Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner


July 01-15, 2006


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Stealing the Blinds, by Steve Leslie

How often do we own a stock of a good company that is a solid investment according to our criteria, but we sell it or give up on it because of pressure from the market? A similar situation can happen in poker if you are not aware.

Stealing the blinds occurs in poker when you are sitting in late position or on the button and everyone has folded ahead of you. Since the blinds are forced bets and are already in the pot you take advantage of the situation and attack the players who are in the weakest position and have already committed money to the pot.

In order to pull this off a few things should be in place. First of all, the blinds should be large enough that it will cost the players some money to protect their blinds. Plus it should be worth your effort to go after the blinds in the first place. You typically don't use this technique early on in a tournament since the blinds are quite small. Second, the blinds should not have a lot of money in their stacks. If they have a lot of money in front of them, then it won't be improper for them to call your bet to see the flop. Third the game should be tight or have tight players in the blinds. You don't want to try to steal blinds against an aggressive player since they like to protect their blinds and they may bet back at you. Plus, tight players are only going to call your bet if they have a good hand themselves so you will have valuable information for you to work off of if they do call your bet. Fourth, you need to have discretionary funds available. You should not try this move if you are short stacked or you could get called and get forced out of the tournament. Plus the others may perceive you as being weak and call your bet. Finally, you have a weak hand and thus are playing a hand that you normally would throw away if circumstances were different.

Here is how it works, when the bet comes to you and it is your play you add up the total of the blinds. For example, if they are 50 and 100 then you would toss in 3 times the total or 450. So for the small blind to call, they will have to come up with 400 more chips and the big blind 350. If you have a lot of money in front of you you may try 4 times the pot. This will force the blinds to have a real hand to call.

A few follow up points. Only try this once in a while, and under the right circumstances. This is an advanced play that done wrong can be very costly to you. If they do fold, it is not a bad thing to show your hand and show them that you buffed them, and are willing to play more than just good starters. This will tend to disrupt their confidence as it will be harder for them to put you on a hand down the road and it will give you an image of being a chip bully. It will also set them up in the future, when you find yourself in a similar situation, and they call you but this time, you raise with a real hand and win a big monster pot.

This is yet another play that you should have ready, for those spots when things are set up correctly. Try it a few times and see how it works. You will be surprised how many times you will pick up chips that you would not normally get.

Beauty, from Jim Lackey

First, my little girl is five years old today.

Next, all the BMX boys are going to Brazil, and this contestant in the Miss Universe pageant is the favorite with all the boys: Rafeala Zanella, Miss Brazil.

And for those who think supermodels only come young... 52 year old Christie Brinkley is back on the free market!

Buggles of War, by Sushil Kedia

Every market in the world it seems is playing a truanting tune with this one more buggle of war. Dollar bearish consensus is being tripped, even while gold is rallying.

Oil bears are being squeezed out. Equities, bonds, money in every form is just going and spooking the majority positions.

Do not get a picture that adds up to various market relationships moving on any one logic of the expected outcomes of this event. That then is one unique subset of all possible relationships that the majority is being squeezed out by the Mistress. A time to turn a contrarian should arise soon against moves of the last couple of days in most markets then. Which ones? How to measure and count them?

Strafed in Beirut, a Poem by Larry Williams

Strafed in Beirut


Up late at night Telexing orders to NYC

Israeli jets swoop low, strafing
Hamra Street, downtown Beirut
We dive for cover

Some things
never change

Still trading...
Jets a long way away from me
Hamra Street still suffers

Cover, always looking for

Little Green Army Men, from Dr. Bill Egan

You've seen them. Little, green army men, in a bag or a box in the toy section of the store. Cheap plastic molded infantrymen with jeeps, helicopters, guns, etc. Some of you may have played with them when you were younger, or your kids have them now.

Now ask yourself the following question: What kind of short story might Stephen King write with little, green army men in it? The kind of story, of course, just like the one you or your kids imagined while playing with them.

A story where they can really fight. It's title is "Battleground" from his collection "Nightmares and Dreamscapes." TNT just adapted some of these stories into one hour cable episodes. "Battleground" is highly recommended for all green-wearing, gun-slinging specs and all others who enjoy this sort of thing. Repeated on TNT on 7/13 at 11pm EST.

The Truth About China, from Larry Williams

Ahhhh, the dream of untold wealth for the world in China...

Let me give you some hard realities: I have three books in Chinese, published by the gummint guys there.

So far royalties are zippo. Guess the books never sold, but wait: why do I get so many emails from there asking questions about the book? And how come 500+ people came out for an autograph party if there were no buyers?

The Chinese will stack the deck for themselves against all outsiders. They know the have the cards and they are dealing a sucker's game... that the corporate world has fallen for.

There are more legitimate opportunities in the good old US of A than all of China. Been there, seen it.

George Zachar adds:

I just read "James J. Hill, a Great Life in Brief" by Stewart H. Holbrook, about the great 19th Century railroad man. he too promoted, funded, and then abandoned a China venture, based essentially on the notion that if everyone in China bought one toothpick, he'd have a market for all the timber on his Western properties...

Elective Surgery at Third World Prices, from J. P. Highland

Tijuana is not the nicest place in the world, but I had a successful laser eye surgery at a bargain price. I was living in the Los Angeles area at that time and several times I crossed the border in order to buy drugs due to the big spread that exists between the drugs sold in California and Tijuana. Dentists are also much cheaper, as are car repairs.

Preliminary Thoughts on Evolution and S-x

Tuesday! What a day, with moves through the old lows, moves through the old highs, a recapitulation of the month of May, finally ending exactly where the month of June ended, enough to get all system players pointed the wrong way, and unloose all weak holders from their positions. It's a day that recaps the entire ontogeny of the market booms and busts over the past year with Nasdaq, for example, below its low of a year ago, and moving up a few percent from that low in the last few hours. Counting on key reversal and wide days of this nature, and moves after series of reversals, and runs now of up 3:30 to closes as the giants shift their strategy to early morning feasting on bulls, is in order.

Yes, all days in the market are different. And some days have more ability to keep the market going and keep the flow of energy in the system in balance than others. But unless these days can reproduce, repeat, and continue onto the next generation they are lost for ever. It would be so nice if, like the aspen tree, they could just reproduce by cloning, with exactly similar moves each day. But then the public would get wise, and the fixed and slow moving would not be able to lose all their money to those with a more permanent perspective.

Tuesday elicits thoughts on why we spend so much time and energy on courtship and mate selection and in the structures that enable reproduction to take place. It happens because we can get the best of variability in the population and engender children that can handle new situations better. The courtship the market displays attracts new entrants into the market to give romance and money, but like courtship in the peacock, it also makes them more visible and more liable to attack by predators.

The predators like to attack when there is too much downness, although they are old now and often find it hard to get out of their stately mansions. Canes were taken out by old lions and others with a buy and hold mentality Tuesday, and I saw them walking slowly back to their stately mansions late in the morning. Many attractive younger players arenít overly enthused by the old codgers who take out their canes on such days, but the fact that these old people have so much wealth at their disposal often enables them to find a fit.

A day like Tuesday fuses so many different kinds of activity, the s-x of downness, the s-x of upness, the s-x of reversalist versus trendist, that one develops a deep appreciation of the hybrid vigor that the market displays. The fact that we have such a day, that markets like this can be created, is a testimony to the importance of s-xual selection in maintaining the tangled bank that allows us to provide the proper flexibility, and liquidity, for the multifarious parties to the fray.

And yes, we can all take comfort that death is relatively swift, while not entirely painless in such situations.

Dr. Janice Dorn replies:

Thou shalt not be aware. It is a mantra for many, and herds are composed of many. People know that they are losing or panicking but it means little at the time, since they are -- in that moment of panic -- almost entirely old-brain driven. In order to get to awareness, one must leave the old brain and ascend to higher cortical centers. One must accept complete responsibility. The role of these higher centers in decision making is, in a large number of cases and in the heat of battle, over-ridden, as fear is stronger than greed and wanting out now reflects that the pain is no longer tolerable. Awareness of some variety, may (or may not) come later -- in the sense of remorse, self-deprecation or dysphoria. In this respect, it is not so much awareness in the true sense of the word, rather it is emotion which may or may not lead to contemplation and acceptance of personal responsibility for one's actions.

Dr. Lee Shulman adds:

Awareness is extremely important to good functioning in any area of endeavor. However, two factors which interfere with awareness are avoidance and denial. When life is not going well, either financially or emotionally, there is a strong tendency toward not wanting to know and fear of taking action.

J. T. Holley responds:

These words and thoughts remind me of words from Bataille's Eroticism and the players you mentioned above:

Animal s-xuality does make for disequilibrium and this disequilibrium is a threat to life, but the animal does not know that .... Eroticism is the s-xual activity of man to the extent that it differs from the s-xual activity of animals. Human s-xual activity is not necessarily erotic but erotic it is whenever it is not rudimentary and purely animal.

These are some extracts from Eroticism that have the same theme and even more importantly Bataille's look at the "comfort that death is relatively swift, while not entirely painless in such situations" that you mentioned.

Counting on Aspen, by George Zachar

I was in the tiny resort town of Aspen Colorado on holiday last week, and it was a stage-set model of prosperity.

For the first time in local memory (and yes, I checked several sources), the private jets were parked in 3 full rows at the local airfield (exceeding the old high water mark of two), with smaller aircraft literally parked under the wings of the bigger planes.

The dozens of commercial flights were solidly booked.

Folks looking to join the ongoing party might be interested in a new house on the market: "Prince Bandar bin Sultan, the former Saudi Arabian ambassador to the United States, is selling his palatial home in Starwood Ranch for $135 million in what is likely the most expensive single-family residence listed in the nation."

Electorally, Aspen is a "blue" place, voting solidly Democratic in presidential elections, though it's surrounded by red in the GOP-leaning state of Colorado. So, those who resent the place for its prosperity can approve of its politics (and status as an enormous money tree for the Champagne socialists).

What? me Count?, by James Sogi

Remember Alfred E. Newman and Mad Magazine? He always asked, "What, me worry?" Well, our motto should be, "What, me count?" The question is what do we count? One answer is in my favorite series The Cambridge Series in Statistical Probabilistic Mathematics by J. K. Lindsey, Statistical Analysis of Stochastic Processes in Time. Though the title is mighty intimidating, the writing is very clear and well edited unlike many other books on math and statistics filled with gobbledygook. Many main ideas are presented without proofs which are for the most part meaningless to me anyway. Surprisingly there is not much well written literature on fitting stochastic models to data, especially time data specs are presented with daily. As always with this excellent series is the gold mine of examples with R code which can be adapted to fit the reader's needs. The main subject of study, dear to specs, is events in time. These are:

  1. States at given points in time
  2. Events, which is the change in state at each time
  3. The time of events

Of course, randomness is the unpleasant wrench in the works, and this needs to be modeled. The goal is to construct simple models.

Some things to count:

  1. Duration between events
  2. Counts of events in fixed intervals
  3. Cumulative number of events over time

No. 2 models the intensity directly instead of the probability or density. How often has it been said in trading I was right, but was too early? What pain did it entail and for how long? Recently, many of the points moved have occurred in a rush and the rest of the time the market drifts when all of a sudden it rushes up or down 12 or more points like this afternoon's rally. It would be nice to know the time between such big moves to cut down on the time getting stretched on the rack as Chair aptly describes it. It would be nice know what precedes such moves. Look at the recent month. Most of the big moves occurred in an hour or two. The rest of the bars are all small. At certain times there are flurries of trades with many 500 plus lot orders, like a skirmish between T-Rex and Triceratops, often at inflection points. The normal fixed interval bars and volume do not model the intensity of trading, the duration between the ticks, or the number of ticks in a point of price or the direction of change per group of ticks. Many things to count.

What, me count?

Sentiment of the Day, from Clive Burlin

From the Yra Harris interview in Inside the House of Money:

The worst thing you can do in a trade is try to get back to even. I call that the "prayer trade." I can spot guys on the floor who have it on because they shake back and forth, basically in prayer, mumbling, "oh, please God, just let it come back to me. Let me break even."
What is that? Break even? That's a loser. I'm not in this business to break even. There's always opportunity in the markets, so forget breaking even. If breaking even is your goal, you're not trading anymore.

A Great Investment Book, by Allen Gillespie

I just read a new book for me, but one that was published in 1933 that I would highly recommend: Profitable Grain Trading by Ralph M. Ainsworth. The book covers more than a few of the Chair's & the Senator's lessons, and if the economics still hold, lays out some timely info for wheat trading. He also reminds a trader of a few economic truths. He does have a little technical stuff, but he was trading pre-computer. A few of the highlights:

  1. Beware the switches - "It was not until I had spend six or seven years studying and trading, that I finally succeeded in overcoming the more serious pitfalls which confront every amateur speculator, although I admit I lost heavily in 1930-1931 after having twenty-five years experience. At first I was tempted to overtrade, overstay my market, sell too soon, take too small profits, trade too often, buy wheat when it should have been corn, or vice versa, or make my trades in Chicago when Winnipeg or Kansas City offered a better opportunity for profit, et cetera.
  2. As a matter of fact, there are very few speculators and grain merchants who really want grain to decline.
  3. Under normal conditions, about eighty percent of the short side of the grain market represents merchandising sales...This lopsided interest produces a number of market situations that otherwise would never take place. It explains why grain often advances rapidly in the midst of the crop marketing seasons when receipts are tremendous and the demand poor. It explains why bear markets are frequently of very long duration, whereas, bull markets seldom last over 30 days.
  4. The one and only axiom in successful speculation is: "the sum total of all yearly, monthly, weekly, and daily highs of wheat or corn is a larger figure than the sum total of all the yearly, monthly, weekly, and daily lows." A long pull trading plan attempts to advantage the monthly price range as well as the seasonal price range.
  5. I Follow No Mechanical Plan Literally
  6. The successful grain trader...remember that 75 cents (in gold dollars of $20.67 to the ounce) is a cheap price for wheat and $1.50 is likewise a high price.
  7. The knowledge of how a certain past market performed when conditions were almost identical to a certain present market is the most valuable of all market knowledge to the professional grain trader.
  8. When the more distant futures continually sell at a premium over the near-by futures the technical advantage lies with the short seller...When the near futures, due to a tight situation, advance rapidly to a big premium over the more distant futures, the technical advantage lies with a long position.
  9. The use of "stops" is illogical and poor trading practice except when taking on additional lines. We don't buy farm land or city property that way.
  10. The successful speculator must buy on major declines and sell on major advances.
  11. The long pull trade always has an advantage over the short swing trader.
  12. Since 1884 it has taken approximately the same amount of labor and capital to produce twenty-one bushels of wheat under average conditions as it has cost to produce one ounce of gold under average conditions.
  13. Wheat and gold are both commodities and must therefore conform to the old economic law of relative costs.
  14. In the past 500 years, the price of wheat has been high only in times of major wars...and in time th expansion in acreage pushed the price as far below the costs of production as it had previously been above the cost of production.
  15. Currency inflation does not in any way disturb the relative cost of producing wheat and producing gold.
  16. In grains, "The bull market is over with the first sharp break...
  17. The percentage of price advance should be three or four times the percentage of bushel losses under a normal crop.
  18. Such wide premiums in the futures over the cash occur only in wild bull markets and are a real danger sign.
  19. Success in any field of endeavor, calls for work, thought, self-denial and sacrifice.
  20. Mistakes Made in Grain Trading - Buying when the price level is too high, overtrading, depending on market telegrams, trading on weather reports, trading on crop prospects, taking profits when the prospects are still bullish, taking small profits, trading in one grain only or in one future only, over-enthusiasm, refusing to take delivery, constant shifting, reversing the position..

A Perspicacious Spec Reads the Newswire, a Continuing Feature


This'll knock a few pennies off the Bl00mberg IPO price..

The Newest Colony, by Laurence Glazier

I have been reading about a newly settled region where a few towns have recently sprung up. There is a nascent economy, comparable to Monaco in GDP, and a sparkling new university where seminars and courses are held. The weather is always good and everyone, it appears, is beautiful. It is a hugely growing sector, I am not sure if or when it will peak. It is called Second Life.

Following years of building up latent energy with the development of the VRML and Havoc products for modeling reality and physics, VR appears to have blossomed. The beauty of Second Life is that the bulk of the creation of value is now apparently done by the customer (i.e. citizen).

I noted, with approval, that there is a chess club, organized by the appropriately named Stephane Zugzwang. I anticipate a stock exchange, this has already been tried, but to no avail as yet (only one company listed).

To join, one chooses any first name, and one from a list of possible surnames.

This world is contained in a server farm of a few thousand servers. Land is rented out in real world currency at $25 per acre per month, and as necessary more servers are added.

Unfortunately, or more accurately fortunately from the point of view of preserving disposable time, this trader was unable to set foot in the new territory as Colorgraphic Xentera multiple trading screens are incompatible.

A couple of interesting Google videos regarding Second Life: A long Google talk on Second Life and the NMC Virtual Campus.

Retrospective Numbers, by Victor Niederhoffer

It's almost the fundamental truth of economics that markets provide better signals than historical numbers as to the likely balance between supply and demand, prices and activity.

Yet, over and over again one sees a day like Friday, where on the basis of one economic number -- a seasonally adjusted retrospective inflation number for April -- the idea that has the stock market in its grip is that interest runs rampant. At the same time, the long bond closes at 106.10, a 15-day high, within a third of a point of its April month-end close, up half a point on the day. Oil is down a buck at $74.09, and the Goldman July commodities index futures are down 1.5 % at 485.

There are two things one can do on a day like this for stock market investors and traders -- throw up the hands in disgust, or take out a pencil and envelope and calculate what happens after such days . Is there something that the stock market knows about inflation that somehow the bond market which invariably sells at a yield almost 100% 1-to-1 with the future expected inflation indexes is missing? Or is there an opportunity here to take account of a mismatch. The dilemma calls into the fray, the difference between a qualitative and quantitative analysis, the importance of ever changing cycles, the interactions between markets, and markets versus history as a benchmark among other important areas .

