Jun

9

Could the internet being changing the way markets trade?

It has been mentioned that the average attention span for adults is 15-20mins, and for the internet now less than a minute!

Could this have implications, as younger "playstation" brought up traders take hold?

I only had to look around at the grad next to me sitting on the desk in London, and watch him at the computer to know these boys were quick!

Could this have wider implications particularly in the normal ebs and flow of a normal trading day?

Alan Corwin writes:

Yes, the Internet is changing the way that traders trade. I think everyone realizes that it has, but if history is any guide, we will find out in the future that we had no idea how dramatic the changes have been or how diverse the fallout will be. Even Jules Verne underestimated change, and he was willing to go way out on a limb.

The one prediction that I feel comfortable making is that everything will happen faster. Certainly, that has been the story of the last twenty years, and the emergence of the Internet has accelerated that trend. I am often dazzled and frustrated by the speed at which markets move and change, but 2010-type trading would be mind-shredding to someone trained to think at the pace that the markets moved in the eighties. I can also remember being told in the eighties that the rate of change then was dramatically different than the rate of change ten and twenty years before.

I do think you have hit on one of the clues to the nature of those changes, i.e., attention span. I don't own the PlayStation kind of games myself because they would take over my life, but I have played several of them enough to realize that they all call for rapid execution of complex tasks, both mental and physical. There have always been activities that fostered these skills (most sports, for example), but the constant comparison against the standard of the machine imposes a different kind of discipline and fosters a different array of skills.

The young are built for change and speed because that is their competitive advantage. If we are competing with them as we are with young traders, we can only win by making the most out of experience. The sad news for those of us past middle age is that they will gain experience quicker and more effectively than we can improve our speed.

I have also noted one encouraging aspect of these games. The young devotees look to themselves for the causes of failure and success. I have never heard one of these kids say: "The machine got lucky" or "the machine cheated". It is accepted that they must look to themselves for the resources necessary to beat the machine. None think that the game is too hard or unfair. That's the way winners think. I like that.

Kim Zussman writes: 

By 1998 the internet was in use by >1% of the world, and has penetrated an increasing proportion of the population. Assuming web-based trading has paralleled this trend, here is an attempt to quantify stock market velocity as a function of internet availability.

DJIA 1928-present was used to calculate a proxy for "weekly velocity" = weekly range:

weekly range = (H-L) / {(H+L)/2}

The attached chart shows historical weekly range from 1928-present. Here is comparison of mean weekly range for the internet period (1998-present), and an equal number of weeks from the earliest part of the series (1928-41), when the internet was just a twinkle in Tipper Gore's mother eye:

t-Test: Two-Sample Assuming Unequal Variances

                   no net    internet
Mean           0.0452    0.0561
Variance       0.0006    0.0014
Observations    648    648
Hypothesized Mean Difference    0.0000
df                   1144.0000
t Stat           -6.2125
P(T<=t) one-tail    0.0000

Any Internet effect is overwhelmed by other market issues.

Craig Mee responds:

Thanks Kim and Alan,

When i wrote this, I was specially watching the dax trade and seeing a counter trend pullback, and thinking every market has a short term cycle. iI wonder if this cycle and any variance is directly related to attention span of its players. With Alan's comment "the sad news for those of us past middle age is that they will gain experience quicker and more effectively than we can improve our speed"….maybe we should then trade in a way that works for our personality and also is physical and mentally practical. 

Jun

9

Cotton sat in a three month side way movement after an extended up move.

Finally broke lower and hit the brakes, and you can almost see the skid marks on the track now, as it reversed.

Holy cow, all those shorts scrambling.

Jun

9

Bucharest, RomaniaThis is left wide open for every reader of the site to make the call…

It seems now that you are going to need an intelligent electorate to accept the tough calls, pull their heads in, bunker down, and not cry for mum when all of them knew they shouldn't have their hand in the cookie jar and thus are all responsible for the outcome, (granted banks are a joke) but because there was NO SIGN, saying don't be greedy, it's apparently for the masses, everyone else's fault.

So on this basis, we need a intelligent voting population to be the first to put their hands up, and say let's take the heat and get on with the pain.

So on that basis, and of course there are factors to consider including the currently state of said economies, debt levels, housing booms, and credit excesses….what is the best placed country or countries?

Well, maybe luckily for me I found this through surfing the web. Although it was written in 01, (maybe nothing's changed), someone agrees, albeit on the surface. I'm open to other suggestions….

Finally, Lynn and Vanhanen peer into the future. They predict future growth is most likely in countries with high national IQ scores but currently bad economic systems. The countries of the former Communist Bloc—Russia, Poland, Bulgaria, and Romania, and the People's Republic of China, and Vietnam—are good bets.

Jeff Sasmor answers:

The good old US of A.

I'm not being sarcastic. Not to offend those not living here, but personally, I wouldn't leave even if Palin is the next prez. Wait– I was talking about Michael Palin…

Vancouver, Canada
China may be headed for their 1929 moment. A populace not used to investing in any sort of asset is seeing an exponential tulip phenom that the gov't can't control (yet). It's gone open-loop. And they're too connected to the US to decouple as many like to think. We're too big a market compared to anywhere local for the near-term. And their population wants decent wages– guess how long it will take foreign capital to pull up stakes and move where labor is cheaper– probably Africa as soon as (if/when) nations there wise up and become politically stable. I used to think S. America, but it's not as biz friendly as it used to be where foreign capital is concerned.

Europeans think that the way to solve their problems is to ban shorting– déjà vu– they're hosed.

The world's economy is in for a tough time just about everywhere. I'll pick right here as the place to ride it out. All the political stuff is just noise– psychohistorians take note.

Alan Corwin writes:

I like Canada. They have more resources per capita than any other place on the planet, a relatively sound financial system, and a sense of humor that I can understand. The only time they lose resources is that their citizens move someplace warm when they get enough cash.
 

Jun

7

Kissing the Clay in victoryWatching the French Open Womans Final was shocking for any Aussie who had watched Stosur "Demolish", and that she did, three previous number ones on her way to the final. The Italian woman grabbed the opportunity and literally went for broke, and good luck to her, she got the result.

What is interesting is how absent minded Stosur appeared, What happened to her game, her intensity, and the aggressive tennis of the previous few games. Sure Schiavone combatted her well with some mighty deep top spin looping backhands, but there is no doubt bigger questions to be asked, in particularly how one's mind can be prepared for such a proposition.

For both woman it was their first Grand Slam final, and who's to know how they are going to react on the day. Stosur (who had beaten the Italian in their 4 previous meetings), had phone and text messages from all Australian past champions like Evonne Goolagong and Pat Cash, and no doubt many more. (The fact that Italy had no past grand slam champions in tennis ever, may have helped Schiavone).

Should Stosur have turned the phone off and concentrated on routine, discipline and more routine? It appears the case is evident that potentially there is the need for a head doctor, especially with someone totally new, to be brought in for BIG occasions, one off events like this, just to fine tune and set things totally straight.

Samantha StosurIt reminds me of traders who have just made a bundle of cash, p and l looking the best ever…and for some reason everything they have ever been taught or taught themselves goes out the window. They drop the bundle and give back what they made and more in a bout of careless trading.

There was a manager of a prop desk in Singapore who used to buy a book of local cinema tickets every month. If his traders just had their best period for some time, he dished out a ticket, they were off to see a movie. Likewise, if others were under the pump, then they were sent off to see a flick as well. He reckons that book of tickets was the most profitable management decision he ever made. Maybe Stosur could of done with a movie with a slow down of adrenaline, resulting in her accounts having a reval, before stepping on to court.

Paolo Pezzutti comments:

I was quite impressed by Francesca Schiavone's determination and resolution during the French Open Womans Final. Especially during the tie break. No fear to win. Focus on her strengths. Will to dominate the court physically and geometrically. No way for a self-defeated adversary to match the same hunger for victory and glory. Many similarities with trading where self confidence also plays a big role.

Jun

3

It has been very trying two-year ordeal for investors in this space. Prompt futures have been sliding with unprecedented consistency, ever since their top price of $13.69 traded July 1, 2008. Every month since, as each new futures contract came on board, it has been one-way street for it to drop, drop, drop…all the way to $2.40 by September 1, 2009! July 2010 contract, however, traded below $4.00 for only a few lucky deals and basically quintuple-bottomed near $4. No major change in fundamentals is on the horizon, with record supplies and gargantuan inventories still dominating industry research reports.

However, traders are starting to pick up on the "active hurricane season" theme and looking to capitalize on surprise short-covering squeeze this summer. Surprise just because same failed to materialize during financial troubles of 2008, and a huge disappointment of 2009. Should we put money this year on "whatever didn't work last year"?

Craig Mee coments:

Got to love watching a good extended contraction and being ready to pounce… and reload if necessary. 

Jun

2

A visit to a New Jersey Gas Station sparks many sad reflections on dead weight loss and its impact on the current position. One sees lines of 20 cars waiting for gas at the stations as gas attendants amble about filling the cars. The cost in wasted time, the alternatives of productive work that could have been done by the attendants and customers in other fields is never seen the same way a dead weight loss impacts the reduction of consumer and producer surplus and other interferences with the natural order of things.

How much of the current malaise comes from such dead weight loss? Many trillions of dollars have been spent for the benefit of the flexions and their clients by the interior folks. This money has been allocated to areas that are green and organized agrarian in input. Yes, the money has been spent and used to buy assets from the above. And there is certainly the dead weight cost of the administrative involved.

But at what cost? Who would have spent this money? How were incentives to start businesses and hire workers and buy things that are useful in the day to day fray affected by this? What rational expectations come into play as to the ultimate impact of these expenses when they have to be paid back? What are the dead weight costs involved, and what goods have not been bought, and what investments in stocks have not been made because of this?

A visit to an ice cream store outside of Kira's graduation ceremony at St. Andrews in Middletown told wonders. They make a very good banana almost as good as Cones. And their peach has as much fresh peach as I've had the pleasure of eating. But they tell me their business is down considerably this year, and they cant figure out why. The owner does a nice job of making balloons outside to keep the kids happy. How many others are in similar predicaments with no explanation as we morph into a European style struggle?

Rocky Humbert writes:

One has sympathy for The Chair as he sits in a long service station queue and laments the NJ no-self-service law. And, as the early summer sun beats down upon his countenance, his thoughts evidently turn to Dead Weight Loss. Since I've started regular daily exercise (including checking my oil and pressure) I've paid more attention to live weight loss and proffer the following alternative hypotheses/observations:


1. New Jersey has some of the lowest gasoline taxes in the nation. Gasoline in New Jersey costs as much as 40 cents per gallon less than Westchester County, NY. I frequently fill up my gas tank on the NJ side of the George Washington Bridge; and perhaps the Chair's queue is attributable to the arbitrage of high gasoline taxes in surrounding states– rather than the NJ no-self-serve law.

2. The NJ Turnpike is a toll road with limited access. There is scant evidence to suggest that off-highway service stations have longer queues and/or poorer service in New Jersey than in other self-service states. Former Governor Corzine proposed an elimination of the self-service ban in 2006– and it actually ran into popular revolt: "I'm not against a lot of things, but I don't want to pump my own gas. It's part of the Jersey identity. It's our thing," said Rose Maurice. See this article.  

3. New York State and Connecticut both permit self-serve gas stations, however, they both require full service on certain highways. Having had an unfortunate brush with this business, my understanding is:

(1) the number of drivers who leave without paying on highways is much greater than on local roads.

(2) The throughput for a WELL-RUN busy full service station is actually higher than for a self-serve.

(3) Post-9/11, it is believed by Homeland Security that full-service highway gas stations provide a platform for surveillance. Your oil-soaked, slow-moving, non-English speaking gas jockey may actually be a highly-trained FBI agent checking your car for emissions from a concealed nuclear/biological/chemical weapon.

4. Our local town Shell station has four pumps. Two are self-service. Two are full-service. There is only one attendant for the entire station. The full-service pumps charge about $.20/gallon more than the self-serve ones. The station has maintained this model for years, and it suggests that there must be demand amongst the Chanel-clad soccer moms in Land Rovers and the very-important-Dads (in Brioni suits) not to soil their clothes while pumping gas or checking oil. In this example, the full-service pumps are a profit-enhancer, since the attendant would be there anyway.


5. During a recent visit to Switzerland, I observed that many gas stations have NO attendants and are open 24/7. One simply inserted a credit card, pumped gas and drove away. One should note that (due to taxes) gas in Switzerland is still massively more expensive than the USA, and it is unclear whether the absence of any attendant results in lower prices or higher profits (or both). I suspect that I would feel uncomfortable if there were NO attendants at a US gas station — on a deserted road — at 3:00 am … and the pump isn't working right … and a car filled with four youths and twice as many tattoos pulls in front of my car … and …. involuntary and not-so-politely relieves me of my wallet and luggage. I guess that's another sort of dead weight "loss."

There is no question that the NJ law introduces dead weight loss. However, the Swiss model (at the other extreme) introduces other costs (such as theft, liability risks, soiled clothes, spilled fuel etc) which are difficult to quantify.

While personal choice is usually preferable , my point is that things are almost always more complex than they appear… And policies need to consider an accurate cost/benefit analysis for the world that we actually live in - not a world that we wished we lived in.

Jeff Watson writes:

A prime example of dead weight loss is when a truck makes a delivery to a distant point and has no cargo to bring back to the warehouse wasting time, fuel, and labor. Wal Mart has engineered out much of the dead-load waste and has increased efficiency of its shipping fleet. They have automated their ordering, delivery schedules, and shrunk the number and size of their warehouses, as they consider warehousing a waste of inventory, space, time and labor. Now, with their "Just in time" ordering and shipping, they are able to use their trucks as rolling warehouses, cutting costs in so many ways and passing along the savings to the consumer. They engineer every step of the production of a product, from the manufacturing to the time it leaves the store. Wal Mart's business model is to be admired as they have introduced many products at low cost to people who otherwise couldn't have afforded them.

In addition to their main retail, Wal Mart has taken only 15 years to become the largest purveyor of groceries in the world because they applied their revolutionary methods in dry goods to the otherwise staid food business. The naysayers decry Wal Mart, but I salute them as an example of a company that took a page from Hank Reardon. Walmart is having it's moment right now, and will until something or someone comes along with a better business model. Never fear, there will be a better model, there always an evolution in business as long as man is allowed to be creative and earn a profit with minimal government interference. To those who complain that Walmart is decimating the business of Main Street, in 1920 the A&P Tea Company had 25% of the retail grocery business because it was light years ahead of the general stores of the day with the modern supermarket concept. The populists and anti-trust people took a careful look at A&P but thankfully never broke the company up. Other businesses should salute and try to emulate the way Wal Mart reduces costs, provides careers, brings a good assortment of products to market, and earns the shareholders a good return on investment.

Jeff Sasmor writes:

When I first moved to NJ from southern CA in 1996 I used to get into trouble with the gas station attendants because without really thinking about it I kept trying to operate the pumps myself. Now after being used to the attendants for so long, when I get gasoline in another state I just tend to sit in the car for a while waiting for the attendant till I remember that I have to do it myself. The attendants are nice to have if you don't want to smell like gasoline; and perhaps it's better not to have pregnant ladies handling gasoline pumps and breathing fumes. OTOH, the attendants end up breathing a lot of gasoline fumes. I recall when I was a youth (pattern recognition subroutines running in my brain just fished up that courthouse scene with Fred Gwynne from the great film "My Cousin Vinny") they used to wash your front and rear windows and check the oil on your car. Ah. My wife's car doesn't even have an oil dipstick anymore….

The great Fred Gwynne …

Jeff Watson replies to Rocky Humbert:

Rocky, I know I used the term differently than how the economists use it. However, on the ground floor, the truckers use the words "Deadhead, dead load, dead log, or dead weight" interchangeably when referring to the loss experienced when driving with an empty trailer. Aside from excessive DOT regulations, the aforementioned is the biggest complaint of truckers as it eats into the bottom line, at least the ones I talk to who are non-Teamster. The union drivers don't worry about such things as empty trailers and bring a whole new subset of inefficiencies and extra costs into the equation.

Jeff Sasmor writes:

I don't think that the queue is a function of the presence of an attendant. That's an assumption that may seem natural (like a policeman directing traffic slows things down). I've not seen it in practice. Traffic in and out of gas stations is lumpy.

It's not demeaning to women– I can't imagine why anyone would want to get that smelly stuff on their hands if someone else does it and the cost is the same. And for preggos who want to keep away from things that are toxic (even if the exposure is infrequent and small) not pumping your own gas may be a good thing. And you can stay in your car in the rain and when it's cold out.

Personally I like having the attendants.

Sri Viswanath writes:

I liked your idea and explanations of dead weight loss… In my market experiences some observations that have warranted pin pricks include (fat specialists claiming to smooth order flow, short skirted well-heeled quaffed FX brokers, account reps talking about how they can get you special margins, analysts of rating agencies, mortgage brokers with outdated actuarial tables (see Bacon), derivative structured product specialists trying to sell libor cubed or some mathematically elegant swaps). All apologies to Hicks and Mr. Marshall.

