Trading Thalesians: What the Ancient World Can Teach Us About Trading Today PDF
Preview Trading Thalesians: What the Ancient World Can Teach Us About Trading Today
Trading Thalesians Trading Thalesians What the Ancient World Can Teach Us About Trading Today Saeed Amen Co-founder and Managing Director of the Thalesians, London, UK © Saeed Amen 2014 Foreword © Paul Bilokon 2014 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2014 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries. ISBN 978–1–137–39952–6 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. A catalog record for this book is available from the Library of Congress. For Baba and Gido, although light has turned to shadow, you will forever illuminate my path, with the cascading streams of your love. “If it wasn’t for me, I’d do brilliantly.” Chamfort – every trader should learn this excuse Baba The wind it blows at times with air which chills, Above the clouds, the sky with rain it fills, The souls become sodden with waters hold, The warm of old are the memories of gold, Behold those thoughts of him which lie within, Never will they be lost, etern’ty’s in, In time although the pain always will stay, It will begin to fade further away, Replaced by thoughts of warmer times with him, That place where laughs and joys of many whim, Neither the loss of him, nor this deep pain, So should eclipse mem’ries of him in reign, He was your king, your all, ever so more, But most of all he wants you in the fore, As each day it passes through simply recall, That the memories of him will shine in all. Contents List of Figures Foreword Prologue 1 Introduction 2 The Basis of Everything Is Water: Understanding Risk in Markets Water as risk The motivation to measure risk Understanding risk in games Oracles rather than probabilities Quantifying financial risk through volatility Structural breaks in volatility regimes Risk sentiment and the impact on market volatility Can we predict shifts in market risk sentiment? We can try . . . RORO your investment boat Understanding implied versus realized volatility Trading risk directly through options Classifying groups of investors by their attitude to risk Does the time horizon of a trading strategy correlate with how risky it might be? Understanding risk through the use of scenarios How can we estimate our maximum possible loss? Using stop losses and take profits is one way Should we even bother to quantify risk if it’s difficult? Yes! 3 Harvesting Olives: Alpha and Beta Strategies Olives, presses and Ancient Greece The ancient Olympic Games, the unusual olive trade of Thales, and following your strengths An example of differences between supposedly simple cash markets The ideas of alpha and beta in the present day What if there’s no obvious market beta? Allocating between different market betas Ancient Greek maritime traders, grain, timber, olives, and alternative beta A practitioner’s thoughts on alternative beta, alpha, and beta Alpha is not always better than beta Do retail investors beat the market beta? Not in our examples Should investors trade alpha or beta? 4 The Code of Hammurabi: Reducing Risk The origins of insurance and Hammurabi The concept of diversification when investing The mathematical way to diversify: The good, the bad and the super- leveraged portfolio Alliances amongst Ancient Greek poleis: Hedging specific risks Hedging specific risks in a portfolio: A financial viewpoint Illustrating hedging with an example For times illiquid: A proxy hedge Is diversification always a good thing? Is concentration always a bad thing? Diversification in a hedged world 5 Not What They Care About: Having Targets Other than Returns How did Thales’ motivation to trade differ from the investors of today? The problem with only targeting returns What about purely targeting risk within a limit? A tale of two traders Ancient incentives to change trader behavior Using the Sharpe ratio as a target What does the Sharpe ratio fail to capture? Understanding drawdowns in investments Is all volatility bad? Enter the Sortino ratio for targeting investment performance Why should portfolio targets differ between investors? Is reaching an investment target fate? Deviating from our investment mandate can impact our targets A view on targets and risk from an investor Summarizing our journey through investment targets
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