May

6

Vic says, "Be direct," in market analysis. "Study the thing directly, not some derivative. Studying the most simple things leads to the most robust ideas even in complex systems."

Taking a "be direct" approach to understanding a market occurrence is certainly a benefit. Individuals incorporating this practice as a piece of her "overall" information collection strategy tend to have a reasonable understanding of market causality.

Moreover, individuals attempting to use a be direct approach, in isolation, should take heed. Susceptibility to manufactured events and disinformation increases dramatically as the number of credible sources decline. Entities conveniently provide information hoping that people will "take their word" and not be objective thinkers. This situation hardly advances our own self-interest and makes informed decision-making nearly impossible.

Perhaps, people could analyze a market occurrence in the most direct fashion available, making notes of their initial reaction and potential course of future action. Placing scenario one on hold, cross-reference that information with as many creditable sources as possible. Timeliness should be a concern because over-referencing might decrease the advantage time sensitive information provides. Throughout this process the information's creditability and relevance will be established.

Combining enhanced qualitative analyses with quantitative "know-how" will invariably lead to more informed, if not better, decision-making.

As for the aforementioned Mr. Koch's postulates? I must have dozed off during the lecture highlighting his work regarding microorganism causality.

As a librarian, I relish the journey of acquiring hard-to-find information. Feel free to contact me if you'd like a list of websites, books, and articles related to the art and science of effective information collection.

Aug

14

This book by David M. Raup, a biologist at the University of Chicago, of the Stephen Jay Gould genre, identifies everything about extinction that we thought was true but is not. The author’s main thesis is that extinction is a mostly random event; due to catastrophes and bad luck, and not related to the process of evolution that is part and parcel of the Darwinian idea. The author believes that the most likely explanation for the major extinctions that we have had is not competition, nature, or physical causes, but meteorites of colossal energy that fell on the earth regularly some 18 million years ago and still threaten us today.In the process of debunking everything that we have been taught about extinction the author comes to six conclusions that are of great explanatory value for all species, all companies, and all investment styles:

  1. Species are temporary. Almost all species die out, and almost all lifetimes are very small relative to the age of the earth.
  2. Species with small populations are easy to kill. This is a consequence of gambler’s ruin, that if you let random events run for a long enough time you are bound to hit the zero point, unless the probability of success is inordinately high. This is something that all traders with fixed systems, and all companies with specialized technological innovations and unique niches should contemplate.
  3. Widely spread species are harder to kill. Geographic diversity, and niche diversity are very important in precluding narrow events from causing a species’ extinction.
  4. It is much easier to kill a species if you get a substantial number with the first strike. The importance of not losing too much in one fell swoop is paramount in any field.
  5. Extinction is most often caused by new stresses that the organism is not accustomed to. Long-lived species have usually developed mechanisms to cope with everything that has occurred to them in the past, so the thing they must fear the most is the meteor … or the spacemen!
  6. Mass extinctions require stresses that cut across all biological boundaries. In the market this would be such a thing as a big war or a global rise in interest rates.

There have been five major extinctions in the history of the earth. They are usually classified as Ordovician-Silurian, 440 million years before present, Late Devonian, 365 b.p., Permian-Triassic 250 b.p., End Triassic 200 b.p., and Cretaceous-Tertiary, 65 b.p., and a high percentage of species and genera were killed off in the years surrounding each of these markers. The author has developed some nice graphs to show what the likely number of species that died are, given the number of genera that were killed in each cataclysm.

There is an interesting but naive chapter in the book on the relation of extinction to industries. Raup argues that most of the companies around today were not in existence 50 years ago, and the cause of their disappearance, merger or bankruptcy corresponds to the causes of species disappearance or phyletic transformation. The author draws parallels between such things as that the total number of companies names was lower 50 years ago, just as biodiversity was less, and that certain industries wax and wane just as species do:

Above all, stock prices as well as the composition of the entire market, are virtually unpredictable from… decade to decade. And so it was with biological evolution in… the most recent 500 million years.

There is an excellent chapter in this book on the history of life, some nice methods of graphing durations and the branching of species, and some good anecdotes about all the famous species like the trilobites and the dinosaurs that did disappear with a debunking of the common explanations.

The book focuses on an extremely important part of the process of life, and shows some interesting methods for sorting fact from fiction.

