Apr

7

Last weekend I did the Richard Petty Driving Experience in Forth Worth After a tiny bit of training, eight laps around Texas Motor Speedway.

I am glad that I did it, but I would not do it again. It's very inefficient. Basically, for 20 minutes of action (including suiting up, getting latched in, learning and then forgetting all the things to do if the car catches on fire), you wait around for 3.5 hours or more. It is such a popular product that they just herd people into every class and make you wait, rather than trying to make it more efficient.

In the markets, people often use the wrong tools for the job, often due to habit and the lack of acceptance of new ideas. In the consulting industry, this is common. Consultants operate the same way that they did 20 years ago. Now, they won't say that. Every two years they invent a new ratio that they apply to past performance and claim that it is an important breakthrough. Nevertheless, in my time, I was the only consultant who actually used factor analysis and systematic statistical techniques to separate beta from alpha. I think this is because I started on the hedge fund side, so when I moved to consulting I looked at the tools and thought "these aren't the best tools for the job."

Anyway, the simple fact is that the steering wheel is the wrong tool for the job. This might sound strange, but bear with me: Normally in a car you might hold the wheel at 10:00 and 2:00. We were told to hold at 11:00 and 5:00. Why? Because the car only turns left, and by holding at 11:00 and 5:00 you never have to roll your hands over. My first thought was, "Rather than using a new tool, they changed the way they use the old tool!"

I found that driving is actually quite physical. I had always dismissed it when the NASCAR announcers said so, but I was wrong. It's quite tiring to constantly pull the wheel hard to the left, particularly as the G-forces rise (my top speed was ~140 mph). You have your arms extended about half way in front of you as you are yanking on the wheel.

Thinking about it later, the wheel is simply the wrong tool for the job. Old bombers use a wheel because they don't engage in physically exerting maneuvers, yet a fighter plan will use a stick. Think of passengers' cars as bombers, and stock cars as fighters. For the physically exerting maneuvers, it would be much less taxing to have a flight stick lower and in front of you than a wheel up high. If you had a flight stick, it would be much less tiring, and would free up a lot of attention and dashboard space for mirrors and understanding your surroundings.

From James Lackey: 

The Petty Driving Experience is only a quick ride. The anticipation is half of the fun. The smell of racing gas and burnt rubber, the roar of the engines, the butterflies before taking the wheel is all the fun. Run any 50-lap racecar driving school. Two each ten lap warm-ups then a 30-lap draft run. On lap 27, the heat, the stress had me say "get me out of this thing."

The physical strength it takes to turn the wheel of a car or slam on the brakes is all in the mechanical systems. A stick on an airplane is a full computer controlled hydraulic system. In your passenger car, with traction control, computer assist and anti lock brakes coupled with hydraulic assist power steering and brakes makes for an effortless drive. Rules and restrictions in racing keep the tech low. The reason often stated is to keep the costs down. Yet the real reason is to keep the drivers input relevant. New technologies make some forms of racing basically a remote controlled car, with a human along for the ride. The reason a racecar is hard to steer is so you can feel if the tires start to lose traction, to correct before a crash.

In the glory days of racecars, the 1960s, technology had not yet made drivers irrelevant. It was easier to make more horsepower than the traction of the tires and the track could hold. A driver needed the ability to control the engines power to control the car. Nowadays everything is restricted by either rules or computers. The worst is the bureaucracy of racecar sanction rule makers. A good result may be achieved by restricting engine size alone. Let all things in the car be unlimited, besides cubic inches.

Trading has seen the same technological advances that make individual traders as relevant as racecar drivers today. We all have a friend that scales in and out of the market using size, time, average range and price. When you point out that they could just as easy program a computer to do the job, they point out that every year is different; the markets constantly change. They can do a better job on the fly then a pre-programmed box.

Market rules seem to restrict technology. Years ago we had limit down rules. The old excuse was in 1987 computer program trades crashed the system. Funny thing since we removed the tight limit down rules, smart traders can't save the market from stupid computers and limit down opens. It's remarkable how much profit I have lost as a trader since that rule change.

Boy, was I happy after the fact on that down 500-point day a few weeks ago. No, not at all happy for the 5th day down being a 500 pointer, I was pleased to see that computers were blamed for the malfunction. We need humans in the markets. My kids need me in the market with the ability to profit. That is a much more honest answer than that the NYSE needs the specialist system to remain intact for public benefit.

When I was a little kid in the late 70s it not only took a fortune to make a drag race car run 8 flat in the quarter; it took knowledge. Money alone could not buy a fast car. The knowledge was not readily available. A few years ago I built a car for less than half of what it would cost 20 years earlier. The first day out the car ran with in 8% of perfect. On paper the car should have run 7.97 seconds at sea level. With in a couple weeks we had the car run 98% of perfect.

Yet in my class, super comp, I would guess that some 3,000 cars in the country run 99.9% perfect and any given race. A few cars have a perfect run down to the 10,000th of a second. Most of that ability to run the 99% of paper perfection is new technology. Yet that last one percent is knowledge. Let's put it this way, you can run your car with in one percent of potential and count on a loss the first round of competition.

In the markets we do not have to compete. We can in theory just buy the market and match the return. Lets call that trading not to lose. At races when conditions are good, to win you need to be with in 0.006% to win. The other day some one mentioned it was a stop run at 1424. A two-point drop on that stop run translates into only a bit over a tenth of a percent. That is tight competition.

A real stop run was last Feb when we broke down 2% on the day; the market dropped 20 more handles in an hour. After many sessions of not having a down one percent day, many were set for tight trading. In racing that would be a nice sunny summer day of practice, then rain and a 50-degree change in the temperature. The best racers have the ability to change set ups quickly.

After heavy weather, the cool air and low humidity, racecars or trading accounts, make much more power. After a big fall in the markets, the intra day moves can be wild. After the big cold front came through in Feb, if you revved your account to 5,500 rpms, dumped the clutch at the open you blew the tires right off your account.

Perhaps it is not the tools for the job, just the calibration. After the huge down it took weeks for risk mangers and funds to adjust. Two days after the fall traders adjusted and were making more than the weeks prior on half the size. If the markets can drop 50 again, they will move 20 points on any given day. It's much easier to make 8 points on a 20 point day than to make the entire 8 point range months prior, unless your investing.

Once conditions become stable at whatever temperature and pressure it becomes much harder to win. In low temperatures engines make more power. Once the car is set up to run at the increased power speeds will increase. It's the same with the markets and absolute daily returns. The problem is taking it easy until the weather and the markets become stable. You can easily crash your account. Yet once conditions are stable, everyone has adjusted, the new problem is being very aggressive with your set up.

If you are too conservative when the conditions are great a rookie will blow you away. That is to say a rookie with a good computer. It's remarkable how quickly the markets adapt vs. just five years ago.


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