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« Panic, Housing, and the Economy: Ritholtz versus Malpass | Main | Market Observations on a Tough Day »

August 09, 2007


Larry Nusbaum

"These are people much like our current investors (our friends --a very intelligent group), but who abandoned stocks for real estate after the 2000-01 experience. Many of these people are still not actively invested."

That's me. I am about 90% real estate. In the stock market, since 2000/2001, I have emphasized value over growth, small cap over large and much broader diversification. I have also added some shorts and some hedges while focussing on the precious metals mining stocks.

But, Jeff just because someone responds to the Tickersense poll one way doesn't mean that person invests the same way. For a long time I was bearish but remained fully invested.

Josh Stern

Hi Jeff, I'm one of those individual investors you ask about. The system that comes most naturally to me as an intuitive process is deep value investing with a nod to fundamental momentum and industry based relative strength (where I'm early enough to the party). I find that individual investors using fundamental analysis have a much greater chance of doing well if they stick to stocks that are not widely followed (the reverse is probably true for individuals using mainly TA). So I mainly end up in small cap value. I had a good week because that sector was up about 5%.



If you use the Google search window on the site you will see several topics on developing trading systems. The link to the TCA model development illustrates a good method. The post where we talked about Ralph Vince and his work does the same.

Most commonly, you have to avoid using all of the data or you have no out-of-sample test. You also cannot use the same out-of-sample too many times or it becomes part of the development data.

Good luck with your work. What a great opportunity!




Thanks for our comments and the helpful links!



You mention "backfitting traps." I am a student and have spent this summer doing some modeling for a local hedge fund. I am curious about what these traps may be. Can you elaborate?

David Merkel

Excellent post. Investors have to know what their edge is first, time horizon second, risk tolerance third, and the amount of work that they want to put in fourth. My best statement on this were the pieces that I wrote for RealMoney on using investment advice.

I recently posted at my blog on my recent underperformance; it was a good exercise to go through. More investors need to analyze the negative side of their performance more. It hurts, but it makes us better.

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