Tuesday, June 14, 2022

More Cowbell

More Cowbell

Investors often wonder when to add to existing positions. To a large extent the answer to this question depends on their investment philosophy, time horizon, and risk tolerance. Simply put, it depends. 

Active trading is based on the theory that the market is NOT perfectly priced and that there is an opportunity for an investor to purchase something that is mispriced; maybe it will be raising a dividend, maybe new management is taking over, there are a host of potential reasons of "why" that an investor evaluates. At its heart, a trade is in essence a best guess based on available information.

To the quant investor the answer as to when to add more cowbell is simply a function of the charts. What does the chart say? Where is the momentum pointing? Does the data indicate that the trend is strong? Growing? Subsiding? These factors guid the path of a quant trader.

Much of the cowbell quandary is based on confidence in the underlying investment. What is the truth? And in this matter financial farmers need to evaluate their investment thesis. Otherwise positions are increased simply on emotion ("This stock can't go any lower!" or "I'm gonna double down on this position!") What is your thesis?

There are a host of reasons to add more cowbell, but an investor should have a code. A theory. A blueprint. Some methodology that can be captured, implemented, and evaluated. In this manor the process can help yield maximum success. If you can measure it, you can manage it. 
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