Apr

8

I am pleased to find that Garet Garrett's novel Satan's Bushel is finally available on pdf. Written in 1924, but taking place a decade earlier, it completely captures the gestalt of the wheat market, the players, the speculators, the pit. This book is to wheat speculation as Bacon's book is to the turf speculator. I've always suggested this book to aspiring grain traders. No spoiler, but this book has the best definition I've ever seen of what a speculator is and does. Satan's Bushel is a value adding read. If this pdf is too hard to read, Kindle has it for $2.99.

Apr

8

To put the size of the bitcoin market in perspective, the total value of the bitcoin market is about the same as the US 2012 commercial tobacco market which was $1.55 billion dollars.

Funny thing about markets and human behavior. When bitcoins were 10 cents each (not that long ago), nobody, not even professionals wanted them. Now, at $160, everybody wants them. There is an obvious market lesson in that.

Apr

2

One notes a 10% drop in corn in 2 days and wonders what the impact of that on various markets is.

Jeff Watson writes: 

Since 2007-08, farmers have been upgrading their operations due to higher grain prices. Farmers have increased storage to the point where they are more likely to store their grain than pay storage at the local elevator. In general many have made capital improvements like crazy due to high grain prices, cheap money, and increased value of land. The benefit of the lower grain prices is that the consumer will have more money to be able to buy more pick-up trucks, etc. The cattle operator will also benefit with lower feed prices (which will increase his margins), which will be passed along to the consumer. This has been a very historic bull market in grains in it's longevity.

Apr

2

Pain is a subject with which traders are probably familiar. There is psychic pain and physical pain. The amount or intensity of both kinds of pain is not commensurate with the amount of the loss in all cases. There is not a direct correlation between the increasing amount of loss and the increase in the amount of pain. For example, the pain of losing 100,000 is not a hundred times the pain of losing $1000, and the pain does not increase in a linear fashion. The pain of losing a loved one is not 1000 times more painful than losing say $100,000. (multiply amounts for wealthy readers). The pain of a small burn can be as painful as a major illness.

The other curious thing about pain is that it ends and its hard to remember after its gone. Experiments have shown that in time people tend to revert to their mean disposition even after horrific personal losses. Some people can handle pain better than others or recover at different speeds. When one is tired, small things can feel more painful. Pain and sadness are closely related to anger. There are mental techniques to handle psychic pain and effective drugs to deaden physical pain. I suppose one could write a book on the subject.

Sushil Kedia adds: 

Pain is a signal to consciousness or to the mind to search for changing the situation. Those traders who are not experiencing pain up to a level of loss are "willing" to lose that much and will thus have lost that much.

Like all of our perceptions, pain too is relative and there is no absolute measure feasible such as the measurement of temperature. Varying wealth levels or varying risk perceptions will, for one example for traders, bring varying intensity, length or sensitivity to pain.

For another example, in a simple surge-protector the fuse is expected to blow up before "paining" the computer to a point that the computer blows up. Some traders believe their stop loss strategies akin to this surge protector. Others believe their computers can withstand any power-surge, by placing some probabilistic calculations that having a surge protector will increase the probability of a power surge. Different hourses, different courses.

Jeff Watson adds:

The real sad thing is that you can be 100% right and the mistress of the market won't stop flogging you. Need to have my head examined. 

Mar

29

One queries whether Passover, Yom Kipper, or Rasha Shauna is bearish for stocks and will say a prayer of atonement and share a torte if it turns out not so.

Anatoly Veltman writes: 

You mean Sell Rosha Shana Buy Yomkippur did out-perform Buy&Hold?

Ralph Vince queries: 

But what about Passover? What about the full moon and a shorting a (very) quiet market?

Jeff Watson writes: 

Back in the pit days, during a quiet market, locals would start selling the market down to where it would trade and order flow would start coming in.

Anatoly Veltman writes: 

Can this be a way of creating "real world" demand?

Jeff Watson adds: 

Sure, the grain companies use this same concept in the reverse to bid up the front month to get farmers to kick out some of their stored grain into the market. Right now look at may corn/wheat spread. It is treacherous and the big grain companies are slugging it out with that spread. I'm avoiding it like the plague, just like I avoided that gold/platinum inversion 1.5 years ago that went out to $150. Too rich for my blood. Very rarely does corn trade premium to wheat. Vic even asked me about doing the trade when corn was 2 cents premium to wheat(where wheat usually commands a 50% premium to corn). I told him I wouldn't touch that trade with a 10 foot pole. In my case, fundamentals and gut instinct kept me from stepping on that land mine. It's been fighting for a week, and I just prefer to be long a little May wheat and have some other months and exchanges spread. I hate risk, and also hate gambling unless I'm the house.

Anatoly Veltman writes: 

The gold-platinum, of course, was entirely different as no Gold is ever consumed. It went out to at least $225 (we should ask Rocky if he knows the high tick, and how long the price was available). To my recollection, the spread double-topped in unusually brisk manner, i.e. the record prints didn't last more than overnight.

Richard Owen adds: 

What is it about spread trades that make them so treacherous? Gold/plat, corn/wheat, the Volkswagen stub, etc.

Is it because the mis-pricing is so "obvious" that people get greedy? Because it's a matched trade, they allow too much for a positive hedging effect? And because they want to trade the spread, they focus too much on maintaining the relative basis, rather than using risk-management appropriate to a gapping short, even if it screws up the net position?

Rocky Humbert writes: 

IMHO the reason the spread trades are dangerous can be attributed to several phenomena:

1) Price Anchoring and false assumption bias. People believe that just because the spread between X and Y has been bounded previously means that this is a law. In the case of stocks, in the fullness of time, it's a good bet that every stock must eventually either merge, get taken over, divest or go backrupt. Otherwise, one stock would take over the world. This means that if you are long GM and short Ford (because it always traded within X bucks), you will eventually blowup. And because GM/F is a mean reversion trade, it has the typical person adding as it goes against you. Can you trade around it and get out at a profit? Sure. But that is intellectually dishonest versus the original motivation. I suspect trading around the position is, in reality, what most profitable spread traders do. They don't put it on, add to it and wait for total reversion. In the case of commodities, there are short-term supply and delivery issues, so even if you are conceptually right, if the convergence doesn't occur before the contract expires, you will incur a permanent loss since the mis pricing doesn't exist in the next contract. That's the case with C / Wheat right now. Corn is at a premium to Wheat in May. But at a discount in all of the other months. So you need to get the price and the timing right. Or you will lose money.

2) Difference versus percentage. I find that people look at the spread as X minus Y. They often ignore X / Y. As prices rise and decline sharply, the ratio becomes more important. But it's not how most people's minds work. For example, a 2 cent mispricing when corn is at 250 is quite different from a 2 cent mispricing when corn is at 736. Oops make that 695 (limit down)

3) False Volatility Assumptions. Assume the price of X0 and the price of Y™ and you are trading X versus Y. And assume that the spread moves up and down $1. People mistakenly think in terms of $1 on 100 … and that's not a big move. In reality, you are trading the spread of $1 and so when it moves to $2 , that's a 100% change — no different from Apple going from $444 to $888 . Don't laugh. I can't tell you how many people fall into this intellectual trap.

4) Butterfly traders. Before interest rates were pegged, I used to chuckle at the 2/5/10 butterfly traders in the bond market — who would do the trade in MASSIVE size. And they'd talk about how the 2 was cheap to the 5. Or the 5 was cheap to the 10. Deconstructing the butterfly trade revealed that (almost all of the time) the P&L of this popular duration neutral curve trade moved with the direction of the 5 year. So it really was a bet on the 5 year rising and falling. And everything was dwarfed by that.

When I was worked with Kovner, he always hated spreads. He would say that it's hard enough to get one trade right. Why add to the aggravation and try to get two or three trades right?

Mar

28

Before work I drink two double espressos. I wouldn't have the courage to leave the house otherwise and go to work. I just rely on jitters to move me uncontrollably and eventually I bounce out the door. An espresso around my house/work costs approximately $3.00. That's $6.00 a day. I drink these on weekends as well, so, that would be around $42 a week and there are two of us in the house. $84 a week. We go through around $10 beans per week. We also need to factor in cleaner for the machine, but I bought industrial bulk cleaner for $20…it'll last a year or two even with weekly double cleans. We also give others a coffee when they come around. I'll ignore that, however.

I bought the coffee machine for around $800 on special and it makes a very tasty cup. We've had it since late 2007. So, we've been drinking $4,368 per year for four years, so $17,472 for the life of the machine. Only $2,080 for the beans over four years. All up, I think we're ahead. There are power costs and so on, but, they're minor. We've probably saved, conservatively, around $13,000 in the last four years.

Here is a good article reviewing the best home coffee machines.

Jeff Watson writes:

I drink a lot of Cuban Coffee, which is espresso, and is very sweet. My pot cost $12 at Target and I've had mine for at least 15 years.

I buy Cafe Pilon which is priced at 4 bricks for $22 and that's a 2 month supply, figuring 4 cups a day.

It takes less than 5 minutes to knock out the coffee.

Dylan Distasio writes: 

My company recently eliminated the free Green Mountain brewed coffee as part of a bean counter initiative and switched over to Flavia packets which is a very poor substitute. I have been going downstairs to buy a large cup of coffee a day for $2.67 but am looking for a cheaper alternative.

I am about to order one of these aeropresses based on the reviews I've read of the device and the coffee it makes. It is essentially a gentle one cup espresso maker which can then be turned in a cup of Americano if desired simply by adding additional hot water.

Update:

So I got my Aeropress and wanted to report back my coffee findings to the group. I am a huge fan of this device and believes it consistently brews a delicious cup of coffee quickly and easily. The only downside I see is that it can only brew one cup at a time. For me, this is a non-issue though since I am using it at work and not for a group. Even if I used it at home (I am considering getting a 2nd one for that purpose), my wife does not drink coffee. I have a Keurig I had bought for convenience at home in case I wanted a quick cup of joe on the weekends. There is no comparison between the two not surprisingly; the Aeropress blows the Keurig with its k-cups out of the water.

Just a little additional background on my coffee habits…I drink my coffee black with a few exceptions…I generally don't like SBUX brew. I am with the folks who call them Charbucks. I prefer McDonald's or Dunkin Donuts coffee, but will drink the SBUX Blonde or an Americano (espresso plus hot water) there under duress. I am not a coffee snob (at least not yet) so you will not be hearing me talk about brewing beans picked out of civet droppings or $1000 burr grinders.

I picked up a bag of whole bean Jamaican Blue Mountain coffee from Costco for my first brews with the Aeropress. I am using a burr grinder versus a bladed one but it is a relatively inexpensive Mr Coffee one I bought years ago when I was experimenting with a Braun Espresso maker. I am grinding relatively fine somewhere between espresso and french press.

Once the coffee is ground, it is a very quick, simple process to brew a tremendous cup of coffee. The Aeropress comes with a measuring scoop which I use to scoop around 2 - 3 scoopfuls into the device after placing a fresh filter disc at the bottom. I then pour relatively hot water obtained from the dreaded Flavia machine onto the grounds and stir with an included stirrer for approximately 30 seconds (they recommend 10 seconds). I then insert the plunger piece into the waiting grounds and with some elbow grease slowly press the coffee down through the filter leaving the grounds behind. After that, I add additional hot water to my coffee mug to craft an Americano. I have tasted it undiluted and it is also delicious. I'm not really sure it would replace an expensive espresso machine since it is not applying the same pressure, but for me, it is a nice cup of what the Aeropress folks call espresso.

Clean up is simple. You just unlock the piece that holds the filter in place, and plunge the grounds into the trash. After that, it's a breeze to rinse off.

One of these would also be great for travel and camping/backpacking. It is pretty small and easy to carry.

In case you didn't notice, I am sold on the Aeropress. I'd highly recommend checking it out if it sounds like a good fit for your purposes. I'm looking forward to experimenting with the grind settings and some different coffee beans in it.

Just to continue this discussion, does anyone have any whole bean coffee recommendations to try?

For those of you interested in debating how many angels can dance on a java bean, check out coffeegeek.com also. The minutiae available for coffee lovers there may blow your mind.

Mar

27

Look at this site and this article "are you a compulsive gambler" and substitute the word "speculating" every time you see the word "gambling." What do you think?

Ralph Vince writes: 

Sure! Here's how it differs:

1. We have more complicated math….
2. We use OPM a lot more….
3. We tend to dress better than those greezers at the tracks…
4. We have better, more sophisticated software…
5. Kids don't have to live in their father's station wagon in a church parking lot because he blew the house…

I can go on and on….. as you can see, this domain has NOTHING in common with that one!

Mar

25

My son sent this to me and I enjoyed some of the life lessons. For some reason I could imagine this coming out of Ben Green's mouth.

Take a little good advice from an old Montana farmer:

Your fences need to be horse-high, pig-tight and bull-strong.

Keep skunks and bankers at a distance.

Life is simpler when you plow around the stump.

A bumble bee is considerably faster than a John Deere tractor.

Words that soak into your ears are whispered… not yelled.

Meanness don't jes' happen overnight.

Forgive your enemies; it messes up their heads.

Do not corner something that you know is meaner than you.

It don't take a very big person to carry a grudge.

You cannot unsay a cruel word.

Every path has a few puddles.

When you wallow with pigs, expect to get dirty.

The best sermons are lived, not preached.

Most of the stuff people worry about ain't never gonna happen anyway.

Don't judge folks by their relatives.

Remember that silence is sometimes the best answer.

Live a good, honorable life… Then when you get older and think back, you'll enjoy it a second time.

Don 't interfere with somethin' that ain't bothering you none.

Timing has a lot to do with the outcome of a Rain dance.

If you find yourself in a hole, the first thing to do is stop diggin'.

Sometimes you get, and sometimes you get got.

The biggest troublemaker you'll probably ever have to deal with, watches you from the mirror every mornin'.

Always drink upstream from the herd.

Good judgment comes from experience, and a lotta that comes from bad judgment.

Lettin' the cat outta the bag is a whole lot easier than puttin' it back in.

If you get to thinkin' you're a person of some influence, try orderin' somebody else's dog around..

Live simply. Love generously. Care deeply. Speak kindly. Leave the rest to God.

Don't pick a fight with an old man. If he is too old to fight, he'll just kill you.

Mar

7

One of the dangers of having a rookie on your team is that the rookies like to find regularities based on looking at every interval, every magnitude, every market, every combination thereof of x variables, and every time period. It's truly a search of implicitly hundreds of thousands of possibilities to come up with a regularity, fifteen on say 40 observations that has about a 5% chance of consistency with randomness assuming it was the only 1 selected. The problem is that they seem so good in isolation before you realize it was the fruit of a tremendous number of look backs, complexities, and multiple comparisons. I strive to tell them "Simplicity." Read Zellner. Another good thing to do is see all the biases from using cart or regressions trees of automatic interaction detector, and all the safeguards built into those methods, —- and of course they overfit, and multiple classify and are only recommended as preliminary by the authors. But …. but…. how destructive it is to receive one of these regularities during the middle of the day… especially when you have a position on the opposite side from the rookies. Proffer. What lessons can we derive from coaches that treat the rookies with grave skepticism like Woodson who calls Shumpert "Rook" and all the players that haze the rooks endlessly to prevent them from interfering with the natural order of things.

Jeff Watson adds: 

I have a rookie close to me and he tends to over-think things and makes grandiose predictions. I keep sending him back to the drawing board because he's not scientific and usually wrong. I love when he says if A is happening then B must happen down the road…..but then again it's not his capital at risk. Rookies, if they are lucky, are taught rational thinking, but sadly aren't taught that the world and the markets are very irrational. I think in the future that every assistant I hire in the future will list "Phone Clerk for a bookie" on his resume.

Richard Owen writes:

I found this article very applicable. 


PLOS Medicine: Why Most Published Research Findings Are False 

Mar

7

This is a story of a downfall, fortunes lost, amateurs, amateur mistakes, and tons of hubris.

"The Rise and Fall of Andy Zaky".

Feb

11

This is an amazing clip of a magician performing the card trick "Sam the Bellhop", which is "without a doubt one of the best card tricks you’ll ever see." (from Big Geek Daddy).

The other week I was at a social event where they brought in a "corporate" magician. I've always wanted to see someone cut aces from a deck in person — and sure enough, the guy said it was easy.

So we went off to the side — I inspected the deck and shuffled it myself. He cut the 4 aces in 10 seconds…unreal!

Jeff Watson writes: 

Notice the very subtle technique he used to get the guy cut the cards exactly where he wanted it cut. Notice the crimp? Notice the Mechanic's Deal? The rest was false cuts, false riffles, false shuffles and very nice subtle pass throughs. He had the deck set up beforehand, and not a single card was moved despite all outward appearances. This guy is pretty good, but you can't listen to him, just watch the hands, and only the hands. His patter reminds me of the noise that the mistress uses to deceive us and relieve us of our cash. One could probably improve their speculation game if they just concentrate on the movement of the hands and ignore the noise. 

Feb

8

It is interesting to contemplate the ecology of the grind, the vig, the infrastructure, as the market mistress each day is content with a 12 or 15 point range and 1. 78 million contracts of volume. Apparently this is enough to feed the eagles, hyenas, worms, and detritovores.

Jeff Watson writes: 

Better add slippage, market friction, and outright mistakes to the kettle.

Feb

4

My parents always send a box of honeybell oranges while they snowbird in Florida to escape the midwest winters.

While fresh squeezed OJ is always an enjoyable indulgence, honeybells take it to a whole other level. I highly recommend partaking should one ever get the chance.

Jeff Watson writes: 

I have a honeybell tree, and OD on them during season. while the honeybell OJ is the best in the world, it also makes the best screwdrivers and orange ice cream. 

Jan

31

There was a time when all big hedge fund managers were bearish. And at the close of a month, they sold in mass, with that ululation that only communality and unlimited funds can match. Where have they gone? Not until the last bear has given up, to say the opposite of what the world's worst forecaster Alan Abelson would say, can we expect those glorious days to come again. One must take sustenance until then with Churchill's guidance: "Twenty to 25. (route 95). Those are the years. Don't be content with things as they are. Don't take no for an answer. Never submit to failure. Do not be fobbed off with mere personal success or acceptance. You will make all kinds of mistakes (the next day especially). But as long as you are generous (to those who need) and true, you cannot hurt the world or even seriously distress her. She was made to be wooed and won by youth. She has lived and thrived only by repeated subjugations". (the drift has subjugated them?).

Jeff Watson writes:

And that's a perfect segue to the idea that has the world in it's grip.

Pitt T. Maner III writes: 

A sentence from a recent column by a surprisingly ebullient forecaster:

"But there's the buoyant stock market, which we've typically found to be in good times and bad a better investment guide than the run-of-the-Street strategist or portfolio pro, and regret not having paid it more heed back in the dark, wintry days of 2009, when it began its long slog back from the depths of the Great Recession."

—Alan Abelson, Saturday, January 26, 2013

 

Jan

30

There is a zero sum part to trading where what one flexion makes, another high frequency or day trader or poor gambler ruined or lack of margined or viged player uses. The win win aspect is that if you hold for a reas period as almost everyone in market is forced to do, you get the drift of 10000 fold a century, except if you lived in the Iron and played a game with kings moving backwards.

Anatoly Veltman writes:

Ok, I'll say it. Drift prevails over a century. And I had no problem with drift as recently as 4 years ago, when the only true drifter I know, a prince of certain oil, was adding to his C holdings by bidding pennies.

I'm having a problem with over-relying on drift now; because now, four years later, you can only bid pennies for C if you add $42 in front of it. All the while the real economic indicators, as Chair pointed out just today, have not and will not improve much any time soon. Now tell me: why assume that there will be much of a drift effect in the near five, or maybe the near ten years? Do you expect policy improvements, or pray for a budget spiral miracle, or Europe culture unity miracle, or what other miracle?

Jeff Watson writes:

Back in 1932, the DJIA made a new all time low that wiped out 36 years of gain. Likewise, the market didn't totally recover from 1969's highs until 1982, and the market has done a 15 bagger since then. I'll stick with the drift, which is a steady wind. 

Rocky Humbert writes:

There seem to be two sorts of smart-sounding stock market pundits: (1) those who get bearish because prices have risen. (2) those who get bearish because prices have fallen. I am neither smart nor a pundit but my views of the 3-5 year upside from here (small) and current positions (long inexpensive s&p calls) are known to all.

In the face of the current seemingly relentless rise (which has used up a year's drift in 3 weeks)… I confess that I am looking at my new, over 50% combined tax rate, and positing that higher marginal rates disincentive not only my risk-taking, but also my selling (as the taxes discourage my speculative urge to sell now and buy stuff back at hopefully lower prices.)

With this in mind, an academic study might consider whether changes in capital gains tax rates result in more serial correlation (i.e. trending — as I look around three times) SHORTLY AFTER the higher taxes are imposed. And the effect diminishes over time as people become accustomed to the new regime. Obviously I would guess the answer is yes.

Kim Zussman writes:

 Increasing tax regime could be bullish:

1. additional vig against frequent trading (as if there weren't enough already) > 1a. "drift" of holding period toward longer timeframe
2. disincentive to sell = incentive to hold and/or buy (including insiders)
3. restructuring away from dividends toward stock buy-backs

Rocky Humbert writes:

Dr Z may be onto something. Does this mean if Obama raises capital gains taxes to 99%, the stock market will triple over night? 

Anatoly Veltman writes: 

1. I have no problem with counting to include the last few years
2. I have a problem with counting to include anything pre-2007, let alone pre-2001, and even more so pre-1987.

