OK. So here it is. The first post.
This blog is meant to be an extension of all my investment ideas. I'm here to talk about market psychology and investor psychology. I also want this to be an intimate diary. I will expose myself--strengths and weaknesses equally. The goal is complete transparency of me, my ideas, and my actions.
In the coming weeks, I will lay out the theoretical framework of a trading system I've developed, Hurwitz System Alpha. The goal of this program is to purchase postions that traders are currently scared to own and sell them as the fear subsides. This fear need not be all consuming. Traders might simply want to avoid entering a situation that might make them scared. The thesis is that collective anxiety is a powerful, but subtle, market force that is consistent enough to be exploited.
For example, if traders are thinking that an instrument is attractively priced, but that other people are going to continue to sell it, they might put off their purchase until the price stabilizes. No one wants to start a trade with a loss. Similarly, if short-term traders think that an instrument has become attractively priced at the end of a trading day, the traders might put off a purchase until the next day to avoid overnight risk. Once again, the traders are avoiding the potential for a significant loss upon opening a position even though the trader thinks the instrument is attractively priced.
The decision to give up a slight average monetary gain for peace of mind is not an irrational act for a human being. But it is inefficient, economically speaking, to make choices that will lower one's lifetime utility of wealth. In an efficient marketplace, someone else will come along who's figured out how to efficiently balance risks and will grab the money left on the table.
I'm focused on the situations where the market might not be efficient. Situations where arbitrage might not be complete. As a general rule, the more speculative the market, the more attractive to emotional momentum traders. These are the markets that are most likely to have a large collective effect from anxiety of individuals. Speculative booms, short squeezes, panics. History has shown markets to be far from efficient during these easily identifiable periods.
Hopefully, this blog will eventually turn into a website, an investment partnership, or a newsletter. For now, it will serve as an outlet to help develop these ideas. Over the next months expect the following:
1) Trading of an actual portfolio using Hurwitz System Alpha.
2) An exploration of the theoretical foundation of behavioral finance, and potential market applications besides Hurwitz System Alpha. A bottom-up approach.
3) An analysis of the psychological state of macromarkets--real estate, commodities, technology, etc.--and how to best invest in these different markets.
4) Discussion of the current state of investment analysis and trading. A search for potential systematic errors by hedge funds, investment banks, individual investors, and other market participants. A top-down approach.
The ultimate goal is the development of a cohesive framework to discover behavioral inefficiencies and exploit them. This work has the potential to both stabilize markets and be quite profitable.
