We have come to the table with a proposal that both “Wall Street” and investors, both individual and institutional have it all wrong. Why? Modern financial theory stopped with the development of the Black-Scholes model. What we have seen in the last few years is mathematicians trying to give trades and banks a way to “pass off” risk using formulas that have time bombs in them because some of the variables can’t be defined exactly. We have all seen what has happened and what continues to happen. Right now modern financial theories, which may seem useful, have large unknowns. What is needed is a clearly defined tool to define and capture risk, managing it’s volatile nature.
That’s where we come in. Any asset that can be definitively be priced at a regular interval can have it’s risk defined to a dollar amount by our formula. Once you know how much “risk” in dollars you have in an asset, you can optimize maximizing it’s value. For example, a $100 stock has $5 of risk in it, the optimal way to invest is to “trade your risk”, not dump your money into a full position. So you would only trade a partial amount of what you plan to invest determined by our formulas. This amount is fluid and changes and adapts as the stock moves. If you were to hold several securities in this way in a portfolio, you could invest a partial amount in other assets. The portfolio would also adjust itself as the securities move.
Everyone in the investment world is focused forward. Sure a companies stock does reflect future earning expectations, by everyone is tricked by their own human nature. Everyone focuses on the pot of gold at the end of the rainbow. People are focused on how much they can make, they are sold on the promise that something can make it there. We are too easily swayed by the “what can be” instead of what is. Humans are passionate and greedy by nature, so this is no surprise. You can see examples of this through history. We are believers that what a stock is here and now is what it is and that it’s risk component can be exploited. Everything in the price today is all you need to know.
We would like to hear back from some people on our theory and share some of our results. Hopefully we can even make some business connections.
Thanks
michael@dualpeak.com