It is amazing that the whole market structure can function given its oligopolistic government based subsidies (a la Citi etc) in excess of a lil' lagniappe. One case of classic deadweight loss is charging for exchange prices. Is this ecosystem capable of being quantified of such costs?
 

Easan Katir writes:

Charging extra to know the score at a baseball game would not sit well with fans. Somehow, the market fans are more docile and pay up. 

Craig Mee Agrees:

You say one case of classic deadweight loss is charging for exchange prices. I couldn't agree more. Isn't this a form of "restraint of trade"!

May

26

The Europeans ponied up $1 trillion of funny money to essentially guarantee the debts of Greece and the other members of the EU family nobody really likes to talk about at family gatherings. Ostensibly, the bailout war-chest was as much to protect major European money-centre banks as Greek and Portuguese civil service pensioners. Stock markets are acting like these countries have already defaulted. If that were actually happening, banks presumably would be doing the same thing they did in the great Credit Crisis of 2008 – not lending to each other for fear of stinky balance sheets on the other side. When this happened in 2008, LIBOR spreads spiked almost 150 basis points. Today LIBOR ranges from .25% to 1%, depending on maturities, (1 mo to 12 months) at all-time lows. It seems that banks continue to be quite happy lending to each other, and therefore there should still be plenty of liquidity in the system. Sure there is in itty-bitty up-tick in May-– not entirely unreasonable since the VIX just doubled - but no indication that it's anything other than business as usual behind the scenes.

Yes, governments are printing money and debt levels are ultimately unsustainable, but just like consumers can keep rolling over and transferring their credit card debts virtually indefinitely, so too can governments that matter, and major banks essentially underwritten by these governments, keep staving off default for a very long time. Look at how long way-over-leveraged Japan has been able to muddle along for over two decades after it blew up in 1989. I don't see banks panicking in this situation, and with all the liquidity and promise of liquidity, that's just more fuel for the fire. Someone is going to wake up soon and realize we may be going down, but we're not going down any time soon, and all those companies reporting big earnings increases are likely to snap back in a hurry. If we are to have a double-dip recession and a bear market, it would be for other reasons, which will be more slowly developing. Shorts beware.

Mick St. Amour writes:

George,

I wish more folks agreed with you as I do. From a technical perspective one thing that I'm not hearing in the media is that Dow Transports don't seem to be confirming retest of Feb Lows by the Dow. If I'm correct on this as well Thursday's action seemed like a washout to me, I can't remember seeing 75:1 downside to upside volume days in some time. I'd love to find research that shows turning points in the market when one looks at the vix collapsing (like it did on Friday) with volume that is at least 10:1 positive to negative. I suspect that would show good turning points.

Craig Mee writes:

It appears that since the bull market run up of the tech wreck, it has been all boom and bust, and until we have renewed respect in the banking sector, and politicians pulling there belts in, and making some tough calls, and with that and a credible plan moving forward…then this charade looks set to continue. Not until we see some consolidation of prices at lower levels over an extended period of time, in essence saying that yes , we have learnt our lessons, and we are ready to come out of the naughty corner…will it seem that the market can move forward without any risk of the volatile behavior of late no matter what numbers companies are posting. 

Alex Forshaw comments:

I'm confused.

LIBOR is at 3-month highs across most maturities. The treasury/libor spread is at 10-month highs.

The series is extremely autocorrelated, which means that a reversal of trend should be taken extremely seriously, as the series doesn't change trend easily.

If anything LIBOR is flashing a big warning sign as $1T of QE has caused nary a blink in the spread's rise over the last month.

May

24

learned your lesson yet? From a technical perspective one thing that I'm not hearing in the media is that Dow Transports don't seem to be confirming retest of Feb Lows by the Dow. If I'm correct on this as well Thursday's action seemed like a washout to me, I can't remember seeing 75:1 downside to upside volume days in some time. I'd love to find research that shows turning points in the market when one looks at the vix collapsing (like it did on Friday) with volume that is at least 10:1 positive to negative. I suspect that would show good turning points.

Craig Mee adds:

It appears that since the bull market run up of the tech wreck, it has been all boom and bust, and until we have renewed respect in the banking sector, and politicians pulling there belts in, and making some tough calls, and with that and a credible plan moving forward…then this charade looks set to continue. Not until we see some consolidation of prices at lower levels over an extended period of time, in essence saying that yes , we have learnt our lessons, and we are ready to come out of the naughty corner…will it seem that the market can move forward without any risk of the volatile behavior of late no matter what numbers companies are posting?

May

19

 I was considering the day before yesterday's fight back of US equities futures before the main board open and was wondering when a market is sold an ATR, below the the previous close, during Europe and Asia, and futures are actually up on by cash open. What percentage of times does the market closes up on the day, (and there is also following thorough the following day)?

May

18

Was considering yesterday's fight-back of us  equities futures before main board open …and was wondering when a market is sold an atr, below the the previous close, during europe and asia, ..and futures are actually up by cash open. What percentage of times the market closes up on the day, (and there is also following thorough the following day)….

May

14

during the 1987 crash1987 rhymes with flash crash?

1. market extended multi months correction overdue

2. correction was swift and violent making one day records

3. something new and unique was blamed for the crash

4. new regulations followed 87, talk is similar to new rules today

5. bears thought that the crash was the first down leg of a bear market; now bulls believe correction over

6. prior crash uncertainty in forex in 87 -Baker -dollar; now euro uncertainty -bailouts

7. fear after crash in 87 lingered long, no fear now really.

8. Volume was very high after 87-volume much weaker today

There is a whiff of similarity to my mind.

How come when there is talk about a "healthy" retest of the lows that would be needed to solidify a bottom like there was in March of 09, that retest never came and now after a ripper of a drop there is no talk at all about a retest. It's like that possibility doesn't exist, just like last week when the possibility of the Cavs losing to Boston wasn't even considered. 

I'm not arguing either, and I listen to sound bites only here and there, but I listen for the theme or the buzz that the media is playing, which is usually aimed at the little guy and which is usually wrong. So like the healthy test that was bandied about never happened in 09 March, so now you hear that the correction is over and it's blue sky ahead, which tells me that I should suspect 1. a healthy retest or 2. a breech of the flash crash lows–to follow my buzz inverse indicator.

Craig Mee comments:

Considering the onset of floor closures and computerized algo trading and the changes that has created, it seems comparing one crash to another opens more questions than answers. I'm not sure if in the history of markets has there been such a period of change. 

May

10

This week is a 10-week low in DJIA. Going back to 1929, checked for instances when this week's close was a 10 week low, AND it was the first 10W low in 10 weeks (a dip). Then checked the return going forward, for the next 10W, 20W, 40W, and compared the mean returns for such "dip-buying" with the means of non-overlapping periods of 10W, 20W, 40W.

(This study is not statistically (or politically) correct, as there is overlap with some of the dip-buying and the data is not strictly independent. However assuming an investor bought at all the stated points, comparison of mean return to dip buying vs buying every 10W, 20W, 40W is valid)

Here are the comparisons of mean returns to dip-buying v automatic buying:

Two-sample T for 10W ret vs all 10W

              N    Mean   StDev  SE Mean
10W ret  132  0.0108  0.0915   0.0080  T=-0.15
all 10W   425  0.0122  0.0860   0.0042

Two-sample T for 20W ret vs all 20W

             N   Mean  StDev  SE Mean
20W ret  132  0.022  0.136    0.012  T=-0.15
all 20W   212  0.024  0.121   0.0083

Two-sample T for 40W ret vs all 40W

              N   Mean  StDev  SE Mean
40W ret  132  0.039  0.190    0.017  T=-0.40
all 40W   106  0.048  0.169    0.016

All of the "buy the dips" returns were lower than equivalent auto-buy periods (though not significantly). Note also the stdev of dip buying was higher (though NS, F-tests not shown): the result of buying in declining/more volatile markets.

How could buying after declines give lower returns than buying all the time? By missing periods of high momentum (eg 1990's), when stocks go up for long periods without making many 10W lows. (From a T and A perspective, this is equivalent to missing the returns above long-term moving averages).

If profit were simple we'd all be rich.

Craig Mee comments:

British Politics in hung parliament, US struggling with oil disasters, Aussie politicians trying to bring in a 40% extra mining tax because the miners are making too much dough and should share it, (where was the government, showing gifts when gold and raw materials where going nowhere for 20 years. They want their hand in the cookie jar, after shocking mismanagement) Europe struggling and debt across the board globally, and as Vic said retail accounts coppering a hammering. No doubt anyone close to retirement who rode the last equity wave up will be thinking of any bounce, and I'm going to cash.

I'm all for contrarian trading, but as Larry has outlined once before, wait for the setup, in price, and volality (just as it did on the recent high). Wash outs no doubt provide a key guide. 

May

3

Watching the German chancellor rabbit on…

How often is the initial chat bullish for the markets as the pollies try and talk it up, and then as soon as question time begins YOURS..

Though as always this must be tested.

Apr

26

San Felipe Beach in BajaThe hard-hit Baja economy daily takes me to the dumps so that I fulfill a childhood dream to live in a junkyard. It is a three-mile thick, 10-mile long ring around San Felipe that is Shangri-La with distinct subcultures.

"There was no competition three years ago before Mexico followed USA into collapse," a walking scavenger lamented a week ago. Most pickers hike with a pointed stick and flour sack for little treasures: clothes, recyclable cans, and toys. They are the dregs of the dump caste. Better push wheelbarrows or bicycles with saddlebags to stuff with cardboard, fishnets, tarps and rope to construct huts that dot the landscape till the next windstorm. The upper crust drive beat-up pickups with a picnic packing family to cull furniture, metals ($.20/kg), and tires as they go. I'm one of a class on a ’03 125hp Yamaha Breeze ATV to range the archives to pick shorts, joggers and jackets, baskets to carry them in, and discarded pineapple rinds from Pinacolata beach vendors to ferment wine.

The dump is also Mother Nature’s barrel. I saw a Great Blue Heron defend his great stack of 2' filleted fish. Walking backwards, I was a step from a 3' western diamondback rattler searching rats. One afternoon, a mew cut the silence and three little kittens tumbled out of a packing crate. In ensuing days I brought them milk and a first meal of tuna, until they disappeared. I sat hypnotized on a couch at four vultures pecking a dead dog's testicles.

I could do terrible things to people who dump unwanted things by the roadside. And today, I sat down for one reason or another and was stung on the buttock by a scorpion. I looked at the 2'' green critter hanging by the tail, he nailed me a second time, and dropped to the ground with legs kicking at the sky. I don't need good food, I don't enjoy flashy cars, I don't parade nice clothes, and I don’t care if I live in a dump. Rubbish! This is the most fun I’ve had in months, and the best dressed I've been.

Craig Mee comments:

I think of trading when reading the following. (No doubt Bo would have a few things to add)

An excerpt from Vagabonding by Rolf Potts:

For the first time vagabonder, of course, preparation is a down right necessity — if for no other reason to familiarize yourself with the fundamental routines of travel, to learn what wonders and challengers await, and to assuage the fears that inevitable accompany any life-changing new pursuits.The key to preparation is to strike a balance between knowing what is out there and being optimistically ignorant. The gift of the information age, after all, is knowing your options — not your destiny — and those people who plan their travels with the idea of eliminating all uncertainty and unpredictability are missing out on the whole point of leaving home in the first place." *"The goal of preparation, then , is not knowing exactly where youll go but being confident nonetheless that you'll get there. This means that your attitude will be more important than your itinerary, and that the simple willingness to improvise is more vital , in the long run, than research. After all, your very first day on the road — in making travel immediate and real- could very well revolutionize every idea you ever gleamed in the library."

"As John Steinbeck wrote in Travels with Charley, "once a journey is designed, equipped, and put in process, a new factor enters and takes over. A trip, a safari, and exporation, is an entity… no two are alike. And all plans, safeguards, policing and coercion are fruitless. We find that after years of struggle we do not take a trip a trip takes us."

Apr

23

One is astonished at how far the subject of position sizing has come since Robert Bacon in 1940 when he suggested 2% of your money on each bet, then a buck on the races so you could lose 50 in a row before going under.

How about an approach where position size was a variable that you put in your statistical return and reward space to start with, then examine the distribution of returns with various positions sizes and determine how your utility fits in with the distribution.

For example, today a 20 day high of 230, indeed a 1½ year high. What is the distribution of the six such?  Max 4.8, min -5, moves to relevant endpoint 2, 5, 2, 2, 1, 5, -2, 3. No trade from Bacon. Wait for overlay. Pittsburgh Phil in the background.

Phil McDonnell writes:

The hard truth, to me, is that it is all position sizing. –Ralph Vince

I agree with this only up to a point. In order to have a winning strategy one must have an edge in a statistical sense. You cannot win with a losing system. One needs both a winning system with an edge and a solid money management system. Neither one alone is sufficient.

After one finds a winning system then you must also have a money management system that does not expose you to ruinous losses. If you graph the expected amount of money you make at various position sizes for any winning system you will find that it looks like a mountain. The peak of the mountain occurs at precisely the positions size Ralph calls optimal f. But if you also look at a chart of risk (stdev) you find it is a monotoncally rising function of position size. Thus as you continue past the optimal f point you are giving back return but still increasing risk. It is the worst of both worlds. If you go far enough past it you can actually wind up losing money even with an overall winning system. That is why I prefer to call the optimal f point the point of maximal investment return.

kahneman receiving nobel prizeWith respect to Vic's comment about utility, there is much merit to this approach. None of us truly knows our utility function and if you believe Kahneman and Tversky it is probably irrational anyway. So then the next best thing is to construct a rational function mathematically from some logical first principles. The three most obvious choices are Sharpe ratio, log, and my favorite is log log Sharpe ratio. Except for the simple log function, one invariably finds that using these utility functions one chooses a point on the mountain graph somewhat to the left of the optimal f peak. So in that sense optimal f is really only 'optimal' for the case of maximizing compounded portfolio return but is sub-optimal and dangerously past the optimal point for maximizing any utility which explicitly takes risk into account.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Ralph Vince adds:

I agree with most of what you say here. Like the old Frenchman used to say, "Most people don't know what makes them tick; they only know that they tick."

Most people do not really know what they are in the markets for — and I think there are very many different and good reasons for being in the markets aside from mere growth maximization. But most don't know what they are here for.

I think until someone can answer that they're probably better off not being in this arena. But I no longer think one needs a winning strategy, and I beg to differ with the notion that you must have a positive expectation (and, this too further indicates that timing and selection are subordinate to sizing). Ultimately, you are in this for a finite number of holding periods or trades (call this T) , and given that you have control over your quantity, you seek to come out at T (or before, if you have achieved the objective of your criteria) with the objective of your criteria.

Again, and I will use this for illustration of the idea — if I could do a full martingale on my capital, and I had unlimited capital, and my goal was to accumulate, say, X……

I could then do a full martingale on a losing system, and when X was achieved (or at necessarily time T) leave the game.

I know for years I too bought into the idea that you have to have a winning system. But I am seeing guys who have specified their criteria well, and are getting astounding results, and are trading approaches that are, at best, feeble. 

Ralph Vince is the author of The Leverage Space Trading Model, Wiley, 2009

Phil McDonnell replies:

I would love to see an example of a system that had a negative expectation but could somehow be turned into a positive expectation through money management. The martingale example is a system that exchanges a high probability of winning a small amount for the small probability of losing a large amount.

Examples of such 'systems' with skewed distributions would include:

  1. Selling out of the money options.
  2. Setting a profit target of $1 with a stop of a $10 loss.

Until I see one I shall remain skeptical that one can reliably expect to profit from a losing system simply through money management.

Rocky Humbert:

As a philosophical matter, I question whether a system can truly have a negative expectation. Because if you take a system that supposedly has a negative expectation and simply do the exact opposite, you should have a system with a positive expectation. I am skeptical that any market participant believes that his approach has a negative expectation.

If you have ever tried to play checkers to lose (instead of win), you'll see just how difficult this can be.

(Note that I am excluding transaction costs from this discussion. But there should be no a priori (efficient market) reason to believe that always buying out of the money options should have a better result than always selling out of the money options– unless there is a systematic mispricing.)

Steve Ellison comments:

crapsAny casino game is a system with a negative expectation for the player (except a blackjack card counter). In craps, one can bet against the shooter, but the expectation is still negative. The only way to take the other side is to be the house. 

George Parkanyi writes:

In my REAP system (Relational Equity Allocation Program), I made the position size a function of the relative separation ( % move of X minus the %move of Y determined the % of position X to sell to fund the purchase of position Y) between two securities made over time. You can re-allocate based on a specific net separation (e.g. 30%) or re-allocate at specific time periods come what may. This has a positive expectation over long periods, because there is dollar-cost averaging dynamic involved - a more aggressive version because fewer shares are sold of the relatively higher security, and more shares bought of the relatively lower security, and the wider the separation the larger the re-allocation size. The compounding over time depends on the volatility (and therefore degree of divergence and funds transfer) between the matched securities.

