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Daily Speculations The Web Site of Victor Niederhoffer & Laurel Kenner Dedicated to the scientific method, free markets, deflating ballyhoo, creating value, and laughter; a forum for us to use our meager abilities to make the world of specinvestments a better place. |
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From: Omid Malekan <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: [SPEC-LIST] Contrarianism
Date: 08/26/2003 1:54:02
Recently I have been thinking a lot about the contrarian approach, and have
come up with three obstacles that need to be overcome. For my purposes, I
define being a contrarian as going against a trend which has already sucked
in a large percentage of those who would play that trend, leading to a turn
in prices.
The first obstacle is determining what percentage of the players have
already taken a certain position. There are many indirect indicators to look
at, but no measure that I have seen is perfect. Volatility makes major
regime shifts over the years, options analysis could be skewed by hedging
strategies, and anecdotal evidence is just that, anecdotal. Surveys tell us
what people say, which could be very different from what they actually do.
Besides, if a perfect measure of "who is long and who is short" did exist,
widespread knowledge of it would eliminate its usefulness.
The second hurdle is picking a level to mark as an extreme. A cab driver
recommending GE may be a sign, but wouldn't 2 cab drivers be a bigger sign?
With the quantified sentiment measures statistical analysis makes the most
sense, but by definition major inflection points are rare, making purely
quantitative analysis shaky. My own experience has been that betting against
a VIX of 50 when it ends up topping out at 70 could be devastating when real
world constraints are taken into account, even if soon enough the index is
at 30.
But it's the final hurdle that bothers me the most. Markets are an extremely
open system in the long term, and a major move in one direction could be
self replicating in the short term. One cab driver recommending a stock that
has had a big run may be a sign, but what about the thousands of other cab
drivers who at the moment have no opinion of the stock. Couldn't another 10%
increase in the stock suck them in to buy, leading to a greater number of
cab drivers who are bullish on it? And couldn't the news of the profits of
the cab drivers eventually lead reluctant valuation based traders who are
lagging the stock in YTD returns to go long, all the while creating further
upside that makes shaky contrarians like myself throw in the towel?
I am certain that this territory has been covered before, and I have a
feeling that a system which is self-defeating below a certain magnitude but
self-fulfilling above it exists in the physical sciences, though I cant
think of any at the top of my head. Advice on where to take my investigation
is well appreciated.
Omid
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From: Kim Zussman <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/26/2003 11:01:57
Contrarian examples are easier to see in hindsight than contemporaneously.
For example, the big sell-off in March just before the Iraq war: Generalized
fear about the outcome, another Vietnam, etc sent stocks south and VIX up.
Looking back, this was an excellent buying opportunity ( I bought a bit
then, with much trepidation after experiencing the prior 3 year bear).
I agree that markets are open (relatively unbounded) over long periods,
which at some level must contribute to the risk participants are taking. In
1996, Greenspan's "Irrational Exuberance" speech was prescient but 4-years
early. Shiller's work suggests mean reversion of stockmarket when PE's are
too high, and has over 100 years of data to support. Yet the trend
continued with vigor in 1990's, making poor those who bet on mean reversion.
To the extent that markets are at least partially efficient, VIX and VXN
should not be reliable indicators (and should become less reliable over time
as investors seek to exploit).
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From:•James Lackey <austin19856@yahoo.com> 8/26 11:1
Subject: [OPEN-SPECLIST] Contrarianism
Attachment(s): 20331202.htm <4K> 97<GO> to view. Page 1/
I have never lost more money than going against what I thought everyone already
knew. I have never missed so many opportunities, thinking that everyone knew,
so I was too late. I have never lost more opportunity by taking small profits
in what I thought was to sell the news as now everyone knows.
All that is retrospective qualitative..but a close second is trading to get
even..and when I did I sold only to see the price rise 10 fold again...LACK
Omid,
Another sign might be significant insider trading by important officers and
directors and that trading is going in direct opposite to the movement of
the stock- be it up or down.