A hand study of the most similar of 15 most similar observations going back eight years shows the effect on S&P, bonds and crude one week later as up 1%, 0.5% and 1% respectively, with variability about two times the mean.

Producer Surplus and Price Variations, by Victor Niederhoffer

One of the central concepts that helps in understanding the gyrations in prices, the profits structure of business, and the dynamics of the adjustment process is producer surplus. This is the extra amount that producers could get if they knew exactly how much the maximum that each consumer would pay for their goods and priced their product accordingly. The produced surplus is usually calculated geometrically as the sector that's left when you subtract the rectangle from the price and quantity at the actual single selling price from the area under a supply curve. A good way to see it in real life is with a homely example like one involving a Broadway show. Suppose the producer could get each member of the audience to pay the maximum price he would willingly pay to enjoy it. Some might gladly pay $1,000 and others might only wish to pay $5.00, and if the producer could just find out who they were, they would make so much more revenue and profit. Indeed, they say that the main reason that Broadway shows are so much more profitable these days is that they are reserving more and more of the good seats for price-insensitive buyers. And those who want to see it the most get to see it. Previously excess profits and frictional costs of such activities were controlled by scalpers.

A good way to see this in tabular form is-

Price of   Quantity        Marginal
  Ticket      Sold    Rev.    Rev.    Cost   Surplus
     500        1     500     500       10     490
     400        2     800     300       20     780
     300        3     900     100       60     840
      20      100    2000    1100     2000       0 

In a market where costs equal price, with no price discrimination the ultimate selling price equals the costs and profits are zero. With price discrimination, the producer produces much less, makes more profits, and the customers who get the most satisfaction from the product get to see it. Pashigian in Price Theory and Applications give three kinds of price discrimination in his analysis of producers' surplus. There is the first degree situation where the producer has complete information about the consumers demand and captures all the producer surplus. These is a second degree situation where the producer has different price schedules for different classes of customers who have different demand schedules the way academic journals do for business, library, and faculty, and student subscribers, or the way colleges do when they give less scholarships to those who apply for early admission or go to visit the college. There is the third degree price discrimination where the seller has no info on the buyers' demand schedules but knows they had different schedules.

The solution to how firms act in these situations is based on the urgency, age, income, and information of the consumers of the product. Working out tabular examples of the kind above leads to the following pricing policies.

I find all these considerations very similar to the price movements in stock and fixed income and commodity markets. The price varies so that customers who want the product can come in at different levels based on their urgency, information, income, and uncertainty. Prices move around to maximize the profits of producers, who try to differentiate the points at which they can gain the most revenues from frictional costs and ephemeral trades that will be quickly broken at a loss with low cost in inventory, and possible selling at a loss when the market moves against of the producers.

Pashigian and other good price texts have 50 categories of pricing behavior that producers take based on such things probability distributions of consumer demand, price cutting, number of rivals, differences in marginal costs, facilitating practices, demand shifts, Nash equilibria, quantity demanded, reservations prices, seasonal variations, signaling, bundling markdown, low price polices, market entry, meeting competition, suggested retail prices, punishment strategies, tit for tat pricing, two part tariffs, uncertainties about tastes, price elasticities, short and long run cost differences.

An understanding of the economic analysis of these factors is invaluable to understanding the reasons that business makes and loses money, and how price variations effect same. It makes you immediately very skeptical of the accepted view that when a company reduces prices or changes prices or misses a quarterly earnings number the way Intel did because of lowering prices or retailers do to clear inventory or MMM did to enter a new market, that these are long term factors that should induce you to sell. Disclaimer: I don't own any of these stocks but use them as examples.

There is Something Fishy About This Market, by James Sogi

There is something fishy about this market -- the Honolulu fish auction market, that is. This is where the fishing boats come in from Alaska, Seattle and other points to Pier 38 and unload their fresh caught moon fish, swordfish, tuna, and dorado, and wahoo. UFA charges the seller a 10% commission on all sales regardless of volume. This commission has remained unchanged since 1952. Longline, deep-sea bottom fish and small-boat commercial fisheries both local and foreign supply the auction with as little as a few thousand pounds to as much as 160,000 pounds of fish on a daily basis. The restaurateurs and fish buyers gather round the auctioneer and move down the long rows of large ocean going fish. Each fish is cut at the tail so the buyers may see and feel the quality of the meat, the oiliness and color. The auctioneer starts the prices and flips back and forth between usually two bidders, $4.30/40/50/60...sold. And the clutch of buyers moves on to the next fish lying in the chilled room and covered with ice. Everyone has to wear knee high boots inside. The fish immediately is loaded on to the palettes, sealed, and moved into the waiting trucks for air shipment to Japan and New York and La where the fish will be eaten that night in fine restaurants. It was a good experience to see that kind of commodity market auction in person. Refreshing to know that the live auction markets are live and well in this day of technology.

Trading and Poker and Tail-End Occurrences, by Leonardo Cecchini

Last week I saw on a cable channel the Monte Carlo European Poker Tour Final (Texas Hold'em rules). I believe this was a rerun so I can't say for certain when the actual final was held.

That poker and trading share numerous similarities has long been discussed and written about. Notably, a recent book by Aaron Brown, The Poker Face of Wall Street, highlights the case remarkably well.

I am writing instead to try and highlight how the unforeseen events in life are more common and frequent than one might expect by drawing an analogy from this poker tournament.

It is generally believed statistically that observations that occur at the tail-end are exceptional and can therefore be almost disregarded (or seem to be disregarded by market participants). Looking at the poker tournament, the finalists' table included two Internet qualifiers. One was 19 years old whilst the other 20. That in itself was deemed an unlikely situation. You might expect one qualifier to make the finals but not two, especially when young. The final was eventually won by the 19 year old, beating some big European stars along the way, whilst the other came third. Again, this would be deemed an incredible and unlikely outcome.

At the micro level, if we analyze some of the hands that were played which helped the soon-to-be champion build is chips. Few of the key hands, where he won big, were from the last card turned (the 'river' card) whose chance of winning was never higher than 9-12%. And guess what? He won every single time.

So maybe tail-end events are more common than perceived and, as with most things, time and location are probably the two single most important components when assessing an uncertain outcome or situation.

Steve Leslie adds:

One thing you have to remember when watching televised poker events is that these are all edited for television. Therefore all that you get to see are the highlighted hands, the ones that have the greatest impact on the outcome of the tournament. So be careful to draw any conclusions as to style of play that a poker player may exhibit or how they may have won the tournament.

FSN, owned by Fox, did show one tournament that was unedited, with Phil Ivey ultimately winning it. The final showdown took several hours of coverage. Now I am addicted to poker and I found it to be truly boring, One step above cricket.

For my money, the best show on tournament poker is the World Poker Tour with Mike Sexton and Vince Van Patton as hosts. Sexton is entertaining, humorous and knowledgeable having been around the game for over 25 years. He knows the players and is also a top competitor himself. His insights are very valuable and one can learn much from his commentary.

Gabe Kaplan is the worst. Completely unfunny and devoid of personality.

Soccer, Deception and Markets, by James Sogi

Soccer, as with many sports such as golf, tennis, are all related to the ability to control the ball with the difficulty handicapped by the limitations of maneuvering the ball with the feet, or in golf using a long stick to hit a little ball where the ability to control the outcome is limited by the mechanism, and the added factor of an opponent trying his very best to take the ball away from you or putting it out of reach. The other interesting take on the soccer is the constant use of deception. Two or more of ever three moves is a use of deception, a fake, a juke, reverse of direction. It's ingrained in the game. Traders might learn from the world's best soccer players. Much of the game of soccer, as with trading, is not in the goal, but in the maneuvering into position, using fakes and deceptions designed to get a step ahead of the opponent. Once a step ahead a good play can be set up. Aside from the fact that there are 10 other players awaiting to take your ball away from you the trader might use every entry, ever order to use a bit of a fake, a bit of deception, a juke, to get in just a step ahead of the opponent. How much easier it is to make a good play when your first possession leaves you a step ahead, rather than an immediate step behind, running and huffing and puffing. How much more satisfying to enter the trade a few points up a step ahead of the opponent giving a little breathing room and a little time to look around to set up another kick or pass or play or even a goal.

Bruno Ombreux responds:

Here is a video compilation about Zinedine Zidane, one of the best soccer players, with great dribbles illustrating the use of fakes and deception.

GM Nigel Davies replies:

Everybody living outside the US and Canada will think of a round ball when the word 'football' is mentioned. I make a conscious effort to translate this into 'soccer' when speaking to Americans.

Not that I talk about football -- I mean soccer -- much. Not every Brit likes the game. I figure it was because I was overweight as a kid, was always picked last (or second last) for the teams and then they made me go in goal. I think they figured it would be more difficult to get the ball past me than a skinny kid, elementary physics.

Later on it seemed that British soccer hooligans had destroyed every European city I visited a week before I got there for my chess tournament. And if we hadn't destroyed their city we'd be trying to renegotiate our membership of the EU. Having a little Union Jack by your board didn't make for a warm welcome. It was almost better to fly the Israeli flag (yes, I tried that too for a while).

Thinking about soccer, I'm not sure that Americans can understand the culture of the game. It is so closely connected to countries, regions, clans and even religions (there are teams traditionally supported by Protestants, Catholics and even Jews). Probably 'we' need it because we're all piled on top of one another in this overcrowded little continent. It's a means of distinguishing one's identity, you relate to a particular team.

Some odd-balls will raise an eyebrow or two by 'supporting' a team that nobody has ever heard of, or one that is totally inappropriate for their apparent identity. But woe betide those who say they prefer tennis.

Analysis of Daily Volume, by Dr. William Rafter

Be careful with analysis of volume data. Most people just assume that you should multiply the price move (or whatever) times the volume. That action treats volume as though it behaves in a uniformly consistent manner over the price data. However, a few illustrations prove otherwise:

Specifically, SPX volume appears to have at least a 2-humped distribution. Since the distribution is neither normal nor anything resembling normal, then something else is going on. A two-humped distribution would usually indicate two separate relationships.

If you do a scatter diagram of SPX volume against VIX, you can see that volume has two faces: At low levels of volatility (usually associated with bullishness), increased volume is associated with lower volatility, and hence more bullishness. However, at higher levels of volatility the relationship goes the other way: higher volume is associated with more volatility which is more bearish. I used the value of 22 for VIX as the cutoff point, but that value is not critical to making the point.

So, a reasonable suggestion is that volume needs to be "qualified" before being used to weight price activity. Implied volatility is just one of the possible ways to do so.

The frequency distribution and scatter diagram can be seen here.

Craig Cuyler responds:

When looking at volume in the futures markets it is important to take note of new buyers or sellers as opposed to long holders selling out existing contracts or shorts buying back their positions. If a markets moves up for example and the open interest increases at the same time then it shows that new buyers have entered the market and vice versa for moves down. The COT data can be broken down to give this type of volume information. In spot markets the volume prints are meaningless as Larry says because the interbank markets, swap markets and hedger markets are huge and these transaction don't cross the screens.

Larry Williams replies

Volume is not really volume or buying/selling pressures -- more now than ever with arb programs, just look at huge volume increases at expiration to see volume that is not real buy/sell; much of volume is swaps, hedging and some tax maneuvering -- nothing at all to do with supply demand as volume watcher think.

So what is one to do -- and was volume ever reliable? Our studies suggest most everything the books say about volume is incorrect; a selloff on large volume is bullish; the say bearish is just one of many examples.

J. T. Holley responds

Larry, you left off a few more hedges in your example! After the farmer sells his wheat to the local grain elevator operator he to then hedges by selling futures contracts for an amount equal to his inventory. As time goes by he sells wheat from his inventory and lifts portions of his hedges so that he stays equal between the physical wheat and the contracts. The miller who buys the wheat from the grain operator has contractual commitments w/ his customer to deliver his ultimate product of flour. He has specific prices he to needs to meet for his obligations so he to hedges his inventory. His hedge though is the opposite of the above mentioned gentlemen! Meanwhile the Baker who is going to buy the flour from the Miller is making contracts for delivery of his goodies. He must also hedge against these contracts by making buying hedges! All to provide liquidity and to keep price swings low do the Farmer, Elevator Operator, Miller, and Baker invite guys like us that stuff Twinkies, Ho-Hos, Loaves of bread, and Double Layer Chocolate Cake in our mouths to the party. Larry's right it's "for" the user and producer, but by the Grace of God the Speculator is allowed to ply his trade amongst them.

Bruno Ombreux replies:

My few cents, as a long time professional hedger:

Studying Open Interest looks like a more promising subject of study, and I think Larry wrote a book on the CoT report.

I have this theory that when hedgers as a group are increasing their long hedges, this is because there is increasing physical shortness. And vice-versa. That would be because considering them as a group and over several weeks, averages out the wide variety in their behavior; ending up in a reflection on what's happening physically.

But this should be tested with statistical studies of OI and CoT evolution vs fundamentals such as stock levels.

A shorcut for gauging the physical situation is looking at front-to-back spreads, which is what many commercials do.

Gregory van Kipnis replies:

Generally, futures markets come into existence when certain conditions existed, such as it is a commodity and is fungible (one ingot or one bushel is the same as another); It can be stored and delivered cheaply and easily; many buyers and sellers, but with one side believing that without a market (tape) it is being disadvantage by pricing inefficiency (collusion).

Irrespective of which country had the first futures market and why, the history of grain markets in the US has its own interesting details. Grain is harvested according to a rolling set of dates as you cross the grain belt. The Railroads had a monopoly on transportation and the grain purchasing agents would hold a single point purchase at each RR junction and get the local farmers to drive prices down. Co-Ops were developed to store grain near transportation hubs; prevent spoilage, and to allow sales to be spread over time. Chicago Board of Trade created a contract that would forward sales and purchases and included a physical delivery feature. Huge issues had to be overcome to insure performance and avoid gambling law violations. 'Margins' were small, good faith deposits, held by the broker as part of the insuring performance process. If you were a seller (farmer) you could satisfy your obligation by either delivering at the designated warehouses or buying back your contract. If you were a merchant you bought to fix your costs and could force delivery to ensure supply. Warehouse receipts evidencing quantity and quality were perfected. If there was a way to cheat someone exploited it. So the details of how the futures exchange function evolved. There have been notable crisis revolving around the taking delivery including the famous salad oil scandal (fake warehouse receipts) and the Russians bypassing normal commercial channels, to hide their tracks, taking huge futures positions, and then taking delivery during the Nixon Admin following a disastrous USSR crop failure.

Lessons learned from Sports, by Steve Leslie.

Roy Hobbs "Did you ever play baseball Max?"

Max Mercy "No Hobbs, I really didn't. But I will tell you I make it more interesting for people to read about it . You know something Hobbs I am going to be around here alot longer than guys like you."

Loosely quoted from "The Natural" with Robert Redford and Robert Duvall.

"Who the hell is Mel Kiper." quote from the general manager of the Indianapolis Colts Bill Tobin.

"Winners always want the ball." Gene Hackman in The Replacements.

I find that probably the most fascinating lesson to learn from sports is from the views of the large number of "experts" who study the game. Especially those who call themselves journalists and either write about sports or cover it on television. More importantly how incredibly wrong these so-called analysts can be and what damage they can inflict on a person's career if they are allowed to, and they are accepted as some sort of be-all and end-all of authority and judgement.

Case in point:

Amelie Mauresmo just won The Wimbledon Championship defeating Justin Henin-Harden in 3 sets. Even though Amelie is ranked #1 in the world, Mary Carillo the NBC analyst was constantly questioning her mental character throughout the final. Her comments were things like "She has always had the game for Wimbledon but many question her mental toughness." Well I guess they don't have to question it any more.

I recently wrote about Dan Duquette General Manager of the Red Sox who 10 years ago was wondering aloud how long Roger Clemens' career would last and if it would not be better to trade Roger for value before the end of the season. Since then all he has accomplished is 3 more Cy Young awards, 2 world championship rings and 4000 strikeouts and the most wins by a right-hander in modern day history. Plus, he is still pitching.

George Foreman was considered a carnival act until he knocked out Michael Moorer for the heavyweight championship at 47 years old.

Muhammad Ali was a huge underdog to Sonny Liston before their first fight for Liston's championship belt in 1964. Do you remember how Ali embarrassed Liston. How about Foreman vs Ali in Zaire and how Foreman was considered invincible until Ali put Foreman to bed in the eight round with his rope-a-dope style.

Phil Mickelson did not have the toughness to win a major golf tournament until he won his first Masters. Now he has 2 and a PGA.

Terry Bradshaw was rumored to be stupid because he talked funny and came from Louisiana Tech. 4 super bowl rings later and the only quarterback besides Joe Montana to have 4 rings he doesn't look so stupid to me. Incidentally, the same was said of Brett Favre because he came from some town in Mississippi that doesn't even show up on a map.

Speaking of Montana he was 3rd string on Notre Dame's depth chart beginning his sophmore year for the Fighting Irish.

James "Buster" Douglas shocked the world by beating "Iron Mike" Tyson with a 9th round knockout in Japan even though he was a 45-1 underdog.

Michael Jordan was cut from his grade school basketball team.

I could mention many others such as Wilma Rudolph, Tom Dempsey, Lance Armstrong but my point remains is that what made these athletes and countless others remarkably great and enduring was that they refused to allow anyone to define their life other than themselves. The greats become the true greats because the never learned the word quit. They find a way. Winners always find a way.

I like that.

GM Nigel Davies responds:

Yes, you are pointing to the overlooked dynamic element which fouls all the predictions. As Jeff Goldblum said in 'Jurassic Park', "Life finds a way."

So Nadal has changed his game on grass, Mauresmo has gone a long way towards solving her psychological problems, and Foreman changed completely after the Rumble in the Jungle to become quite an extrovert (his grill is great, by the way). It is mankind's striving that is overlooked, and this is magnificently illustrated by my all-time favourite film 'Rollerball'. The game of Rollerball was designed to demonstrate the futility of effort, the inevitable failure of the heroic. But Jonathan E defied them all to become a hero in a futile game.