The reason I have a problem with it: historical price analysis, no matter which way analysis is performed, relies on the notion that participants have not largely changed, and that "their" psychology has not changed. This is not the case - if one goes too far back - because financial market mechanism and participant make-up has changed ever increasingly over the past decade.

One of the victims of methamorphosis was "trend-following". I believe that most previosly successful trend-following rules have died in application to regulated electronically executed markets, because most clients are now automatically prevented from over-leveraging. Thus, "surprise follows trend" rule, for example, lost potency. Nowadays, you get preponderance of surprise "against trend". That's a very significant switcharoo, which has put most of famed trendfollowers of yester-year out of biz.

Also, Palindrome was not much off, predicting the other day hedge fund outflows due to old as age "2&20 fee structure". This structure just can't survive the years of ZER environment. Huge chunk of very cerebral participation has been replaced by bank punk punters, gambling public's money for bonuses.

Gary Rogan writes:

The drift seems to be a long-range phenomenon that has existed in different stock markets for a very long time. It is therefore difficult to make predictions of its demise based on any specific factors. One thing is clear: calamities like revolutions end the existence of the market and obviously the drift. Benito Mussolini was very good for the Italian stock market for a long time, and even way into the war it kept up with inflation, but eventually it succumbed to the realities of war (in real, not nominal terms). Granted, Mussolini initially had much better economic policies than Obama, but who would really expect that faschism could coexist with a great stock market? The question still remains: will there be a total wipeout? Short of that the drift is likely to continue.

Il Duce wasn't chosen completely at random, and the question was (just a little bit) tongue-in-cheek.

I could easily make the contention, and a great case, that fascism co-exists with a great stock market right here in the USA.

Ralph Vince writes:

I think we make a huge mistake when we assume that policy affects long term stock prices. Sure, you might have seen events, like a lot of stocks seeing big ex-dates last year, before big tax theft years — but the long term upward drift is a function of evolution. Like our progress has always been — starts and fits.

Sometimes the fits have lasted 950 years! But it always comes around. I like to get up in the morning, put my shoes on, by a few shares of some random something or other. If it goes against me, buy a little more. When it comes around to satisfy my Pythagorean criterion, out she goes.

As I've gotten older, I like to do it with wasting assets, long options.

It makes it more sporting.

Stefan Jovanovich writes:

I wish that we all could agree that prices only count if you can use the money . Zimbabwe's stock market does not have prices for anyone who wants use the money except in Zimbadwe. The Italian stock market was not quite that bad but close enough to make its "performance" entirely fictional from the point of view of anyone wanting to do what people now take for granted - use their dollars to buy/sell "foreign" stocks, close the trades and then take home their winnings - in dollars. That was not possible in Italy after 1922 or in Germany after 1932, for that matter.

As for Mussolini's economic policies, they were far more destructive than the President and Congress' inability to stop writing checks that the Treasury has not collected the money for. In his Battle for the Lira (1926), Mussolini decided that the currency would be fixed at 90 to the pound, even though the price in the foreign exchange market was 55% of that figure. The result was to create an instant bankruptcy for all exporters and those few remaining financial institutions that dealt in international trade. As a result Italy got a head start on the rest of the world; its Depression began in the fall of 1926. But Quota 90 did create a windfall for the Italian industrialists who were Mussolini's supporters; their costs on their imported raw materials were immediately halved. Like the German industrialists after Hitler took power, they saw their order books boom with all the government spending for guns and butter. And look how well that all turned out.

Baldi writes:

Ralph, you write: "As I've gotten older, I like to do it with wasting assets, long options."

Older? You wrote about doing just that in 1992:

"Finally, you must consider this next axiom. If you play a game with unlimited liability, you will go broke with a probability that approaches certainty as the length of the game approaches infinity. Not a very pleasant prospect. The situation can be better understood by saying that if you can only die by being struck by lightning, eventually you will die by being struck by lightning. Simple. If you trade a vehicle with unlimited liability (such as futures), you will eventually experience a loss of such magnitude as to lose everything you have. […]

"There are three possible courses of action you can take. One is to trade only vehicles where the liability is limited (such as long options.) The second is not to trade for an infinitely long period of time. Most traders will die before they see the cataclysmic loss manifest itself (or before they get hit by lightning.) The probability of an enormous winning trade exists, too, and one of the nice things about winning in trading is that you don't have to have the gigantic winning trade. Many smaller wins will suffice. Therefore, if you aren't going to trade in limited liability vehicles and you aren't going to die, make up your mind that you are going to quit trading unlimited liability vehicles altogether if and when your account equity reaches some pre-specified goal. If and when you achieve that goal, get out and don't' ever come back."

Jan

28

I was skiing in Vermont recently and as is usual for skiing in the northeast, the slopes weren't as deeply covered with snow as one would wish. When one attacks a steep run in these conditions, it is guaranteed that the center of the trail will be bereft of snow — thin cover is the term we use euphemistically to indicate ice and rocks — mostly ice though. When this happens, there can usually be found some snow piled on the edges of the trail, it having been pushed there by previous skiers who made all their turns in the center, their scraping edges clearing it away off of the underlying hardpack and pushing it to the sidelines.

Skiing in such conditions can be done, but not without incurring greater than normal risk. And it is usually not as satisfying as skiing using the entire available path whose deeper, more sweeping turns are somehow more satisfying and which provide greater control. But under these conditions, staying in the center is deadly so advanced skiers will stick to the edges of the trail, making all of their turns in rapid succession on what is in effect a trail only two or three feet wide. This means that turns must be small in degree and therefore must happen very quickly so as not to allow the tips to remain pointed straight down the hill and therefore incurring excessive speed. This kind of skiing requires conditioning, linking extremely rapid turns is exhausting and one must not attempt this when fatigued as the resulting inability to really push hard and dig can be catastrophic. It also requires some nerve, for one, keeping near the edge puts one in dangerous proximity to the treeline (or the edge of the abyss -as the case may be) and one slip at high speed and it's all over. And it means high speed, even while carving one edge after another in succession, the lack of available surface on which to gain traction means keeping the tips pointed perilously close to straight down the fall line. Mistakes at these speeds tend to have greater than normal undesirable consequences.

As I enjoy the speed, I will make one or two runs in these conditions just for the thrill of it, but this kind of tight skiing in a narrow and steep path requires tremendous concentration and loses it's appeal rather quickly. I will spend the majority of my time on tamer runs with more snow, even though they may be more crowded, so I can make the more gratifying, longer, carving turns that I prefer.

Jeff Watons writes:

That's just like surfing big waves vs small waves.I am not comfortable in the brutal conditions Mr Sogi San surfs on an every day basis. In those conditions, I will look for the rip current to get outside, paddle and make a bottom turn, and ride it in. Like typical Sunset. I don't stay out very long as I did when I was younger when it is big. But if the waves are 2-3' overhead, I'm good all day long. I'll still find the rip to make paddling out easier, but I'll attack the wave harder. But some of the very best days are those waist-chest high waves where you cruise on a long board, and catch the glide. However, during calm conditions I have suffered the greatest traumas while surfing. Broken vertebra, herniated discs, tendon and ligament damage, broken nose, etc. Somehow, being relaxed while it's calm is more dangerous then when it's big. Or maybe I'm more careless when the waves are small, and a bit reckless thrown in for good measure. Carelessness happens in the markets also. You start taking your profits for granted. It's humming along nicely with all your positions in the green, then wham, the Mistress gets a little PMS(no sexism intended) and throws the whole system off balance or upsets the cart, and your account suddenly needs a tourniquet. The lesson here is to keep your guard up at all times.

Jim Sogi writes:

Just back from backcountry skiing in the Eastern Sierras. The conditions were snow that was about a week old, with very cold temperatures, and no wind. The sun made a crust where solar energy hit, so the powder stashes were hidden on north facing aspects where there were old growth trees. The cold had dried out the snow making it sparkle and soft and creamy sugar which was excellent for skiing.. Though it had not snowed for over a week, in the shade, on the north facing slopes shaded by old growth pine where the sun did not affect the snow there was beautiful sugary soft powder. It took some doing finding these niches and some hiking to get there and fighting some pesky brush at lower elevations. No one else seems to have discovered these hidden stashes of nice powder. This reminds me so much of the markets, when even in less than optimal conditions, there are hidden stashes of unridden goods. It takes understanding of the underlying processes that create and destroy snow, the equipment and will to get there, and the ability to ride those conditions. Its surprising in such a huge mountain range that only in such limited conditions would there exist such fine skiing. The last day, new wet snow came and turned everything into the famous Sierra cement.

Laurel Kenner writes:

I took Aubrey to our favorite ski place, Telluride, a couple of weeks ago. A drought was on and the mountain was brown, but the resort's snow-making machines had been at work since November and most runs were open. A few patches of grass were visible in some popular places — enough to send a skier head over heels in the old days. The new equipment was somehow able to ride it out, although caution was still warranted. That strikes me as like the market; if you're well-equipped enough with margin and numbers to ride out the rough patches, you can still do well in adverse conditions.

Steve Ellison writes: 

I ski 10-15 times per year and encounter a wide variety of conditions. Light is an important factor. An overcast sky causes what skiers call "flat light". I slow down in flat light because the lack of shadows makes it hard to spot irregularities on the surface until one is nearly upon them. Dense fog is even worse. I have been in fogs in which I could not see the trees on either side and momentarily lost track of which way was down.

I like fresh snow, but there can be too much of a good thing. One day right after a 2-foot snowstorm, I started down my first run and fell on the very first turn when my outer ski caught some snow. I pushed off my hand to get up, but my arm sank into the snow all the way to my shoulder. It took a few minutes of wiggling and maneuvering to get back on my feet.

Wind is another factor. The Sierras sometimes have very high winds, which blow loose snow off exposed areas. The result is alternating ice and soft powder (in the spots in which blown snow settles). Going too fast at the transition point can result in a fall. On one traverse I often ski, I use moderate wind to my advantage by letting the wind slow me down as I ski into it with no effort on my part.

Duncan Coker writes: 

When backcountry skiing which Mr. Sogi describes another key element is the approach. There are no lifts, so you hike uphill for every turn you will make downhill. It can be exhausting, but also very rewarding and you get to know the terrain including snow pack, the location of rocks, couloirs, tree wells, cliffs and the grade. After enjoying the view at the top you can descend focusing mainly on execution, making some nice turns. Skiing the steeper, untouched terrain has more dangers but is more rewarding.

I love the surfing analogy of "never taking the first wave" alluding to the dangers of being tempted by the first big wave in a set, after a lull. In skiing there are times when it is better to take pass on a run as well. Condition may appear good, but dangers are still there. Ultimately though we all have to "drop in" at some point for whatever activity we are pursuing, and taking some risk is certainly worth it.

Jan

28

Here is a great article mentioning the disturbing act of betting money on a WWE match. How much vig are you really paying? Seriously, this one is truly over the top and is indicative of the degeneracy of the masses. If the financials are to be believed, there are a lot of people out there hooked on professional wrestling, and are big fans. While it uses athletic moves, requires conditioning and coordination….plus a high tolerance for pain, professional wrestling is still just Greek theater. I'm not going to ever bet on a WWE event any more than I will bet the South will win the time my wife makes me watch "Gone With the Wind" on Netflix. The vig is just too high.

Jan

25

We used to sing variants of this song at different times on the floor
depending on the conditions of the market and/or our level of boredom:

(To the tune of Camptown Races)

Puts and calls will break your balls, doo dah, doo dah
Puts and calls will bust your balls oh doo dah dey
Sell a naked call,
Sell a naked put,
Ground up balls is what you'll get, oh doo dah dey.

Puts and calls are highly rigged, doo dah, doo dah
Puts and calls have a lot of vig, oh doo dah dey
Time decay aside, straddles all the way,
Options will really rip your balls, oh doo dah dey.

Strangles and straddles will choke you dead, doo dah, doo dah
and strangles and straddles will smash your head, oh doo dah dey,'
Sell a put today, die another day
the only one who does OK, is the guy saying you made a good trade today.

Black Scholes was the holy grail, doo dah, doo da
Black Scholes is is the sucker's game, oh doo dah dey
Sell a call at night.
Buy a put at day,
Whatever you do, it will sure be wrong, so oh doo dah dey.

Options are a suckers game doo dah, doo dah,
Options take your money away, oh doo dah dey,
But your balls at night,
Bust your balls at day,
The premiums you pay, make someone;s day, oh doo dah dey.

Now today you will fail big time, doo dah, doo dah
Listen to the touts, they will lead you astray. Oh doo dah dey
But since it's only money, and you;ll soon be so broke
just sing this song and get along as you and the money will soon part ways.

Jan

24

If cheapskating is going to increase, we might consider whether individual stocks that cater to cheap skates might have inordinate returns. This is the kind of things that my kids might make money with in terms of the category of stock, rather than its financial characteristics. Perhaps. On another front, I believe it is important to be especially cheap after having a good year. I think of Rimm every day with grave loathsomeness.

Art Cooper writes:

It's been a market theme for quite some time to buy stocks like Family Dollar Stores, Dollar General, etc. instead of retail stocks which cater to the middle class. The high-end retail market is a different market, as it responds to different forces. 

Jeff Watson writes:

I'm always accused of being a cheap person and try to not be penny wise and pound foolish. I never pay retail for anything and try to buy only stuff that will hold value. Herb Cohen is a person I look up to. He might look a little seedy, but he makes great sense and teaches sound methods of bargaining. His first $19.95 book I ever bought was probably the best investment I ever made, saving at least a million bucks, by bargaining with some of his techniques over a 30 year period. That's a hell of a return and his techniques work…

Pitt T. Maner III writes: 

Cheapskating is likely to be an increasingly popular topic as hidden inflation and taxes go up. Perhaps there is an opportunity for a "Global Skinflint"!

"Jeff Yeager, dubbed "The Ultimate Cheapskate" by Matt Lauer on NBC's Today show, is a very cheap guy. He re-cants, as opposed to decants, the wine he proudly serves his dinner guests, funneling cheap box wine into premium-label bottles. He believes you should never spend more than USD 1 per pound on food items. And to save time and energy costs, he soft-boils his morning eggs along with the dirty dishes in the dishwasher."

And then there is the TLC show :

"Be aware of what you're using. Victoria Hunt, who retired from her accounting career at 48 has been tracking her expenses and her income on a spreadsheet since 1989. "Every minute of every day has something to do with how I can make a better decisions financially," she points out."

Rocky Humbert writes: 

Mr. Yeager is either wasting money on his super-heated dishwasher or he's stretching the truth about his eggs. Dishwashers (generally) do not heat the water about 140 degrees. See this article on naturalhandyman. To get the egg white solid, it requires about 180 degrees. Even my Miele doesn't get the water to 180 degrees! This does not compute! (That is, he's making his money selling books. Not cooking eggs.) I would suggest that he should instead put his Pop Tarts and morning sausage on his car engine's manifold. By the time he gets to work, he'll have a well-cooked breakfast. (And he can similarly roast hot dogs on his drive home.)

Dr. Johnson writes: 

Ballyhoo? Like any good Spec, one must test, and test I did, the claim that an egg can be cooked in a dishwasher during a normal wash/dry cycle.

Equipment- Miele G5775.

Note: Perhaps not the ideal brand for testing a cheapskate's assertion.

Eggs= Phil's Fresh Farms Free Range Large 42F wrapped in plastic film.

Max Water Temperature Wash5F Max Air Temperature Dry= 185F

Time to complete cycles= 54 min wash & rinse, Dry 22 min.

Results: Egg removed immediately at end of the cycles= Yolk 134F thick and slightly flowing, settles to 1/4 height, white 151F at shell boundary with firm consistency.

Egg removed after 10 Min.= Yolk 141F thick and settles to 1/2 height, white 141F at shell boundary with firm consistency.

Conclusion: Not Ballyhoo! One important consideration for those cheapskates who want to try this method is that egg shells are semipermeable, therefore unless the taste of detergent combined with a menagerie of old food waste is to your liking, sealing the egg in plastic wrap is advisable (also which at +140 F will transmit unwanted substances).

David Hillman writes: 

Yes, let us commend Dr. Johnson both on his testing and on his using Phil's Farm Fresh Free Range eggs, the chicken egg of preference at Casa DGH…..cage-free, no chemicals, natural whole grain feed, laid in nests, and certified humane!

That said, even though my Bosch heats water to 160F and air dries at what seems to be 1200K if one opens the door during the 'sanitize' cycle and is met by a blast of superheated air, this whole business of cooking eggs in a dishwasher seems a bit impractical.

One, it seems like using a sledgehammer to place a pushpin in a cork board. Two, while the dishwasher here is run every 2-3 days, typically in the evening, eggs are a daily breakfast staple. What to do on 'accumulation' days? Three, counting time to heat water or a pan, it takes about 10 minutes to fry, poach, baste, scramble or soft boil eggs on the range. Why wait 76 minutes? Four, dishwasher cooking uses a heck of a lot of water and electricity v. range top cooking, multitasking notwithstanding.

For those who feel the need to multitask in the kitchen, there are what seem to be more practical alternatives to cooking one's breakfast eggs in the dishwasher, though at $90, this might not be thought of as 'cheapskating' …..

Pitt T. Maner III adds:

A few older links, but possibly of interest to those seeking to find ways to ride the money-saving trend and as a possible example of a company that finds quickly (identifying trends) and uses new inventions from private inventors. Khubani the CEO started with ad in National Enquirer.:

1) From 2010: 'A.J. Khubani, the man behind many “As Seen on TV” gadgets such as the PedEgg foot scraper, is making cheapskate gimmicks a priority at his company Telebrands, one of the nation’s top direct-response TV marketing companies.

More than half of Telebrands’ gadgets, sold online and at 90,000 stores, are now focused on helping shoppers be cheap. Khubani, who has been traveling around the country to meet inventors, is speeding up the number of new products he’s launching to every 30 days from every 60 days. “The mood of the country has changed,” said Khubani. “We’ve had tremendous opportunity with this recession.”'

Since 2007, Telebrands’ revenue has doubled to several hundred million dollars, he said.

Read more.

2) The current lineup of brands.

3) From 2012: "For the first time in our company's 29 year history, TeleBrands had 15 products ranked in a single year including our most recent hits like, Slice-O-Matic, Plaque Blast, Slim Away, OrGreenic and Bake Pops," said TeleBrands' CEO/Founder, AJ Khubani. "Each year, we continue to solidify our spot as the largest and most successful marketer of DRTV products aimed at solving everyday problems and reaching mass audiences at affordable prices. In 2011 alone, we rolled-out 12 products — the most in a single year in our company's history."

Read more.

4) On Khubani from 2011:

"The son of Indian immigrants, Khubani started out at 23, spending a few thousand dollars on an ad inNational Enquirer — a move that led to his first big hit. Since then, he's sold hundreds of millions of "As Seen on TV" products, including AmberVision sunglasses, the PedEgg and Doggy Steps. He has bolstered the careers of ubiquitous TV pitchmen, including the late Billy Mays, who enthusiastically hawked products now found on the shelves of more than 100,000 retailers. Today, Khubani is the leader in the $20 billion direct consumer marketing industry, turning out more "low-tech" products than ever before."

read more.

5) Not all have been appreciative of Khubani's methods:

"But will anyone care about dust mites? Khubani wasn’t achieving much traction among his Telebrands staff with his bed-spray idea, when along came a proposal for an anti-dust-mite pillow, from a colleague Khubani mysteriously describes only as “a business associate.” It’s hardly a new concept—there are several such pillows already marketed to allergy sufferers and asthmatics. But so far, nobody has had the brilliance to incite a national panic around flesh-eating creatures that feast on human remains—and lurk in the pillow of every man, woman, and child. “The hum you sometimes hear at night?” Khubani asks eerily. “That’s the sound of 2 million dust mites eating your dead skin.” Or perhaps it’s the sound of one man in Fairfield, New Jersey, homing in on your next anxiety. "

Read more. 

Victor Niederhoffer adds: 

Of course the main virtue about cheapskating is that it prepares you for such activities in your business. As the oil magnate said, "I am not smart enough to act one way in my personal life and another in my business. My margin is 8%, and if I gave away 8% on everything my 200,000 employees would be out of a job. So I make them pay for their telephone calls." Regrettably, the oil magnate was victimized by old man's disease (the same disease as the sage), and he was locked up in England for 20 years, with his retinue preventing him from going back to us for fear that he might change his will, and he was soporifisized by many nubile girls and other attractive women he would meet at museums. 

Funny. More important even then the fine posts with examples and tests of cheapskating is the query I have received from many of the younger hearted on the list. "Where are those museums that the oil magnate frequented?".

Gary Rogan suggests:

I suspect the Getty museum is a good place to start.

Stefan Jovanovich writes:

I hope Gary means the original one in Malibu, the villa whose design Getty himself supervised but never saw. The monstrosity built on top of the landfill by the 405 is absolutely the worst place in LA for the amusements Getty had in mind. If he were alive today and living in SoCal, he would be going to OCMA to appraise the latest generation of lovelies.

Jim Sogi adds:

Eggs can be cooked sous vide at 144 -155 for 20 plus minutes for a wonderfully cooked smooth soft boiled egg with a consistent texture throughout.

Food grade hydrogen peroxide diluted to a 3% solution is an excellent way to sanitize kitchen and utensils and not toxic like chlorine. 

Jan

21

I've watched a fair bit of the Aussie tennis open in week one, and it is amazing to watch the amount of drop shots that are getting played, with the net effect of approximately 30 played and 3 winning points against player 27 in the matches I've watched. Not good odds, some may say.

