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April 1-15, 2006
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15-Apr-2006
Bacon and Turf Betting, by Kevin Depew
Great Bacon summary, thank you.
Sometimes it can seem that Bacon and others (Cramer, Mark not Jim) are suggesting that the professional turf player is simply looking for "THE overlay" in the race, as if races are broken down into two categories - those with an overlay that the turf player can choose to play or not play, and those without an overlay that the turf player must choose to pass in order to maximize the slim potential for long-run profitability. If only life were so simple.
The reality, at the track as in markets, is that a race may contain many overlays. The task is to choose which overlay to play. This is where many turf players fall short. And this is where speculation at its finest enters the picture. What if there are three or four overlays in the same race?
Bacon's advice to always be thinking differently from the public, at first sounds quite reasonable and almost facile, but it might be just a bit more complex. Someone asked me not long ago, what is the best way to learn to handicap a horse race. I’ve thought about the question for a long time because I'm about to start "training" my 9-year-old son in horseracing degenerateness.
I came up as a horseplayer the hard way - absorbing all the nuggets of conventional wisdom and accepted tenets of handicapping as handed down from one generation of losing player to another. Lord, it was expensive. How nice if someone educated as a speculator at the track would have passed along some of the lessons I paid so much money to learn? Well, the truth is I don't I think it would have helped all that much. At least it wouldn’t have helped me.
Haruki Murakami once wrote that, "If you read what everyone else reads, you'll think what everyone else thinks." Thinking what everyone else thinks is quite comfortable. Most of us prefer it even as we generate advertising campaigns that say each of us should "Think Different" - the irony of a marketing campaign exhorting all of us to buy the same product, therefore uniting us in our thinking different-ness! If there is a secret to professional turf betting, or speculation of any kind, maybe it is hiding somewhere between Bacon and Murakami. Yes, if you read what everyone else reads, you’ll think what everyone else thinks, but understanding what everyone else thinks is critical to choosing a different path.
Bacon is at once dismissive of the public’s goal – finding the secret to winning at the track, the foolproof method that involves the least amount work – but he is sympathetic too. I think that his sympathy, Bacon’s cry - “He has no right to lose so much. It's almost as if he did it on purpose!” - is a profound insight. It is a necessary relationship between the winning individual at the track and the public at large. That sympathy keeps them playing, and as long as they are playing, the game can continue. Hurt them too much, or let sympathy descend into pity, and everything falls apart.
Everyone hates a winner, maybe it brings too close to us a sense of finality and conclusion - a reminder of the ultimate finish line we will confront; truly we will all be winners in the end. Hope, on the other hand, springs eternal, and losing affords the public an endless amount of hope - the next race will be better, there's always next year, tomorrow's a new day, hope for the best.
Steve Leslie comments:
One of the great quotes attributed to President Reagan with respect to the Soviet Union and their disclosure of weapons was "Trust but verify." The esteemed Chair says it a bit differently; to paraphrase: "test, test, test" and if in doubt "test again."
Now this is where I might take exception to Haruki Marukamis statement. "If you read what everyone else reads, you'll think what everyone else thinks."
This is not necessarily a bad thing provided you are reading the right things. IF you are reading the right "things" you are shortening your learning curve. and after reading such "things" You are working and expanding on the thoughts and views of the "things" that you just read and adapting them to your own particular skills, styles and limitations. It is up to the reader to ferret out the relevant and useful from the useless. I once heard a motivational speaker say knowledge is not power applied knowledge is.
You are thus climbing up the "intellectual food chain." By accepting everything at face value or blindly grasping at concepts and straws, you are merely being mentally lazy and driving down an expedient and lonely road to ruin.
This is where wisdom separates itself from knowledge or "information." This is what differentiates the achievers from the average. They are willing to go the extra steps to put the extra effort in go the extra mile. It only takes a nose difference to be declared the Kentucky Derby champion. Many races have been decided by photo finish. Now the winner gets the lions share of the prize pool. Even though the horse may have won by a blink of an eye. Is it fair. Not necessarily but as they say down home " that's how they do it!"
And you know something that is how they do it in real life also. Sometimes all it takes is that little bit more effort that one extra step that one extra push that one idea, that puts you onto the summit.
14-Apr-2006
Does the Market Mistress Play Dice? by Victor Niederhoffer
A question I often have in the back of my mind is, "How long will it take for the market to show her full repertoire of moves?" For example, if you've had a string of 12 Wednesdays in a row where stocks were up, when will the mistress give you that next down Wednesday? What is the probability that the next Wednesday will be up? And what is the expected lifetime of the number of Wednesdays that will occur until you get the next down?
The question has theoretical and practical implications. According to the strong form of the random walk theory of market behavior, the distribution of future price changes is not affected by its previous path. According to the weak form, no inordinate profits, or at least no inordinate profits adjusted for risk are possible based on past price moves alone.
I like to approach the problem in practical terms as a variant of the hot hand problem. What are the chances that if a baseball player is hot, he'll get a hit the next time up. But more to the point here since I'm concentrating on the full repertoire is this. Consider the pitcher with four good pitches, a fast ball, a curve, a change up, and a slider. Given that a batter hasn't seen a certain pitch in his last three at bats, what are the chances that he won't see it on the fourth? Does the chance change when he hasn't seen that certain pitch for 4, 5, of 6 of the last pitches, and what is the expected number of pitches he can expect to see until that unused one comes up.
There are numerous anecdotes we know of in sports where the hot hitter or shooter knows that he's due for a certain pitch based on the past. That is the essence of strategy in these games.
OK, I'd like to apply this approach to markets. There are a plentitude of ways of attacking the problem. I'm going to concentrate on the occupancy problem approach. The market has four different patterns she can throw at you. What are the lifetimes in days or hours you can expect until you see that full repertoire?
