Let’s begin with a few facts:
- Past rate of return is the foremost element for evaluating investments. A decision to invest evolves from an analytical process that usually includes past performance.
- How rate of return is calculated has less than nothing to do with actual capital at risk relative to Real Trading Returns. (RTR) This fundamental error is only one cause of poor decisions leading to many unwanted losses.
For example: Rate of return (ROR) is calculated using realized and unrealized profit and losses, interest income minus costs. The capital base used to calculate ROR is called "notional funding." Notional funding is an account size the client wants to be traded. Advisors may only use 3% to 10% of that value for actual trading. They may also allow accounts to be funded at a lower percentage of the notional value. Also, unrealized profits have no value to a client until they are realized and interest income is not a trading return earned from capital at risk.
- Past rate of return also has little relevance to potential future results.
For example: Past rate of return data on a managed futures account is a financial scorecard that quantifies skill successfully applied during a specific situation in the past. The situation partially includes market condition, perceived "trade-setup" within the market condition relative to an ability to perceive and act effectively at that specific moment without error. That particular situation with all detail is forever gone and will never repeat itself.
Heavy reliance on past rate of return data to analyze how people will execute trades in a future situation seems to be imbalanced superfluous interference we can all use less of.
- The infamous Standard Deviation, also calculated using past rate of return only measures volatility of past return. Because basic past rate of return calculations have nothing to do with actual capital at risk relative to Realized Trading Returns (RTR) and neither does volatility of return, layers of inaccurate analysis are increased. causing even greater potential for loss.
Since rate of return is a function that includes "beginning equity," appearances of volatility and draw-down can easily be manipulated by adjusting the account size.
For example: One advisor had larger than normal draw-down (41%) with above average returns (over 150%). The account size was only $40,000. Commitment to margin was 40%, high according to the "mandates of tradition," low when we evaluate the entire scenario. If we transfer the return to a $200,000 account size, we alter the commitment to margin and return relative to draw down statistics by five.
1) Return 150% / 5 = 30%
2) Draw down 41%/5 = 8.2%
3) Commitment to Margin 40% /5 = 8%If the $200,000 account size was applied over the entire length of a track record, return relative to commitment to margin and draw-down "looks and feels" acceptable. The trader is now labeled conservative!
- Standard deviation is also the foundation for other mathematical applications. I'll keep my mouth shut and move on!
Conclusion
Erroneous thoughts can only create inaccurate results. Accurate mathematical concepts applied to incorrect thoughts will cause colossal confusion, leading to wrong actions, potentially causing substantial misfortune.
Nothing else is or ever will be possible.
Re- Building From the Ground Up!
Proving something wrong, for the sake of being right has no value. I have a need to believe that people do the best they can with what they have at any time. Notice I said; "need to believe." My need to believe is an Achilles Heel. The belief has no relationship to truth. Without awareness and diligent application the belief will always invite difficulty into my life.
POINT: Once we discern belief from truth, anything can be built with boundaries appropriate for self-imposed objectives.
"HONEST" Realized Trading Returns on actual capital at risk can simply be defined using the following information. All risk management models can be built using internal benchmarks on a simple accurate consistent foundation called…..
The Trade – A hypothetical example of taken from a guide called Profit and Peace of Mind
A single contract (One) Cranberry Futures trade was completed over 9 days. It was bought at $3.00. Maximum open trade loss was .50 cents, ($2.50 market low). Maximum open trade profit was $11.00 ($14.00 market high). We realized a gross profit of $7.00 ($10.00 liquidating price.) The transaction cost was 0.10 cents. Advisor fees are 20% of trading profits. ($1.38).
There is nothing else to include except margin, maximum capital at risk.
Extend the Information:
- Cranberry margin is $1.50.
- Trades are chosen to risk 1/3 of initial margin. (50)
- Reward potential to capital at risk ratio is 10 to 1($5.00 to 50 cents).
- Reward potential to capital at risk is a self-imposed parameter used to determine quality of a trading opportunity. Internal Benchmark)
- Transaction cost is 10 cents per contract.
- Over one year we completed. 32 cranberry trades.
Trades produced the following results.
- Average net profit was $3.75 ($1.25 under the internal benchmark target).
- Average loss was $1.00. (50 cents over internal benchmark target)
- 60% of the trades were profitable.
- Total Profit $72. - Total Loss $12.8
- Profit to loss ratio is 5.62 to 1
Finally extend the data into all markets traded within the strategy under consideration. Look at information you are missing, compensate for the potential error and keep building. For example: Order of trades is omitted, or the composite process that built past performance. Without order of trades, we lack pertinent information. Somehow, we need to compensate for the void. Costs need to be accounted for, also circumstances external to the strategy such as current market conditions and equity under management. Probably most important and least considered is current mental and physical reality of the advisor.
The Internal Benchmark
An internal benchmark is an achievable objective, or self-imposed mathematical standard within the investment, rather than external to it.
WHY? Unlike equities, managed futures have NO "real" external benchmark. A "real" benchmark is defined as a passive counterpart of the investment or equal in risk/return to the investment being considered. The words "equal to" must be mathematically quantified.
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Let’s perpetuate the inaccurate information we are revealing: We not only have NO real benchmarks, what we do have is calculated using irrelevant information. Good old past performance data!
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Peak Performance Evaluation
After we decide how to sort and apply our simple risk management strategy, we have increased accuracy for comprehending the following:
- Real Trading Returns (RTR) relative to Real Capital at Risk for each market traded and the composite investment when appropriate, relative to an internal benchmark.