Mike Buchsbaum
From: Bbands <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/26/2003 11:33:02
Humphrey B. Neill, the father of contrary opinion as we know it today,
suggested a three step process. First, you must find a widely, if not
universally, held view. Two, you must wait for that view to be wrong. Three,
you must wait for market action to confirm. Admittedly such a rigorous
approach to contrarianism reduces the number of 'opportunities' but, as Mr.
Neill was quick to point out, true contrarian opportunities are few and far
between. Mr. Neill also asserted that it was very hard to be a true
contrarian. I doubt that fading the VIX at 50 would have been appealing to
him. He would have required a lot more background and information.
To quote Mr. Neill from "The Art of Contrary Thinking": "Let me emphasize
that "contrary opinions" are of great value in analyzing 'economic and
political trends', not merely to catch the occasional swing in the stock
market. Market trends are symptomatic of fundamental shifts in our economy
and in the world economy. In this regard they are significant, of course,
but the lesser ups and downs in stock prices are of negative value and are
generally unpredictable."
--jab
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From:•Mark Serafini <SPEC-LIST@HOME.EASE.LSOFT.COM> 8/26 11:3
Subject: Re: [SPEC-LIST] Contrarianism
Attachment(s): 16321431.htm <1K> 97<GO> to view. Page 1/
Contrarianism is best performed in a context where the market is in the
process of creating a self-fulfilling/self-defeating paradox. Once u locate
those environments, u can then wait for the market to behave in a counterintuitive
manner...at that point in time u have found yourself a true contrarian
opportunity.
From: Tim Melvin <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/26/2003 12:08:59
Omids post brings out some excellent questions. I am, of course, a natural
born contrarian. Finding that a majority of people in the room agree with me
will, in most situations cause me to rethink my opinion.I am not capable of
ollowing a trend. everytime I have tried to be a trend follower it has cause
me to lose money, break out in hives and engage in irrational behaviour and
on several occasions has even caused a bad case of marriage. I am by birth,
upbringing and personality the antithesesis of trendy, in life and in
markets.As omid wisely points out, trading(or living) contrary to the trend
can cause excessive amounts of pain if the trend continues against us. Human
pyschology typically leads to excess and like pet rocks, bungee jumping and
chocolate martinis, market trends can last far longer than ever thought
possible.
some observations..I think it is easier to be against the trend in sectors
and markets as oppossed to individual situations. it is also much easier to
fade the collapse than it is the rise of these situations. the rise is fuled
by euphoria that will last until people are literally forced to give up. the
feeling of gain, fast unreasinable gain is both pleasent and addictive. It
becomes self fueling as more and more seek the pleasures of easy gain. It is
difficult to ascertain when and what will stop the fuel from being added to
the fire. Insider selling in these cases in almost meaningless as executives
and officers cash in their gains in the face of the buying onslaught.There
are no natural sellers other than shorts who are a minority of traders and
do not possess the liquidity to stop a parabolic rise
fading the collapse however is a little different. the feelings of loss are
something we all want to avoid so the collapse is much quicker and more
volatile than the rise. To avoid the loss, the daily qwithering away of
capital contained in the day end quotes in the paper or on the ever present
scrolling ticker tape on the bottom of cnbcs screen ( does anyone else think
that should go across the top when maria is wearing one of those little low
cut tops?).As sectors and markets collpase, there ARE natural buyers and
they leave footprints. perhaps not the elephant prints of Lobologa, but they
are there. Insider buying across an entire industry is one very good sign
that the turn, while maybe not today, is imminent.We saw this in telecom and
power generators last year, and it was present in banks in a big way in the
early 90s. there are also natural insitutional buyers. trolling the sec
sites for names like mason hawkins, john constable, talton embry, david
tepper, bill miller,marty whitman..if they start showing up in fiorce in an
industry, makret or country, theres a good chance the end is near. as
sellers panic out early and trading volume in these destryed sectors and
names shrinks, these natural buyers do have the liquidity to stop a decline.
they are the first buyers of a meaningful nature in a collapsed situation.
they leave footprints. Look for them..Congressional hearings and network tv
news exposes on an industry group are also pretty good indicators that
sentiment has just about played out to the downside.