Trade sizing can also be used for money management in trend following. The simple principle of scaling into a position as it rises keeps your risk relatively low on initial entry, and there is a cushion of profit to fund the risk of subsequent higher-up scaling purchases. Here again, you can optimize by how high you go before adding, and what tranche sizes you add at each level. The trade-off is that you limit your profit potential by scaling, but your stop-outs are cheaper, and waiting to add provides confirmation of the trend.

I currently am using a 40-30-30 scaling sequence, using a specific setup pattern rather than a fixed % rise (e.g. 0%, 10%, 20%). You could use a relatively wide stop on the first tranche, or really keep your costs down and use a very tight stop that allows several inexpensive stop-outs before you "latch". The latter is a better way to go I think if you are trading breakouts and strength patterns. A good break-out doesn't look back, so your tight stop doesn't factor in. If you have to stop out 3 to 4 times before you catch it, you can still keep your misfire costs low.

Rocky Humbert:

Fair point. I was referring to the financial markets (and not casinos,) but you can indeed buy and hold the shares of publicly traded casino companies and you are taking the other (positive expected) side.

Turning a system upside down highlights an additional phenomenon: path dependency can determine whether one is a trading "genius" or "moron."

Nigel Davies comments:

Fascinating discussion.

If I might offer my two cents I've found that in my field there are an immense number of practical difficulties in bringing a nice piece of theory to the board. From my amateur perspective I see many issues with regards to the subject under discussion:

a) A maximum loss size implies that you have a clearly defined exit point, i.e you are trading with stops of some kind and these can nonetheless leave you a winning system.

b) Assuming you have your exit point, how realistic is it that this will be achieved (slippage etc).

c) Does assigning all trades the same position size represent maximum efficiency? I suggest that some are much better than others and should therefore be weighted more heavily.

I'm sure that readers of this site can think of many more issues such as these. This in turn makes me wonder about the utility of trying to apply very precise mathematics to practical and very messy issues. Surely it should come with a good sized dollop of common sense and flexibility in which good lab experiments are regarded as mission statements rather than straight jacket rules.

Of course doing this is an art in itself which will extends into all sorts of psychological nuances. If anyone is unable to do this they should be looking to work on themselves rather than 'the system'. Discovering the reasons why people can't operate effectively under pressure is very valuable, both in the markets and in life.

Craig Mee responds:

Fair call, Nigel, though the one thing I would have to agree about on the surface but disagree on is "I suggest that some are much better than others and should therefore be weighted more heavily."

It had been my humble experience that the trades I thought were crackers ended up as duds, and those I thought were tradable, but just above the criteria, turned out to be 4-10 baggers. Setting the same cash risk, at the start was imperative across the board.

Nigel Davies writes:

Well, yes, that can be a tricky one. But if one's assessment of bullitude/bearitude is unreliable vis a vis degree, what makes you so sure that they're not completely the wrong way round!? It could be that 'sure thing' trades lower one's vigilance in which case we're back to the human factor. Anyhow, now I'm more awake I can think of some other flies in the ointment in this position sizing debate. What about:

a) The good part time trader with a day job who wants to build up capital. Perhaps he should he push the boat out more at first so as to get a big enough account to go professional.

b) The improving trader; shouldn't he trade small size whilst learning?

c) The successful professional trader who wants to protect capital. Shouldn't he gradually reduce size rather than have his entire wealth and livelihood on the line.

Don't get me wrong, I think that an understanding of position size risks is essential. But there's a lot more to this than just numbers.

Apr

23

It always interesting observing price action between instruments and then weighing up the need to trade on these observations.

Watching for example $/¥ get smoked the other other day as the share markets got hosed, with the argument being there will be unwind of the carry on any sustained selloff. As the world equities bounced back, two days of rallying in $/¥ followed, though what was interesting was as the U.S equity futures suffered in Asia Thursday, were we going to see any significant selling? It appeared not, with the market holding up relatively well.

What happened to the correlation? And is this a sign that there would be further follow through buying? Should we gear up when we notice these medium term broken relationships across markets? What it does show is traders suffering, the market still caught short, and that there will be a need to unwind these positions, should there be any reason to do do. The squeeze just keeps squeezing. After this the market could be just as prone to establish contraction as further expansion, unless fundamentals provide a new catalyst for a move.

Apr

20

A depiction of Antigone trying to bury her disgraced brother whose body had been denied a proper burialIn order to destroy the myth and hero status of a villain and stop others of the same vein from following in his footsteps, the dead and bruised body should be displayed in all its glory. (see this story from heraldsun.com.au about gangland killers)

In trading the same can be said. Hang that P&L sheet from your bathroom mirror. Blow up that chart and stick it on the fridge. As you clean your teeth everyday and pour your OJ, you will have to remember that big spike down in P&L and what on earth you were thinking when you put on the risk. Gone will be the feeling of "it's a new day, a new dawn," and wipe that smile off your face. It will continue to make you do the work and stay in touch, without memories of past grandeurs.

Maybe give yourself a heavy punishment, e.g., a morning exercise routine — 200 sit-ups, 200 push-ups, 30 minute run — until you get the P&L back on track of pre-madness levels. (And at the same time something good could come out of the negative.) 

Ralph Vince writes:

Craig,

I don't know if I would do it with P&L statements, but your post illuminates something I have been thinking about a lot in recent years. At first, it was just a nagging problem, became an obsessive one, and ended in an epiphany which has changed not only how I approach trading, but my results– dramatically. And it is the simple question that often nags us (and, when it does, the discussions usually end unresolved, or "resolved by convention") of "What is a trade?"

Some years back, I had the statements of a famous long term trend follower, and was reverse-engineering his system (because I am sneaky that way). This particular fund always had a position in a market, either long or short. These were futures positions, so, of course, there was the rollover issue going on.Did a rollover constitute a "trade?"

There was a fellow a few years back who would put on, effectively, two positions when the time came to put on one. When half the position saw enough profit such that the stop on the remaining half of the position was hit would result in a scratch, he would exit that half.
Is that one trade or two?

Is a long term trend following system an accumulation of day trades?

Is what appears on a p&l statement really a trade? Is what the software you are using to research your trading ideas give you a trade that is the same as what SHOULD be considered, by you, a trade?

Here's the solution I came to, and why it was significant to me. I determined that a "trade" is, in effect, anytime I have on a position, sized according to the moment or equity at the moment. For example, a long term trend following system IS a cumulation of day trades (sans commission on most of those trades) if, each day, the position is resized based on the current capital in the account (and this is not to say that size varies proportionally to capital — it can even vary inversely, but it varies). In effect, anytime the compounding aspect of consecutive "trades" is affected– that is a trade.

If I trade 10,000 QQQQ always, and never vary my size…it is one trade.

Why was this rule important to me? Because, the results of my trading are not the p&l statements, but rather the multiplicative effect of this stream (in fact, I regard each trade by the term I and others call an HPR, which now makes it a relevent mathematical entity). So I am racking up HPRs into a type of queue, if you will, and their multiplication together IS what I am making or losing, and does show me the drawdown I am really experiencing.And from that, I can now go and craft my trading around creating "trades" (HPRs) to append into this queue……and it is the mathematical "shape" of these HPRs that becomes important, because that IS the effect of my trading. Rather than having arbitrary "trades" handed to me, and looking at where I am at time T, and saying "Oh, look what happened there…that's odd," I am able to steer things much more in the direction I wish them to travel.

Lastly, as I said, it doesn't matter if quantity is varying in direct proportion to capital or not– in fact, it is the very function of HOW it varies, in this respect, that is the REAL puzzle of money management (for example, direct proportional variation is simply a "fixed fractional" approach, wherein one fraction would result in optimal geometric growth). But optimal geometric growth may NOT be someone's criteria– and it is the very function of how your size varies relative to your capital that must be crafted to satisfy what someone's criteria is.

Gibbons Burke replies:

Interesting insight, Ralph.

So, if I understand you correctly, a trade is any action which changes a position's risk connection to the portfolio, including initiating it? Or is a trade considered when an HPR can be calculated, that is, when an already-initiated position is changed?

As an example, how do you account for the fellow who uses the old floor trader's trick of taking half the position off the table when his objective is reached, and letting the rest ride. When the position is initiated, do you initiate two trades in your tracking system, or does the single initiating trade #x get split into trade #x.1 which is completed logging an HPR (holding period return), and trade #x.2, which remains active? What if profits are take on position x.2 when another objective is reached - you then get trade x.2.1 which is realized as an HPR, and trade x.2.2 which continues to ride?

How difficult is it to reconcile your way of trade accounting with brokerage statements, and reports which must be made to taxing authorities?

Ralph Vince replies:

Until I am flat the tradeable, I consider it as one trade. One I am flat– I have an HPR (to add into the queues of HPRs) The reason is that the initiation of any position in a tradeable is a function of the current state of compounding/equity.

So, for example, I buy 1000 shares of XYZ. IT goes up, I am still in it but now I buy 1200 XYZ (I have a total of 2200, the subsequent 1200 buy a function of the equity at the time). Thus, I would consider this two trades, two separate HPRs. The first one would be on 1000 shares and it would be considered closed when I added to it (!) The second position now, 2200 shares…ad infinitum or my own physical demise (whichever comes first!) Similarly, if I buy 1000 shares, and I say, I am buying 1200 shares, irrespective of account equity at the time, but rather based on account equity at the establishment of the first part of this position, then, this is one trade when closed out.

Chris Cooper writes:

Ralph's way of looking at the trades makes sense when the reasons for increasing size are due only to some function of your equity. But often, changes in your position are due to other causes. For example, one might trade 1000 shares of XYZ when the price reaches one standard deviation above a moving average (Bollinger Band), and 1000 more if and when the price reaches two standard deviations above the average. These should also be considered two separate trades, but entered roughly in parallel, not strictly serially as in Ralph's example. The parallel case implies different characteristics in modeling risk and reward, whereas the serial case is more straightforward.

Apr

20

I saw it mentioned in a newspaper article a few days back that trauma doctors are missing stab wounds, particularly under the armpit and in the groin area, leading to the death of their patient. It got me thinking about market ramifications. Which no doubt I have been guilty of more than once.

It seems the studies concluded the 'error' was human weakness, instead of anything technical i.e "limits in reflection, communication, and "metacognition" skills that allow doctors to detect and correct their errors on the fly".

Well, traders are certainly in the same predicament and need to ask themselves the same questions. What can we do as traders to keep this at bay? Better planning, more discipline, all the usual misdemeanors, or is there something else at play?

Here is an interesting study about it:

Into the big muddy and out again: Error persistence and crisis management in the operating room

The study seeks to understand and reduce fixation error (the process of sticking to a single presumed diagnosis despite mounting cues one is on the wrong track)This study highlights the fact that failures to handle OR crises effectively are related not to weaknesses in technical knowledge but rather to limits in reflection, communication, and "metacognition" skills that allow doctors to detect and correct their errors on the fly. It lends support to the idea that effective crisis management in time-constrained, high-stakes settings requires an integration of single- and double-loop problem-solving modes.

Apr

9

It is always interesting when a market 'takes off' or gets 'clobbered', a measuring percentage above the recent ATR, without any news service's being able to quantify above the usual rhetoric. I have often wondered if we could put a measure in place of a dozen drivers of the market, and if no ticks go in any boxes for the said day, then it would be very possible we should be on the move. Measurable by 2-5-10 day/one month performance after said event.

A gold example. I flew up a few days back, and I saw nothing above the norm, on the push from 1110-1130, now 1156 trading. Big pushes without any good reason, and even without any volume (I believe Larry Williams never found any use in volume), depending on your trading size, and the ability to limit risk in this day and age of instant information may be the leading indicator we need.

Mar

31

sugarI was considering recently when the best time is to buy weakness after a sustained selloff — read sugar. Usually it seems prudent to see a retest of a low after a bounce to then enter into the market. However just maybe volatility plays a part here. If volatility on the initial low is such that it is at an extreme (on what comparison?) then potentially a retest can be dismissed. Similarly with a low volatility low, then the chances of a retest maybe be significantly higher. Of course this must be tested.

Mar

8

pacquiao-boxer-of-the-yearThis is a market that's not close to expiry and starts taking on size, and the yours mine battle heats up. Watching the Aussie share price index recently where the daily battle is normally in a relatively controlled volume situation (maybe except into the last few days of expiry, where its been known to be smashed around with some big clips), it was most interesting to see that some obviously big players have a right ding dong battle. After the market hit fresh highs and was looking to retract, it was enthralling — just like ultimate fighting — to see both sides launch at each other with some big hits. Maybe running off time could be the answer, when volume comes in from one side and the boys take to it with earnest. Running a clock like a boxer's rounds may be worth considering for an option for entry on the side thats holding its nerve.

Today the market soaked it up and then some and shot to new highs on the day. It has been basically bid in the week since. No doubt there may be something worth counting in a huge move in relative clip size, time relative to tight range in the "reach" of the fight and returns, on the close, and 1, 3, 5 days subsequent. Like a boxer absorbing blows left right and centre after a flurry from the opposition and then coming out of the gate to wreck havoc, markets may play by the same rules.

Feb

10

When markets move to extended areas where they are not quite sure of whether they are welcome, they do one of two things, either rebounding ferociously back fearing an ambush (or receiving one), or the forward party moves back over covered ground, doing little forays, with snipers out in front, tracking back and forth to gauge the reception.

It feels the U.S equities are doing the later at the moment, pushing, gauging the reception, and withdrawing. It could all turn nasty again in a heart beat, or they could dig in with battle lines drawn and trenches dug, and hold their position in embattled territory for an extended period, without suffering any real damage. It appears that due to the nature of this foray, without any undue volatility the chance for a massive push back to the command centre at 1200 may be something quite remote. I wish the troops good luck.

Jan

24

IRVING FISHERHere is a great article: "Thoughts on the End Game" by John Mauldin

The brilliant U.S. economist Irving Fisher first highlighted the fact that an economy's debt level could have a deleterious impact on economic growth if it is, in fact, excessive. At $3.70 of debt for every dollar of GDP, U.S. debt is excessive (Chart 1). Fisher pointed out that the unwinding of debt levels results in prolonged economic distress, and we certainly agree. In 2009, the book This Time is Different - Eight Centuries of Financial Folly, by Reinhart and Rogoff, shed new light on the role of debt by compiling a database that looked at financial crises in 66 countries over a period of 800 years. The main standard in explaining more than 250 crises studied is whether debt is excessive relative to national income, even though idiosyncrasies apply in each case. They reiterate that this old rule (excessive debt) continues to apply, and this time is not different.

Jan

21

A picture from the Google vs. Ebay cricket matchWatching cricket (or the same could be applied to baseball for the Americans or football for the Europeans and Brits…and South Americans and…) I have often considered how structured and polished the performances are– clean batting, clean bowling and clean fielding.

When is a risk taker going to be coach? When will some one bring the advantages of risk and a polished team into play?

Indecision must bring opportunities.

Why couldn't a fielding team (that's getting flogged or maybe not flogged) start to miss EASY field returns, but have a back up plan–thereby allowing for the batting team to be lured into a second run and capitalise on the often poor communication between batters looking for a run out.

Many other ideas and ways of creating opportunities to take advantage of a situation could be put in play. It seems most areas are not being explored.

Markets certainly don't have those problems with a muliple of false break outs catching everyone on the hop, and whether we like it or not, keeping the game interesting.

Dec

18

Is the blood, sweat, and tears and more importantly, repetion worth it? At what stage do you say, once mastered–there's nothing more to be gained, it's like a chore now, your energy is getting weaker and your soul being drained? At what stage do you determine, like a trade, positive flow against negative flow, are there too many pips and not enough 5 baggers? At what stage does the occasional good going out be worth the crap of reduced positive flows coming in? There must be a law of diminishing returns here, once the student learns the lessons that need to be learned, and learns what the matrix is and why it exists. Why hold on for that last 1% of no doubt ego gratification.

I looking at people staying around too long in there chosen careers, sports, whatever …

It seems it's important to move on, lessons learnt, and the path to the next destination will hopefully be somewhat clearer. Luckier for me on the trading front that that decision of moving on doesn't have to be made!

Riz Din comments:

I quite like the idea of maximising my utility and exiting when the marginal returns are greater elsewhere, of getting 80% of the easy results and moving onto the next activity where I'll pick up another 80% in the same time that it would have taken me to get the remaining 20% in the first activity. This dim-sum approach reminds me of the episode in Seinfeld where George Costanza learns about the showman's approach of leaving on a high and employs it to great effect:

Jerry: Showmanship, George. When you hit that high note, you say goodnight and walk off.

George: I can't just leave.

Jerry: That's the way they do it in Vegas.

George: You never played Vegas.

Jerry: I hear things.

