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Book Preview – Chapter 6

Posted in Big Ideas

Here is this Friday’s installment of Avoiding Investment Strategy Flame-outs, a short book we are previewing for subscribers. Chapter previews will continue for the next three Fridays.

Chapter 6: “Modeling at the Portfolio Level”

“Evaluating strategies based only on trade-level performance, as often presented by trading advisory (“education”) services, may mislead. Some strategies concentrate opportunities, at times identifying more trades than can reasonably be addressed with a limited amount of capital and at other times identifying no trades.

“Moreover, evaluating strategies based only on a list of closed trades, with the performance of contemporaneous open trades unknown, may mislead because open trades may be losers that at times absorb all the capital and preclude further trading.

“Modeling profitability at the portfolio level in such cases may be complicated and tedious, but is essential for understanding effects of a trading strategy on wealth. Portfolio-level modeling means carefully accounting for the allocations of all capital in a portfolio at all decision points in time series.”

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