It seems to be part of human nature to focus on the most hopeful point of the trading cycle. Our research indicated that liquidations are vastly more important than initiations. If you initiate purely randomly, you do surprising well with a good liquidation criterion.
In other words, Eckhardt is saying that if your method of selecting stocks involves throwing darts at a newspaper, you can still do okay so long as you know when to get out.
This concept of achieving surprisingly good results through a random process has also been observed in other areas of interest. One book I read, The Selfish Gene, by Richard Dawkins, gives a very interesting example, which I will summarize:
Imagine that you are a coach trying to put together a team of oarsmen to compete in the next Olympics. Of the candidates competing there are oarsmen that are fit, unfit, right-handed, and left-handed. The ideal team would consist of the most athletic candidates; half of which would be right handed, and the other half left handed.
Assume further that as a coach you are blind. Nonetheless, your task is assemble the best team possible. To accomplish this, you randomly assemble candidates in a boat, and time their performance. Afterward you randomly assemble a new crew, and time the results again. Over time it would become clear that some oarsmen are consistently found in the fastest boats, and that some work better with right handed oarsmen and vice-versa. It would not be long after until the coach identified the fittest men, and the proper proportion of right/left handedness. In fact, this blind coach, by simple timing random runs probably could assemble a better team than the most experienced and discerning coach.
You may think that this may work in theory, but not in real-life. If so, I recommend you buy a copy of Michael Covel’s Trend Following, and read the fascinating story of how trend follower John Henry was able to purchase the Boston Red Sox in 2002 and, through a technique known as Sabermetrics, led that team to the World Series.
