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Candid CEO: Don’t Tweak Your Models! | Aref Karim, Quality Capital Management | #30

1 comment
  • Kumuyi August 12, 2015 at 5:23 pm / Reply

    Stops are an essential risk maemnnaegt tool All hedge funds use them. I can’t dispute the second statement, but the first is bunkum.Once a position has moved against you, you have a larger risk than before, whether it’s a simple short, a long, or a long vs a benchmark position. Your regularly-scheduled updates to your beliefs about the future may continue to have the same target price, in which case you have a higher potential win, but your risk has grown a bit faster than the win. If the first position was optimal, it’s now a bit too big, and should be pared back if your review didn’t find an even stronger opportunity.But paring back a position to its previous risk/reward profile is far different from taking it off the table entirely; for a long equity investor who cares about say, the S&P 500 benchmark, closing it completely would put on a negative bet why would you do that, just because some new info appeared that probably didn’t contradict your earlier insight?The whole idea suggests lousy framing of the trading or investment process problem. How do you make any money if you drive spending most of your time looking in the rear view mirror?

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