Of course, much depends on the activity and one's objective, for there are many ventures where the structure is more akin to a tournament and the spoils go to the victor. Here, going 80% of the distance is fruitless. It is as Al Pacino says in the film Any Given Sunday, that life is a game on inches and you do everything you can to gain that extra inch, for it is in the tightest of margins that you find the difference between living and dying, between winning and losing.

Almost every decision we make is a like a trade, with an entry and an exit, but too many times we enter into life's positions without thinking about our exit. It's different strokes for different folks, but that doesn't mean we shouldn't stop to question our motives, asking how much is enough, if it is ever enough, or how little is too little, if it is ever too little (so long as you keep on giving it your all and do not fade gently into the night?). Likewise for mastery of an art - while I admire the patient, Eastern philosophy of practising a simple task over and over, I also know that this approach is not for me. Here's a quote from an article I read about a Japanese knife maker:

'I will stop making knives when I stop learning something new and I haven't stopped learning in the 90 years I've been making knives'.

Maybe the greatest sin to simply carry on doing what you do as an avoidance strategy. By keeping busy you are avoiding confronting yourself and straight up asking yourself whether your actions have the value they once they did, if at all. In this situation, time eventually decides on your behalf, and one way or another, you get carried off. You've stop being the master of your destiny and have fooled yourself into thinking that you are still making the right choices - an impossibility if you have stopped asking yourself the right questions.

Dec

7

Gregory (Scotland Yard detective): "Is there any other point to which you would wish to draw my attention?"

Holmes: "To the curious incident of the dog in the night-time."

Gregory: "The dog did nothing in the night-time."

Holmes: "That was the curious incident."

Dec

7

I was wondering if one could be taken off the street, with no experience, and taught to be a profitable trader. My father says no, with a few added conditions. He believes there's a genetic component combined with many early childhood predictors that indicate a propensity for success in trading. He cites games, sports, competition, and the willingness to accept risk as major predictors of success. He also believes that if one doesn't exhibit these characteristics by adolescence, it would be very improbable that one would become a successful trader later on in life. He also says that mentors are not enough if you don't have a "fire in your belly." My uncle, on the other hand, says he could take a monkey off the street and teach him how to trade successfully within a year. What do you think?

George Parkanyi responds:

I think the question becomes can you teach creative thinking, self-motivation, self-discipline, courage, patience, and self-confidence? If you believe that these can be taught (which I do, but it's not simple or easy), then I believe you could teach someone to successfully speculate. Good ideas and opportunities abound in speculation and are recognizable to many people, and the mechanics of trading are fairly straightforward. But actually implementing them and managing the risks are altogether something else.

Also I think that to be good at anything you just have to do it — warts and all, and make the necessary adjustments as you gain experience. You would never be able to teach the things I mentioned above without a heavy dose of hands-on application.

Paolo Pezzutti writes:

I agree that being good at sports and in particular at sports competitions is an indicator of predisposition to trading. Determination, ability to remain focused, to implement a game plan, to understand weaknesses and strengths, the self-confidence that allows to take reasonable risks with a winning attitude and so forth. However, that there is not only the "fire in your belly" component. I do not think that one can trade only by instinct or intuition. There are also analytical qualities that are more intellectual and less related to the guts. Can technology help somehow? However, if one is a great mind and finds certain market inefficiencies that a computer can exploit, does one need to have the great athlete's qualities? Those who develop successful algorithms need to to have the "fire in their belly"? I am not a trader so I cannot say for sure, but I tend to believe that mechanical trading can be successful. Besides that, if your father believes that he could teach a monkey how to trade in a year, I think I am better than a monkey and if he wants he can try with me!

Craig Mee replies:

No doubt a few of you have heard of Dennis and Eckhardt… these days different rules, different times, maybe if there had been tasty markets for it, before the rules of ever changing cycles kicked in. I believe Richard Dennis has struggled to replicate his results.

Dave Goodboy replies on behalf of Michael Covel: 

M Covel"Whether you agree or disagree with my book The Complete TurtleTrader it is one of the most unique "training" experiments ever conducted on Wall Street. It is the true story of literally taking novice traders off the street, injecting them with trading rules, and then watching millions be made. 25 years later it is also interesting to note which of the originally group thrived and which imploded. As far as the genetic component debate goes there are some great books out now about "talent" (see: "The Talent Code" and "Talent Is Overrated") making a very convincing case that success is far less genetics and much more about deliberate practice –which backs much of my research."

- Michael Covel

Dec

6

Just got back from my almost annual Asia run, this time including Malaysia-Langkawi, Singapore, Thailand's Phi Phi Islands, and the not to be missed, Bali. After spending three days in meetings in Singapore main business district and comparing it to my year working there in 04-05, I can certainly say the place is booming. For a start many of the Aussie financial houses are sending staff north. They certainly don't have to be pushed out the door, with Singapore's low tax rates. The English aren't far behind with many distressed at the way the government has recklessly pursued social equality in expense of the countries financial situation. They too are arriving in size.

The place is full of energy and with the warmth of the tropical heat. The few expats I spoke to gave little thought to returning to the homelands soon. I don't think I have seen busier beaches anywhere in the world than after arriving at Thailand famed Phi Phi islands. Speedboats parked offshore allowed the free sand to allow others to load and unload willing punters. The place is magnificent although the touring hordes were slightly distracting. Malaysia Langkawi holiday island was certainly thriving with Asia's low cost carrier AirAsia, jetting people from all parts of the orient to its shores providing a low cost getaway for many from the major hubs.

Bali as always was warm and endearing. The place is changing rapidly, with developer friends on the island telling me the Russians are in, and the Arabs on the close island of Lombok pushing money in many directions. Certainly on flying out of Asia's shores you get the feeling your heading the wrong way.

Chris Cooper adds:

Regarding Bali, I am living about half-time there now. While it is true that foreigners may not hold title, methods have evolved which allow foreigners to purchase and control the property, which amounts to the same thing. Certainly there are many expats who have done so. It is the same in many other countries. Once you have liberated yourself from the idea that you need to hold title in your name, many more things are possible. 

Nick White comments:

I have never come across a person who has invested or had major business dealings in Vietnam, Thailand, Laos, Cambodia, Indonesia, Bangladesh, etc, who would consider doing it again–whether it be hard assets or financial ones. They are a bit like the southern baltics — you just don't know who you're really dealing with on the other side. Singapore, Malaysia, Hong Kong, Japan, South Korean, and Taiwan are all fine. 

Nov

30

Just thinking that there may be a correlation between the more countries one has traveled to, and the less arrests for unlawful activity one has, especially for violent crimes. i.e there is greater perspective on the part of the individual.

This of course must be tested (and could be a hard one to test). The market comparison could be that the greater the number of global countries trading a market, the less volatile it may be…. though distribution of this volume could be a key.

Nov

3

If there ever was a day right out of the Iliad with Zeus deciding with his balance scale whether to let Achilles or Hector win the battle, i.e. the bulls or the bears win, it was today [2009/11/02], and not until 3:59 did the scales finally tip. What was it that caused it? Why did the junior operative from  the Fed state his worries about the banks? C only has 250 billion in cash, the most of any firm ever. What were the forces that led to this fourth reversal?

Craig Mee comments: 

Maybe the force was a market close to a previous low, in a overextended (?) selloff… The shorts' nerves became thin after a day of yours mine, and the bulls held out as stops could be more well defined.

Nov

2

50 200 MAI don't want to touch off a quant vs tech battle, but was interested in thoughts about the use of moving averages. The claims are seen so often in the media for example as 50m/a has crossed the 200m/a as bullish or bearish. As quant this is easily testable, but is there some fallacy built into the assumption, checking once premise. As an average of levels over some period is this overly sensitive to a large event that may have happened at the beginning of the period, or as new data are added and taken away from 200 days ago. This seems a drawback. So on an unchanged day the 50m/a could cross the 200m/a, so it is a lagging measure. I have not used them much but interested in testing and what the merits might be if any. I am prepared to buy a round if venturing too far from our charter.

Craig Mee comments:

Normally people use exponential moving averages which put more weight on the most recent numbers, however it must be noted when looking at technicals from any of the major houses, one day they may be looking at the 50 day exp m/a, the next day the 20 day exp m/a, next day 16 and so on. There seems to be little uniformity and who's to say the market's in a 50 day cycle or 20 or whatever, no doubt this will change at any rate, it must be proven, as to the reason it's used , and this is never done. 200 day just constitutes a longer term trend number. Could be 167 or 198 for the purpose. They may have more of a chance to perform some sort of return in a slower moving stock or short-end rate market, but for futures markets, there is way too much given away on the turn (i.e. consolidating flat markets forever paying away the spread to get in and out.) It's much the same in running a moving average over your profit and loss on a trading system as a filter , normally what you'll find is that the major gains are made on the swing, for that's when markets are extending, and if you're not in then you're not in!

Victor Niederhoffer comments :

Not to mention that it is extremely spurious and dangerous to your wallet to see cycles in moving averages.This is due to the Slutsky-Yule effect, a consequence of regression to the mean, creating false cycles.

Anatoly Veltman suggests:

The best M/A use I know of has nothing to do with crossovers, or even with price charts' current levels vis-a-vis averages. It has to do with current slope of all averages in an optimized pitch-fork of three averages. The method was originally described by Stan Weinstein, as applied to longer-term stock strategies. I’ve had positive results applying the general overriding idea; and over the years, I’ve worked with people who did optimization and chose a pitch-fork of 14-, 30- and 50- day pivot simple M/As. Furthermore, a few effective signals were developed: dubbed Moving-Average Fake-Out Trade and Moving-Average-Divergence Trade, at the time…

Oct

13

The economist and historian Ralph Davis estimates that the supply of sugar from the Caribbean into Britain rose from three or four thousand tons a year in the late fifteenth century to over two hundred thousand tons by the 1770s, or an increase of over fifty-fold. (The Rise of the Atlantic Economies, Cornell University Press, 1973, p. 251, 255).

Though sugar is coming off a solid hitout at the moment, and new lows have been seen, it may be one area that should be considered if booming emerging economies do not implode — though no doubt acreage, supply, weather and uses need to be considered.

Jul

24

It sounds like all the qualities to you need to be a success in front of the screens "or in life in general " are mentioned here ..

From a Sidney Morning Herald article about cricket:

"It is very fitting that a man of Justin [Langer]'s calibre takes this honour because when you break a record of one of the greatest individuals, that being Sir Donald Bradman, it has to be by a man of quality," Hayden said last night.

"He epitomises class, perseverance and persistence and the quality and culture of the baggy green, and his work ethic is second to none. I'm very, very proud of Justin because these results are not a fluke. It's about all those qualities that include determination, perseverance, leadership, integrity and honesty. …."

Jun

18

Should golf pros who want to win a major, practice in cold wet windy annoyingly uncomfortable environments?

Should surf pros who want to win the world title do the same, train in crappy onshore beach break conditions?

…so when it's game on, they will be so happy to be warm, and comfortable and hungry for the win?

Should we traders be in cramped humid stuffy rooms, with no daylight, to reinforce the value of money and stay focused?

Scott Brooks disagrees:

Professional athletes as well as military personnel should practice/drill in the worst conditions so they can thrive in the best conditions. But no one performs at his peak in these conditions.

Drilling and practicing are very different from actual live game day executions.

Traders aren't forced to trade in bad conditions. We should trade in conditions that optimize our ability to think clearly and perform.

There is a big difference between drilling/practicing and actual execution of a task. Trading is real life execution. Game days are real life execution, Battle is real life execution. You don't want to be at anything less than your best when it comes time to execute.

If you're a professional athlete and it's raining on game day, both you and your opponents have to play in the rain. If it's the day of the battle and it's freezing cold blizzard, both you and your opponents have to execute in those conditions.

But when you're trading, you don't want to put yourself in a less than optimal situation. Your opponent has probably created the most comfortable environment that he can to optimize his mental acuity. Why would you want to give yourself the handicap of being uncomfortable?

Create the "peak performance environment" so that you have the highest potential to reap the greatest rewards for yourself and your clients.

Riz Din adds:

A documentary series recently aired in the UK that provided insight on the natural life on the small South Pacific islands. In these small islands, life has evolved in strange ways, producing several instances of flightless birds for example. Unfortunately, after many many years of comfortable living, the introduction of new predators onto the islands wreaked havoc.

I agree with Scott that the physical conditions should be optimal, but I would add that the mental aspect needs to be tended to well, as complacency can spell death when market conditions suddenly turn, strategies stop working, etc. Better to retain the ability to fly, just in case.

May

2

Here is a fascinating read on how to beat a 20% vig from Contingencies magazine. To whet your appetite:

"By the time he succumbed to pulmonary embolism in January 2008 at the age of 62 Woods and his pioneering partners in computerized horse betting had transformed the nature of the sport in one major world market and spawned and industry that is still lengthening its stride around the globe. According to his obituary in The Australian, Wood’s fortune was estimated at $670 million at the time of his death."

Michele Pezzutti comments:

Quoted from Contingencies magazine: “The only way to develop a consistent long-term winning system is to either have the unbelievable luck of making the right guesses on enough races or to know something the rest of the public doesn’t.”

One of the thing I liked most about this story is that the information is actually out there for everybody, there aren’t people who have a competitive advantage on information availability. Alan Woods has built a competitive advantage over the public starting from the same knowledge base, which was under everybody’s eyes but unseen by most.

But how sustainable is this? If I liked horse betting, I wouldn’t bet anymore after knowing that a lot of people have a competitive advantage over me. You could argue that this is true also for financial markets (maybe even worse, as information might not be really available to everybody). That’s correct, but a bet is a single shot– either you lose or win. In financial markets, duration of a bet is generally unlimited (provided that your capital allows it or a company does not go bankrupt) and positions can become profitable also after being potentially a loss. Moreover, if a company generates value, every investor will benefit from that.

Craig Mee writes:

I was speaking to a mate about this guy, his reply:

"It’s a sad story actually. I read about this bloke in last year or the year before Business Review Week Australia's Rich 200. He had sent a letter to the BRW asking for inclusion in the Rich 200. The BRW naturally thought it odd someone would want their wealth on display and also thought it odd they had never heard of the guy before. In his letter he professed to be worth about AUD700mio and said he could prove it with a list of assets all around the world. He said he was waiting to be in the top 10 before applying but unfortunately things were taking a turn for the worst as he had been diagnosed with cancer. He died six weeks after he sent the letter.

A guy who chased a dream and succeeded………regardless of the end…….he had a cracker life."

Dec

19

After collecting Euromoney magazine's "Best Bank in the World," Santander described itself as such in full-page newspaper ads. The same bank now accounts for almost a quarter of the $13 billion potential losses European investors have said they may incur after Madoff's arrest. Santander said it won't compensate clients because Madoff's investments were a fraud.

Nov

19

Kicking goals in Rugby Union and trading may have more in common then one may think. As the Australian chosen goal converted Matt Giteau said during the week, "rhythm and authority" are the two crucial attributes in rugby, and not changing your style every time something goes wrong, leads to a high percentage of success. With trading, being able to keep reloading and staying in the game, and having a well thought out "run up," and confidence (authority) staying high due to no rule breaking, i.e good risk reward trading, sets up the platform for success. No doubt lots of traders look for the edge in strategy and keep changing it too frequently, when the platform for success is right before there eyes.

Substituting trading for kicking/kick in the following quotes by Matt makes pretty good sense:

"I think kicking can get complicated at times. But it doesn't need to be. "

"I suppose if you do miss a kick, it's very easy very to fall into a trap and change something straight away."

The 26-year-old has landed 50 shots from 58 attempts in 2008, including 16 straight at one point, at a conversion rate of 86 per cent. "I feel as though I'm striking the ball better and more consistently. That's the biggest thing," Giteau said. "There's been times where I may have kicked well one week and the next week been a little bit inconsistent. "This year, in particular, I've been really pleased with how consistent I've been." Giteau said he hadn't altered his style this year and was merely practicing what former Wallabies kicking coach and good friend Ben Perkins had preached during his stint with the national team. "Rhythm and authority are the two things Ben taught me," he said. "Things don't change a real lot. I think kicking can get complicated at times. But it doesn't need to be. "It's just being consistent and trusting your run-up. I suppose if you do miss a kick, it's very easy very to fall into a trap and change something straight away. "But I think this year I've tried to focus on the same thing each kick and so far it's worked for me."

source

Aug

5

The equity market is bit like a coil being unleashed at the moment (2008/08/05, 1pm)… With only very small vibrations; market participants are desperate to get in, but with very selfish market longs underpinning it and they will not let others in the door…. A bit like a schoolchild, who has been bullied for months and finally getting his own back.

Jul

17

Pull towardNever in my life do I experience such a force, an intense unbelievable drive to right my wrongs in the quickest form possible by doing something completely and utterly insane, as when my account suffers as a result of a poor trading decision, outside of my trading plan. In line with James Sogi's piece "Mistakes were made" and its reference to Cognitive Dissonance, and how a chain of events can spiral out of control, I believe it's not the initial mistake, and not adhering to your trading plan, that causes the major issues in remaining profitable and being successful. It is the subsequent immense urge that wants to right these wrongs, and drive you into oblivion.

