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I Need Two Losing Investment Strategies to Win – The Paradox

If you analyze the joint dynamics of two losing investments or trading strategies properly you could end up with a winner. It is hard but possible. This is related to Parrondo’s paradox.

In 1996, Spanish physicist Juan M. R. Parrondo came up with a class of  interesting games. Parrondo’s paradox, as it came to be known, is a situation where two individually losing games can be combined to a winning game.

Although Parrondo’s games are not directly applicable to stock investing in their original form, if one could identify two suitable losing strategies one could end up with a winning strategy. I argue that one of the strategies should be long-only and the other short-only. Then, due to longs and shorts interacting, the resulting strategy can be a winner.

I am thus  looking for two investment advisers, one permabull and one permabear, who are always losers during the same period of time but winners otherwise. How could a bull and a bear be both losers at the same time? This can happen when the market is choppy for example. Then, the signals from the two may cancel each other during the losing period and you are left with the winning trades.

This is not exactly diversification. We are not talking here about diversifying risk across several managers. We are talking about turning two losing propositions into a winner.

Of course, easier said than done but this is not a joke…