7/29/05
Trading Advice

Dear Vic,

I have recently finished Education of a Speculator, and I am currently enjoying Practical Speculation. I understand that you are extremely busy, and won't bore you with my life story. I have just began my career in Proprietary Trading in January of 2005. I currently spread trade Eurodollars, notes , and FYT spread as well. My success has been limited, and this business does indeed require an expensive tuition.

I feel that Spread Trading is a mean reverting strategy, and I usually trade well when the spread trades in a range bound market. Unfortunately, I don't know when the range is truly being broken, and if spread is actually trending significantly in one direction. On some occasions, I have doubled and tripled my positions as it goes against me. At times this has bailed me out, other times this has crushed me. I don't advocate this strategy, just lack the mental discipline to take the early loser and cut my losses. I'm learning the hard way, but I am learning.

I decided to write to you after reading the chapter about Technical Analysis in Practical Speculation. I agree with you about the validity of the TA, and I was hoping you may be able to help me improve my strategy. I base my decisions (i.e. entry/exit points) solely by looking at the 5, 15, and 60 minute charts of the spread. I try to incorporate what the rest of the yield curve is doing as well. This is hardly and an edge, and embarrassing as I strive to be considered a Professional Trader.

Given that I am backed by the Prop shop I work for, and that we are expected to trade on an intraday basis (generally not allowed to hold overnight), what type of indicators can I use on an intraday basis to provide more support for my trading plan. The guys that make the real money here (well, probably not in your world) don't have any charts up at all! They use spreadsheets, certain rations, and probably other more sophisticated tools as well. I'm getting frustrated, but I refuse to give up. I am passionate about this business, and will do whatever it takes to succeed. Thank you for your time and consideration, I look forward to hearing from you.

Sincerely, z

p.s. I'd be interested in playing a game of Chess with you at your leisure

Vic Responds:

Make that a game of checkers, and yes, you ask the right questions, I gave up on trading fixed income myself because the markets were much too efficient. I find that there is some seasonality in fixed income and would urge you to count that. Instead of looking at charts, start by entering the prices in a hard bound book. see if you can come up with regularities based on the last 30 or 60 days movements, and simulate how you'd do by acting on them. Are there systematic things that happen vis a vis fed meetings? that's a good place to start. also, does the stock market effect your spreads, and especially the euro (German bund) market. those are kinds of questions that others don't answer and that will give you an edge. instead of trading within the day, like a chicken with the head cut off, consider trading overnight only. are there systematic things that cause others to get out too early and eschew risk. In the end you only get paid for risk. Vic

7/27/05
Dear Daily Speculations,

I have been looking for a program that will compute standard deviations over different S&P time frames. I have been unable to find a program that will suffice and my programming skills are primitive at best. I have a program that I'm able to write trading systems for, but these seem to be missing key elements that I believe with additional research I could fix. If you have any recommendations, I would appreciate the advice.

Jonathan Crocker

Victor replies;

My office reliably inform me that Market QA is a good program for doing this sort of work.

7/27/05
Dear Victor,

As I was reading your post, I get a call from a broker telling me about a new note a broker knows that specializes in answering the phone quickly is putting out, a 4.5 year principal protected note linked to the decline of the housing sector index. Although the principal is protected, the housing sector index has to be below its level on 07/27/2005 at maturity for there to be any appreciation. T-bills would probably yield a better return over the same period. Perhaps a sign of the times; people want the opportunity to capitalize off the decline in the housing market, rather then participate in the upside of the future.

Yuri, (ydsflics@att.net)

7/24/05
A letter on Congress and the Stock Market, sent in by Walter Greenspan

Victor,

You might already be aware of this, but in case you're not ...

"Congress and the Stock Market" describes a strong negative link between Congressional activity and stock market returns that persists even after controlling for known daily return anomalies.

Stock returns are lower and volatility is higher when Congress is in session.

This "Congressional Effect" can be quite large -- about 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session.

For the complete paper, "Congress and the Stock Market" by Michael Ferguson and Hugh Douglas White please click here.

Michael Ferguson, University of Cincinnati, Department of Finance-Real Estate and Hugh Douglas White, University of Missouri at Columbia, Department of Finance.

Regards,

Walter Greenspan

7/22/05
An article from Motley Fool by Paul Elliot, sent in by ydsflics@att.net

Lighten up ... rotate out ... take some profits.

Call it what you will, but it means "selling." And it's tricky business. So before you reach for the rip cord, ask yourself this:

What if you had never sold a stock? Honestly, would you have more money now, or less? I set out to answer that question for myself this morning, and to back it up with some hard data. I chickened out.

Heck, I knew the answer. If I had never sold a single share of stock, I would be ... richer than I am today. How much richer? Much richer. I can't give you a precise figure because I knew that once I saw it for myself, I would scream. How about you?