It is important to realize that you WILL be early. your positions will
probably move against you at first. I am convinced that scaling into
contrary postions is a critical part of succesfully trading in this
arena.You will also from time to time just simply be wrong and have to exit.
have a plan for this. Also be aware that after you exit, its a good idea to
keep an eye on your recently sold position....in fading the trend, further
price decline after you throw in the towel may mean its time to
reconsider.because youWILL be early and you maybe wrong, I think you have to
limit your use of leverage entering the trades...as considtions imporve you
can always ramp up later as the fog clears and others begin to agree with
your position.....when everyone agrees with it, its time to consider where
you re geting out.
.
From: Abe <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/26/2003 13:18:50
Hi Tim,
>> I am not capable of following a trend. everytime I have tried to be a
trend follower it has cause me to lose money, break out in hives and
engage in irrational behaviour
>> when everyone agrees with it, its time to consider where you re
geting out.
A question arises:
Suppose you enter a market in a counter-trend situation and you are
right, what determines how long you are going to hold on to your
position?
You state (see above) "when everyone agrees with it". For example, at
what point would you have closed your S&P position after having bought
the big sell-off just before the Iraq war?
I am asking because when you get the bottom/top right and a market turns
around your way, you automatically become a trend follower because your
position is suddenly with the trend.
The danger I see is you might get out by far too early of an otherwise
great trade. I am asking because I got the bottom right with a lot of
money. What I didn't get right was the exit - only two weeks later!
All the best,
Abe
(?)
From:•Tim Melvin <SPEC-LIST@HOME.EASE.LSOFT.COM> 8/26 13:3
Subject: Re: [SPEC-LIST] Contrarianism
Attachment(s): None Page 1/ 1
this is my biggest flaw as a trader..Im always early on the exit.....while
it has helped me avoid some disasters , I have also left some spectacular
profits on the table...working on new approaches to this prblem now and will
keep you informed....
From:•Philip J. McDonnell <phil@pmcdonnell.com> 8/26 17:35
Subject: Re: [SPEC-LIST] Contrarianism
Attachment(s): None Page 1/ 7
I partially disagree with your conclusions regarding the future demise of
the VIX & VXN as reliable indicators. Both measure volatility which roughly
acts as a measure of risk. As risk rises prices adjust to provide more
return. Thus even in an efficient market high levels of VIX & VXN should
show higher returns. Lower risk indicated by VIX would be expected to show
lower return.
However if we are talking risk adjusted return then it's reasonable that an
efficient market could one day eliminate superior risk adjusted returns.
Phil McDonnell
From:•Zussman <SPEC-LIST@HOME.EASE.LSOFT.COM> 8/26 22:0
Subject: Re: [SPEC-LIST] Contrarianism
Attachment(s): None Page 1/ 1
Tim and all
Wasn't it Rothschild, who, when asked how he got so rich, stated "I sold too
soon"?!
We are paid to suffer; the reason everyone can't do it is that it hurts too
much to miss buying the bottom and selling the top.
From: Cliff Roche <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/26/2003 22:19:04
Omid:
You started an interesting thread.
At the risk of engendering some controversy, I suggest that perhaps it might
help your cause if you think in terms of being a "contrarian opportunist."
Since all available evidence indicates that the market's very long term trend
will always be up, one would have to be a fool, not a contrarian, to go
against this prevailing trend. In the mean time of course advantages can be
gained
by making contrarian plays on entry points and/or exit points if you're so
inclined. A fine recent example was noted:
>For example, the big sell-off in March just before the Iraq war: Generalized
>fear about the outcome, another Vietnam, etc sent stocks south and VIX up.
>Looking back, this was an excellent buying opportunity ( I bought a bit
>then, with much trepidation after experiencing the prior 3 year bear).
You asked about how to quantify things that aren't really (or at least
easily) quantifiable before making a move. IMO short term contrarian plays
almost
always involve sentiment as the sole real measure. I don't care if every
fundamental in the world says the entire market (or a single stock for that
matter)
is over or undervalued, during volatile moments sentiment is king in
determining the actual "perceived" value; which is what matters if you want to
speculate successfully. It also seems to me that contrarian plays are often
intuitive . . . based on "gut" feelings (that can be disguised as wave theories,
etc).
