Thursday, 24 July 2014

Why trade?

11:28 Posted by The Thalesians (@thalesians) 1 comment
If we go back to the ancient world, let us think of Thales of Miletus, the ancient Greek philosopher. He was mocked for being a philosopher, who couldn't make money. To prove his doubters wrong, he bought options for the use of olive presses, during the low season, because he foresaw a great harvest. When it was indeed a great harvest, Aristotle tells us, he made a fortune. An illustration that sometimes, you can make money as a by product of other objectives (in Thales' case merely to disprove his doubters). Our group the Thalesians is named after Thales. It was this story about olives, which gave me the idea for my book Trading Thalesians.

If we think more broadly about the title of this article, it might seem like a ridiculous question: why trade? The answer might seem obvious and consists of one word: money. However, there are a multitude of ways a trader can make money, which can impact whether we are successful. If a trader simply wants to maximise his or her returns in isolation, then perversely the result, could actually be lower returns. Conversely, maybe the better approach is to target some other factor, just like Thales did, in his olive trade?

Why? If your sole objective is maximising returns, it is very tempting to over-leverage and to take on too much risk. The result is of course, an inability to tolerate any sort of drawdowns. Even what might have been a relatively small drawdown on an unleveraged basis, might force a highly leveraged investor to exit all risk. Hence, a trader will have taken losses, but unfortunately not the profits of a strategy.

If instead, an investors targets lower vol (so lower leverage) and lower drawdowns, potentially in the long run, returns might be more sustainable. In this instance, an investor is more able to hold onto their positions and continually generate returns.

We might not all be like Thales, but we can try to learn from him and the ancient world!

My book Trading Thalesians: What the ancient world can teach us about trading today also has some colour on this topic (mixed in with a bit of ancient history).

1 comment:

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