World Beta Blog

Mebane, with all the recent concern that the SEC will restrict or limit trading of commodity futures by commodity ETFs, what do you recommend doing with the commodity portion of the 5-asset-class allocation model?

"If you do not manage the risk, eventually they will carry you out." - Larry Hite (via Market Wizards)

"You can't spend losses" - a very wise trader

"To make money they didn't have and didn't need they risked what they did have and did need, and that's just foolish just plain foolish..." -Warren Buffett on Long Term Capital Management principals bankrupting themselves

"Several decades were to pass, and many vicissitudes to be undergone, before I could master the simplest and most important of all rules of material welfare: The most brilliant financial strategy consists of
living well within one's means." - Ben Graham

"If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has." - John Maynard Keynes

"It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine." - John Stumpf CEO Wells Fargo commenting on recent lending practices c. 2008

"We have the right, as individuals, to give away as much of our own money as we please in charity; but as members of Congress we have no right so to appropriate a dollar of the public money." --Congressman Davy Crockett

"Statistics are like bikinis. They show a lot, but never everything." - Lou Piniella, Cubs Manager

"When the stock market crashed, Franklin Roosevelt got on the television and didn't just talk about the princes of greed. He said, 'look, heres what happened'." -- VP candidate Joe Biden referring to the 1929 stock market crash... except TV broadcasting wasn't available in 1929 and FDR was president from 1933-1945...

"At the center of this crisis was a bubble in risk-taking. The risk premiums dropped off the cosmic scale, the lowest ever recorded. On our seven-year forecast data, we reckoned that between June of '06 and
June of '07, people were actually paying for the privilege of taking risk." -- Jeremy Grantham, Chairman, GMO after/during crash of 2008

"Do you think we will learn anything from all of this turmoil?

We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent." -- Jeremy Grantham, Chairman, GMO
after/during crash of 2008

"Try to bear in mind that the U.S. has committed itself to almost $13 trillion just to battle this financial crisis alone, and that figure is 50% more than the government has spent on every single project,
war, or undertaking since the country's inception, in real dollars -- combined." -- Paco Ahlgren on 5/2009 (financial analyst and author)

"Everyone is a long-term investor until a bear market hits." -- Steve Forbes

"The problem with socialism is that you eventually run out of other people's money. " — Margaret Thatcher

"Everyone has a plan 'till they get punched in the mouth." -- Mike Tyson

Hi,
• "The key to trading success is emotional discipline. If intelligence were the key, there would be a lot more people making money trading... I know this will sound like a cliche, but the single most important reason that people lose money in the financial markets is that they don't cut their losses short." Victor Sperandeo
• "Don't focus on making money; focus on protecting what you have." Paul Tudor Jones
• beginners think about how much they can make, professionals think about how much they can lose. Vhehn posted on elitetrading.com
• "The market will decide how much profit to give you. Only you can decide how much to limit your loss." Linda Bradford Raschke

Don

rsmlp,
I completely agree with you.
If you read Ralph Vince and understand his concepts of Optimal F (which I heartedly recommend to everybody) you will realise that being able to withstand large drawdowns is key to excellent performance (but not the only one!).
In fact, as long as you dont overtrade, you should aim/prepare yourself to large drawdowns as, if the strategy is succesful, the better return will be obtained

Trend Following is one of the most succesful strategies and large drawdowns are typical..

This is obviously not taking into account standard, widespread but quite misleading indicators such as Sharpe ratio (see Mandelbrot as to why they are flawed: Volatility != Risk)

A) BRK was down over 40% peak to trough

B) Commodities were down 65% peak to trough and I doubt that rogers ever sold any during the DD.

C) Jesse Livermore ended up commiting suicide after losing his fortune for the umpteenth time.

The truth is you can't avoid risk and even a model that has stop loss provisions can lose plenty through a few whipsaw trades.

Don't forget Robertson shuttering his funds too!

Meb--
When you get a chance, I'd be quite interested in what this means in real trading tactics.
Is it as simple as setting a priori stop loss points, loose stops, tight stops, etc.?

Obviously your TAA system has a nifty built in way of doing this--simply exit after a month if price goes against you and penetrates the 10 MMA. Is that it? Is it that simple? Or is there something else the Robertson's do that mere mortals don't see?

I think it is a focus on risk reward characteristics of a trade or strategy.

"I am more concerned about the return OF my money than the return ON my money". --Mark Twain, mistakenly attributed to Will Rogers.