The human seems to be at its weakest at this time, or maybe the natural competitiveness to stay on a righteous path and motor forward is the primitive instinct. However what I do know is that it takes every bit of my will power to fight this urge, and it only loosens its grip when I have a success and have the account moving back in the right direction.

This could explain why a lot of people do a lot of stupid things, as they meander through life without any discipline plan or focus: we need these to take stock and have something to measure against, when all goes pear shaped. Without a game plan, we are all doomed.

Riz Din adds:

On the occasion when trading off-plan blows a massive hole in one's account, I have experienced another base sensation that reminds me of some personal accounts of gruesome shark attacks. The adrenaline rush is so strong that these people sometimes feel no pain during the worst of it. It's nature's anaesthetic. One man describes a feeling of almost beautiful serenity, knowing his time was up as he bobbed about helplessly in the water, but feeling no great pain. This chap was apparently saved by dolphins and went on to have hundred of stitches. If you live, the pain comes later. 

Jul

17

UPDATE 2-Nigeria locals blow up Eni oil pipeline, output shut…oil rallies $1.5 [news headline]

As I sit and watch Crude rally a buck and a half off the back of the headline above, I wonder what will be the attention span to traders on this headline, how long will it hold their focus (Can this even be measured… does it vary market to market? Can information like this be collected, grouped and categorised for further study? ) before their mind moves elsewhere and either the massive long position that has been built up within trend for the last 6 months + looks to continue yesterday's liquidation, or whether the bulls will resume seizing control at any opportunity.

May

27

MotoAfter just arriving back from a two week visit to Vietnam (from Saigon to Hanoi), Bali, Singapore and Malaysia. there was a few thoughts which reverberated through my mind.

Bali is coming back from its tough times in finally good shape and after several terrorist bombings more and more big name brands have moved into the main tourist area of Kuta. People were present in all areas I went to, and the island, while still holding its charm, is certainly one of the best value, wonderfully scenic and frendly serviced tropical holiday destinations I've encountered. This was my sixth time there since 1997, and have seen a lot of changes in these 10 years.

Singapore is undergoing a building bonanza. Two casinos are going up, and Western expert participants from all over the world have arrived in mass, driving up rental prices (with apparently a lot of companies now not allowing the employee to take the saved rental money in cash, and so by allowing players just to hit the offer). Singapore real estate agents are notorious for showing expats ludicrous prices, often four times inflated (I was offered my condo at over 3200, four years ago, and we settled at 1300/month). Expats' friend are now complaining in the last year they have received letters from landlords saying, "your lease is up, your rent is doubled, if you cant pay get out." Condos are going up everywhere (and old good ones are being torn down to be rebuilt with more units). But the island nation was at is finest while I was there, great weather, great food, great service, and a lot cheaper in living cost then old London town.

In Malaysia we enjoyed some great golf at a luxury resort for next to nothing by UK or US standards, and the place on the hour journey up from Singapore looked wonderfully clean, though my traveling companions from Singapore assured me all is not quite right with many problems with the ruling United Malays National Organization party.

Vietnam is a country going places, at the footsteps of China roaring to its north, the country is moving fast, Saigon is a bustling new city, while Hanoi, still holding a more conservative approach, is breathing its own fire with rapid expansion and an influx of a lot of development money from Japan, China, and other local Asian powerhouses. I witnessed massive new manufacturing developments and condo developments pushing the perimetres of the city in all directions and people are enjoying the new direction and thriving on the speed.

In Siagon as I forced my way across an eight lane road with traffic going in all directions in a city of four million motorcycles, I soon realised there would not be a safe Western time to traverse, but I would have to take the Eastern approach of just entering the cauldron, and while keeping a steady pace the traffic would meander around me as I safely exited on the other side. I realise that risk management and trading and crossing nerve racking traffic in Asia, have a lot in common. Softly softly.

Apr

14

Even though Immelman, won this mornings Masters by three strokes it wasn't without a few quick heart beats.

His preshot routine looked a tad nervous through out, however it gave him just what he needed, at a time when maximum anxiety wanted to play with his mind.

The most telling moment for traders however was the lay of his ball after his drive on the 18th fairway. The previous three holes hadnt been kind, and after he drilled one up the middle on the last hole he must of thought the worst was now far behind him, and victory was his. However as is the case more often than not, this is a journey until the the very end, and his ball came to rest( in the middle of the fairway) in a large divot! How his heart must of sank. This Green Jacket and with most outcomes really wanted in life was going to come, if at all, kicking and screaming. Well now the rest is history , he spoke with his caddie, talked about yardage, looked at various shot options, then years of experience held out and he drilled his second shot onto the dance floor, and victory after two regulation puts was his. The comparisons with trading , that is holding risk steady, take smart options and having a well defined pre trade routine are Im sure self evident, but there maybe no better sport to compare with then 18 holes of golf.

…. as I watched it , I thought of the John Dalys of the world, and the OJ Simpsons and believe that it is by far the better option, to not be the most gifted athlete, but be the one who has worked his fingers to the bone every step of the way, and all those life experiences will deliver in the end, and make you in more ways then one, all the better for it.

Sam Humbert adds:

My takeaway was a bit different. Browsing the morning newspaper, the spin was that Tiger had failed — after #11, he coulda/shoulda converted the 'energy' from his birdie into a back-nine run…

From NBC sports:

Even Woods seemed baffled by it all, just as he had been all week. Woods might have been the only player at Augusta National who wanted the wind to blow, but when it, did he couldn't take advantage of it.

This strikes me as analogous to the after-the-fact market commentaries on Bloomberg et. al. that are so often ridiculed by the Specs. In fact, Tiger shot ~5 strokes better than the average of the other leaders on Sunday, and, had he been fewer strokes behind coming into the day, would have been lionized by the media his heroic effort, shooting par on a very tough day, as others crumbled, capped by a clutch put on #18 to seal the victory, yadda yadda. .

Apr

10

Is the Subprime mess one more indicator of the devil may care, not my fault, no care no responsibility, times we are living in? Are the Fed bailouts the ultimate back up to keep this poor social situation alive, leading to a poor thought process for the next rogue trader, head fund manager, and for that matter retail trader sitting down at his platform.

Is this ultimately leading to a internal breakdown of our own risk mismanagement on our own accounts even though at the end of the day it's us on our private accounts and we will be ultimately responsible.

How can we change the situation - When is someone going to stand up and say, "I'll take the hit , I'll wear the pain , It was me!"

Janice Dorn explains:

Maslow's hierarchy of needs is often shown as a pyramid where people go from the base to the apex in terms of what they focus on. The lowest level (base of the pyramid) reflects the most basic human needs– food, health, sleep, physiological needs). The next level is shelter and safety from danger. The next three have to do with belonging (love, affection, socialization), esteem (self and from others) and-finally-the highest state is self-actualization (evolution to a higher consciousness, authenticity, achievement of individual potential, transcendence, creativity).

Humans are unable to progress to the higher levels when they are preoccupied with the needs of the lower levels. In order to distract people from higher levels, one need do nothing more than threaten their basic needs. When people are focused on their basic needs, they do not have the capacity to deal with powerful issues such as personal responsibility. They are too busy focusing on either feeding themselves, dealing with illness or worrying if they will have a roof over their heads tomorrow.

Throughout history, the best way to strip power from a person is to divert their progress up the pyramid by doing something that forces them to stay "stuck" near the base of the pyramid.

We are not evolving. Rather, it appears that there is a not insignificant amount of devolution occurring. As long as we look to "the powers that be to get us out of this mess, the less chance we have to move through the bottom two stages and get on with creative evolution. We will, as a nation, remain, worried, frightened, and sick. The way that power was taken from kings was to poison them. They did not die, but they stayed sick and thus fell down the pyramid to the lowest level.

The person that must stand up and take the hit and wear the pain is the person who looks back at each of us in the mirror. If we cannot do this, we will turn to everyone else to rescue us, to fix the mess, to take care of us, to save us from ourselves. The war against personal responsibility and individual empowerment is in full force. We are unraveling.

Alex Castaldo notes:

I was surprised by the headline in the Financial Times on April 10 "Banks take blame for crisis".  Maybe there is hope after all. 

Russ Humbert offers a deeper perspective:

While nobody wants to take responsibility for the sub-prime mess, the media has certainly laid blame at the feet of the capitalist. "Capitalists acting too aggressive", "Capitalists only out for their own self interest", are a couple of the "causes" I have heard from the media. However, if the origins and the incentives in the sub-prime markets are studied or in other words the true "cause" is explored, it clearly was due to the markets letting socialism creep into their midst.

The timing of the GSEs entry into subprime seems highly suspect.

The deterioration of underwriting standards can be understood, if you understand the rating agency or risk management was graded almost solely on industry average and industry statistics. Such "pooling" of risk management might as well been pooling of agricultural production. What happens is nobody works. It was a mad rush to capitalize on others' efforts.

Thankfully, the capitalist inspired puts in the contract led to most of those irresponsible enough to think they could get a free ride on everybody else's risk management efforts paying the price. The capitalist insisted they had a least enough skin long enough that they couldn't ignore it without getting caught. Thankfully, some of those capitalists caught this problem early enough and are driving a hard bargain to make sure this mess gets cleaned up fast and making sure it won't happen again. While this may be a high price to pay, just imagine if those aggressive capitalists hadn't all dived in at once. The march to socialism might have been slower, but like a boiling a frog, this would have slowly allowed the GSE's to eat a cancerous toxin, driving them to a slow painful unavoidable death. Or if the short sellers had not been allowed to price the actual risk, those executives responsible would have crippled the banking system and the economy for perhaps a decade, bleeding but not admitting wrong doing to stay in power (as happened in Japan).

Capitalist was the cure, socialism the cause.

Apr

7

This is the fourth close within one point of the close five sessions ago, and those proceeding four sessions have all closed within three points of that close as well — maybe one for the record books. After a 3.5% gain, one may expect some consolidation – though is this taking it a bit far.

J.P. Highland adds:

The way the overnight session traded and the sustained action above 1380 made me think the S&P would have a good move and maybe test the early Feb highs… but the 9:30 open was a little disappointing and the following breakout attempt ran out of gas way too fast.

Nothing left but to keep hustling.

Mar

17

Is this the real price?
Is this just fantasy?
Financial landslide
No escape from reality

Open your eyes
And look at your buys and see.
I'm now a poor boy
High-yielding casualty

Because I bought it high, watched it blow Rating high, value low Any
way the Fed goes Doesn't really matter to me, to me

Mama - just killed my fund
Quoted CDO's instead
Pulled the trigger, now it's dead
Mama - I had just begun
These CDO's have blown it all away

Mama - oooh
I still wanna buy
I sometimes wish I'd never left Goldman at all.

I see a little silhouette of a Fed
Bernanke! Bernanke! Can you save the whole market?
Monolines and munis - very very frightening me!
Super senior, super senior
Super senior CDO - magnifico

I'm long of subprime, nobody loves me
He's long of subprime CDO fantasy
Spare the margin call you monstrous PB!

Easy come easy go, will you let me go?
Peloton! No - we will not let you go - let him go Peloton! We will not
let you go - let him go Peloton! We will not let you go - let me go
Will not let you go - let me go (never) Never let you go - let me go
Never let me go - ooo

Feb

16

When looking at a snapshot of a particular sport which you are attuned to, you can tell in an instant whether the person displayed is an amateur or a professional.

It's a bit like the markets. If you watch a market move day in day out, you can look at it at any one time, and have a reasonable "feeling" of how this market is set up.  If you rarely look at a particular market you don't have that feeling and are trying to make decisions based far too much on assumptions to do with how your core market may have performed (and not this particular one).

It is important I would say, to not try to trade too many markets, when speculating, as each has its own rhythm, and you must know this inside out. It is useful to ask whether any market snapshot in time, is the work of an amateur or a professional.

Jan

23

I get the feeling on days like we have seen recently, that it is a total battle between the bulls and the bears, ie who is going to win on the day, with this being signified by being on the positive side of unchanged or the negative side at the close.  Coming back from a strong deficit will not be seen as win for the bulls unless they make it over the line- and vice versa. The acceleration of the market into unchanged and away from unchanged throughout the sessions is brutal on the turn.

Vince Fulco ponders:

One wonders what the approximate level of blended Treasury rate is that is low enough to bring out the asset re(allocators). I don't think pension funds can meet long term liabilities with a 3.45% ten year! 

Nov

27

Cold Reading [book]In Practical Speculation, Vic and Laurel identified a number of ways of making deceptive non-verifiable predictions, and described techniques for marketing stock prediction abilities and systems. I came across a good supplement to such methods by Ian Rowland in "Full Facts Book of Cold Reading" (2nd edition, 2001). What is "cold reading"? These are techniques used by magicians and palm readers to deceive their victims, much as many market participants are deceived by the same techniques into believing the practitioner has a method to predict the market. I will try to give some market examples applicable to the current situation from top news sources such as Yahoo Financial, CNN and my own repertoire.

1. Rainbow Ruse- Have one trait and, at times, the opposite. "The bad news out of the financial sector will continue to flow, and on the days that it does, the market will take a hit", said Chris Johnson, chief investment officer at Johnson Research. "But select stocks will outperform the rest of the market", he said, "particularly in technology".

"Robert Loest, portfolio manager at Integrity Funds, said that a late December rally could depend on what the Fed does on Dec. 11." CNN

2. Barnum Statements- General statements that fit most people (combine w/ forking). "I think we're going to have a tremendous amount of volatility and basically stay in a trading range until we get information on first-quarter earnings," said Dan Genter, president at RNC Genter Capital Management." Yahoo

3. Fuzzy Fact- General broad statement likely to be right. "An end of the year run is not necessarily off the table," said Art Hogan, chief market analyst at Jefferies & Co. He said that Wall Street still needs to work its way through a lot on the financial side. Yet, the broad selloff of recent weeks may have primed stocks for a bigger bounce back, particularly in the areas of the market that are unaffected by the credit market mess. "But there's no question of volatility," he said. "It's going to be very bumpy through the end of the year." Yahoo

4. Good Chance Guess- ("I see a blue car" or "a house with number 2 in address") I see the number 1450 in your near future. Me

5. Lucky Guess- Make 2, 3 parts. If hit, then wow; if miss, they'll forget. 1400 is going to be a support area, unless it breaks through. Otherwise, so we are likely to see some resistance at the 1450 area and if broken a run at 1500 again and then possibly new highs.

6. Push Statements- State something wrong and keep pushing it! The subprime scare is pushing stocks down and may spill over into the general economy causing recession and global slowdown.

7. Russian Doll- Statement with many possible layers of meaning; keep working till get hit. Market participants were concerned about Wall Street sold off sharply Monday as concerns about a weakening credit market wiped out investors' enthusiasm about strong retails sales over the holiday weekend. For a brief period today, there was a twinge of optimism that the stock market would be able to score back-to-back gains. Reports of stronger than expected retail traffic over the Thanksgiving holiday contributed to that view. However, it wasn't long before concerns about the financial sector (-4.1%) took hold again and knocked the market down to size. Briefing.com

8. Peter Pan/Pollyanna- Tell them what they want to hear. "After years of living happily beyond their means, Americans are finally facing financial reality. A persistent rise in energy prices will mean bigger heating bills this winter and heftier tabs at the gas pump. Job growth is slowing and wage gains have been anemic. House prices are sliding, diminishing the value of the asset that's the biggest factor in Americans' personal wealth. Even the stock market, which has been resilient for so long in the face of eroding consumer sentiment, has begun pulling back amid signs of deep distress in the financial sector." Fortune

9. Certain Predictions- No time frame. The market is very likely to make new all time highs despite the recent sell offs.

10. Likely Predictions Unlikely Predictions- The abandoned baby pattern seen earlier in November was similar to the pattern that preceded the big August sell offs.

Self-fulfilling- "You will make a new start" The market may see new lows before turning higher and cause uncertainty among traders creating risk.

Vague Prediction. "The market is now looking toward 2008 and a slowdown, and I find it hard to believe that we can have a year-end rally," Mendelsohn added.

But hey, there are some reasons why Wall Street might see a typically upbeat December and an end of the year "Santa Claus" rally. (From Cnn Money) (predict both sides, always right if market up or down)

Unverifiable- The pull back to resistance level provided support for the overnight rally. The Asian traders encouraged by strength in the yen decided to bid up the SP in the night market. Me.

Larry Williams adds:

Larry WilliamsThe biggest part of cold reading is called 'pumping': asking questions that give a clue to the correct answer; it is very effective in allowing someone to think you knew.

Most cold readers rely on a 11 psychological traits from a study done at the University of Michigan, traits we all share, that can be made into specific statements. The cold reader will use the first three on client A, the next three on client B , etc. so they don't hear the same thing.