A typical four pattern might be morning and afternoon of one day and morning and afternoon of the next day. Or, the last four days of moves up or down in a market. Let's say that each day can be up or down. Then there are 16 different permutations of (+) and (-) in the four days that can occur.
The 16 permutations ( 8 of which shown ) are:
Day 1 Day 2 Day 3 Day 4
- - - -
+ - - -
- + - -
+ + - -
- - + -
+ - + -
- + + -
+ + + -
. . . +
Now given that one of these 16 hasn't occurred, in a few days, does it become due? Does the market mistress have a limited repertoire which she stores up, and throws at you when you haven't seen it for a while?
The problem is similar to the classical occupancy problem which has wide applications in almost all aspects of science. The mathematics of the problem are covered well in Ion Saliu's Monty Paradox; the classical occupancy problem.
As "always," the answer is a variant of 1/e. And the answer depends on a very exact definition of the problem and a very exact model that you attack it with. See for example the discussion of how Bose-Einstein models and Maxwell Boltzmann models would answer the question of "Suppose we place three indistinguishable balls at random into three buckets. What is the probability that one bucket will contain exactly two balls?"
I am going to concentrate on a event that's fairly common in the market to start the ball rolling, to prove that the market mistress likes to use up her full repertoire. I'm going to look at an event has four outcomes, for example: big up, small up, small down, or big down. Then I will look at four consecutive days of such events and look to see when one of the outcomes hasn't occurred, and whether it's more likely to occur than randomness.
How long on average will it take for all four outcomes to occur? What are the chances that each of the outcomes will appear once and only once in four consecutive events? That problem is relatively easy. Any of the outcomes can occur on the first event. Then it's 3/4 that one of the other three outcomes will occur on the next day, and given that two of the separate outcomes have occurred, its 2/4 that the the third outcome will occur on the third day, and 1/ 4 that the fourth outcome will occur on the fourth day. Thus, the chances that all four outcomes will occur on four consecutive days is 3/4 x 2/4 x1/4 = 6/64 or a little less than 1 in 10.
Let's look at a typical four outcome event in the market based on the directions of change in the previous (open to close) and the next open.
There are four possible outcomes:
Pattern Previous open to close Next Open
1 + -
2 - -
3 + +
4 - +
In four consecutive days there are 256 ( four to the fourth different permutations of the four patterns that can occur). Do the four consecutive four different ones occur more than they should? What is the degree of certainty that the four different ones will occur in n realizations? There are a number of approaches to the problem and the short answer is that the full occupancy model, does occur too frequently for chance.
Here's one approach based on lifetimes which we like to use in these offices for humble purposes. Consider pattern #4, up (open to close) followed by an up (open).
What is the expected number of days, the lifetime to its next occurrence, given that it hasn't occurred on n days? Does the lifetime go down as the number of days in a row it hasn't occurred goes up? The baseball analogue is given that the pitcher hasn't thrown a curve in the last few pitches, what are the chances that he'll throw one the next time?
Expected Lifetime to Next Success:
For: an Up (open to close), followed by an Up (open),
after it hasn't happened in # of days # of obs 1 4.0 357 2 3.8 276 3 3.7 207 4 3.8 146 5 3.5 116 6-10 3.3 239
A question, an approach, an answer -- a meal for a lifetime . And more important, a nice way of looking at the market. I encourage other contributions and approaches.
Prof. Charles Pennington offers:
Since 1996, S&P futures -- Drift adjusted (meaning I drift adjusted separately all the close to opens and opens to closes).
Combinations: down down=0 down up=1 up down=2 up up =3
Look at the most recent 4 numbers. There are 256 possibilities (4*4*4*4). There are 24 possibilities for which none of the numbers repeat: 4*3*2*1=24.
One expects a fraction 24/256 of the sequences of 4 to have no repeats, and 24/256 is 0.09375.
Actual frequency of no repeats was 281 out of 2581, or 10.89%.
Expected is 0.09375*2581 = 242.
Probably the statistical uncertainty should be something like sqrt(281), which is 17.
281-242 is 39, which is more than twice as large as 17. So it seems there are an inordinately large number of no-peats.
14-Apr-2006
Hal White and Friends, by
Dr. Philip McDonnell
Dr. Kim Zussman brought us yet another interesting study:
Excerpts:
(We) Use bootstrap procedures to show that some high-alpha mutual funds have persistent out-performance, especially in growth fund:
We test whether the estimated four-factor alphas of "star" mutual fund managers are due solely to luck or, at least in part, to genuine stockpicking skills.
After reading the study it is not clear that the entire conclusion is warranted. The figures shown as the bootstrap alpha t-statistic in Table VII on p. 49 seem to indicate that only the top fund each year may show significant alpha. On the other hand the bottom deciles 6 through decile 10 generally show statistically significant negative alpha.
The point is that the methodology of the study is very good at picking out inferior performance by what appears to be about one half of the mutual fund industry (!) but not very effective at identifying top performing funds, with the possible exception of the single top fund itself.
The reasons that half the funds under-perform are probably two fold. First, some may be proactively incompetent money managers to the extent that they are non-randomly picking bad stocks and exhibit poor market timing. Secondly, some may be crooks and are simply robbing their investors in one way or another. In some cases both factors may be at work.
In any event it appears to me that the four factor methodology employed in the study cannot reliably pick a good performing fund, but it can help one avoid the entire bottom half of the spectrum. On the other hand it may be a good model for regulators who wish to weed out the crooks from the majority of legitimate funds.
14-Apr-2006
Jeff Rollert Finds an Article from the WSJ on Animal Behavior
"Buffalo Seek Consensus And Other Tales of How Animals Decide Things" April 14, 2006
The Manyara buffalo of Africa begin stirring from their postprandial rest just before dusk. Each beast raises its head higher than usual and gazes into the distance.
