Thursday, June 18, 2015

Could N. M. Rothschild be a systematic trader?



"Buy when there's blood in the streets, even if the blood is your own"
N.M. Rothschild

Would a systematic trader even invest this way? There are investment adages that many will nod with approval once they are presented, but it may be difficult to actually try and project the rules that would be employed to make this wisdom operational. If the great Nathan Mayer. Rothschild, was a systematic trader,  how would he make his wisdom operational?

The basic premise is that if there are loses or blood in the street, an investor, even if he is one of the investors bloodied, should be doubling down and investing more on the decline.  No trend-following for Rothschild. No stop losses. Add to the position when there is a major sell-off.

The Rothschild quote would likely never come from a traditional CTA, but that is the point of our focus. Rothschild would be a value investor who could, would, and should invest on weakness. It is different strategy than the trader who will buy on trend and cut loses with a stop.

The problem is that value investing is harder to turn into a set of operational rules. If you are long and prices fall, the market could be telling you that you are wrong. You have to validate your expected price quickly. Buying on weakness could be the worst thing to do. In a crazy blood in the street scenario, the first thing may not be to buy but question all your assumptions, erases and move to the sidelines even if it is temporary. 

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