Originally Posted by boden36
It seems to me that Certanza is using theory to show that spread trading as we do it does not work, and we are saying that we have a track record of actually doing it successfully and for significantly reliable profit.
The inference here is that unless we employ an expert like Certanza, then we are not going to make a regular profit. We have found that inference unfounded in real world experience.
I've been enjoying this thread and greatly appreciate Certeza's real-life risk expectancy examples, but I'm a bit baffled. We've all been reading the same posts I assume?
Why is it so hard to understand that Certeza is simply demonstrating that risk should be demonstrated in an apples to apples basis. Not for the SEC, not for blowing smoke etc... but to keep trading strategies truly comparable?
Perhaps an extreme illustration would help. Let's pretend for a moment we are back in the early 80's in Miami
. There are three of us sitting down to a few cocktails and a chat on investing.
Person A - Grandpa has no tolerance for risk. He's into capital preservation
and not capital appreciation
at this stage in his life. Grandpa happily places his life's earnings into Treasury Bonds. Grandpa sleeps well knowing that no matter what happens short of a nuclear war he'll earn ~12%-15% with virtually no risk to his hard-earned capital.
Person B - Farmer Bob is middle aged and earns his keep as a farmer. Bob knows that most years he invests ~$100k in seeding, tending, and harvesting his crops each year, however he typically earns ~$200k for his efforts at the close of each year. Sure now and then Bob's crops return a fraction of the $100k invested, sometimes as low as say $25k, but hey, locusts happen?
Person C - Drug Smuggler Slick Willy is young and willing to take great risks. He knows that a kilo of cocaine purchased in S. America for $500 will net him 40x his money ($20k) back in Miami
Slick Willy eventually gets busted and not only loses some of his capital, but also his freedom. Luckily Slick Willy has a good Attorney on retainer and gets sentenced to just 5 years in a plea-bargain. Slick Willy will be out of jail in just a few years (good behavior) and sees it as a reasonable level of risk for the earned reward which he has wisely stashed for the most part.
Certeza is simply clarifying that risk needs to be fairly evaluated for any investment, and expected returns are based on the level of risk you are willing to take.
Taking Slick Wily risks for Farmer Bob level returns is not a great investment strategy.
If you are going to take Slick Willy risks, at least earn Slick Willy returns.
(I'm not trying to imply by any stretch that Moore's system is at all illegal. Just trying to exaggerate risk vs. reward for illustration purposes only.)
Speaking of the early 1980's, as some of you know the classic 1983 movie
Trading Places was based on a bet between Richard Dennis and his friend William Ekhardt. Dennis believed anyone could be taught to trade
, whereas Ekhardt believed he had an innate ability that couldn't be taught.
Dennis placed an ad in the Wall Street Journal looking for newbies he could train to test his theory and a bet made with Ekhardt. These recruits (students) became known as his "turtles".
The outcome was Dennis was proven correct and there were some valuable lessons learned from his turtles suitable for anyone to follow:
1) Anyone willing and intelligent (he selected people who excelled in their respective fields to be his turtles) *can* be taught to trade successfully by following a general system
2) If you have a $10k account, you should never-ever put more than $2,500 at risk at any given time.
There were plenty more lessons, but the key takeaway for the sake of our discussion is number two as again it relates to risk vs reward. Note the cap of a 25% drawdown? Risk is risky and should be rewarded accordingly, but never taken on without fully understanding the... RISK
Dennis famously turned an initial $5k into over $100 million. He's obviously fully on the risk-taking bandwagon, but even he has a level of risk tolerance he's not willing to exceed, and that level of risk (25%) is FAR less than Moore's system as touted!
have been written on or even by the Turtles if you're interested - great reads!)