After much shuffling around, the herd treks toward a new grazing ground, but not in the direction -- north-northeast, say -- that a majority have set their eyes on. Instead, the buffalo compromise. They perform the bovine equivalent of vector algebra, biologist Herbert Prins of Wegeningen University, the Netherlands, has found, choosing a direction that represents the weighted average of the directions the members of the herd have "voted" for.
Compromise, consensus, plebiscite: When it comes to decisions, the animal world is as diverse as the human one, providing a menagerie of approaches that scientists believe can illuminate decision-making in groups of people.
In contrast to the buffalo's compromise strategy, Cuban leaf-cutter ants are more likely to follow the crowd. When placed in a box with two exits, the ants use each about equally under normal conditions. But if scientists drop insect repellent into the box, the panicked ants follow the herd: An average of 75% try to get through only one exit, scientists at the University of Havana reported last December in American Naturalist. When people do that, as when fire breaks out in a crowded room, the result has been multiple deaths.
Honey bees, biologists recently figured out, prefer quorums. In late spring, colonies divide, with the queen and half the workers leaving the old hive. The swarm forms a cluster outside its old home and goes about finding new digs. But the queen doesn't choose. Instead, the bees engage in what biologist Thomas Seeley of Cornell University calls "a plebiscite, where once you have a quorum in favor of one site it wins."
In a swarm of 10,000 bees, several hundred "scouts" visit a dozen or more tree hollows. Each visits only one site; there is no comparison shopping. When a scout returns to the swarm after finding a great site (lots of space, small entrance), she shows her enthusiasm for it by dancing. Much as the "waggle dance" tells other bees where to find food, the dances of scout bees tell watchers the location of prime real estate.
"When a scout really likes a site, she dances her little heart out," says Prof. Seeley. The number of times she scoots around the dance floor reflects her enthusiasm. The more circuits, the more uncommitted scouts follow her directions, also becoming recruiters for the site.
A scout that loves a site visits it repeatedly, returning to the swarm after each sortie to dance about it. But with each reprise she makes 15 fewer circuits, Prof. Seeley and colleagues will report in the May-June issue of American Scientist. (Enthusiasm dims with time.) As a result, scouts that visited mediocre sites and so performed shorter dances from the get-go eventually stop dancing for that site (Subtracting 15 from a smaller number gets you to zero sooner than subtracting 15 from a larger number.) Soon, uncommitted scouts are being recruited only to top sites.
Once scouts find a quorum of 10 to 20 bees at a site, they emit a high-pitched sound that tells other bees in the swarm to warm up their flight muscles. After an hour or so they take off for their new home, scouts leading the way. "The beauty of this process is that quorum sensing results in selection of a great site even though no one scout knows all the alternatives out there," says Prof. Seeley.
Even cockroaches manage to make collective decisions that, seemingly by magic, produce an outcome that benefits everyone (except the people whose kitchens they are in). When roaches decide where to move in, they must balance crowding against protection against predators. The goal: pack enough roaches into a shelter to provide strength in numbers, but not so much that dangerous crowding results.
When scientists put roaches into a dish containing identical shelters, they thought the roaches would fill one shelter and then use others for spillover. But the gregarious bugs defied expectations.
When more than half the bugs could fit into one shelter, they divided into two equal groups: For instance, when 50 had a choice of three shelters, each with a capacity of 40, 25 cockroaches gathered in one, 25 in another, and none in the third, biologist José Halloy of the Free University of Brussels and colleagues reported last month in Proceedings of the National Academy of Sciences.
Dividing up evenly, he says, "spreads benefits and risks among all individuals," rather than having 40 bugs safe and happy while the 10 for whom there was no room at the inn suffer. But when each of three shelters could hold 70, all 50 cockroaches packed into one. Each outcome was optimal, producing the greatest safety in numbers without crowding.
Yet no leader assigns lodging. Roaches just check out shelters, with later arrivals deciding that a crowd signifies "this is the place to be." Overcrowding means "find somewhere else." A group decision that perfectly balances protection and crowding emerges from dozens of such individual decisions.
14-Apr-2006
Ideas Have Consequences, by Victor Niederhoffer
That's the thought that motivated me to study the stock performance of a company whose founder believes that he should never buy a technology company because he doesn't understand it, and that he should buy traditional companies whose products don't change from year to year, like shoe companies, retail candy stores, carpet manufacturers, mobile home companies, and companies with a brand that insures steady growth since it has been so well known throughout the world for so many years, and people never change their drinking habits. I have been criticized for taking a short position in such companies from time to time, and also for indicating that I don't believe that such a message has much mojo for those who try to follow this message in their own investments; as so many of the awards winners at the recent Mar meetings apparently do also as some of them quoted the elder partner of the founder to the effect that Simple and Understandable and Value is best.
But my views have to be tested. Thus in honor of this simple method, I calculated for the last five years, what would happen if every time this company performed better than average in the week: you sold it, and every time it performed worse than average in the week: you bought it.
The results for Moves in the next week following under and over performances:
Average Std Count %Up Performs Better in prior week. -0.14% 2.9% 159 48 Performs Worse 0.55% 3.7% 158 55 in prior week.
I would like to thank Mr. Dude Pomada for his calculations on this project that won him a fish dinner for two. I will run his extensions past the Minister and hopefully report them as this is a retrospective study, and one starts with the knowledge that during the last six years, when half the books sold have extolled this stolid founder's message, the stock itself has shown mediocre performance at best. Thus, the results are by no means generalizable.
14-Apr-2006
Gerry Bertier, from Steve Leslie
Who was Gerry Bertier?