It gets worse, and worse, and worse I bought Microsoft (Nasdaq: MSFT) back in 1987. I sold it the next year for a quick double. OK, that's not exactly true. In fact, it's an out-and-out lie. It is, however, one the most sickening things I can imagine having to say as an investor.

I didn't buy and sell Dell (Nasdaq: DELL) as a small cap, either. But I know how it feels. Pull up a five-year chart for Pulte Homes (NYSE: PHM) and you'll see a steady ramp upward, connecting $10 to the ... top of the freakin' world. (OK, only to around $100, but still.)

You guessed it, I bought Pulte at around $10 and sold it a year or so later for around $16. Now it's in the mid-$90s. That, my friend, is what I call the most painful 60% profit of my career.

"So what did you do with the caaash?" How should I know? I probably bought another stock, though do you think it did as well as Pulte? I know for a fact that I didn't have a better stock in mind when I sold it -- and that I didn't buy a house or even furniture (you'll see in a moment how this is relevant, believe it or not).

I sold my meal ticket for no other reason than to lock in a nice gain. But what did I really "lock in"? Zippy. You never do unless you pull that money right out of the market -- which is not something I think you should seriously consider, especially if you're in your prime investing years.

That's right. I don't think you should try to time the market. A lot of folks claim to do it -- and a few actually seem to pull it off -- but it's not for me. In fact, you might want to brace yourself, because I'm going to go one giant step further than that.

I barely believe in valuation At least not when it comes to selling. Yes, there are times when a stock gets so cheap you simply have to buy it. IBM (NYSE: IBM) in 1994 or McDonald's (NYSE: MCD) in early 2003 come to mind. But the math gets more dicey when it comes to selling -- especially growth stocks, and especially winners.

How about a funny example? Two years back I asked Tom Gardner -- we'll talk more about Tom and his Motley Fool Hidden Gems in a bit -- for the one stock I should buy for my Roth IRA. "I love Moody's," Tom replied, "but it's a little pricey at these levels." I bought it that instant (it's up about 75% since).

What was I thinking? It's simple: I'll take a company a great investor absolutely loves over a "bargain" any day. If that same investor tells me the stock is "a bit pricey," I love it that much more. The fact is, I've met some great stock pickers in my day, but only a very few great sellers. Come to think of it, I've never met a great seller.

Promise me you won't get too cute. I'm not the least bit surprised that Tom Gardner and his Hidden Gems crew have picked half a dozen stocks that have more than doubled in value over the past two years. They work hard and stick to the fundamentals. Plus, they are fishing a rich pond. Wall Street isn't snooping around yet, which creates inefficiencies and pent-up demand.

But I wouldn't want you to think I'm a Hidden Gems cheerleader, so I'll tell you a secret: I only use the service to lead me to undervalued small caps with big potential. Sure, from time to time Tom will tell his folks when to sell, but I typically don't listen -- and probably won't in the future. Not unless the story is really broken. And certainly not if it's a winner. I will never sell on valuation.

That's how tragedies happen. One day you'll find yourself chatting with a stock jock, and the fellow will say something like, "Yeah, but a lot of people lost money over the years on Home Depot (NYSE: HD) or Wal-Mart (NYSE: WMT)". But then you will look at a long-term chart, and it's a gentle slope skyward. So how on earth did anybody ever lose money on those stocks?

Know what else looks like that? The S&P 500 -- a.k.a., the market. Granted, when you zoom in the ride looks a bit bumpier than it appears on a 30-year graph, but the long-term trend upward is unavoidable. So, how do you lose money in the market? Well, either by buying at the top in 2000 -- and buying only at the top in 2000 -- or by getting cute and buying and selling along the way.

Consider this approach instead: Sell your stocks when you want to buy a house or furniture. Sell when you have too much in stocks and you want to buy some bonds, gold, or collectibles. Sell if you have too much in any one stock. But sell a stock, or the market, on valuation at you own peril.

The little picture. Like I said, when you join a service like Hidden Gems, smarter investors than I will tell you when to lock in your gains. The great thing is that the choice is yours. However, when Tom and the Hidden Gems gang tell you to buy, you sure as heck want to listen. After all, as of July 22, the stocks recommended in Hidden Gems are up 35.7% on average. That's compared to about 10% for the S&P 500.

Are you earning returns like that? If not, you're in luck. Tom is offering a special free trial to Hidden Gems. right now. Take him up on it, and you can check out everything I've told you without it costing you a cent. Whatever you decide, just promise you won't get too cute. Click here to find out more.

