Bill Eckhardt, the systems trading pro and former partner of Rich Dennis, once offered:
“…many prospective clients have asked me what’s the most I’ll lose on one trade. I can look up these statistics, but this is not something I would ordinarily pay any attention to. It doesn’t matter how little you lose on an individual trade, but how much you might lose on your whole portfolio. You’re not going to keep a ship afloat just by making sure the leaks are small. The important thing is to limit portfolio risk, the trades will take care of themselves.”
Eckhardt may have lost the bet with Dennis over the Turtles, but it was his hands on instruction that was critical to the Turtles’ development. How do I know? Almost all of the Turtles I talked to were quick to credit Eckhardt. It should also be noted that Eckhardt, not Dennis, has the 15+ year continuous perfomance record going back to the early nineties!
Much more on Eckhardt is in my book.
November 20th, 2009 at 5:49 pm
Where does the expression “balls to the wall”(which describes “Richard Dennis” style well) come from?
http://www.slate.com/id/2136001/
November 20th, 2009 at 6:38 pm
Circa 1984: http://www.youtube.com/watch?v=ph8kGPXOoUw
November 20th, 2009 at 6:40 pm
And that’s one hard bit! (managing portfolio risk that is).
If you want to be a bit more aggressive in your overall position sizing, you should not assume that your total portfolio risk is the sum of all your open trades risk (ie not all trades should be losing at the same time).
And therefore you should take correlation in consideration… The problem is that at time of market “shocks” (ie when you want to be protected on the downside) all markets seem to correlate more than usual - negating the benefite of non correlation offered by diversification..
I am having problems figuring out what strategy to employ but I guess safety should come first and worst case scenario should be considered… (at the expense of bigger profits at “normal” times).
November 23rd, 2009 at 5:07 pm
It’s fascinating to look at holdings of professional hedge fund managers. Some of them have $billions in less than 10 investments and some of them have $billions in over 2000 investments. The higher number of investments is usually the quants.