Similarly we see stocks defying those who believe in a closed controlled universe and the futility of effort. It is striving and innovation that constantly disrupt 'fixed laws' of supply and demand.

Expectation, by Dr. Janice Dorn

Blessed is he who expects nothing, for he shall never be disappointed. -- Benjamin Franklin

Often, when we open the front door, and invite others in as our guests, we get a bit more than we bargained for. We find that, not only have we opened the front door. We have opened the back door, the windows, the garage door and the doggie and kitty door. Suddenly, the rooms are overflowing and it feels like the walls are either closing in on you or falling down. At some point, you ask yourself, why am I doing this? How much more of this can I tolerate and still keep myself intact? Why aren't I getting back all of this that I am giving? Why aren't people thanking me for everything I am doing for them? Why do I feel so empty and drained and caged in? Help! What are you doing and what do you expect? If you expect "Thank You," then be prepared for disappointment. If you expect "Applause," then be doubly prepared for let down.

The best you can do it to expect the unexpected. Expect nothing. That way, if you do get thanks or a hug or even two hands clapping, it is a bonus because you didn't expect anything to begin with. Our hearts and minds are only open truly when we do what we do without expectations of response from others. We do these things for ourselves. Altruism, in most aspects, is not about doing for others. It is about doing for ourselves, via what we do or give to others. We are able to open fully our hearts ( doors) to others when we truly have absolutely no hope whatsoever of getting anything back. The random act of fried chicken kindness I did was for me, not for the poor homeless woman. If it brightened her day in any way, I do not know. All I know is that it made me feel good and it brought up in me certain aspects of my own life on which I needed to work.

If you do what you do for others because you want them to like you, respect you, treat you well, give back to you or for any reason that had anything to do with you, you are on a path of self-deception and disappointment. Expect nothing from others and expect everything from yourself. That is what it means to strive for excellence and inner peace without worrying about the negative voices which tell you that you can't, you won't or you're not good enough. Remain open without expectation. Truly feel that and be with that. Be grateful to those whom you invite in, as they are your teachers. If they thank or praise you, it is an unexpected gift. Accept it and take note of it. Remember those people. If they don't thank you, applaud you, praise you or continue to want more and more doors open, even as your walls are falling in, take note of that. Remember those people and learn from them.

Life Lessons from Games, by Steve Leslie

Now that there have been two excellent discussions on torture in the markets and another with a nautical theme, I thought that it would be helpful if we could start a discussion on the lessons learned from games to the markets.

There must be some valuable lessons to be gleaned from such games as checkers, backgammon, bridge, monopoly, dominoes, and games of chance.

The site is authored by such wonderfully brilliant people that this could be a tremendous exercise to initiate this weekend. I will weigh in with something that I wrote a month or so ago on roulette and gambler's fallacy.

I have been reading my copy of "Beyond Greed and Fear" by Hersh Shefrin. Dr Shefrin is one of the pioneers in Behavioral Finance and his book is must reading for anyone interested in markets and games. He has a profound ability to take a complex subject matter and make it easy for a layman to understand. Perfect for someone like me.

I just finished his chapter and discussion on gambler's fallacy.

Gambler's fallacy is a phenomenon that casinos use to their great advantage. It helps them create a false sense of expectation among the players in some of the most popular games of chance. The most obvious example of which is Roulette.

The gambler's fallacy is a logical fallacy which encompasses any of the following misconceptions:

A random event is more likely to occur because it has not happened for a period of time; A random event is less likely to occur because it has not happened for a period of time; A random event is more likely to occur because it recently happened; and A random event is less likely to occur because it recently happened.

In the game of roulette there are either 37 or 38 numbers depending on the type of wheel used. From 1 to 36 they alternate in color from red to black. The 37th number is a neutral color 0 and if there is a 00 it also is a neutral color.

Players can then wager on numbers, colors or combinations of numbers. Their payoff is determined by the odds, with a little left over for the house.

With respect to roulette this is how the casino uses gamblers fallacy to their advantage. Casino's install a tote board similar to that which you see at NASCAR events, alongside the roulette wheel that tracks every number that comes up on the wheel. Red numbers are on the left and black numbers on the right. Players who view the tote board may then try to use this information to detect a pattern or a run and to make their next wager. Naturally the information is entirely useless because with respect to a random event such as roulette past performance is no indication of future performance. The ball has no memory. If there are 37 numbers on a roulette wheel and your lucky number or birthday just hit, on the next spin you still have a 1 in 37 chance that the same number will hit again. Therefore, in a fair game, with a balanced wheel, the gambler can not receive any advantage from the tote board. The board will show runs of colors and numbers but it is completely useless information as to what is going to happen on the next spin of the wheel.

Why does the casino use such an obvious ploy? They found in research that their take at the wheel went up dramatically after they installed a tote board. The ill-informed assumed that they could use the information on the board to detect patterns to help them determine how they should place their next wager. It is like a rubber crutch. The gambler takes worthless information and uses it in a ill-conceived heuristic to devise a strategy. A fatal concoction to say the least.

Other examples are seen in baccarat, where the player is given a sheet of paper and a pencil to let them track the winnings of the player vs. the banker. They try to use the information to help them place their next bet. Once again, not worth the paper it is inscribed on.

Just remember, if a casino is giving something free away especially information, it is to their advantage and not that to the player and it is an inducement to have the player gamble more . Not unlike the information that one can receive on Wall Street on a daily basis. Someone once said if you can read it in a research report or in the newspaper its usefulness has been severely diminished.

The State of Origin Indicator, Specious Correlations & PE Ratios (ASX 500), by Andrew McCauley

I note that the performance of the All Ordinaries Index is inordinately positive after NSW (New South Wales) win the State of Origin series. I also note that stork sightings & birth rate increases are somewhat correlated.

The numbers above disclose the existence of statistical correlation between two sets of data. However, the data does not imply any causal link between two pastimes as unrelated as the Greatest Game of All & the stock market.

This non causal link reminds me of the "Market Gurus" in the media who regularly talk about general market PE levels. They talk about the PE Ratio as if it had some conclusive predictive quality, when it is trading above or below an historical average, with the ring of truth or plausibility but actually fallacious.

I note that on all occasions that NSW won the State of Origin Series the general market PE Ratio was above the long term historical average. Could it be that the State of Origin Series Winner has more predictive quality than Broad Market PE Ratio? I suspect not. However, both are spurious in forecasting ability.

Who knows, if the Blues win & the market continues up in the order of 1% per month for the rest of 2006, maybe some investors will take this indicator seriously. I hope not. Go the Blues.

Horatio Alger in a Different Light by David Baccile

I came across a very funny passage in "Our Crowd" by Stephen Birmingham that I will share with the website. Our Crowd is filled with the stories of how several Jewish immigrant peddlers became the great Jewish families of NY.

"To educate his five boys, Joseph (Seligman) hit upon a dazzlingly American idea. He hired the creator of the great American boy hero, Horatio Alger, to live in his house and tutor his sons.

The experiment was not entirely a success. Alger may have been able to invent boy heroes, but he was far from one himself. He was a timid, sweet-tempered man who, in his non-teaching hours, practiced his ballet steps. He was easily cowed, and his customary cry of alarm was "Oh, Lordy-me!" Ten lively Seligman boys were clearly too much for him, and was forever having to rush...for assistance. Once when he cried out for help, the boys jumped on him, tied him up, and locked him in a trunk in the attic. They refused to let him out until he promised not to tell their mothers.

After lessons, such as they were, he liked to play billiards with the boys. He was extremely nearsighted, and when it was his turn at the cue, the boys substituted red apples for red balls. Alger never caught on, and, as each new apple was demolished with his cue, would cry, "Oh, Lordy-me, I've broken another ball! I don't know my own strength!"

But Alger had his compensations. J. W. Seligman Co. opened an account in his name, took the literary royalties and invested them for him, and made him a wealthy man. He remained a friend of the Seligman's and long after the boys were grown, was a regular guest at Sunday dinner, where the practical jokes continued.

There was one favorite. Joseph's married daughter, Helene, and her husband lived with her parents. After dinner one of her brothers would steer Alger into the library and into a sofa next to Helene. There he would artfully drape one of Mr. Alger's tiny arms around Helene's rather ample waist while another brother ran from the room shouting "My Alger is trying to seduce Helene!" Helene's husband would then rush into the room brandishing a bread knife, crying, "Seducer!" The first three times this happened, Alger fell to the floor in a dead faint. Perhaps he did teach the boys to be Americans after all. "

Skip College, by Ken Smith

College - an academic institutional setting - can be skipped if all you want is an education.


To those readers who despair of tuition costs and desire only an education, can do without credentials, I recommend a course of reading the will provide you with an education surpassing any general education you might obtain from a university and the expense is relatively nothing compared to university costs and time wasted in your short life.

David Wren-Hardin adds:

I agree, with a couple of caveats. The first is that even for a well-motivated, well-informed student, there is a huge risk when self-teaching that one will miss vital aspects of a field simply because the student isn't aware they are there. This would be especially true for someone with absolutely no background, i.e., a 19 year old fresh out of high school.

Secondly, there is a lot to be said for being guided through the material by an expert in the field. A good college will provide the student with small class-sizes and discussion groups in order to more quickly answer questions and fill out nuances. This expert can be at your work too. A mentor can be a huge benefit, and should be sought out by the self-learner. This list, obviously, can serve that function.

Finally, it takes a lot of discipline to work through material in a through fashion. College is a good transition where you are responsible for studying on your own to a large extent, but with deadlines that force you to keep up the pace.

But you're right, there is a tendency to chase credentials. "I need a B.S. in business. Now I need an MBA. Ooo....CFA!" This person then enters the marketplace with little practical experience, but a whole-lot of letters after their name that force them out of the pay scale of entry level positions. Get your degree, then get a job, ideally one with a good mentoring system that will eventually pay for your MBA/CFA if you need to get one.

A Highly Recommended History of Finance Book, by Victor Niederhoffer

One of the best and most enjoyable ways to appreciate and navigate the world of markets today is to study its foundations and evolution. The highly recommended book The Origins of Value, by William Goetzmann and Geert Rouwenhorst contains a series of 20 essays that trace the history of finance from its origins in Sumerian and Roman times to today. Chapters on the origins of interest, the first corporations, the business and money used on the Chinese Silk Road and the Italian City States, the origin of bonds and stocks, mutual funds, conduct and returns in the Dutch East India Company, the innovations of John Law, the origins of the New York Stocks Exchange, Eurobonds, German Debt, annuities, and Fibonnoci's contributions, and King Leopold's finances and madness appear. The book considers these particular aspects of finance in the context of three principles, the transfer of value through time, the development of mediums for the transfer of uncertainty, and the ability to buy and sell to negotiate value.

There are numerous insights that I gained from this book about how things that we now take for granted were started and developed in a different time and place, but with uses very similar to today.

Every chapter is filled with fascninating facts about the structure and materials that we use today. Pictures, tables and maps illustrate how things actually looked and worked during that time. There are only 5 charts, but those are completely fascinating in that they show the prices, debt, equity, and dividends (incredibly high) of the Dutch East India Company, and moves in prices of equities and debt of big bank and insurance companies on the NYSE from 1790-1820.

The one criticism of the book is that it contains mainly facts and history, illustrations and examples and explanations. There is little of a grand framework of analysis to fit all the pieces together and provide a framework for how all the parts fit together. The authors' recommend The Rise of Financial Capitalism:International Capital Markets in the Age of Reason by Larry Neal for that. Along with Larry Harris's book, Trading and Exchanges, this book provides the ideal foundation for the study of markets and finance from the ground up.

Torture in the Markets, by Victor Niederhoffer

No one shall be subjected to torture or to cruel, inhuman, or degrading treatment or punishment
-- Universal Declaration of Human Rights, UN, Dec 10, 1948.

The violent and cruel moves of the market from mid May to July, with the excruciating pain of the first 20% decline in the first week and a half, the fake relief rally during the next week to June 2, the even more horrible decline of the next two weeks, with the gradual rise to July 4, leaving most markets within a single digits of their old high, still up substantially on the year, has all the earmarks of the torture techniques perfected in the times of the Roman Caesars, used throughout the world for 350 years during the inquisition, and now coming back into prominence in conjunction with the treatment of Iraqi prisoners in Guantanamo Bay.

Like Senator McCain, who was exposed to physical and mental torture by the Vietcong and now is one of the leading advocates of its abolition under any circumstances, even if the ticking time bomb is at issue, I have had direct experience with many of the techniques of financial and psychological torture that these moves have inflicted. I thought it might be well to reflect on the instruments and techniques of torture so that I and others would not be subjected to such pain in the future, and possibly to induce the inflictors of torture to give up such activities in the future.

Let’s start with the most famous historical cases of torture, those inflicted by Spanish Inquisition which from its inception in 1480 to its end in 1808 registered the following statistics:

Burned alive 31,912
Burned in effigy 17,659
Subjected to severe
pain and penance 291,450
(Source: Knox, op. cit)

The main initial instruments of torture used by the Spanish appear to have been the rack, the wheel, the thumb screw, and the water torture. These created so much pain and damage that a confession and recanting was almost always obtained. A common feature of these tortures was the compression and stretching that these machines inflicted on the human body, which was not made to withstand forces of this nature. The financial body of most people is not made to withstand the forces set by a 10% decline, especially when leverage is used or the money has been recently invested at the top. The firsts 10 to 25% declines in the markets did elicit capitulation and recanting from investment in stocks from all who had the least vulnerability to such.

One of the terrible things about torture is that it hurts so much that when it's over great relief is felt. That's when the guard is lessened. The Spanish perfected a technique to prey upon the weakness that occurs. It was the "no hard feelings either way, now we're all friends again. Just embrace us and this peaceful statue of the Virgin Mary" gambit. A nice description of it is contained in one of my favorites, a 942 page, 125 year old book, ok, The Underground: Or, Life Below the Surface, 1880, profusely illustrated, by Thomas W. Knox. After the heretic had recanted, he was told that now that all was forgiven, he should kiss the statue to prove his sincerity.

As he went to obey the injunctions, he placed his foot in front of the image and his weight fell upon a board which touched a spring. The arms of the statue were instantly closed about him; knives were thrown from these arms; and he was pressed against the breast of the figure. Pierced in many places, the recanting heretic yielded his life

A related mode of death just when it was felt that the torture was over was to encourage the victim to descend a dark stairway where sustenance and relief might be found. The stairway would suddenly give way and the victim "was precipitated upon rows of spears fixed upright.”

To put it in perspective consider a few markets, typified by India down from 12,500 on May 12, to 10,000 on May 20, up briefly to 10,500 on June 2, then down to 9,000 on June, 14, now up to 10,700 with comparable moves in the US down from 1330 on May 12, to 1260 on May 20, back up to 1285 on June 2, then down to 1220 on June 11, then back up to 1280 as of July 2, or Japan, down from 17,500 on April 15, to 15,600 on May 23, then up to 15,915 on June 29 then down to 14,218 on June 13, now back up to 15,600, or Egypt at 60,000 on April 12, then down to 45,000 on May 14, false rally to 49,750 on June 2, then back down to 43,000 on June 10, now back to 44,640 as I write.

There is a reason that torture has been used throughout history to extract confessions. The main illegitimate one is that an atmosphere of terror and punishment is necessary to maintain leaders in power when their positions are not due to voluntary behavior on the part of their constituents, whether they be political or supplicant. The main legitimate reason is that often the harm that would come from not being able to extract a confession is infinitely greater than the harm that comes to society from acting in a humane way. Consider for example the not so hypothetical case of the prisoner just taken who knows the whereabouts of a ticking time bomb that will be deployed in one hour that will destroy a few million inhabitants of a city. Are the gains to be made from respecting the prisoners' rites and other innocents who don’t know of ticking time bombs that much greater than the loss of life from one who knows of a ticking car bomb destined to go off in the middle of a city? The Israelis have a name for such a situation "The Ticking Time Bomb” problem. You see terrorists are often captured with information of just such a nature.

The torture that was inflicted on market participants must be considered within the backdrop of what happened in Arab markets. Markets like Dubai and Saudi Arabia had already dropped some 50% before the first rumblings of havoc were unleashed in the US. Such markets as the 10 year bond market had moved from 4.8 % yield to 5.2 % yield in the previous several weeks, the price of gold had registered some $720 an ounce up from $600 an ounce a month earlier and Silver was over $15.00 an ounce. There was every reason for the grand inquisitors in this case to consider that there was a ticking time bomb problem here and that some staged jawboning of inflation while it might administer torture to many market participants was in the long term interests of a more orderly economy.

The most common and famous form of torture through the ages is the Chinese water torture. The Chinese water torture consists of the combination of restraint applied to the victim while he is held upside down and a quart of water is dripped into his throat slowly asphyxiating him drop by drop with the certain knowledge that the next drop will be worse than the previous until the end.

Markets seem to adopt this method of torture the most often also. Once they go against you, especially on the down side, they can go for an eternity, 17 down days in a row for example in Japan with nary a break for a single rise. When the rise occurs, it is invariably so small that to take it is almost humiliating as it has such a small impact on the loss. The series of down Fridays and Mondays, 5 in a row in the US stock market and the series of 6 down 3:30 to closes that occurred at the height of the US meltdown were part of the Chinese Water Torture technique that the markets administered.

All one can do in such a situation is to know that this seems to be a last resort of the inquisitor, that it is almost invariably followed by the end of the sentence, and that if you can just withstand it, or be saved for example by the up opens, or up Tuesdays and Wednesdays that invariably follow such a water torture, that you have a good chance of surviving.

The other main form of torture seems to be in its most general nature, a form of compression, either in living area, food, or the muscles in the body. The screw that breaks the limbs, and the infamous French prisons where the height of the confined area is say 18 inches above a mud floor, or the constantly decreasing confined area are examples of this. We find the market analogue of this in the compressed ranges that often occur before explosive moves of a tortuous nature are due. It is hard to remember but from 4/18/06 to 5/4/06, the market experienced more than 2 weeks with the high close of 1313 not more than 1% above the low close of 1302 . Such a period relaxes the senses of danger and makes the punishment that's ready on one side or the other all the more horrible when it occurs.