I doubt anyone has ever heard of him. I never had until I watched "Remember the Titans" on TV last evening. . He is one of those marvelous people who without the aid of being memorialized in a movie, I never would have.
The star of the movie was Denzel Washington, but the hero of the movie was Gerry Bertier.
So big deal, who was he? In 1971, he was one of the top 100 high school football players in the country. Highly recruited with offers from many colleges including Notre Dame, his football career ended when he crashed his new Chevrolet Camaro and became paralyzed from the waist down. This was just after his team had won the state high school football championship in Virginia and they were proclaimed one of the top football teams in the country. The cause of the accident was deemed to be a faulty motor mount.
He just happened to be in the wrong place in the wrong car at the wrong time. Gerry did not let this stop him from his greatest dream of participating in the Olympics. Not the Summer Olympics of course, but the wheelchair Olympics. In fact, he won a gold medal in the wheelchair Olympics in the "Shot-put" event.
Gerry spent the remaining years of his life, helping the handicapped obtain easier access in the world. He died in 1981. There is a scholarship in Virginia named after Gerry Bertier and his legacy lives on 35 years after his high school playing days ended.
Other than that I don't know anything else about the young man. I do know this, every day on this planet is a gift, a blessing from God. We all complain about the hardships we may have had to endure until we meet a Gerry Bertier. If not in person, perhaps through a book or a movie. It is at that moment that we need to step back, reflect on our lives and truly give thanks for all the marvelous things that we have received in spite of ourselves.
14-Apr-2006
Thoughts on Diet and Training, from
James Lackey
When training for the 2004 Grand nationals for BMX, I came to the conclusion about six weeks out, I could do "more" was a perfect "diet." That was an answer to the question "are you doing everything possible to succeed"
I knew the "gist" of diets from the Army. I had anecdotal evidence of "what was best for me" in my many years of racing. Now I just had to find the exact formula, routine to maintain power to weight ratio and to so called "Peak 6 weeks hence." The exact calories for 6 days of vigorous training and racing was divided to Protein 240 G carbs 287 G and Fat 47G with a 10% increase every 3rd day.
I had 2 problems. The first was my stealth tactic of arriving a week early and racing the grands track and not practicing the "event practice" two practice days prior to the race. The tactic was to rest while others worked, to be at my best after 12 hours of Qualifiers on Sat and 6 hours of Semi finals on Sunday and hopefully peak Sunday at 5pm. That seemingly was a huge edge as 50 of my friends did that routine for 2005.
My biggest problem is always on race day. I can't eat. Its much like a marathon racer that cant eat for the duration of the pre race and race. A simple solution of carb packs, sugar or Red bull as we do not have problems with dehydration prior to a 60 second sprint.
The problem is not being amped for the lap after one hour of rest prior to each 60 second sprint. On Sunday, you can be eliminated at any single race by not making the top 4 in the semis. All season I tested Red bull, sugar (look both ways caffeine which everyone said was stupid as it dehydrates you) Anyways almost everything caused a sharp spike and gave me the shakes and I smacked the starting gate, over cleared the first set of double jumps etc. It was in my head that none would work. What I did was wake up at 5 am eat pancakes, take a nap and diluted 50% Gatorade and water all day all season.
I stumbled on to 2 things that worked for me. One was an slight increase in body fat to carry me through the weekend. Next was caffeine to actually dehydrate myself by 5 pounds just prior to the end of the day, (after being over-hydrated all day) then a quick gulp of sugar (alertness) and a water bottle to keep mouth wet in staging lanes. It all seemingly worked. My fastest lap times and best performances were always in the main events.
Back to the point of food harmonics. I read all sorts of studies on Almonds carry a certain frequency etc and I kinda just gave research up there. It was too far over my head or mumbo. I dunno I just stopped.
However I did find what Vic has said many times about over all health. The amount of time food stays in the body has a correlation to overall health. It certainly did with performance. I did not eat much or any meat for protein 10 days prior to the Grands. It was protein bars/ nuts that supplied all my daily Fat and Protein requirements. It was awful. Yet, between training, resting, a bit of strategy that was successful Ive never felt better in my life.
Perhaps there is much to be said for working out, simple carbs, nuts and food harmonics. There are certain bottles drugs and supps that help (supposedly) the bodies ability to release lactic acid. That is every athletes "wall" I never bought into that idea as with any drug or performance enhancing agent, once you are with out it or wrong amount you are worse off than baseline. Therefore I always used training and work to hit the wall 1-foot after the finish line.
"Patrick said adding or subtracting anything from the eventually arrived at ratio, just lowered the frequency. (It wound up with 10 different ingredients). Research indicates that foods with an over- ride frequency of 72MHz or greater increase the body's bioelectric energy. Foods below 72 MHz deplete the body's energy.
Patrick says cost was never considered, only foods that potentiate the greatest life force energy were chosen. (This would explain their higher cost). He measures processed foods from 10MHz to 30MHz, fresh organically grown foods from 30MHz to 80MHz, and an average of 83MHz for ordinary super-food products. (Thus, his claim Life Source provides up to 36% more vital energy)."
13-Apr-2006
Et tu, Governor Olson? by
George Zachar
We have a Fed-misuing-futures Daily Double today. First Kohn, and now Olson:
With respect to inflation, although forecasting energy prices is risky, I should note that the futures market suggests that crude oil prices will move up a bit further in coming months before flattening out at $70 per barrel. If so, the drag on real income and spending from rising energy costs should diminish over time, as should the risk of additional energy cost pressure on underlying, or "core," inflation.
My takeaway, which is an obvious one, is that the Fed staff must be propagating this line of analysis for it to emerge so regularly and consistently in the bank's public pronouncements.
