EVERYTHING IS EVERYTHING
Yesterday I posted a detailed study looking into what I believe is a significant relationship between the post 1987 market and the post 2008 market. The obvious question after posting such a study is what tangible difference to portfolio net exposure will this study make?
Here is the answer: None. I'm going into this week net neutral, with a TZA hedge that is up 18% since I initiated the position on October 10th to a chorus of boos and jeers in reaction to my emerging bearish bias.
Despite the fact that I strongly believe the study I posted yesterday makes this an astoundingly promising risk/reward spot for initiating equity exposure, I am bound by a system of allocation that I follow through thick and thin. I know full well that this system will cost me in some spots. I expect this to be one of those spots. My TZA hedge will probably be exited with a single digit percentage profit instead of the 18% it is currently at. I am perfectly fine with that.
I know that my method of allocation, over the long run, has a positive expected value. That is all I care about. The long term equity curve and return data is my concern. If I were to abandon my methodology based on one study - and worse yet be successful because of that abandonment - then I open Pandora's Box into a realm of volatility that I don't necessarily want to experience.
The studies I post to this site assist with clarity. They allow me to read the playbook of the market, which inevitably helps me pad my performance numbers as a result of foresight.
I can't emphasize enough how important it is for traders of all sizes and methods to have some mechanical method of allocating assets. It protects wealth and allows you peace of mind through even the most treacherous market environments. Additionally, it doesn't allow you, as an investor, to be swayed by every data point that comes your way throughout the day.
Believe in something or you will fall for everything.
