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The post by Rick from Tokyo gave me pause to think and I believe I understand
my own trading philosophy a little better now. Sharing my observations with
the list is cheaper than psycho-therapy and I hope the general nature of my
posts is not an irritant. Further, I hope my posts are helpful to others who
like me are trying to refine their own trading philosophy.
In an earlier post, I expressed a preference for market segments that have a
higher standard deviation of return than a comparable segment with a lower
standard deviation. This is different from the standard deviation of returns
that I desire for my own portfolio. For my portfolio, I desire consistent
positive returns that do not cause me to loose sleep. I use an active
management strategy that includes stop loss orders to limit the minus part of
the standard deviation of return for my portfolio. Standard deviation of
return is another way to say risk.
I prefer market segments with high standard deviations of return because,
perhaps incorrectly, I assume that a segment with a high standard deviation
will include stocks with high betas. That is, a segment that includes stocks
which move proportionally more than the overall market when the market moves
in a given direction. By focusing on stocks with high betas, I hope to make
proportionally more from a given move in the market.
In his post, Rick correctly pointed out that the standard deviation of
O'Shaughnessy's portfolios would not be comparable to an individual investor's
portfolio because the number of stocks included in each would be dissimilar.
I do not try to create a portfolio that mimics O'Shaughnessy's passively
managed portfolios. Rather, I use his criteria to identify a market segment
that is likely to outperform the overall market, select stocks from from that
segment using technical analysis and then actively manage my portfolio to
limit my risk.
Which brings me to a comparison of gambling with speculation. In my mind,
gambling is a game played against poorly understood or unfavorable odds.
Speculation on the otherhand, according to my narrow definition, is a game
trying to take advantage of intermediate term swings in a given market with
the object of capital gains. According to my narrow definition, traders play
short term swings, speculators play the intermediate term and investors play
the major swings. Traders, speculators and investors can all be gamblers. I
try to understand the odds and only speculate when the odds are in my favor.
Of course, I could always do a better job, but, that is what makes the markets
so challenging and rewarding.
Thanks for listening. I feel better now.
Dan,
Pocatello, ID, USA
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