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January 2006 Letter and Contribution Awards

Readership of DailySpeculations, measured both by visits and page views, set records in January. Along with the surge in attention came many noteworthy contributions and letters to the editor. A few highlights:

The material on this Web site is provided free by us and our readers. Because incentives work better than no incentives, each month we reward the best contribution or letter to the editor with $1,000 to encourage good thinking about the market and augment the mutual benefits of participating in the Daily Speculations forum. Prizes are awarded at the end of each month by the Chair and the Collab. This month, we award the $1,000 prize to Russell Sears for "Tying Your Shoelaces" and $250 to each of the honorable others mentioned above. -- Victor Niederhoffer and Laurel Kenner

The Winning Posts in Full

1/9/2006
Thoreau on Markets, by Henry Magram

Reading great literature with a eye out for trading wisdom, I found two particular passages in Henry David Thoreau's A Week on the Merrimack and Concord Rivers. In the first passage, Thoreau offers fishing advice and perhaps a trading lesson: a passive angler will never catch the biggest species of fish. Only a spearer, who wades into the river, will take home a prized meal. In the second passage, Thoreau happens upon scraps of newspaper bearing New York commodities prices, and he expresses how prices hold more truth than media commentary. The more I read books that have stood the test of time, the more I, too, disdain public news and commentary.

Henry Magram is a University of Maryland sophomore.

1/20/2006
A letter on underestimating your hand, from Steve Leslie

Living in Florida I learned how to play poker on the daily cruise ships the so-called trips to nowhere. Described as such because they have to travel beyond the 3 mile limit along the Florida coast before they can offer gambling activities. Then they wander aimlessly in the ocean, not unlike many of the souls who were passengers on the ship.

The most popular poker game offered then was seven card stud 8 or better. This was long before the huge popularity of hold-em poker took over. Now unfortunately, one would be hard pressed to find 7 stud 8/better spread anywhere in Florida.

I learned the way most poker players learn, I suspect, by losing and losing often. Thankfully the stakes were small, so the curve was not too expensive. One thing I began to notice after a few sessions was that there were plenty of action players, guys who threw money around, the conversationalists, but the ones who accumulated the chips were the old guys, the real quiet ones. They spoke little, drank coffee, played just a few hands per hour and neatly stacked their chips in front of them. You hardly even knew they were at the table.

Once I gained a clear knowledge of the game, the fundamental aspects, I adopted the old guy style, and magically my win percentage went way up.

As I think back on those days and I am sure many of those old guys are gone now, I smile inside knowing now how they felt to drag a few well deserved pots their way.

1/12/2006
A Spec asks:

I'm wondering how many positions to aim for. As an options trader, how many I can I ultimately handle and still enjoy? When does a juggler stop adding another ball?

GM Nigel Davies responds:

Only take trades where you have an edge, as the Chair advised me the first time I met him. No edges, no trades, more edges, more trades. I've also been advised to specialize in a single instrument, which is fine by me because I have more than enough trouble with just one.

As to simultaneous displays, a GM becomes markedly weaker when he plays on lots of boards at one time, I'd estimate around 300-400 Elo points. I think it's better to play at full strength in fewer games.

1/9/2006
Mike Good writes in on the Heat Loss of Crocodiles

While I enjoyed your piece on crocodile investing, I want to point out an error in deduction when you state: "The basic design of the crocodile, very thin and long, a large perimeter relative to surface area seems to have great survival value. Heat loss is proportionate to surface area, and thus energy required to keep a croc going is less than for any other form."

Your conclusion is backwards: a greater surface area increases heat loss and requires more energy to sustain core body temperatures. Crocs can go so long without eating because they are cold-blooded and this explains why they are such sun-worshippers. As a business metaphor and inspiration, can we conclude that if we practice cold-blooded and remorseless genetic pruning, like the croc, then we, too, can enjoy our place in the sun?

A Las Vegas Whale extends:

The problem with stock picking in this day and age lies in a massive structural problem deeply embedded in the US stock markets: long/short and "market neutral" equity strategies. The herding of money into these strategies has stripped all of the available alpha completely out of the market. With so many wizards out there in the market with so much ammunition, they have shot everything in sight long long ago. The smell of burnt gun powder has gotten every shooter high, and the smoke, always making lines of sight more cloudy, continues to stream from the gun barrels. The landscape is so confusing, shooters are shooting each other every which way. Like Ramree all over again.