Here are a few…

There is someone from your past you wish you could talk with again

There are issue with one of your parents (pump comes next, usually boys are with dads) I see a parent with long hair… they reply yes ,my mother (you agree and look very wise) or if they shake their head and the reply is, 'your mother was not the one it was your father.'

my favorite:

growing up there were s-xually awkward times and you still have unsettled areas here.

Word games can be very impressive in the right mouths.

Craig Mee replies:

Thanks Larry… I remember watching a show on this topic many years ago, which opened my insights into these people… and the following day I was an extra on a Gatorade commercial , which went on for hours, at some point I found myself, next to a very attractive young lady, analyzing what could it be that made her sit here at 2am in the morning for some spare cash… (For me no doubt it was to bolster trading capital!)… so I surmised that she must be there for a specific purpose, ie need the extra cash for something special, I then thought OK, lets go with a wedding, and she either needs a new pair of shoes or a new dress. Well at that point I turned to her and said, "who is getting married and what colour are the shoes you are buying!?"… well I struck gold, and she was beside herself… Certainly a great way to start a conversation with the opposite sex as well!

Jul

24

One of the qualities by which a client rates his bank or broker on is the ability to work things "quietly" — execute an order in a discretely to achieve a good fill. This is because participants are generally unaware someone out there has a buy or sell order and won't strive to squeeze you. In that respect, anonymity is a good thing.

Yesterday I was booking a hotel on a website, and came across a variation of this, where top hotels are willing to unload inventory at knockdown prices, but they do so "anonymously" through an intermediary website. They want to sell a few extra rooms, but don't want to publicly quote the price because it will impact their pricing power.

I considered going with one that offered a reasonable rate and gave general details about location and specs of the room, but at no time before paying would I know they name of the hotel. It mightn't sound like a big deal, but if I were handing over a few hundred Euro, I'd like to know more about the premises. In the end I didn't pull the trigger — I went for somewhere a bit more expensive, where I knew what to expect.

Afterwards, I thought about it and asked whether I lost out on a good deal and whether this anonymous selling is a good idea and will succeed. My own view is it won't, because hotel rooms are among the most expensive transactions people make regularly on the Web, and travelers are quite risk averse when booking. They want reassurance — number of stars, brand name, location — before paying, and are quiet skeptical about descriptions (I can tell you from experience there is nothing regal about the "Royal Hotel" in Tipperary town).

Moreover, the hotels are over a barrel, because if an anonymous five-star hotel is offering rooms at 75% off, people think it can't really be that good, of there is something fishy; and if they are only slightly under a similarly priced but known hotel, people will pay that slight bit more to avoid uncertainty. So they are also looking for information in the price.

Sam Humbert writes:

When I've used PCLN for hotels, I've gotten, broadly speaking, good value for money. Generally there's been a reason a particular hotel traded cheap-to-the-curve — construction noise from building a new wing, or the pool's closed for repairs. Also I've found desk-clerks exude bad juju when you check in/out on a PCLN reservation — they don't view you as a "real customer" who's loyal to their hotel brand.

Craig Mee adds:

Reminds me of a friend who was a manager of a world-renowned hotel chain. Two things he told me –

1. He told his hotel counter staff never to give poor service, even if there are discrepancies with the bill and customers are disagreeing. What he said made perfect professional sense, "once you're committed to not charging the customer for the said amount from a business standpoint wear it on the chin and be as nice to that customer as any other." Then he added quietly, "besides, it's usually the cleaning staff taking liquor from the mini-bar, not the patron."

2. Specials are special on the menu for a reason; don't go near them. They usually jazz up something that is "on the way out."

Jul

22

I'm sure the Rio trade (well at least the myth) was alive and well on every major exchange floor in the world. It was the last salute, the final straw. When a local trader had just about lost the lot he jumped in a taxi, called his "give up" broker to buy maximum size at the market, and when he got to the airport he made the same call. But this time he asked for the price. If he were in the money nicely, he told the taxi to turn around and head back to work. If not he was on the next one-way flight to Rio!

Today I watching the final round of the British Open, Andres Romero, to name but one professional golfer, had the same sort of explosion, but this was with plenty of cash in his account. He was leading with two holes to play and in trouble, so he goes for the Rio (a difficult low percentage shot). The outcome was no longer in contention — a four shot turn around and a big opportunity, maybe even a lifetime opportunity kissed goodbye!

Admittedly, the trader in trouble is driven by sheer panic. But for the golfer in control it must be too much adrenaline, too much confidence, and how much this victory means that drives everything else literally out the window.

Next time anyone thinks about gearing up above and beyond what they should do with their account size, it may pay to watch a rerun, of the 2007 championships final holes. If the pros are trying it and failing, then best we mere mortals stay right away.

Riz Din writes: 

It was beautiful watching how the final two holes at Carnoustie humbled so many players. Romero rose and fizzled like a firework. He took crazy risks toward the end but he had already taken quite a few wild shots on the back nine, and had been rewarded with endless birdies after pulling off one magical putt after another. Before he walked on to the final two holes, I caught him almost laughing to his caddie; even Romero was bewildered at what was happening. Perhaps it felt like an out of body experience. So, come the final two holes, should he suddenly change his game or keep on playing as he had been? Golfers, like tennis players, are a superstitious bunch, and I can see why he chose not to moderate his game.

In trading I believe it is important to set limits and parameters and to modify these constraints only gradually, but in sports the self-reinforcing cycle of the 'mind game' component seems considerably stronger, and it just didn't seem right to deny the gift from the gods of a 'hot streak'. Importantly, Romero didn't seem upset one bit at the end but was highly emotional and what he had achieved. It seemed to be a rare situation of where a player may have had to play below his capacity (at the time) to ensure a win, and brings about many questions about motives and objectives (playing your best vs. winning).

The other lesson came from Open champion, Padraig Harrington. Before the playoff, he sunk the ball into the water twice on the final hole. Watching him play through the 18th, you couldn't tell whether Podraig was playing for a double bogey or a birdie. He gave it his best right at the point when it seemed to be over. Maintaining one's composure at this turning point is very difficult - even Tiger mumbles curses as things go downhill, before switching right back. I believe it is crucial in succeeding in life's competitive endeavors, regardless of the eventual outcome. 

Jul

19

I looked at the depth in cm of snowfall per year in the Thredbo ski resort in Australia, from 1968-2006. The average was 193.925.

It appears to me that you want to be a buyer at 100 cm and below, and a seller at 280 cm and above. After the two worst years, 1982 and 1993, depth increased for the subsequent three year period, and after the worst year on record ever, 2006, 2007 is turning out to be one of the best with powder everywhere in the mountains.

As a trader, it may be possible to come into the chalet market after a season like 2006 and buy up all the leases for the following three years, at bargain basement prices, as the doom and gloomers take hold and global warming reaches fever pitch, only to sublet as the bumper season the following year begins. Alternatively in the record years, sublet any holdings in advance and hit the South Pacific tropical islands for the much earned rest and relaxation!

Jul

17

Every night after the U.S. markets close I get the tube out of the London Square Mile, to my home in London’s West Side. The problem is that there are four alternate destinations and if you are not lucky enough to get your correct tube, then it’s usually better to get off and get the bus half way to your destination, then mess around with some untidy station changes.

The bus I get comes every 10 minutes, and for the last three weeks, I have been in constant draw-down. I get off the tube and every bus but mine comes past, with my number 22 finally showing up on or about the 10 minute mark. But I knew it! This is a numbers game! The longer I stick at it, the more chance I'll hit pay day. And finally it happened. Last night as I strolled up the escalators and crossed the street, the 22 pulled up at the bus stop. After three whole weeks of pain there was my savior; there couldn’t have been a quicker transition.

Good things await those who are prepared to stay in the market.

Jul

17

'No Sun link' to climate change
By Richard Black
BBC Environment Correspondent

A new scientific study concludes that changes in the Sun's output cannot be causing modern-day climate change. It shows that for the last 20 years, the Sun's output has declined, yet temperatures on Earth have risen. It also shows that modern temperatures are not determined by the Sun's effect on cosmic rays, as has been claimed. 

The "greenhouse" hypothesis is that the increased CO2 levels are preventing the sun's heat from being radiated back out into space. There is no doubt that this is true. What is still in question is the magnitude of the effect and the likelihood that there are other contributing causes to the fluctuations in earth's surface temperatures.

The hypothesis about cosmic rays is a theory about another contributing cause. The difficulty with both the hypothesis about cosmic rays and its rebuttal is that neither side has a time series of data with sufficient length to be a reasonable basis for any robust conclusions.

In the last 20 years the data show that there has been a negative correlation between the sun's energy output and the earth's surface temperatures. But (the economist's other hand) the data from the period leading up to 1980 show a strong positive correlation. So, the debate has hardly been settled either way. Saying "we still don't know" is probably the bravest of all positions to take on these matters; you can be guaranteed to have arrows in your back and your chest. 

Craig Mee notices:

Read the sunspots.

The mud at the bottom of B.C. fjords reveals that solar output drives climate change — and that we should prepare now for dangerous global cooling 

Jul

15

I take the subway to work daily. While not the most prestigious means of transportation, it is definitely in my case the most practical, economical, and time saving. I happen to live three subway stops from the beginning of the line.

By the time I catch the subway, it is usually full with no seats available. Sometimes, I am in dire need for a seat to get a little nap, especially if I am caught trading overnight. An hour nap can do wonders in my case.

Out of this need I become more creative about finding this precious vacant seat. Knowing that the previous two subway stops to my own have only two sets of stairs closer to the front end of the train, I started walking all the way to the opposite end in hope that most people will go for the closer compartments. This is in fact the case except oddly enough that the farthest compartment is always packed.

My reasoning in this case is that most people play the same game I do hoping for the precious nap and seat. However, three cars away from the far end seems to be day after day the optimum solution to this game. Now that I choose the optimum car successfully, sometimes I still am not lucky enough to get a seat unless one of the passengers gets off the train.

I start analyzing the passengers’ profiles trying to figure out which ones are likely to get off the train first to sit in his or her place. This is not an easy task but some knowledge of the city and behavior can do the trick. For instance, I stay away from all people over 30 in business suits as chances are that they are headed to my same destination. Once this category is eliminated, I try to eliminate all university students by guesstimating their ages simply because four out of five universities are located downtown (at the end of the line) so the odds are clearly not in my favor there either. I try to spot two age groups. High school students and under since parents most likely prefer to send their kids to nearby schools so it is unlikely that this group will travel all the way downtown for schools. Also, the elderly group is most likely not traveling far either. This whole process usually takes few seconds since I usually get lucky enough to get a seat before we reach the next stop.

This process is very similar to gaming the mistress although I admit it's never this straight forward with her. Incentive, incentive and incentive. I play the market for monetary profits and only profits. I don't care what philosophical reasoning a speculator would give you a la George Soros; the bottom line is that it is all about the monetary reward. It is all about the nap in the case of my subway trip.

I always try to figure the line of least resistance in speculation, the car with the fewest passengers. This is usually the road least followed by the public. In search for prosperity, I have to copper the public play at all times (by going to the opposite end in the case of the subway), but sometimes the simple contrary play is not good enough to win the game. A little tweaking is often needed. In the subway example I had to go to the third car from the opposite end and not the last since some smart passengers figured out the "simple" contrary play by going straight to the last car.

Timing is also a very critical factor and can make all the difference between a win and a loss. In the case of the subway one has to process some information and position oneself accordingly in a few seconds before reaching the following stop. Flexibility is also a key to successful speculation as no fixed system will beat the market forever. In the subway example, my game plan is different on the way back home since a different crowd is taking the subway at that time.

Ever-changing cycles also plays a great role in this game. The last car was full as the public got wiser and I am sure the third will be one day and a new game plan and system will have to be developed.

Knowing who you are playing against is critical to any speculative game as is the case of the passengers' profiles of this subway. An extensive knowledge of the markets you participate in is essential to your success as is a knowledge of the different subway stops and what they represent to different passengers.

I will end this post here as I reached my subway stop and have to vacate my seat for the next player.

Sam Humbert comments:

In my Manhattan years, I'd often give up my seat to a person of gender or age. For me, the psychic pain of sitting whilst a pregnant woman or pensioner is standing outweighs the benefit of sitting down. Often I'd get the fish-eye from my fellow New Yorkers — they were silently thinking "he must be mentally ill." I'd sometimes make eye contact and explain "I'm not originally from New York," and this would calm them.

Craig Mee adds:

Watching commuters pile into the tubes in London, there is sheer brawn! Doors open at the station and boom, some people are fixed on the destination, i.e., empty seats and God help anyone getting in there road. Funnily enough this is usually concentrated to a certain gender. Some people like to try and muscle markets around too!

Chad Humbert adds:

1. Watch for mothers with small children. Sometimes a child will scurry, and the mother will have to leave her seat to retrieve him. Voila! Open seat!

2. The elderly are often slow. I've found I can often simply beat them to the open seat by walking somewhat faster. If I'm careful, I can make it appear that I passed them inadvertently. "Oh, were you going to sit here? I'm sorry! Do I need to move?" Most of them want to be polite, and they insist that I keep the seat. Copper the elderly.

3. I've found that the handicapped seating rules are rarely enforced, and when they are, it's just a small fine. I pay that fine many times over with the extra trading profits I generate from feeling refreshed after a nice nap.

Yishen Kuik offers:

Mr Saad's comment on how the farthest caboose is not the optimal choice because of gamesmanship, but rather some not so inconvenient caboose reminds me of a well known behavioral finance game.

Ask 100 people in the audience to pick a number between zero and 100. The winner is the one whose number is closest to two thirds of the average.

Eggheads will zero in on zero, but that answer merely demonstrates deductive abilities without canniness.

People with a more limited appreciation of convergent series might pick 33 instead, based on the assumption that the average will be 50. People able to think one more step ahead might pick eleven. People able to think one more step in the convergence series might pick nine, and so on.

The real challenge of the game is to guess the distribution of this gradient of deductive powers among the audience and weight one's answer accordingly.

e.g. If you think half the people in the room will guess 33 and the other half are extremely bright but guileless and will guess zero, you should guess eleven.

So perhaps if the challenge is given in a lecture room at MIT, guess one (zero is pointless because of the likely pot split). If the challenge is given to the general public, guess between ten and fifteen.

Philip Tetlock, whom I'm reading currently, reports that the most common winning answer is thirteen.

Barry Gitarts contributes: 

Here are a few of my subway gaming experiences as they relate to the market.

Gain an edge by counting - I use the grip mats markers to note where the train doors open when the train stops, so next time I will be standing there well in advance of the train arriving. This prevents others from being the first in the door. This takes several observations, because the train never stops in exactly the same spot, but it’s remarkable how close to the doors you can be. Standing on different parts of the platform to observe which cars are the emptiest helps in figuring out which car you would want to focus on.

Work harder then the next guy and be prepared in advance - Even if you are the first in at your door, there will be others coming into the same car through other doors, competing for the same seats as you, this is why you must start looking for empty seats through the windows as the train is still pulling in so you know exactly which seat you need to go for, instead of walking in, looking around and then going for a seat. Those two seconds are the difference between sitting and standing.

Know the relationships between markets - I find that sometimes, especially during rush hour, it makes sense to take a different train one stop away from your destination so one can catch the transfer one stop before the mob boards.

Capitalize on the public fears long after the threat is gone - Unlike Mr. Saad, in my case the last two cars are the emptiest, because the train I take starts in a more unfriendly part of the city where people wouldn't want to be caught sleeping in the last car, so when the train gets to midtown, every car is packed like sardines except the last two which are near empty.

George Zachar strategizes:  

As someone who sits most of the day in front of screens, my subway priority is not getting a seat but minimizing total transit time. I have a mental map of where the stairs are at my destination, and maneuver to get closest to the doors that will open nearest to my exit route.

Market lesson? Different players have different goals. Absolute or relative return? Style box restriction? etc. 

John Floyd adds: 

I spent one of my school day summers as a messenger in Manhattan. To increase efficiency I learned the exact subways, waiting positions on platforms for door openings, and the correct cars to place me near an exit that would easiest to get me to my destination. I did this for as many of the routes I traveled as possible.

The numbers of possible routes in terms of subways, exits, etc. are myriad. The proper choice allowed me to be the first off the car and up the stairs, oftentimes placing me right inside the building I needed to reach. This was an added benefit as I avoided the often hot, humid, and crowded streets. I would estimate that this on average increased my efficiency by 20-30% at least. Conversely when I rode my motorcycle across the country I looked at the map once in the morning to get a general idea on the direction I wanted to head and roads I might want to take and then just drove. My efficiency of time probably dropped by 50% but my efficiency of pleasure went up by equal.

When traveling now I try to use the time to read, listen to books on tape, or use the time as a period of thoughtful reflection. I do this mostly because I find it most productive for me given I do not find the sleep comfortable or useful to me in modes of transport. I can understand others find it as a useful battery charger that allows them to be productive later.