Any help that my colleagues here can give me, as to torture's relation to recent and past markets, with a view to how to profit it, or at least counterthrust, things beyond the rack, the screw, or the wheel would be deeply appreciated.ed.

J.T. Holley replies:

My studies in Existentialism while in college delved into and around this topic many times. The Surrealists and their many branches focused on a lot of man's transgressions. The author that came up more than enough was George Ryley Scott. "Cruelty is inherent in mankind" from Scott's book The History of Corporal Punishment. He also wrote The History of Torture Throughout the Ages. This later I came across while learning and studying the works of Georges Bataille. He focused daily on a set of pictures taken by French soldiers in 1905. The soldiers witnessed Ling Chi or "Death by a thousand Cuts". This was a practice of which the Chinese tied a person to a pole and proceeded to grotesquely humiliate them during and after the death process. Ryley Scott wrote of this in "History of Torture". Bataille fascination was over why the man being sliced had a smile on his face as if in ecstasy, albeit opium was commonly given as a sympathetic attempt to those enduring the slicing. Ironically, Bataille also thought of Nietzsche as the character Virgil in Dante's Inferno.

You could very easily substitute the word markets for mankind as Ryley Scott's quote would read "Cruelty is inherent in the markets". Man always seems to be driven to exert his strength and control over his fellow man. This exertion seems a lot of times to find its way in a sadistic manner with moral and legal ways following suit. The markets to me appear to be no different with man involved and the regulatory bodies trying to guide the moral and legal restraints to justify the torture and keep it from getting out of hand. Bataille and his fascination with those pictures, I can only remember my attempts at making money trading stock options and having a smile on my face as I lost over and over my money watching the statement go to zero.

P.S. The movie Hostel is a newer movie that focuses on this Underground World of Life. I don't recommend it. The first half is soft porn, second half is gory torture never before seen in the cinema. Tarantino of course was involved.

GM Nigel Davies replies:

Chess is a game in which both players attempt to inflict torture on the other. Several players, notably Bobby Fischer, have been quite explicit about the sadistic element of the game. "I like to make 'em squirm." "I like the moment when I break a man's ego." The pain may not be physical but it is pain nonetheless. But only when you play chess properly, and make it your entire existence for the duration of the game. For a few hours it is the only reality you should be aware of.

During the twists and turns of every game first one player, then the other, might hold the upper hand and torture the other. In this the psychological dynamics are very similar to markets. I don't know how it is for the rest of you, but for me one of the greatest pleasures is the feeling of release, the moment you sense the tables have been turned and your former torturer(s) are now being tortured. There's nothing quite like a short covering rally after you've been down on the trade for a few days.

Admitting these feelings exist is, in my view, a good start to controlling them. Can you take the pain or will you pay the ransom? And are you able to release your victim at the right time for the right amount of money, showing that you are a businessman rather than a monster?

There have been some chess players who could not bring themselves to win a won game because they were enjoying their 'winning position' too much. Similarly in markets I imagine there are traders and indeed fund managers who are reluctant to take a profit because this will mean releasing, or partly releasing their victim.

The fraternity of modern Grandmasters understands torture very well and the consensus is that one should avoid being taken prisoner at almost any cost. For Fischer himself this was a revelation: "The turning point in my career came with the realization that Black should play to win instead of just steering for equality." Lasker too emphasised mobility in both his writings and games, above all trying to avoid a rigid and prospectless position in which your opponent could turn the screw. This idea is reflected in the stats, defences which have counterchances score much better than the solid passive ones in which you play very correctly but allow yourself to be a prisoner of White's initiative.

What is the solution for traders? In my view it should be the same as with chess. Above all to avoid being cornered and always keep a hand or an arm free so you have a chance to escape your captor. And when doing the torturing you must be prepared to let the victim go, at the right price of course.

Stefan Jovanovich replies:

This is the best description of the weakness of the French tactical use of their Maginot Line. It also describes the successes that the Russians had after 1943 in turning the aggression of the blitzkrieg against the German attackers (Kursk being the most horrific example.)

Easan Katir replies:

Report of (a) person brought as penitent to the public auto de fe, held by the Holy Court of the Inquisition upon Sunday the 3rd day of May in the year 1579:

Orbrian, a native of Flanders, inhabitant of the city of Xeres de la Frontera, a binder by trade, in his thirtieth year. He had burnt different paintings with the picture of our Lord Jesus Christ and other saints thereon and had put his faith entirely in the teachings of Luther, considering them to be the truth. He had also ventured to teach others. He, showing great stubbornness on account of this was condemned and handed over to the arm of secular justice, so that he be burnt alive and all his good and chattels be confiscated.

One who stubbornly believes, practices and teaches market dogma may experience a similar fate. Or perhaps, don't fight the tape.

Stefan Jovanovich responds:

I apologize for being a dogmatist, but it seems to me the lesson of Orbrian, like that of Tyndall (first English translator of the Bible -- hanged, drawn and quartered for his sins), is that freedom always has its official enemies.

The "tape" exists because millions of people are free to trade. Under the Inquisition there was no such freedom. The Spanish, in spite of having the best army in the world for 200 years, lost their empire because the idea of liberty was itself considered a heresy, and the idea of a free and open market for goods and services was considered an "infidel and Jewish conspiracy".

As for torture, Napoleon is alleged to have once said about the use of bayonets that "you can do anything in the world except sit on them."

Easan Katir retorts:

One bows to your more catholic* frame of reference. My intent was less catholic, that is, inspired by the Chair, to only relate torture to markets. While Spanish ruled during those 200 years, to make profit one would align with the Spanish, and tithe to king and church, no doubt. Irrespective of one's concept of freedom, there was certainly plenty of trade going on in that age. From my same source, i read a 16th century account of a trade of 1,500 slaves for Peruvian silver, for example.

one could theorize such trade still goes on today, perhaps in milder form. When a bank buys a $10 m block of CMOs, the bank is buying the right to receive the benefit of the work of the indentured mortgage slaves, yes?

* from the Greek katholikos "universal, general"

Stefan Jovanovich answers:

The notion of "indentured mortgage slaves" is the kind of sophistry that my Alabama relatives -- and their South Carolina cousins -- used for a hundred and fifty years as an argument against abolition. It was nonsense then, and it is nonsense now. The reality of slavery is that you have no right to hold money or to learn to read and write. You have no right to contract for property subject to mortgage, and you certainly do not have the right to indenture your own labor.

The commerce of the Spanish empire from 1550-1750 was limited to those few people who held official licenses from the king. It was officially sanctioned barter, not market capitalism. The Inquisition had no tolerance for bills of exchange, letters of credit and other devilish sophistries allegedly created by Jews, Anabaptists and Lutherans (actually invented by good Italian large "C" Catholics). By outlawing the freedom to trade without official sanction the Inquisition effectively destroyed what remained of the very commercial vitality of Aragon and Catalonia that had helped create the Spanish empire. This sad history is the reason Spanish and Italian 19th century liberals were so passionate in their admiration of John Stuart Mill and their opposition to things royalist and Papist. They thought that the theocracy that Philip II created had been not the glory but the ruin of their homelands. There is very little that can be argued against that judgment.

Bruno Ombreaux replies:

I found a very interesting punishment tying up the thread on torture with the nautical thread. Keelhauling. The mild, side to side, version, is what the market imposes on offenders when it wants them to live to trade again. That's me when I am taking 10 losses in a row. I just feel... keelhauled.

The tougher, bow to stern version, is what happens to systematic traders, thousands of barnacle cuts followed by drowning.

The market knows other marine punishments. "Walking da plank", and some methods of hanging, end up in quick death, the equivalent of blowing up in a stock crash or a commodity spike.

Elliot wavists and Gannistas favor the "cat-o-nine tails" because of the mystical properties of the number 9. Caneologists prefer caning. And marooning is the ideal outcome for Jesse Livermore's admirers, because it culminates in a self-inflicted shot to the head.

Easan Katir replies:

At the risk of being too gruesome for polite dinner party conversation, one feels the need to convey a particularly extreme torture not mentioned yet in our study: In 16th century England, 105 Catholics and those convicted of treason were tortured this way:

The full sentence passed upon those convicted of High Treason was as follows : "That you be drawn on a hurdle to the place of execution where you shall be hanged by the neck and being alive cut down, your privy members shall be cut off and your bowels taken out and burned before you, your head severed from your body and your body divided into four quarters to be disposed of at the King's pleasure." The quartering part was designed as a punishment beyond death, as the common belief was that one needed a whole corpse to rise from the grave when the prevailing religious predictions came to pass.

Stefan Jovanovich responds:

As many of the list members may know, the Black and Tans successfully repressed the movement for Irish independence by adopting a less public form of terror. Very little of it is officially documented (understandably), but there are more than enough personal recollections to confirm the following: if, in a city street or a country district, there was a shot fired at a policeman or soldier, a family would be selected purely at random and evicted. The house would be left standing, along with all the furniture. If it was a farm, the neighbors would be told to care for the livestock. The family would be allowed to return when the rebel had been caught. The Israeli practice of demolishing houses has not been nearly as successful because it has been all stick and no carrot. The evicted families became willing informants precisely because in almost all cases they were not guilty. Irish nationalists found themselves being tempted to surrender their weakest - i.e. potentially disloyal - members to satisfy the British and retain popular support. But that, in turn, led all but the most fanatical to become bystanders. Why join the movement when you could be turned in by your own countrymen for an act of treason (against Ireland AND the crown) that you did not commit?

Bruno Ombreux makes a more timely reference:

There we have an analogy with the World Cup. Everybody was making fun of the French team, saying they were too old, couldn't score, wouldn't make it past the first round... Next thing they are in the Final.

The last two paragraphs of this story are from Thierry Henry:

"It was true at the beginning (of the tournament) we were not playing well but it was harsh when people said we couldn't score."

"The thing that is happening now is that we are not listening to it, to the stick. We are trying to play our game without listening to it. That's the most important thing in football."

Perhaps in trading too.

Hanny Saad replies

While I agree that concentration is a key to success in any sport as well as to trading, there is more to the story of the French's success.

Risk: yes, that four letter word again. As you all know, the French team has the oldest players in the World Cup. No one thought they would go this far judging only by their ages. In fact, it is no surprise that France got this far. Their coach Dominech said (quote) that Zidane and Henry will play all games because they are old, famous and ready for retirement (Zidane will actually retire after the World Cup), so in fact, they have nothing to lose and will take more risks than a green player who will avoid to make any naive mistake that could ruin his career. Dominech was right. They both played very well and embarrassed the Samba players more than anyone in the world cup. It seems to me that the French (contrary to the mainstream opinion) understand risk more than anyone. It's a "general" belief that the older you get the less risk you should take in markets and in life in general. How naive and sad!! I don't buy this nonsense.

Wisdom and experience: As you know, the French started very weak. They tied with Switzerland 0-0, with Korea 1-1. Yet they beat Spain, Brazil and Portugal when it really mattered. Unlike young players who are too excited to be in the world cup and being watched by millions, these guys have been there, done that. They won the cup in '98. They knew they have to save their best shot for late in their games. The end game for the trader is of supreme importance to his/ her success. It is wise to sometimes to exhaust the opponent, give him false sense of security and of your own weakness before you come up with your unexpected best shot for a nice closing.

Economy of motion: For those who are obsessed with soccer and markets the way I am, if you watched the French play, you'd notice that they don't run as much as the other teams (with the exception of Ribbery). For instance, against Portugal, their possession of the ball was remarkably lower and yet they managed to win to qualify to the Finals. They depend more on long passes with purpose. Remember, in markets, doing nothing is always a choice. If you don't have a quantifiable edge, stay out of the markets.

Economy of emotion: Here in Toronto, police officers (non French) were hoping that the French win against Portugal and are also hoping they win against Italy. The reason? If the French win, the French immigrants in Toronto will go have a nice dinner and celebrate over wine. You rarely see French celebrating their wins. The odd car with a French flag, nothing more. Most everyone else, although peaceful, block traffic for hours celebrating. The French player have the same trait after their win. If you're sitting across from a good trader, you shouldn't be able to tell if he's up or down on his trades.

Humility: Wow!! what an unusual trait for the French you say. The fact is that they actually are more humble. The German papers claimed that they will dine on the Italians like Pizza and Spaghetti prior to Germany's defeat. The Italian papers responded that the Germans should not eat Pizza and Spaghetti in the first place as their taste is not that refined and that the Italians are superior to any team on earth and may be even mars. The Brazilian striker Ronaldo claimed that he would be very surprised if he doesn't score even more goals in the World Cup after scoring the most goals in the history of the cup (he stated that prior to Brazil being ousted by France). The French newspapers on the other hand criticized the French players after their win over Portugal last night saying that if the French play this same game against "the wonderful" Italian team, they will lose in the Finals. I don't need to elaborate on the analogy to markets since every other post by the chair mentions the humble mien as a key to success in markets and in life.

David Lamb responds:

Upon engulfing the great book, Les Miserables, by Victor Hugo I came across the description of a 19th century galley, one of the most horrid houses of hell ever to be constructed. I now quote:

There was at the Chatelet de Paris a broad long cellar. This cellar was eight feet deep below the level of the Seine. It had neither windows nor ventilators, the only opening was the door; men could enter, but not air. The cellar had for a ceiling a stone arch, and for a floor, ten inches of mud. It had been paved with tiles, but, under the oozing of the waters, the pavement had rotted and broken up. Eight feet above the floor, a long massive beam crossed this vault from side to side; from this beam there hung, at intervals, chains three feet in length, and at the end of these chains there were iron collars. Men condemned to the galleys were put into this cellar until the day of their departure for Toulon. They were pushed under this timber, where each had his iron swinging in the darkness, waiting for him. The chains, those pendent arms, and the collars, those open hands, seized these wretches by the neck. They were riveted, and they were left there. The chain being too short, they could not lie down. They remained motionless in this cave, in this blackness, under this timber, almost hung, forced to monstrous exertions to reach their bread or their pitcher, the arch above their heads, the mud up to their knees, their ordure running down their legs, collapsing with fatigue, their hips and knees giving way, hanging by their hands to the chain to rest themselves, unable to sleep except standing, and awakened every moment by the strangling of the collar: some did not awake. In order to eat, they had to draw their bread, which was thrown into the mire, up the leg with the heel, within reach of the hand. How long did they continue thus? A month, two months, six months sometimes; one remained a year. It was the antechamber of the galleys. Men were put there for stealing a hare from the king. In this hell-sepulchre, they agonized, and what can be done in a hell, they sang. For where there is no more hope, song remains.

Now, the direction from the Chair, as I understood it, was to parallel types of torture with the recent (and past) market movements, and how to "profit it, or at least counterthrust". I will notate one with Hugo's galley depiction.

The Mistress is merciless to anyone and everyone who are so presumptuous as to steal her "hare" and think they can't get caught. However, some do, and some don't. Those who do get caught pay a severe price and are required to pay dearly.

In quantifying and qualifying these past many months vast amounts of particular data in the bonds futures market, I have realized many things. One thing has been the realization that counting and then weighing these certain types of variables can yield a very telling story. To me, the numbers didn't add up to being a bear market. Anomalies that were quantified and then compared with past anomalies and their ensuing movements told me that there wasn't much weight and, therefore, not much longevity to the reversal. Sporadic and inconclusive movements were constantly being experienced. Psychological bias, and its qualifications, told me that it wouldn't, and couldn't, remain for very long. Time series analysis demonstrated that minor market movements had no weight to them, whereas as the opposite could be realized with the bull side. e.

So, what did all this say to me? That the canes had better come out to play. Those who got caught trying to steal a hare from the king (Mistress) are now paying dearly because they didn't correctly quantify all the important variables or weigh properly the chance of stealing a hare when there was no hare to take. Of course, I have read comments on this list of those who correctly caught the brief bear move. There are always those who are able to steal the hare without being caught and, therefore, not experience the galleys of the Mistress.

I hope to never experience anything like these galley's Hugo described, nor experience (too severely) being caught trying to steal a hare from the Mistress.

Tim Hewson replies:

This torture thread makes me think of escapology, and what use does this have to getting out of tricky situations.

Wikipedia isn't hugely useful, but it does mention that a safe way to prevent someone escaping is to tie their thumbs together as their hands become redundant. Is this the same as having too tight a stop, thereby having no room to maneuver.? It also says the seasoned escapologist does everything to give himself a head start, like breathing in when being bound in order to give himself some wiggle room.

Marlowe Cassetti replies:

Market torture reminds me of the old joke of the definition of Heaven & Hell:

In heaven, the police are British,
The cooks are French,
The engineers are German
The administrators are Swiss
And the lovers Italian.

In hell, the police are German
The cooks are British
The engineers are Italian
The administrators are French
And the lovers Swiss.

Okay, what then is the definition of market torture? Wouldn't it be a place where prices are totally random without any relationship to earnings, interest rates, political events, etc? Market hell would be a place without rhyme or reason; driven by a big random number generator. Talk about ever changing cycles; counting would be useless, although I suspect that some will be quick to point out some arcane number sequence that unlocks the market's secrets. Can you imagine what the Talking Heads on CNBC would be saying as they explain about why the markets acted as they did? And the nonsense the economists would be spouting. I cannot imagine what Cramer would say; yes indeed this is the definition of torture!

James Sogi responds:

The torture inflicted by the market is different than the corporeal torture Chair describes in that it is self inflicted. The source of the pain is not external, it is internal. The mere drop of prices in itself is not painful, nor is the reduction in wealth by some percentage. The pain comes from an internal source. Without credentials in psychology, speaking from my own experience, it is a combination of fear, fear of being wrong, of being a fool, and of being seen as wrong and as a fool. It is frustration at loss of control and power. It is anger self directed at past actions and failings and personal defects. These self inflicted tortures inflict more pain and suffering than the cruelest inquisitor as no one knows the weak soft spots better than the person himself. It is odd why the market can cause such reactions. From reports, it is a general and common phenomenon. Is there anyone here who does not experience this in market operations? Why does it do what it does? What is it about market operations that cause such intense reactions? What is the best way to deal with these tortures? Central to this whole theme, it is this very pain that gives the opportunity for profit. Who is the toughest?

