The Leverage Space Trading Model E-Book

Ralph Vince

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Trading Series
• Sprache: Englisch

Seitenzahl: 256

Veröffentlichungsjahr: 2009

Beschreibung

The cornerstone of money management and portfolio optimization techniques has remained the same throughout history: maximize gains and minimize risk. Yet, asserts Ralph Vince, the widely accepted approaches of combining assets into a portfolio and determining their relative quantities are wrong--and will cost you. They illuminate nothing, he says, aside from providing the illusion of safety through diversification. Although numerous Nobel Prizes have been awarded based on some of those widely accepted principles, their popular acceptance does not constitute real-world validation. What has been needed is a viable alternative to directly address these real-world dictates. In The Leverage Space Trading Model, Vince offers a groundbreaking contribution to the literature that builds on a lifetime of expert analysis to deliver not only a superior new portfolio model, but takes the entire discipline of portfolio management to a new level. In this book, Vince--who has made many important intellectual contributions to the field for over two decades--departs radically from informed orthodoxy to present an entirely new approach to portfolio management. At its core, The Leverage Space Trading Model basically tells how resources should be combined to maximize safety and profitability given the dictates of the real world. But, as the author points out, given the complex and seemingly pathological character of human desires, we are presented with a fascinating puzzle. Research has found that human beings do not primarily want to maximize gains--our psychological makeup is such that we instead tend to possess seemingly more complex desires. If the models don't work, if we are ultimately unable to satisfy our more complex desires, what's the alternative? As Vince shows, the answer is to utilize the Leverage Space Model as a "framework" to achieve the specific ends a trader or portfolio manager seeks. The author's new allocation paradigm avoids the troubles that come with mean variance models--which most models are--and quantifies drawdowns to achieve a growth-optimal portfolio within a given drawdown constraint, in a manner that satisfies these seemingly pathological human desires. And for those who don't wish to get involved with the mathematics, Vince has presented the text in a manner of two congruent, simultaneous channels, with math and without. Most simply put, this book will change how you think about money management and portfolio allocations.

Leseprobe

Table of Contents

Title Page

Copyright Page

Praise

Preface

Introduction

PART I - The Single Component Case: Optimal f

CHAPTER 1 - The General History of Geometric Mean Maximization

CHAPTER 2 - The Ineluctable Coordinates

CHAPTER 3 - The Nature of the Curve

MATHEMATICAL ADDENDUM TO PART I: THE SINGLE COMPONENT CASE

PART II - The Multiple Component Case: The Leverage Space Portfolio Model

CHAPTER 4 - Multiple, Simultaneous f—“Leverage Space”

CHAPTER 5 - Risk Metrics in Leverage Space and Drawdown

MATHEMATICAL ADDENDUM TO PART II: THE MULTIPLE COMPONENT CASE

PART III - The Leverage Space Praxis

CHAPTER 6 - A Framework to Satisfy Both Economic Theory and Portfolio Managers

CHAPTER 7 - Maximizing the Probability of Profit

ALGORITHM AND FORMULAS

PROBABILITY OF PROFIT AS A CONSTRAINT IN MAXIMIZING PROFIT

FORMULA PLANS

APPLICATION TO NEGATIVE EXPECTATIONS

CONCLUSION

Bibliography

Index

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Copyright © 2009 by Ralph Vince. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Vince, Ralph, 1958- The leverage space trading model : reconciling portfolio management strategies and economic theory / Ralph Vince.

p. cm. - (Wiley trading series)

Includes bibliographical references and index.

eISBN : 978-0-470-49602-2

1. Portfolio management. 2. Investment analysis. 3. Investments. I. Title.

HG4529.5.V558 2209

332.601-dc22 2009000839

He that will not apply new remedies must expect new evils;for time is the greatest innovator.

—Francis Bacon

Preface

I can explain ...

This material began as a panoply of notes for a series of talks I gave in late 2007 and in 2008, after the publication of The Handbook of Portfolio Mathematics.

In those talks, I spoke of how there exists a plethora of market analysis, selection and timing techniques including charts and fundamental analysis, trading systems, Elliot waves, and on and on—all sorts of models and methods, technical and otherwise, to assist in timing and selection.