A corollary: the staff of the central bank of the world's reserve fiat currency is really really clueless.
13-Apr-2006
More Chess Wisdom Carried Over to Trading Philosophy,
by Michael Cook
I often think of something I read in Richard Reti's book, Modern Ideas in Chess.
"Those chess lovers who ask me how many moves I usually calculate in advance, when making a combination, are always astonished when I reply, quite truthfully, "as a rule not a single one." ... the power of accurately calculating moves in advance has no greater place in chess than, perhaps, skilful calculation has in mathematics."
More important to him than such calculation was a grasp of the position. There are won positions and there are lost positions which can be perceived without calculation. In Chapter One he says:
The earliest books on the game... are written by masters of that period, and, from the beautiful combinations contained in them, we recognize, quite distinctly, the chess talent of the particular authors. But on the whole they were groping in the dark, for the gross and glaring errors that occur in those works lead us to the conclusion that to obtain an accurate grasp of a position, or "sight" of the board, meant as much trouble to the experienced player of that time as it does to the beginner of today.
Application to trading: I ask myself, "Do I like my position?" and, "Do I like my portfolio?". I don't like to try to predict what's going to happen - this is like trying to think 10 moves ahead in chess. I prefer to form an understanding what is happening, and position myself accordingly.
GM Nigel Davies Warns Against Complacency...
It's the kind of thing strong players sometimes say to make a point. There is a lot of 'feel' in chess, but to thing there is no calculation involved is very naive. Korchnoi has to calculate a lot before he gets a sense of what's going on, Smyslov much less. The calculations act as a kind of probe into the position which give players a sense of what's happening.
Anyway, here's a game of Reti in which it looks like he played 29.Kf1 without calculating when 29.Kh1 Nd4 30.Qxe5 Nxb3 31.Nb6 would have denied Black the vital 31...Nd2 CHECK resource. Back to the drawing board...
Reti,R - Lasker,E [D15] Maehrisch Ostrau Maehrisch Ostrau (9), 1923
1.Nf3 d5 2.d4 Nf6 3.c4 c6 4.Nc3 dxc4 5.e3 b5 6.a4 b4 7.Na2 e6 8.Bxc4 Be7 9.0-0 0-0 10.Qe2 Nbd7 11.b3 a5 12.Bb2 c5 13.Rfd1 Qb6 14.Nc1 Ba6 15.dxc5 Nxc5 16.Ne5 Bxc4 17.Nxc4 Qa6 18.Bd4 Rfc8 19.Bxc5 Bxc5 20.Qf3 Be7 21.Nd3 Nd5 22.Nde5 Bf6 23.e4 Nc3 24.Rd6 Qb7 25.Re1 Bxe5 26.Nxe5 Qc7 27.Nc4 e5 28.Qf5 Ne2+ 29.Kf1 Nd4 30.Qxe5 Nxb3 31.Nb6 Nd2+ 32.Kg1 Nc4 33.Nxc4 Qxc4 34.Qf5 Rab8 35.e5 b3 36.e6 fxe6 37.Rdxe6 Rf8 38.Qe5 Qc2 39.f4 b2 40.Re7 Qg6 41.f5 Qf6 42.Qd5+ Kh8 43.Rb7 Qc3 0-1
GM Nigel Davies Brings Pattern Recognition into the Discussion...
Two interesting articles on the role of pattern recognition in chess skill, one by IM Jeremy Silman:
The Psychology of Chess SkillSilman asks an interesting question; what is the difference between pattern recognition and intuition? The point is that typical patterns often arise in chess, but the exact configuration will almost certainly have some original features which set it apart from the 'kind of thing' we've seen in the past. There is something at work beyond the primitive identification of salient features.
13-Apr-2006
The World According to (Fed Governor) Kohn, by Steve Ellison
To say that participants in futures markets expect prices to remain approximately the same is at best a tautology. Aside from net present value considerations such as risk-free yield and storage costs, participants who expect the oil price to go up buy, and those who expect the price to go down sell. Thus the current price should already reflect the expectations of future prices.
Dr. Zussman in January brought to the List's attention a paper by Kat and Oomen that showed that average physical commodity returns approximated roll returns. Hence the expected return of a commodity in contango is negative, at a .05 significance level in the case of crude oil.
13-Apr-2006
From Friend of the Chair Nassim Taleb, An Announcement of Note...
Infovest21 Staff
April 5, 2006 EST
The LongChamp Non-Gaussian Fund, which has been live since January 1 trading with about $20 million in propriety capital, is expected to launch in May to outside investors. The fund, which consists of a diversified portfolio of option-based strategies, currently allocates to eight managers but plans are to increase that over time. Nassim Taleb will play an active role in the fund.
The diversified, long tails multi-manager fund aims to benefit from large market moves while producing positive carry. The fund targets annual returns of 6-10% during quiet markets while being positioned to earn upwards of 50% in the event of a traumatic 1987-style crash.
The fund aims to benefit from the fat tails, the non-Gaussian attributes of the market; produce high return during financial crises; and gain from high volatility while earning positive carry during quiet markets.
The fund's investment philosophy is based on the empirical notion that markets rarely experience medium volatility. Most moves are either extremely violent or very mild. The Gaussian distribution implies that close to 68% of market moves take place within +1 or -1 standard deviation. Empirically, markets actually tend to spend between 80 and 95% of the time within this range.
The LongChamp Group, established in 1981 and which has about $1.2 billion in alternative investment and funds of funds assets, is the sub-advisor for the manager of the fund. LongChamp Management International Ltd is the manager of the fund. The LongChamp Group is an affiliate of Silvercrest Asset Management Group which currently manages over $6.3 billion, primarily for families as well as endowments, foundations and other institutional investors.