While we cannot always look to an index (or other tangible parameters) to
tell us the general mood of the public at large we can grasp things in a general
sense and then it's time to put some money where our mouth is, or not. If
you're shaky it's going to be tough to ride things out. If on the other hand,
you have the strength of your convictions and confidence in your call (whatever
it's based on) you can run the course. At least so long as it seems prudent
to do so.
People who bet heavy and long during the big March sell off were rewarded.
All the major valuation perimeters at the time were irrelevant, what mattered
was the fear in the eyes of the herd (as registered on the VIX among other
places). Of course whether or not this feat can be duplicated, or if the gains
can be held on to is a different story. The pendulum of sentiment swings
between fear and complacency. Recognizing where we're at on that scale may in
fact
be more art than science.
Just a few thoughts from someone who is always ready to hear comments to the
"contrary,"
Cliff
From: Zussman <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/26/2003 23:18:21
Phillip, Dino, All
So, let's say finance academics show in a series of (statistically valid) papers
that buying the market at VIX (or VXN, etc) over X results in positive returns
over 1 year:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=371461
These papers circulate to all the hedgies and investment houses who pay PhDs to
capitalize on anomalies. The houses in turn trade heavily according to these
findings. Will VIX based buying remain profitable? If VIX is an indelible
indicator of risk, then buying at a certain level should proscribe high
probability of either loss or gain, without knowledge of which. If high VIX
were an immutable indicator of profitable long entry, smart would buy (earlier
and earlier) and the indicator would not indicate.
IMO contrarian buy or sell signal points should be very difficult to identify
contemporaneously, otherwise they would be exploited by (all you) smart money
and would not form global minima and maxima. If you were around in 1987, how
would you know to throw in at the vertiginous convulsion (and the largest drop
since the great depression)? And even if you had some indicators, what about
the guts? Bail out 3/00? Why not?
From: Mvb <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/27/2003 11:29:16
Zussman wrote:
These papers circulate to all the hedgies and investment houses who pay
PhDs to capitalize on anomalies. The houses in turn trade heavily
according to these findings. Will VIX based buying remain profitable?
If VIX is an indelible indicator of risk, then buying at a certain level
should proscribe high probability of either loss or gain, without
knowledge of which. If high VIX were an immutable indicator of
profitable long entry, smart would buy (earlier and earlier) and the
indicator would not indicate.
Random Ponderings, (insert foot in mouth)
So if this logic is valid we should discard all methods or anomalies we
discover, based on the fact that the hedgies with lots of PhDs will
discover them as well and obliterate them with heavy trading. Last time
I checked Renaissance had something like 60 PhDs on staff. Why even
bother to trade against that?
The anomaly is that the rule does not seem to apply to firms like
Renaissance, look at their track record. It does defy gravity.
Apparently they are able to discover and exploit anomalies with greater
success than most. The question is when does an anomaly become unworthy
of exploiting? Only when it ceases to exist? So until then should we try
to exploit it? Does the VIX anomaly still exist at this time? Should we
cease trying to exploit an existing anomaly in anticipation of its
future demise? Are all anomalies destined to dissipate?
Mark
From: Cliff Roche <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/27/2003 11:33:17
>Subj: Re: [SPEC-LIST] Contrarianismô
>Date: 8/26/2003 8:18:23 PM Pacific Daylight Time
>From: <A HREF="mailto:zussman@ADELPHIA.NET">zussman@ADELPHIA.NET</A>
>These papers circulate to all the hedgies and investment houses who >pay
PhDs to capitalize on anomalies. The houses in turn trade heavily >according to
these findings. Will VIX based buying remain profitable?
In terms of cause and effect, the VIX is a measure of effect, volatility in
this case, not the cause of it. It seems more than unlikely to me that even a
very wide spread awareness of the VIX could possibly lead to the elimination
of volatility from the market - any more than an awareness of thermometers
could somehow limit summer temperatures to a certain range. So the question
might
be better phrased as - will buying during highly volatile times remain
profitable?
The answer to this question could never be a fixed yes or no, could it?
