Time, by Ryan Carlson

January 31, 2007 |

The competitive side of me says push on and make more money (make hay while the sun is shining). Don't change the model (assuming your model works) and press on.     -Scott Brooks

A point Jon Krakauer wrote about in Into Thin Air is that mountain climbers need to haul ass when the weather is good since they have to expect bad weather rolling in at some point and they won't be able to move. In my experience, good markets are infrequent and that's the time to trade with full effort. When the opportunities dry up, it's best to hunker down and spend the day surfing the internet or taking a vacation.

I've seen many traders ease up when the goings good and then be in a desperate position to trade when the market is quiet. Being wrong in both situations always leads to an early exit in the business.

Ryan Maelhorn comments: 

Suppose it is February 1st, which it almost is, and suppose that already, your fund is up 20%.  This is amazing for any given month, and pretty good for the YTD as well.  I don't know what 20% sounds like to everyone here but that is double the drift of the market as a whole, so I will assume for this writing that ending the year up 20% is seen as a pretty good year.  This being the case, how long should one go without making a trade?  Should the fund close up shop for the rest of the year?

How does one measure time as risk?  At some point, it becomes illogical not to make another trade.  We can think of this on the maximum scale — the length of our lives, and realize that if we never make another trade for the rest of our lives, nor any investments, our money would start to be riddled away by various expenses, taxes, and inflation.  What are the concerning factors such as having a good year early, the possible closing of the fund next year and the desire to try for a record year, etc.? What is a good formula to value time as risk?  How many hours of non-involvement in the market should one percentage of our total capital buy?

Russell Sears offers: 

Don't invite me to Vegas … I can't take it, too nerve racking. Everything within me rebels the longer I stay, knowing that the house will grind me down. Every loss hurts twice, once the wallet, second the mind.

However, stocks are different. You have the edge. You are the house and time is on your side.

At the start of 2006, I believe I counted the average return when the economy is not in a recession, and when it is in a recession. The bottom line is that unless you expect a recession, stocks are the place to be. If 2007 gives the average return of no recession, which I think is likely, the S&P would be at 1602, which is very close to what Markman predicted in his MSN money column.

Russell Sears adds: 

At the start of 2006, I believe, I counted the average return when the economy is not in a recession, and when it is in a recession.

This is an excercise that I believe a reader should do by hand, at least I found it a learning experience.

Alan Millhone comments:

My father began building spec homes in 1955 and he always did remodeling and insurance repairs. I began working with his crew when I was 13 during the summers and he always expected more out of me than his regular crew of carpenters. I have had new employees who were amazed that I could tell them how long it should take to move a dump load of gravel or sand by wheelbarrow or how long it takes to tar coat a basement wall and then install a French drainage system around the perimeter of a home. I do have years of experience in construction and I mostly learned from the ground up, and have been around several good contractors over the years and have always listened to what they expounded on 'tricks of the trade.' Owning and renting apartments is another 'niche' in the market that is not for the faint of heart! Most think all you have to do is collect the rent … However, you have maintenance of units, renters who will not pay, and you have to legally evict them. You need to be a little bit of a handyman if you own units, so it is not for everyone. Also, you have to know when to raise rents. I was asked once by a fellow who owns a lot of rentals if I knew the best time to raise rents. He told me at Christmas time! … People cannot afford to move then. Yes, a bit cold harded, but many renters will not give you any breaks. The best time to raise rent is when a unit becomes empty. I always scout around the area and get a feel of what other apartment owners are charging. I would not mind building a few new units, but material prices are currently too high to make the numbers work.

Now in return for my treatise on renting, I expect the spec. list to help educate me a little on investing.

Victor Niederhoffer responds:

You seem to do very well in real estate. For someone who knows the field, I imagine real estate is as good as stocks. Jim Lorie once told me that the main difference between the returns of stocks and real estate was that you could get a very good return from stocks through index funds without knowing anything about it, but in real estate to get that return, you had to know a lot about it.

James Sogi adds:

It's up 20%.

How can one maximize gains? Say if it's up but it does not want to liquidate, could a trailing stop on a portion give a synthetic option? We've discussed them and they are inefficient, but path dependency prevails, so they might have function. Another way to think about the question is say you are up 2% on a trade on your margin, do you liquidate with the idea of buying back lower? Let's assume your risk factor has gone up. Do you lighten up? I think our conclusion last time was to adjust leverage in a market with drift to protect gains. That seems to be the answer to catching further gains, but reducing risk ala. Gardiner Principal: be small when wrong and large when right. The corollary of which is to adjust leverage to the probabilities thereof.



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