HH21 Teresa Lo Site

Hello and welcome to my blog.

A couple of days ago I posted a chart by Justin Mamis concerning sentiment. It is from his book, The Nature of Risk. A very nice summary has been done by Teresa Lo on her site. Here is the link: http://www.invivoanalytics.com/2007/12/07/the-sentiment-cycle/ There is also a great deal of other stuff there and it is well worth clicking around and doing some reading.

The following is taken from the link above.

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Yes, a good trading system helps us stay the course and do the right thing. It prevents us from chasing performance, from loading the boat at the top. A good trading system does not allow us to experience the trauma of puking at the bottom after a long downtrend by virtue of using stops and position sizing. A good trading system frees us from our worst fears - the fear of losing, and the fear of missing out.

Buying high and selling low is not the way to go, but human nature makes it hard to resist doing it because we are simply designed to feel most confident and have the most conviction to act when there is a massive amount of public opinion that concurs with the fundamentals, along with widespread agreement that a big trend in place. Contrarians tend to be way too early, and often experience the old "light at the end of the tunnel is the on-coming train" phenomenon. By and large the typical human "gut" is simply not geared for trading.

We tend to worry too much about making the trade at hand work out for us as if we want bragging rights or something. Let’s not forget that each trade is inconsequential in the big picture (unless every trade is a loser!), since the goal is to make as much money - over a reasonably long run - with as little risk as possible. If you don’t believe me, read the papers at SSRN on Prospect Theory. One of the best ones was The Diversification Puzzle by Meir Statman.

Because each of us we will conduct many transactions over the course of a lifetime, we can’t get worked up about every single one of them. Some will make money; some will lose money, but if I know that my approach is correct and my methodology is sound, then the only thing I need to do with the trade in front of me is make sure that it will not be the one to put me out of business.
We have to keep the ball moving toward the end zone, but we can’t go for the 90-yard "only in the movies" touchdown attempt every time. Most often, the hardworking team grinds it out play by play - a few steps forward, one step back. Always be defensive. Recover those fumbles.

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Thank you Teresa Lo.

Thank you for your time.