The pain is related to personal shortcomings. There is some dynamic with these personal weaknesses that causes such intense pain. I've seen over and over many people who refuse to see personal defects or shortcomings and place the blame elsewhere and repeat the same mistakes in order to avoid the pain. The most painful thing in the world, almost impossible, is to acknowledge one's own defects and faults. Yet that is the source of strength and progress. Change is very very difficult and without the recognition, impossible. Compounding the problem is the years and years required to accomplish the change and retrain the mind and body to alter the defects. Resolution of shortcomings and compassion for others salves the pain. The reason is not clear. The pain stems from self pre-occupation and compassion redirects the pain and converts it.

Craig Cuyler replies:

To continue the nautical theme and one involving torture, a practice called being "bent over a barrel" was a common torture administered by Barbary Pirates operating on the west coast of Africa and the Mediterranean in the 1700s. When Pirates attacked a trade or merchant ship an inevitable fight occurred where many lives were lost. The survivors of the attacked vessel were often the fiercest fighters and the most skilled, these poor wrenches were assimilated into the pirate vessels crew, where if they proved themselves they would become Pirates themselves, but the most likely fate was that they would be chained to a bench and pull oars until the day they died. They would sleep, eat, defecate on their allotted space with other captured men and their life spans were obviously very short from this point on. More interestingly if any of the attacked ship's crew were found hiding in the hold or avoiding battle they would be tied to a barrel and sodomised almost to the point of death by other slaves (kept for unsavoury tasks like this) before being thrown overboard and drowned. I don't know if the expression bent over a barrel comes from this practice but it's possible.

I would liken the hedge fund's and smaller aggressive trading operations to the Pirates of the financial world with the large banks analogous to the navy's of the countries they belong to - almost impervious to the tides, waves and the various conditions of ocean (markets). Smaller operations require larger incentives, larger risk and fiercer loyalty from their employees and must take more severe measures to keep them and punish them for disloyal behaviour. The term Vic used was "draconian". I think of the vast herds of graduates that are assimilated into the larger banks where they work as virtual "slaves" for many years before they either burn out or if they are good, get poached by the pirate operations for greater incentives and far greater risk. The ones that prove themselves here share the spoils of victory but the ones that don't have the appetite for the fight are "bent over a barrel" until they lose their jobs (tossed overboard).

Steve Leslie comments:

This concept of torture and the markets is an interesting one. To equate "Man's inhumanity to Man" or a physical abuse of the sort of torture that has been devised through the centuries and millennia and project it to the financial markets can be quite helpful and instructional provided we learn through this exercise.

Let me state first that he markets are neither good or bad, noble or ignoble, cruel or gentle -- they merely are. They exist as a vehicle to facilitate the transfer of a fungible asset such as cash and convert it to a security which will then be converted to cash again. Once that is complete then either the cash will be converted to another intangible or a tangible asset. And on and on it goes. Therefore the market in truth does not exist but in our minds. To suggest otherwise would to anthropomorphize the markets which may be cute yet would also be purely wrong. The perception of the events in our mind will be the determining factor as to whether the individual will experience pain or pleasure.

Let's look at a physical event that most of us would perceive as painful. There is a very small group of people who are true masochistic. They derive a sordid pleasure out of a literal physical beating. This can be s-xual in nature, but does not have to be. Without going into salacious detail I think the reader can imagine some events that most would consider humiliating disgusting and a host of other adjectives but to the masochist they truly experience a sordid delight through the event. Now those people are wired a certain way or have been classically conditioned to perceive this physical and/or psychological abuse as pleasurable. In fact, they will go to extreme measures to seek it out. They also will try to replicate the sensation by going deeper and taking greater and greater risks to themselves. We have read and seen some who have actually died due to a s-xual enactment or re-enactment that went way too far.

The movies have glamorized physical torture in other ways. One such example is in "First Blood" where Col. Troutman who speaks of Rambo to Sheriff Teasle as "What you consider hell, Rambo considers home."

This is where the pain or more importantly the perception of pain will exist. That is in the mind. This is the extraordinary measure that needs to be considered.

Think of it this way, if one has a nerve to an extremity severed, they will never associate pain to that body part no matter how severe or extreme the situation may be.

Let's look at financial markets. If I am long a stock and it goes up in value I am probably going to experience pleasure with this event. On the other hand, the one who took the short side may experience the pain. Why? It is not the event such as a stock going up or one going down it is the relationship to my personal situation that will be the determining factor. There are 7000 stocks and they are all constantly changing in value but only the ones that I have a financial stake in will affect me emotionally. Now if I can detach myself mentally and remain completely objective to "Vulcanize myself" like Spock then I will feel nothing when the stock goes either up or down. I will merely manage the event in an attempt to maximize my return. I will of course be a computer in a sense that feels neither pain nor pleasure. The risk is of course that unless I learn to turn off the switch so to speak I will not experience pain or pleasure in other events either.

Perhaps this is why some quants can have some of the highest returns in their performance as evidenced by Messers. Simons and others. They do not allow the emotional to interfere with the objective. Thus they focus on the statistical and their algorithms and detach themselves from the emotional aspects of financial markets. They place all of their energies on the cerebral and eliminate as much emotion as possible all in the hope of attainment of wealth. I do not know quants but in my experience with thousands of individuals is that those who's see money as nothing more than a tool for them to ply their trade with usually have the greatest success. This is why most of us are better off employing others to manage our money rather than ourselves. They may be the human equivalent of the Terminator or at least a close relative. "They feel not compassion no pain and will never stop."

Therefore, if it wealth that one seeks through financial markets I suggest one seeks out those who have already devised a pretty good mousetrap and ask them to use it for your good.

Grunting and Screaming, by GM Nigel Davies

British commentator on a Mauresmo scream vs. Sharapova: "I really like the way she screamed." Of course Sharapova has been by far the noisier of the two, but she's just played a couple of good shots without a murmur.

I am considering the effect of grunting during my chess games and/or the trading day in order to dissipate tension. Who knows, if I can get away with it at the British Championships then maybe it will become all the rage on the trading floor of Merrill Lynch.

James Sogi relates the topic to another pursuit:

In martial arts, a strike or block is often accompanied by an explosively loud shouted exclamation used to focus the power of the mind, breath & body and to disarm the opponent.

Human Machine Interface, by Paolo Pezzutti

Being responsible for naval command & control systems in the Italian Navy, we give great priority to the issue of the "ecological" or "direct perception" approach to support the cognitive aspects of human problem solving. Decision making can be supported by designing computer interfaces to make the constraints on the problem domain more visible. Rather than designing an interface simply to present the enormous amount of available information, the process seeks out important relationships and constraints underlying the data that are germane to understanding the problem. The interface is then designed to show this functional information, graphically, to the decision maker. Often, the information is not directly available as "data" but must be derived by combining or transforming the data into more meaningful forms. Human Machine Interfaces in the trading environment, as far as I know, do not have these characteristics. Other disciplines have adopted modern visualization methods to manage and explore mountains of data. Finance, however, has done little with the discipline of visualization of data. Information visualization of trading data (ticks) could improve human performance for intraday equity trading. The analysis of tasks and requirements, and the breakdown and mapping of the decisional process may allow the development of 2D-3D visual representations that improve the perception of specific trading conditions and the consequent decision making.

Gregory van Kipnis replies:

Once I was a Captain in the U.S. Air Force and at a certain point was exposed to the design logic of cockpit "heads-up" screens which summarized abundant info into graphical and sound alerts which quickly and efficiently informed the pilot(s) of problems and discrepancies. Depending on the mode of the mission, different screens could be activated then one was in a combat situation versus take off and landing, for example.

Many years later, when I had the chance to build a trading room for our proprietary trading group at Morgan Stanley in 1985-90, we brought in an ergonomics expert and programmers skilled in "human interface engineering." We introduced sounds, flashes and other forms of alerts to notify the trader when different conditions arose, such as: a actionable trading signal, unusual action, news, a completed execution, etc. In addition, the research team was given 3D equipment to allow visual examination of multi-dimensional relationships. The design of the trading desk, keyboard holders, chairs, lighting, sound proofing, etc., were all configured to maximize comfort and minimize distraction, for the over all purpose of maximizing productivity and minimizing opportunity costs (e.g., errors and missed trades).

James Lackey responds:

I was accused of video gaming the Gulf one and the markets in 1999. The gist was "its not hand to hand combat" as in WWI.

The gist from Army War college: "We look at the linear lines of 19th century warfare and shriek.. How could they be so stupid to form lines and meet in a meadow and go head to head."

The answer is technology. Even up to the Civil War the weapons of the time called for direct assaults, head to head linear formations. The rapid increase in tech via the industrial revolution made Militarists look "smart" for simply adapting new technology. The best and the worst example is so called "blitzkrieg" fast moving armor with air support, when the Cavalry had been using similar tactics since Genghis Khan.

The new new thing is data and usable data for front line soldiers. its imperative for a commander to know where his forces are, especially the US as we are usually the Superior force. Yet the enemy's position is as important, yet a joke is seemingly less so. The Russians gave the Iraqi all they data they could use -- the problem was that they couldn't use it.

Now to trading. There is 2 things in a linear type of trading position, where you are and where the market is at. Like the enemy it can't tell you where it is going. We can "surmise, suppose or hope" but only predictive testing or knowing your enemy's tendencies will help.

The only thing tech can do for trading is reduce human errors up to the ability of the programmers. Next it reduces "labor costs' as now one man can trade 100 stocks in 5 markets with several trading machines vs. even 5 years ago where you needed many hands on deck.

One of the most striking things to me as a newbie in the army was the over plus of labor. It was ridiculous in peace time. We had so many guys we had to create entire schedules of "busy work" that was so redundant none of it made sense as far as business sense.

It all came abundantly clear in combat. Every single man was needed and used. God forbid we lose men in battle, now manpower and technology will be pressed.

I am a gear head so the Russian T-80 new tank circa 90 had an auto loader, 3 crew man a lower silhouette and more ammo, a louder less powerful engine yet simple and less prone to breakage vs. the M1 turbine and auto trans. We had heated arguments what was best. I heard from every single "old timer" that the 4th crewman in the M1 tank was the best advantage and soon I would find out.

Tech and new tech is a wonderful thing until it breaks. We all have back up systems for combat and trading. The problem is there is no back up for the human computer. One man can't run a tank. The Russians had a major problem if the auto loader failed. Our tanks could lose a man for what ever reason and could operate quite well with a 3 man crew until a replacement was found. d.

All the new tech in trading has reduced the need for clerks, brokers, phone operators, an extra man in research and the 10 traders needed 10 years ago can be done by one or two.

The problem is what if one man goes down?

Best tank I saw was the Germans' gunner system. It would save many targets at once and then auto fire, had a fail safe to abort etc. It was cool and it took the best of us to hit one target at a time training for the CAT tank trophy. We never had the opportunity to compete due to the war. It would have been very close unless they had a tech problem.. We had to be perfect to beat them. If they had a tech problem, I don't know how hard they trained on their back up systems.

Kind of like when you see an NFL team use the 2 minute drill and fly down the field. You ask 2 questions: how come they don't do that the entire game? Well its designed for 2 minutes of clock time so the boys spend all their energies. Secondly and most importantly, every NFL team practices their "2 minute drill" which makes them damn good at it.

Department of Personal Living, from Bo Keely

Someone wrote today for suggestions on his family health problems of respiratory and stomach woes. I provided the two following paragraphs:

The best preventive and remedy for throat, respiratory, sinus ailment to me is wrapping the throat at night like we did the water pipes in Michigan. Hamlin probably sleeps in air conditioning. This is the opposite of what is required to heal the problem. Warmth brings expansions brings blood and the microbe military to the right spot. It's all logistics, and I tell you that wrapping the throat can turn the war around. Get a very long scarf or towel and make several wraps around the neck to ensure it doesn’t fall off before laying down for the night. Then, for eight hours, instead of cool air that probably exacerbates the long-term ailment, the warm air provides healing.

As for indigestion: I'll bet my ulcer that's what it is. Envision the stomach as a balloon with an inside skin lining. The skin is sensitive -- warms and pains -- and when acidic food, strong sugar solutions such as sodas or spices touch to it there is too much warming and pains. You can 'bandaid' the sensitive spots in the skin all month for repeated temporary relief with the traditional over-the-counter medicines and teas, however for a long-term and more permanent cure get to the root and cut out the antagonizers. Stop or dramatically cut back fruit juices, spicy foods, greasy foods and strong sugar solutions. You can dilute 3:1 your juices and sodas with water (3 waters per volume drink) but I personally stop fruit juices and cut back even on fresh fruit. When my stomach/intestines get too gung ho I just go to dry shredded wheat for every breakfast. No coffee ever, no juice. Lots of distilled water. I continue the day with a bland lunch, and salads, potatoes, pasta for supper. There is tremendous Improvement -- actual anatomical change in the stomach lining -- in one week but the diet should be continued for a month to have a lasting effect.

Here are two final tips from a lifetime of amateur health research. I'm big on V-8 juice and a few years ago drank it for a week to learn to like it. Always get the non-spicy, snack on it, make it a meal, use it for a sport drink I'm not a supplement bum but do take Dr. Schultz's Superfood. In fact, I became a fan of his after a study of his life. You find lots on him on the net; order something and you get a catalog of products and his bio. You can start at  his official website. Happy grazing.

Kevin Eilian replies:

Many thanks to the Chair (and to Bo) for this excellent recommendation- the Superfood product is the best supplement that I've seen.

On the cold/respiratory front, may I suggest a product that was referred to me by the head of the NYC Ear and Eye infirmary. Its a sinus irrigation product called "Grossans hydro-pulse Irrigator" :

Basically, it uses a gentle stream of water to flush out the sinus cavities of pollen, mucus, debris etc. It also comes with a throat irrigator to wash the back of the tongue and throat. Ive found it incredibly useful- also, the Dr. told me to expect a much lesser frequency and severity of symptoms related to cold and related viruses.

J.T. Holley replies:

To begin with "I am not a metros-xual!", ok maybe have a little metros-xual phobia but that's it. With that being said a good way to heal "cracked heels" is to rub some lotion on them and sleep with your socks on for a few days. I run around in flip flops and barefoot the other half so this is a frequent problem of mine. This works better than those cheese graters on the market at Bath and Body Works. Though I do use the pumice stone frequently.

Russell Sears replies:

I concur with Bo, on V-8 as a sports drink. It has the electrolytes you need when you sweat, mainly high sodium.

In the 70's salt was commonly handed out to manual laborers, and athletes, to prevent cramping and involuntary muscle twitches. However, This of course cause heart attacks to the un healthy heart. So this practice was stopped.

Until recent history one of the most common causes of death for marathoners, was lack of salt. This lead to a heart attack. Rather than high blood pressure, however, it was brought on by hypohydration, and lack of salt in the blood.

Bo dessert environment dictates V-8 use, as the fifth food group. I used V-8 in training for my marathon best in 1996. Now in OK and still trying to train for competitive marathons. I have trained myself to like anchioves straight from the can.

Point is know your enviornment and what your enemy is.

Survivor, by Bo Keely

I stopped by Alba's a few days ago and found her clutching a 10-day old pup with unopened eyes. Alba was near tears. 'It's name is Survivor, the only one of a litter of six that weathered last week's cyclone and 'burial.' She explained that a big wind hit her plot hard and raised wood and empty water containers high into the air. The mother of the new litter panicked in the storm and dug a 1-foot deep hole in which she stuck all the pups and covered them up. Meanwhile, Alba ducked out of the blow into her own trailer and didn't discover the buried litter until the following morning. 'Five were dead with ants coming out their nostrils,' she cried. 'But one had turned it's head sideways and breathed up through a little opening made by one of the pup's legs.' That was Survivor. The sturdy pup is now doing fine on canned mild and attention from Alba.

Dick Sears Weekly Commentary: Fed UP!

Consuming, a Political Act? from Jason Schroeder

Ran across some high level business execs sharing their true feelings and leanings, Marxists of a sort methinks. They said: I believe that consuming is a political act.

Communism renders me profoundly impatient. So I am not patiently rational about it.

Is this a catch-phrase? Does it capture the anti-thesis of "trading one good thing for another good thing" and express that "trading is finding mutually bigger fools"? Is not this simply an appeal to judging human actions as continual attempts to cajole?

Is this an appeal that the price discovery process is totally random? That synchronization of wants only results in desperation?

Can this phrase through contortions be seen in a libertarian light, for example?

The Customs of an Operation Steeped in Peril, by Victor Niederhoffer

On a recent visit to our office, a savvy reporter for a well known daily publication was wrongfully and incorrectly tipped by an enemy with opposite positions that we were out of business. He noted that there was an unusual air of formality in our operations with such things as a couple dozen people packed into a crowded office addressing each other as "Mr", an air of discipline in place, activity, language and demeanor, concerned concentration and silence, daily brainstorming sessions with the senior offices, a division of many responsibilities with 100% attention to their duty by everyone , frequent ringing of bells to warn of the approach of the opens, hours, and closes at which repetitive and important activities were invariably dispatched, look outs posted for enemy attacks and considerable scrambling by all hands when it arrived, , an absence of romantic distractions, parsons or hoodoos ,emphatic enjoyment in the food served daily from below, a daily game of cricket I mean tennis by all operatives on the hard court outside, copious drinking of tea and coffee ,frequent sounding of the position above and below water, much studying of log books, classical music in the background, a group of interns entering and computing positions under the tutorship of senior officers, considerable scientific naturalizing and computing, a private area for the chair to pace about, and several lieutenants making entries as to the good and bad that the hands were up to. I pointed out that we tried to adopt the traditions of the British navy during the late 18th century when they were securing a Pax Britannica throughout the world, making the world safe for trade, encouraging cooperation between countries rather than conflict, spreading the idea of limited government and the rule of law, and transporting the material fruits of the industrial revolution throughout the modern world. Arthur Herman in his excellent book "The Rule of the Waves" summarized these contributions nicely:

British sea power made sure that the nations wealth depended on an active and expanding middle class. It removed the need for large standing armies, and large intrusive government: It established safe and secure trade routes, preserved the liberty of Europe, and the rest of the world... an empire born out of ruthless ambition and brutality had become the basis for a new progressive world order "

The query has led me to thinking about the daily humdrum way of life in a trading room and how it relates to the customs of the British Navy during the hay days described by Patrick O’Brian in the Aubrey/Maturin series. The series is particularly resonant to me because the interplay of the swashbuckling hero, completely competent at all things nautical but totally adrift on anything involving the land, with his much wiser, and competent Dr. friend, Stephen Maturin, modeled after Darwin and Sir Joseph Banks is very similar to the relation that I have with my colleague Dan Grossman.

