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Hedge Fund Market Wizard

Tom Claugus: A Change Of Plans

Claugus provides an important lesson that is both market-specific and also has general importance for all investors: Alter exposure based on opportunity. When stock prices are near the lower end of the long-term price range, Claugus will hold a maximum long position. Contrarily, when prices are near the upper end of the range, he will hold a maximum short position. Altering the net exposure based on the current opportunity provides a considerable improvement in an investment approach. 


While selecting individual stocks, Claugus looks for companies that will profit from a future development that is not being priced in the current market environment. The origin of the improvement can take many forms like expected new sources of production, new technology, an anticipated increase in asset value, etc. He believes that if a revenue source is more than a year away, the market will frequently fail to allocate a significant value to it. Fundamental screens will fail to recognize these stocks because the source of the bullish potential is not reflected in existing statistics.


Traders make a mistake of judging trades as right or wrong, based on the outcome. A losing trade may reflect a valid trading decision. They have to accept that a certain percentage of good trades will lose money.


As long as a profitable strategy is executed according to plan, a trade loss does not indicate a trading mistake.


On the other hand, a winning trade can be a poor trading decision. 


Trading is a matter of probabilities. No matter how effective a trading strategy is, it will be wrong a certain percentage of the time. Traders confuse the ideas of winning and losing traders with good and bad trades.

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A bad trade can make money and a good trade can lose money. A good trade pursues a strategy that will be profitable with a reasonable risk, if repeated multiple times, although it can lose money on an individual trade. A bad trade follows a process that will lose money if repeated multiple times but may make money on an individual trade.

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Units 12/17