I kind of admire Ed Thorp so I am biased with whatever is even related to him. On Twitter he shared a few sets of Q&A. I want to mark it for future reference for myself.
In 1284, while the town of Hamelin was suffering from a rat infestation, a piper dressed in multicoloured clothing appeared, claiming to be a rat-catcher. He promised the mayor a solution to their problem with the rats. The mayor, in turn, promised to pay him for the removal of the rats. The piper accepted and played his pipe to lure the rats into the Weser River, where they all drowned. Despite the piper's success, the mayor reneged on his promise and refused to pay him the full sum even going so far as to blame the piper for bringing the rats himself in an extortion attempt. Enraged, the piper stormed out of the town, vowing to return later to take revenge. On Saint John and Paul's day, while the adults were in church, the piper returned playing his pipe. In so doing, he attracted the town's children. One hundred and thirty children followed him out of town and into a cave and were never seen again. Three children remained behind: one was lame and could not follow quickly...
Time is an illusion - Einstein in Theoretical Physics Time Timing is an illusion - Einstein in Stock Markets* We will straight away jump into what this article will try to answer. Question: Can a retail investor, one who receives salary every month, time the markets to achieve better returns while doing his Systematic Investment Plan? Conditions: The retail salaried person only does Index investing in Sensex. Assume that on Christmas in 1979 he decided to start an SIP in BSE Sensex with an ETF or an Index fund with no expense and no tracking error. Hypothetically assume these instruments existed since then (even if there is an expense we can reduce the returns appropriately). His strategy was Buy and Hold forever. Short Answer: No we cannot time our SIPs. Long Answer: With a lot of effort (which we will not discuss in this post) we can just scrape ahead of the index but the gains are not substantial enough in this long period of 40 years. At least in my opinion. Let us look at s...
I liked Prashanth's recent article on drawdowns. Leaving aside definitions we ponder over few things related to drawdowns in this post. The sun setting at Lake Washington. Photo taken by Deepak from Houghton Beach Park in 2022 There is some form of direct correlation between drawdowns in equity curves and pain suffered by investors/traders. The questions presented below are situations where you have to chose one of the two options which you feel is less painful. Assume this is the equity curve of your portfolio which begins it fall from value N at time t to some lower value at a future time. In one situation recovery is also shown. Simply note down which is a preferred Experience A or B (less painful for you). First try to answer each of these three questions impulsively. Then give each of these questions a few minutes of thought. Also try to recall real drawdowns you have witnessed in your equity curve before. Are you confident about the options you have chosen? Sensex as the e...
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