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insights www.tradersonline-mag.com 04.2014 equity curves of thousands of tests run on samples of Well the truth is, that never before in history have we portfolios starting out with 13 randomly chosen stocks. been more able or have we had more tools at our disposal Systematically concentrating funds in the winners/ to fine-tune and isolate risk than at present. Going in survivors, seems to be the better way. Which makes a depth through all the tools and techniques available great case for us warning against mindless diversification, would take at least another article and probably a whole i.e. without thinking things through first. Apart from book. So let me just give an example in the above case providing a better end result on average, the return of of having, on margin, 180 per cent of one’s portfolio into the pruning portfolio stays on top of the diversified one stock. First of all, no one in his right mind would start portfolio all along the way with a difference up to 2.36 per out any position with 180 per cent of his/her total capital. cent, including transaction costs. And that’s even after Such a position would only make its appearance after realising that in this setup the pruning portfolio has to scaling in a stock that is appreciating. The scaling indeed make a lot of artificial costs just to un-spread itself. In accelerates the profits from the appreciation. reality a concentrated portfolio doesn’t have to start from So to begin with the position would already have to a diversified one. Instead of having 13 round-trip costs show quite a nice profit as the current stock price will as in the experiment, in reality, a concentrated portfolio probably hold quite a distance from the average entry price. could be built up nicely in three to four entries and only This would provide a first margin of safety. Of course if we one exit. That leaves room for up to four dips in the water don’t want to indulge in ‘mental accounting’, paper profits (eight round-trips) and cutting the loss short, before need to be cherished as much as initial capital or margined starting to generate higher round-trip transaction costs capital. A stop can take us already a long way but only so than the homogenous diversified portfolio would leave far. A simple technique for coping with this is to extract you with. cash from the position by actually selling part or whole of the position, freeing up most of the cash and securing But, But … most of the profits, while exchanging a very small part of it Isn’t that carelessly dangerous After all, spreading did for call options (in the case of a former long position). lower the average risk, right Can you even imagine So instead of holding, say, 1000 shares worth $32.37 a holding 180 per cent of your portfolio (that also implies piece, one could sell the shares, cashing them in for $32,370 the use of margin already) in one position No stop will while buying ten long to medium-term call contracts for protect you if it opens 40 per cent lower on after-close lets say $3000 or only 9.27 per cent of the original position, news from the previous day. cutting the downside to a fraction of what it was. No more than the option premium can be lost form there on. It’s like having a stop at F2) Homogenous Diversified Portfolio vs Concentrated Pruning 9.27 per cent without having to worry about the whole thing gapping down. Next to cash extraction you can also use, what we call, volume extraction, trying to buy shares for the same amount at a lower price after selling on a new base breakout. By buying for an equal amount at a lower price, one can buy more shares without investing more capital in the position. Of course this will take more time to manage the portfolio. So to take this home, instead of using diversification, pretty much the only thing available in earlier An average portfolio of 13 randomly chosen stocks is compared to its concentrated counterpart where the cash freed up by positions getting stopped out are divided amongst the survivors. The grey lines show the days to minimise risk, we should average returns from each individual (averaged stock) up until the point where they got stopped out. The black start using new ways of achieving lines give the total return of both alternative portfolios. this, without keeping on paying the Source: www.chartmill.com negative consequences it brings. « 20
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Page 1 and 2: Interview: Perry Kaufman - Masterin
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Page 5 and 6: TABLE OF CONTENTS PEOPLE 68 The Pro
Page 7 and 8: ADvErTOriAL Unlock your trading pot
Page 9 and 10: Coverstory That’s exactly what ha
Page 11 and 12: Coverstory revealing the line-plott
Page 13 and 14: insights - TRADERS´ Talk Listed de
Page 15 and 16: insights it’s even cheaper now an
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Page 24 and 25: iNSiGhTS - NEWS www.tradersonline-m
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Page 35 and 36: TOOLS In the first chapter there is
Page 37 and 38: tools • Commission • Entry and
Page 39 and 40: Enjoy free money £100,000 of it Ta
Page 41 and 42: strategies markets, Relative Streng
Page 43 and 44: strategies It should also be noted
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