You wouldn’t initiate a trade without using the analysis you specialize in, but there is another world, a world of quantity, a world “out there someplace,” which has either been dark and unknown or, at best, fraught with heuristics. You will begin to understand this as I show you how those heuristics have evolved and are, very often, just plain wrong. Numerous Nobel Prizes have been awarded based on some of those widely accepted principles. I am referring specifically to the contemporary techniques of combining assets into a portfolio and determining their relative quantities. These widely accepted approaches, however, are wrong and will get you into trouble. I will show you how and why that is. They illuminate nothing, aside from providing the illusion of safety through diversification. In the netherworld of quantity, those flawed techniques still leave us in the dark.

There are still fund managers out there who use those atavistic techniques. They stumble blindly along the dim, twisted pathways of that netherworld. This is akin to trading without your charts, systems, or other analytical tools. Yet most of the world does just that. (See Figure P.1.)

And whether you acknowledge it or not, it is at work on you, just as gravity is at work on you.

Pursuing my passion for this material, I found there is an entire domain that I have sought to catalogue, regarding quantity, which is just as important as the discipline of timing and selection. This other area is shrouded in darkness and mystery, absent a framework or even a coordinate system. Once I could apply a viable framework, I found this dark netherworld alive with fascinating phenomena and bubbling with geometrical relationships. Most importantly, the effects of our actions regarding quantity decisions were illuminated.

FIGURE P.1 Market Analysis and Position Sizing (Both Equally Necessary)

I have encountered numerous frustrations while trying to make this point since the publication of Portfolio Management Formulas in 1990: People are lazy. They want a card they can put into a bank machine and get money. Very few want to put forth the mental effort to think, or to endure the necessary psychological pain to think outside of their comfortable, self-imposed boxes. They remain trapped within their suffocating, limited mental notions of how things should operate. Incidentally, I do not claim immunity from this.

When I alluded to quantity as the “other, necessary half” of trading, I was being overly generous, even apologetic about it. After all, some of the members of my audiences were revered market technicians and notable panjandrums. Indeed, I believe that quantity is nearly 100 percent of the matter, not merely half, and I submit that you are perhaps better off to disregard your old means of analysis, timing, and selection altogether.

Yes, I said 100 percent.

On Saturday, 26 January 2008, I was having lunch in the shadow of Tokyo Tower with Hiroyuki Narita, Takaaki Sera, and Masaki Nagasawa. Hiro stirred the conversation with something I had only marginally had bubbling in my head for the past few years.

He said something, almost in passing, about what he really needed as a trader. It knocked me over. I knew, suddenly, instantly, that what he was (seemingly rhetorically) asking for is what all traders need, that it is something that no one has really addressed, and that the answer has likely been floating in the ether all around us. I knew at that moment that if I thought about this, got my arms around it, it would fulminate into something that would change how I viewed everything in this discipline which I had been obsessed with for decades.

In the following days, I could not stop thinking about this. Those guys in Tokyo didn’t have to do a hard sell on me that day. I knew they were right, and that everything I had worked on and had compulsively stored in a corner of my mind for decades was (even more so) just a mere framework upon which to construct what was really needed.

I might have been content to stay holed up in my little fort along the Chagrin River, but an entirely new thread was beginning to reveal itself.

On the flight home, in the darkness of the plane, unable to sleep, in the margins of the book I was reading, I began working on exactly this.

That’s where this book is going.

RALPH VINCE Selby Library, SarasotaAugust 2008

Introduction

This is a storybook, not a textbook. It is the story of ideas that go back roughly three centuries, and how they have, and continue, to change. It is the story of how resources should be combined, when confronted with one or more prospects of uncertain outcome, where the amount of such resources you will have for the next prospect of uncertain outcome is dependent on what occurs with this outcome. In other words, your resources are not replenished from outside.

It is a story that ultimately must answer the question, “What are you looking to accomplish at the end of this process, and how do you plan to implement it?” The answer to this question is vitally important because it dictates what kinds of actions we should take. Given the complex and seemingly pathological character of human desires, we are presented with a fascinating puzzle within a story that has some interesting twists and turns, one of which is about to take place.

There are some who might protest, “Some of this was published earlier!” They would certainly be correct. A lot of the material herein presents concepts that I have previously discussed. However, they are necessary parts of the thread of this story and are provided not only for that reason but also in consideration of those readers who are not familiar with these concepts. Those who familiar with the past concepts, peppered throughout Parts I and II of this story, can gloss over them as we build with them in Part III.