Or why core position trading works.
I recently had a conversation with my wife about what options exist to solve the mass shooting crisis in America. She’s come a long way from being 100 percent anti-guns when we met to meeting me halfway in the middle. We’ve both learned from each other – I grew up in the country where hunting and shooting sports were common and she did not.
What I never understood about anti-gunners was their fear. For me and my friends, gun safety and gun handling were drilled into us at a young age. I assumed that everyone had gun safety drilled into them. My wife assumed that no one did. I started turning her around on guns when she agreed to go to a shooting range with me and I spent the 30 minute car ride explaining gun safety, gun handling, and range etiquette to her. And then spent another 15 minutes at the range repeating it.
But even with her becoming more comfortable with guns she said she was still in favor of an outright ban on AR15s. She was in favor because they look scary.
My response to her was that you needed to ban capabilities and not appearances as a Ruger Ranch rifle shot the same bullet, had the same magazine capacity, a similar size and weight, and was just as lethal.
And just in case any firearm aficionados or armchair commandos happen to stumble upon this by accident: please save me the hassle of filling up my inbox saying an AR15 is superior to a Ruger Ranch rifle. That isn’t the point.
Banning an AR15 but not a Ruger Ranch rifle makes no sense. Same thing for any of the other common military rifles that are easily obtainable like the AK47, SKS, SCAR, IWI Tavor, Steyr Aug, or PS90. These rifles obviously fit in the same category but there hasn’t been a single mention in the news about adding them to a ban.
Core Position Trading: Appearance vs Reality
This conversation got me thinking about how to explain why core position trading works. The public has been brainwashed to believe that volatility is bad and mark-to-market losses are even worse. Hedge fund managers live and die by promising investors smooth returns. It’s the appearance of the investments they hold that drive behavior, not the reality of the value of the investments.
What’s really going on?
My best guess is that investors look at the account value and make plans for its uses. When they see the account balance go down they imagine all the uses quickly slipping out of reach. As a result, they liquidate holdings to try to stem the bleeding. This creates a virtuous cycle that forces prices lower and lower as more and more people sell more and more to avoid the nominal loss in their account.
The reality is that the underlying fundamentals of an investment haven’t changed nearly as much as the price volatility makes it seem. Assuming an investor isn’t chasing a bubble, and has realistic expectations of cyclical industries, the fundamental value of the holding is much less volatile than the price would indicate. Eventually enough investors figure this out and pile back in and bid up the now undervalued asset. This causes prices to climb back up and the whole process eventually repeats itself.
This is where someone who ignores price volatility can repeatedly make money using core position trading. Core position trading relies on reality instead of appearances to consistently grind out profits in volatile markets.