task is to significantly cut exposure to anything he is not 1000% up to speed on. IOC was a huge position at Soros and they had a 100%+ profit in it. CIO decided to sell 2.8 million shares. 2 million of the shares were taken by Goldman Sachs at a $3 discount. Stock was trading at $74 at the time with huge upward momentum. Goldman thought they could dribble out the stock into the market and/or find a buyer for a block. Stupidly, one of the Goldman traders accidentally advertised that Goldman had 2 million shares to sell. Goldman risk management stepped in and forced liquidation of the position over several days. Let's be super clear about this.....Soros does not have any information edge. It was a decision by the new CIO to not inherit a $350 million position in a small cap company that he knows nothing about. The next day, the energy PM at Soros was let go. The remainder of the Soros position was sold after the filing.

Chandler - Chandler is well known in Australia for taking large positions in companies where he feels he has a tremendous advantage and the risk/reward is heavily skewed in his favor. Chandler owns 17% of Energy World and is extremely close to the InterOil story. He built his IOC position immediately ahead of the T2 results, NRC approval and the sell down. He is well connected and has good information. Chatter is Chandler is confident that T2 will be extremely successful and strongly believes NEC approval is coming soon.

So....we had a decision by a new CIO to not hold a stock that he knows nothing about and has a 100%+ profit in.... and we have a wickedly smart self-made multi-billionaire that is extremely tied into all of the players in and around InterOil stepping up and buying 2.5 million shares."

http://shareholdersunite.com/mybb/showthread.php?tid=479

If one wants to make huge bucks, need to play huge bucks!

 

Then obviously huge sizes can lead to huge losses, as amply demonstrated by rogue traders ( losses in sizes of multi millions and billions as well).

So the example of huge size ==> huge profits or huge losses, must mean there is more to huge size as huge risk/ huge reward.

First : these huge sizes can be huge, but well within reasonable money management rule.
Second, may be, the size is not the key factor when it comes to the reward : if someone is using insider trading ( illegal as long term it gets people to leave the market ) then huge size is not a problem.

The issue is really not the size in terms of huge risk for huge reward,
but really about thinking in terms of

the risk of loss and huge reward

 

CALCULATED HUGE risk - knowing well the risk of loss - leads to HUGE rewards.

here again the abbreviation "huge risks leads to huge rewards" was a distortion.
Forgotten is the term calculated!

Looks like these beliefs are passed around like gossips
and on the way, the key facts facts facts are dropped! lol

 

Then there is a case of high risks high rewards questionned,
with examples of low risk, high rewards :

http://www.ft.com/cms/s/0/8510b958-9aad-11e1-9c98-00144feabdc0.html

High risk = high return belief is questioned
By Ruth Sullivan



Challenges to established thinking in the field of finance....
One such case is a recent study* showing that low risk, low volatility stocks outperform their high risk counterparts, defying conventional theory that high risk should mean high reward(/b].


The research, ... reveals low volatility stocks consistently delivered market-beating returns in all of the 21 developed countries they studied between 1990 and 2011. The same findings hold true of 12 emerging markets over a shorter period since 2001.

 

“The fact that low-risk stocks have higher expected returns is a remarkable anomaly. The study is persistent and comprehensive, contradicting the very core of finance,” says Mr Haugen.

