When we talk about something being "stationary" we mean that the observations look like they could be drawn from the same "bag of observations" (distribution), regardless of what time we choose to look at.
If you have some kind of factor that you think predicts future stock returns (or similar) and you are making charts like below, then here are some tips...
We'll go through an example of trying to "time" SPX with the level of VIX.
1. What exposures do I want? 2. What exposures do I have? 3. How do I get closer to 1 from 2, given that:
a) it costs to switch positions
b) my estimates are noisy
c) co-movements of assets are somewhat predictable
1/n
Concepts like "open trades" and "unrealized p&l" tend to be unhelpful in this paradigm.
If you don't like the exposures you have, then move them closer to the ones you want.
It makes no difference if you're underwater or in profit in your "position accounting"
2/n
There is no difference between a position that you have kept on the book for a while and one you just opened. It's exactly the same exposure either way.
Let's run through these 3 questions using a simple toy trading approach...
3/n
I think of the returns from "fundamental investing" coming from two sources...
1. Risk Premium - The tendency of risky assets to be relatively cheap vs their expected cashflows. This leads them to "carry" more than they would if their real cashflows were riskless
2/10
2. Mispricing - For behavioural/structural reasons, some assets are under/over-priced vs a reasonable estimate of their ex-ante "fair value".
On average, we expect them to converge towards fair value over some long time horizon.