" You have no neutral thoughts. Everything you see is a result of your thoughts. There is no exception to this fact. Thoughts are not big or little, powerful or weak. They are merely true or false. Those that are true create their own likeness. Those that are false make theirs."
Your Rock of Gibraltar!
Physics has already proven that all material reality is created from energy beginning as thought resonating through people interacting with an environment, formally known as Laws of Correspondence. Since investments are one aspect of material reality, a positive return is literally energy revealing itself at a constructive, consistent frequency. If you need more convincing read A Unified Foundation for Investment Selection, be aware of the reference material that the guide was built upon.
Because energy translated into physical health is easy to understand, I'll document three very short experiences and their relevance to constructive risk management. The logic is consistent.
Power is Always with Nature, Which we are Part of:
Lesson One - I was born with severe allergies resulting from an impaired immune system. For the first 25 years of life, I was given monthly cortisone to repress symptoms. Treatment also included inaccurate dietary guidelines and topical treatment that never worked. At 25 I took myself off artificial treatments, revamped my entire physical system including emotional patterns and relationship dynamics. The symptoms almost immediately cleared. It did take several years to stabilize the immune system.
FACT: For over 20 years treatment was repressing normal reactions to an immune system imbalance. The body was asking for help, however I was conditioned to "trust respected traditional resources outside of myself." Results of traditional treatment created more damage than good because the real cause was never defined and treated.
RELEVANCE: If strategy development or investment analysis is constructed on a weak or inaccurate foundation the imbalance exists and energy that causes loss will remain REPRESSED always in the environment increasing potential risk. If the imbalanced foundation of energy lies within the trader, it will eventually be revealed in their physical environment. Nothing else is possible. This is natural law!
Lesson Two - March 1992 I had back surgery. It was the culmination of a four-year saga of inaccurate diagnosis, erroneously treated, causing added misery. I also had an under-active thyroid and stressed out adrenal glands that were left undiagnosed causing more physical and mental imbalances. I was told by first, second and third opinion that it was emotional and the hip pain was NOT related to my back. Again treatment increased loss, at the physical, mental, emotional and financial levels. Remember that statement.
RELEVANCE: Unknowingly we may be paying advisors to lose our money. Permanent resolution for any problem can only take place by seeking and resolving cause, never treating a symptom. Cause is always at a level of energy that precedes the physical reality of symptoms. When cause is treated symptoms cease to exist.
Lesson Three – A few years ago, the traditional medical profession said I had a disorder that disturbs eating pleasure, which is all I really cared about. Here we have three MD visits at $125.00 each and three different antibiotics at $20.00 each over a time frame of three months. Treatment did nothing for the original misery and added renewed misery, an allergic reaction to antibiotics! Antibiotics also weaken your immune system.
FACT: Another book by Gary Null, immediate dietary changes and within 10 days 85% of the misery disappeared. Needless to say I would rather die of natural causes than look at a traditional MD without being armed with research and a Gary Null book!
RELEVANCE: Traditional risk management and investment analysis has value when applied to a relevant foundation. For people like me, any use of derivatives requires risk management at a level of cause rather than only at the level of material reality.
Lesson Four - I listen to classical music while working. Today there was a commercial for a new laser surgery that removed symptoms of acid reflux. "A simple surgical procedure that offered permanent comfort." A male voice said " I can now eat pizza at 10:00 PM and not suffer because I had surgery!" Amazing huh!
POINT: The Truth that they won’t tell you is FREE - acid reflux is the body's way of asking for help. A natural acid alkaline balance is off. A simple shift in food intake will keep the body happy and eliminate symptoms. The truth is also simple and free when evaluating managed futures.
Managed Futures and Risk Management
Think about the following:
Advisor Evaluation
The foundation for traditional risk analysis and advisor evaluation is calculated using past performance of monthly returns. Monthly returns are derived using either actual cash or nominal assets and include unrealized profit or loss. Actual capital under management, nominal assets and unrealized profit or loss have nothing to do with real capital at risk used to produce a realized rate of return, which is the only relevant issue. Read Why You Benefit from SafeMoneyMetrics
Trading Strategy Development
Modern Portfolio Theory was awarded a Nobel Prize because of the mental integrity that translated into a potential for superior risk management. Pure energy of intention causes mental integrity. People in the derivatives industry from traders to exchanges claim to use Modern Portfolio Theory as their foundation for building diversified trading strategies. To prove "pure intention" which can only cause pure results, we need the following:
- Facts to prove that trading results derived from each market reduce risk and correlate in a manner that also reduces risk of the composite portfolio.
- A strategy was developed with a rational correlation and profit potential between market conditions and strategy. Original ratios should be documented and tracked as time moves forward for each market and the composite. Any one area of weakness that develops can cause imbalances within the composite and should be reevaluated.
- Profitability of each market traded and composite profitability relative to actual capital at risk and quality of individual trades should be developed using ratios and tracked.
- From the Exchanges - in-depth and altered methods of educational marketing to prove they are using wisdom and prudence serving people, rather than manipulating people to increase exchange traded revenues.
If you ask for actual trading results of each market included in an advisors portfolio, sometimes they aren’t available. When available sometimes you can see that they lose money in over 75% of all markets traded and the profit to loss ratio relative to number of profitable trades is frightening. Sometimes they seem to trade "empty noise" or market mediocrity. Mediocrity to me is opportunity that offers $1.00 for a fifty-cent risk with only a 50% probability of succeeding.
A slight shift of relationships in current market conditions can nudge the strategy right over an edge into consistent losses.
Costs and Account Size.