The dynamic friendship these two had serves as a model for the profusion of progress that occurred as the modern world was dawning with Aubrey 's energy and abilities, and entrepreneurialism combined with Maturin's scientific curiosity, and attention to detail representing the two sets of personal qualities that spread material and personal well being, and spawned the takeoff (and ten fold increase in population ) that led to the modern world. I only wish that I was as competent as Aubrey in my trading as he was in his navigating, but if I am not, perhaps others aren’t either, and a little reflection and study of the customs might be improving for me and others.

I am inspired in this pursuit by the many similarities between the ocean and the market. Both are fathomless and everchanging. They are beset by internal and external forces which are always changing and never completely predictable. Disaster or great riches can flow to those who can navigate the two successfully. Those who live in each field work in close quarters, shielded from outside life, with great rewards and punishments always in the offing.

Regrettably, I am not a nautical person so I have been forced to gain my insights into the customs from the seamless tapestry of everyday life provided by the 22 volumes in the O’Brian series, helped along by my colleagues of a more nautical bent.

The main lesson I get from the O’Brian navy is the importance of incentives. Each man on the ship as well as the admirals received a share of the prizes. It created the atmosphere of competence and cooperation at all times from all hands. The good trading shops have a similar profusion of incentives, and I am happy to say that almost all in my employ have profited handsomely from their own and the firm's success and suffered when it has experienced misfortune.

The life at sea was subject to shipwreck from the weather, running aground from uncharted territory or faulty equipment, sickness from microbes or lack of proper food, and annihilation from the enemy. The life of the trading shop , at least mine, is subject to annihilation from October 1987 type moves set off by a misguided Secretary of the Treasury, or anticipatory and conjunctive market moves set off by terrorist activities on the scale of September 11, and combined fleet actions from the higher forces in the feeding chain, who like the French are always ready to ridicule the powers of tradesman and enterprise, or massive withdrawals of troops and funds from the customers. The always present danger strangely sets off an air of attention to humdrum things, practice, and politeness on the ships. We have to give each other the benefit of the doubt. Knowing of our vulnerability to forces beyond our control, we try to go about our daily activities so that there is not a chance that when such an event occurs, we will not be in perfect condition to withstand such attack. Since every hand knows of the possibility of total disaster if they don’t do their job, the hands are willing to fight for their life and very loyal when the crisis arises. We live in tight quarters so we have to keep noise to a minimum and thus, the silence. The division of responsibility with the captain in complete command is necessary to prevent confusion and more important to stave off disaster and balance the seeking of prizes with the risk of running aground. Because of the loneliness of the captain’s job, and the responsibilities he must bear, there is a certain deference shown to him, a space is set apart for him, and the custom is for him to dine alone and not to interrupt him in his pursuit of the main chance. These customs have developed naturally in the ship and all trading shops not supported by unlimited capital of the kind that the big brokerages and banks can use to support their market maneuvers.

It is hard to recruit hands for such a perilous and close quartered job. Thus, considerable attention to recruitment is necessary. We do not press men into our service but generally promote from within based on the ability of the hands to equip the many jobs necessary to go into the proper running of the operation. By that same token, we are not very pleased with deserters as they dissipate the work product of all in the best case, and in the worst case which often happens they try to steal valuable charts and maps, and codes which are necessary for our survival. While we don’t have a penalty of death as was common in Nelson's navy for such deserters, we are often tempted to take draconian actions to preclude such desertions leading to our mutual demise.

One of the amazing things to me about life in the trading room is the air of cheerfulness and friendship that prevails. Knowing of our common goal, supported by incentives, living in constant knowledge of our danger, we adapt a life and let live attitude to our colleagues. We are a band of brothers like the Nelson navy and hardly a hard word is exchanged even when the ship is near foundering.

One of the beautiful things about the Aubrey/Maturin series is the way the author builds up a tapestry of the every day details of the 18th century naval life leaving you with the feeling that while the times and loci are different today, very similar forces were at work, and peoples’ reaction to them, and the evolutionary ways of dealing with them successfully have not changed. Here's one of my favorite O’Brian passages describing the ability of the seaman to deal with anything except sudden wealth:

But there you are. That is your seaman. He can put up with uncommon dirty weather, endure great hardship and very short commons, a good steady courageous uncomplaining creature under officers he can respect. He will bear all that and sometimes harsh punishment, shipwreck and scurvy. What he cannot bear is sudden wealth. It goes straight to their heads, and if there is the least possibility they get drunk and disorderly and desert in droves.

By the way, by far the worst thing I ever wrote was the endless pages on the analogies between poker and trading in EdSpec. While I had read all the books on poker, I hadn’t played the game in 30 years since I lost all my money to Oswald Jacoby in a game that I was in over my head in. My writings looked good on paper, but had that same lack of verisimilitude that all the stuff from writers who don’t trade or ghosts who have lost all their money and hope to impress others with their fair thee wells and points and tips have today. I am hopeful that others of a more nautical bent and aptitude will augment what I have written above, correct my errors, sharpen my spongy points. I will offer a reward comparable to the ones awarded monthly for the best letters for the best contributions of a nautical bent on this subject.

Paolo Pezzutti replies:

As an officer of the Italian Navy I finished my assignment as a Commanding Officer of the frigate Aliseo (pictured below) in 2004. O'Brian descriptions of the navy are still valid nowadays. Traditions are very important in the navies. And many of them come from the British Navy of O'Brian's memory. Traditions are to be kept in high consideration because they represent values and lessons from the past. At sea these lessons were and will be valid forever. You have to have great respect of the sea. The weather conditions can change very quickly and transform a calm sea in a storm in a very short time. A threat for the ship and crew safety can be concealed anywhere. You have to learn and live with the inherent uncertainty and complexity of forces and variables when you make decisions. Predictability is never completely possible, because the environment is changing continuously. It is impressive how fast changes can occur both for better and worse conditions. Experience and knowledge of what you can expect help a lot. You get organized to face the worst at any moment. I bring this approach to my way of life, with all the pros and cons of it.

But this is the way I was grown up since the Naval Academy, where, since when you are 18 years-old you are taught these things. The cruise on board Amerigo Vespucci, a beautiful sailing vessel built more than 60 years ago, has the intent to teach the cadets how to respect the sea, living difficult conditions and situations. A ship at sea must be able to ensure first of all the function of survivability, then mobility and finally fighting. The highest priority is given to survivability. When I refer to "the ship", I mean the hull, the equipment in general and the crew as a unique element (I believe a ship is a living organism by all means) of an incredible and beautiful complexity. Every aspect of a ship's life is studied in the minimum details. Both technical and human. The human factor is of fundamental importance. Living in a very close environment, every member of the crew has a specific task. The objective is shared by everybody. At all levels. This makes the difference. Sharing the same values and objectives. Team work is important to ensure coordination of activities conducted in the different areas, the platform services (e.g. propulsion) and warfare related (e.g. tactical situation management). O'Brian navy describes the relationships between men on board ships, with the difficulty and beauty of an unstable balance. A balance of discipline, initiative, bravery, technical knowledge, human qualities.

I do not agree on the view of the military as a framework that poses constraints on the individuals. The organization of the navies today, I speak of what I know, reflects what was learned in centuries of life at sea. This has a value. If it is true that such organization might be slow in introducing transformations and changes to adapt to new realities, it is true also that in other "eco-systems" it is quite impossible to find the same cohesion due to common values and objectives, the first and most important of which is survival.

P.S.  Pictured above is Aliseo's crest. Every ship has a crest and a motto. The motto, in latin, is "constans et indomitus". The name Aliseo means a constant and dry wind -- this is the wind which helped Columbus to sail to America. The crest reproduces one of the 3 "caravelle", sailing safe pushed by regular and constant winds. Wonderful and fascinating traditions.

J.T. Holley replies:

I served onboard the USS Stark FFG 31 '90-91 and mostly cruised around the waters of the Atlantic Ocean from Halifax, Nova Scotia down to the lower Caribbean then briefly was on the USS Saratoga before land duty. I came on board the Stark to find a different World than the one that I assumed it would be. It was something frighteningly similar to Mr. Smiths account but also that of Mr. Pezzutti. I to could go on for hours of comparisons but for no reason haven't sat and jotted my thoughts down on paper for the comparisons?

The life at sea is something that is very lonely. Not only for the captain but also equally as lonely for the crew. The captain very simply can segregate himself due to his position and cabin assigned to him, of whom the crew doesn't have that option; they are constantly forced to be with one another without the ability to be alone in their loneliness. For me constantly being around people all the time without the ability to "be alone" was torture, especially when you don't get to choose who you are around.

The first observation that I made once onboard was that men while in dock were jovial, lighthearted, and a comfort to be around but once at sea they became bastards, cutthroats, and monsters. This wasn't due to the isolation or the sea. It became very obvious that these men simply had wives, girlfriends that they regularly had s-x with or were alcoholics/addicts and in both cases were taken away from their sources. The first two weeks at see was no more than a detox. Not a pleasant environment even after the two weeks of separation and adjustment. This might lead to the "sailor attitude" that everyone perceives and comment by Aubrey of "What he cannot bear is sudden wealth. It goes straight to their heads, and if there is the least possibility they get drunk and disorderly and desert in droves." Think of the image of a Sailor, we used to think of a drunken, girl in arm, cussing type, that has some VD. You are at sea with pent up frustration and you do nothing but collect money directly deposited into your account onshore. As soon as you pull into port and hit the pier there are only two things on your mind on average for most of the crew and a big wad of dough that you've never have had equal to in your life.. The U.S. Navy has gone to extreme measure to try to correct this and has a constant fight at hand. Vic your men get to go home every night.

The one thing that sticks out the most from other Branches of Service is that you have a sense of security in the gun, rifle, tank, or weaponry that you man beside you. In the Navy there doesn't exist such. You are on a metal ship in the middle of the water feeling totally defenseless. Nothing in your hand to give you a sense of security. The only thing is if you man missiles or cannon and in today's technological Navy that means sitting looking at switches on a board. No sense of security of which leads to the only thing. Safety and Rescue. You spend countless hours training on nothing but fire measures, chemical attack, or a sinking ship. It is all you got "sink or swim". You basically know how to pull together as a Team to over come all emergencies. Weird concept, men who lie, cheat, and steal from one another placing differences aside instantly and working as one knowing that it's their own life if not accomplished? The training is so exceedingly real for instance a smoke machine used to fill up berthing at 3am and then alarm is pulled. This usually takes place when you just fell asleep, you wake up roll out of the rack see smoke and then know with out a question of a doubt where you are supposed to be and be doing on only a 30 minute nap. Bell Bottoms allow for you to put your pants on while sleeping in your boots!

There are a couple of differences in "traitors" stealing maps and giving away trade secrets. I doubt a sailor has time or that important knowledge to do this w/ China, Russia, Al Qaeda and such whereas onboard the Manchester it's quite possible. The old sayin' "Loose Lips Sink Ships" is the one that is highly applicable and I would be most worried about. Men who don't talk much all day, then go to port and have some liquor can talk all night! The other thing in this light that is a pilot fish is the old Navy talk about Commands and Ships. It is totally negative and is a bad attitude that I've found common among Prechtoablesonians that is "The best command is the command you left or the one you are going to". I hated this so much. It's like no one liked where they were "right now", and as if where they were going was going to be so much different or the place they just came from was so much better? Didn't matter if it was a different class of ship, land, sea, another part of the World it was still the freakin' Navy! When someone is talking about another fund, the fund they used to be at or how things were done there, or how things are going to be done when they get there watch out, man overboard or deserter!

Chain of Commands have there place for a reason. Much of the Navy is very educational now and training is extensive. Those higher up than you know more because they have "read, studied and have been tested" what they didn't pass was an exam on was people, emotions, fears, dealing with someone who is 18 has three children and is away from them, alcoholics, homos-xuality. This was something that stuck out tremendously and why uniformity, efficiency, conformity is so important on a ship. All walks of life were onboard from young, old, ethnic backgrounds, experience, gangbangers, farm boys, and even foreigners trying to get citizenship. If the Chain of Command didn't exist then one naturally would form as in prisons.

Top to bottom, left to right. This is how you clean, paint, and brush your teeth and everything else in the Navy. Very important because I found you remember where you left off prior or where a shipmate was incase you take over. I also would have never guessed how many shades of gray there really were in the World. Painting a Navy ship pretty much involves all 150 shades of gray to ward off that one color, orange from rust! Remember rust never sleeps. Price data never sleeps either and is always advancing, so our eyes have to constantly have and know those different shades of the same color when looking at prices to avoid that one color red that also never sleeps.

Incentives. They only existed in the old days. The US Navy has the same pay rate as the other branches of services. The very first mathematical equation I solved onboard was "hourly pay rate". I got the Joke right away. This was way below minimum wage, but you had clothes provided, three meals a day and no bills. It didn't matter how hard/smart you worked you were still getting paid the same. I get criticized in the work place now in reviews because they don't understand that it's not a race it's a marathon. You are always constantly working so take a measured pace. A lot of people just don't get that, and being in the Navy where it's a 24/7 thing taught me that. It also makes it easier in dealing with emergencies with a constant pace versus being sporadic with work pace timed with an emergency. The only thing that mattered was your life so you made sure to pay attention when training involved that. I felt my life was priceless.

You wanted to know penalties? I stood at Captain's Mast twice. Once for getting a tattoo unauthorized in a hazing ritual. That's right someone turned me in after looking at my body in a shower, knowing what my body looked like before! I only got the tattoo because whoever on my ship didn't have one had to do the dirtiest, foulest, grimiest, nastiest work on the ship. One that I hated was dumping trash into the ocean after it had been sitting in a bin that was 100 plus degrees cooking all week long, I also didn't like dumping trash into the Ocean. I finally after six months of cleaning toilets, pubic hair from drains, laundry, pots, grease, oil, exposed to paint thinner, shinning brass bells, gave in and broke and became like them. I regret it to this day and intend to have it removed. I suffered nothing in that Captain's Mast but a lecture on the human body and infections that can come from needle's (how about the disease that can come from the trash/toilets was silently going off in my head). The second time I stood at Captain's Mast was due to total disregard of the Navy and leaving my ship to be with my Grandfather who had just had a stroke and was dying. I asked for permission to leave and it wasn't granted. Family came first in my life ahead of the Navy. I was gone for 20 days. 28 days and then you are a deserter and suffer severely. The penalty for 5 minutes late up to 27th day believe it or not can be the same and usually was. Though the Captain was sympathetic he let me know that it was during time of War (Desert Storm). My penalty was 30 days restricted to the ship (no leaving for anything), 30 days half pay, 30 days extra duty (constant working considering you were always doing something anyways). I made a mistake and paid for it, my Grandfather admonished me and was disappointed. I lost twice. Very similar to having losing position, emotionally getting out, buying the opposite direction and losing again. Losing twice sucks and has a horrific compounding effect.

There are a million other things to mention and talk about. Good, bad, indifferent. I might have focused on the negative above but tried to keep it in the spirit of the Spec List in focusing on learning from losses.

GM Nigel Davies responds:

I don't believe one can easily separate British naval traditions from its past culture. In the days of empire it was considered honourable to die in the service of king (queen) and country, and in fact many did so.

This deep sense of national 'pride' could be seen at every level of society, even the schools. During my own school days I attended King George V Grammar School in which 'house pride' (I seem to recall there were 4 houses), school uniform and discipline (including canings) were paramount. This culture fostered subordination to authority, I personally found the atmosphere oppressive and could not get out fast enough.

For trading I believe one must have personal discipline rather than the kind that is enforced by the brainwashing tactics of the old British institutions. I would claim that its origins are completely different in nature, emanating from individual striving rather than submission.

Apparently there have been elements of this in the Arab - Israeli conflict, as an ex-lieutenant of the Israeli army once explained to me American and Israeli soldiers could still operate if their leader was killed whereas Arabic soldiers had difficulty in this department. I don't know much of British military history, but I suspect that in imperial days they had the same problem as the Arabs.

Henry Gifford replies:

On a tour of a US Navy destroyer I saw a sign. It was engraved in steel, permanently fixed to a bulkhead in a prominent location.

It described the order of priorities:

  1. Maintain the watertight integrity of the ship's hull.
  2. Maintain manueverability.
  3. Maintain fighting ability.

The lessons and the clarity of thinking are both instructive to me.

Number one is all about survival as the first order of business. Number two involves the choice of engaging or disengaging from an enemy. Number three is lowest on the list for good reason -- it won't matter if number one and two aren't looked after. Thinking about these priorities ahead of time gives a great advantage over panic in an emergency.

J.T. Holley replies:

These plaques are very common and usually have some history or legacy to them. My ship the Stark had one that was unique in that it had a plaque of the names of the 37 sailors who died back in '87. Most ships haven't been attacked other than the Cole since then. The ships where sailors has died due to combat have pretty much been either mothballed or decommissioned! This is where survivor bias is a good thing!

Martin Lindkvist replies:

During my military service (army though, not naval),  I learned the importance of always having your weapon close at hand. If you at any time were seen with your weapon more than 1.25 metres (about 4 feet) away, they would tie it to you with a 1.25 metre rope. The 1.25 metres being the length of one leap for you, should someone try to take it, or should the enemy strike. I find that being within 1.25 metres of the computer or my portable screen and phone is very helpful when the enemy attacks.

