A Brief Interlude: The ABC-K6 Model I Created and Financial Products
— Products that this mathematical formula 'can handle' and 'cannot handle'
Up to this point, I have been discussing the future, probability, and time while using the mathematical formula known as the ABC-K6 model.
I would like to pause here and organize my thoughts.
Which financial products is this model compatible with, and which are fundamentally incompatible with it?
This is not a discussion about superiority or inferiority, nor is it a recommendation of specific products.
It is strictly a discussion about the boundary line of whether the K6 calculation structure can 'handle' them as a prerequisite.
The single condition that K6 assumes
First, I will start with the conclusion.
K6 is premised on only being able to handle 'financial products where the future does not end midway.'
What K6 is calculating is not 'whether it will be profitable.'
It is a replica of the time series of valuation, and the DD (drawdown) and time to recovery that appear within it.
For that, the prerequisite that time does not forcibly end midway is essential.
Financial products most compatible with K6
◎ Index Funds (Spot Trading)
For example,
• S&P 500
• NASDAQ 100
• All Country World Equity Index
• TOPIX
Products composed as an aggregate of multiple companies like these.
The reason for their good compatibility with K6 is very simple.
• The investment target is not a single company
• Failures of individual companies are averaged out
• The market structure itself assumes long-term continuity
In other words, the probability structure is relatively stable.
Crashes will happen.
Long periods of stagnation will also happen.
Even so, the probability that 'the market itself will collapse and disappear' is extremely low.
For these types of financial products, K6 can observe the following as a time series until the end:
• Depth of DD
• Frequency of DD
• Time required for recovery
However, given the above characteristics, it should be self-evident that even among equity index funds, products called bear-type or inverse-type are incompatible with K6's prerequisites.
Financial products with subtle compatibility with K6
△ Individual Stocks (Spot Trading)
It is not that individual stocks 'cannot be handled at all' by K6.
However, the prerequisites become difficult all at once.
This is because what determines the future of an individual stock is dominated by narrative and non-probabilistic elements such as:
• Business strategy
• Technological innovation
• Regulations
• Management decisions
• Competitive environment
It might be possible in principle to translate these into a mathematical formula as 'future probabilities'.
But most of them would become a collection of hypotheses rather than a model.
What K6 excels at is handling the 'collective biases of civilization and markets.'
Treating decisions that sway the fate of a single company as a stable probability structure is inevitably prone to failure.
Financial products incompatible with K6
I will draw a clear line here.
✕ Bonds
✕ Foreign Currency (FX)
✕ Crypto Assets
✕ Commodities like Gold/Oil
✕ Derivative indices like VIX
✕ Active Equity Funds
What these have in common is that they have a structure where
time is not on your side.
• Zero-sum or cyclical structure
• Growth does not self-propagate
• Expected value is not stable over the long term
K6 is not a model that guarantees a future where 'if time passes, you will definitely be rewarded.'
But at the very least, it is premised on a structure where probabilities accumulate as time continues.
Active funds are the same.
• Manager changes
• Policy shifts
• Survivorship bias
Over time, the probability structure itself changes.
This is the type of target that is most difficult for K6 to handle.
Summary so far
If I were to summarize this in one word, it would be this:
• K6 handles 'time,' not 'price'
• Products where time is cut off midway cannot be handled
• It is compatible with markets that grow as an aggregate
The next topic I will handle is 'leverage,' which many people tend to confuse here.
Even with the same leverage, 'products where time continues' and 'trades that end midway' are essentially different things.
In the second half, I will organize these from the perspective of K6 using the axes of settlement deadlines, margin calls, and loss cuts:
• Leveraged ETFs (e.g., Leveraged NASDAQ)
• ETF margin trading
• CFD
———
Misunderstandings about leveraged products
— Even if the leverage is the same '3x', the handling of time is completely different
From here on, this is a topic that cannot be avoided when talking about the K6 model.
That is the fact that not all leveraged products are the same.
Many people summarize it with the phrase 'leverage = high risk'.
But from the perspective of K6, what is important is not the multiplier.
Whether time can continue or not.
That is all.
Leveraged ETFs (e.g., Leveraged NASDAQ) are 'products'
First, leveraged ETFs represented by TQQQ.
This is a financial product.
• No settlement deadline
• No margin calls
• No forced loss cuts
• Trading continues as long as it remains listed on the market
This is what is important.
No matter how much the price drops, the time series does not break midway.
In the US market, there are circuit breakers.
If the entire market drops by a certain amount in one day, trading is forcibly stopped.
As long as this system exists, TQQQ will not theoretically reach zero.
To be precise, it means 'it will not reach zero' in the sense that 'the structure is designed so that the valuation maintains a finite value as long as continuous price formation is maintained.'
The market value assessment might become infinitely small. But it will not 'disappear'.
When adapting to the K6 model, this is an absolutely important property.
Margin trading and CFD are 'contracts'
On the other hand, there are other ways to operate QQQ at 3x leverage.
• ETF margin trading
• CFD
But these are not products.
They are contracts.
And contracts always have an end.
⸻
Decisive difference ①: Margin calls
In margin trading and CFD, when the valuation falls below a certain level, the following occur:
• Demand for margin calls
• Deposit of additional funds
If you cannot deposit, it is a forced settlement at that point.
What is important in margin trading and CFD is the point that 'you are forced out of the market before the price reaches the bottom.'
What the K6 model wants to observe is:
• How deep it dropped
• How long it stagnated
• The time until recovery from there
But in margin trading and CFD, the time series is severed in the middle of the DD.
⸻
Decisive difference ②: Loss cuts
Loss cuts are not a 'mechanism that protects you'.
From the perspective of K6, it is a device that steals the right to observe the future.
• Temporary panic
• Loss of liquidity
• Sharp drops and sharp rebounds
In such scenes, the most important 'recovery process from the bottom' becomes unobservable.
With a leveraged ETF, even in a hellish DD, you can see the subsequent recovery to the end.
But in margin trading and CFD, it ends before that.
⸻
Decisive difference ③: The wall of time called settlement deadline
Margin trading has a clear deadline.
CFD also costs money to maintain positions, and there is a de facto time limit.
This directly conflicts with the premises of K6.
K6 is a model that observes the probability that the future will be saved by extending time.
But in contracts where time cannot be extended, that observation itself becomes impossible.
Even with the same '3x leverage', they are different creatures.
Let's organize this here.
◯ Leveraged ETF (Leveraged NASDAQ, etc.)
• Settlement deadline
→ None
• Margin calls
→ None
• Forced loss cuts
→ None
• Continuity of time series
→ Yes
• Compatibility with K6
→ Good
◯ Margin trading/CFD
• Settlement deadline
→ Yes/Depends on the exchange for CFD
• Margin calls
→ Yes
• Forced loss cuts
→ Yes
• Continuity of time series
→ No
• Compatibility with K6
→ Bad
The reason K6 can handle Leveraged NASDAQ
The K6 model does not call Leveraged NASDAQ a 'safe product'.
The DD is deep.
Recovery takes time.
It is also mentally tough.
But no matter how tough it is, the future does not end midway and it presents time series data in various scenarios.
For this one point, for K6, Leveraged NASDAQ can be included in the simulation model not for evaluating the future, but as a target for facing the future.
(Postscript)
This article does not intend to optimistically downplay the risks inherent in asset management, nor does it intend to recommend or guide specific financial products or specific investment actions.
The examples of each financial product for the ABC-K6 model described in this article are based on the rules of various transactions or product descriptions at the time of writing, and there is no intention to claim universal correctness over the future.