- Rather than correlating markets, which is probably useless with when applied to futures: We can correlate returns for each market. This gives TRUTH as to whether Modern Portfolio Theory (MPT)is an honest attempt at diversification, or a shallow marketing strategy that wastes capital and charges larger fees. Correlation analysis of returns also provides early warning of potential imbalances. Once one sector of a strategy becomes imbalanced, it will perpetuate imbalances throughout the composite weakening the entire structure. (Universal Truth!)
- Maximum margin relative to account size. Although still inaccurate, this provides insight into quality of people and offers a uniform foundation for multi-advisor evaluation
- Tracking equity growth and correlation of returns for each market.
- Tracking profit to loss ratios relative to number or percentage of profitable trades for each market over time. This gives current reality of strategy efficiency relative to A BENCHMARK or internal standard for measuring slippage of optimum performance.
- Remember our decision was based on past data and we have a PEAK or AVERAGE INTERNAL BENCHMARK TO MEASURE THE FUTURE WITH. This benchmark represents the optimum of what the advisor or we are happy with. We can also use a range.
What does an Internal Benchmark do?
Universal law (also physics) proves that when fear is removed, strength is automatically increased. There is nothing to do but release fear. Because the benchmark is defined by either the advisors own performance, or in mutual agreement with our objectives, fear of loss is lower. We are not only impersonally kinder, the position of all participants is stronger as a by-product of simple kindness. Comparing ourselves to someone external to our highest potential weakens us because it goes against the power of nature.
External human comparison is superfluous interference that causes unwanted misery in many areas of life. If people can learn this one fact of living the planet will change in an hour!
Universal Law and Investment Returns
A Universal Foundation for Investment Selection
Requires that analytical models be built in alignment with natural law. (Universal Intelligence). When we live and work with these laws, we have the power to move mountains.
To encourage easy understanding, food is used as the analogy in the following hypothetical example:
The objective is to design a strategy for building and maintaining optimum health and energy. Eating RAW vegetables almost allows the maximum benefit of all nutrients and enzymes available from each vegetable to be efficiently used by our bodies. The term almost is used because a few risks are:
- No knowledge of growing conditions, chemicals or quality of seed used. (Nutrient value and potential chemical poison within the vegetable.)
- Even with testing, true efficiency of a person's physical system and its' ability to absorb nutrients is also unknown.
- Other habits that unknowingly undermine the benefits of our new design for healthy living. (Drinking, eating too much cheese, bread and cooked food are a few!)
- Finally interaction between mind, belief, emotion and body dramatically affects the physical system. We could be repressing massive amounts of emotion without awareness of the toll that repressed energy steals from our health.
FACT # 1: No mathematical strategy exists that can precisely quantify the four points above.
FACT # 2: There is too much we will never know that effects each point, at different times, therefore decisions will always be inaccurate.
FACT # 3: We all have very limited perception and are prone to greater error than our ego allows us to believe. No matter how good our ego thinks we are, Mother Nature always knows better and will always win!
POINT: We can easily compensate and probably eliminate potential risk defined by facts 1, 2 and 3 by aligning our health management process with the REAL power of universal law.
When juicing RAW high quality vegetables using the highest quality juicing process possible, we can even increase the benefits beyond those offered from the RAW eating state. We have immediate nutrient absorption without the laborious process of digesting and eliminating waste. Because fiber (waste) is also removed from the vegetable, we are working with pure energy. Now, we have pure energy of the vegetable resonating with pure energy within us. The degree of effectiveness remains unknown because of risks described above.
Remember physics and resonating, we are comprised of and benefit from the same God given power that was in each little vegetable seed. Nothing can refute this truth. More exciting is that every nutrient and enzyme has the intelligence to find its way to the exact place inside us where it does the most good and is the happiest. We can even feel the energy. Notice that our only function is to realize this TRUTH and get out of the way! Universal Intelligence does the work.
Any statistical application will function above average expectation with less error, risk and cost when applied to this foundation
Optimizing Natures Perfection:
Juicing vegetables maximizes energy input and our energy rises because required energy output is less. Energy outflow is energy it takes to chew, digest the vegetables and remove waste so the good stuff finds its normal course to maximum efficiency. Reflect on the natural intelligence of that process. Through the superfluous activity we create, nature still functions and we manage to hang in there for several decades.
THAT IS PURE POWER.
Negative interference with PURE POWER is how much of humanity functions. Negative interference is mental, emotional and physical. All affect optimum performance of any physical system. It's also WHY systems fail, we live and work against universal intelligence.
Optimizing the power of universal intelligence or nature is the right balance of RAW Juicing with eating foods that give each atom and cell in our body new life while cleaning dead cells and waste. How efficiently our system works combined with the right balance of food determines the degree of efficiency that universal intelligence can function through us.
FACT: If anything within us, or what we do is out of balance, we are responsible for weakening the power of nature that always works through us. This is true physically, mentally, emotionally and spiritually.
Annihilating Natures Perfection:
If we consume cooked FRESH vegetables, we kill enzymes that are responsible for regenerating life. Although cooked food sustains life, it has no power to build NEW life. Eating raw frozen food, takes us farther from the power of natural law, however it's better than cooked. Consuming frozen cooked food, is almost suicidal and finally if we are dense enough to even think about canned foods, well what can I say!
Conclusion:
We can conclude that eating or juicing high quality RAW fresh vegetables gives us a maximum reward at the lowest cost and risk relative to other methods of eating. No one can prove otherwise.
That is defining and using power that exists above and beyond any human polarity. We live with a tide of life on our side.
The same principals can be applied to any risk management foundation. The analysis of a trade in its simplest form gives us the most power with lowest risk