active trading strategies get absolutely
killed on risk. Specifically, the
sortino or sharp ratios. So, let’s talk
about what those are and why I’m so
skeptical that anybody can trade
actively trade anything. Literally, it
doesn’t matter if it’s gold, silver, you
know, soybeans, corn, uh cryptocurrency.
If you’re actively trading anything,
stocks, bonds, you’re probably losing.
But let’s talk about the sharp ratio and
sort ratios. So the sharp ratio and the
sortino ratio measure risk because when
you’re trading anything, you’re trying
to get a risk adjusted return. So if I
go to somebody and say, “Hey, in the
last three years, I’ve made 500% gain on
my Bitcoin.” They could retort, “Yeah,
but I bought a lottery ticket and I
could have made a billion dollars for
$2.” One second.
And of course that is true. They could
have made a billion dollars with a $2
lottery ticket, but the reason they’re
not going to is because the sharp ratio
or the sortino ratio is awful. That
means the likelihood, the amount of
downside risk or the total volatility,
the likelihood you’re winning versus
losing on a lottery ticket is abysmal.
Which means even if you have a millionx
possible return, the probability that
you’re going to win is 1 in 250 million,
which is basically zero. So you’re just
not going to win. which is why lottery
tickets are such a waste of time uh and
such a horrible thing for people to buy.
Um okay, so knowing that, what is the
sharp ratio? The sharp ratio measures
how volatile something is. And you need
to know how volatile something is
because if you’re investing in something
that is volatile, then the that
volatility is going to affect your
ability to make money on it. So if
you’re actively trading something and it
has very high volatility, the probab
probability that you’re going to
properly time the market by buying when
it’s low, selling when it’s high, and
all that is low. It’s much lower if it’s
a high volatility asset. So something
that has a good sharp ratio means the
amount of ups the amount of reward as
compared to the risk is good. It’s in
your favor. Something with a bad sharp
ratio means that the probability that
that volatility is going to kill you is
much higher which tends to make it a bad
investment. Uh Bitcoin has the best
sharp ratio and sortino ratio of
basically any asset. Meaning on a risk
adjusted basis the risk versus the
reward is much more favorable to you
with Bitcoin than virtually any other
asset. Okay. So let’s talk about what is
the sortino ratio. Well, the sharp ratio
measures how volatile something is up
and down. Now, you might be thinking,
why would anybody care about volatility
to the upside? Because everybody wants
assets to go up in value after they own
them. But that’s not true because some
people short assets, meaning they’re
betting that the asset’s going to go
down. So, the sharp ratio measures the
volatility up and down. The sortino
ratio measures just the volatility down.
Meaning you don’t get penalized for
volatility that is up to your, you know,
to your favor. So anybody that is
investing in Bitcoin with the hope that
it’s going to go up is it’s better to
use the Sortino ratio rather than the
sharp ratio. Now the truth is you’re not
going to use any of these ratios because
you have to have a bunch of technical
dashboards and expensive software and
wonky stuff to use any of these things.
But it’s helpful to understand the
concept of what these things are even if
you’re not actually going to use them in
day in day-to-day life. Okay. So the
sortino ratio only measures the downside
risk. So if you’re investing in Bitcoin
with the hope that it goes up, the sort
ratio is a more appropriate measure. Now
again, you’re not going to find these
things. They’re esoteric down in the
weeds of investing. But I want to talk
about those because when people are
actively trading, the risk is what kills
them. Nobody would argue that someone
who’s actively trading doesn’t have the
potential to make a lot of money. Just
like nobody who buys a lottery ticket,
nobody’s going to say it’s impossible
that you’re going to win. It’s not
impossible that you’re going to win.
It’s just extremely unlikely that you’re
going to win. Uh same same with active
trading or day trading or anything like
that. It’s not impossible that you’re
going to make money. It’s just highly
unlikely that you’re going to make
money. So, I did a video a little while
back about why I’m so skeptical about
active trading strategies, and I used
the acronym hardly, H A R D L Y, with an
F, as in it hardly ever works, and you
get an F uh if you’re actively trading.
So, I wanted to compare risk
specifically to those things. So, H, you
can go back and watch the video, but H
stands for hurdle rate. Obviously, you
need to be comparing, you know, at least
to the S&P 500 or gold. But if you’re
trying to beat, in my world, if you’re
trying to beat something, you have to
beat Bitcoin itself. It makes no sense
to brag about returns that are below
Bitcoin because you could have just
bought Bitcoin. So, H is for hurdle
rate. And again, most things don’t even
perform as well as Bitcoin. So, there’s
no point in even doing them. If your
investment strategy does not even
perform as good as Bitcoin, what are you
even doing? So, H is for hardly. A is
for all portfolios. Again, people
usually lull themselves into uh
believing they’re performing better than
they are because they only look at the
returns of their most recent portfolio.
