Money management

One of the great things about being market neutral is that its mechanics force you to optimize your money management techniques. In this segment, money management is the synonym of bet sizing.

Indeed, some people think that how much you bet on each idea is more important than how successful the trade ultimately will be. Here is an example which demonstrates that, depending on the money management approach chosen, you could earn one thousand times more.

Suppose you're playing heads or tails, with a perfectly normal coin and a normal flipper, so the odds, long term, are fifty-fifty that it will land on heads or tails each time. Let’s also say that you always bet heads, and for each dollar you bet, when the coin lands on heads, you make two dollars; if it lands on tails, you lose one dollar.

So you have an edge in your favor; your expected payout per coin toss is fifty cents. Finally we'll assume that you are starting with $100 in your pocket. If you wish to maximize your payout in this game, what percentage of your total account should you bet on each flip: 10 %, 25 %, 40 % or 51 %? Click on one of the radio buttons below to reveal the answer.

The analogy is this: in the same markets, an investor with an efficient money management technique can make up to a thousand times more money than others. This concept is explained further in my book, "Stock Portfolio Protection Against Market Crashes", which comes with a bonus money management file.