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The Virtues of Being Certain Versus Taking Risk, by Victor Niederhoffer
A lively discussion has arisen concerning whether it pays to wait when the market is going down to find an entry. Various rules have been suggested. Wait for a 10% decline from a high. Wait until there has been a 10% rise from a low. These seem impressionistically very good, after a period of decline or rise. But qualitatively they are just two of one million variations in a trend-following milieu. They all must be tested and have been with the result that the vast majority of reasonably testable assertions show that such rules lose vast money during the past 15 years. In addition to subjecting you to a large preponderance of losses, they have the other unfortunate aspect of keeping you out of the market during sustained rises. To people like this, the words "might have been" (see below) and "if only" are very terrible, and they are vigilant in mounting the high horse during the intermittent periods of 3% to 7% declines that occur, telling you how it was so easy to miss them. As for me, I'll stick with the differential of 1.5 percentage points in favor of earnings yield on stocks versus bonds at a time like this.