So I would extend the logic and say that while the goals –profits, learning, etc., may be the same, the path and methods to getting there may be very different. I think another important point is that one needs to decide and focus on what works best for them, as it may not be the same as what works best for others. 

James Sogi comments:

We don't have subways here in Hawaii, but I try to find the best time to find uncrowded waves for surfing. The best bet is to take my boat to spots such as the nearby national park that has nice waves, but only with a long walk and even longer paddle which weeds most out. The boat takes me to the front row spot and a short paddle, with refreshments waiting.

The other method is to go right after lunch, but before school is out and before workers get out. That seems to be the old guys’ slot, and usually only one or two old guys like me are left still surfing.

The other odd thing, is that even if its crowded, many in water can't see where and when the wave will form and break. If you calmly paddle to the spot where the wave will form as you see it coming over the horizon before anyone else realizes where or when it will come, you will be right at the right spot as it breaks without paddling and catch the perfect wave with a single stroke without effort at the perfect spot while all the crowd is scrambling around trying to catch the wave in the wrong spot.

This of course takes about 40 years water experience and have obvious market application as well. Study of the bottom, which many in water don't bother looking at, triangulation of shore navigation aids, like palm tree lined up with volcano peak and far point, and timing of the waves and sets all help find the ideal entry point. I guess it’s like standing at the right spot on the subway platform.

Another method if the waves are small, or really big, is to use a big board. All the kids ride short boards and only have one board, so if the waves are mushy they can't catch rides, or if the waves are big, they can't catch rides, and with 12 different boards for each micro category of waves it’s easier to catch the nice ones. So really good equipment helps.

Another method is to exercise and train even when the waves suck, so when the waves come, you are in great shape and can charge while the kooks are gasping for breath. Of course pros like Shane Dorian exercise all day long lifting weights, and after surfing five hours, swim around Tavarua Island twice. Geeze.

There are a million ways to beat the crowd. The last one is move a million miles away. The market still reaches here in about 89 milliseconds. 

Victor Niederhoffer extends:

These posts on how to get a good subway seat are a fine pyrotechnic display of native ingenuity. Presumably many of our readers, in their days as poor shavers, also had to apply these techniques to finding parking spaces, especially if they lived in urban areas and didn't want to pay $50 a day for a garage. What I'd like to ask, however, is how these ingenious delectations could be applied to getting a seat in the market. When someone is forced to get out at an unfavorable price, how do you know it's coming, like on the subway, and how can you take his place at a very favorable position to you? One hint is to study Michael Covel and his gurus.

Allen Gillespie replies:

In my experience, a sign of an open seat in the markets frequently presents itself when everyone sells a stock from news on a single company. A recent example is the retail selloff following SHLD's news — only to have WMT, HD, and retails sales numbers lead the market higher a few days later.

Questions I always try to ask myself in those situations:

1) Is the news company-specific or general?
2) Is the bad news the result of good play by a competitor?
3) Did the valuation make the news appear more important than it really is?
4) Which companies have future catalysts? 

Hany Saad contributes:

A fund manager using a trading system that has been losing for more than three consecutive reporting periods is usually a good bet, especially if the majority of fund managers trading the system fall into the switch trap by moving to a different system (usually a very thorough read of the fund prospectus is necessary in this case). They usually give up on the first system at the exact wrong time when it is on the verge of a big win, falling into what Rob Bacon warned against in his wise words "beware of the switches", leaving a seat wide open for the wise observant player.

The same reason I wager that trend following will make a killing next year with the only reservation being that it should be on the long side. 

Barry Gitarts adds:

I have tried to predict who would get up on the train, but such efforts have usually been futile. Instead I stand ready, knowing that anyone could be the next person to get up and I'll be ready to run for the seat. Of course this works better standing in the part of the car where there are fewer people, since there will be less competition for that seat when someone does get up.

In the market, this is like predicting the next big selloff. I can't predict when it will come, but I can be sure I have sufficient reserves for when the opportunity presents itself. As in the subway, this may work better where it is less crowded, and in stocks/markets with less media/analyst coverage. 

Jul

9

While watching the Wimbledon final (what brilliant tennis it was!) I noticed that on every mis-hit the player doing the mis- hit won the point, usually within the next one to two strokes.

Point being — when a market changes its rhythm don’t believe you have a better winning situation. Cut the position, as the whole set up has now become an unknown.

Jun

9

I wonder if "covering shorts" is a more predominant activity on Fridays than going long. And I wonder what method could test this. We see this today in debt markets for home builders' bonds, covered shorts, but not long buyers.

Bill Rafter adds: 

I don't have any proof, just a feeling that you would find Fridays to be mean-reverting, or reversing the Monday to Thursday action. But most of my feelings are wrong, which is why it's important to do the testing.

Craig Mee writes:

Climatic selling at its best late in the week saw the markets rates and equity finally break into a gallop and suck in some big ones after months in a slow well control trot. With so much energy now exerted, it looks like Phar Lap, will now look to please the crowd and not the punters. 

May

22

For the last week I've been using public transportation. It is an interesting slowdown in life. You are forced to sit back, wait for buses, trains, and ferries to come. They then slowly meander around the loops and turns until they get you to your destination.

It's made me think that at times you may need to move from equity index trading to short-term rates in order to slow down and smell the roses. With less volatility, more windows to gaze out of, and interaction with a higher proportion of the general population, I achieve a broader viewpoint.

May

17

Its is my hypothesis that overnight markets are not as efficient as day sessions, which leaves certain opportunities to gain an edge.

It appears overnight market are used heavily, by the big money to contain risk, with any left field events bringing the resident allocated night hedger into the frame. Certainly it seems that this person will quickly size up the situation, and usually will take the safest option to hedge the desk book.

When all traders are back on deck the next morning, a group decision can be reached about the state of the "book" and what the best way forward is, however an individual without the collective input of his peers is reluctant to push any boundaries. Whether this book is being covered by a person, who is allocated to do the job overnight in the home country, or is passed to an overseas desk, (to a certain extent this is inconsequential), no one will usually trade against the status quo, and risk having to explain themselves.

In Australia, once a month, there is the same" jouno guy", who mentions his thoughts about the immediate interest rate environment, in the the financial papers — released about midnight Sydney time. The local overnight bond market will react in line with the risk, regardless of whether any credible sources are quoted. However the next morning board meetings are held, the collective view is exchanged, and surprise surprise, more often than not, the previous night's hedges are lifted.

This must be tested with specific numbers, and not withstanding the size of the overnight market and its draw on overnight participants from different regions … but one view against many can become quite intimidating.

May

1

Is a market that doesn't test previous highs on a breakout (over x amount of time) telling us something, therefore should we add a certain % of higher risk on its next foray into blue sky after a measured period of consolidation, if indeed it does not give us "that pullback?"

Some markets just take off and never let you get back in … maybe on ones that do this a different trading appoach is needed rather than the feeling "I've missed it."

Apr

15

Lately the local paper has had front page headlines on how to eradicate a growing seagull problem. But tonight I witnessed a newfound appreciation of their skills.

The seagulls flew along next to me at the front of the boat against a very strong headwind. Using light reflected off the water to sight fish, and then using this stiff breeze they swooped down to nail their prey. After missing more times than not, they built enough speed that they actually glided back into their original position to undergo the same sequence of events once again. Those who persevered were rewarded as we came into port and the boat speed decreased, and the success rate became much higher for those who were successful using the power of the headwind to increase speed and fly away from the pursuers.

From a market viewpoint they reminded me of counter trend traders in a roaring market. They waited for the right setup. But time again they failed with only the odd one being successful. As the momentum of the market slowed, more and more were able to get the prize, however, it wasn't a meal for a lifetime, just enough to keep them in the hunt for next time.

However, some smart ones, like Jonathon Livingston ("begin by knowing you have already arrived"), instead of going the whole journey waited near port where conditions were more favorable, and just traveled the last 500 meters in, where the success rate increased exponentially, maybe something to consider for us all.

Apr

9

I thought some might be interested in the following title: "Speed Mathematics - Secret Skills for Quick Calculation," by Bill Handley (published by Wiley, interestingly enough). Although completely discovered by accident, this book may actually have changed my life, and has taught me a valuable lesson about perceptions in life and the markets. I'd like to share it, if I may.

Aside from the useful techniques in the book, the most valuable lesson learned is an indirect one: The most hopeless seeming situations may carry the gravitas they do largely because a specific problem owns a person, rather than the person owning their problem. This limitation may then be continually reinforced -usually by a combination of self and external influences (teachers, friends/family, culture, market etc). The key to victory over this persistent problem seems to lie in finding a solution that is non-standard for one's particular predicament. Sometimes you can search far and wide - and apply! - a standard solution with no joy. But that doesn't mean the answer isn't out there. Indeed, the biggest problem in one's life may be overcome by some very simple solution that is heretofore hidden/overlooked.

The techniques I discovered in this book are not new, but I have had twenty years of discouragement and resignation over some of my math skills. I believed I simply wasn't "quantitative." However, at any time I might have stumbled across this technique and many things may have been different. As persistent and pervasive as the problem was, so was the solution. Within 30 minutes of learning the new technique, the problem that had haunted me for so long was solved. Most important, the problem wasn't with an intellectual limitation I thought and believed I possessed. Rather, the problem was the techniques I was applying to overcome that "perceived" limitation. Within a day, I actually saw a new and exciting path for my life - all because of being shown a way of "owning" and changing my "limitation." My brain was the same, but my methods had changed.

I think some of the biggest limitations to overcoming problems are rooted in pride. It's a tough thing to seek help in a way that damages your self-perception (such as consulting a basic math book to overcome problems with basic computation). But what a small price to pay! How many of the problems that we face - the ones that threaten to overwhelm us - could be easily solved by a yet unconsidered solution or a person we've not yet met? What would be different in your life if the biggest limitation you had were removed? I can tell you from first-hand experience, it is a most exhilarating feeling.

Sometimes a problem may truly be beyond our powers to change. We're all frail, with diverse randomness/future-coping mechanisms. We must be vigilant of our true weaknesses, but we must be equally vigilant of those "false" weaknesses that we have accepted as part of the fabric of our reality. For all that, discoveries such as the one I made may give some hope that the tide may yet turn favorably. Some may just have lost hope in the possibility that a solution could be closer than they think - and may even be hidden by their own hubris.

There are numerous other insights that arise from this foundational idea, but those can be left to the meta.

Craig Mee adds:

Yesterday somebody mentioned to me about buying a birthday gift. They couldn't quite find the right object they had in their mind. This person commented, "I've just got to let this go, and get the idea right out of my mind or I'll never move on."

Maybe in markets at times this could be a good idea. Sometimes it seems that we spend too much time analyzing the outcome without spending enough time on the suitability of the initial conception.

Apr

9

Are traders the only people who can learn to totally control their emotions? Is sport something that we will always emote to due to things seemingly out of out control, even considering the most disciplined among us still make frequent errors? For example: consider Tiger Woods after poor shot selection on the 17th hole at the Masters.

"Honestly what the hell just happened" - I'm sure many of us say this daily, but the number one golfer in the world?

Mar

29

On looking at the way some overnight, particularly Asian equity markets trade, and their relationship to the U.S. markets, i.e., Dow or S&P, it would be an interesting experiment to test say the average maximum range move in the Dow. An example would be comparing settlement to extreme high or low, to the corresponding move on the overnight Aussie market in order to gain an average rate of volume between the two. When this varies greatly a meal may be presented.

For example, last night the Dow was off 140 at the extreme, and the Aussie equity futures where only off 33 on the extreme (which on optic observation is a minimal move on average over x range). Subsequently on the day session, today, the market rallied all day from the open. You could throw in a filter such as gold (as the Australian market has a reasonable leaning to resources), with gold being up five dollars overnight (a large sell-off on the index was very much against the resource sector).

Mar

27

I'm not sure where the numbers truly are when it comes to the housing bust of the recent bubble. However, I can tell you it has had a very small affect on this area and our absorption rate is healthy. Homes in the ranges of 1.2 to 4.5 are moving along in a normal pattern of sales. They are projected to jump by 12% and we are on track. One of our projects, 2100 acres of land (956 unimproved), is looking at a fair market value of 158 million. We have 14 buyers who are currently in the running for our property and expect bids to come in shortly.

The sub-prime situation has hit the lower income and mainly ethnic groups in San Antonio. Yet, I do not see a slowdown in midsize to high end homes any time soon. In fact, both West Coast and East Cost monies are flowing in to purchase homes and land.

Of course, I expect somewhat of a bump eventually, due to many sellers not going being able to unload their homes in the up and coming market. I also figure that sellers will not want to write checks, at closing, to buyers, and will sit and ride whatever storm is brewing.

Not only is the bust bringing boom to the home sales market in the South West Region of Texas, many corporations are moving into and around the city of San Antonio for the economic reasons such as inexpensive and abundant land, cheaper labor, and weather.

I came to this region two years ago to capitalize on the next recession, the next long and harsh bear market that will hurt the east and west coasts job market and real estate market, and cause individuals to migrate to less expensive areas. I think my timing was early but I know I am on the proper track.

Nonetheless, the bust is nothing but boom in the southwest region. In fact, the proposed 14-lane highway called, the Texas Trans Corridor is looking to bring in more real estate money. I will find out more in two weeks when we have a lunch with Congressman Gonzales to discuss the NAFTA and commerce.

Craig Mee adds:

Certainly in greater Sydney (Aus), where the housing market broke down earlier than the States, middle to high-priced houses on the coast have had a relatively solid floor bid. The poorer areas (and last into the "bubble") are coping with the worst of it. 

Mar

26

I was lucky enough to view the film, "I'm Your Man." It is about Leonard Cohen and billed as "an intimate look at the songs, poetry and life of one of music's most celebrated and influential troubadours."

What an amazing intriguing and humble character he is, representing all the traits needed to push beyond imaginary boundaries into the next level of introspection. The amazing performances of featured muso's is mind-blowing.

Mar

22

Last Friday I caught a train that went through 1000 kms, inland, south of Sydney to Melbourne (in Victoria, Australia's southern state).

I couldn't believe the state of the land, it was as dry as a bone through the entire distance, with everything a yellowish brown. Although we may get the odd downpour in the major cities, drought is a persistent problem.

Mar

22

In one of Patrick O'Brian's typically hilarious touches, in HMS Surprise, Maturin is on a rock collecting boobies with Nichols, before he is eaten by sharks due to despondency over his wife's infidelities and the typhoon. He tells Nichols about an Urdu English phrase book he is reading. "I believe it must have been compiled by a disappointed man." Here are some phrases:

My horse has been eaten by a tiger/leopard/bear.

All my money has been stolen.

I wish to speak to the collector.

The collector is dead sir.

I have been beaten by evil men.

I wish to hire a palanquin. There are no palanquins in this town sir.

Yet salacious too

Woman, wilt thou lie with me?

I immediately thought, what would a comparable phrase book be like for a trader entering the speculative arena? Perhaps it would include the following examples:

I have no money left. I lost everything when my stops were elected right before it turned.

The margin clerk is off duty sir, so it is not possible to delay getting your money.

The locals have given me a beating in the market.

I wish to enter a market order to sell. — There are no market orders possible sir. It's limit down.

There is 5000 bid ahead of you.

You are filled at your price, and I'm afraid it has continued down.

Yes, it went through your limit, but we're going to get them to take that price down.

Goldman against you on the offer 10000 to go.

It traded at that price, sir but there was a fat finger error and they're canceling all the trades at your price and below.

The Fed just acted and I'm afraid the market is very much against you.

I suggest you use stops next time on your orders, sir and that way your losses will be limited.

It did trade at that price, but your order was canceled at 5:30 due to computer bookkeeping.

Price hit a pivot point and immediately gapped 2% against you.

A domino effect was triggered and it went against you.

Sorry, that fill was for your brother not you.

They revised the previous months number against you, and I guess that 's considered more important now.

I'm afraid you were in over your head.

Your order was rejected by the compliance department.

You can't take money from your account until you get back to initial.

It was too late to cancel sir.

I am open to other appropriate items for such a phrase book.

Allen Gillespie adds:

We listened to the tape and it went against you.

Craig Mee writes:

Only in trading the Mib (Italian index futures) "yes sir, it opened higher than your sell level, but due to the mathematics of the opening print, nothing done"

I haven't quite worked that one out.

George Zachar adds:

It's a fast market. Nothing done.

Markets went subject just before your order. Nothing done.

That printed on globex. Your order went to the pit. Nothing done.

We don't show that expiry on our system.

That account is closeouts only.

Fed funds options? The local is in the toilet.

There is no market in that spread, sir.

Mar

14

I have written before about meaningless statements in finance, like "overdue correction." This sort of thing is not unique to finance, however.

Someone flipped his Mustang over the median and ran into a truck in Oklahoma City today. I am watching the news right now. The police say "speed was a contributing factor." Well, isn't speed a contributing factor in every automobile accident? How does one car hit another if speed is not a contributing factor? I suppose that if a car were parked precariously on the wall of a parking garage and the wind blew it off and it fell on to a car below that speed would not be a contributing factor, but that's about the only example I can think of.