Is it that players are tired? And going for the easy out, or some 3 dimensional hiccup in the brain, which makes them think that it's a percentage play, with the opponent right down the far end of the court, even if it is rebound ace. Do they just want to mix up their game, knowing they will lose this point but provide unsurety in their opponent for the following points? Or is the RIO trade alive and well, i.e they just can't help themselves to go for the "get out of jail free" shot.

I'm not sure… I wish I knew the answer.

It seems unforced errors is possibly the most major stat to take interest in, along with 1st serve percentage. Winning, doesn't mean a great deal, if one has the same unforced errors, and in this day and age one needs a 70%+ 1st serve in, to give them some space.

If one doesn't following their trading plan suitably and manage risk appropriately, then winning a slam becomes a distant thought.

Victor Niederhoffer writes: 

The same thing about the drop shot being non-percentage could be said about the lob. Both become even more non-percentage as the game wears on. It's almost as bad as trying to take a few ticks out of them near the close of a market. The mouse with one hole is quickly taken. The one thing that could be said is that the weak players don't have coaches who count. And the hard surface makes drop shots even less effective than usual. But of course, it does tire the opponent out, and set him up for when you need a point. And of course it is like the penguins jumping into the whale first in social learning, as the one shot that you hit with non-percentage makes the vast majority of your " colleagues" , the subsequent shots, that much more effective.

Jim Lackey writes: 

One that knows nothing about racquets, sees something similar in dirt bikes. We take the extreme inside line in a tight corner vs. the outside berm rim shot, it's much faster. It's about the line or exit of the corner. If you dive bomb on the inside you can cut off the exit of your opponent. This forces him to either take an inside line or a tighter line on the outside, thus slowing him down.

The wear out your opponent is a funny thing. Everyone that does count knows every single move and limit of the other riders… If towards the end of a race I know a guy gets "arm pump", which is literally your forearms swell up and it's hard to hand on the bikes, we use or force those boys to inside. One needs to stand on the brakes very hard to take the inside line. When you have arm pump it's very difficult to let go of throttle and put a couple fingers on the front brake to slam on. I'll put it another way… like tennis looks, it seems much easier to stand back in one box and hit it as hard as you can when you're exhausted vs. running around and using your touch. Same with MX. It's so much easier to stand on the gas and take the outside and go as fast as you can vs modulate.

I am doing BMX now here, it's a short 400 meter spring and to pedal. It's similar but a different training sport, but the counting goes on. I made a comment off the cuff to a 14 year old expert about changing a gear ratio 0.1-T or we use decimal gearing since it's single speed bikes. IT pinch ratio you can have the same gear ratio in a chart book. IE 41-18 X 24" circumference tire. At the big races towards end of day I would lose power. So I'd go down to a 40.9-t custom gear. It's still a 41T sprocket but the circumference of the gear is small, so it's a lower ration shorter roll out IE I crank revolution 2.277 vs. a 2.72222. t changes it just a tick and its enough to help.

Our friend, an MIT grad and racer, picked up on our questions to why the same gears felt a tick different on other bikes and he'd always say, "it's not same ratio," it's tire diameter or pinch in gear brands. So he invented a new business. Guys ask me if it works and I burst out laughing. I been doing that for 30 years. (Yet dad didn't have CNC machine so we have to mess with combinations IE got from 41-18 to 36-16 but we measured and charted ever, single combination on every race every track every time.)

Bottom line for MX, BMX, or any other sport. I never ran a 4.5 40' and can't run under a 22 minute 5k so I was always stuck in the middle and never a great athlete. The only reason I ever won a national event racing was counting, everything. Yet in baseball or the A pro level of all racing… "everyone does that".

Anatoly Veltman writes: 

Drop shots are akin to those who try to "provide liquidity" against an Elliott Wave impulse (offering against the third wave, or early on against the fifth).

Jeff Watson writes: 

 Just exactly what is an Elliott wave???? Has anyone ever seen one, or do they only exist in hindsight?
 

Jan

20

Eccentricity/degree of crazy is class based. If you are rich and like to chase dogs down the street while naked, you're considered to be eccentric, but if you are poor and do the same thing, you're crazy.

Gary Rogan writes: 

Eccentricity at the top is also somewhat cyclical as people often want the opposite characteristics to the last package that didn't work or simply became boring. You could argue that Hollande is far less eccentric than Sarkozy, that Putin, Yeltzin, and Gorbachev were/are significantly more eccentric than anyone between Khrushchev and them, and that the highly non-eccentric Bush Sr. led to a string of Presidents that were each differently eccentric, to coin a concept, with the last one being more non-orthodox in a number of parameters than eccentric.

That same principle works on Wall St. It's seems highly predictable (in retrospect, of course) that the dot com crash would result in a reversion to the mean in the investment bankers' wardrobes. Animal spirits that clearly go back and forth between extremes work the same way, as revulsion with past failures is probably one of the strongest forces in investment trends. The Depression and the subdued consumer spending in the US lead to the consumerist paradise which itself reversed to a kind of malaise, with a few more minor cycles that followed.

Eccentricity is in many ways like the periods of fast mutation in evolution, which themselves tend to revert to the mean. And speaking of Churchill the reversal he suffered after being thrown out of office after the war had a profound influence on him, and likely his health and was used as an example of being extremely powerful and then suddenly not, and the effects of such changes, in the book I'm currently reading. Nothing is forever, and I'm sure eccentricity will return to the British political scene in due time.

Richard Owen writes: 

Winston Churchill would sit starkers in his bathtub and dispense to his secretary notes and instructions for the Great Offices of State. Soak complete, he would towel off, don a Chinese floral silk dressing gown with matching fez hat and take bedside visits from his Cabinet. Part of the game was to leave the odd setting and peculiar garb unmentioned. Out for duty, he would don a custom made Siren Suit - a glorified boiler suit - and set forth to whichever geopolitical circus he had budgeted his day to. Sartorial fruitiness featured throughout.

What does one look for in a great leader, thinker or doer? An ability to act independently? Think differently? To consider the facts of the matter and take provocative, even painful action?

Siegmund Warburg - perhaps the only individual in the modern era to create a full service European investment bank from scratch and entirely within his own lifetime - upon his death bequeathed a large library of fine literature and other books. Within sat a unique folio of pornography, surgically extracted, before handing over to St. Paul's School for Girls for posterity. Some of Siegmund's business rules included: good manners; consideration of others, particularly juniors; ignore the fashionable; non-conformism as a right, not a duty. This does not feel familiar in today's Wall Street.

To be branded an eccentric these days can be terminal. Particularly in the American paradigm. Instead of independence, determination, or contrary thinking, it is a signal of unreliability and cause for suspicion Some of the driving factors are positive: the British eccentric has class-based roots. The public schoolboy, assured his place in the firmament, could afford to transport his playground hijinks into the world of work. Just as investment bankers re-donned their suits after the dotcom crash, so did the pressures of openness and assessment mute some of the rakish public school excess. But a paradigm can swing too far.

Who do we have leading the Labour left in the UK? Mr. Edward Miliband, an impressive man whipped into a strait jacket of conformity. He arrived by Faustian deal with the trade unions; everything he utters is calculated for short term gain. Even the passion moments - the big conference set-piece speeches - feel badly scripted with an insipid instinct for popular policy.

The batty leaked clip of Miliband repeating the exact same soundbite answer to every question thrown his way at a media scrum - whether it made an iota of sense or not - gave the impression of a malfunctioning replicant whose circuitry had badly fused. The semi-autistic response mechanism was a guerrilla tactic to cope with today's minefield 24-hour news loop.

The irony is that Miliband's constituency - the unions - have backed a man who's supposed state educated, humble upbringing, disguises a militant intellectual father, likely private tuition, and all the other bells and whistles of hidden cultural advantage. The socialistic Labour left's distaste for the British grammar school has hamstrung a generation of intelligent working class and closed off their main vein of progress to the upper-echelons. Eccentric this is not.

And the Conservative coalition? Headed by David Cameron, every inch the PR man. A better looking, more charming and affable version of Miliband? Perhaps. But we need not repeat the basic assessment - they are both ultra-Blairs. But without the Blairite flair within.

Blair himself was most definitely an eccentric. He was willing to throw his whole reputation onto the pyre for a self-styled humanitarian war in Iraq. You can assess the merits, but at least it showed spine. Blair was so effective that he construed the ensuing hate into three back-to-back election victories.

Blair, however, left a messy intellectual endowment: the idea that, today, politics doesn't matter and one just acts as intelligent administrator. And just at the very turning point where hard choices, real budgeting, became essential.

What isn't obvious from the public record is that underneath the "call me Tony" demeanour was a burning intellect. A man who insisted on rising early to pen his own speeches. An intentionality. His followers have adopted the outer shell, but are missing the flavoursome crab meat inside.

When discussing interesting investment outcomes on Wall Street, we refer to eccentric or non-systematic returns. Bespectacled, absent minded Leon Levy could thread profitable eccentricity back-to-back. Just don't ask him which subway stop he meant to get off at, next year's EPS to one decimal, or the date of his anniversary.

Wall Street now wants conformism pretending to be eccentricity. Actuaries demand excess return without deviating from the crowd. And yet we're surprised at the aggressive behaviour created.

Ace Greenberg, penning Chairman's memos to his staff would channel the advice of Haimchinkel Malintz Anaynikal, an imaginary and often hilarious business philosopher; a figment of Ace's minds eye. If Jamie Dimon tried that today, he would be carted off the premises and branded a loon. Perhaps private partnership allowed better for private eccentricities. But something deeper, more cultural, is at work.

 To quote British banker John Studzinski: "after the dotcom crash, investment bankers were put through the meat grinder and came out robots." Warburg was so listened to by clients because he actually had something useful to say. His eclectic, eccentric outlook gave him a differentiated, potent opinion. Instead today's bankers collect endless, vapid powerpoint slides rather than bequeathable collections of fine literature. And they have opinions to match. Produce views and analysis like clockwork. But Warburg knew that producing was for the farmyard and generated opinions like manure. Quoth Siegmund: "One general reservation which I feel about some of the US investment banking houses is that they put too much emphasis on measuring, almost from month to month, what a specific partner produces. I don't even like the way they pronounce the word - not produce, but 'prodooce'. All this emphasis on producing - that is all right for a cow, but not for a human being."

Keynes, the great economist, trader, bon vivant, and political adviser was as likely to be found of an evening cottaging with the local bishop as penning a treatise on the National Product. Disraeli, a spectacular Prime Minister, was also a former bankrupt, mining entrepreneur and spiv. Try shoehorning such vitae into a political career today.

What do we have instead in British national life? Andrew Mitchell and the Plebgate inquiry, staffed by thirty full-time police offers, all straining to determine whether a politician muttered the word "pleb" to himself when heading past some cops at Westminster's gates. It's not so much fiddling whilst Rome burns as actively brainstorming more and better fuel supply lines.

Thatcher, every bit the eccentric, would have known what to do. Colleagues stung in the press by petty scandal would be grabbed by the arm and marched through Westminster's lobby. A show of support from the top; a smothering of the flame before it became entrenched in the press.

Straight-laced individuals, politicians, businessmen, forget their independence, their room for originality. Horrific, black swan events demand attention; perhaps a gun review is sensible post Sandy Hook. But don't forget the didactic nature of the Oval; exactly how FDR sucked billions of deposits back into the banks, or a gamely Reagan re-invigorated a whole nation. The lowest cost, highest impact fix would surely be a fireside chat on the benefits of sitting down for dinner daily with the family; taking an interest in your children.

On complex issues, one can't clear one's throat. The free-thinking intellect and the prejudiced have an intersection: the former will at least try on the latter's opinion to see how it fits. But don't dare be caught by the media as such.

Even the thesaurus is gripped by the modern will - it serves up for eccentric: aberrant, abnormal, flaky, crazy. Perhaps all those things. But also: essential.
 

Jan

15

New Years eve brought the biggest best waves of the year to Kona. In the morning it was triple over head, clear blue sky, perfect shape, completely glass on the water without a breath of wind, and only a handful of friends out. It doesn't get any better. That afternoon the waves got even bigger. Just before I went out a huge wave cleaned out the entire line up and washed people on to the rocks. They got out with white faces and minor injuries. I had a perfect day where I did not fall once, did not get caught inside and caught each wave perfectly and rode it to the end. All in all a very rare day, one to remember for a lifetime.

Lack recently wrote about not making any errors. My son used to play Mortal Kombat video game as a kid and when he beat the opponent without suffering a single injury it was a perfect fight. It's the kind of day when you enter perfectly at the bottom tick and your bid is taken in size, and it immediately starts up, you ride it all the way and exit right at the top. For some reason it's not the kind of thing you can do at will, nor does it happen all the time. I had been training so felt strong, and there had been waves for the prior two weeks. Mentally I felt good. I wish I knew the secret to achieving such good results with more consistency.

Jeff Watson comments:

The key sentences, "I had been training, so felt strong, and there had been waves for the prior two weeks. Mentally I felt good. I wish I knew the secret to achieving such good results with more consistency."

Well played Sogi San. And you answered your own question.

Meanwhile our waves have been thigh to waist high and the SUP has been getting the workout, not my 9'6" or fish or any other board in between. It's really a drag living on the pond of the Gulf of Mexico.

Craig Mee writes:

Sounds great Jim, good job indeed.

Having a consistent plan before you paddled out, and it seems conditions were relatively steady, probably allowed for a strong take off with commitment each time. Finally, as you felt comfortable, you were probably more likely to squeeze each wave for everything it was worth. Your day, your market, your result– excellent.

Jan

8

On the corporate morality thread, I can offer some experience of the company I first worked for, a large manufacturing business. The number one priority ahead of profits, customer service, quality or value was safety for the employees. We will not injure our employees, and there was zero tolerance on this issue. The quickest way for a manager to lose his job was lax safety practices. And in fact some of the work around machinery was dangerous. Every meeting started and ended with reports and progress on safety. It is the morally right thing and does not conflict with good business. Safety at work or anywhere else is fundamental. Secondly, this focus attracted a culture of employees who cared not just about safety but about the other things that make a business successful, productivity, investment in new ideas, costumers and creating value. I would predict that companies with good safety records internally have equally good performance externally for customers and shareholders, and the opposite.

Jeff Watson writes:

My grandfather had another indicator of the condition of a company. Drive by the place and look at the parking lot. If it's full of older cars, junky cars, it's probably not a good place to work for and probably is a poor credit risk. On the other hand, if a parking lot is full of shiny new cars, it's probably a better place to work and probably has better financials and business.

David Lilienfeld writes:

I don't doubt the morality in corporate behavior. In the pharmaceutical industry there is lots of concern about patient safety. There are two schools of thought about why: The first is that the companies are enlightened and accept George Merck's "Do well by the patient, and you will do well by the society." The second is "A dead patient doesn't buy drugs."

My observation is that while the industry has a sincere interest in patient safety, it can also deceivingly discounts that safety in preference to efficacy, which is perceived to be the reason drugs gets approved. I don't think this is a conscious effort at deceit. That doesn't make it any less real. Many of the leading pharma houses have come to accept that and have tried to design in fail safe safety mechanisms into the approval process. It will take another 4-5 years to see if they are having their intended effects.

Jan

7

The miserable performance of the text book company in all areas including the nook, and sales of books, and stock price, would seem to raise the question of whether a company that has declining sales might be worse situated to provide customer satisfaction than the companies with increasing sales and profits. Thus a positive feedback loop of sales, profits, and customer satisfaction develops. It would be interesting to look at customer satisfaction as an indicator of future stock performance.

Jeff Watson writes: 

In Florida, there are two main grocers, Publix and Wal-Mart. (Winn Dixie, Whole Foods, and Sweetbay are minor players). Publix charges higher prices, but offers better quality, good variety, better service, quick checkout, better trained employees, an enforced dress code, employees that smile, and bright, cleaner stores. Wal-Mart offers rock bottom pricing, surly employees, poor quality, and long waits at the register.

Here is a chart of Publix's 5 year performance (private yet employee owned).

Here is Wal-Mart's 5 year performance.

Maybe customer satisfaction in the grocery industry isn't reflected in the stock prices, but these are just two samples and Wal-Mart does a lot more than groceries.. My friends at Publix tell me it is an excellent place to work and they regularly receive bonuses every quarter while at Wal-Mart, the full timers are lucky because they might get 32 hours a week. 

Jan

7

One recently waited 15 minutes after making a big purchase at Barnes and Nobles while they held me up because the computer went down and they couldn't take cash, exact payment, credit card. At the end, they sardonically told me that if I had a complaint about the wasted time, effort and treatment, I should talk to their manager. On the other side, I read in John Mackey's new book Conscious Capitalism about how when a hurricane hit a Whole Foods in Conn, the computer broke and a lower level operative without any feedback from headquarters gave everyone in the store free goods for the 1 1/2 hour that the computer was down. They got millions of good will and publicity as an unintended consequence. A study in the book shows that companies that cater to the customer, and employees and suppliers as well as the stockholders have better performance than the average. Panera and The Container Store are examples. I wonder whether this is a real effect and whether these companies will perform better or worse—- and the former will never get my business again and the latter will. What's your experience and view.

Vince Fulco writes:

My wife works in the textile area of Target, I have tried to look at its operations with a jaundiced eye as a financial analyst would. I've always felt welcomed and well treated there without their knowing we were an employee family.

anonymous writes: 

I bumped into a colleague at Costco today who quizzed me about the recent tax changes. Not sure why he thought I would know, but after 5 minutes of listing the various relevant increases I asked, "Do you have time for more of these?" "Not really", he said, adding "You've already depressed me enough". "What are we going to do, raise fees?" he asked.

In the wake of recession we have not raised fees, and in many cases lowered them. It is better to stay busy and build good-will when people need it, and raise later when discretionary demand increases.

Increased taxes ordinarily reduce demand. But for businesses with existing demand, they are inflationary.

Maybe the FED gets what it wants (inflation preferable to deflation), and the agrarian organizers do too.

Rocky Humbert adds:

The chair asks a very important question; and the implications transcend business. With the caveat that I'm rather better at asking difficult questions (than answering them), I'd pose the question this way:

1. To what extent do people and organizations act in their self-interest?

2. If (1) is 100%, then any act of altruism MUST BE motivated by either reciprocal altruism or goodwill. If (1) is less than 100%, then any attempt to answer (1) is hopelessly complicated using a rational/analytical framework. And I won't go there since it's a moral argument.

3. A paradox arises because except for reciprocal altruism (i.e. keeping your counterparty in business so he can buy your goods and continue to service your needs), there is a irrationality that occurs for any action which isn't in one's self interest (for both the seller and the buyer) For example, if the customer is rational and self-interested, then ANY warm and fuzzy feelings towards a vendor are not rational if those warm and fuzzy feelings arise because of a historical and non repeating gesture (giving away goods during a power failure assuming that the goods wouldn't otherwise spoil.) However, in contrast, convenience IS rational and is part of the value proposition. That is, a vendor who doesn't make you wait in line when the cash register breaks has a superior product at the same price for SOME (not all) customers. And ceteris paribus, that should garner more business (for some, not all) customers *IF* he doesn't have to raise prices for a massive fault-tolerant computer system. If he has to raise prices for a massive fault tolerant computer system, then the customer who doesn't care about waiting in line won't shop there anymore. But the lone vendor who tries to gain a lasting competitive advantage by giving away milk and bread during a blackout will fail — since the goodwill generated by this will quickly fade and there's no lasting benefit to the customer.

Every economics question can be solved by recognizing that: 1) Incentives Matter. 2) Resources are limited. And … then it's simply a question of utility curves. BUT BUT BUT if there is a moral aspect to the question, then all of the rational analysis goes out the window. And that is, I think, what Whole Foods was trying to do.

Jeff Watson writes: 

Right before Hurricane Andrew hit South Dade County and went across the state to hit Naples and Collier County, Home Depot was giving away 4×8 sheets of plywood……just had truckload after truckload, bringing it in to offload it to anyone who wanted it for free to board up windows etc.

Their main competitor, Scotty's was gouging, and charging $40 per 4×8 sheets. In the aftermath of the storm, Home Depot kept their prices down while Scotty's jacked them up. Scotty's did the same thing after Hurricane Charley. Much editorial space was spent discussing this in the Miami Herald, El Nuevo Herald, Sun Sentinel etc. Scotty's reputation suffered greatly and eventually went out of business at the end of 2005.

There was lots of bad karma and my builder friends avoided Scotty's like the plague. Scotty's said they closed all their stores because of the hyper-competitive building supplies market…..this was when Florida had the biggest construction upswing in history. Again, real bad karma. Home Depot is still a viable corporation. Because of Scotty's actions(and that of others), Florida passed a non-gouging law in 1993 which Scotty's still ignored in 2004.

Steve Ellison writes:

In Predictably Irrational, Dan Ariely devotes a chapter to "social norms" (the friendly requests people make of one another) vs. "market norms" (you do x, I'll pay you y). People generally see social norms and personal relationships as being on a higher plane than mere market transactions. In one study cited by Professor Ariely, implementing fines for picking up children late at day care centers actually increased the frequency of late pickups. Before the fines, the parents felt bound by social norms and felt guilty for inconveniencing the day care providers if they were late. After the fines were implemented, a late pickup was reduced to a mere market transaction: I want to be late, and I am paying for extra service.

My guess is that companies such as Whole Foods that serve customers beyond the bounds of how customers expect a profit-seeking corporation to behave elevate themselves on the social vs. market scale and thereby gain much customer loyalty.

Russ Sears writes: 

People are cooperative beings, they want to feel they are in a partnership where one looks out for the other. While the individual is the driver of innovation and change, progress is made by the most connected in ideas. Arts, science and technology thrive is these highly cooperative environments such as the big cities. Ideas are one thing that the sum of the parts can become exponentially more.