Nassim Taleb, author of the book "Fooled by Randomness" as well as a specialist on risk, derivatives hedging, portfolio protection and model risk, will act as a "vigil" overseeing trader selection and providing his comments to the manager of the fund. He will set up the analytical tools and methods to alert the fund to purchase additional insurance when necessary and will actively review the risk exposure in all sub-manager portfolios, focusing on each individual risk.
The fund consists of a diversified portfolio of option-based strategies, each exhibiting asymmetric return profiles. The fund currently allocates to eight managers but plans are to increase that to 12 to 15 over time. It may invest in bounded arbitrage positive carry managers, short credit managers, long volatility low carry managers, pure long tail managers, the stub as well as others.
The minimum investment in the fund is $1 million. There is a 1% management fee and 10% performance fee. Redemptions are permitted on a quarterly basis with 60 days notice.
Deloitte & Touche are the auditors of the fund. Farara Kerins is BVI legal counsel. Sterling Management (1985) Limited is the administrator.
13-Apr-2006
A Review of "Secrets
of Professional Turf Betting", by Kedrick Brown
I recently had the privilege of reading Robert Bacon's "Secrets of Professional Turf Betting."
Thanks to the chair for recommending this outstanding book. I am impressed with the unique and engaging way in which it explains the necessity of a professional turf speculator betting only when he believes he has a positive expectation, sizing his bets properly, developing unique viewpoints (that may often fly in the face of public opinion), and actually speculating as opposed to grinding out profits. If Bacon's advice is sage for turf betting, in which the track's take can be in the neighborhood of 15% plus, how much more so for market speculation (which has a relatively lower proportion of execution costs)!
In "Secrets...", Bacon exhorts the aspiring turf speculator to only bet on individual situations in which he believes that he has a positive expectation with respect to the displayed payout ratio (or "price") for a horse at the track. A situation like this is called an "overlay", as has been mentioned several times on this website.
The displayed payout ratio for a horse on the track board is formulaically related to the probability of winning that the horse must have for a bet on the horse to have a zero expectation. A speculator that is able to make bets with consistently positive expectations will not win every bet, but can expect to be net profitable over the long run (provided that he sizes his bets sensibly).
If we state the displayed payout ratio at the track as R:1, a turf speculator's actual probability of winning must exceed [1/(R+1)] for him to have a positive expectation. For example, a 3:1 payout ratio requires a probability of winning greater than [1/(3+1)] = 25% for the speculator to have a positive expectation. So if you believed in this situation that the horse's actual probability of winning was closer to 40%, this would be an "overlay", and it would make sense to bet on that horse winning the race. Another way of looking at this is that if you believe e.g. that a horse's probability of winning a race is 40%, its payout ratio must exceed [(1/40%)-1] = 3:2 for it to be worth your while to bet.
A speculator's percentage of winning bets thus doesn't reveal a whole lot by itself. For example, did that speculator achieve a 50% win rate betting only on situations with 3:1 payout ratios? Or did he achieve a 50% win rate betting only on situations with 1:3 payout ratios? Furthermore, how did he size his bets? The answers to these questions all have vastly different implications for his profitability. Further complicating the situation is the fact that payout ratios at the track are not static during the period when bets are allowed, but shift up and down based on the public's betting behavior.
Clear overlay situations do not come along in every race, and Bacon emphasizes that exploiting them requires tremendous patience and discipline. Hard work must also be put into estimating probabilities of winning, which Bacon shows to be both art and science, and the fruit of dedicated study of track conditions.
Bacon also shows in his book that the public seems to have a tendency to overly focus on recent performance and pay little attention to a large number of other details (seasonal factors, weight allowances, etc.) that may make certain horses great bargains at particular times. The books illustrates clearly that different things work at different times, and a turf speculator must constantly be on the alert, and thinking outside of the box, to take advantage of whatever opportunities are present.
The "music" of the track (i.e. payout ratios and musical intervals):
In the spirit of fun (based on the "Music and the Markets" thread found below)...The fact that payout ratios at the track are rational numbers in the form a/b (i.e. where a and b are integers with b not equal to zero), brings to mind an instant parallel to music. Perfect two-note musical intervals can also be expressed in the rational form a/b, which is a ratio of the note frequencies in the interval.
For example, if your root note (e.g. Middle C) is 440Hz, the next higher C which is 1 octave higher, would be at 880 Hz, which makes the interval ratio 880/440 = 2/1. The note G can then be set at 660 Hz, which equates to a ratio of 660/440 = 3/2. If musical intervals have rational number ratios, they sound more harmonious to the ear than if they have irrational number ratios, the latter which is the case on many modern pianos (due to a relatively modern tuning convention). This is a fascinating explanation of the history of tuning.
In any case, we have the fact that musical intervals can be expressed as rational numbers, and we also have the fact that all payout ratios are expressed as rational numbers. So imagine if you will that each payout ratio at the track is continuously played as a musical interval with the same root note (perhaps on a separate instrument for each horse). Lower priced horses (i.e. those most favored to win) would tend to have tighter intervals (e.g. 9:8, 1:1, 7:8). Higher priced horses (e.g. 4:1, 5:1, 10:1) would tend to have wider spaced intervals, with the respective second interval notes at higher pitches.
As payout ratios shift up and down pre-race, so would the individual intervals played, probably resulting in a partially harmonious / partially chaotic sound similar to the tuning of an orchestra.
Steve Ellison comments:
My brother is a music professor. I saw a presentation he gave once about overtones. In addition to the note being played at a particular frequency, most instruments also issue waves of higher frequency which are most noticeable at integer ratios of the original note. The most prominent overtone is at a 2:1 ratio to the original note, but subtler overtones occur at 3:1 and 4:1 also. Another professor at the same presentation played a recording of four New Guineans singing without instruments. At one point, overtones of their voices converged in such a way that it sounded as if a fifth very high-pitched singer had joined them.