What they mean, of course, is that excessive speed was likely what caused the accident, i.e., the idiot was doing 100mph around a turn and lost control. But if so, why not just say that?

It reminds me of the two years I spent on a federal grand jury (one or two days per month). A DEA agent was before the grand jury telling us about a drug bust, and he emphasized that the suspect had a "saleable amount" of cocaine.

I asked him what a saleable amount was. He said "He had X grams, and that is enough to sell." I said "But isn't any amount of cocaine a saleable amount?" He said "Well, he had X grams."

I said, "I understand, it's just that you didn't say that he had 'an amount' of cocaine. You said he had a saleable amount. I am trying to determine what the cutoff is for a saleable amount. If he had the tiniest amount on the eraser on a pencil, would that be a saleable amount"

He said, "Well, yes, you can sell any amount of cocaine."

And I said, "Well, that is my point, the phrase 'saleable amount' has no meaning, and you just use it for effect."

He started to say something, and then the Assistant US Attorney stepped in and stopped my line of questioning. Something also happened when I questioned the definition of "packaged for sale" when it comes to drugs. In short, unless it is scattered on the floor, it is packaged for sale.

Craig Mee replies:

I recently drove with my father. He has much driving experience, though he hadn't been on a highway for quite some time. With me in the passenger seat, he was tailgating cars at 100kph, not something he has normally done. The perception of distance and safety for him has obviously been impaired, as has sensing trouble with cars braking in front of him.

The relationship to the market is this: Having a good understanding of trading and knowing what needs to be achieved may be fine. But diminishing perceptions and feel for the market may interfere with results over time and might lead to a major disaster if not detected early.

My father also recently mentioned to me that life and death situations which he narrowly avoided in his youth, and did not think too much about at the time, had recently come back to haunt him in the shape of dreams and waking up in cold sweats.

Being on guard and aware of changes taking place is paramount.

Nigel Davies adds:

Consider how someone knows he's driving too fast. Speed tolerance varies greatly from one person to another. For me it's when I feel tired after the journey because of the stress. My body's telling me I wasn't fully in control. Of course, here in the UK there are so many speed cameras now that it is difficult to get so stressed without losing one's license.

Can this be applied to markets? Are constant feelings of market-related stress due to "lack of control" an important message from our bodies? 

Sam Humbert notes:

From After the Race, in James Joyce's 1914 collection Dubliners: 

The car ran on merrily with its cargo of hilarious youth. The two cousins sat on the front seat, Jimmy and his Hungarian friend sat behind. Decidedly Villona was in excellent spirits, he kept up a deep bass hum of melody for miles of the road. The Frenchmen flung their laughter and light words over their shoulders and often Jimmy had to strain forward to catch the quick phrase. This was not altogether pleasant for him as he had nearly always to make a deft guess at the meaning and shout back a suitable answer in the teeth of a high wind. Besides, Villona's humming would confuse anybody: the noise of the car, too.

Rapid motion through space elates one; so does notoriety; so does the possession of money.

Mar

14

I am both an investor and trader. But looking at my results I should probably only be an investor. It is not easy to trade with a full-time job on the side.

As an investor I am 100% long with my stocks. I will stay 100% long no matter what. I can sell a stock, but only if I am able to find a better one to replace it. I am not going to sell because of the overall market. Actually, I could sell if it goes up 130% like Shanghai last year. But I am never going to sell because it has been going down.

Today, my investments are down 2% from 12/31/2006, and down 10% from February intraday peak equity. I don't care the slightest bit. They could go down 30% and I wouldn't care either.

I am not crazy. There is a very good reason for this stubbornness.

I started investing seriously in stocks in 1996. Since then there has been a crisis in 1997, another one in 1998, and one of the biggest bear markets in history in 2000-2002. I was investing with a mix of stock picking, market timing, style timing, and small/big timing. Believe it or not my market timing allowed me to sell at all the intermediate tops in 1997, in 1998, and in March 2000. It allowed me to avoid the bulk of the bear market in 2000-2002. I came back too early in August 2002, sold in September, came back at the exact bottom in March 2003!

With this nearly perfect timing, you would think I have impressive compounded returns. That couldn't be further from the true. At the end in 2005, I did a complete audit of my 10-year record. It was prompted, among other things, by some things I read on the Spec List, mostly from the Chair but not only from him. So thank you guys for your down-to-earth audit-prompting approach.

Results of the 10-year audit:

Market timing resulted in dramatically lower volatility and draw-downs than the market; but who cares? It resulted in only a 2% over-performance compared to the index. In terms of absolute returns, beating the index by only 2% is ridiculous. It is incredible that even though I caught most major tops and bottoms in 10 years, I only over-performed by 2%. Even more sobering is that if I had kept the first 10 stocks I ever bought and never sold them, forgot them and never done anything else, my over-performance would have been 4%.

How could this happen? Well, that's very easy:

First, I caught all the actual tops, but also about 10 of them which never turned out to be tops. The market continued higher and I missed part of the move. Second, even when the top was an actual top and I was flat, it created the problem of knowing when to get back in, which in most cases occurred a bit too late. Third, buying and selling too much is created a lot of friction in the form of commissions. Over 10 years, the amount paid in commissions can be really impressive.

Based on this I decided to be always 100% long. I am not timing the market, styles, or anything any longer. I still hope to continue beating the market by a couple percent a year from stock-picking (probably more beta than alpha). I don't care if the results are more volatile. This is largely compensated by a huge decrease in workload and worry. Freed time can be dedicated to more useful pursuits, like learning to trade.

Jaime Klein writes:

I have, well, had, two now only one extremely financially talented relatives. The late one, when told I was going into the financial business, laughed rather rudely, I thought. And noting so many of my family members were already in that line of work, he asked me who was going to bring home the bacon. Well, he said, seeing as you're determined, I'd give you this bit of advice: Never buy a stock if in your lifetime you don't see it returning your original investment to you annually in dividends. And if they're any good, they only pay two percent.

Absurdly enough, his own results were so far beyond this as to make this counsel seem the most conservative expectation possible. He was probably 30 years ahead of the sage into Coca Cola, which he obtained by selling Minute Maid to them for stock. He never sold it except to buy the occasional Goya or Renoir, or make a charitable donation to Harvard or MIT.

I was aware of only two other plays: one was a quick flip which his partner told me netted over 100X in less than three years. The other was selling United Fruit, which I imagine he paid near nothing for, to Eli Black, right at the top back in the conglomerate heat of the '60s. I can't remember much about the foolish and ill-fated acquisitor except that he defenestrated himself shortly thereafter, taking his briefcase along with him.

Anyway, it's been my pleasure, while unfortunately lacking in outstanding talent myself, to have met so many ingenious and interesting people in my all too brief 65 years. One of these days I'm hoping I'll learn something from them. But in the meanwhile, it's always fascinating, albeit particularly in the political and religious arenas sometimes quite alarming, to see how clever so many people are.

From Scott Brooks:

Volatility is a terrible measure of risk. There is no risk on the upside of volatility. The goal should be to reduce all down side volatility, thus my patented investment strategy of buy low and sell high (Green List/Red List post from several months ago).

In all seriousness, I am fixated on the discovery of ways to mitigate downside volatility while participating in most of the upside of volatility. But since I'm far from the smartest person on this list and have been told in no uncertain terms that it can't be done, I feel like I'm fighting an uphill battle. Still, who knows, maybe there is a way!

I've never been one to give up just because others say it can't be done. If I listened to others (like my guidance counselors), I'd probably be laying carpet back in Maplewood, going to the corner bar, watching COPS every night, and aspiring only to be the "Maplewoods, King of White Trash."

From Craig Mee:

I accept these results, however…

Plenty of you know a lot more about stocks then I do. But I would like to offer here that a two percent increase in returns and with this, the opportunity to be out of the market in major declines, represents to me some nice sleepy nights.

With a bit of fine-tuning maybe marks can be picked slightly better on entering and exiting longer term positions. But on that black swan event, when something may drive the market into a huge selling spiral, I believe for me at least it may be worth that extra agro.

From Kim Zussman:

Similar but less quantitative self-assessments:

1. At least in US, taxes bite deeply into putative alpha (or masquerading beta) if you trade vs buy and hold.

2. Concur that most effect was lowering volatility. You will get lower volatility with stocks<100%, and pretty much always lower returns. Looking back, you will regret not being 100% stocks, but during the ride you live happier <<100%. Thinking about a big down year as a future possibility feels a lot different than having one.*

3. Besides drift, the reason buy and hold works is that there is too much temptation for the vast majority of people to time the market. It is unnatural not to check your investments, and not to be tempted to act on them. People don't like it when their million $ port becomes worth $800,000, and sell before "losing it all". Then it turns around and people don't like missing up 30% years, and buy back in. The hope-panic-irony cycle makes the market rise over time only for those not riding the emotocycle.

* The abstraction of future pain and foolish willingness to fall in love is nicely summarized by the late Sam Kinnison.

Jack Tierney adds:

I was invited to a dinner party but expected very little. The guests were getting thin on top and hefty through the middle. Our host was dressed in colors that defy the known spectrum and civility was to be shown the greatest horse's rectum. So we mingled and we spoke and mentioned our positions. I mooted that I was all in cash and was swarmed by five physicians. "Perhaps an evil humor attacked him on his flight or maybe he's an infidel who has yet to see the light." Their concern was very real and they needed to be consoled so I admitted that in addition I owned a little gold. Screams and wails followed and the panic gained momentum.

To quell the crowd I shouted, "Wait, I also own argentum." Now that they were fully aware of these judgmental flaws they ripped away my velvet gloves and exposed my hairy paws. They marched me toward the door when the host yelled out to quit, "Why this poor benighted soul has never heard of drift."

So began my lessons and I've brought them to the south, a bearish thought may cross your mind but never cross your mouth.

Abe Dunkelheit adds:

Bruno's post was very interesting. I made exactly the same observation. Market timing lowers volatility but doesn't guarantee any substantial out performance. And yes, one's first ideas tend to be much better researched than all these other in and out decisions. Never to sell them would have turned out the best in my personal case also.

And there seem to be people who don't make any professional impression and live a very retired life who tend to buy and hold and accumulate incredible returns without doing much.

I know about a guy in Switzerland who was retired and did it with wine. He bought all these Chateau Mouton Rothschild wines for USD 500 a bottle 10 years ago and they now go for USD 10,000 at auction because rap stars and Russian mafia are pushing prices up. I only know about this guy because I was one of the sellers. I had bought my bottles for USD 300 and thought a cool 60% gain in less than two years could not be wrong. He had an incredible cellar with all these wines, but his house and car and his whole appearance were very modest.

Another example I know about is a guy who was jobless and lived on social security, but had saved several hundred thousand euros [back then deutschmarks] and invested them through the accounts of his children. He put it all into Deutsche Telecom at the IPO and cashed in a 600% profit during the Internet boom. That was his one and only investment.

Mar

7

As I look at a chart, and wonder the next move in the great spectacle of global markets, an old prop trading colleague's response comes to mind.

In his words: "I asked my five year old daughter, 'where do you think this is going,' as I held up a chart which had a reasonable bias from lower left to upper right on the page. Then came the response 'don't be silly, Daddy, it's going up!'"

As I look to fade markets — which for some reason feels like a natural instinct to me, maybe due to the usually more volatile response of these pullbacks, this memory has saved me lots of hard currency.

There's a lot to be said for the uncomplicated power of youth.

Feb

13

Here are a few interesting points on the upcoming TV program, Living Old.

"The bad news is the price that they will be paying for the extra decade of healthy longevity, is up to a decade of anything but healthy longevity."

Within the next 25 years, the number of Americans 85 yrs of age and older will reach 60 million.

A few rough calculations have me assuming that this is currently the amount of people in the U.S. 65 and over. I realize we have spoken about health care as being a future booming sector, but 20% of the current U.S. population being 85 and over is astounding.

One key point: of all the elderly people interviewed, the lady who looked the "most with it" was a 94-year-old stockbroker, still belting orders down the phone, and yelling at her broker not to chase it…superb!

Feb

11

The back of my brain has been telling me for the last month of price action, as I glance through the numbers, that gold and the U.S. dollar are no longer best of friends (or at least reverse market indicators).

It appears to me that gold and the dollar index had a ambiguous correlation in the past, but all this has changed recently. Through the last month, gold has put on 8.3% (+55.9), while the dollar index has actually added .03% (basically flat).

I believe the Chair has shown in the past that relying on these inter-market relationships will lead to a diet of two-minute noodles. It looks like another one, at least for the moment, joins the graveyard.

Feb

8

The book titled The Oil Factor outlines a number of key points. Of note moving forward is negative price action. Oil this time last year was trading around 64, now it hovers around 58. If the March and April equities sell off materializes this year, and oil stays relatively flat from here (at least without any major shocks), there looks to be far too many positives not to open up the cupboard and polish up the cane.

When oil rose by 100% or more over a 12-month period, stocks during the next 18 months experienced an average monthly decline of 27%. (Sample period 1973-2003. That is to say, if oil rose by 100% 15 times, then this figure is the average of the percentage decline in the markets of the 18 months for those 15 years.) The smallest decline was 13%. It, too, wasn't straight down. There where times when stocks rose. But the average maximum gain of stocks following 100% rise in oil was only 4%.

Therefore, over 12-month periods where the rise in oil is greater than 100%, results of the following 18 months returns in stocks average are: 27% loss and 4% gain. Further breakdown as follows:

·    50-100% increase in price of oil: average loss 11%, average gain 17%

·    25-50% increase in price of oil; average loss 7%, average gain 25%

·    0-25% increase in price of oil; average loss 3%, average gain 21%

·    Less than 0% increase in price of oil; average loss 1%, average gain 30%

Feb

6

Maybe its time to run a water portfolio for the coming year….

I believe a recent post pointed out water utilities could narrow this down, as I believe a recent post mentioned this would be a good area in the field. A unit of General Electric will on Tuesday announce its first investment in the European water market, signaling its belief that water could soon rival the energy sector as a destination for infrastructure investment.

news.moneycentral.msn.com

Feb

6

If a market trades with regular volume of 20 lots a side, and trades fairly rapid fire throughout the day, you can bet your kids college fund on the fact that if a market then goes 2 lots on the bid and 80 on the offer and holds there for 4 x plus of a time period greater than the normal time of an execution without the small volume being given, that offer will be lifted pronto.

You can almost count it 1 … 2 … 3 … mine.

Victor Niederhoffer writes:

 This is a most interesting and creative observation that suggests many fruitful extensions. It may be the best way to show that volume matters - of course it's the opposite way from what is usually thought. Still, Justin Mamis had similar speculative insights.

Hanny Saad writes:

Very well stated and I agree with you [Craig]. Do you care to take a stab at what you think might be happening behind the scenes? 

Craig Mee replies:

There're probably a few options here, but certainly at times you do have one or two key buyers or sellers driving the market. When this happens, the small retail traders will lean against solid offers time and again. This will continue until a situation develops where the market has traded through several levels and where no more small sellers are there to be found, yet the one or two hungry sharks are still circling. Thus you get the situation, whereby we have only two on the bid (all retail punters are now already short or have been burned trying to lean against offers) and 80 on the offer. Thereby no one hits the bid, market holds, 1/2/3/ bang… the big fish can get size on and lift the offer….

So, in a nutshell, one reason this happens, I believe is due to one or two large corporations shipping in volume for a hedge (though I'm sure the list could offer other reasons). And if you have big enough pockets it can often pay to fade this move. Its not, however, always a smart move, unless you have a direct line to God.

Bruno Ombreux writes:

"[A]nd if you have big enough pockets in can often pay to fade this move, however its not always a smart move…"

That's one thing I've seen a few times when I was a professional oil trader. It is entirely anecdotic and not testable, but relevant to the subject. The nice thing about being a professional, is that one has people on the floor, and they comment on what's happening like, "Goldman on the bid for 10,000 lots."

Now, in the 1990s, 10,000 lots WTI was big size. And if it were Goldman, and not their commodity subsidiary J. Aron, it meant they were acting as brokers for a fund that was an outsider. When professional traders tried to move size, they rarely showed it that way. They worked it all day long, preferably through several floor brokers, to hide one's intentions.

What usually happened in bygone days, is that a lot of small people tried to front-run the 10,000 lots, on the theory that a big buy order is like a free call option. They probably expected it to be taken piecemeal, if it were to be taken, which would leave time to sell and get out if the size showed signs of being eaten away. And if the market went the other way instead of filling the order, it was free money.

But instead of the order being eaten piecemeal, we often got information like, "Hess just booked Goldman." Which meant a commercial filled the 10,000 lots in one go, probably for hedging purposes.

The market moved toward size and the result was that all the frontrunners saw nothing below, and got into a panic. It cascaded as they hurried up out of their longs and the market collapsed. It can be really fun if it happens a few minutes before the close.
 

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