The key is to be the crocodile. Like the continuous rolling and twisting of the crocodile, you look for the shooters' overcrowded fire, and you wait for them to shoot all of their ammo, then you bite, and bite hard, and never let go!

From Nightmares of Nature by Richard Matthews:

On the night of 19th February, 1945, Japanese troops were trying to escape from the Island of Ramree, off the coast of Burma. Bruce Wright, a member of the British forces, was trapped on the island and wrote of what then happened.

"That night was the most horrible that any member of the Marine launch crews ever experienced. The scattered rifle shots in the pitch-black swamp punctuated by the screams of wounded men crushed in the jaws of huge reptiles and the blurred worrying sound of the spinning crocodiles made a cacophony of hell that has rarely been duplicated on earth. At dawn, the vultures arrived to clean up what the crocodiles had left. Of about 1,000 Japanese soldiers that entered the swamps of Ramree, only about 20 were found alive."

I am not familiar with the incident but I shed a real tear, not a crocodile tear, at the deaths and will refrain from comparing the incident to any market events. -- Vic

01/06/2006
Lord Byron, from A Las Vegas Whale

What I read today only confirmed what I have always known: This beloved strategist, formerly at a leading Wall Street investment bank, and the "surprises" he puts out every year are nothing more than a representation of how even the most ignorant and undeserving get to places and positions of so-called "prestige" and "dignity". What kind of strategist would speculate that society and the markets will be surprised by an Asian-born USA pandemic, or that there will be a major terrorist act in the USA, killing at least 100 people? What an embarrassment. And a shame. Not only are such events a possibility that would likely not be taken as a surprise, they are an insult to our great nation's efforts to diminish such risks.

My Top Three Predictions for 2006:

  1. No widespread illness that spooks the markets.
  2. No terrorist activity in the United States.
  3. Dow 12,000.

01/13/2006
Top 10 Daytrading Lies, by Craig Maccagno and James Lackey

  1. "I would be up money this month if it weren't for the commissions."
  2. "All I have to do is make two points a day, on a two-lot, to make a nice living."
  3. "If it weren't for stops I would have been broke a long time ago."
  4. "It traded my price, but I didn't get any fills."
  5. "The Internet went down, so I didn't get any fills."
  6. "My trading software was down, I didn't get filled."
  7. "I knew it, but I didn't trade it, darn it."
  8. "Trading has been great."
  9. "I was right, just too early, my timing was off."
  10. "If it weren't for that one big loss last year I would have made money."

Nathan Stewart extends:

What about these pearls of wisdom?

  1. "I am about even." (Stopped looking at the statements a long time ago.)
  2. "The secret to day trading is: never risk more than two ticks." (Bleeding to death.)
  3. "A chat room run by a true super trader, join now to move from one winning trade to the next." (Does not trade or trades one-lots, moves from one losing trade to the next.)
  4. "When this line crosses below that line and turns up, buy. It is an art though, it must be interpreted not followed blindly." (You'd be better off trading blindly. Random.)
  5. "Always wait for confirmation." (Buying at short term highs, bad fills, losing the edge on most occasions.)
  6. "Trail a tight stop after entry, locking in profits." (Shaken out of any chance for a good trade.)

01/26/2006
Jungle Travel, by Rod Fitzsimmons Frey

I recently returned from Madagascar. There were many highlights in my month-long trip, but overland travel certainly stands out.

Moving between towns using public transportation requires planning, determination, courage, and flexibility. A trip of roughly 100km begins at 6:00 am. We get the backpacks filled, have a cold shower, and actually get onto the road by 6:45 and are full of self-congratulation at our industriousness and preparation. Until we get to the bus station, that is, where we see hundreds of people more determined, more industrious than us. No matter how early we start to compete for a spot on the bus, we should have started earlier.

Our size and foreign skin play to our advantage, though. We push our way to the front of the swarm of people, and the vendors, pretty sure we'll pay three to four times the going rate, are anxious to serve us first. Our initial politeness and demure behaviour wore off early in the trip, so we take full advantage of the only edge we have. I let Heather negotiate, since her French is much better than mine and I'm better equipped to intimidate those curious about the contents of our backpacks.