13-Apr-2006
The Learning Curve: Music and the Markets, by
James Sogi
There are many ways to learn new things. I started learning guitar at around 12, first listening to my mother play, then a guitar teacher got the curve started. With little noticeable progress in the intervening 40 years, thoughts turned to how to learn and get better. Though now my lack of talent can be made up with expensive equipment, attempts at learning sparked thoughts on the different ways of learning. These ideas also come into play in learning market styles, statistics, and computer programming by an old dog trying new tricks.
In music, the quick and easy way is to learn by ear followed by trial and error, until the fingers learn the notes that the ear hears. It is possible to become accomplished by this method alone given natural talent. The Beatles, the Rolling Stones, and Eric Clapton listened to the old blues masters and achieved greatness. A second way is to learn the music theory, learn the scales, the notes, and to read music notation. All written music becomes accessible. Another new way now is called tabulation, where pictures of charts of the guitar fret board show where to put your fingers. It's fast and easy. There are also videos of instructors playing with explanations to help learn music.
Learning to play music and perform requires the ability to play without fear of making a mistake, to play naturally in a relaxed manner, not too stiffly, and even “play through” a mistake, without becoming flustered, having to stop at a mistake then start over, like a child. When a market entry is not perfect, the marketeer must continue the performance and there is no chance for a replay. Can’t get flustered and got to play through.
As always, in trying to apply meager knowledge and ability to the markets, how can one go about learning the markets? As with music and any other worthy endeavor, it is the journey of a lifetime. With the inspiration of the Chair and the List, the old dog learned statistics and computer programming the hard way by getting the text book and reading it over and over until some glimmer of meaning came through. There was no luxury of a teacher or tutor, but that is recommended to speed the process. The Wiz’s "zero to hero" jump start was a logjam breaker for R. Programming consultants are available to break the mental logjams in the learning process. The next project will be Java.
The Market can be learned by ‘ear’. After years of watching and listening, and even trial and error, skill might be obtained in understanding the moves of the markets at a gut level. Natural ability makes a big difference. A second method involves a tutor for instruction on the market basics and basic skills. A third method involves the study of the notation of the market and counting the permutations. Just as a given chord can be inverted and played in a number of different positions on the guitar fret board or piano with similar sound but with a different feel and effect, the market goes through various and endless permutations, often of the same basic chordal structure, but evoking different emotions. Study of the theory of the structural and statistical elements of the market, like a music notation chart, will help the performer understand the basics of the music to be played. But just as with music, rote recitation of black and white notes do not alone make music. There needs to be a basic emotional connection with the market moves. When the band plays there is no sheet music, but if it gets in gear, everyone ‘gets the feel’ of the music and rhythm. Everyone has individually studied or practiced the basic tune before the group plays. On a good day, with prior study of the structures, the marketeer can be ready to be involved with the current permutations on a deeper level than just the notes or bars on the chart. Like good music, the market is driven by emotional content. Learning to harness the emotive power in music parallels the process of harnessing the emotive power of the markets into profit.
GM Nigel Davies on Learning and Motivation
If there are two things I've learned, whilst studying and teaching chess, it's that people must educate themselves in their own way and that everyone's motivation will be different. It's possible to train people to perform to a certain level in chess, but if this training does not promote self education and a philosophical attitude, then the trainees will be little more than performing seals. They will be adept at catching a ball if it's thrown to a particular spot at a particular time, but unable to improvise or contemplate the nature of the ball.
Many people are very good at being trained whilst those with inquisitive minds, or who think differently, can find this difficult. It sometimes seems that schools cater to the conformists who make teachers' lives easier, but the unsurprising result is that many people who do well in school find university very difficult because they're suddenly called upon to do more thinking.
There is an analogous situation in chess, with children being pumped full of information by coaches hired by their all-too-keen parents. They win an under-11 championship but fall behind more thoughtful contemporaries when hitting their teenage years and beyond.
Thus, I think that the debate about fixed systems goes beyond the points at which one should buy and sell, it's about trainees versus thinkers, those who don't ask questions versus those who do. But then what makes a thinker?
It may have much to do with our ability to gain acceptance. Most people start out life wanting to be like 'everyone else', some just can't make it. Ethnicity may be a factor, so might culture or a genetic difference or deformity. I hypothesize that if one examines the life stories of the great thinkers from history, the vast majority will have had some reason why they were unable to fit in too well with the indigenous population.
A similar process may be involved in motivation. People who easily fit in will not want to lose this comfort by standing out of the crowd. For those who cannot fit in, standing out won't be a problem. In fact, their inability to do so may even be a great motivator. If one cannot fit in the best way to survive is through strength; woe betide those who are both unusual and weak. A darker reason to succeed might be a form of revenge, which one certainly detects in some chess champions. Bobby Fischer constantly referred to 'the weakies' and Victor Korchnoi has lauded the power of 'hate-energy'.
Can one learn to be a good speculator? Certainly it's possible to be taught how to calculate a z-score and glean information about the kind of patterns to look for. But learning to ask the right questions is not something that can be trained. Those of a philosophical disposition will be able to ask them once they know what they look like. But performing seals will need to be told what they are, and the information they acquire will have a very limited shelf life.
This is why the games chess and markets are so beautiful, they are an aspect of the world where mediocrity finds little reward. And this is why the mediocre hate them; they hold a candle to their souls and they don't want anyone to know that there's actually nothing there.
