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The Martingale
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The Martingale

Wile E Coyote was the best asset manager... until he looked down.

Shyam Sunder
Apr 3
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Don’t look down: consumers and businesses have just run straight off a cash cliff

The Martingale strategy involves doubling up on losing bets and reducing winning bets by half. It essentially a strategy that promotes a loss-averse mentality that tries to improve the odds of breaking even, but also increases the chances of severe and quick losses. (Investopedia)

The Martingale, in some sense, is the opposite of trend following’s "Cut your losses short and let your winners run" maxim.

When markets start their drawdowns, the typical knee-jerk response of most investors is to average-down on their holdings. After all, isn’t that what Warren Buffett said? However, where does the money to buy these losers come from? It comes from selling the winners. Or, if you are pumping in funds from your salary, it comes from not buying winners.

Basically, retail investors follow a Martingale strategy.

Its all fine and dandy as long as the losers recover. One might even be remembered a hero with balls of steel to have endured and doubled-down on stocks that were getting cut in half.

But play the game enough number of times and eventually, you will go bust.

Right now, the most prominent fund manager playing the Martingale is none other than Cathy Woods. ARKK, her flagship ETF, is now down to just 35 stocks, from 60. (Morningstar)

It is an interesting game to learn from as a passive observer.

Markets this Week

Links

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Legendary stock picker Peter Lynch made a remarkably prescient market observation in 1994. (TKer)

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