A.I.M. Users Bulletin Board

[ls7550]

Hi 1step

If you held perhaps 20% in each of
Permanent Portfolio
Fat Tail Minimisation
Decision Moose
Mebane Faber's Quantitative
Wellesley Balanced (40% value stocks, 60% bonds)

then you're tracking both value and momentum in the set whilst each style individually is relatively low-down.

'Value' equates to above average risk. You're buying something that apparently is relatively cheaply priced in the hope of a rebound. The risk is that the stock might collapse a lot further, or it could rebound strongly i.e. the volatility is potentially high.

Value might work equally as well as momentum (or potentially even better) but momentum styles have more stop-loss type measures in place. Typically with either the price declining below its 200 day moving average, or another leader stepping up to take the lead role, or a trailing stop loss being encountered. With value you just have the stop loss alone, so with fewer loss prevention mechanisms in place there's a greater risk of larger loss.

Providing you cut losers relatively quickly and run winners, you'll be running with Call Option like methods that have finite downside risk, unlimited upside gain potential. If the few large gains compensate the more frequent small losses then overall you're in profit. Much of upside gains arise out of a few individual good performers - whole indexes comprised of hundreds of stocks can be uplifted by one or a few stocks performing very well whilst the remainder remain flat or in decline. Picking strong gainers is therefore much like hunting for a needle in a haystack.