If the business really is adding value, then they display it by highlighting cooperation with their customers. Because long term the good will makes them more resilient and able to grow.

Whereas if every transaction is a zero sum game, then the signal to the customer and investor is short term thinking. There is a tinge of buyer beware for the customer and an touch of desperation to next quarters results to the investor.

The entrepreneurs I know who are successful only do it because they love the business otherwise the risk the stress and the heartache are not worth the money or the effort.

I believe Jobs showed the world that at some point it is no longer is about the money, it is about making a difference, giving others what they want and of course "beating" your competitors. If you can do these 3 things well it is like having a blank check written by the world.
 

Gary Rogan adds:

Yes, that's another way of looking at the situation. But Jobs is Jobs, and regardless: when confronted with a situation where a person (or an entire business enterprise) who doesn't know you from Adam is particularly accommodating and friendly to you, you have to decide whether (a) that's just how they are (b) they are doing this to get repeat business as a calculated move (c) they are conning you (d) they saw you and really fell in love with you. The thing is, it could be any combination of these or something else. All I'm saying is that a "they are giving stuff away" or some equivalent to "therefore I will make them by business/partner of choice for a long time" isn't always the most rational thing to do. One really should only feel gratitude to people who are doing it for un-selfish reasons while recognizing that a good businessman will often behave "nicely" as opposed to being a jerk.

Clearly almost all expressions of "good will" and cooperative behavior by businesses are self-serving. The rare exceptions are of the nature of some owner or executive clearly touched by the misery of his customers and/or employees and doing something good for them just because. Cooperative, reliable, and resourceful businesses do add value by not wasting their customer's time and money and not aggravating them, so often everybody wins. Sill in many of these situations have to be analyzed carefully because you are typically not dealing with friends or relatives. Otherwise one can become a "victim" of deception, as someone who buys a company's product because its advertising agency made a particularly effective commercial that is often in no way related to the quality of the product. 

Jeff Rollert writes:

I'd like to share a story that happened this weekend.

A number of you know my hobby is racing sailboats. Well, I'm on a number of forums and they have members that range from the grouchy to super nice and helpful.

About six months ago, a fellow I'd never met or spoken to offered to lend me a sail to test an idea I had been struggling with. There was not a request on when to give it back; in fact it was open ended. After dealing day in and day out with the squids of our occupation, the offer seemed too nice. Something worth $200-$500? Just drive over to my house and you can have it. Really? This is Los Angeles!

Well, in a race this weekend we all got to talking about boats we had owned and one of the guys had the same as mine. We started to compare notes, forums, parts suppliers etc.

It turns out he was the guy who made the offer. I was ashamed at how genuine and nice a guy he was, and what I had suspected.

I only bring this up as a probability point…no matter how pissed you can get at humanity, the percentage of genuinely nice folks is always above zero. I'd forgotten that lesson.

You guys often remind me of that lesson too!
 

Jan

7

How many market lessons can you find in this article? Fantastic article.

"A Pickpocket's Tale: The Spectacular Thefts of Apollo Robbins " by Adam Green

Michael Ott adds: 

Here's a link to the video that accompanies the piece.  You can see him in action and it's fantastic.

Dec

30

Does anyone believe there is a contagion in things like mass shootings, and pushing people onto the tracks in subways, and that it has to do with the Qe's, the tarps, and the singling out of the successful for "takings" by the remaining 99%? I do.

Jeff Watson writes: 

It's just a permutation of the old "madness of crowds" meme.

David Lilienfeld writes: 

There are a few papers published in the New England Journal of Medicine and some other venues over the course of the last decade that illustrate social contagion for behaviors such as obesity, smoking, and so on. I don't know that there's been any efforts, though, for less frequent behaviors.

Dec

11

I have a question for Jeff Watson and Jim Sogi, our two surfing experts. Do you think Kelly Slater been able to dominate surfing for the last decade plus partly due to the conditions in surfing being so variable…so nobody gets "set" ? Not to diminish his obvious ability to take new younger opponents and their fresh techniques apart piece by piece…

I am reminded of this article I recently read from the world of cricket… Michael Vaughan (England) was commenting on when Sachin (India) (arguably, or maybe not, the second best ever batsmen in the world) should retire:

"Sachin could still eke out a few runs for another 12 months but he is not batting at the levels he used to. Look at the way he was out in the second innings in Kolkata. It was a good ball from Graeme Swann but he was just prodding at it.

He got 76 in the first innings but the man at the crease was not the Sachin Tendulkar I know. He was not playing the free-flowing way we have loved down the years. He is having to think and really work out where he can score every single run but in the past it came naturally."

… once you have a solid start, the middle order feels more comfortable and is coming in with the game already set up."
 

Jeff Watson replies: 

Slater is smart, is a complete waterman, and a great competitor who knows how to win. Pro surfing contests are a game, and Slater plays it better than anyone. That being said, he is an animal, a freak of nature, a surfer like one has ever seen before (and we might never see one like him again). Slater is arguably the best surfer in any and all conditions, from the slop in New Jersey to big gnarly Teahupoo in Tahiti. Slater has that uncanny ability to predict what the wave is going to do just like the best chess grandmasters are able to look 10 moves into the future.

I don't know of any other athlete in any other sport that has dominated like Kelly and been the best in the world with a 22 year run. It simply has never happened before, so there's no data to compare it too. Furthermore, whenever the naysayers say Slater has lost his mojo, he wins another title…..and the naysayers have been saying this since 1996-1998……One could argue they thought he lost it in 1991 when he was on the TV series Baywatch, and was dating Pamela Anderson . And I think that was around 10 titles ago. 

Jim Sogi adds:

Kelly was the youngest world champ and is now the oldest. He is in phenomenal shape and has muscles on his muscles in his calves. He trains constantly and scientifically down to what he eats. He has a fierce and competitive attitude. The mental part is probably the biggest factor. Many younger guys have athletic ability or gifts, but the road around the world to the competitions is tough. Kelly cherry picks the contests to which he is seeded, so doesn't have to work his way up or qualify, saving him valuable mental and physical energy. He can travel with style. He loves what he does, and this is the most important thing.

Craig Mee says:

Thanks for your thoughts gentlemen. And now a few words from Slater himself while at this years concluding event where a few points separated Slater and another world championship):

"Slater played guitar and sang at a concert at the Turtle Bay Resort while the event went on hold this week. Golf has been high on the agenda. The stress does not appear to be killing him.

'We've had enough time to think about it,' he said.

'We're trying to put it out of our heads as much as possible because when you're out in the water, if you're thinking about a world title, it's taking away from what you need your mind to be on.

It's Pipe. You have to be on your toes. Which way are the waves going? Do you have to paddle deep? How's the lineup look? How far in on the reef are you? How big is this set going to be? Where's the guy you're surfing against?

'You have to be clear-minded enough to make good decisions every time there's a peak coming at you.

'There's enough to think about in the present moment without worrying too much about the bigger picture.'

Dec

10

Jeff's coin proposition bet illustrates a nice lesson for me when applied to trading. That is, even if probability is favorable, there can and will be streaks against. So, there needs sufficient N and staying power for probability to work in trading. So all the seasonal or studies that trade once or twice a year probably don't have a statistical edge.

The inverse lesson is that sometimes it is good not to trade when the probability is not in favorable, as in never take a proposition bet against a Florida surfer with a low handicap, (humor intended).

Jim Sogi writes: 

I read that in a sample of 10^10 binomial chances, there can be a run of a 1 million 1's.

The idea that in an infinite random time series every possibility will occur, such as the history of the earth, kind of worries me. There seem to be laws of nature, but are they? Will they change? Do they?

Ralph Vince writes:

James,

Yes, and it is man's innate ability to asses such probabilities (and hence, the fallacy of Huygens and Pascal — that risks should be assessed based on mathematical expectation) that is the most fascinating thing about the entire story of evolution (again, to me).

Why do you get on an airplane when it can crash? Why do you get in your car and go out to buy a quart of milk? We have evolved over eons to pursue often time-critical rewards on a risk-laden planet — it IS how we operate or we would be still cowering agoraphobically in the shadows of a primeval world. This notion fascinated me (and the reason I wrote a book on it in 2011), and the more I dove into it, the more I saw that the answer to it — i.e . the fundamental equations we posses innately for assessing risk, pertains to all other mathematical decision (game theory is rife with concepts that are tuned to the Huygens/Pascal model, not our innate model) and ought to be reassessed under the lens of our superior, realistic model (and yes, it is superior, or we would all be looking for termites to eat up in a tree some place.

Leo Jia writes: 

Ralph,

Your notion about man's innate ability to assess probabilities is fascinating to me. I hope to read your new book soon (I presume it is Risk-Opportunity Analysis.)

It is clearly phenomenal that the human species was able to advance over other species. It is not as clear though whether it was man's special innate ability that made man evolve or it was the evolution process that gave man the innate abilities. Regardless of whatever came first, I think many of man's innate abilities that exist today were largely fostered by the evolution process. While this was wonderful, it is perhaps also very discomforting to learn that many of our innate abilities were more meant for the environment of the wild, not really for the modern times as the modern couple hundred years is far too short in evolution terms. It begs the question of what of the very innate abilities are really useful and what are not. Whether we realize what abilities we have or not perhaps is not a big issue as we naturally use them in life. It does become more important for us to know what of our innate abilities are actually harmful to ourselves today.

Leo Jia adds: 

I did a test. It went like this:

1) toss a coin 10 times,
2) if there is 5 heads then add 1 to a record do the above 2 steps 1 million times.

The chance that in ten tosses one gets exactly 5 heads and 5 tails is 24.5539%. 

To be more comprehensive with the test results:

4 heads and 6 tails: 20.4194%

6 heads and 4 tails: 20.5125%

3 heads and 7 tails: 11.7019%

7 heads and 3 tails: 11.7010%

2 heads and 8 tails: 4.4018%

8 heads and 2 tails: 4.4145%

1 heads and 9 tails: 0.9783%

9 heads and 1 tails: 0.9830%

0 heads and 10 tails: 0.1004%

10 heads and 0 tails: 0.0968%

Easan Katir writes:

Thank you, gentlemen. This is good info to ponder and apply to trading. For my part, I found a shiny Lincoln-cent and spun it 10 times. Result: 7 heads.

Jeff Watson writes: 

But there is also another trick of spinning a coin very fast, get down to coin level on the table and observe carefully, and if you get a blurring image of tails, call tails…same thing if you see heads, call heads. Since the coin spins at a slight angle, the side that you can see the image will be what lands.

Ralph Vince adds: 

Gentlemen,

As far as coin tosses and trading — and this may be redundant information to many of you — to me, personally (in my sciatica and failing vision nowadays) I find the largest implication pertains to the nature of the equity curve and expectations, and the deceiving nature of randomness.

We know if we plot out the equity curve of consecutive coin tosses (with heads +1, and tails, -1, say) and we plot this out, we can then draw bands around the mean expected value (0 in this case) of standard deviations. Thus, we can draw a one standard deviation band above and below.

Such a band will be parabolic, like a parabola resting on its side, rightward-facing, opeining up as time or trades or plays go by. That is, the upper band will always be ever increasing albeit at an ever decreasing rate. Thus. to be ahead of the expectation by play number X to the tune of 1 standard deviation, is below being ahead of the expectation by play X+1 or X + N where N is any positive number.

Couple this now with the Second Arc Sine Law*, which pertains to such randomly-generated equity streams and tells us (the essence of The Second Arc Sine Law) that we would expect both the peak and nadir of equity stream to occur least likely towards the center (time-wise) and most likely near the start or finish of such a stream.

These two principles, take together, warn us that in a stream of randomly-generated outcomes (coin tosses, or trading if/when the outcomes occur with randomness) we should expect the rightmost endpoint to be at or near the very top (or bottom) of the entire equity run, deluding us into conclusions, "This works!" or "This fails," that have no basis in a causal existence, but are merely the artefacts of randomness.

*The First Arc Sine Law buttresses this further, this law being that we should expect the ratio of the cumulative equity line (comprised of X number of plays) least likely to be above the expectation X/2 number of times, and most likely to be above or below X or ) number of times — the same Arc Sine distribution as the Second Law. Thus, say, if I toss a coin ten times, it has an expectation of 0 (given the caveats mentioned in this thread!) and I would expect with highest probability that ten of those tosses see the cumulative equity line above (or below) the expectation line of 0 and with the least probability, see 50% of them above and below the expectation (0) line.

Nov

28

First consideration, have a customer who is willing to pay. If you have that, you have a business. Without that, you have an idea and not a business.

Second, be willing to amend your plan(s) in whatever fashion in order to accomodate what the customer is looking for.

Third, don't listen to anyone–naysayers, govt regulators or other douchebags– just go, do it.

Jeff Watson writes:

It might be advantageous to consider the possibility of finding a business near bankruptcy and doing a turn around. Failing businesses like pizza and bagel shops and others can often be bought turnkey for pennies on the dollar (the owner is selling equipment before the creditors can attach it), moved to a new location and turned around, or liquidated.

Plenty of people go into business without enough specific knowledge, capital, a business plan, proper help, quality product, or a realistic price list. They compound these mistakes by not watching their pennies, mismanaging inventory, having over optimistic, unrealistic expectations. They also might place too much trust in their employees and not notice what's going out the back door. Many don't realize that running a business is 24/7 and every small detail counts. I've seen small business owners who don't even know their raw material costs or how to figure a gross profit. I've also seen people go into business not knowing the size of the market which can be as deadly in a brick and mortar business as not knowing how much wheat is for sale at any given time.

A further note, speaking of gross profit, if I walk into a small business that is always disorganized, messy, poor sanitation, dirty windows, I would readily make a wager that the business also has a gross profit problem and probably much worse. I am always on the lookout for these types of opportunities, since being a silent partner in a properly managed turnaround situation can be very profitable. It's the ecology of the business world, just like in the markets…the strong eat the weak.

George Coyle asks:

Ralph,

Re: your 1st consideration, I assume you just mean end market demand for whatever it is you are selling. If entrepreneurs waited for the end market demand to cover costs I would imagine the majority of businesses that exist today wouldn't.

Ralph Vince writes: 

I mean before you go to sell or market something, find at least one person who tells you, "yes I will buy THAT at THAT price," and tell them you;ll be back with it tomorrow, or whenever. But make the sale, whether you are selling vats of mustard or something that has never been sold before. If you are going to consult — don't go into the consulting business, get a customer to pay you for something. Now you are a consultant. Do not go into business and wait for a sale
– that's doing it backwards.

Vince Fulco writes:

Ralph- the latest craze in the start up world of 20 year olds is developing a minimum viable product. MVP, which is the barest of bare bones app/site/product, gets customers to sign on and then one goes about building out the real infrastructure. Think of fake storefronts with no sides or back walls. Frankly, some of the truth stretching to get paying customers on board makes me conjure up carny barkers. Similar to the HF/FOF world, most experienced business people never, ever, ever want to be the 1st customer. How do you surmount that hurdle?

Vinh Tu writes:

Look at Kickstarter. there's no pretense, really: people are pretty upfront about the fact that they're at a stage where it's mostly a webpage, maybe a prototype or half-baked product. And in some cases people are still willing to kick in the cash. 

Vince Fulco adds: 

This is a good list for a quick and dirty website idea.

And throw in reveal.js for your funding/customer pitches.

 

Nov

20

There's a market lesson in this cartoon.  That lesson is that it is sometimes very dangerous or even fatal to believe in what everyone else around you believes. There are probably many more lessons here, but this one just jumped out at me.

T.K Marks writes:

On the perils of consensus, I recall standing uneasily in the silver pit one afternoon some years ago. The market had been probing new highs in recent weeks and on this day the entire ring had loaded up long going into the close. Visions of stop close-only buying dancing in our hopeful little heads.

But suddenly there was an eerie silence and a collective epiphany as it dawned upon us that we were all in the same boat.

At which point an inveterate misanthrope amongst us asked rhetorically of the pit, "When was the last time EVERYBODY was right???…"

His words had the same convulsive immediacy as James Baker's "Regrettably…", only this time it was said by a brawny Italian guy from Staten Island rather than a Brooks Bros. WASP from the State Department.

Seconds later the bell for the silver close rang and the bloodbath began. It's quite a spectacle to see 100 pit traders simultaneously try to dump longs for their own accounts, nary a bid to be found.

Been known to lead to some momentary inefficiencies.

As for the misanthrope whose mischief triggered the whole debacle, he was long too. But his value system valued mayhem as well as money and this was just too ripe an opportunity to pass up. You see he was a downside terrorist by nature — rarely met a collapse he didn't like or profit from — and on that occasion wanted once again to teach the wobbly longs a lesson.

Even if it cost him 20 grand.

Other than that little personality quirk he was a fairly upstanding guy. Generally stayed out of jail. Last I heard he was teaching a Lamaze class in one of the "tonier sections of Bensonhurst."
 

Nov

20

I know of at least 3 suicides from the action of the 2007 WZ/MWZ spread which bankrupted an entire class of grain speculator. I haven't heard of any suicides from the gold/platinum spread action the past 16 months.

Richard Owen writes:

Some funds will only short through long put options because of the non-zero probability of totally wiping equity with a margin balance. And simply reduce gross when vol / time value erosion is too costly (ie., just be long, albeit less long). Is this excessive prudence or sensible? I would argue that for some portion of assets at least, it is sensible. Large players can have a bankruptcy remote portion of their assets that will short and make margin.

Nov

19

I have often thought that the lyrics of Oscar Hammerstein contained tremendous deep truths of the human spirit, and I always encourage those new to the American song book to listen to Hammerstein rather than Sondheim. Here's how his nephew, eminent author of An Empire of Wealth, put it: "Like all artists whose work endures, Oscar Hammerstein used aspects of his own life to provide a window through which less-gifted people might see more deeply into the human soul and learn better what it is that makes us human". I believe the Hammerstein lyrics are good for market people and we listen to them every day here.

Jeff Watson writes: 

You're right about Hammerstein's lyrics 100%. I listen to Hammerstein once a week, maybe twice (usually a favorite from South Pacific). I play a wide variety of music here. It can be very pleasing to the ear as well to the soul to successfully fit the music to the tone of the market, and it's harder than it looks. A wine steward pairs wines with courses, a successful speculator pairs the markets with music. Sometimes it's Chopin, sometimes it's Tony Bennett, maybe The Brian Jonestown Massacre, could be Frank Zappa, Celtic music, Cajun waltzes, East Texas Swing, and on and on. The grains alone sing a greater variety and styles of songs than all the musicians and songwriters in the world combined. Admittedly, this speculator finds it very hard to match the music with the market, and when I can't get it right, nothing beats the Overture from William Tell or March of the Valkyries to wake things up. 

Nov

4

Should you find yourself in need of a kite for kite flying this weekend, I highly recommend a foil kite over traditional framed kites. A foil kite has a stitched honey comb design which inflates expanding the canvass to catch wind. They require no cross bars or frame. They are lighter, pack much smaller, require less wind to fly and can be stored in a backpack to be near when the kiting urge takes over. Premier is a good brand. Find a field, some wind, a small child, or child-like mood and enjoy the day.

Jeff Watson writes: 

I fly a lot of kites and use this purveyor Into the Wind. They have my good seal of housekeeping. 

Craig Mee adds:

The Tao of Kiteflying: the dynamics of the tethered flight by Harm van Veenmuch is quite a good little book with a great foreword: "dedicated to all those who have not yet unlearned their sense of wonder about reality in general and the phenomena of kites in particular". 

Easy enjoyment and also market lessons for all.

Nov

1

The question arises, "who can you trust as you get along in life" and "how can you teach your kids or your wife to take care of their financial lives when you are gone" and "how many spouses and family have been victimized when the person that controls considerable wealth is seduced by a much younger and more sexual personage with the intention of relieving him and the family of their wealth"?

an anonymous commenter writes in: 

My friend recommended The Sociopath Next Door a few days ago. Here is a great quote:

"Maybe you are someone who craves money and power, and though you have no vestige of conscience, you do have a magnificent IQ. You have the driving nature and the intellectual capacity to pursue tremendous wealth and influence, and you are in no way moved by the nagging voice of conscience that prevents other people from doing everything and anything they have to do to succeed. You choose business, politics, the law, banking, or international development, or any of a broad array of other power professions, and you pursue your career with a cold passion that tolerates none of the usual moral or legal incumbrances. When it is expedient, you doctor the accounting and shred the evidence, you stab your employees and your clients (or your constituency) in the back, marry for money, tell lethal premeditated lies to people who trust you, attempt to ruin colleagues who are powerful or eloquent, and simply steamroll over groups who are dependent and voiceless. And all of this you do with the exquisite freedom that results from having no conscience whatsoever. You become unimaginably, unassailably, and maybe even globally successful. Why not? With your big brain, and no conscience to rein in your schemes, you can do anything at all."

Ken's book suggests 1 in 25 have the personality type. Sociopath's seem to be an overweight in the business sphere. And Sociopath's organizations echo their personality traits. Thus identifying them would seem to be essential. Unfortunately, there's the chicken and egg issue: by the time you have foreknowledge, it's often too late.

The only ready indicators I've felt: a general feeling that somethings not quite right when you meet them; something about the eyes that is a bit vacant (but as distinct from meeting an introvert).

But I do not claim any success in this measure.

I think the Rockefeller approach of cheating your own sons perhaps has sense. Similarly, I think you need to meet some truly ruthless people to get a sense of them. You might seemingly want to protect children from these sorts of experiences, but perhaps it ultimately costs more later? Unfortunately, ruthless people are not always in ready supply until you are on the battlefield, so to speak.