Fool writer Paul Elliott promises to keep you posted on Tom Gardner's progress at Motley Fool Hidden Gems. All picks and results are posted on the Hidden Gems website. Paul does not own shares of any company mentioned in this article. Dell is a Motley Fool Stock Advisor recommendation. Home Depot is a Motley Fool Inside Value recommendation. The Motley Fool is investors writing for investors.

Responses:

What you sent me was a very intelligent thing. Vic

Despite their zealous admiration for buffet, I have been seeing a lot of "the value in growth" posts. It seems the MF is turning into a forum not of blind buffet followers, but investors interested in concepts that work. ydsflics

That is amazing, they didn't seem like the kind that could learn. Vic

7/22/05
Yuan Revaluation Meme

Dear Victor,

From: ydsflics@att.net

7/21/05
Trend Line Secrets

Dear Daily Speculations,

The secret to trend line ratios is that the market will always choose the path that will make the ratio work. Start by drawing numerous exploratory lines. Next, darken the one that has been chosen by the hand of providence while erasing the others. Mr. Niederhoffer learned this from the men with green eyeshades in ed spec.

The Chair responds:

Yes, this is the springfield way. Vic

7/11/05
Decision-Making Under Uncertainty

Victor:

Your July 9 update is nonsensical. "Decision making under uncertainty" is vague: Did you mean the decision to use untested drugs, the decision to test drugs, the decison to treat knowing new drugs might soon be available, or something else?

"Retrograde" is nearly synonymous with "reverted" in English and, if one takes the respective Latin roots -- retrogradus and reversus -- in Latin as well. Did you mean, "Doctors who make decisions with insufficient information often return patients to their prior state"? I've not seen the term "sub rosa" in my Latin reading, so I must refer to AHD: "sub rosa" is a figurative phrase having to do with meetings or, perhaps, conspiracies (very common both in Republican and Imperial Rome).

"Furtively" would be more accurate than "sub rosa". Finally, the term "normally distributed prices" is neither the same nor the opposite of "catastrophes". Thus, your characterization, "...the strain that says because prices do not conform to a normal distribution, catastrophes..." is inconsistent or, to affect your use of Latin phrases, a non sequiter (sic).

And the gist of the questionable sentence is wrong anyway: gold, crude, stocks, et al (oops) all very briefly reacted to the recent London terror bombing in the thin premarket but immediately corrected even before all effects of the bombing had become known. Clearly many successful traders fade catastrophes with the belief that there is little correlation between catastrophes and prices.

Tyler Okada

The Chair responds:

I am guilty of many errors, but I stand by what I say. If the FDA were to be abolished and doctors' licensing and state medical boards oversight ruled unconstitutional, the lifespan of the average American would go up by 10 years within a decade. As for the quack I met at Harvard, and his expert follower and collaborator today, I trust they will point to some piece of evidence might falsify their belief, some length of time without a big change, some amount of money they have lost, that might refute their theories. My theories are easily refutable by the performance of the Matador Fund.

7/11/2005
Floating with the Current

To The Daily Spec,

I must comment on Dick Sears' claim that "They say a log (or, I suppose, a wooden horse) launched in Troy takes a year to reach Wall Street. Twice each day it drifts down 12 miles, but then the current reverses, and it gives back all but a quarter mile of what it had gained."

The amount of time it takes for a log (or ice) to reach the Battery from Troy depends on the season. During the spring melt it is only a matter of days before the ice from Albany/Troy reaches the Battery. I spent 21 years working near the Battery and have observed this first hand many times. Please see

http://life.bio.sunysb.edu/marinebio/fc.1.estuaries.html

for the order of magnitude difference in the seasonal flow of the Hudson.

Analogs to market action are useful only if they are correct.

James E Birk

Morrisville, PA

7/9/2005
Courage

Greetings Victor,

I am reading Practical Speculation for about the tenth time, and still getting useful information out of it.

I have been meaning to write for some time, and this is an opportune time.

I, also, am a squash player. Although we have never met, there is somewhat of a 'connection', in that Sharif Khan's younger brother Aziz was my squash coach when I lived in Toronto and played at the Mississauga Racquet Club.

In the late 90s, I used to tune into your web site every now and then to see what was going on. I recall tuning in a few times after the Asian meltdown in late 1997, and saw that things looked kind of static, and I wondered at the time, has anything bad happened? There was at the time a lot of unconfirmed rumour flying.

When I originally read your story at the beginning of Practical Speculation, I realised my fears were correct. And I thought, rather than quote more Kipling at you, I was drawn to this opening verse of the song 'Brave Wolfe', written after the battle for Quebec:

Come all ye young men all let this delight you
Come all ye young men all let nothing fright you
Never let your courage fail when you're brought to trial
Nor let your fancy move at the first denial

I dithered too long in making this connection, but now I've made it I wish you well in your future endeavours.

Best Wishes,

Henry McGilton

Letters to the Editor: Archive