Tag Archive | "Paul Erdös"

Végre nem butulok tovább


“Végre nem butulok tovább” is Hungarian for “I’ve finally stopped getting dumber.”  This is the epitaph on the headstone in Budapest of Paul Erdös, the world’s most prolific mathematician.  See below, three steps I take to stop my investing from being dumb and dumber.

Erdos

Erdös wrote this, his own epitaph, so I am confident that he was wise.  I believe this because in each of the 47 years of  global investing, the most important lessons I have learned are about how much I do not know.  I believe, with luck, after 50 years of investing I’ll truly know that I know nothing.  Only then can I, maybe, become a great investor.

Recently I met with a group of experienced investment managers.  There were two points upon which we agreed:

“There is always something we do not know!”

Risk is our partner for better or for worse!”

Since investing always creates some chance, we are lucky to have geniuses like Erdös who come into the world.  We can use simple logic to apply their advanced thinking in a way that makes our investing better.

For example, Erdös and another mathematician, Alfred Rényi, published theories about a type of math called “Combinatorics”.

Here is the definition of Combinatorics: “Given a positive integer n and a probability value 0 \leq p \leq 1, define the graph G(n,p) to be the undirected graph on n vertices whose edges are chosen as follows. For all pairs of vertices v,w there is an edge (v,w) with probability p”. 

Just thinking about combinatorics makes my head spin!  I do not have a clue what this means.  Yet when we use a telephone, computer, electricity, buy food or fly in an airplane, we are taking advantage of combinatorics.

We may not understand the math behind combinatorics, but the civilization that supports us does.  Companies use it in many big projects.  Airlines figure out the best way to maximize the space for the most number of passengers to increase profit per takeoff.  This requires the program to not only figure out the best fit in the space but also in the budget.  Combinatorics is used in computer science for programming and algorithm construction.

I am in awe of those who have mathematical genius.  They make math seem so simple.  It is said, Archimedes discovered the principles of geometry by using his fingernails to trace figures on his oily skin after emerging from his bath.

Yet there is a trade off.  Erdös collaborated with more people than any other mathematician in history.   However, his every day life had to be looked after by mother and later his friends.  He put in nineteen-hour days, regularly taking Benzedrine or Ritalin, strong espresso, and caffeine tablets.  He once said “A mathematician is a machine for turning coffee into theorems.”  He never cooked or even boiled water for tea.  He was twenty-one when he buttered his first piece of bread.  He was eleven, before he tied his shoes for the first time.  His whole wardrobe fit into his one small suitcase with room to spare.

There is a lesson to be learned here.  We do not have to be geniuses to enjoy the works of genius.  We may even live a better life without being a genius, especially if we let the geniuses work for us.   Most of us are not electricians but we all know how to turn on the lights.

A specific example shows how to apply mathematical genius in investing.  Our most recent report “Three Currency Patterns for 50% Profits or More” revealed the 22 best value stock markets in the world and 19 ETFs that provide diversified opportunity in all 22 of these markets.  I gained this information from the mathematical genius of Michael Keppler – Keppler Asset Management.

EWA chart

Five year chart for iShares MSCI Australia. Click on image to enlarge.

However when I combine Keppler’s math with the math of the TradeStops’ Smart Trailing Stop 2.0 I gain even more insights into my investments.

For example TradeStops recently sent a Stop Alert on the ETF that covers Australia, (one of the 22 good value markets).

The ETF is the iShares MSCI Australia  ETF (symbol EWA).  This fund has a very low volatility quotient of  14.04%, so the share is not expected to bounce around much.  The Smart Trailing Stop 2.0 is a unique way to use trailing stops because its algorithm uses a best price as a basis for creating the stop rather than on any specific purchase price.

In the case of iShares MSCI Australia  ETF TradeStops best price was around $26 a share.  With a 14.o4% VQ, the stop price is $22.75.  When I looked at this share, the price was $22.46.  TradeStops had already given a sell signal because the price had fallen below the stopped price.  The fund has already corrected by more than it was expected to correct in the normal course of business.  This means that it has moved further than VQ from the recent high close as detected by the STS 2.0 algorithm.

Just because a stock has a current STS 2.0 status of Stopped Out does that mean we shouldn’t buy it?  A STS 2.0 status of Stopped Out is just telling us that the stock has already corrected more than what would normally be expected of it.

One of the golden rules of investing is look for good value, high quality stocks with rising earnings and increasing attention from the market.  The stopped out status simply tells us that there is something we do not know because the shares are high value, but the price is falling rather than rising.

There is a third mathematical genius I bring into my investing armory, my investment adviser, ENR Asset Management.

Keppler mathematics helps me zero in on good value markets.  TradeStops helps me manage the behavior gap that will impact the good value investments I make.  Human nature leads us to sell our winners short and hold our losers too long.  TradeStops helps me hold my winners longer and sell my losers sooner.

The information from both Keppler and TradeStops is impersonal.  Their math applies to all.

ENR, as an investment adviser, adds the personal touch and helps me decide which of the good value investments (stopped or not) makes sense for my own personal situation.

I am not sure if I am not still getting dumber.  If it requires an epitaph to do so, then this is good.  I do know that I am increasingly aware that there is always something in the investments I make that I do not know.  By using the mathematics of these three geniuses brings me closer to the truth and protects me from disobeying another golden rule of investing.

“Don’t fall in love with a stock…the feeling is never mutual.”

Gary