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Letter to the Editor

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PostPosted: Sat Aug 20, 2005 5:09 pm    Post subject: Letter to the Editor Reply with quote

Lou, I use the concepts of econometrics, because it takes too much time to build and test formal models. Moroever, there are lags in the data. So, I conceptualize models, make sure they're sound, and anticipate what the data would look like. To use econometrics, it's necessary to understand relationships of variables and economic theory. Statistics doesn't require knowledge of Economics. The better traders use statistics, and the best traders, e.g. Buffett and Soros, use econometrics.

When I look at indices or ETFs, I look at economic data and then technical data. When I look at individual stocks, I look at fundamental (firm specific) data, and then technical data. I often use relative value to judge what's undervalued or overvalued. I don't want to get into examples, because there are too many, and all of them would be most helpful.

I've been using spreads to buy calls and puts (it's important to follow option prices closely). For example, if the SPX Sep 1,230 puts bid is 12.10 and ask is 13.50, I place a bid at 12.20, if I want to buy when SPX is at the current price. I also place bids at lower prices, and on one or two other SPX puts. Of course, SPX has to move into the direction of the bid. When I buy the puts, I lower the bids on my existing orders, and place a sell order at a higher price. I normally had lots of buy and sell orders, in case there was a big move. I started using fewer buy orders at lower prices last week, which worked out better, although I missed quite a few volatility trades.

If I held all my options longer, I would have made much bigger gains, because many of my winners turned out to be big winners. However, it always seemed too risky to me, since I'm mostly a volatility trader. One of my successes has been buying calls when the stock is near the low and puts when the stock is near the high (although not always). However, most of the time, I sold too soon. Nonetheless, I use many successful trading strategies, which consistently work almost all the time. Holding options or stocks for a long period of time (e.g. months) is risky, and can make a portfolio inflexible.

Bernie Schaeffer's Master Portfolio is up 63% in five years, which is a 10% annualized return. I doubt he could "at least tripled those returns" using only technical indicators. I look at technical indicators also, and Schaeffer's site has lots of info. If you wait for an excellent trading opportunity (e.g. when SPX was in the 1,240s to buy puts or if oil hits $70 to buy OIH puts), you could make 63% within a week on a bold move. Arthur


I'm curious, and was hoping you could elaborate more on recent emails.
You recently said econometrics is most reliable, but I'd need another lifetime to understand it.
In addition, you said statistics is much more reliable than TA.
Can you elaborate a bit?
e.g. Do you look at a companies historical p/e or historical volatility before investing?
Perhaps a write-up on your website on how you use statistical data to your advantage???

In addition, I'd love to hear more detail about your recent trading style changes.
In general, market has been on a big run since approx. Aug. 2002
Many stocks have made big runs since that time period.
Do you think that fact has something to do with you having better performance if you held your
positions longer? Rising tide floats all ships?
If market should underperform 2006 and beyond, perhaps holding longer would be a bad idea.
(Am I oversimplifying or would that have something to do with it?)

Regarding the Schaef Master Portfolio:
(Having tried subscribed to a few of his services you may find my insight insightful.)
You said his portfolio is up ONLY 63% since inception (5yrs).
I realize your an amazing investor, but for most people that would be a respectable return!!
In addition, you must remember this is a fairly intermediate stock portfolio.
I think he reels subscribers in with his cheaper stock portfolio then people switch to riskier option
services. Naturally, those are much more expensive.
They let me sample their hot stocks service and they had several stocks in common the MASTER.

I find his sentiment based investing sometimes works amazing and other times fails miserably.

On his website, you can check the track record of a lot of his services.
A lot of them aren't very inpressive.
In fact I think his cheap stock portfolio outperforms many of his more expensive option services.
I wonder what that says????

Considering Schaef is an options expert, I would bet that in his personal portfolio he trades around those Master Portfolio core holdings using options.
I would not doubt, he personally at least tripled those returns.

You said he has an excellent website.
May I ask what data you like to incorporate from the site so I too can exploit it?

Have a great weekend
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