Jeff Watson writes:

The sociopaths in the S&P pit in the late 80's were legendary. Any
time I would get a trade down, even my own firm's broker stole from me.
He was busted for it in 1989.

Kim Zussman writes: 

We trust friends and family based on incomplete information, or empirically based on a sample of trials from which we conclude trust or not. This is true because we can never get into minds of others to understand their true motives and intentions (and even if we could, their motives may be indecipherable as they are invisible to themselves).

Thus it is logical, when presented with unexpected criminal evidence, to question the original basis of friendship or kinship.

Put another way, when should countervailing evidence out-weigh personal connection?

Oct

28

Friday October 26th in 1861 the Pony Express made its last run as the telegraph was established

Made me think back to my Boy Scout years and i had to get a message thru and learned Morse code.

Alan

Jeff Watson writes: 

Believe it or not, we still use a lot of CW(Morse Code) on the amateur bands. For the past couple of years, I've seen an influx of real high speed operators, all with perfect form and perfectly even spacing between the dits and dahs. The thing about them is that they are fakes, just guys who use computers to crank out Morse Code. They use the same kind of program that deciphers(CW) up to 120 words per minute. No human can send that fast, only a computer. There is no personality, no individual style with the fakes either.

An average "real" CW operator on the amateur bands is about 50-85 years old. Some of those old guys can copy 60+ words per minute in their heads. They can also send 60 with a good keyer. They are all, to a person, very unique individuals. It takes a bit of craziness to still use CW, and do it well.

Old time CW operators are very humble about their skills and will admit to copying CW to 35-45 words per minute. Like golfers, old timers sandbag a lot. One is officially considered to be an old timer if they have been licensed over 25 years and active in the hobby. Everyone knows who the real old timers are.

Fakes, on the other hand are quite boastful about their abilities on CW. The average "fake" CW operator is in his 20's-30's, very computer savvy, and could care less about learning the craft of CW. I don't know why those fake CW ops play with computer generated CW when there are so many easier modes of communication. They do brag in a conversation about being a CW op, but drop the ball when questioned by a real CW op.

If I'm seeing a decline of traditional skills in the noble hobby of amateur radio, what does that say about the rest of the world? Are other important skills in other areas eroding? Does the speculation community have a similar decline of skills? Are computers making us stupid?

I wonder what percentage of today's speculators cannot do very quick, accurate math in their heads without a calculator? Quick, accurate math was a primary job requirement for both speculators and bookies in the 1900's. There have always been many tricks and shortcuts to doing quick math in your head. Have computers replaced traditional short cuts in out minds?

As an aside, I suspect that the extremely pleasant and humble Mr Milhone would make a great CW operator.

 

Oct

26

I became involved in the personal computer movement back in the early days. I built an 8 bit, Intel 8008 powered computer from a July 1974 magazine article in Radio Electronics. I also started one of the first "home computer" clubs at NASA/Houston in 1975, so I have been a really long-time observer of this technological development.

I have been amazed at the development of what has become the worship of Apple, even from the early days of the Apple 1. Now an anthropologist has confirmed that it has become a religion.

Today Apple Inc. has become a mammoth corporation. All very interesting.

John Bollinger writes:

I was just a few years behind you, starting with a z80 S100 system in 1978. Indeed, I developed Bollinger Bands on such a system. In those years there were a wide of microcomputer choices and many users moved around from platform to platform, but the Apple people were exclusive from the start. They used separate stores, forums, bulletin boards, user groups, ect… It seemed that with Apple you were either in or out, whereas with other platforms there was a lot of cross fertilization, debate and movement. One could work with a Commodore, Radio Shack, S100, cp/m, Atari, Sinclair, etc. user, even with some of the mini-computer users, PDP, VAX, etc., but rarely with an Apple user. The dividing line seemed to be memory mapping versus port mapping, with Apple's 6502 using memory mapping while much of the rest of field used port mapping, a distinction that faded long ago. My take is that the closed culture was deliberately fostered by Apple's founders to ensure the success of their brand.

David Lilienfeld writes:

I too remember those early days, having built the first MITS machine. Running a program meant flipping toggle switches up and down. The 8008 was followed by the 8080, which was a great chip with which to design. It was a lot easier than the 8008. There were only two competitors of note–the Motorola 6800 and the AMD 6502. That's how Motorola and Advanced Micro entered the microprocessor market (and the world introduced to Jerry Saunders, who could have taught Liberace a thing or two about flamboyance).The Z80 followed in due course. By then, the TRS-80 came on the scene, along with the first set of Apple computers. Those were heady days. Just getting a "Star Trek" program to work was considered a major accomplishment.

I'm not so amazed by Apple's development, per se, as by its rescue from the trash heaps of the PC industry. This isn't close to being the arrogant company that built the Lisa and the original Mac. I'm not sure it is a religion, though. Look at what's already happening with the early adopters and the new iPad. This situation is like the original versions of Word, and the Microsoft fans (Microsoft worship in corporations was pretty prevalent, though nothing like Apple). As with Microsoft, this support of Apple will in time pass.

Jeff Watson writes:

I remember my first Commodore and thought that being able to figure out empirical calculations(curve fitting) with major fudge factors to describe grain prices was the cat's meow. But then again I thought my old HP 35 calculator was something.

 

Oct

23

I have been wondering, is there any strategy for slots? I know there is a lot of strategy for blackjack and other casino games that is applicable to trading but I've never really read about/considered slots. My quick online searches returned nothing very scientific. I assume slots have a routine (low) payout ratio. I wonder how random the results are (the conspiracy theorist in me is highly skeptical, especially of video slots).

It seems the time to play would be after a string of losses as the payouts do need to come. Sort of like counting in blackjack, you could watch other players on machines, wait for them to lose a lot and potentially assume the odds were going up. It also seems (much like old horse racers) the best recipe would be to bet a consistent amount. Watching players I see bet sizes swinging all over and a lot of loss. Usually it is bet big, lose, reduce size, win, up size, lose, repeat until broke.

Bets could vary but only as a constant function of capital (I.e. 1 with 10 in capital, 2 with 20, etc). This would be subject to casino limits but would probably beat changing size due to martingale risk. I also figure different machines would have different odds. Best to play the machines with the highest odds. The scratch lotto for example publishes the odds of their games in ny, I imagine one could find similar publications with slot odds.

Next I wonder how stop losses could be tied in. Would it be best to use a set number of losses to move to the next machine. When playing with house money should you let it ride or use a rolling stop. Rolling stop sounds better. Also if you had a big win it stands to reason that machine was not going to be paying out big soon so you should cash in and move on.

This all may be virtually impossible too unless there were teams working in shifts (people have to sleep) but casinos don't.

Welcome any thoughts or ideas. I know slots aren't sexy like table games but the anonymity and lack of fellow players makes them fun at times (but it would be more fun to walk away up money).

Will Weaver writes: 

If slots are random they don't have a 'quota' of payouts… and as in flipping a coin, every iteration holds the same probability. So there shouldn't be any advantage. But I know nothing about the machines other than they probably are not completely random, though closer than would generate an edge.

Sam Marx writes: 

If they are electronic slots, I believe they use some sort of random number generator. So I've had the theory that if there was some way to determine the formula used, then they might be beaten.

Craig Mee writes: 

Watching the payout numbers on a screen a long time ago when a technician was working on one– this was a poker slot– showed the payout to be approx 80% before double up, and after double up it went down to the low 60% if memory serves me correctly. When playing I took the strategy of banking all my small wins due to this, and doubled up on any large wins i.e 4 of a kind and the like. From there I would work a stop at flat after doubling the stake (if I won my doubles) and then a trailing 20% stop of total win one tripled my initial stake. It seems to let you have a plan, and walk away, rather than the guy next to you, tipping money into that feeder all night. If you must play, then having a plan of attack is the most important aspect, so you bank or your stop goes off …quickly…and you're out of there. 

Jeff Watson writes:

There s one great slot strategy that hasn't been touched on. The best way to win at slots is to not play at all. Even the places that offer 98% payouts. What they are really saying is that for every $100 you feed through the machine, you will get 98 dollars back. The vig is too tough for me, or any other sensible person, for that matter. One has noticed that the really easiest games of chance usually have the highest vig. Things like wheel of fortune, chuck-a-luck, slots, and keno all have outrageous vig and should be played by no one. Save your money and go to a great show.

Pitt T. Maner III writes: 

Along the lines of the slots thread, here is some info about roulette strategy:

1) Under normal conditions, according to the researchers, the anticipated return on a random roulette bet is -2.7 percent. By applying their calculations to a casino-grade roulette wheel and using a simple clicker device, the researchers were able to achieve an average return of 18 percent, well above what would be expected from a random bet.

Read more

2) "There have been several popular reports of various groups exploiting the deterministic nature of the game of roulette for profit. Moreover, through its history the inherent determinism in the game of roulette has attracted the attention of many luminaries of chaos theory. In this paper we provide a short review of that history and then set out to determine to what extent that determinism can really be exploited for profit."

full article here.

Chris Cooper writes:

The most obvious and effective countermeasure is to disallow betting after the ball is released. The casinos allow betting after release because customers like it, but if they have any doubt it is a simple matter to change that practice.

Secondly, Thorp's original work (and mine) were based on finding wheels which were not quite level. After he hit a few casinos successfully, he found that the number of out-of-level wheels decreased. The paper cited in the original post details an approach for level wheels, but notes that more accurate timing is required.

Plus eV roulette did make it to book form, if not the front pages, by a group from Santa Cruz. More recently, a Hungarian was purportedly successful to the tune of over one million. My paper many years ago is lost to the ages, but in any case you can learn much more by reading the paper cited in Mr. Maner's post.

Oct

10

I thought it would be fun to see who we can find at the top of any sport (or interest) that we have been involved in, who can teach us a lesson or 10.

Maybe this interview could be of some interest. It's Kelly Slater, talking about a few things, unfiltered. One highlight for me was his refreshing insistence on not selling out and going corporate…

Jeff Watson writes: 

When Slater was young, he took a year off the tour to star in the TV show, "Baywatch" with Pamela Anderson. The big guys on the tour at that time, Curren, Andino, Occy, Potter, et al all busted his chops for being a corporate sellout. Then when he did his album, "The Surfers" with Machado and Peter King, people called him a sellout. His big 7 figure yearly sponsorship, Kelly INC,….people call him a corporate sell out. His 30-40 movie appearances, the naysayers call him a sellout.

Personally, I like what they call "Sellouts." It shows that the individual is engaging in selfish behavior and that's a good thing.

Meanwhile, while they are calling him a sell out, 40 year old Slater has been steadily competing and holding his own. He's the reigning champion, and is competing and beating guys that weren't even born when he started on the tour.

If one weighs things on the balance of life, Slater has contributed so much.

Similarly, punk rocker Johnny Rotten of the infamous punk band The Sex Pistols, is under fire for doing TV commercials selling butter in the UK. The social media in the UK is abuzz with all of this, with most comments being highly critical and negative towards the ex-punker. To Mr Rotten, I say "Bravo." A man has to pay the bills sometime.

Oct

10

Sir John Gurdon, who just won the Nobel Prize in Medicine, apparently didn't do very well in science as an undergrad. In fact, his first foray into zoology was quite disastrous. A copy of his report card where the teacher noted, his idea of becoming a scientist "quite ridiculous," can be found here.

Although I never won a Nobel Prize, and never will, I know what it's like to absolutely flunk chemistry in high school (I eventually raised the grade to a C-) then go on to major in it as an undergrad, then a grad. There are some lessons applicable to markets, to learn from Gurdon's travails, but I will leave it up to the reader to draw their own conclusions.

Oct

1

What are the common errors, the improprieties, the lack of attention to proper mores, the p's and q of trading that cause so much havoc and could be rectified with a proper formal approach? Here are a few that cost one fortunes over time.

1. Placing a limit order in and then leaving the screen and not canceling the limit when you wouldn't want it to be filled later or some news might come out and get you elected when the real prices is a fortune worse for you

2. Not getting up or being in front of screen at the time when you're supposed to trade.

3. Taking a phone call from an agitating personage, be it romantic or the service or whatever that gets you so discombobulated that you go on tilt.

4. Talking to people during the trading day when you need to watch the ticks to put your order in.

5. Not having in front of you what the market did on the corresponding day of the week or month or hour so that you're trading for a repeat of some hopeful exuberant event which never happens twice when you want it to happen.

6. Any thoughts or actual romance during the trading day. It will make you too enervated or too ready to pull the trigger depending on what the outcome was.

7. Leaving for lunch during the day or having a heavy lunch.

8. Kibbitsing from people in the office who have noticed something that should be brought to your attention.

9. Any procedures that violate the rules of the British Navy where only a 6 inch plank separated you from disaster like in our field.

10. Trying to get even when you have a loss by increasing your size and risk.

11. Not having adequate capital to meet any margin calls that mite occur during the day, thereby allowing your broker to close out your position at a stop while he takes the opposite side. What others do you come up with?

Jeff Watson writes: 

I don't know if it is an error or a character flaw, but freezing will create mayhem with your bottom line.

Alston Mabry comments:

"Do Individual Investors Learn from Their Mistakes?"

Steffen Meyer, Goethe University Frankfurt– Department of Finance Maximilian Koestner, Goethe University Frankfurt - Department of Finance Andreas Hackethal, Goethe University Frankfurt - Department of Finance

August 2, 2012

Abstract:

Based on recent empirical evidence which suggests that as investors gain experience, their investment performance improves, we hypothesize that the specific mechanism through which experience translates to better investment returns is closely related to learning from investment mistakes. To test our hypotheses, we use an administrative dataset which covers the trading history of 19,487 individual investors. Our results show that underdiversification and the disposition effect do not decline as investors gain experience. However, we find that experience correlates with less portfolio turnover, suggesting that investors learn from overconfidence. We conclude that compared to other investment mistakes, it is relatively easy for individuals to identify and avoid costs related to excessive trading activity. When correlating experience with portfolio returns, we find that as investors gain experience, their portfolio returns improve. A comparison of returns before and after accounting for transaction costs reveals that this effect is indeed related to learning from overconfidence.

Kim Zussman writes: 

Trading a market, vehicle, or timescale that is a poor fit for your personality, temperament, and utility, exacerbated by self-deceptive difficulties in determining this.

George Coyle writes: 

Speculation by definition requires some amount of loss otherwise the game is fixed. However, I believe loss can be broken down into avoidable loss and unavoidable loss. Unavoidable loss is, well, unavoidable. But in my personal experience (and based on pretty much all speculative loss I have seen or read about) all avoidable speculative loss is traced back to some core elements/violations: not being disciplined (many interpretations), getting emotional and all of the associated errors and mistakes that brings, sizing positions too big so that regardless of odds you eventually have to reach ruin, not being consistent in your approach (the switches), not managing your risk adequately either via position sizing or stop losses, finally you have to be patient for the right pitch whatever that may be for you. 

Jason Ruspini writes: 

A similar distraction comes from making public market calls.

Jim Sogi writes: 

The Sumo wrestlers' trainers in Japan are conscientious about avoiding mental strife in their fighters since it affects their performance. Sometimes when other life issues intrude, like getting up on the wrong side of the bed, it is better to refrain from entering a large position. You're off balance. How many times have I thought to myself, "I wished I had just stayed in bed this morning"?

William Weaver writes:

Mistakes I'm working on:

-execution error
-having too much size too early — the first entry is usually the worst
-not being able to add size when appropriate — need to add to winners; understanding when to retrade and why — why did the trade fail, was it me or the trade?
-not taking every trade
-need to adjust orders when stale
-not touching orders when not stale
-not getting excited about trades
-not holding until appropriate exits, especially winners — disposition
-not accepting the risk. Must accept the risk.

When we fear, we fail. But we cannot be courageous without risking overconfidence because it leads to recklessness (at least I cannot). So how to not fear and not be courageous at the same time? One of the best traders I know is indifferent to any trade, yet he is excited by his job. He also has (and shoots for) only 40% winners but simultaneously is profitable on a daily basis (and expects to be). These were contraditions to me 8 months ago, now they are just fuzzy in my mind and I understand them but cannot explain them.

Sep

27

This site is devoted to the scientific method… expectations, the real world, actual decisions that people make under uncertainty. Any individual taking an economics course learns that consumer choice takes into consideration a myriad of expectations about the future subject to constraints and substitutions and alternatives. Please go back to the economics texts to see why prediction markets are much more accurate than polls. The prediction market is 75% for the incumbent. That's an all time high. Gentleman, does it have to go to 99% before you see that people actually making bets with their money is a much better predictor of outcomes than a poll? A good article assessing accuracy of expectations and margins of error for predictions versus polls is by Berg. Please. No more self supporting ideas about how close the polls are.

Stefan Jovanovich writes:

Ouch. Since all my ideas are self-supporting, I can only confess to absolute guilt. I also have to agree that money is and should be the litmus test. Intrade is not about money, however. The current "market" for Obama is 1 share offered at $7.51 and 104 shares asked at $7.46. Their comment stream, on the other hand, is unending; it dwarfs even the Huffington Post in frequency. Polls matter precisely because they are about money. They are the only device the campaigns (including the supposedly independent issue ones) can use to decide where to spend their advertising dollars and where to schedule the candidate appearances. Professor Berg's assertions about Intrade's markets are 10 years old; they also go back to the golden age when those markets themselves were so obscure that they were, indeed, pure. They are anything but that now, even if they remain shallower than the Platte River in September. I suggest that we all look at these questions the way the advertisers and producers look at audience ratings in television and radio; the overnights matter but P&G, Colgate and the car companies all want to see the internals so they can decide where to put down their next bets. What everyone knows is that trusting the raw numbers during sweeps week is not the best way to decide how to spend the hundred million dollars required to launch a new household cleaning product.

Jeff Watson writes: 

If polling offers more predictability than incentive markets, then perhaps one should look at the paper traders for guidance in the markets.

Rocky Humbert writes: 

Unless someone changed the law when I was not looking, it is unlawful for a US Citizen to bet on Intrade. When I tried to open an Intrade account several years ago, this fact was made very clear to me by the Intrade people. (And I didn't open an account.)

Hence you either have the US Election being predicted/decided by non-voters. Or you have the US Election being predicted/decided by Americans who flaunt the law.

I report. You decide.

Jason Ruspini adds: 

Liquidity used to come in during US hours and looking at just the past two days for the Obama contract, that still seems to be the case. The federal law that might be most relevant for listers is the Commodity Exchange Act. With Cantor movie futures and Nadex, the CFTC signalled jurisdiction over prediction markets, which would make Intrade an illegal commodity exchange. I guess they are busy with other things…

I have a theory that the hassle of wiring money in clips of less than $10k coupled with the margin system (you post $6 to buy a 60% contract but $4 to sell it) means that not only are the markets thin, but prices tend to be closer to 50% than they otherwise would, beyond the usual longshot issue near extremes.

EDT Hour    Volume

0                111

1                 36

2                 193

3                 60

4                 198

5                 283

6                 148

7                   22

8                  297

9                  537

10                270

11                3334

12                6621

13                1883

14                3079

15                2819

16                  262

17                8171

18                1961

19                6897

20                 101

21                 346

22                 536

23                 400
 

Sep

27

Whatever you think of Agassi, there are several market lessons here, and Agassi must have either read the Chair's books or have been taking lessons.

"Quit going for the knockout, he says. Stop swinging for the fences. All you have to be is solid. Singles, doubles, move the chains forward. Stop thinking about yourself, and your own game, and remember that the guy on the other side of the net has weaknesses. Attack his weaknesses. You don't have to be the best in the world every time you go out there. You just have to be better than one guy. Instead of you succeeding, make him fail. Better yet, let him fail. It's all about odds and percentages. You're from Vegas, you should have an appreciation of odds and percentages. The house always wins, right? Why? Because the odds are stacked in the house's favor. So? Be the house! Get the odds in your favor."

-Agassi, from Open: An Autobiography

Victor Niederhoffer writes:

As usual Agassi has it all wrong–something that can be predicted from an ingrate from a family like his. The only one that can go for singles, that can grind is the house. The player should never grind.

Jim Sogi writes: 

Lions and hyenas use a similar strategy when they kill a buffalo or wildebeast. They group up and wound it. They don't go in for the kill. They let it bleed a while, weaken, then tear it up and eat it. Why risk injury when waiting works.

George Parkanyi writes:

What kind of a market lesson is that? "We'll let you stew on your margin call for a while– THEN we'll come and throw you out of your house." ; )

Sep

18

It will be interesting to see if this 4% drop in a second comes in any other market.

Jeff Watson writes: 

You are so right, you can be sailing along smoothly then this happens… [40 second video]. Markets are the same way.  [Reuters: Theories behind Monday's shock ].

Sep

14

There's an interesting article in Nature about the coming winter–with a prediction for a worse than usual one. It seems to me this is a test of the climatologists' ability to do any long-term predicting–and if they are off on this one, I have to wonder what happens to the global-warming deniers (probably "I told you so").

All of which leads me to ask the commodities traders on this list: is natural gas going to put in a bottom (even if seasonal) on news like this, or is there still so much supply in the US (stored and otherwise) that even with a bad winter, natural gas will remain cheap for a long time to come?

Jeff Watson writes: 

Back in the pit days, if it looked like the contract was making a bottom, I'd sell 5,000 bushels a quarter cent below the bid (had to time it just right) to see if there was anything down there. The thing was by doing this, it was very low risk, got me a lot of information, and would cost me a max of $25, but I was usually able to scratch the trade more often than not. The grain market will tell an inside player (one who's always making a market), very clearly, when it's a bottom. Stocks and bonds, I don't know that much about.

