Recently we revied the performance of Einstein, a German trader who managed (without a leverage) to make almost 2000% in less than three years. LetYourMoneyGrow.com translates his investment grades in layman's terms:
Tenbagger - the stock will grow ten times within 3 years.
Doubler - the stock will grow twice with a year
Outperformer - the stock will be better than peer group by factor 2
Money - one may but not necessarily need to buy the stock
No-hoper - one will neither lose nor earn money with this stock
Pinocchio - the board does not get along with the truth
Brief - one may but not necessarily need to sell the stock short
Short - one can earn money if sells this stock short
Snot - avoid buying this stock, do sell it short!
Snot to the power of 10 - target zero, total loss, blacklist and megashort!
The maximum drawdown (MDD) is likely the most important measure of risk in practice. We explain how to calculate it and why you should keep it under control. Remember, if the MMD reaches -50% the portfolio have to grow +100% in order just to compensate the previous loss!
Sometimes (esp. to fool inexperienced retail investors) the diversification is claimed to be a silver bullet (even in a financial crisis). I show that in crises the diversification effect weakens significantly but still persists (esp. for "defensive" stocks).
I argue that in a normal (non-turbulent) market the diversification is very helpful in theory but also critically consider its applicability in practice.
The results that we obtained for the DAX / German stock market should be extrapolated with caution for other markets. You will also see why it is better to watch and know the market (rather than to blindly rely on quantitative analysis and common sense).