Anyone knows that larger accounts have the appearances of less volatility and low draw downs. Larger accounts also pay larger fees and low volatility attracts institutional money. Advisors are compensated on the accounts notional value even when partially funded.
For example: An advisor trades a diversified portfolio that they say requires $1,000,000 to successfully trade. Under most circumstances, only 3 to 10% of the $1,000,000 is used for trading They accept partial funding of $300,000. Clients pay management fees on the $1,000,000..
POINT: Capital committed to margin at any time on this required $1,000,000 account could be 3% to 10%. Maximum drawdown and daily equity swings on both realized and unrealized account value could also be nominal relative to the required account size. To me, the required account size is imbalanced relative to maximum margin requirements and needs of the strategy.
Trading Discipline and Success
Many advisors blindly follow their "systems" with no daily tracking error at the individual trade and correlation levels. They can’t determine when or why the strategy may be out of balance relative to current market conditions.
These traders, stick to what they built on yesterday's data with blind devotion thinking they are being disciplined quite prepared to maneuver through current and future market conditions. They call it systematic trading.
Are Paradigms of Reality Relevant
Many models and tools used for investment analysis emanated from stock, bond and other areas of financial risk management. They may not be relevant to clearly evaluating managed futures.
For example, unless a pure hedge, a monthly rate of return on any managed futures account is human talent expressed within a marketplace related to a specific time and amount of capital net of costs. If you alter the amount of capital and time you can alter the rate of return, NOT the human talent. Human talent also expresses itself differently over time, relative to other areas of life including health. Perceptions dramatically shift with simple dietary changes! Lord only knows the talent and health needed to function well in a highly leveraged marketplace.
I have a friend who turned $8000 into over $30 million in 25 years. I worked with him for twelve years. His mistakes were numerous, as was his talent. Bottom line is he gets up every time! Do We? We sit back and attempt to quantify human talent by dehumanizing the art of trading and the person whose art is being expressed with analysis that may not even be applicable to the investment. On top of that we threaten people with more judgment, fear of loss, and refusal of fair compensation. We judge and compare their talent to a benchmark that does not even exist and another industry where fees are lower, volumes of capital are greater and different skills are required for success. No wonder real trading talent is hard to find and mediocrity permeates the industry. Values or lack of them that the industry perpetuates is hard living for human beings with principles that revere life.
Maybe its time to start seeing people and becoming a bit more human. We can slowly eliminate causes of loss that are magnified by our fears of loss.
Increased returns and comfort for all people will be the by-product
Language and Beliefs
We label spread strategies as hedges, clearly investment strategies of any nature are NOT and NEVER will be hedges. Our use of language, beliefs, mathematical paradigms and applications for evaluation at times are all cause for increased loss. POINT: We need to evaluate tools being used for evaluation in isolation and in relationship to see where and how they take us farther from truth, therefore increased risk.
We perpetuate a mountain of erroneous information and beliefs that increase misery rather than manage risk.
Multi-Advisor Investments.
We now have an impeccable foundation of empty noise distracting us from relevant truth. We believe in our brilliance because we need to. The statistics and data-bases prove our correctness. Now we can leverage our masterpiece into building multi-advisor investments and market the entire concept through electronic media so empty noise and inaccurate beliefs are perpetuated more swiftly.
Have you ever looked at the performance of public funds? That is, it if you can find anything accurate to look at. I know one tiny firm that can document $30 million in lost funds annually. Imagine how much capital this industry destroys in the name of Modern Portfolio Theory and healthy risk management.
Benchmarks
I have two definitions of benchmark portfolios one by William Sharpe the other by Philip Jorion author of Value at Risk.
Sharpe - Benchmark Portfolio - a portfolio against which the investment performance of an investor can be compared for the purpose of determining investment skill. A benchmark portfolio represents a relevant and feasible alternative to the investor's actual portfolio, and in particular, in similar terms of risk exposure."
Jorion - Policy Mix and Active Management Risk -
Risk can be broken into two components one due to policy (or benchmark) choice, the other to active management. Policy Mix Risk is the risk of dollar loss due to a policy mix selected by the institution. Since policy mix generally can be implemented by investing in a passive fund, risk represents a passive strategy (benchmark). Active Management Risk is the dollar loss due to total deviations from policy mix. It represents the summation of profit and loss across all managers related to their benchmark.
POINT: Nothing in the managed futures, hedge fund, options or derivative industry has a real benchmark portfolio, as defined above that can be used for actual investment or even direct tracking. There are myriads of indexes sorted by computers created by massive amounts of advisor data, which is also traditionally analyzed, packaged and labeled investment analysis. These indexes are standards used for correlation analysis, and abused to "prove" that a CTA strategy is worth committing capital to."
This is only one teensy example of what is perpetuated as truth and what the public is getting.
Are we beginning to get to you?
Remember when you buy food, be sure it was properly grown or processed. You might believe that you are feasting while unknowingly committing suicide!
Our Solution
Build a trading strategy that defines each source of risk and how it is currently evaluated. Then define how the evaluation can potentially increase cause for loss and finally what can be done to eliminate or at least reduce error at a level of cause.
Although unconventional according to traditional standards, our evaluation of traditional analysis has accurate thoughts and we hope "pure intentions" with truth garnered from physics, nature and non-traditional resources. Results are all the proof we need. As the Course in Miracles says:
Investments Fourth Edition - William Sharpe - glossary Page 796."Thoughts are not big or little, powerful or weak. They are merely true or false. Those that are true create their own likeness."
Value at Risk - Philip Jorion Page 411 VAR and Investment Management
Course in Miracles - Workbook Lesson # 16 Page 26.