Master of Your Domain?

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  • on September 9th, 2010

Anyone trading markets for a period of time knows that knowledge does not translate into profits.  In fact, the illusion of knowledge has broken some of the most intelligent participants including Long-Term Capital Management and Victor Neiderhoffer.  So should traders and investors seek to expand their knowledge base, or focus on one strategy they can repeat over and over?

The post “Compleat Trader” got me thinking about specialization vs. generalization.  In it, the supersmart @milktrader says we should embrace new ways of attacking markets rather than settling for making money the way we always have, that the advice to “keep it simple, stupid” is a little too, well simplistic.

As I was digesting this side of the debate, I read the following from highly respected Charles Kirk in his awesome piece “7 Things To Do To Improve“:

“Become a specialist, not a jack of all trades.”

So is there a right and wrong answer?  Maybe not, but I’ll frame the debate here.  Regardless of your level of experience, do you really want to jump into battle against the experts in your shiny new backtested strategy?  Creating an options strategy can be a great tool for managing risk, but do realize that you are now treading into the territory of those who focus exclusively on profiting from unusual options pricing.

Conversely, basing one’s livelihood on a single mean reversion strategy is a sure way to the poorhouse in a runaway bull or bear market.  If you’re going to nail down an edge, be sure you have some way to measure when that “edge” has been taken away by too many adherents or changing market conditions.

My experience watching both myself and others leans with Kirk’s advice to “find something that interests you more than anything else and concentrate all of your time and focus on that one thing.”  It’s hard enough to compete with the best, but to compete with only a fraction of your focus is an exercise in futility.  I do believe, however, that once you’ve passed into unconscious competence in one strategy you are free to add another strategy to your toolkit.

This will involve lots of learning, but if you love what you do this becomes a joy to pursue.  It’s been a long road, but technology has helped me incorporate low-correlation strategies that both smooth my returns and appease my inner thirst to improve.

I think the essence of the discussion is brought together with this line from milktrader:

“It doesn’t hurt to be comprehensive in your knowledge and targeted in your approach”

Indeed. Just like golf, there is a time to practice and a time to play…never confuse the two.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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