Tim Price at The price of everything has an excellent post up today with the title, “It’s About Time...” In it, he quotes Jim Leitner of Falcon Management as saying (in Inside the House of Money: Top Hedge Fund Managers on Profiting in the Global Markets) that “If all investors allocate money to a one-month time frame, by definition there are going to be fewer opportunities there...There’s just too much competition over short-term trading, which is a timing-driven business. With timing, sometimes you’re going to be right and sometimes you’re going to be wrong, but it’s not going to be consistent over time. Meanwhile, the longer-term opportunities still exist because there hasn’t been that much money allocated with multi-year lockups. That’s not happening yet and probably won’t because investors are way too nervous and shortsighted.”
I talked a little about time horizons in A Sentiment Primer, and will have more to say on the subject at a later date, but I today want to note that I don’t believe Leitner picked the one month time frame for his hypothetical out of thin air. Given that the SPX is a real-time pricing measure, the VIX looks out 30 days, and VIX options extend all the way out to the middle of 2008, this presents an interesting context in which to think about risk and reward.
Later in the same article, Prices cites Nicholas Nassim Taleb (whose Fooled by Randomness is required reading for all VIXophiles) as the source for the statistic that the day trader’s portfolio has a 50.17% chance of improving for each minute that the frenetic trader checks the balance, while the long-term investor who checks his or her portfolio once a month is likely to see a gain in the period 67% of the time.
What is your time horizon? Do you always trade in the same time horizon? How good are you at matching your research, thinking, setups, entries and management of existing positions to your target time horizon? Do you know the time horizon of your favorite indicators? Do they suit your trading style and typical holding periods?
I'm not sure about the answers to all these questions, but I wanted to pose them as a thought experiment. I will kick them around a little more and weigh in again at some time in the future.