Pitt T. Maner III replies:

While working in Puerto Rico about 8 years ago I ran into the CO of the DDG-57, USS Mitschercher, , in a museum in Ponce, PR. He invited me to come aboard his destroyer the next day, a Sunday, for a tour.

What was quite remarkable about the tour was the amount of fire fighting equipment and gear that was onboard. The crew had to be extremely well-trained in fire fighting. There was a lot of redundancy, back up, etc for fire fighting. One would not normally think of fire hazard as a major concern but it really is on a wartime vessel.

Another thing that made an impression were red warning lines on the deck around the perimeter of the 5-inch 54 caliber front gun. A closer inspection revealed dents in the deck where spent casings had come flying out. These could do serious damage if you happened to be standing in the area as the gun was being fired. The CO offered me 2 spent casings, but they were fairly heavy so I walked away with only one and sent it back to US by UPS--God knows if it would make it through the mail today with explosive residue on the inside of the shell! It is a terrific souvenir.

Before leaving, the CO told me about budget problems (this was during the Clinton years in 1998) and the need for a strong Navy. I understand the CO is now a rear Admiral.

The tour was quite impressive and it really gave a me a greater appreciation for the dedication of the young people that make up the majority of our military and the fine officers that lead them.

Stefan Jovanovich adds:

You can include the ship builders, too. When our WW II vintage LST was sailing from Vung Tao to Subic Bay and ran into the edge of a typhoon, I had the dubious pleasure as the damage control officer of having to check the lashings of the cargo on the tank deck. Each time the bow hit a wave, the shock would ripple through the length of the ship and the cargo chains would slack and tighten as if some genie were plucking them like strings. All I could think was Thank God for the integrity of the people welding steel plate in 1944 in Pittsburgh.

Mark McNabb replies:

On the water one can find many errors in seamanship due to the presumption that if a big boat has a wheel then it must be like driving a car. Overestimation of ability is rampant around most recreational boating areas where money rather than sense or skill is the rule. Fixation on the objective rather than awareness of the more subtle forces such as current, tide, and wind around narrow port channels is a pet peeve of mine

In more historic fishing and commercial boating areas, that overestimation among the old pirates and fishers only occurs after midnight when they run out of drinks and decide to jump on a boat in order to pillage another friend's dock cooler. In the boat yard this Saturday Bo was re-fiberglassing a smaller center cockpit's nose so it would be ready to go fish Sunday. I asked how it happened and he said, 'Hit a buoy!' I asked the time of impact already knowing the answer....'well about 1am they decided to jump in a boat to go over to Sturgeon Creek and raid Bubby's father's cooler and even though they know the Chesapeake like the back of their hands, they got some help in finding their marks -- that is help from Jack Daniels, Pepe Lopez, and Sam Adams.'

I find on powerboats the inability to dock a boat without saying more than one or two words a certain indicator of skill insufficiency between husbands and their wives or captain and mates. Also a good indicator of skilled charter fishing boats is the degree to which the captain and crew do not discuss boat or fishing strategy as they communicate nonverbally or intuitively on the better boats.

In sailboat racing, thinking ahead of the boat is the most valuable skill: best captain I've raced with was Navy nuclear sub captain who made every task and every challenge fun as he reviewed the big and little picture for the crew approaching marks and tactical shifts. Even when Dutch rolled by a gale force gust in a passing thunderstorm, the crew placed it's trust in the leadership so that one could eagerly enjoy the adventure of a knockdown as the outcome was never in doubt.

Peter Earle replies:

The most basic naval tactic - so basic that we learned of it at West Point - is "crossing the T". It involves manuvering ones' ships in line so as to cross the column of enemy ships. Several tactical advantages are accomplished with this single move:

  1. The firepower of the "crossing" column of ships is maximized while the crossed column is limited to the forward-facing guns, if any, of the foremost ship;
  2. Ranging errors - fairly common in the days of inexact munition science - were made extremely dangerous for the crossed column of ships while essentially negligible to the crossing force; and,
  3. The crossing column could disperse in several ways, including - if their coordination and manuverability were sufficient and more so if they'd done enough damage to slow down the trapped column of enemy ships - "crossing the T" again in the other direction (as was the case in the Battle of Jutland).

With respect to trading analogies, I find an immediate association between the predicament of the crossed ships and being trapped in (an) illiquid position(s) on the wrong side; the fire of the market brought to bear on me and, with my defenses are minimized, I'm left controlling the urge to quickly escape - which would only leave me more vulnerable.

Indeed, my goal is to cross the T on the market: to find those points where the collective consciousness of the market is in a row, aligned and effectively immobilized, unable or unwilling to hurl artillery back at me. After a steep drop, with gloom in the air and nary a dissenting opinion to be heard, it's often time to shuffle on deck (ubiquitous cane in hand), direct the engine room to full bore, and buy 'em hand-over-fist.

James Sogi replies:

Drownproofing: One of the greatest dangers at sea is drowning. Drownproofing is a skill that ought to be learned and practiced ahead of time by ever mariner. Drownproofing itself is simple and can save your life. 

"Never Get in Over Your Head. " Chair wrote. but at times you will find your self there. Many were on the night of June 13, 2006. Fighting off panic in the middle of a crashing market in the middle of the night while heavily long is critical to survival. Breath is one of the most important functions, but interestingly breath can be controlled and has big physiological effects. The control of breath is most critical during panic situations. Panic often induces a series of unforced errors resulting in disaster or death. The drownproofing and breath exercises are helpful to avoid panic on dark and dangerous nights at a stormy sea or in the market. Huffing or panting through the mouth is a precursor to panic and lowers oxygen intake. In boxing the preferred method is breathing in the nose,and blowing with puffed cheeks out the mouth. Meditative methods call for slow inhale in and out the nose. Very basic methods but fan make the difference between life and death.

The Hawaiian Double Hull Voyaging Canoe as a Metaphor for life: The Hawaiians have a saying, "The wave from within swamps the canoe". The canoe voyage is a metaphor for life. First it is a small canoe with limited resources upon which we all live together and our first care should be for the safety and integrity of our canoe, our vessel, our land, upon which our lives depend. Secondly, harmony among the crew is critical for a successful voyage. Tight quarters for extended periods under adverse conditions, exhaustion can lead to frayed tempers and bad functioning which create its own set of dangers. The two are related. Care of the canoe leads to harmony of the crew.

Watermen:Hawaii has some of the most beautiful cruising grounds of any in the world, but there are few cruisers here because the dangers are too great. It takes specialized local knowledge to navigate the intricate bays filled with rocks, the shifting winds, currents, waves, reefs. I know the rocks in the water, the line ups of the trees with the mountain, and signs of the clouds, can predict what the wind will do, what direction from which it will blow, and the intensity ahead of time, know the changing depth of the tides and the effects on the ocean, and can predict with some reasonable accuracy what the wave direction, size 20 hours hence, at my 'spots'. study of conditions and cycles around the entire pacific help to know conditions here. Men with the ocean knowledge and experience here are known as "watermen", combination sailors, surfers, fishermen, men of strength and specialized knowledge. I give these men my high respect.

Steve Leslie details:

Ships are built for a variety of purposes. In an Aircraft Carrier group, for example, the U.S. Navy forms a battle group on an as-needed basis and assigns ships based on the mission. As a result, there are numerous complimentary ships which are involved. At the centerpiece, is the Aircraft Carrier itself. It stands over 20 stories tall, carries 70-80 planes, houses 6000 crew members and is constructed from over 1 billion parts. It is worth $5-6 billion itself and has an additional $1 billion in aircraft on board. It has a speed of 700 nautical miles a day and can travel literally anywhere in the world in two weeks or less. It is expected to travel under any and all duress, during all conceived or unimagined weather conditions and on any ocean or sea. Its enormous value makes it an inviting target for hostile forces.

It is supported by 2 guided-missile cruisers to attack land-based targets. Each of these cruisers can cost over $1 billion and are armed with nuclear weaponry. Their total arsenal is beyond description.

Two destroyers stand at the periphery of the group as a defensive measure against submarines and aircraft. They exist to insure the safety of the Aircraft carrier. Nothing hostile is permitted to bypass their line of defense.

A frigate seeks out and attacks hostile submarines. Its lightning quick agility and flexibility allows it to identify and deter any aggression expressed against the group. It is the quick response unit above the surface.

Nuclear powered submarines are deployed to defend against other ships and submarines. Additionally they are used to attack and destroy land-based targets. They also can carry nuclear weaponry.

A supply ship carrying food, fuel and ammunition is for support of the total group.

In addition and depending on the mission, there may be a mine sweeper, troop ships and other ships such as other amphibious vehicles.

The goal of the Carrier group is to carry out the mission and defend the battle group against attacks. Its mindset is singular in nature. It is imperative that all understand their defined purpose, the reason they were created and thus their role in the mission. It is through the meticulous strategy and careful orchestration that everything comes together in a beautiful yet awesome display of pageantry and power.

It takes years to design, construct and maintain such a fleet. Once assembled it is intended to be operational for multiple decades and be more than capable to withstand any challenge placed upon it. It is under constant scrutiny and review. Properly formed, it is virtually indestructible. It is created to travel the world and not to sit in a safe and secure confine of a well-protected harbor. In fact, efficiency experts declare that the Aircraft Battle Groups lifespan is extended through its use. The enormous capital and manpower employed is for one purpose and one purpose only to have a fully transportable and functionally mobile airport on demand. Its raison-d'etre to serve at the pleasure of the President and the United States of America anytime, anyplace, and anywhere.

David Lamb replies:

As I have had zero experience out at sea, in a ship, or anything having to do with the ocean, I should just be quiet during this vein of discussion. However, I/we just returned from Coronado Island, San Diego yesterday and I had a most enlightening discussion with a 20-year fishing veteran.

Saturday morning, like any other morning, I woke up rather early. I am on Arizona trading time. So, finding myself in a hotel room with the wife and kids still sleeping I decided to follow instructions by leaving the room if I woke up too early.

The Hotel Del Coronado is a magnificent place to stay. The backyard is the beach, and being such I walked out of the room, down a little sidewalk, and onto the beach. Immediately I saw a small group of fly fishermen about knee-deep in the ocean, doing the 10:00-2:00 motion. I walked along the beach for awhile until I came upon a little cluster of rocks protruding out of the beach. In the middle of this little cluster I saw a white hat bobbing up and down. As I got closer I saw that it was a smaller man (about 5'0" tall), wearing rubber overalls, with a t-shirt underneath, along with that white hat. I saw him scrapping a rock with a long knife-like tool. Being the nosey person that I am I traversed the jagged rocks to make it toward this man to find out what he was doing.

As I approached him he turned toward me and yelled out a "Good Morning", in a Pilipino accent. He possessed a weathered face, friendly eyes and voice, and a small go-tee. I decided to ask him what he was doing. He started out his explanation to me by pointing out that small group of fly-fisherman I noticed before. The following is the gist of what he explained to me.

I have been fishing here for 20 years! I have experienced it all. Those people fly fishing over there are not doing it right. It's the wrong time of the day to fly fish; the wrong time of year; and they are probably using the wrong kind of flies (I noticed a little smirk coming from the go-tee). (He then rattled off all the kinds of fish that MAY bite the fly out there but, to him, it was the most difficult way to fish.) If you want to catch fish out here (he than rattled off some more names of fish, with their applicable sizes) this is what you need to use.

He started to scrape the mussels from off the rock where he was standing with that knife-like tool he had. He said, "Nature provides its own bait, if you study the surroundings; if you just do a little work. You see, I have in this bucket two days worth of bait. This will land me and my wife about 100 pounds of fish in those two days.

He then explained how to use this bait, after my incessant prodding, and everything he knew about this type of fishing. He talked for about 20 more minutes and I walked away with a great appreciation for him and his knowledge.

In this experience with the ocean I learned many things. Not the least of which was the fact that experience, hard work, and persistence was the key to this man's wealth of knowledge. I am sure these same qualities can be of use to me in my trading endeavor.

Marlowe Cassetti replies:

With this nautical theme talk and the art of speculation reminds me of the following quote:

If the highest aim of a captain were to preserve his ship, he would keep it in port forever

-St. Thomas Aquinas (Scholastic philosopher and theologian, 1225-1274)

It's all about risk, isn't it?

The President of the Old Speculators' Club replies:

Sailboat racing is among the most boring of spectator sports. For participants it's another matter. Now the racing I'm speaking of is not the America Cup's version. That's strictly a series of one-on-one races where skill plays a huge part but as recent competitions have shown, the winner generally is the boat with superior design and equipment. This isn't all bad. But frequently the best helmsman and/or best crew does not receive the top prize. This is overcome in one-design (every boat comes from the same mould, has the same hardware, has specifically mandated gross tonnage, has sails cut to identical specs, and the combined weight of the entire crew falls within narrow parameters.) One-design regatta racing usually sees the cream rise to the top as results are almost entirely due to the efforts of helm and crew (luck is almost always a factor, sometimes small, sometimes great). Regattas I'm familiar with can have as few as three races and as many as 15. Scores are cumulative with competitors allowed to "throw out" a given number of poor performances (e.g., in a 7 race regatta you may be able to toss your two poorest finishes).

As in golf, the lowest score wins. With the exception of first place, your finishing position determines the number of points you receive - the first place finisher receives 3/4 of a point - that 1/4 point can make a huge difference in a close regatta. And, again as in golf, the overall winner may never have finished a race in the top two or three spots.

It's more important to be consistently good than occasionally great. With rare exceptions everyone starts on a starboard tack (left side rail in the water, right side rail out); boats on this tack have the right-of-way. Unfortunately, the starting line is not overly long and collisions aren't unusual. As long as you're not involved this is a good thing, as "protest flags" are immediately hoisted, and, later, several competitors will be disqualified; it's a good thing if all those disqualified finished ahead of you.

Unfortunately, in a regatta with 30-40 boats all starting at the same time, it's not unusual to be buried by several (or many) boats that timed their start better. The first goal is to get to clear air. This generally means going over on a port tack and heading for the far right side of the course. Once clear, a new strategy must be developed For the average crew, sailing from the rear offers a no-brainer strategy: take the opposite tack as that of the lead boats. When they tack left, you tack right; you are literally taking the opposite side of the course at every opportunity. Your hope is that you'll catch a wind shift which will "lift" your course up towards the first buoy, while that same wind will "knock" the other boats off their course to the buoy.

This is generally a losing proposition, though, as the leaders (generally possessing far greater skills) will also be looking for these shifts and tack when they crop up. If they happen to be in a different wind pattern and see the trailing boat making up distance on the other tack, they will frequently tack also and sail for the "new" wind - more often, though, they will hold their course to make sure the shift is a permanent one and not a temporary fluke; more times than not this is the case, and your distance behind the leaders has grown significantly.

Better sailors, while not dismissing a big wind shift should it occur, content themselves with the knowledge that it's a long race and while the wind remains steady they'll slowly pass up their less gifted competitors. The starting leg is just one of eight and a boat handled with skill will grind down those that make occasional mistakes. After a fair start and sailing from the middle of the fleet, the strategy isn't much different. The one thing that must be guarded against, though, is the big wind shift that the trailing boats are looking for. They do occur and depending on the body of water (Lake Geneva in Wisconsin is notorious), can be frequent and substantial. The only ways to learn this are to grab local talent for a crew spot (a bad idea for a variety of reasons), get tips from the club members and other sailors (good luck), sail the lake beforehand (rarely doable), or find out who the best local boats are and shadow one of them (and have the others watched) from the 10-minute warning gun (this is an iffy proposition which fragments the crew's attention and puts you at risk of picking a favorite on one of his off days).Summary: your on your own...adapt.

Sailing from the front isn't as great as it may seem, though it beats the alternatives. First, you can be sure that most of the boats close to you are populated by the best helmsmen, crews, and strategists - one screw up and they're all by you. Secondly, these fine sailors will be on split tacks.

Some will be going left with you, others will head right. It's impossible to cover the fleet so the best you can do is tack on the shifts (here I'm speaking of minor shifts of several degrees and that last for several minutes).

But here's where keeping an eye on the local rock stars can really help. If one (or more) of them hangs way out left when everyone else is back towards the middle or going right, be prepared to tack quickly. For the most part, though, you're going to use your skills as best as possible, don't do anything stupid to pick up one position, and don't foul anybody. Remember the prime directive: "you don't ever have to finish first to win the regatta."

A comment on the weather gauge. When an opponent's boat is between you and the wind, he is said to have the weather gauge. He will tack whenever you do to maintain this advantage - it's advantageous because whatever shifts come, it cannot benefit you anymore than it does your opponent and his lead is maintained. But that's true only on the upwind legs (beats); on the downwind legs (runs), the boat with the weather gauge is in last place. If the boat immediately behind

You can blanket your sails with his, you'll die in the water as he cruises by. It's essential then to learn how to maintain your position whether the wind's at your back or in your face. Final word on helmsman and crew. Unless there is a strategist on board, the responsibility for winning or losing is the helmsman's alone. Sails will rip and booms will bust but the guy who gets the trophies also gets the blame.

Dr. David Brooks replies:

Interestingly, I think this is a trope that can be applied to many endeavors - surgery, for instance. Much of what you said struck me as truth. At each turn we are faced with the unknown and the unpredictable. Much, indeed most, comes and goes with routine and regularity, but one must always be on the alert for the unexpected, the different, the evil. And so we do things "the same way, every time" so that routine protects us in a small way from the unexpected.

Our lines of authority are strictly drawn (but becoming less so now that Federal forces have pushed their noses under the tent of resident training), we have great respect for our enemy (disease) and its immense power to confound us and overwhelm our best efforts. We are extraordinarily attentive to detail. I would like to believe we are cheerfully optimistic but also realistic, and when the tide of battle is turning against us, we accept the superiority of our enemy and support our troops with kindness and empathy.

Dr. David Brooks is Director of Laporospic Surgery at Brigham Hospital in Cambridge, MA.

