Sometimes when I meet people at parties or other social occasions, they ask me “What I do”? I always struggle for a response. I usually start by saying I am a programmer. Some people leave it at that. But some people are more curious and want to know the details. After some hemming-and-hawing on my part they get the idea that I do something related to the stock market. And then they ask me for Investing advice. That’s when I begin to grumble.
The reason is simple. I have no Investing expertise whatsoever. At least the kind of expertise that can be useful to a retail investor. And it’s difficult to explain that. After all, I *have* been trading stocks for a living!
So, why don’t I have expertise in Investing after all these years? The reason is something pesky called the “Time Horizon”.
Time Horizon is just the period over which you expect your strategy to work out. For high frequency traders like me, it’s something measured in seconds, minutes or (rarely) hours.. but definitely not days. On the other hand, long term investors like Warren Buffett look far out in the future, with time horizon measured in years or even decades. Finally, Analysts predict (if you can call it that) company performance over the next quarter.
Now, you cannot.. absolutely cannot.. mix expertise in one time horizon with another. If Warren Buffett were to try his hand at high frequency (and I don’t mean by hiring someone else), he would lose.
Time Horizon affects everything.. It influences how you think, what skill-set is important, the data you look at, the data you *don’t* look at, the tools/technology/infrastructure that you use, how you manage your orders.. everything. You cannot mix-and-match.
I believe that consistent performance is possible only at the two extremes… at the low end (aka high frequency) or at the high end (aka Warren Buffett style). Interestingly, most analysts, hedge funds, and other market participants concentrate on the middle end. The result usually is terrible.
I became consciously aware of the importance of Time Horizon only accidentally. Several years ago, I used to work for a very successful high frequency group. A former colleague of mine was interviewing for a new hedge fund that Andrew Lo had started, and I was one of the references. After a short discussion about the candidate, Andrew seemed curious to know about our strategies. His first question “What is your time horizon”?
thinktradepray 