This is a wonderful opinion article on stock investment by the derivatives tycoon "Assassin Night Walk" - "How to Manage Funds". But it is also applicable to the crypto industry, especially for players who are new to crypto investment.
I used to be an exotic derivatives trader.
On the trading floor, there is a series of contempt chains: those who work in fixed income look down on those who work in equity, those who work in derivatives look down on those who work in cash equity, and those who work in exotic options look down on those who work in flow options.
Our group is at the top of the contempt chain, the most complicated. The quants we recruit are all PhDs who used to study string theory. They are all extremely smart. The guy next to me ranked first in the American high school chess competition when he was in high school.
The first question often asked to interviewers is: Please calculate the standard deviation of a dice in your head.
When they first entered, everyone thought they were the chosen ones. People who first entered liked to show off their skills.
Later I realized that this was a stupid thing to do. After studying the technology for a few years, I thought I understood it all, but it had nothing to do with making money.
The most technically proficient people, those with PhDs in physics and mathematics from Ivy League schools, are all doing quant work and modeling, not trading.
Traders are also divided into high and low levels, and everyone is extremely smart. A big trader's book has to support dozens or even hundreds of people.
Where is the difference?
After a long time, I gradually realized that even if you have mastered the skills, making money ultimately depends on luck.
For a period of time, I don’t know what happened, but I made money like a ton of money falling from the sky.
For a period of time, I lost money no matter what I did. I cried late at night and was so anxious that I couldn't sleep every night.
So superstitious that I put a lucky cat on the Bloomberg terminal.
You know, many successful people are superstitious and they all look at Feng Shui and calculate their fortune for the year.
There are many things that you should do, and you have done your best.
The rest, which cannot be explained, can only be explained by the sky.
It’s a bit depressing to talk about this, and it’s hard for people who haven’t experienced it to understand.
I was also skeptical for a while. Since it depends on luck, it shouldn't matter who you work for. Why do investment banks spend so much money to recruit so many smart people?
Later, I gradually realized that a trader’s biggest task is to control risks.
Controlling risks requires extremely strong psychological qualities.
No one has strong psychological qualities on the first day. They all have to go through several cycles, suffer losses, cry bitterly, and suffer psychological torture. Many people have also experienced depression and taken medicine. If they can get better, they will be reborn like a phoenix.
Traders all love gambling, especially Texas Hold'em.
Because whether it’s stock trading, investing, or gambling, it’s all about probability.
Options, in particular, are almost the same as Texas Hold'em: it all depends on how much chips you put down (premium) and what the possible return is (expected payment).
The most valuable thing I have learned from all these years of training is how to control risks.
You can't take it too far.
Today I will talk about several basic methods, both those that work and those that don’t.
1. All in
Never allin.
You can't afford the loss, and no one can afford it.
If it falls 20%, it will have to rise 25% to recover.
If it falls 50%, it will have to double in value to recover.
If it falls 90%, it will have to rise 900% to come back.
There are many stocks that have fallen by 90% in a short period of time. Can you find a few that have risen by 900%?
Not to mention, the psychological torture of losing money is much greater than the psychological happiness of making money. How many professional fund managers jump off buildings every year?
Never think of getting rich overnight. Don't take the chance.
Those who suffer great losses and some who jump off buildings are pitiful people. There must be something tragic about them, and that is greed.
2. Double down
Some people like to double down. The more they lose, the bigger they bet, hoping to win it all back in one go.
Take betting on size as an example. Transaction costs are not considered.
You put one dollar in, if it comes up big, you win two dollars, if it comes up small, you lose everything.
Someone asked: If I lose, I will put twice as much money next time, won’t I win in the end?
This is a perfect example of a double down.
Let’s change it to stocks: every time the stock price falls, I will increase my holdings, and add more and more. In the end, as long as the stock price goes up a little, I will get my money back and make money, isn’t that right?
Theoretically, yes.
It doesn’t work in actual operation.
Because you ignore that the amount of money you have is limited.
The market will stay irrational longer than you can stay solvent.
Before the market even rises, you’ll lose all your money.
This has also been studied and proven in the academic community, such as Martingale trading strategy. If you are interested, you can go and read it yourself.
3. Swing trading, pairs trading, range trading, etc.
Most people can't do it.
Even if professionals do it, they may not make money.
For Swing and the like, you have to ensure that you have enough time to watch the market. Even if you have time to watch the market, one or two unexpected events, such as earnings, stock splits, or M&A, will immediately wipe out all the profits from the previous swing.
Pairs, it sounds reasonable. Buy a good stock and sell a bad stock in the same industry, and hedge the systematic risk directly. Hedge funds also do this, the basic idea of fundamental equity long short.
But in the past 10 years, equity long and short have not worked. No matter how good your valuation is or how strong your stock picking skills are, it is useless. There are more and more ETFs, the Fed is injecting more and more water, and all stocks are rising and falling together. It is difficult to tell which is good and which is bad.
By the way: This year is a good time for equity long short funds, the situation has finally turned around.
I have mentioned a few strategies that I think don’t work. Now let me talk about what strategies I think work.
I used to be a derivatives trader.
The most wonderful thing in the world is a long call option with the smallest possible premium.
You pay a little money and sit at the table, limited downside, unlimited upside.
But you have to give up something.
Long call, is Long gamma, short Theta.
Gamma is change and uncertainty. Theta is time decay, and time is money.
In my opinion, the most effective investment is to put most of the money in riskless assets and use a small part of the money to seek high returns. The most important thing is to control and adjust the position. Replicate a structure similar to call option.
In fact, if you only look at payoff, long call option, Principal protected notes, Constant ProportionPortfolio Insurance, and Core-satellite investing, they are all similar. They all talk about the same principle, but the methods of controlling and adjusting positions are slightly different.
In detail:
You need to have a bond floor, or riskless asset allocation, that is not easy to lose, for example, 70% of your assets should be placed in safe assets.
The remaining 30% can be used to seek high returns, or even leverage. For example, buying Tesla or participating in PE. This part of the money is intended to be lost, and it will not be painful to lose it all. Of course, it may also increase by 10 times. If it increases, move more to riskless assets.
In short, you should have a clear mind and a method. You can't just buy something without knowing what it is.
If making money was so easy, who would go to work every day?