Negotiating price, whether for our bus ticket or last night's meal of Zebu steak and infused rum, has always been a strange part of rustic travel. It seems odd and wrong to argue over 25 cents for a $2 item that would cost $40 at home. Indeed, my wife and my first trip together was on our honeymoon, when we backpacked through Peru and Ecuador. Full of the spirit of love and compassion, we rarely paid much less than the asking price for anything: after all, what was $5 to us, compared to its value to the vendor? We ran out of money after three weeks and had to phone home for more.

We learned that negotiation isn't a moral issue, it's a state of mind essential to survival: if one fails to adapt to the local rules of the game one might as well paint "fleece me" on one's forehead. The local vendors are fighting for survival too, and they're better at it than us. We need not feel sorry for them, not on their own arena.

Eventually our seat is purchased and we take our place on the bus, which is actually a 30-year-old 12-passenger van. The original 3 back benches have been removed and replaced by four rows of wooden benches. Eventually 16 adults and nine children fill the back. The van sits lifeless for two hours. There is no reason not to get moving: the van is full (schedules do not exist). But we know that the van has its own master plan, and it is inscrutable. Trying to find a faster ride would be the worst thing we could do: the van would leave while we were arguing with the proprietor and the next one wouldn't go for a week. So we wait.

We entertain ourselves by showing the kids photos of Madagascar from our guidebook. It seems like they've never seen photographs before: maybe it's true. One of them recognizes a street in the town we're in, and there's a flurry of excitement and mayhem as the guide gets passed around. We're heros for about fifteen minutes. We keep a close eye on our backpacks anyway.

When the driver starts the van and pulls out, we are elated. Out of the town, the roads degrade from the merely potholed streets to narrow eggcartons of broken asphalt. The van picks its way along at about 15 km/hour, listing 15 degrees to one side and then the other as the wheels pass over 50 year old chunks of pavement. Seeing my white and drawn face, the mother of one of the kids shows me how you can take the window out of its housing to lean out the side. Heather's stomach is stronger than mine, so she just snaps my photo as I part company from my morning baguette. Fortunately for my pride, the bumping is so bad she only gets a picture of the overhead light.

Eventually the pavement dwindles to nothing and we are driving on what seems to be a track in a wide plateau. We can see some jungle in the east, but nothing in front of us, and soon, nothing behind us. Later, we can't even see the track in front of us. If it were night, we'd guess the driver was navigating by the stars, but it's 4:00 in the afternoon. GPS is not an option. We decide we don't care, since at least we're moving fast -- at least 70 km/h -- and we've been on the van for ten hours.

On the horizon to our left, Heather spots a cloud of dust. We get out the binoculars and discover that it's a van similar to ours, going in the opposite direction. We're on the national highway, and it's 60 km wide. Soon afterwards, we arrive at our destination. It seems that in the jungle, the well-marked paths are the slowest and most treacherous.

01/12/2006
Friday the 13th, from the Assistant Webmaster

Here's a quick and dirty update of the enumeration of stock market moves on Friday the 13ths that's in the DailySpec archives, using INDU data since 1929 (in the fashion of Dr Zussman) to give the broad sweep of history. I whipped up an R script to output a summary by decade of Fri-13th percentage changes on the day in INDU. There are 17'ish observations per decade. Looks as though Friday the 13th is bearish some decades, bullish others. This is why I've never written an Almanac.

Last few observations:

               Y   M   D   W     INDU     %
 9/13/2002  2002   9  13   5   8312.7 -0.80
12/13/2002  2002  12  13   5   8433.7 -1.23
 6/13/2003  2003   6  13   5   9117.1 -0.86
 2/13/2004  2004   2  13   5  10627.9 -0.62
 8/13/2004  2004   8  13   5   9825.4  0.11
 5/13/2005  2005   5  13   5  10140.1 -0.48

Summary by decade:

          N   Avg%  StDev      T
1930s    17   -0.9    1.6   -2.3
1940s    16    0.2    0.5    2.1
1950s    19    0.3    0.5    2.9
1960s    16    0.3    0.5    2.1
1970s    17   -0.5    0.7   -2.8
1980s    18   -0.2    1.9   -0.4
1990s    16    0.5    0.7    2.6
2000s     8   -0.2    0.9   -0.7

01/03/2006
The Friendly Skies,
by James Sogi

On my way to the beach for a surfing/camp trip over New Years I had to drop off a package on the way at the airport and was astounded at the traffic jam of private jets lined up at the airport. In the DailySpec tradition, I counted 51 private jets lined up at the airport, surpassing the previous highest year 2003 count by seven. Of those, only three were the small private jets; the rest were 737s and shiny 16+ passenger models. If this is a leading indicator, then next year portends well. If it is a lagging indicator it shows why last year was good for business. I tend to go with the leading indicator theory based on 2003 results and knowing who some of these folks are.