Zeitnot, Dignity and Vicars, from GM Nigel Davies

The symbol of a cross within a circle signifies time-trouble (or 'zeitnot') in the languageless chess symbolism that we use. Yet this cold symbol conceals a hornets nest of emotions and drama. When both players run short of time in a chess game anything can happen. A player might construct a beautiful position only to throw it away in the last hour.

Many players feel this is somehow unjust, that simply by building a position they deserve to win. So when Botvinnik complimented Stein by saying 'he plays well in the last hour', one senses a backhanded nature to it, perhaps because of one game that Stein won against the former World Champion. The implication was that this demonstrated an opportunistic style of play, not in keeping with the grand intellectual traditions of the game.

Yet it is the last hour that makes all the difference for a player's practical results. The ability to slug it out under immense pressure may not be dignified but is one of the best measures of real practical strength.

This is one of the many difficulties facing established players. Those with a reputation naturally want to keep it and may be reluctant to risk their dignity in a life or death struggle. Yet this reluctance can lead to a pulling of one's punches, nice concepts without the warrior spirit which is required at the highest level.

I think this is one of Viktor Korchnoi's secrets, despite having been at the top for 50 years he has not given in to premature dignity. He is still fighting, feuding, complaining and winning, which is something that 70 something's really 'shouldn't' be doing according to conventional wisdom. And it's the same with everyone I know who has kept their practical strength. You'd worry a little about them meeting the vicar.

Botvinnik,M - Stein,L [C85]
Moscow Spartakiad Moscow, 1965

1.e4 e5 2.Nf3 Nc6 3.Bb5 a6 4.Ba4 Nf6 5.Bxc6 dxc6 6.d3
Nd7 7.Nbd2 Be7 8.Nc4 Bf6 9.0-0 0-0 10.b4 Qe7 11.a4 Re8
12.Ba3 b5 13.Na5 Qd6 14.c4 Nf8 15.c5 Qe6 16.Re1 Rd8
17.Qc2 Ng6 18.Bc1 Nh4 19.Nxh4 Bxh4 20.Bb2 Re8 21.Re2
Qg6 22.f3 Re6 23.Bc3 Qh5 24.Qb2 Bg5 25.Rf1 Bf4 26.g4
Qh3 27.Bd2 Rg6 28.Bxf4 exf4 29.Rg2 h5 30.Qe5 hxg4
31.Qxf4 bxa4 32.Rg3 gxf3 33.Rxg6 fxg6 34.Rxf3 Qg4+
35.Qxg4 Bxg4 36.Rg3 Bd7 37.Rg2 Rf8 38.Nc4 Bh3 39.Rf2
Rd8 40.Rf3 Be6 41.Na3 Bb3 42.Kf2 Rb8 43.Rg3 Bf7 44.Ke3
Rxb4 45.Rg1 Rb2 46.Rb1 Ra2 47.Rb8+ Kh7 48.Nc4 Bxc4
49.dxc4 a3 0-1

After a Big Win, from GM Nigel Davies

So after his famous victory against Roddick, Murray lost disappointingly to Baghdatis. Funny how this often seems to happen, both in games and in markets, and even on the roads most accidents occur when people are close to home and breathe a sigh of relief.

The canny Swedish GM, Lars Karlsson, once told me to be very careful after winning a tournament, at least for the next few games. And in cricket you see the best batsmen take a fresh stand after reaching a century, as if starting anew for the next 100.

What would be an equivalent strategy for traders? I've seen it suggested that one should take some money off the table after a big win, which makes sense from a psychological standpoint and might have some points in its favour from an empirical angle too (things which have been working often run into a cycle change). But it would be interesting to hear how spec-listers handle situations like this.

Yoffi replies:

Very often it seems to me the issue is in a state of mind of a combination of :

  1. Celebrating the success that may have not seemed inevitable to you beforehand and it takes time for the heightened cognition to go down and that special feeling to routinize.
  2. As you win , it is always in a dialogue mentally with what others think you cannot do and it is prolonged longer when you were denied the glory beforehand or even at this recent success.
  3. Any achievement makes the next one more possible but also the defeat more likely as the challenge gets to be higher than what you may be able to expect of yourself.

In the case of Murray it appeared to me, watching for unobtrusive indicators of course...what else; even if you interviewed him it is obtrusive in his face and body behavior at the very start of his last game and at the very end of his one before last game that all three issues predicted the easy loss.  That does not take away from Baghdatis' performance.

I found myself thinking about each of these variables, as well as others not directly relevant to this consciousness when preparing for battle after "a victory" (e.g. successfully probing a piece of complicated scheming by a criminal group; a chess game on the Internet; winning a frame of reference in tackling an R&D project...)

My conclusion is not betting on less of my resources to be committed to the next battle but to be in as comprehensive awareness and personal , on your own , analysis of what is happening to you and most importantly --relax with music or a muse or making love , making wine -if you have the time -or what else is working for you. Incubation of coming together with yourself is what counts most. Losing dictates almost the same logic of struggling with the truth.


Real Tennis, from Saurabh Singal

Two weeks ago, I attended the annual Northfield Conference. My host, Dan DiBartolomeo, chief of Northfield is a strong racquet sports player and once played tennis with Dr Niederhoffer more than 20 years ago. The conference was held in Newport, RI which used to be the venue of the US Open Tennis championships before the event moved to New York. The International Tennis Hall of Fame was the venue of the conference. Interestingly, the International Tennis Hall of Fame also houses one a handful of "real tennis" courts. It was a privilege to view the semi finals of the US Real Tennis championship which was in progress. In inimitable style, Dan explained to me the rules and some of the history, which I will list below.

A Town Called ..., by Jeff Sasmor

Last week I was vacationing at Lake George NY. Last week a lot of the Eastern USA was drenched with rain; somehow that area escaped most of it but Monday was gruesomely wet and Wednesday was overcast and dreary.

So on Wednesday I packed the wife and kids into the SUV and took a ride to the town of Blue Mountain Lake, NY, home of the Adirondack Museum:

Took about 1.25 hours and the scenery was triumphant as we went up to over 2000 feet altitude along the way. The roads were deserted, so I got a chance to let the big V8 guzzle some long-chain petroleum molecules into some zoomzoomzoom.

Anyhow, along the way I discovered an interesting town which I didn't get a chance to visit but snapped this pic of a road sign with its name.

Whole Foods Sausages and Wine, by Bill Egan

For those of you with a Whole Foods n earby, you should try the garlic and herb chicken sausages and the prepared shish kabobs. The sausages are excellent and moderately spicy. They cook in about 12-15 min at slightly less than medium on my stove burner. Don't see why they couldn't be grilled but I have not tried that yet. The shish kabobs are also very good grilled. The meat section at Whole Foods is more expensive than the local marts, but generally higher quality and I have nothing but good results so far. The Whole Foods French baguettes are a tasty addition to the sausages, and we are now successfully using Land-O-Lakes Spreadable Butter with Canola Oil.

Huia Vineyards, New Zealand has a nice, dry Sauvignon Blanc (2004) which I purchased for $19 at the wine shop adjacent to our whole Foods. Quite good. I am happily stuffed.

Lessons from the Market Moves of May & June, by Victor Niederhoffer

The market's moves over the last two months provided many opportunities for heroism, cowardice, survival, disaster and guidelines for proper and wrongful demeanor in the business of everyday life. I was subjected to all these qualities and opportunities, good and bad, in the middle of the fray at every moment during this period, participating as a buyer and seller of individual stocks, derivatives, commodity markets, manager of a trading group, head of a firm and family. borrower and lender, giver and receiver of advice, focus of rumors and buffer for those seeking a safe harbor. I thus feel qualified to give a first-hand account from the firing line of lessons that I have learned for the benefit of myself and others.

First let's put some things in perspective with some stock market numbers:

 Dec 15, '05 1272.7
Dec 31 '05 1248.3
Jan 27, '06 1283.7
Feb 28, '06 1280.7
Mar 31, '06 1294.8
Apr 30,' 06 1310.6
May 31, '06 1270.1
Jun 30, '06 1270.2

My goodness, June was unchanged! We're back to where we were in the middle of last December, and we're up about 2% for the year. How could we all have missed so many opportunities, made so many mistakes, come so close to the edge, given so much poor advice to others, lost so much money, and generally equipped ourselves as Boppo in the childhood game, or Linus in the Peanuts comic strip? What secrets are there in our hearts and others that could have led to more appropriate behavior?

  1. Never Get in Over Your Head. The first lesson to learn is that the key to success in business is never to get in over your head. When you do, you become prey for those who have more capital. Random events, and events precipitated by the strong, can force you to give up at the worst possible time. Such opportunities to be forced out came on May 24, 2006, when the market hit a low of 1245.3 only to close up 2 on the day at 1258.7,on June 8, 2006, when the market hit a low of 1235.2 only to close up 2 at 1258, and June 13 and June 14, and June 27, 2006, in the market's darkest hours when it closed at 1223.7 and 1239.2, respectively. Who among us was not forced to liquidate at the bottom, who could not sleep because of life-threatening fears, who could not have retired or beggared himself for life, who did not have an army of friends and foes who showed their true colors during those periods? The ones who rose to the top were those who had a prudent reserve for all emergencies, who had their canes available for forays, who were able to calm their colleagues' panic, and meet the stormy forces of fortune with a steady and resolute hand.
  2. Where you end up is path-dependent. Look at all the fortunes made and lost during May, that could and should have been made, and look at where the market ended the month: exactly unchanged. How shameful for those who sold at the bottom, didn't buy at the bottom, or didn't add to their positions during all the opportunities that the market provided as it declined inexorably at the end of each day and scared the daylights out of everyone by going down consecutive Fridays and Mondays in a row, and gave small rises to induce everyone to get out right before heroic once-in-a-decade moves up before cardinal events. Unless you take account of that path dependence, and the ability of the market to perform violent gyrations to see exactly how much pain you can take, you're a dead duck.
  3. Counting helps. Having a foundation based on proper counting enables one to withstand the temporary moves in the tide, the squalls that always come and go, the incessant false rumors, misinformation, disinformation, harmful popular myths and self-interested propaganda disseminated by those with opposite positions to your own. I can point to some good I've done in this direction. I start out with the knowledge that in periods like this with the earnings yield well over the bonds yield, there has invariably been a good rise on a year-to-year basis. But how to get there? Certainly, moves after bad months, and bad series of weeks were relevant in that they almost always lead to reversals except during period like 2002 where runs of negativism spawned by the aftermath of 2001 rule the day. The series of massive declines in the last half hours or the day, and the runs of down Fridays and Mondays provided further opportunities for counting to come to the fore and save the day.
  4. When fear is greatest, that's the time to come in. The Federal Open Market Committee meeting on May 13 was the start of the 10% decline; the CPI on May 20, was the climactic follow on qualitative events. These were vivid, life-threatening events. I hypothesized that the next CPI and the next FOMC meeting would bring opposite moves. Who had the courage to withstand them given what happened before? Only the strong. Who had the courage to go against the tide of mutual fund redemptions, the extremes of bearishness among the advisers and the public, the storm of negativism from all the media, the assurances from the prudents that any rally was just a dead-cat bounce, a temporary oasis before the inevitable move back to the long-predicted Dow 5000?
  5. Don't listen to doomsday scenario-ists. They establish a position, then look for anything in the world that is bad, sell the market with all the meager forces at their command at the time that the adversary is most vulnerable, and then point to how bad the market looks and acted. Are you victimized by such talk? Are you a card-carrying member of such a club or forum? Get out of it if you don't want to experience the same fate as all other doomsdayists have, are or will experience.

Predicting the Long-term Trend in Equity Prices, by Dr. William Rafter

The best predictor of a long-term change in equity prices is a reversal of Federal Reserve policy. How one measures changes in Fed policy is somewhat subjective. Allow me to illustrate two versions: (a) Quantitative/Econometric and, (b) price-based

Unfortunately I have to first create the context. We choose to watch the Monetary Base numbers as the indicator of policy. Those numbers are bi-weekly and start in 1983. The Base, being deposits in Federal Reserve Banks and currency, grows along with the level of the economy, and in turn the population, which grows at a rate best fit with a parabola.

I have always been amazed at how well the Fed "targets" the Base, although I think they deny it. The fit is so coincidental as to not be a coincidence. Once you entertain the possibility that this parabolic fit is their "target", you can then plot percent deviations above and below that target, and see whether the Fed is accommodative or restrictive. However it is the switchovers of policy that have the most effect on subsequent equity prices.

Currently the Fed is about 3 percent below the target, which is approximately equal to their restrictions in 1988 and 2001. It is worthy to note that the Fed's restrictions in 1998 had to be reversed when Russia defaulted on its bonds and Long Term Capital Management failed. How restrictive the Fed would have been otherwise is not known. The most severe constraint was approximately 5 percent in 1990.

As an alternative to the Monetary Base vs. its target, examine "T-bill Yield Acceleration". The latter is measured by taking an accrued t-bill asset (i.e. create an index of what you would have earned in bills), and then take its 1-year change vs. the prior year's 1-year change. By doing so, you will see that the t-bill yield acceleration is better at identifying Fed policy changes than the Fed's own actions in that pursuit.

To see the above with graphics.

Bill Rafter has managed hedge funds for over 20 years, and has been fully licensed as a securities and financial principal. He is President of Mathematical Investment Decisions, Inc. consultants to institutional investors and developers of Financial Data Calculator, a programming environment for researching financial markets. Rafter was educated at the Wharton School of the University of Pennsylvania, and the Haas Graduate School of Business Administration of the University of California, Berkeley.

Married for 35 years, he has two grown daughters. A lifelong competitive rower he is President of Fairmount Rowing Association in Philadelphia.

Stu Ungar, Poker Legend from Steve Leslie

When anyone talks about the greatest poker players of all time, Stu Ungar's name will surface immediately. If it doesn't, it should. His accomplishments in poker are legend. He is considered by many to be the greatest No Limit Hold'em player of all time. He is a three-time World Series of Poker Champion winning his first championship at the age of 24 in 1980. He repeated as Champion the next year and again in 1997 after essentially disappearing from the game for seven years, the last time he competed. Out of 30 major poker events he won 10 of them.

As great as he was in poker, he was better at Gin Rummy. Gin, at one time, was The Game that high stakes gamblers played. He started playing gin in New York moved to Miami and ultimately to Las Vegas. He was so good at the game, that eventually no one would play him. He was virtually barred from playing blackjack anywhere forcing casinos to eliminate single deck blackjack, as he had a genius IQ and a photographic memory. He could count down multiple decks of cards a feat he would replicate upon demand or for a wager. He never held a real job. From the age of 14 his was a life of high stakes cards and games of chance. He would gamble on anything and lived for the action. It was not uncommon for him to win a million dollars in cards and lose a million shooting dice.

On the surface, his was a marvelous life, a seductive life one of gambling, action and living. Some will suggest that he made over $30 million playing poker. There was virtually nothing he could not do at a poker table and seeing him at a final table, others resigned themselves to picking up the "left over change." Unfortunately, there is not a happy ending to this story. After 20 years of leading a storied life of incredible ups and downs of fantastic swings in capital, it all came to a crashing halt in a cheap downtown Las Vegas motel. On November 22nd, 1998 Stu Ungar was found dead and broke. The Coroner's report revealed a combination of cocaine, methadone and percodan caused a massive heart attack. All at the age of 42. What a complete waste of a life. Possibly the greatest natural card talent ever completely destroyed before middle age. Imagine what could have been. Where all that talent could have taken him. He could have traveled the world, done incredible things, could have had a life that but a small percentage can only dream of.

I tell this story because it is humbling and to illustrate that the battle in life is ultimately waged not on a card table, or on a quote machine or a trading floor, but within our selves and within our minds. It is the balanced one, the one who keeps an even keel and a steady approach to life who becomes the victor instead of the victim the living and not a weak faded memory.

Dead Money, by GM Nigel Davies

As well as being a poker term the term 'dead money' is often applied to property rental. It seems to me that one might also apply it to options purchases.

But behind the emotive sound of this phrase it seems to me that there are complex issues involved. Are we not talking about the exchange of money against time and risk, a dynamic relationship that exists in all markets and indeed life itself?

In almost every aspect of our lives we exchange time for money, and depending on the nature of what we do we may also accept risk. But how does one assess these factors?

Advice Columns, by Steve Wisdom

Flipping through a stack of old Oprah magazines, as I clean up before heading off for the holiday, I read through a few of Suze's columns. She's the magazine's financial "expert" but her advice is repetitive and tiresome. Pay off your mortgage early.. Avoid credit-card debt.. Save money for a rainy day.. Eat at home, not at restaurants.. Don't lend money to your deadbeat brother-in-law.. Tell you husband to get off his fat ### and get a job.. Gets me to thinking: wi th all the "talent" in the hedgefund industry now, why isn't there a good personal-finance column from a hedgefundist perspective? Would have to be more entertaining that Suze. I'm imagining something like -

Q: Dear Fundist,
My aunt recently turned 80. She has ambulatory difficulties and is confined to a nursing home. She has a "nest egg" of $300,000 that she's saved over her lifetime. Before I took control of her finances, she was in CDs and muni bonds. But since she needs more gains to cover the considerable expense of the nursing facility, I moved her into a midcap stock portfolio, levered 4-1 through an offshore bank. Now some of my relatives are saying this is too "risky" and she should be in "safer" investments, or at least should cut down to Reg-T leverage. What do you think?
Concerned in Kissimmee
A: Dear Concerned,
Whoa! You can't choose your relatives, but you should lose yours! They suffer from the common misconception that older folks should take less risk. In fact, the opposite is true. The older you are, the less time you have available for compounding to work its magic, so you need to "step on it". I like the easy-to-use "square root of age" rule: since your aunt is 80, she should be about 9-1 levered. Remember, nothing says "I love you" like the gift of leverage. Since you already have the offshore facility in place, why not go up to 6-1, and rotate from midcaps into smallcaps. You can add immediate spice with index futures while you're working on increasing the gearing. But: keep some powder dry for carry trades! With the nursing home expenses, she'll need plenty of positive carry. Have you considered Turkish or Mexican paper? Another handy rule: "good beaches means good paper!"
Happy to help, Fundist