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Something I’ve been thinking about lately is timing. By timing I mean the reality that there are windows of opportunity for certain styles of trading/investing/etc (I will call it “speculation”). Probably the best example comes from the equity curves of various systematic trend following strategies (see: https://www.iasg.com/).
Systematic trend following tends to experience long periods of slow decline (or drawdown) followed by short bursts of huge profits. As evidenced by the equity curves of these strategies back ~40 years, it is clear there are windows when the methods work and there are windows when they do not work. While systematic trend probably provides the best example, the reality is that there are good and bad periods for all methods of speculation.
I’ve been reading John Boik’s great book which profiles successful stock traders back to about 1900. As John repeatedly points out, many of these traders spent weeks and months in cash as the market provided no opportunity for their methods.
Another thing I notice is that the Market Wizards books often come out right after an epic window for the methods used by the subjects of the books and returns decrease for a while after. For example, the original Market Wizards had a lot of trend oriented futures traders and came out after the late 1970s/1980s which was a great window for that style of trading. Or notice Stock Market Wizards came out in 2001 shortly after the epic stock market dot com boom. Or Hedge Fund Market Wizards which came out in 2012 which is close to the top of hedge fund prominence in the last ~30 years.
To be clear, I think these books are great and I believe there is a lot of amazing wisdom contained within. My point is that there is an uncontrollable tailwind which allows or disallows for epic returns and these books seem to have a pattern of coming out right after the epic tailwind for a given method. While I think the majority of these traders are truly great, the truth is some element of ideal timing for their method enabled jaw-dropping returns.
In theory, the “optimal” solution to getting epic results involves finding what will work now and doing that then repeating with the changing era. In practice, reality provides scant evidence of this being possible.
In terms of what does seem reasonable within the context of reality, there are two approximate choices:
Picking a method and sticking with it through thick and thin. This will provide for the big ups but also some big downs.
Diversify across methods. This approach tends to have less painful “bust” periods, but the “booms” aren’t as wonderful as they are for those who focus on one method. Highly diversified strategies rarely make headlines for outstanding outcomes.
In terms of which approach is “right”, that depends on the individual and his/her temperament and goals.
Bottom line, nothing works all the time, and the best speculators stick with their method until the good times return.