George Zachar replies:

I do the same counting at the Aspen airport, and this year not only were there ~40% more private aircraft than in recent years, but the landing slots available were inadequate to meet the demand, forcing many diversions to nearby fields. History indicates such spurts are coincident indicators of wealth creation, according to my two decade history of visiting Aspen.

A Las Vegas Whale adds:

The number of, and even more importantly, the access to, private jets has gone up approximately ten-fold in the last five years. And the idea or representation of being a private jet owner is tres chic. Despite public opinion, the price trend and costs associated with private chartered flights to Las Vegas and the Bahamas have diminished in recent years. Competition, you name it.. More of a fad that has become more visible than ever before than a sign of a hidden boom in net worths.

George Zachar replies:

The cost of flying private from NYC to Aspen in a smallish (8 seat) jet is ~$1,200/seat/hour. That's a large multiple of even 1st class airfare. The proliferation of NetJets-like fractional ownerships and charter opportunities has made such transport cheaper, yes, but it is still an option for only the uber-rich, of which, apparently, there are more these days.

The Assistant Webmaster mentions:

A new generation of ultra-cheap private jets is just appearing on the market, which, by simple supply/demand logic, will cause a substitution from public to private transport, regardless of wealth creation or other macro considerations. An everchanging cycle.

01/21/2006
J. T. Holley
on the Pinewood Derby

I have had an unbelievable speculative/competitive experience over the last two weeks that culminated today at 12 o'clock. My son is a Tiger Cub in the Cub Scouts and he had the Troop's annual Pinewood Derby. It is something that brought out the competitive juices in all involved, to win the coveted trophies and ribbons at stake. Secrets were kept tightly over the last two weeks, monies invested in the 50 dollar range for potential edges by parents. Kids were lined up against checkered flag tape like old timers against the rail at a horse track.

The competition was tough but my son brought home the 4th place ribbon losing only by a 1/10,000th of a second to the car in the show place. If anyone wants to see this demonstrated via a movie then rent Down and Derby with Holly Hunter and the late Pat Morrito. Incredible - you would've thought that you were in the middle of a trading pit or open market exchange if present.

J. Lamberg adds:

This brings back memories. Years ago I had two sons in the same Pinewood Derby. The rules were quite lax and my sons had an engineering dad. Besides the usual center of gravity, wheel placement, weight, and wheel balance techniques, they each ran a car with modified wheels -- turned to a thin edge in the center and packed with moly lubricant and a "hubcap" to keep the lubricant sealed in. The cars blew away the competition and I had to make sure they did not compete against each other during the elimination rounds. The cars took 1st and 2nd. Next year the rules changed as many of the parents cried foul. It was nice to see my sons win, but one has to consider who the race is for -- the kids or the parents.

In retrospect, I'm not sure I would do it that way again.

Kim Zussman writes:

When my daughter was in 5th grade there was a science assignment to make a solar oven capable of cooking a hot dog. One helped a bit by showing how parallel rays from the sun are reflected to a point by a paraboloid, and that to heat a cylinder (outside of Ikea), one should construct a parabolic hemi-cylinder. We used perf-board to plot the parabola, and nails along the curve to anchor the reflector fashioned out of an unrolled cookie can. The focus was determined experimentally, and marked with a long clean nail for the hapless weenie.

The year was 1999, so we named it SizzlingWiener.Com, much to the puzzlement of the teacher (who couldn't object too much since it worked).

Last summer this same daughter (now in high school), studied at a college on the east coast. She was alone in a large poorly lit dorm room, which she approached with the same resourcefulness as some spec-listers. She stacked her suitcases and boxes, covered them with sheets, and topped them with desk lamps bearing sunglasses. Many of the other kids came to see her robots, who were all named after various infamous family members, including Walt Crying. It seems that at a recent family function Walt choked up while reminiscing about the missed opportunities of his college years.

