Forum Archive Index - June 2002

["Peter" <pmaiden@today.com.au>]

Something to think about - the more often you check the value of your 
portfolio the greater number of unpleasurable moments you will have.

So says Nassim Nicholas Taleb in his book 'Fooled by Randomness".

Take the case of, say, an excellent investor who makes returns of 15% 
annually with a volatility of 10% pa. He checks his portfolio every 
hour. The probability of seeing a gain is 51.3% - in essence over a 
year there will be 1,067 pleasurable moments (the portfolio goes up) 
and 1,013 unpleasurable moments (portfolio down).

The numbers for daily checking of a portfolio in this scenario are 
140 pleasurable days against 120 unpleasurable days a year.

Checking on a monthly basis 8 pleasurable months against 4 
unpleasurable months. Sounds less stressful.

What Taleb was demonstrating was that over short time spans one 
observes the volatility of a portfolio - not its returns.

This also explains the relative contentment of excellent long term 
investors like Snoopy and Hugh. Their long term hold and buy strategy 
possibly means they don't bother check the value of their portfolios 
all that often. In doing so they see the returns - not the volatility 
that some gung ho traders see. And in doing so they have less 
unpleasurable moments.

Didn't think you guys would mind being mentioned in this light. A 
book that you both or others could possibly enjoy - even though Taleb 
is a hedge fund operator.

Cheers

Peter


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