A Few Points on Extinction in the Markets from Jeremy Lyter

  1. Species are temporary but the energy manifested in individuals and markets carries on beyond the gradual understanding of science and reason. (Corporate) death is nothing but an opportunity. Time is nothing but a hubristic attempt to contemplate the unknown.
  2. Individual entities, while susceptible to a variety of ills, are more inclined to survive attacks based on the presumption stated in point four, which assumes a large group is present and available to be taken out with the first strike. Less mass = Less possible chance of extinction.
  3. Diversification in multiple markets should prove a trusted strategy?
  4. 90/10 rule?
  5. Extinction would have taken its toll on multiple organisms, yet somehow these organisms were allowed endure. Perhaps, spacemen and meteors are mere market chatter.
  6. Markets are the perfect non-biased teachers of self-reflection and discipline. A survival rate has less to do with war and more to do with the preparation of war’s outcome.

Gary Rogan adds:

This book should be required reading for those who advocate “focused” portfolios. What you do not know will eventually kill you if you are too concentrated. The most amazing thing for me about evolution has always been the fact that for over a billion years the range of temperatures and other environmental conditions on earth were within a narrow enough range not to kill every organism in our branch of the evolutionary tree. When the dinosaurs were wiped out, the mammals and many other species did manage to survive. What are the chances that over such a long time the temperatures were not high enough long enough to kill all non-extremophiles on Earth? Perhaps we are simply unbelievably lucky and there is essentially zero chance for other intelligent life in the universe for this very reason.

Steve Ellison mentions:

In January I reviewed Evolutionary Catastrophes: The Science of Mass Extinction by Vincent Courtillot:

“Courtillot presents evidence that at least seven major hotspots have emerged under continental plates in the past 300 million years. The initial emergence of each of the seven hotspots resulted in clusters of massive volcanic eruptions that coincided with large numbers of extinctions. Courtillot theorizes that major hotspots originate deep in the mantle, at the boundary with the core. This layer of the earth’s interior is also associated with the magnetic field. Intriguingly, the two greatest mass extinctions in the period studied, at the ends of the Permian and Cretaceous periods, each occurred after abnormally long periods of magnetic field stability. Usually, the earth’s magnetic field reverses polarity every few million years, but it went 35 million years between reversals in the Cretaceous period. Courtillot theorizes that the lack of reversals might have been due to the boundary layer between the core and mantle growing to a greater than usual thickness, which might have inhibited polarity shifts while at the same time becoming more unstable and leading to a more dramatic ‘correction’, i.e., formation of a more intense hot spot, than usual.” [Read More]

Generalizing this idea, long suppression of needed adjustments leads to cataclysm in other disciplines as well. In seismology, the longer the interval between major earthquakes, the more devastating the earthquake is likely to be. In politics, the century-long period of European stability after the Napoleonic wars gave way to World War I.

Jim Sogi adds:

  1. All trading systems are temporary.
  2. Traders with small balances are easy to kill.
  3. Diverse trading style less likely to go bust.
  4. If the first strike knocks you down to margin limits, your chance of going bust increase.
  5. Always protect against the 6 sigma event to prevent extinction. What is the greatest historical draw down on the system? Is there enough margin to cover that event or worse?

On Extinction — Sharks have survived since 100 million years before dinosaurs. They have a simple system. They constantly cruise around and eat the weak or struggling fish, they never pick fights with the strong. They go check it, they give it a test, and then they eat it. If there is any problem, they are gone. They are really really tough skinned and lack any emotion whatsoever. Smaller fish are dominated by fear. The small sharks hunt in packs. The big ones travel the globe. There are always always going to be dead, dying or injured or weak struggling fish around.

On Diversity — Changing cycles demand diverse trading styles. The 1980s favored buy and hold. The late 1990s were great for short term trading opportunities. Early this spring was terrible for short term, and these past few months are great again for short term trades with multiple 7-15 point moves. Horizontally it is good to be able to trade several styles to fit the seasons and cycles. Vertically, like a fund, allocate portions of capital to different styles or asset classes to achieve diversity. The issue is not whether short term or high frequency trading is in itself good or bad, but how it fits in with the current cycle and with asset allocation.

Archives

Resources & Links

Search