01/21/2006
J. T. Holley on the Pinewood Derby

I have had an unbelievable speculative/competitive experience over the last two weeks that culminated today at 12 o'clock. My son is a Tiger Cub in the Cub Scouts and he had the Troop's annual Pinewood Derby. It is something that brought out the competitive juices in all involved, to win the coveted trophies and ribbons at stake. Secrets were kept tightly over the last two weeks, monies invested in the 50 dollar range for potential edges by parents. Kids were lined up against checkered flag tape like old timers against the rail at a horse track.

The competition was tough but my son brought home the 4th place ribbon losing only by a 1/10,000th of a second to the car in the show place. If anyone wants to see this demonstrated via a movie then rent Down and Derby with Holly Hunter and the late Pat Morrito. Incredible -- you would've thought that you were in the middle of a trading pit or open market exchange if present.

J. Lamberg adds:

This brings back memories. Years ago I had two sons in the same Pinewood Derby. The rules were quite lax and my sons had an engineering dad. Besides the usual center of gravity, wheel placement, weight, and wheel balance techniques, they each ran a car with modified wheels - turned to a thin edge in the center and packed with moly lubricant and a "hubcap" to keep the lubricant sealed in. The cars blew away the competition and I had to make sure they did not compete against each other during the elimination rounds. The cars took 1st and 2nd. Next year the rules changed as many of the parents cried foul. It was nice to see my sons win, but one has to consider who the race is for -- the kids or the parents.

In retrospect, I'm not sure I would do it that way again.

Kim Zussman writes:

When my daughter was in 5th grade there was a science assignment to make a solar oven capable of cooking a hot dog. One helped a bit by showing how parallel rays from the sun are reflected to a point by a paraboloid, and that to heat a cylinder (outside of Ikea), one should construct a parabolic hemi-cylinder. We used perf-board to plot the parabola, and nails along the curve to anchor the reflector fashioned out of an unrolled cookie can. The focus was determined experimentally, and marked with a long clean nail for the hapless weenie.

The year was 1999, so we named it SizzlingWiener.Com, much to the puzzlement of the teacher (who couldn't object too much since it worked).

Last summer this same daughter, (now in high school), studied at a college on the east coast. She was alone in a large poorly lit dorm room, which she approached with the same resourcefulness as some spec-listers. She stacked her suitcases and boxes, covered them with sheets, and topped them with desk lamps bearing sunglasses. Many of the other kids came to see her robots, who were all named after various infamous family members, including Walt Crying. It seems that at a recent family function Walt choked up while reminiscing about the missed opportunities of his college years.

1/31/2006
Tying Your Shoelaces, by Russell Sears

As the great John Wooden taught his freshmen to put on their socks right, a distance track coach should teach his beginners how to lace up their shoes.

I learned this trick from Nathan Pitner. A kid that graduated from HS at 16 and went on to become a MD. Instead of double tying or triple tying, what really works best is tucking your laces between the tongue and the other laces. It reduces the bouncing. The constant but random vibration is what causes your knot to unravel. I forgot this this Sunday as I tried to do a 15k (9.3 miles) hard (close to 5 flat per mile). Twice I had to stop to lace up my left shoe.

But, most of us are not like Bill Rodgers. If a racer's lace unravels: stopping costs more than time, it is usually disaster after the first 2 miles, let alone after 20 miles like Bill is said to have stopped. On an easy run, stopping is no problem, as you can catch up quickly after a short rest. In fact the rest generally can more than be made up for. Jeff Galloway suggests you walk through your water stop, at least the first few water stops, in a marathon for this reason. A moment's rest refreshes.

Further, if I am running with slow runners I find myself feigning a loose lace so I can stop to stride to catch up. But, while racing this usually causes your system to lose balance and muscles to tighten, often ending the race for you.

I suspect that employee turn-over for a fast growing company is like the bouncing of the laces, it can cause the whole system to grind to a stop, forcing it to regroup and redevelop the competitive drive. AT&T, Lucent even Wal-Mart come to mind. Where as GM, Ford, the unions shops, and slower paced job turnover is like walking through the water stops, not racing.

 

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