When the going gets weird, the weird turn pro. - Hunter S. Thompson

16 August 2007

Information Arbitrage: Keep it simple

Discipline, especially when it goes against one's native instincts, is hard. When your friend brags about a particular stock or strategy on the golf course, you are jealous, right? And when you hear stories of people making tons in _____ (choose your era - tech stocks, commodities, currencies, gold, etc.), regardless of a lack of documentation (self-reporting is notoriously poor as people tend to remember wins and forget losses), you want in, right? It is very hard to be the tortoise when you are seemingly surrounded by hares. But you know what, you can try your hand a bit if you adhere to a few simple guidelines:

1. Set an asset allocation mix that makes sense for your age, stage, family circumstance, etc. If you can't do this with confidence get some help;
2. Establish the majority of your allocation using low-cost, liquid instruments like index funds and ETFs;
3. Figure out if you want to try and dicker with investing at all, and if the answer is yes;
4. Limit your "play money" to 5-10% of your total portfolio.

By all means have some fun. Do some research. Collaborate with others. Try and generate some real alpha. But don't, DON'T have this be the core of your investment strategy. Please. Don't. Do. It.
Retail Investors + Complex Investments = Failure (Information Arbitrage, 16 Aug 07)

(Speaking of investing, the White Trash and Minor Vices Portfolio is taking a beating but, with its emphasis on consumer staples, doing one hell of a lot better than the markets as a whole. The White Trash Portfolio is only up 0.3% since inception, but that's compared to a 0.4% loss for the S&P 500 over the same time period and a 1.1% loss for the US stock market as a whole, as measured by the VTI ETF.)

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