Sep

12

What are the best markets to trade? Many futures markets trade differently. Some have a lot of depth and intraday gaps are infrequent (I consider these the best to trade). Others have ample liquidity but are prone to gapping. Others still are downright scary. E-minis and 10 years seem like very "safe" trading markets. Eurodollars as well. Crude oil has a lot of liquidity but can gap. Gold seems prone to fast and erratic moves. Grains seem like they can get a bit dicey. Less trafficked softs seem rather risky. Commodities in general appear to have more erratic price risk than stock index futures or financial futures. FX is fairly liquid and seems ok. I am largely making observations based on personal experience and in some case I have none so I am curious for thoughts from seasoned specs.

Bill Rafter writes:

Ask yourself, would I rather trade an extremely efficient market in which information was digested immediately and most of the fluctuations not related to new information were due to randomness, or would I prefer a market that was less so. As you gain experience you will learn that one of these mutually exclusive choices is more profitable to trade than the other. One of these requires virtually no expertise to trade, and indeed expertise would not appear to be helpful, whereas the other requires considerable expertise. One is the frequent choice of novices, whereas the other tends to be avoided by novices. Then ask yourself, how do novices typically fare?

Jeff Watson writes: 

Grains are impossible right now. The 30 cent daily ranges make it too much of a gamble. Even trying to predict, or have a gut instinct of where the carry spreads, the corn/wheat/bean spread, the crush, are going….Oy Vey. To play the grains, to coin a surfing analogy: You better be in really good shape, you gotta see the wave (move) coming toward you, then paddle real hard, pop up and catch the wave. You better either be quick to bail or commit to the wave, make a bottom turn, then ride it until it's over. Determining when the ride(trade) is over isn't as simple as it sounds, and many dangers exist on and below the surface that can still mess you up when you bail the trade. The most important decision a grain trader can make right now is whether he wants to gamble a lot for a potentially big reward, or hunker down and reduce risk.

 

Sep

11

Here's a magnificent article about a 23 year old who was profoundly deaf, being able through the advances of free market technology, to hear music, to decipher music, for the first time.

What playlist of 10-20 songs, groups, orchestras, symphonies, etc would you recommend to a 25 year old who's never listened to music?

In fact, what would you recommend for the very first song a person coming out of the shroud of deafness should listen to?

Sep

9

Inspired by the market if touched order and the trapdoor spider, I have been studying spiders with a view to the lessons they can teach. The following has been helpful to me. Spiders on Wikipedia. I find that the spider has many methods of capturing prey and avoiding predators. Some use speed, some use the web. Almost all the orders that are used in the market seem to have counterparts in the spider's arsenal. The limit order to me is the normal one we see when the prey gets caught in the web and can't get out.

The spider is particularly adept at signaling other predators like birds not to mess with it by attaching pieces to its web. Many use deception. They are often captured by wasps and other insects that pretend to be prey. They have a very clever path they follow to get to their prey without destroying it.

I am interested in what you might think we can learn from spiders.

Gary Rogan writes: 

I have always found the web weaving spiders to be more fascinating. The ratio of the created object complexity to creator complexity for the web has got to be close

Pitt T. Maner III writes: 

In the South we learn about the secretive, brown recluse spider and its reputation at an early age. Even though it does not use a web to catch prey it's a fascinating creature too. According to the second article below the spiders are developing generations more quickly this summer due to the extreme heat.

1)

"In nature, brown recluse spiders live outdoors under rocks, logs, woodpiles and debris. The spider is also well adapted to living indoors with humans. They are resilient enough to withstand winters in unheated basements and stifling summer temperatures in attics, persisting many months without food or water. The brown recluse hunts at night seeking insect prey, either alive or dead. It does not employ a web to capture food — webs strung along walls, ceilings, outdoor vegetation, and in other exposed areas are nearly always associated with other types of spiders."

2) 

One man in Omaha has witnessed the infestation of brown recluse spiders first hand. Dylan Baumann has so far counted 40 brown recluse spiders within his home, "in the entryway, the bedroom, under the fridge." Despite living with such dangerous roommates, Baumann has yet to be bitten."They are called recluse for a reason – they can fall far back in the walls once you use poison and I'm told they can go for up to nine months without eating," Baumann said, adding he has called his landlord "about five times."
 

Jeff Watson writes: 

In my part of the South and on my coast, we are constantly on guard for the Huntsman spider. They have a painful bite and are toxic but human hospitalization is rare… A recluse bite is much more damaging. Huntsman don't build a web, but catch prey using speed and ambush. The huntsman has legs resembling a crab, and is fast, extremely fast. Huntsmans also grow up to be bigger than the size of your hand, legs and body. They eat palmetto bugs, larger insects, small lizards, small frogs and toads. The mothers carry the children in an egg sack, which contain a few hundred babies. It is very disquieting to find one on the wall above your bed (and have it escape), which happens every once in awhile.

Aug

27

Dear Mr Niederhoffer,

I really like your website dailyspeculations. There are a lot of fascinating and interesting articles that lead to new ideas and inspiration.

I read in the "About V.N & L.K" section that you trained some very successful traders and hedge fund managers. I am a student of business administration in Germany and want to work as a trader in the future.

It would be interesting to know how the training of your traders was structured and what were the most important things you focused on during the training? If you were now in my age (25 to 30 years), how would you start and where would you try to get the sufficient education for this business?

I hope that you can help me with your insights.

I wish you all the best and hope you will continue to share your insights on the markets.

Kindest regards,

Lars Gutt

Victor Niederhoffer writes: 

This is a good question. Does anyone have a good answer besides reading a good statistics book like [the old] Snedecor, Horse Trading by Ben Green, Bacon's Professional Turf Betting, and starting a hypothetical trading account, and doing some hypotheses testing from a field they know something about?

Jeff Watson writes: 

A big question is why you would want to trade. Trading is a pretty thankless job, very tough, and maybe you only see the media presentation, or you want to tell people at a cocktail party, "I'm a trader," but I'd like to see a why.

Having a good mentor, someone that you can apprentice to, is the most important thing in learning how to trade. A good instructor is much more important than Ivy League Degrees, how to manuals, internet chat rooms, books, systems, gurus, the financial media, and all the other mind numbing stuff out there.

My mentor when I first started was an 85 year old guy who was first trained by Art Cutten. He learned well from old man Cutten, and taught me how to keep out of trouble. The main lesson to learn in trading, more than anything else, is how to keep out of trouble. Manage to keep out of trouble, keep your own counsel, and the mistress might give you a second or third date.

George Coyle writes:

Series 3 study guide is a great (relatively brief) overview of the commodity futures industry. It touches on styles of trading as well as goes through lots of the unexciting but important details (order types, etc.). (Outline of material covered in exam [pdf]). (Online version of Study Guide by Investopedia).

From there the Market Wizard books are good to look at the different styles to see which sounds the best to you.

If quant focused I would say read something on how casino games work (odds and such–Richard Epstein's Theory of Gambling and Statistical Logic book is good) and think of how that might be applied to markets with the trader acting as the casino. Focus on keeping it simple, think of what is practical and possible when working with data.

Read your books of course. Read interviews with William Eckhardt. Larry Williams' recent book (LT Secrets for ST Trading) does a good job of outlining how quant works specifically, as does Charles Wright's Trading as a Business. Livermore's How to Trade in Stocks is a good one too (less popular than Reminiscences but more of a "how to" manual).

Deitel and Deitel C++ How to Program is the best C++ manual out there in my opinion. I dodged it for years but it is crucial and so useful. www.thenewboston.com is a great website to watch youtube vids on various languages to get your feet wet (but Deitel is necessary if you really want to learn the specifics).

And just start trading. The best teacher is experience. Even if equipped with all the great logic from above it seems real experience is necessary to actually follow the rules.

Craig Mee writes:

Understand valuation. Get a handle on all things that move a market price. Maybe have an 8 week internship of your own making with 8 different dealers. Corn farmer, art dealer, financial dealer, car dealer, importer, etc, and understand that whatever you're trading, you potentially should be able to move in theory from one to the other seamlessly. You are a valuer first and foremost, and if you value it wrong, you will also see how most of these choose to cut their positions. This might help to keep in the forefront of your mind what your mission actually is.

George Parkanyi writes:

Well if you can get past the fact that he finally went bust and blew his brains out, I found Reminiscences of a Stock Operator, about Jesse Livermore, to be quite useful. The most notable things I remember are (1) "making the most money when he was sitting, not trading" – meaning a position needs time to make really big money, and (2) to Jeff's point about staying out of trouble – averaging UP a position once its already showing a profit, and never averaging down a losing position. (The latter is especially important when trading with leverage.)

Ultimately, it still comes down to a style you are comfortable with – keeping the staying out of trouble part in mind; however you do that. And this may or may not involve the things mentioned above.

David Lilienfeld writes: 

Go through some psychology texts–learn to understand human behavior and get to know one's own temperament. Understanding on an intellectual level doesn't help much if one's temperament is suited to trading. I have an old friend from high school who was on the Solomon trading in the mid-to-late 1980s. He hated it, often spent the weekends sweating his positions, etc. He moved on to be a buy side analyst, became the portfolio manager for a number of funds that succeeded pretty well under his direction and prospered. He had no trouble sleeping as a portfolio manager, and as I said, his funds did very well. A college roommate became a sell side analyst and was bored as could be doing his job. He did OK with it, but not great. He changed employers (at one point he thought about leaving the industry if he wasn't hired by someone to do something other be an analyst), started in its training program and found himself on the trading floor. He enjoyed it immensely and retired last year (I'm still not sure if he "retired" or was retired by his employer; looking at his homes, it's not as though he's wanting for much, so maybe he really did retire–but it's also not been a topic open to discussion, at least not with me). My guess is that just about everyone on this list has friends with similar stories. The bottom line: You have to know your temperament. You can learn the math, but if you don't have the fortitude, the math doesn't much matter.

The psychology part is understanding what people are about. Understanding gambling is about the mathematics of risk. Important stuff to be sure. But people matter too, and understanding what they are all about is also important.

Those are my recommendations. Lucking into a good mentor helps, but observing for a while is also one of the best teachers.

Aug

24

A common mistake that stock people do I think is to pay attention to the increase in sales numbers. What does this have to do with future profits? I would think there is zero correlation given the earnings change since sales are so easy to manipulate by such things as discounts, pre-orders, and incentives for early buying, and reducing inventory et al. How did this ridiculous emphasis on the sales increase become as or more important than earnings relative to expectations in affecting stocks after the earnings report? I recently met with a pairs trading outfit and gave them 100 reasons I don't think it works, but it was from the seat of my pants. The main reason was of course that it goes against the drift. It hedges against the 10,000 fold return.

Gary Rogan writes: 

If sales increase while profits are decreasing, that's a bad sign. However when profits increase while sales are decreasing, this may be very good, but it can't go on too long. Sales trends gained influence as a counterbalance to profit growth being fudged. When you have profits, sales, and cash flows all increasing in unison and indebtedness not increasing, that's as good as it gets. 

Jeff Watson comments: 

Profits increasing while sales are decreasing are usually a sign of increased productivity, better inventory management, better management of labor, and better management of capital. Although Gary says this scenario can't go on too long, it really can go on forever. 

Gary Rogan replies: 

Well clearly it's mathematically possible to decrease sales by .1% per year and increase profits by .1% per year close to forever so "too long" was perhaps a bit harsh, but at some point in the real world gross margins become so high as to make further advances impossible due to competition or substitution. My statement was prompted by not being able to recall a real scenario of sustained profit growth and sales decline resulting in a good outcome having looked at hundreds of income statements, but I've never made a study out of it nor have I looked at multi-year trends. When customers are buying less of your stuff year in and year out that usually means they are not excited about your stuff, because they don't like it but perhaps in this case because the price is too high for them to use more of it. When customers get into the habit of using less of your stuff, that's hard to fight. 

Jeff Watson adds:

The Chair is 100% correct. Going back to Sears as an example…their aggressive pricing will only squeeze their retail operation out of business(if continued long enough), as prices this low are unsustainable in the long run. If a store has a 30 percent increase in sales after implementing a big sale, but it's gross profit goes from 22% to 6% or less, is that a good business plan? Even though Sears is not increasing labor to handle the increase in sales, the model is still badly flawed. I understand that one of the most important things in retail is buying right, but I suspect that most of the things Sears is selling is a loss leader. Maybe they are subscribing to the old cliche, "We might be losing a little money on each sale, so we'll make up for that with the increase in volume."

Russ Sears writes:

Coming from the world of insurance, when things sell unexpectedly well the actuaries double check their pricing. The agents and the market will quickly spot when you are selling $1 or risk coverage for 99 cents. When I started, before rate books were online, a printing error cut-off the $1 handle of 70 year old women term life insurance rate per $1,000 (this was highest age we sold term to). The month after the book went out we had more 70 yr. old women apply for insurance than we had in the past several years combined.

In other words sales increases often indicate increase in claims volatility. Sales increases make me wonder if management really knows what they are doing. One wonders if this rule holds for the retail and stocks in general. 

Carder Dimitroff adds: 

I may be naive, but in some sectors I believe the top line could be critical for long term investments. I'm thinking of regulated and capital intensive companies like electric utilities, gas utilities, water utilities, pipeline companies, transmission line companies and MLPs. In a different way, I'm also thinking of non-regulated utilities, such as independent power producers, refineries and REITs.

In all these cases, if the top line falls, the bottom line is plagued by fixed costs, such as interest, ad volerem taxes, depreciation and amortization.

The second derivative of revenues in such cases is capacity factor. Low revenues suggest low capacity factors. Low capacity factors suggest troubled assets and long-term challenges. The assets could be partially stranded by market conditions.

An example is marginally efficient coal plants. With low market prices for natural gas, many coal plants find themselves out of merit and not dispatched (zero earnings for producing energy). When natural gas prices return, marginal coal plants are again deep in the merit order and they are dispatched frequently or continuously.

Julian Rowberry writes: 

An internet marketing equivalent of over valuing sales figures is over valuing social media subscribers. Twitter followers, facebook likes, page views, ad clicks etc are all very easily manipulated.

Leo Jia adds: 

Here is my two cents regarding growth vs non-growth.

The present value of a business without growth is much lower than that of a similar sized growing business. So one obvious question to any business owner is whether he would like to receive more money or not if the business is to be sold today. The answer is obvious. But one may counter: since he is making good profits on the business, why would he sell it today? Well, isn't that the beauty of modern finance produced through Wall Street? To sell it today, the entrepreneur can collect today all his future earnings projected based on the best periods of his business performance, and with that reward, he can move on with his life, rather than be tied up by the business which may turn sourer later and cause him to suffer.

Why would Wall Street care more about growing businesses? Those people who bought out the entrepreneur have an even higher reward outlook than his and would seek higher profit on the investment.

Art Cooper writes: 

An example of this currently in the news is Hormel Foods, described in the article "Spam Sales Boost Hormel's Profit" on p B4 of today's WSJ.

The article notes that Hormel's Q3 earnings rose 13%, led by strong growth in products such as Spam and Mexican salsas, continuing a trend of higher YoY earnings. "Even so, rising commodity costs and shoppers' resistance to higher prices are pressuring its profit margins, which could affect its results in future quarters."

HRL's price has been roughly flat for a year.

Aug

24

I have found great value in the website, Delanceyplace.com. I signed up with them and get a short but very thought provoking excerpt from a book every morning in my inbox.

Since I signed up with them I've ended up reading over 10 books I wouldn't have normally read, just because of the excerpts.The website describes themselves by saying: "Delanceyplace is very simply a brief daily email with an excerpt or quote we view as interesting or noteworthy, offered with commentary to provide context. There is no theme, except that most excerpts will come from a non-fiction work, primarily historical in focus, and will occasionally be controversial. Finally, we hope that the selections will resonate beyond the subject of the book from which they were excerpted."

I recommend this site and find the 45 seconds it takes to read the excerpt to be a very pleasant treat.

Aug

22

Any opinions on Sears Stock SHLD?

Barrons had a positive article on it last week but the shorts keep shorting it.

Down 2 Yesterday.

Somehow I find it difficult not to be in Ed Lampert's corner.

Anatoly Veltman writes: 

Maybe this is off-topic re: stock purchase, but I'll throw in an Alan-esque: in advance of seasonal clothing change-overs this year, they marked down 85-90%, even off fashionable labels.

Jeff Watson opines: 

A common mistake retailers do is to mark things down, give up gross profit, all in the order of increasing the sales numbers. Giving up gross is a bad, bad thing. In retail, if something is not sold at full price, it is considered to be shrink. Shrink is very bad in the retail game. I went to Sears this week and bought 3 pairs of Levis, for $16 each and 3 pairs of nice Dockers for $19 each. I saw Sears selling name brand surf trunks that I know cost them $16 wholesale, selling for $4.99. Sears is giving clothes away. I wish their sales would extend to the Craftsman line, their electronics, or their appliance line, which was only 25% off the big ticket items.

An anonymous contributor adds:

A common mistake is to think that Eddie is about retail, Eddie is about cashflow liquidation and control stock. Is Berkshire about Textiles? He has now also filed on the Gap and Avon. Sears was always about the owned commercial real estate and durable goods, but the internet and housing bust crimped it. He also has filed on Autozone and Autonation (Sears automotive?).

his MO has been to buy 50% of the float of a stock that he could LBO completely, but then to drive cashflow into stock repurchases while cutting CapEx. My personal opinion is he is planning to eventually put all these pieces together.

The technical issue then becomes the expiration of his 5 year lock-up for investors that Goldman raised the money for, therefore I would not be surprised by a large 4th quarter in the stock.

His stocks trade more like a corner or pool operated stock. The reality is they are no longer public stocks they just happen to trade on an exchange–stocks like this used to be called footballs and to understand the trading one must understand the personality.
 

Aug

12

Cold reading has much in common with market charlatans:

"There seem to be three common factors in these kinds of readings. One factor involves fishing for details. The psychic says something at once vague and suggestive, e.g., "I'm getting a strong feeling about January here." If the subject responds, positively or negatively, the psychic's next move is to play off the response. E.g., if the subject says, "I was born in January" or my mother died in January" then the psychic says something like "Yes, I can see that," anything to reinforce the idea that the psychic was more precise that he or she really was. If the subject responds negatively, e.g., "I can't think of anything particularly special about January," the psychic might reply, "Yes, I see that you've suppressed a memory about it. You don't want to be reminded of it. Something painful in January. Yes, I feel it. It's in the lower back [fishing]…oh, now it's in the heart [fishing]…umm, there seems to be a sharp pain in the head [fishing]…or the neck [fishing]." If the subject gives no response, the psychic can leave the area, having firmly implanted in everybody's mind that the psychic really did 'see' something but the subject's suppression of the event hinders both the psychic and the subject from realizing the specifics of it. If the subject gives a positive response to any of the fishing expeditions, the psychic follows up with more of "I see that very clearly, now. Yes, the feeling in the heart is getting stronger."

Jeff Watson writes:

Here's a great how-to" book on cold reading.

Bill Egan writes:

A complementary resource I recommend is "The Definitive Book of Body Language" by Allan and Barbara Pease. Always watch peoples' body language and compare it to their words, and watch how both change over time. For example, when the fraud thinks he has you, there is often a split second where he will shift his body position and display a chilling facial expression like a fox looking at a chicken. That half-a-second is real important to you.

Jim Sogi writes:

Trial lawyers look for cues in the jury's race, clothes, hair styles, books or magazines, shoes, apparent class, education, prior experiences who they speak with, their background information on their questionnaires to get a read on how they might decide a case. Trial consultants use broader data on how similar groups might react to similar situation. During Voir Dire, a short question and answer period, the lawyer can ask the prospective juror some questions that might shed light on the juror's prejudices that would justify being removed from the panel or dispose the juror against the lawyer's client. Again, all forms of cold reading.

A fun game I like to play while people watching in restaurants, or on the street is to look at people and try to figure out without anything more than watching from a distance, where they are from, what they do, what the relationships are between members of the group, what they might be like. Family groups on vacation are a pretty easy read as well as their internal family dynamic. Old couples are straight forward. Groups of young people tend to send strong signals. Groups of business men, groups of tourists, newlyweds all have characteristic mannerisms. The next level to try discern their relationship, what they are like and get an idea about them from only external signals.
 

Aug

1

The market if touched would seem to be an exact replica of the spider's attacking when the thread is tripped. The brokers have a variant of that called a "ghost order" that is not on the books anywhere but is triggered whenever a bid or offer hits the price electronically that maintains the privacy of the spider's plan.

Gibbons Burke writes: 

In the days of the dinosaur, when physical pit trading reigned supreme, the would-be spiders with resting M.I.T. orders could be gauged by the size of the deck of order tickets held in big-fish client's brokers hands. The hunting raids mounted by locals called "gunning for the stops" often caused the would-be predators to become prey.

This game is now being played by the new locals (co-locals?) - the HFT bots at the speed of light.

Speaking of the speed of light, and a different order of M.I.T., some smart fellows there have created a camera which is so fast (a trillion frames per second) it can take a movie of a packet of photons - a laser light bullet a millimeter in length - traveling through a soft drink bottle:

Here is a nice TED talk from Ramesh Raskar on "imaging at a trillion frames per second".

Victor Niederhoffer writes: 

One believes that a buy market if touched order rests below the current price. And a sell market if touched order rests above the current price but the spirit of taking advantage of the weak is the same.

Jeff Watson writes: 

Furthermore, MIT orders, buy stops, sell stops, GTC orders, etc if held at the exchange or their servers become part of the market and are served to the inside players as delectable morsels to snack on.