Volatility in and of itself does not identify an absolutely assured buying
opportunity, does it? Many South American markets have been very boisterous over
the past few years. I
ve not been in a rush
however to place all of my eggs
in that particular basket (although I
ve dropped a few in
Brazil).
>IMO contrarian buy or sell signal points should be very difficult to >
identify contemporaneously, otherwise they would be exploited by (all >you)
smart
money and would not form global minima and maxima.
Aren
t almost all
significant "signals" more easily identified in hindsight?
>If you were around in 1987, how would you know to throw in at the >
vertiginous convulsion (and the largest drop since the great >depression)? And
even if
you had some indicators, what about the >guts? Bail out 3/00? Why not?
Here
s where we get to the
rub. In his original post our friend
Omid was
looking for assurances (ie: measurable and repeatable indicators) before making
a
contrarian play. Unfortunately, as you noted, if such things do ever exist
they aren
t around for
long. As I tried to point out earlier,
it does take
guts and a willingness to incur risk to reap a contrarian reward. Wildly moving
markets force most participants to run for the doors. At times, going against
that trend can prove to be profitable. It will however never prove to be
easy, no matter how many indicators tell us the move is the right one.
From: Omid Malekan <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: [SPEC-LIST] Contrarianism
Date: 08/27/2003 13:34:49
Assuming the spec-list represents a fair cut of the investment world, much
can be learned from the recent discussion of contrarianism. Many of us admit
to the approach, and more importantly we all take a certain pleasure in it.
In my brief years of interaction with traders I have met many people who are
and love to talk about being a contrarian but I haven't met many who talk
with the same glee about just following the trend. I know there are many
trend-followers, but not many of them seem to get the added pleasure that
contrarians do just from their approach. I believe this comes from the fact
that if you are a good contrarian not only are you making money, but by
definition you are making money when the majority or "the crowd" is wrong
and thus losing money.
Now we have hit a trap. The first lesson most traders learn is how dangerous
trading for any other reason other than to make money is. And as much as
most traders will agree with me on this, most of us end up doing a trade for
external reasons (having a bad day, wanting to recoup losses, meeting a
certain profit goal, paying the rent) sooner rather than later. I submit
that being a contrarian should be added to the list. Why is it that most of
us usually complain about being early vs getting in too late? Does it have
something to do with wanting to pick the exact top, the points where the
greatest number of people are wrong?
I still see much value in the approach, but now believe that many of us are
contrarians because we get certain satisfactions, not necessarily because we
are good at it and make money.
Omid
From: Tim Melvin <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date:
this starts to remind me of the value/growth argument....a contrarian needs
the trend to turn the other way ( by definition a new trend) and a value guy
needs the stock to grow its way back to health. unless of course you re a
vulture..then you dont need trends or grwoth..just liquidate the SOB and pay
me. I think there may be mental satisfactionthat comes from being contrarian
in your approach..but its imprtant to recognize that if you re not mentally
and emotionally comfortabele with and even enjoy your style and approach.
you re doomed to sleepless nights and in all liklihood losing positons
From: Tom Durff <tdurff@earthlink.net>
Subject: [SPEC-LIST] Contrarianism
Date:
Interesting coincidence.
The latest issue of Nature Magazine arrived yesterday.
The featured cover story: "Against the Grain---Brownian motion in a
nonequilibrium system."
It's way, way above my skill level, but it is a study done on GRANULAR
MATERIALS and focuses on the fluctuation-dissipation theorem.
Nature, vol 424,
the report of the study.
TomD
From: J.T. <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date:
Someone speak out and support or reject the following:
A lot of "Trend Followers" - Henry, Dennis, Dunn, Seykota, and the likes
don't trade individual stocks because they don't Trend like the futures or
currencies Trend. The only equities they do trade are the indexes.