Between 1990 and 2011, the least volatile decile of developed nations’ stocks generated average annualised total returns of 8.7 per cent, while the most volatile lost 8.8 per cent a year.
Narrowing the focus to US equities, the research shows the least volatile decile made average returns of 12 per cent over the same period and the most volatile lost 7 per cent.
“In every country of the world, risk and return are upside down,” argues Mr Haugen, a proponent of the theory that equity markets are inefficient.
But not everyone is convinced by the findings. Antti Ilmanen, managing director of AQR Capital Management and author of a book called Expected Returns, suggests a 21-year period of testing is relatively short, pointing to a clutch of existing studies on the topic extending over longer periods, a view shared by Elroy Dimson, finance professor at London Business School.
Mr Dimson points out “the 21 years were a period of disappointment in world equity markets,” with stocks underperforming bonds by 2.4 percentage points a year. He refers to a broader study – Betting Against Beta – by Andrea Frazzini and Lasse Hele Pedersen, in 2011, which looked at equity markets, government and corporate bonds and futures.
There is also healthy debate on the performance of low-risk stocks. “I don’t think you can say low-risk stocks always outperform high-risk stocks. It is too limited a view,” says Fiona Frick, chief executive of Unigestion and chair of the Swiss asset manager’s minimum variance committee.
However she says “it is true in some kinds of environment such as volatile markets where corrections occur but in bull markets high-risk equities tend to outperform [low-risk ones].”
She believes it is important to add other factors on top of a low risk, low volatility approach such as “fundamental information about the company”.
In constructing its minimum variance equity portfolios, Unigestion prefers to look at a wider mix of diversified companies than just low risk, low volatility stocks “like choosing different kinds of players in a football team,” adds Ms Frick.
Mr Ilmanen takes a slightly different view of the research. He believes low-risk stocks outperform high-risk stocks on a risk-adjusted basis “but if you look at [comparative] absolute returns then that is flat,” he says. Nonetheless he sees the appeal of such a strategy. “If you can get at least the same returns as investing in riskier stocks then this is attractive.”
“People get well rewarded for taking small risks, such as buying defensive stocks or extending maturities in the money market, but taking further risks is poorly rewarded in the long run.”
So why are people exposed to high risk/high volatility stocks in the face of such evidence?
According to Mr Haugen “professional investors were persuaded to move trillions of dollars in equity investments into market capitalisation-weighted equity indices such as the S&P 500,” largely because they were influenced by earlier concepts of market efficiency, such as the efficient market hypothesis.
Mr Ilmanen says many traditional long-only fund managers are more concerned about their tracking error versus the benchmark than about total portfolio volatility. “Defensive investments reduce portfolio volatility but raise its tracking error risk, so many managers say ‘no thanks’,” he argues.
This may help to explain why investors are not piling into low-risk stocks although there are signs of a shift. “For the first time in my career I am seeing significant interest in low risk/low volatility stocks, including [from] pension funds,” says Mr Baker.
Consultants are also starting to play a part in driving a shift to low-risk strategies particularly in the UK, Europe and Asia, according to Mr Haugen.
While investors are not piling in yet, it is a good time to benefit before prices are pushed up, argues Mr Baker.
“For returns to fall, there will have to be a very large price adjustment, then low-risk stocks will be on a par with high-risk but this will take 10-20 years,” he says.
Mr Ilmanen also identifies a change of strategy but only among a minority of investors “We do see some investors moving into a low volatility strategy but most still like more active, risky, speculative investments,” he says.
He believes the same stocks will do well again as investors are likely “to behave the same way in the future. It worked in the past 20 years and I feel confident it will work in the next couple of decades”.
However he is quick to point out that low-risk stocks did not fare well in the “junk” rally of 2009. “Nothing works all the time,” he adds.

 

Just checking that my week-end trades are behaving well.
I still need to work better on my var var var calculations.

Interesting that I found 2 times this week-end very small amounts, and I was extatic about it. I just love the idea of finding free money. The amount does not matter, just having the "universe" sending these is very pleasing.

Also, as my sibling was late, I systematically went to do some yoga exercises in a nearby park near a river. It is quiet amazing how the daily routines are really impacting my life in a very natural way.
Soaking up the sun, grass and trees around, and this normally difficult conversation I had to have went very well, as I reacted very well. I could help my sibling psychologically/spirituality.
The work I did because of trading is also impacting positively those around me.


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Some people used to say that if one does the trading well- work on every aspect needed - one will see some very significant positive changes into oneself.