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Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place. |
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12/03/04
Philip J. McDonnell on Money Management
Steve Ellison reviewed some of the money management points from Stuart's
book which I would like to rebut one by one (so I numbered them) because
they appear to be based on several myths and half truths about probability.
Here are some key points of Stuart's money management philosophy:
1.Most players are winning at some point and can remain winners by
quitting at the right time.
There is no way to determine the right time. There is no guarantee that you
will EVER be ahead at a casino. In fact the arc sine law says that a very
large percentage of random walks will go above zero and stay above zero or
go below zero and stay below zero indefinitely. See Feller for more on
this. However, quitting is ALWAYS a superior strategy in a casino - even
better is not to start at all.
2. Designate in advance an amount to put at risk and walk away if you
lose that amount.
As I discussed in my earlier post today, this strategy will double your
probability of being at or below that loss level. However it will neither
give you an edge nor take one away. Walking away is your best bet.
3. If you get ahead, do not lose any more than the original amount at
risk from that point.
This is a rising trailing stop idea. The same caveats apply here that your
probability is going to double - only now you are ratcheting the stop up
based on the recent high water mark. Thus the probability that you will get
stopped out on a low is undoubtedly greater but I can't quantify.
4. If a streak of three or more is occurring, either bet with the streak
or not at all. You can only lose once betting on a streak to continue.
You can go bankrupt betting on a streak to reverse.
This is some more silliness. Dice and wheels have no memory. What they did
on the last three realizations has nothing to do with the next outcome. You
can also go bankrupt betting every time you see a streak of 3 or more.
5. If you win a bet, take the money off the table rather than pressing
the bet.
Not betting and betting less in a casino is always a good thing!