Individual stocks are the "last mile" it seems for trend followers. The two
methods of entry they use seem to let them get whipsawed too often to let
them continue because of the volatility. The stops that are entered to
protect losses as well as the money management also becomes more cumbersome
because "a stock is a stock" vs. trading in trending
rates/currencies/futures/metals which all differ. Sure their are
growth/value , small/mid/large, domestic/global but in the end it is still a
stock. The Trend is something that is sustainable for a duration and also
can be diversified w/ other Trends. They don't own opinions ie
fundamentals/techincal/economics, just talk to one or two of them. Since
their is no opinion it is hard to be contrary. Just like the moving
averages they use is a lagging thing so to are their opinions. I guess they
can be contrarian in hingsight but while in the action they are either in or
out, and when they are in it is of know opinion to be contrary to, and
equally it seems when they are out it is of know opinion to be contrarian
to. In looking at returns and historical returns a lot of the guys
mentioned earlier had great numbers in '87. These numbers could show a sign
of being a contrarian, because most got out of the S&P long positions in
June - August and started short positions to lead them to great gains with
the crash in Oct, but in honesty these guys I don't feel had a "Contrarian"
opinion at this time, the discipline just said to do that? The true
contrarians were the ones that started the selling they just took advantage
of the contrarians, maybe that is where they can be contrarian?
j.t.
From: Tim Rudderow <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date:
As a long time trend-follower, it is well known that it is a losing game in
individual securities. Why - because in the equity market every player is the
same - a profit maximizer. In the commercial markets, commodities currencies
and interest rates, the existence of risk averse hedgers, with cash exposure
outside the exchange, changes the dynamic of the market. Furthermore, the
demand for stock is totally elastic - i don;t need to own it and if I do and
want to sell, I have to sell it to myself - someone just like me. That is why
when PG misses an earning number by 5% the stock falls 20%. The result is large
signal to noise. In commercial markets, hedging demand is inelastic - hedge or
risk going out of business. If I'm making a candy bar, I NEED Sugar. Inelastic
demand. When markets reach the tipping point (not enough or too much),
inelastic demand must be rationed.
TR
From: Michael Cohn <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date:
Perhaps there is middle ground that has developed and this explains the
explosion in the use of ETF's by hedge funds. Perhaps industries and sectors
trend
although since I cannot find a straight line with a paper, ruler and two
pre-drawn points I will leave it to others to define a trend. I always know it
after the fact but as the FT points out today in "The Real questions about
market
efficiency" -The question is why is it so hard to determine that the bubble is
there while we are in it.
.
While I could not stimulate a discussion about market efficiency yesterday
and information dissemination I have quietly persevered. I myself fight being a
contrarian every single day and am happy to report that leverage is the best
antidote to being contrarian. E.g. the cost of being different and wrong is
too hard to accept.
MC
From: Derek Gard <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date:
What then is the contrarian view now for September? Some argue that
since September is well known to be a down month, everyone is expecting it
will be again so the contrarian view is to go long because September will be
up.
I wonder if the contrarian view is not to go short because so many people
are talking about September doing the opposite of what it traditionally does
that the mass herd is going long. Therefore the market should move in the
opposite direction and move down... just as one would expect.
A paradox?
From: Dino Sola <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date:
This one is easy:--- zussman <zussman@ADELPHIA.NET>
wrote:
> So, let's say finance academics show in a series of
> (statistically valid) papers that buying the market
> at VIX (or VXN, etc) over X results in positive
> returns over 1 year:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=371461
>
> These papers circulate to all the hedgies and
> investment houses who pay PhDs to capitalize on
> anomalies. The houses in turn trade heavily
> according to these findings. Will VIX based buying
> remain profitable?
If this strategy gave superior profits, it would be a
stark violation of weak-form efficiency. Once those
papers have publicized the strategy, it is a piece of
cake to implement it. Making money can't be that easy;
I think it very unlikely that markets are *that*
inefficient.
--Dino
From: Adi Schnytzer <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/28/2003 5:04:14
And yet a horse betting system that was published in about 1981 was shown to
remain profitable (just) in 1995! The reason is simple: Not every weak form
efficiency can be arbitraged away easily. If you don't believe me, take a
look at the projected tote data for the place and show for any race in the
US horse betting markets (which tend to be the amounts bet on the different
horses in the race) and try to calculate the projected returns for each
horse! For an Aussie who is used to the simple Aussie system of calculating
place dividends, I was amazed that the US system doesn't let you do it! (The
payouts for any horse for the place or show depend on which other horse(s)
runs a place or show!! Now, all of this being the case, there must be
similar examples in the more complex world of speculation!! All the best.
