Everyone interested in managing their own money ought to keep an old idiom in mind: if it seems too good to be true, it probably is. Unfortunately, greed is a powerful motivator. It’s tempting to see a new model with an incredible backtest and think this could be the answer.
Experienced investors know that there’s often a drastic change between a model’s backtest and its first live run. You can usually find that point by checking for where the 45-degree angle increase in value drops off into sideways movement (and generally underperforms the market).
This week, we’ll take a deeper dive into how you can minimize these problems using professional techniques.
Review
Our last Stock Exchange revisited a common theme: making stock picks according to a set time frame. Our models suggested finance and software stocks in the short-term, and energy for the long-term.
Let’s turn to this week’s ideas.
This Week— *crickets*
We usually arrive to find the gang happily enjoying their weekly poker night. Instead, all we’ve got are Felix and Oscar’s weekly rankings with a “gone fishin’” note on the counter. Strange behavior.
We decided to give Vince Castelli a call to investigate. Vince is our modeling guru, a brilliant scientist who spent the bulk of his career as a civilian employee for the U.S. Navy. During his time there, he’s had hands-on experience with modeling techniques vital to national security – not something you can find in the classroom. He knows these models better than anyone; after all, he designed them.
Jeff: Vince! What is this about giving everyone the week off?
V: I didn’t give them the week off. There were new no new fresh signals.
J: Is there something wrong with the gang? They encompass five different methods. How can there be no fresh ideas?
V: A key feature of all models is recognizing the best times to trade. When volatility increases trades become less predictable.
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