Here is this Friday’s installment of Avoiding Investment Strategy Flame-outs, a short book we are previewing for subscribers. Chapter previews will continue for the next seven Fridays.
Chapter 2: “Making the Strategy Logical”
“Making an investment/trading strategy logical essentially means making it testable and implementable, with inputs, outputs and rules clearly defined, properly sequenced and inclusive of all material factors. Clearly defined inputs, outputs and rules enable verification and extension. Definitions that require subjective interpretation are not clear. Properly sequenced inputs, outputs and rules fit the real world, representing an analysis and implementation scenario available to an investor in real time. Some strategies are more forgiving of tight sequencing than others. Including all material factors means accounting for all significant contributions to (capital gains, dividends, interest) and debits from (costs of data, trading frictions, cost of shorting, cost of leverage) investment outcome. The materiality of factors varies with strategy specifics.
“How can investors make sure their strategies are logical?”