William Weaver writes: 

Even orders that are held on a broker server can be seen by others within that brokerage… I was exploring Bberg the other day and found a function that allowed me to see what other orders rested within the firm. I've been keeping orders personal server, or CPU side for a while, but after that discovery I've become even more paranoid (not that I am a big enough player to get attention, but sometimes it seems like it is statistically improbable for prices to all but reach my take profit only to reverse and get almost to negative where I exit flat).

Anatoly Veltman writes: 

Just to remind us, today's slippage on filled orders is only one tick, or even half-tick. It is the slippage on unabled limit orders that's a real killer. In the previous discussion of how HST effects long-term investors, who are "forced" to wait in queue for execution…yes, the sheer volume of short-term predatory activity, which occupies certain time on exchange server, and could go awry - could spill into a more illogical (random) near-term direction. Long-term is a series of short-terms to a degree - and all this short-term activity may be adding to randomness. This is liable to confuse the heck out of longer-term thinker and leave him entirely outside of the trade: we hear more and more how this or that traditional indicator has become a victim of fake-outs. 

Jul

16

An often overlooked component of the grain market is Country Movement. Country movement is basically how much grain is being transported around the country, in and out of terminals, mills, ports etc for consumption, processing, or export. Grains primarily travel by barge, rail, and truck. Different grains are usually shipped differently with wheat being shipped more by rail to end users or ports than corn or soybeans. A bottleneck in any of those transportation systems will affect grain prices. Right now, a situation is developing where the Mississippi River is getting low and it's hard for barge traffic to move. While the forecasters are not expecting a repeat of 1989, it will be close. Barge traffic is by far the largest method of shipping grain for export.

While I'm on the very important subject of grain transportation modes, here is an illuminating paper that will provide a high level overview of the various grain shipping methods. This paper sorts out the different methods of shipping, costs, areas, and crop specific shipping domestic use, and exports.

Country movement is very important and I monitor it very closely, along with transportation costs, which greatly affect the end/retail price of the commodity. Another note, the Mississippi is such an important transport route that the top 4 grain companies own the top barge lines and control around 35-40% of the tonnage shipped on the Mississippi.

Jul

12

Corn had a horrific report earlier today. It rallied early, but sold off sharply. Buying opportunity or reason to jump ship…that's the conundrum. The mistress of the market sometimes plays games to separate us from our money.

Gary Rogan writes: 

I just came across this snippet:

"Corn prices fell in today's pit trade despite a bullish corn production forecast by the USDA due to dry/hot weather. CNBC suggested that one of the reasons for the slide was that the USDA will help farmers with the drought."

Can this be actually a cause of a sharp sell-off? How would anyone know to sell so quickly?

Also a more general question: what is the general lesson here, don't act on any news?

Bud Conrad writes:

I used to call myself a grain trader. The game was to predict the USDA numbers, then to see if you are more right than the consensus predictions. There is no secret that the Midwest is hot and killing corn. The question is how much?

If you know something that the market or the government don't, you have a chance. So today the government confirmed the well known situation. It common to see the markets "Sell the news". The question is whether it will continue to get worse (stay hot) in the future. Any few day of rain before July 4 can turn things around. At this date it looks like permanent loss.

I have no positions, but am sorry that the last month was a pretty good run on the situation that I should have seen. Aren't you afraid that the broker could be stealing your stash? I'm not reopening my futures accounts because of the lack of protection, which may be what the government wants, so prices won't be driven by speculators.

Jul

8

I've had a few encounters with sharks while in the water, but nothing major except for being next to a person who got bit at New Smyrna Beach, shark bite capital of the world.

This is the story of my perfect non-encounter with a shark.

One morning, a few years ago I went out, solo, for a dawn patrol (Nobody around me). The water was cool, glassy, and the waves were about waist high, with a thick marine layer keeping visibility and sounds attenuated. In other words, a perfect morning to surf. I had just paddled back out after riding a wave, and saw a lot of small schools of 1-2 inch greenbacks going through the water, darting around too and fro.

All of the sudden, the school of greenbacks started jumping, panicking, and I immediately knew something was chasing it. I thought, maybe a big snook, or maybe even a tarpon was getting breakfast. They were jumping for a minute or two, all around me, then I noticed the tell tale fish oil slick on the glassy surface that happens from recently chomped on fish. I didn't think anything of it and caught a nice wave.

Paddling back out, I noticed the slick got bigger, and the greenbacks were really nervous, and it seemed like a whole acre of them were jumping all over the place….some even landed on my board. My mind started to wander and I started to think, possibly irrationally, "It's really getting sharky out here."

Right when I got that "sharky" feeling, I felt something bump my fin pretty hard. That got my sphincter tightening and I pulled up my legs and hands as well as I could and waited, trying to see what was below. Boom, got bumped again and I started to feel real scared……humans are not at the top of the food chain out there in the water.

About 20 seconds after that second bump, I saw the dorsal fin of a porpoise surface next to me, and I realized that he was just checking me out. With Flipper out there protecting me, I felt fine and surfed my brains out for a few hours with only a few thoughts of sharks.

There must be a market lesson here…

Don't panic if and when the market puts you in danger…

Not all market moves that appear dangerous will hurt you if you don't overreact.

Keep the irrational thoughts out of your head while in a position, as those thoughts are simply flawed thinking, and flawed thinking about your position and/or the market is never good.

When watching the market, open up all your senses and try to see what is unseen, just like I was trying to "see" what was happening underwater while my board was getting bumped.

If the perceived danger doesn't materialize, still don't let your guard down.

Jun

30

To what extent did the 20% rise in the grains in the two weeks preceding the beginning of this week, presage the upward move of 50 points this week in S&P? How to quantify?

Jeff Watson writes: 

Grains were oversold a couple of weeks ago because many players thought Greece would leave the Euro, and China's economy might crash.

Gary Rogan writes: 

It seems rather unlikely that China crashing would affect its demand for grains much. Perhaps some substitution from animal feed to human consumption. I had read in the past that its demand for basic foodstuffs is pretty inelastic, and in fact this demand becoming such is what really led to the upheavals in the Arab world as there was a huge new inelastic customer entering the market thus leaving the low-end elastic customers in the dust ready for partial starvation. It also seems strange that Greece's fate would have any appreciable demand on grain demand. Oil maybe, but not grain.

Jun

26

The period right before a hurricane is very often a good time to surf as there is a large fetch that brings up big waves. After the storm has passed, and there are calm wind conditions, there might be waves for days after, although they are ever decreasing in size and power. Even though there is no hurricane wind forming them, there will be a left over swell. In fact, some of the best, most enjoyable surfing with great shaped waves comes from the leftovers after a hurricane.

Waves after a hurricane are generally smaller, less powerful, frequently more organized, more predictable, and better shaped then the waves before and during the hurricane. I'm curious if one can find a parallel of waves after a hurricane to the action of the markets after a cataclysmic event……Has the market shown to be more predictable in any time frame after such an event? Is there any way to reliably make such a prediction? Would the markets be more orderly? After the initial volatility has gone, is there an attenuation?

Jun

21

I've been told that most people have recurring dreams of one sort or another. Many recurring dreams involve school, taking final exams without ever attending the class, or being unprepared one way or another. Recurring dreams are never good in my opinion.

Last night I had a variation of my most common recurring dream. I was trading on the floor while the pits were still open. I had suffered great losses for a few months and was down to the last $20,000 in my trading account. The grain market was in the middle of a great summer rally, crops were short, there was a drought, and the wheat prices were moving up 10-15 cents a day all summer long. However, I was scared money and not willing to even scalp a 5 lot without scratching.

It was about five minutes before the close and the market looked like it was going to have a very strong close, up 18.4 cents or so. I was looking at the board and saw KC start to weaken and my mind said something like "Reversion to the mean" and before I knew it, I was offering a million bushels of wheat at the buck. I immediately regretted the stupid decision to sell volume at this point, in fact, any other person would have s**t his pants. The broker at Bunge said, "Take it" almost before I got the offer out of my mouth. I carded the trade and said "Oh Crap" but thought to myself that the market might sell off in the next five minutes and I'd be OK. The market didn't trade above my million and now the market was trading down to .6 offer, then .4 offer, then .2 offer. The bids dropped and the market started to sell off about 3.6 cents on heavy volume. I decided to cover during the last 30 seconds with the market down a nickel. I turned my hands inward and started to bid frantically a cent over the other bids to cover the million bushels I sold. There was only one problem…..I completely lost my voice and nobody heard me. The final bell went off, the market closed, and I still had a 3 cent profit on a million bushels. Still, I was sick to my stomach.

I figured out that I could do what most people do after the market closes and they are either light or heavy….I sauntered over to a bunch of different brokers and tried to cover my position through "after the close" trading(this practice was very common back in the day). Unfortunately for me, nobody had any wheat for sale at the closing range price. I turned in my cards and headed out the door to the bar downstairs. About 45 minutes later, while nursing a drink, Cathy the margin clerk came up to me and said that I needed to deposit a check for $150,000 to carry my position. I told her that I was down to my last $20K and would just have to be liquidated when the market opened back up. The market opened limit up and my position was liquidated first thing and I was wiped out. I woke up in a cold sweat. When I finally got out of bed this morning, I checked the market.

Jun

10

Pete Earle wrote a magnificent article: "Of Krugman and Diocletian"

May

21

An extremely low ranked golfer just shot a 55 on a 6698 yard par 71 course. The score of 55 matches a record set in 1962 and some are claiming it to be a world record because this course is a bit longer and is a par 71 vs a par 70 in the 1962 record. The golfer, Rhein Gibson, also shot a course record of 60 earlier this month at the same course in Oklahoma.

I wonder if Gibson has the course so dialed in that his scores are reflecting his familiarity with the course? After all, he did make 12 birdies and 2 eagles and played a virtually flawless game. Is this real or is it a fluke and this golfer is merely the equivalent of a Bob Beamon long jump in Mexico City? I wonder if there is any similarity with this golfer and his game to traders who "know" their markets like this golfer obviously knows his home course. If not, why?

May

17

I have sad news to report….the ukulele market in the UK has crashed, the price of a used Uke going from 45 pounds to a pound and change. The Ukulele market was showing bubble like conditions….when, suddenly it went south, popping like a balloon, and sinking like the Titanic. Luckily for me, I saw the move coming and was able to short the Ukulele market, my son taking the other side of the trade.

This Ukulele debacle is the worst musical instrument crash since Recorder Wednesday back in the 1993 when millions of students simultaneously quit the recorder. This might be time for the canes to step up to the plate and buy good Ukes to the extent of their balance.

May

9

I've been playing a lot of cash golf recently, with mixed results, and need to offer a few rules to help protect your bankroll in cash games.

1. Never play against a guy who is older, real tanned, friendly, and laid back. (If someone offers to carry your clubs from your car…run away)

2. Never believe a handicap of a stranger until you've seen him play at least 10-15 times. Funny thing is that amateurs egos make them take 2-3 strokes off their handicap, while good hustlers add 2-8 strokes….whatever the market will bear.

3. Never bet a new guy you've just played 17 holes for fun, on the 18th hole…..Never.

4. Never, ever play a guy for money who has a set of irons that have all the impact marks on the face, dead center, the size of a dime. See this and know you are going to reach for the wallet.

5. Never, ever play a guy for money who's clubs seem to be greasy(it's OK to look at and admire your opponent's clubs). Vaseline on a club face of a wood adds yards and can correct a slice.

6. Some old time golf hustlers think that if one is not cheating at least twice a round then you are not doing enough.

7. Watch out for the player that might have a couple of greens keepers who are a couple hundred yards down the fairway in carts who will kick a ball into a better lie….or kick a good lie into a sand divot….all for a picture of Franklin, some weed, coke, or whatever.

8. Never leave your clubs overnight in the locker room while you are the guest of a club…you might find the lies and lofts of your irons have shifted more than a few degrees while you were not watching them. Not all pro shops are honest.

9. Remember that not all the world's best golfers are on the PGA tour. In fact, most of the best golfers are probably not on the tour, but I cannot afford to quantify this statement.

10. Stay away from playing "Sticks" when you are a visitor put into a foursome.

11. Never accept a bet someone who is willing to play you with a pitching wedge, left handed, while offering you a ton of strokes….You will lose

12. If someone offers you a proposition bet like they can hit the ball closer to the pin than you with their 5-iron from 60 yards out, or any similar propositions, just say NO..

13. If your opponent shakes your hand, and his hand is smooth, without calluses, avoid betting money with him. Also, those squinty, cold eyes are an indicator .

14. Remember that the talent to shoot low scores is not the key to winning money.

15. The very best golf hustlers have negotiation skills that equal or surpass their golf game.

16. For the best golf hustler, when the game gets intense, it doesn't deteriorate, it improves.

17. The very best golf hustlers are more fearful of a seasoned golf gambler than a PGA pro….much more fearful.

18. Never bet a guy who says his caddy can beat you….you will lose and the caddy will win.

19. Remember the old maxim, "You drive for show and put for dough." The short game is where the real cash is made.

20. Stay out of cash games in Florida during the winter, especially with strangers. A low key guy at my club has hustling earnings that would put him in the top 15 if he was in the PGA.

21. Never play for cash with strangers at the Las Vegas Country Club.

22. Never bet with anyone who offers you any proposition up front at a public course…..especially a run down public course.

23. Even friends might turn 5 strokes into 3 on on the front nine and you will suspect it while settling up over drinks at the 19th hole..

24. Never, ever take a mulligan in a cash game with a stranger.

25. Never play cash games with strangers, and in foursomes, watch out for the tanned, laid back, callous free, friendly ringer.

Hustlers realize that the score their opponent shoots means absolutely zilch….what matters is who walks away with the cash. The sucker can shoot a 69 and lose money, but the hustler can shoot an 86 and win. Scores mean nothing until the game is over and the checkbook is pulled out..

All of these rules have market corollaries. What do you think the corollaries are?

May

2

World class poker rounder and poker player, Thomas Austin Preston Jr. aka "Amarillo Slim" died of colon cancer yesterday at the age of 83. Known as a real solid poker player, he was also a great prop hustler, one of the best on the planet.

Slim listed 10 rules for poker success that have relevance in trading.

1. Play the players more than you play the cards.
2. Choose the right opponents. If you don't see a sucker at the table, you're it.
3. Never play with money you can't afford to lose.
4. Be tight and aggressive; don't play many hands, but when you do, be prepared to move in.
5. Always be observing at a poker game. The minute you're there, you're working.
6. Watch the other players for "tells" before you look at your own cards.
7. Diversify your play so others can't pick up your tells.
8. Choose your speed based on the direction of the game. Play slow in a fast game, fast in a slow game.
9. Be able to quit a loser, and for goodness' sake, keep playing when you're winning.
10. Conduct yourself honorably so you're always invited back .

How do you think these rules translate to the trading arena?

Apr

20

This is a fascinating article extolling the benefits of free markets and how the free market (and freedom), and the invisible hand, guided the development of the Blues.

Apr

18

My erudite son let me look at this very interesting essay, just published today in Lapham's Quarterly.  An enlightening, alternative take on Virgil, to say the least. The final paragraph in this magnificent piece summed it up:

"…As the nations of the young West fought to define themselves, Virgil stood as proof that, evidence of Rome itself notwithstanding, "empire without end" was not only possible, but worth the struggle. We saw in him what we needed to see: a hope of immortal civilization. Then, when the world cracked around us, we again took from Virgil what we needed: comfort that progress and ideal empire was an illusion, and had always been so. Perhaps there are more revelations yet to come."

There are many, many market lessons in The Aeneid.

Apr

10

Here is a good list of movies that use math in the plot.

Feb

17

I don't think Oppenheimer was a spy; the problem was that he knew people (and slept with many of them) who knew people who were. He had a genius' confidence in himself and he genuinely inspired confidence in others; General Graves always maintained that, without Oppenheimer, the bomb would never have been built. The difficulty was that Oppenheimer could never imagine that other people were not as trustworthy as he was.

Whether that lack of imagination justified his losing his security clearance seems to me largely irrelevant. By 1954 Oppenheimer's part in the world of insanely lethal weaponry had largely drawn to a close. "The bomb" was now nuclear and US bombers were airborne 24 hours a day with payloads 100,000 times more destructive than the firecracker explosion at Alamogordo that had prompted Oppenheimer to quote poetry. People had very good reasons to be "hysterical" in 1954; the world was literally on the verge of annihilation.

Debating the question of Oppenheimer's guilt or innocence is - to my mind - much like arguing about capitalism. It is to accept terms that leave the people who are permanently aggrieved about the United States and its history with the upper hand. No one with an ounce of common sense, let alone Oppenheimer's genius, could have doubted that the Russians under Stalin were addicted to a tyrannical ambition as monstrous as Hitler's or the Japanese Emperor's. The Hitler-Stalin Pact had made that unmistakably clear about the Russian communists; the willingness of American communists to rationalize and even praise so monstrous an alliance erased all doubt about where Communists' loyalties would always lie. Oppenheimer also had to know what was happening to Polish Jews in 1940, with the complete support of the Russians. There was no excuse for him to be so cavalier with his "hazy and vague" connections to the Communist Party; as an American and, more particularly, as someone of Jewish descent he had no business associating with anyone even vaguely connected to the Party of Revolution.

Growing up in NYC (every borough but Staten Island) in the 1950s, I always thought the question of Oppenheimer's "innocence" (and even more the Rosenbergs) and Alger Hiss) was a coded message that translated into the general suspicion by the Left that the goyim were out to get them. What is remarkable is how that not entirely unreasonable anxiety has stayed alive even as the Left is now duty bound to support everyone who wants to blow up Israel.

P.S. FWVVVLIW, Ethel Rosenberg was probably not guilty of the crime her husband committed; those of us who despise conspiracy laws (how can you possibly reconcile them with the first Amendment?) wish that the prosecutors had been wise enough to understand the difference between her loyalty to her husband and Julius' active espionage.

Feb

15

I was playing Texas Hold'em Poker online yesterday. For about an hour, I had some very good wins. Then my wife came in from outside, and we had the Valentine's greetings. It was for less than half a minute. During this time, someone called all-in. When I discovered, the software followed the bet for me when my response was timed out. So I lost it all.

Things of this nature happen more often and more easily than we think. This is just another alarm for me to take the lesson seriously.

Jeff Watson writes: 

The real lesson here is to not play NL poker games. The risk of ruin in any NL game approaches 100%. Limit poker is much better for your longevity and bankroll….provided you are a good enough player to have an edge. If you don't have an edge, stay away from the game. This applies to any game, market, sport, or activity that is competitive in nature and has a win/lose outcome.

John Netto comments: 

Jeff, I have a different perspective in the limit vs. no-limit game discussion. As you hit on, much like trading, issues like bankroll, rake, skill of opponents, and ability to extract the greatest amount of expected value all play a roll. When discussing the risk of ruin in a No Limit game, it is important to qualify one game vs. a career. Limit hold'em can impede the ability to extract bankroll from weaker players who will egregiously overpay to chase draws or call after they have been beat. Over the life of a professional speculator, forsaking this volatility can come at a cost of giving up even greater alpha (we are trying to push the efficient frontier up and left, not down and right)…

In fact, playing no-limit tournament poker vs. no limit cash games is a different discussion all together, considering the variance as a professional tournament player vs cash game player (almost akin to being long gamma vs short gamma strategies in the market).

The reason why I am a professional sports bettor, former cash game no-limit poker player, and commodities trader is the ability to put myself into asymmetrical bets and judiciously control my bankroll. In fact, as unfortunate Leo's misfortune was, operational risk is a part of trading and poker. Many poker sites will give the option to check or uncheck the "call" button. There are benefits and drawbacks to both situations.

Sam Marx writes:

Can you imagine the damage a Flash-Crash would do if it occurred on an Option Expiration Day.

The previous Flash-Crash caused damage but much of it was later straightened out. But on an Option Expiration Day the damage might be insoluble

Ralph Vince writes: 

On a similar note, given this creeping-up market of recent weeks, Prechter's prediction (which, I am not discounting one speck) I was thinking this morning how the 2008 crash closely correlated with Obama's imminent election (please, I am not arguing political idealogy here. I do not care one joy who is in charge of the Magic Kingdom and it means nothing to me at all).

Rather, given the landscape of the political backdrop here (and making the giant assumption that a large part of the drop of 08, planet-wide, was a consequence of Obama's imminent ascent) should I be en guarde for perhaps a replay of this into the Summer? Does anyone concur to a recent complacency regarding a rapid, precipitous drop similar (or worse) than '08 ?

Enjoy the etouffee,

Ralph Vince

Stefan Jovanovich adds: 

These Presidents did not lose reelection during a war, but they did choose not to run again: Polk (the Treaty of Guadalupe-Hidalgo was signed in February and the last troops left Mexico in August 1848 but Polk had already announced that he would not stand for reelection), Johnson (Lyndon, not Andrew) and Truman. Eddy's Mom has the 30 months and out rule; if a war lasts more than 30 months, the incumbent President is in trouble. It seems to apply. The military winners have been Jefferson (Franco-American naval war), Madison (1812), McKinley (Spanish-American), Eisenhower (Korea) - none of whom had a war last more than 2 years while they were in office. That leaves Lincoln (who only won because of the votes of the Union soldiers themselves), Roosevelt (by 1944 everyone in America knew it was Roosevelt's last term and the Republicans invented the Michael Dukakis of their history - Dewey) and Bush I (which I think has to be discarded because 3+ person races throw out all the rules - vide 1860 and 1912). The only winner who has clearly violated the 30-month rule was Bush II. My explanation for that anomaly is that the Democrats lost because John Kerry was still trying to prove to himself and the world that he really earned all those medals he put in for. (Of all the issues on which to base a challenge, why would anyone choose: Incumbent reservist draft dodger vs. fake war hero?)

