Dear TradeStops Subscriber,
Sometimes the biggest secrets are hidden right out in the open. That’s certainly the case with investing.
The financial markets are so full of smoke and mirrors (many of which were designed to part investors and their money) that it’s easy to hide real value out in the open. Most people will never notice it. And if you cover your open secret with the slightest whiff of mathematics you’re secret is safe from nearly everyone.
Take, for example, my two volatility-based investment tools – volatility trailing stops and volatility position sizing. These tools are easy to use, available to all subscribers and are extremely powerful.
Let me show you a few examples of what I mean.
I recently was able to analyze the performance of a couple of anonymous individual investors. Each of these investors had five years or more of trade history and a substantial amount of buy and sell transactions over the history of the portfolio.
VQ is my acronym for my proprietary Volatility Quotient – the most important number that I believe investors need to know about any of their investments. It tells you how much uncertainty or noise there is in your stocks. More conservative stocks like J&J have lower VQs (currently 11.3%) while more speculative / less certain stocks like Tesla have higher VQs (currently 42.2%). I’ve written about VQ extensively before, most recently here.
In the following studies I used VQ both as the basis of a trailing stop strategy as well as for position sizing. For the trailing stop I set the initial stop VQ% below the entry price. For position sizing, I took the available capital in each portfolio and distributed it across the investments so that more capital was in the less risky positions and less capital was in the more risky positions.
These VQ based tools are both available in every version of TradeStops.
I’ll let the results speak for themselves.
Investor 1 could have improved overall returns from 98% to 132%. Investor 2 could have improved overall returns from 142% to 206%. Those are both significant improvements!
First of all, there is the all too common story of not staying with our winners. There are numerous examples of these investors prematurely exiting investments while the VQ trailing stop strategy would have stayed in the investment for big gains.
Here are a half dozen examples across both portfolios illustrating what is, in my opinion, the single biggest reason that most investors fail to realize their full potential.
The second biggest contributor to underperformance in these portfolios is not knowing when to sell a stock that is going down.
This first example of an unnecessary loss is particularly painful because the investor actually had paper-profits of over 100% before finally throwing in the towel for a loss of over 50%. Ouch! The VQ trailing stop strategy, however, exited with gains of over 50%.
While it’s easy to visually illustrate how a VQ trailing stop strategy can impact performance, it’s not quite as easy to show the impact of VQ based position sizing on individual trades. In the charts below, however, I’ve added a blue line which shows how much improvement was added to each portfolio just by using VQ position sizing.
To the growth of your wealth,
Richard M. Smith, PhD