Adi
From: Dino Sola <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/28/2003 18:40:50
Interesting!
Could you explain the system? Is it something like:
bet on the winner (or the last placed) of the previous
race, or something?
One point is important, though: it is informed
investors who make markets efficient. With their
investing choices, they make stocks move in a certain
way. But in horse racing, even if everybody bets on a
certain horse, that will not make that horse win. So
there is no reason to expect that the horse-betting
market be efficient.
--Dino
From: Adi Schnytzer <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/29/2003 9:22:03
The system is essentially to bet on hot favorites for the place or show if
the amounts put on them for the place or show are sufficiently less than
what what would be warranted by the amount put on them for the win! Hey,
wasn't that concise? Basically, you take the projected win payout for the
favorite and using Bayes Theorem calculate the place and show probabilities.
Then bet if the hoese seems underbet for the place or show. I'll put up the
reference when I track it down. It's a system which works but is boring as
hell! The original paper is Hausch, DB, WT Ziemba and ME Rubinstein,
"Efficiency of the Market for
Racetrack Betting," Management Science, 27, 1981, 1435-1452.
It was written before laptops and today is a breeze to implement.
As to your second point, you assume that horses are gambles and stocks are
not in the sense that insiders can't pick winners on horses as well as on
stocks and there you are simply wrong. I will send you my 1995 EJ paper if
you want proof! All the best. Adi
From: Dennis Burkey <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/27/2003 21:15:07
This is a good place to mention one of my favorite lines by Mr. Soros.
"...Now that the contrarian viewpoint has become the prevailing bias, I have
become a confirmed anti-contrarian." -The Alchemy of Finance (p. 308)
-db
From: J. Rollert <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/28/2003 16:23:08
On a serious note: I have joked for years that as soon as
Maria begins to wear clothing that "accents her figure" then
the ratings clock countdown has begun on financial news and
a trading market enters the picture. How long have you seen
this? I don't watch her at all.
I have also found a correlation in market and industry tops,
with brokers/sales people separating from their wives.
Wives sometimes smell their husbands fear better than they
realize. As an analyst, I even look at this with
management. The Director of Marketing's usually my first
choice for observation.
Remember the top with Jack Welch...
Jeff
From: Mvb <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/29/2003 13:00:31
Rollert wrote:
I'm curious, which Renaissance are you referring to?
That would be Jim Simon's Renaissance Technologies. If you are
unfamiliar with them a google search for an article titled "The Secret
world of Jim Simon's" will yield an interesting read.
They used to have a website www.rentec.com but I see it's been taken
down.
Mark
From: Dennis Burkey <SPEC-LIST@HOME.EASE.LSOFT.COM>
Subject: Re: [SPEC-LIST] Contrarianism
Date: 08/29/2003 13:25:34
That was a very interesting article. Thanks.
Here's the link for anyone interested:
http://ljsavage.wharton.upenn.edu/~cengiz/Finance/jim_simons.pdf
-dennis burkey
From: VICTOR NIEDERHOFFER, NIEDERHOFFER INVESTM
To: LAUREL KENNER, NIEDERHOFFER INVESTM
Subject: Fwd: [SPEC-LIST] Omid's contrarianism
Date: 09/02/2003 7:58:59
very good for us to tackle vic
----- Original Message -----
To: STEENBAB@AOL.COM
At: 9/ 2 7:58
a very good question that we could most usefully tackle. vic
----- Original Message -----
From: Daniel V. Grossman
At: 9/ 2 0:09
Omid, I recognize a similar tendency in myself, but would analyze it an an
unfortunate "perfectionism".
Thus if I make two trades on a day:
1. I sell 1000 shares at the high (or within a cent or two of the high) for
the day, after which the stock drops significantly.
2. I sell 2000 shares not near the high for the day but making twice the
profit.
I would probably have stronger thoughts about, get more pleasure out of, the
first of these trades, because would demonstrate to myself how smart I was,
how my thinking and instincts were so perfect that I was able to get out at
the high.
Is this familiar to anyone, or is it solely my own counterproductive
idiosyncrasy?
Dan