That leaves Obama. I agree with Prechter in his thesis about social mood; the arrow of causation runs in the opposite direction. The markets will tell us the fate of the President. So, if Ralph is right, elephants will be dancing in the streets in November.

 

Feb

9

Back in 1980, Esquire Magazine ran an article on O'Donnell's Laws of Cartoon Motion. I found those laws on the internet, and also found several other hilarious axioms that are of grave importance to an avid cartoon junkie like myself. Despite the fact that none of this is my work, and has been published on dozens of websites, I feel that this is a good laugh, and it's always good for trading to start the day off on a lite note. For what it's worth, the old Warner Brothers cartoons did the best job in bending the physical laws.

I. Any body suspended in space will remain in space until made aware of its situation. Daffy Duck steps off a cliff, expecting further pastureland. He loiters in midair, soliloquizing flippantly, until he chances to look down. At this point, the familiar principle of 32 feet per second per second takes over.

II. Any body in motion will tend to remain in motion until solid matter intervenes suddenly. Whether shot from a cannon or in hot pursuit on foot, cartoon characters are so absolute in their momentum that only a telephone pole or an outsize boulder retards their forward motion absolutely. Sir Isaac Newton called this sudden termination of motion the stooge's surcease.

III. Any body passing through solid matter will leave a perforation conforming to its perimeter. Also called the silhouette of passage, this phenomenon is the specialty of victims of directed-pressure explosions and of reckless cowards who are so eager to escape that they exit directly through the wall of a house, leaving a cookie-cutout-perfect hole. The threat of skunks or matrimony often catalyzes this reaction.

IV. The time required for an object to fall twenty stories is greater than or equal to the time it takes for whoever knocked it off the ledge to spiral down twenty flights to attempt to capture it unbroken. Such an object is inevitably priceless, the attempt to capture it inevitably unsuccessful.

V. All principles of gravity are negated by fear. Psychic forces are sufficient in most bodies for a shock to propel them directly away from the earth's surface. A spooky noise or an adversary's signature sound will induce motion upward, usually to the cradle of a chandelier, a treetop, or the crest of a flagpole. The feet of a character who is running or the wheels of a speeding auto need never touch the ground, especially when in flight.

VI. As speed increases, objects can be in several places at once. This is particularly true of tooth-and-claw fights, in which a character's head may be glimpsed emerging from the cloud of altercation at several places simultaneously. This effect is common as well among bodies that are spinning spinning or being throttled. A "wacky" character has the option of self-replication only at manic high speeds and may ricochet off walls to achieve the velocity required.

VII. Certain bodies can pass through solid walls painted to resemble tunnel entrances; others cannot. This trompe l'oeil inconsistency has baffled generations, but at least it is known that whoever paints an entrance on a wall's surface to trick an opponent will be unable to pursue him into this theoretical space. The painter is flattened against the wall when he attempts to follow into the painting. This is ultimately a problem of art, not of science.

VIII. Any violent rearrangement of feline matter is impermanent. Cartoon cats possess even more deaths than the traditional nine lives might comfortably afford. They can be decimated, spliced, splayed, accordion-pleated, spindled, or disassembled, but they cannot be destroyed. After a few moments of blinking self pity, they re-inflate, elongate, snap back, or solidify.

IX. For every vengeance there is an equal and opposite re-vengeance. This is the one law of animated cartoon motion that also applies to the physical world at large. For that reason, we need the relief of watching it happen to a duck instead.

X. Everything falls faster than an anvil. Examples too numerous to mention from the Roadrunner cartoons.

• If a tree falls on a character, it results in a partially elastic collision, repeatedly bouncing off their head until they are driven into the ground.

• It is possible for fire to spread by becoming temporarily animate.

• Any alligator, when punched, will fly up in the air returning to the ground as a nice set of matched luggage or perhaps as a nifty pair of boots.

• Objects launched into the air need not follow parabolic trajectories.

• Intelligence is inversely proportional to body size.

• Firearms are relatively ineffectual weapons (unless, of course, your intent is to blacken someones face, make it difficult for them to drink, and hold, water, or remove bills or feathers).

• Drawings are real as long as you're not aware they're drawings.

• A 'toon's GI-tract will always expand linearly in proportion to the object being swallowed regardless of the object's size.

• A vehicle's speed is limited only by the size of the numbers written on the speedometer.

• Pretending one is stepping on brakes is as good as having them.
• Holes are moveable

Jan

30

I am often asked what ten steps one should take to become a successful speculator.

I would start by reading the books of the 19th century speculators, 50 Years in Wall Street, The Reminiscences of a Stock Operator by Markman, and others.

Next I would read the papers of Alfred Cowles in the 1920s and try to compute similar statistics on runs and expectations for 5 or 10 markets.

Third I would get or write a program to pick out random dates from an array of prices, and see what regularities you find in it compared to picking out actual event or market based events.

Fourth, I would read Malkiel's book A Random Walk Down Wall Street and update his findings with the last 2 years of data.

Fifth, I would look at the work of Sam Eisenstadt of Value Line and see if you could replicate it in real life with updated results.

Sixth, I would start to keep daily prices, open, high, low, and close for 20 of so markets and individual stocks and go back a few years.

Seventh, I would go to a good business library and look at the old Investor Statistical Laboratory records of prices to see whether it gave you any insights.

Eighth, I would look for times when panic was in the air, and see if there were opportunities to bring out the canes on a systematic basis.

Ninth, I would apprentice myself to a good speculator and ask if I could be a helpful assistant without pay for a period.

Tenth, I would become adept at a field I knew and then try to apply some of the insights from that field into the market.

Eleventh, I would get a good book on Statistics like Snedecor or Anderson and be able to compute the usual measures of mean, variance, and regression in it.

Twelfth, I would read all the good financial papers on SSRN or Financial Analysts Journal to see what anomalies are still open.

Thirteenth, of course would be to read Bacon, Ben Green, and Atlas Shrugged.

I guess there are many other steps that should be taken that I have left out especially for the speculation in individual stocks. What additional steps would you recommend? Which of mine seem too narrow or specialized or wrong?

Rocky Humbert writes:

All the activities mentioned are educational, however, notably missing is a precise definition of a "successful speculator." I think providing a clear, rigorous definition of both of these terms would be illuminating and a necessary first step — and the definition itself will reveal much truth.

Anatoly Veltman adds: 

I think with individual stocks: one would have to really understand the sector, the company's niche and be able to monitor inside activity for possible impropriety. Individual stocks can wipe out: Bear Stearns deflated from $60 to $2 in no time at all. In my opinion: there is no bullet-proof technical approach, applicable to an individual enterprise situation.

A widely-held index, currency cross or commodity is an entirely different arena. And where the instrument can freely move around the clock: there will be a lot of arbitrage opportunities arising out of the fact that a high percentage of participation is inefficient, limited in both the hours that they commit and the capital they commit between time-zone changes. Small inefficiencies can snowball into huge trends and turns; and given the leverage allowed in those markets - live or die financial opportunities are ever present. So technicals overpower fundamentals. So far so good.

Comes the tricky part: to adopt statistics to the fact of unprecedented centralized meddling and thievery around the very political tops. Some of the individual market decrees may be painfully random: after all, pols are just humans with their families, lovers, ills and foibles. No statistical precedent may duly incorporate such. Plus, I suspect most centralized economies of current decade may be guilty of dual-bookeeping. Those things may also blow up in more random fashion than many decades worth of statistics might dictate. Don't tell me that leveraged shorting and flexionic interventions existed even before the Great Depression. Today's globalization, money creation at a stroke of a keyboard key, abominable trends in income/education disparity and demographics, coupled with general new low in societal conscience and ethics - all combine to create a more volatile cocktail than historical market stats bear out. 2001 brought the first foreign act of war to the American soil in centuries. I know that chair and others were critical of any a money manager strategizing around such an event. But was it a fluke, or a clue: that a wrong trend in place for some time will invariably produce an unexpected event? Why can't an unprecedented event hit the world's financial domain? In the aftermath of DSK Sofitel set-up, some may begin imagining the coming bank headquarter bombing, banker shooting or other domestic terrorism. I for one envision a further off-beat scenario: that contrary to expectations, the current debt spiral will be stopped dead. Can you imagine next market moves without the printing press? Will you find statistical precedent of zooming from 2 trillion deficit to 14 trillion and suddenly stopping one day?

Craig Mee comments:

Very generous post, thanks Victor…

I would add, in this day and age, learn tough typing and keyboard skills for execution and your way around a keyboard, so you don't wipe off a months profit in the heat of battle. I would also add, learn ways of speed reading and information absorption, though these two may be more "what to do before you start out". 

Gary Rogan writes: 

Anatoly, I don't think really understanding the sector and and the niche is all that useful unless one knows what's going on as well as the CEO of the company, which means that in general understanding quite a bit about the company isn't useful to anyone without access to enormous amount of information. It's the subtle, little, invisible things that often make all the difference. There are a lot of people who know a lot about pretty much any company, so to out-compete them based on knowledge is usually pretty hopeless. It is nevertheless sometimes possible to out-compete those with even better knowledge by sticking with longer horizons or by being a better processor of information, but it's rare.

That said, it has been shown repeatedly that some combination of buying stocks that are out of favor by some objective measure, possibly combined with some positive value-creation characteristics, such as return on invested capital, do result in market-beating return. Certainly, just about any equity can go to essentially zero, but that's what diversification is for.
 

Jeff Watson adds: 

In the commodities markets it's essential to cultivate commercials who trade the same markets as you(especially in the grains.) One can glean much information from a commercial, information like who's buying. who's selling, who's bidding up the front month, who's spreading what, who's buying one commodity market and selling another, etc. When dealing with a commercial, be sure to not waste his time and have some valuable information to offer as a quid pro. Also, one necessary skill to develop is to determine how much of a particular commodity is for sale at any given time…. That skill takes a lot of experience to adequately gauge the market. Also, in addition to finding a good mentor, listen to your elders, the guys who have been successful speculators for decades, the guys who have seen and experienced it all. Avoid the clerks, brokers, backroom guys, analysts, touts, hoodoos etc. Learn to be cold blooded and be willing to take a hit, even if you think the market might turn around in the future. Learn to avoid hope, as hope will ultimately kill your bankroll. When engaged in speculation, find one on one games like sports, cards, chess, etc that pit you against another person. Play these games aggressively, and learn to find an edge. That edge might translate to the markets. Still, while being aggressive in the games, play a thinking man's game, play smart, and learn to play a strong defensive game……a respect for the defense will carry over to the way you approach the markets and defend your bankroll. Stay in good physical shape, get lots of exercise, eat well, avoid excesses.

Leo Jia comments:

Given that manipulation is still prevalent in some Asian markets, I would add that, for individual stocks in particular, one needs to  understand manipulators' tactics well and learn to survive and thrive under their toes.

Bruno Ombreux writes:

Just to support what Jeff said, you really have to define which market you are talking about. Because they are all different. On one hand you have stuff like S&P futures with robots trading by the nanosecond, in which algorithms and IT would be the main skill nowadays, I guess. On the other hand, you have more sedate markets with only a few big players. This article from zerohedge was really excellent. It describes the credit market, but some commodity markets are exactly the same. There the skill is more akin to high stake poker, figuring out each of your limited number of counterparts position, intentions and psychology.

Rocky Humbert adds:

I note that the Chair ignored my request to precisely define the term "successful speculator," perhaps because avoiding such rigorousness allows him to define success and speculation in a manner as to avoid acknowledging his own biases. I'd further suggest that his list of educational materials, although interesting and undoubtedly useful for all students of markets, seems biased towards an attempt to make people to be "like him."

If gold is up a gazillion percent over the past decade, and you're up 20%, are you a successful speculator?If the stock market is down 20% over a six month period, and you're down 2%, are you a successful speculator?If you have beaten the S&P by 20 basis points/year, ever year, for the past decade, without any meaningful drawdowns, are you a successful speculator?If you trade once every year or two, and every trade that you do makes some money, are you a successful speculator?

If you never trade, can you be a successful speculator?

If you dollar cost average, and are disciplined, are you a successful speculator?

If you compound at 50% per year for 10 years, and then lose everything in an afternoon, are you a successful speculator?

If you lose everything in an afternoon, and then learn from your mistake, and then compound at 50% for the next 10 years, are you a successful speculator?

If you compound at 6% per year for 10 years, and never have a meaningful drawdown, are you a successful speculator?

If the risk free rate is 6%, and you are making 12%, are you a more successful speculator then if the risk-free rate is 0% and you are making 6%?

If you think you are a successful speculator, can you really be a successful speculator?

If you think you are not a successful speculator, can you be a successful speculator?

Who are the most successful speculators of the past 100 years? Who are the least successful speculators of the past 100 years? 

An anonymous contributor adds:

In conjunction with the chair's mention of valuable books and histories, I would append Fred Schwed's Where are the Customers' Yachts?.

While ostensibly written with a tongue-in-cheek hapless outsider view of 1920s and 1930s Wall Street, it has provided as many lessons and illustrations as anything by Henry Clews. In this case, I am reminded of the chapter in which Schwed wonders if such a thing as superior investment advice actually exists.

Pete Earle writes:

It is my opinion that the first thing that the would-be speculator should do, even before undertaking the courses of actions described by our Chair, is to open a small brokerage account and begin plunking around in small size, getting a feel for the market, the vagaries of execution quality, time delays, and the like. That may serve to either increase the appetite for such knowledge, or nip in the bud what could otherwise be a long and frustrating journey.

Kim Zussman adds: 

The obligatory Wikipedia* definition of speculation is investment with higher risk:

Speculating is the assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss. The term speculation implies that a business or investment risk can be analyzed and measured, and its distinction from the term Investment is one of degree of risk. It differs from gambling, which is based on random outcomes.

There is nothing in the act of speculating or investing that suggests holding times have anything to do with the difference in the degree of risk separating speculation from investing

By this definition one must define risk and decide what comprises high and low risk — which may be simple in extreme cases but (as we have seen repeatedly) is not very straightforward in financial markets

*Chair is quoted in the link 

Alston Mabry writes in:

I'm successful when I achieve the goals I set for myself. And rather than a target in dollars or basis points or relative to any index or ex-post wish list, those goals may simply be to act with discipline in implementing a plan and then accepting the results, modifying the plan, etc.

Anatoly Veltman adds: 

And don't forget Ed Seykota: "Everyone gets out of the market what they want". I find that everyone gets out of life what they want.

Plenty a market participant is not in it to make money. Fantastic news for those who are!

Bruno Ombreux writes:

This will actually bring me back to the question of what is a successful speculator.

In my opinion success in life is defined in having enough to eat, a roof, friendships and a happy family (as an aside, after near-death experiences, people tend to report family first). You can forget stuff like being famous, leaving a legacy or being remembered in history books. If you are interested in these things, you have chosen the wrong business. Nobody remembers traders or businessmen after their death except close family and friends. People who make history are military and political leaders, great artists, writers…

So you are limited to food, roof, friends and family. Therefore my definition of a successful speculator is a speculator that has enough of these, so that he doesn't feel he needs to speculate. I repeat, "a successful speculator does not need to speculate."

Paolo Pezzutti adds:

I simply think that a successful speculator is one who makes money trading. Among soccer players Messi, Ibrahimovic are considered very successful. They consistently score. They experience short periods without scoring. Similarly, traders should have an equity line which consistently prints new highs with low volatility and a short time between new highs. Like soccer players and other athletes it is their mental characteristics the main edge rather than knowledge of statistics. One can learn how to speculate but without talent cannot play the champions league of traders and will print an equity line with high drawdowns struggling losing too much when wrong and winning too little when right. Before dedicating time to find a statistical edge in markets one should assess his own talent and train psychologically. In this regard I like Dr Steenbarger work. In sports as in trading you very soon know yourself: your strengths and weakness. There is no mercy. You are exposed and naked. This is the greatness and cruelty of markets and competition. This is the area where one should really focus in my opinion.

Steve Ellison writes:

To elaborate a bit on Commander Pezzutti's definition, I would consider a successful speculator one who has outperformed a relevant benchmark for annual returns over a period of five years or more. Ideally, the outperformance should be statistically significant, but market returns can be so noisy that it might take much of a career to attain statistical significance.

Jeff Rollert writes:

I propose a successful speculator dies wealthy, with many friends. Wealth is not measured just in liquid terms.

Should a statistical method be preferred, I suggest he is the last speculator, with capital, from all the speculators of his college class.

In both cases, I suggest the Chair and Senator are deemed successful, each in their own way.

Leo Jia adds:

If I may wager my 2 cents here.

I would define a successful speculator as someone who has achieved a record that is substantially above the average record of all speculators in percentage terms during an extended period of time. The success here means more of a caliber that one has acquired which is manifested by the long-term record. Similarly regarded are the martial artists. One is considered successful when he has demonstrated the ability to beat substantially more than half of the people who practice martial arts, regardless of their styles, during an extended period of time. It doesn't mean that he should have encountered no failures during that time - everyone has failures. So, even if that successful one was beaten to death at one fight, he is still regarded as a successful martial artist because his past achievements are well revered.

With this view, I will try to answer Rocky's questions to illustrate.
 

Julian Rowberry writes:

An important step is to get some money. Preferably someone else's. [LOL ]

Jan

24

When I traded on the floor, superstition gave rise to very ritualistic behavior among traders. A bad day suffered, meant that certain abstract actions and physical items would be avoided if perceived to have caused bad luck. Conversely, if a trader had a good day, he would look to repeat the events that led up to his good fortune.

Not enough time to shave, and then a profitable day? Good chance, you were now growing a beard! Often times, boxers failed to be discarded in the laundry hamper in a timely manner, and most assuredly, ties were never changed after a good day in the pit. Pens were saved and reused, along with the repetition of parking spot, route to the building, and ingress into the pit; as long as your propitious streak persisted.

This perverse protocol even extended to the members bathroom. Inside this veritable sanctuary, every member had their lucky stall, having mentally claimed “squatters rights” after spending time there prior to a particularly profitable day. Conversely, losing stalls were avoided like a trip to OIA.

What are your trading superstitions or idiosyncratic behaviors?

Scott Brooks shares:

Anyone who thinks shaving or not shaving has never watched hockey playoffs…..a bunch of unshaven guys wearing one of two different uniforms, all skating around. One wins, one losses, and both have itchy scratchy beards that played no role in their success.

However, routines, based on logic and reason, can have a huge impact on outcome.

I have routines for hunting that I've used for years that I know work. From the time I get up to the time I am situated in my tree stand, I follow a routine. A routine that minimizes scent and the chances that deer will know I've moved into the area are followed religiously.

Reading my reports, news articles checking the spec list and communicating with other traders are all a part of the routine that I follow every day.

But the most important thing that I do when it comes to trading is this: If I have an up day, I don't change underwear, shower or brush my teeth as long as the winning streak continues, because I don't want the good luck to rub off…..but yeah, I know that's pretty obvious as I'm sure everyone else does the same thing…..right?

Jeff Watson writes: 

I remember knowing a very nasty wheat trader who was very superstitious and wore the same unwashed blue trading jacket for about 4 years straight. The thing was so dirty it stood up on it's own and smelled like a combination of sweat, nicotine, and BO. Although he ascribed many powers to the jacket, he was very careless with it and would leave it hanging on a coat hook after market hours. One night after the close, after about 5 hours at our local watering hole, a couple of us partners in crime went back to our clearing firm's office, in a prankster-ish mood and sufficiently lit, and hid his jacket at the back of a closet. The next morning, before the open he came in and couldn't find the jacket and went absolutely nuts. He was inconsolable, irrational, and out of control….and this was before the open. After the open, he went on tilt, made a hundred mistakes, and ended up losing a ton of money, all in one day.

The trading jacket, like any other talisman, had no power. What had the power was his faulty belief system and his delusions that he could not make money without the jacket. He was one of the most rational people I ever met and he thought a jacket had supernatural powers. He gave the jacket powers because of a couple of untested, unscientific, irrational, anecdotal observations.

Back to the story…..He lost money all week long and I felt very bad and ended up coming in early on Friday morning and put his jacket back up on the hook. He was very happy and thought his jacket would turn things around. Needless to say, he continued on his losing streak, bidding instead of offering, buying the spread instead of selling it, and making a million other costly mistakes. The jacket made no difference and it took him a couple of months and a few weeks off to right his head. Although it was a cruel joke, it wasn't the jacket that was keeping him from making mistakes and he ended up realizing that talismans are what they are….talismans. 

Gary Rogan writes:

These were cool stories, thanks for sharing Jeff! 

Jan

22

A big M3 solar flare was ejected from the sun and is expected to hit the earth today at 22:00 Zulu. It is also expected to hit Mars. There is a possibility of a strong solar storm with excellent aurora viewings in the northern and southern regions. Radio propagation should also be crazy at this time.

Jan

4

Here's a good article listing 12 things that happy people do differently than everybody else. I don't agree with everything on the list and I would add a few anecdotal things points. I wonder if the we could compile a complete list of things happy people do differently. I'll bet there's more than 12 things, probably closer to 100.

Russ Sears writes: 

Perhaps top on my list of New Years resolutions this year is to learn to enjoy effort both intellectually and physically. I believe this will perfect several of the items on the list… including 1. Take care of your body (and mind). Practice "Flow" 2. Savor Life's Joys (by practicing "Living") 3. Setting goals 4. Develop coping skills.

All these are achieved mainly by loving the challenges of effort. But perhaps more importantly, this will help you maximize the resources you are given.

This is the key to feeling good about yourself and overcoming the fears that turn into opportunities.

I would add to the list: "Learn to guard and value money for the freedom and potential opportunities it can bring to your and your families life".

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