And all the portfolios from before that,
they say, “Yeah, but the the bad
outcomes of that portfolio was because I
didn’t follow my own rules or I didn’t
follow my gut instinct or I didn’t know
what I was doing yet or hadn’t learned
about some new Fibonacci retracement,
you know, whatever.” And so then they
always say they always discount the bad
performance of uh former portfolios. But
you got to take those into account
because there’s no guarantee the current
portfolio you’re trading that you feel
good about is not going to turn into one
of those past performers where you say,
“Oh, well that didn’t work out. I did
lose a bunch of money, but that’s
because I didn’t understand X.” And then
X is your new trading thing that makes
you feel like you’re always going to
win. So HA A is for any and all
portfolios. And again, when you count
any and all portfolios in instead of
just your most recent portfolio, you
realize your risk goes through the roof,
the H of hardly hurdle rate. If you’re
not counting Bitcoin as your hurdle
rate, again, you realize your
performance sucks against the world’s
number one performing asset, which is
Bitcoin. So, HR, R stands for uh
recession. Again, the problem is not
that your strategy can’t work in an in a
world with no recessions. Virtually all
strategies work in a world without
recessions. The problem is when a
recession comes, your strategy gets
killed. So, it’s very easy to believe
you’re performing better than you
actually are because the risk that is
reflected by the sharp ratio or the
sortino ratio shows up most aggressively
in a recession. And unless you’ve been
trading with the exact ta same strategy
from prior to 2007. So it was working
before the great recession, it was
working during the great recession, and
it’s worked after the Great Recession,
then your strategy has not been battle
tested. One second.
And a strategy that has not been battle
tested can look like it’s working a lot
better than it actually is because the
massive risk inherent in that strategy
is being shielded by the fact that a
major recession hasn’t hit while you’ve
been executing that strategy. So H is or
sorry uh R is for recession. Uh D is for
diversification. Once again, the if if
you even acknowledge that the risk is
high in your portfolio, it means you
have a relatively small percentage of
your assets in it. And this is typically
what I find when people are actively
trading something. I find out that it’s
like 1% of their assets or 5% of their
assets or 10% of their assets. They’re
trading a pretty small percentage of
their total net worth or their total
assets, which is an acknowledgement that
their strategy is too risky to employ
for a larger percentage of their net
worth as opposed to somebody like me
who’s got literally 100% of my liquid
assets in Bitcoin because again, the
sharp and sortino ratios for Bitcoin are
so favorable that I can feel good about
having 100% Bitcoin exposure, which I
would never feel good about of an
individual stock or bond or commodity or
anything like that. Uh so HR D is for
diversification. If if your strategy is
so risky that it requires
diversification, that indicates that is
a high-risisk strategy. Uh L H A R D L
What did L stand for? Um it’s been a
couple weeks since I did this video. Um
uh I can’t remember. Maybe it was loss,
like risk of catastrophic loss and Y was
like years. can you hold on to it for
years? And f are you killing getting
killed with fees? Um, all of those
things. I’m forgetting what some of
those, you know, the acronym, my own
acronym I came up with, what it stands
for because again, I’m just do this for
the love of it. I don’t uh I’m not a
full-time uh producer of any sort of
content. But regardless, when you factor
in those elements, you just realize the
risk is way higher than most people
acknowledge. So, if there was a way, I
do not know of a way to find out the
sharp ratio or the sort ratio of an
individual, you know, individual who’s
actively trading something because
typically they’re selling and buying.
And I’m not aware of any trading
software that actually tracks that for
you. But if it if there was software
that tracked it for you, you would find
out that your sharp ratio and your STO
ratio are absolutely abysmal. And by
abysmal, it means you’re taking on
vastly more risk for your active trading
strategy than you think you’re taking
on. And that’s going to show up in a
recession or when you finally make a
really bad big bet and wipes out half or
3/4 of your portfolio. Um, but the the
the major risk is a major recession,
which again, almost nobody’s active
trading strategies have actually been
battle tested by a recession. So if
you’re actively trading anything, the
right way to measure that is the sharp
ratio and the sortino ratio. I’m not
even sure if you can find that out for
your individual portfolio. Other than I
can assure you it’s probably absolutely
abysmal. Meaning if you could if some
sort of trading software would track
your sharp ratio or your shortino ratio,
you would find out that the risk of your
portfolio and the risk of your active
trading strategy is catastrophically off
the charts compared to holding Bitcoin
or just buying and holding whatever you
know diversified group of S&P 500 or
gold or whatever. Um so anyway, keep
that in mind if you’re actively trading
anything. I’m skeptical. I don’t think
it works. Um, I don’t think the average
person can actively trade anything
without an abysmal sharp ratio and
sortino ratio, which means again it may
look like you’re winning, but it’s like
somebody who goes to a slot machine and
says, “Hey, I made 50% above my money.”
It’s like, “Yeah, but the risk you had
to take on to get 50% more than your
money made your riskreward absolutely
horrible.” That doesn’t mean you didn’t
get lucky or it doesn’t mean you won’t
get lucky until a major recession. It’s
just that the probability that your
strategy holds up when it’s when you’re
taking on vastly more risk than you’re
anticipating is just not good. The odds
are not in your favor. So risk is what
kills active trading strategies. The
risk is hidden. If it was not hidden,
the right way to measure it would be the
sharp ratio and the sortino ratio. And
if you could find that out for your
active trading strategy, it would tell
you that the riskreward ratio on your
active trading strategy is probably
abysmal. And uh hope that helps because
in my ideal world, everybody would buy
and hold whatever it is they wanted to
buy and hold. And the active trading
strategies that work so badly for
people, people would stop trying them
because generally they just don’t work.
So wanted to share that. Have a good
evening.