13-Apr-2006
See our Buyback Study Update
13-Apr-2006
Executive Hobos and 9/11, by
Bo Keeley
Five Parts:
Their intelligence surpasses any in 150 years of hobo history. Arthur ‘The Wiz’ Tyde shoots aerial photos of the catch-out yard from his Cherokee Piper, Omid ‘Big Apple’ Malekan downloads train data from the Pacific to Rockies, Brian ‘Pronto’ Molver personally reconnoiters the first jungle, and Lisa ‘Clown’ Bradley shapes the group as a professional humorist. They call me Doc Bo, a hobo college professor and alpha of this brainy pack of business executives. We’re outward bound by freight train for 2500 miles that, strangely enough, will end with 9/11.
(Part 1) THE PACIFIC
Follow any hobo on a California railroad track far enough and you penetrate the sprawling Davis Yard in Roseville, Ca. sixteen miles northeast of Sacramento. This is the Pacific junction, the largest rail yard on the west coast, with coastal Canadian northbounds and Mexican southbounds, and daily hotshots east to all points on the USA track gridiron. The Davis Yard, once in the heart of the gold rush, historically smothers America with freight traffic, and hobos.
It is sunset on July 25, 2001 as four business executives creep waist-deep the golden grass where nineteenth century tramps ducked bulls to grab the same ‘Dirty Face’ freight on to better fortunes. We enter our hobo jungle, a spare opening in a Live Oaks copse littered with bottles, cardboard that train tramps call ‘thousand-mile paper’, and a ring of seat-less chairs. We sit on the frames and evoke the first fast freights, their rolling steel wheels called cookie-cutters, and the joys of escape into a gritty, strange world.
Soon, we walk 100-yards through a red dusk to the Davis perimeter fence and part the barb-wire strands for each other to insert. Beyond lays our iron road, the original 1865 Transcontinental RR. It still runs east up the Pacific lowland, over the coastal Sierras, a flash through the Great Basin, along a steel ribbon above the Great Salt Lake, out the Rockies, and down beyond to the executives’ Denver destination. This rail is also the executives-to-hobos birth canal.
Hobo numbers swell and fall with the financial times. The rails blackened with men and families during the Great Depression. They slackened in the 1950’s with the loss of steam engines as the new diesels started faster and, with no need to take on water, there are fewer cross-country pauses. In 2001, I estimate there are 20,000 train tramps but only a few hundred out tonight on the rails and, certainly, we are the only executives.
Look at us, interchangeable with the overall tramps we’ll face during the journey. Each thought to grow a week’s beard in his respective workplace before the shove-off. Everyone’s outer clothing is dark as the night, boots are steel-toed, and each sports a baseball cap with a tether string against the freight wind. The rest is in their noggins… or deep in their packs: We carry clip-on ties for eventual business meetings, tablecloths for storm tarps, sleeping bags, gallon water jugs, two-days food ration, short libraries, and individual kits of high-tech instruments.
I feel like a Mensa scout leader. Meet Arthur Tyde III (The Wiz), the founder and CEO of Linux-Care computer systems; Brian Molver (Pronto), the Bay Area Chief of Disaster Response; Omid (Big Apple) Malekan, a New York computer programmer for high-roll investors; and Bryce Bradley (Clown), a Toronto stockbroker and professional comedian who’ll board in Colorado for the return to the Pacific.
‘Men with packs are sneaking into the yard!’ comes a muffled voice inside Wiz’s pack. Another responds, ‘I’m on them!’ The Wiz, grinning, pulls a police scanner from the pack and adjusts the volume. He has pre-programmed the device for every yard frequency from Davis to Denver. He reaches deeper and comes up with ‘Brownie anyone? My wife makes double-chocolate so I’ll come home faster after business trips.’ ‘Later! Let’s exit the yard,’ orders the disaster expert, Pronto. Big Apple, silently calculating probabilities, motions me, and I lead the team out the barb wire just in time.
Car lights crack the night 400-yards away pursuing two other unlucky tramps. We’re safe. The bulls- railroad police- are the hobo nemesis cruising the tracks in white Broncos with phallic CB antennas. Hobos use various evasion tactics: Hide in the weeds next to the rail to board a freight ‘on the fly’, secret inside a train car before it rolls, or use hobo interference as we do tonight. With the bulls busy in a snarl of headlights and shouting tramps, we boldly retrace a short distance to the mainline and continue deeper into the yard to ask yard workers for train info.
‘Tonight’s puzzle is peculiar to the Davis yard’, I brief the squad inside the yard. I point at starlight running along the main south, swing a finger to dozens of darker parallel tracks coursing into the stockpile area, up the yardmaster tower rising like the dollar’s eye a quarter-mile to the north, and finally rest it on a narrow bridge a quarter-mile beyond the tower. ‘The north mainline that we’ll ride tonight branches just after the bridge to send a track north and another track east. We want the latter, but without foreknowledge or at least ‘reading’ a train before its departure, there’s no way to tell if the next rolling freight will go straight after the bridge to Seattle or bend west to our Salt Lake, our wish.’
Apple scuffs the grit and nods south without looking up, and says, ‘For example, that approaching dot could be the headlight of our ride, or not.’ Pronto murmurs, We’re exposed!’ Wiz poohs, ‘What the hell, the bulls are busy.’ The bright dot enlarges, engines thunder, the ground trembles and the locomotives trudge ten feet from us and stop.
12-Apr-2006
I've Discovered this New Show called "American Idol", by
Charles Pennington
Circa 1996 I overheard my graduate school advisor, a third generation professor, and at that time the senior member of the Harvard Corporation, discussing basketball with a colleague. "My son has become simply fascinated with the play of a member of the Chicago Bulls basketball team. Perhaps you've heard of this fellow, Michael Jordan."
In that spirit I offer a glowing review of "American Idol". I've always had a favorable impression of it, but I've rarely watched it. Tonight though I got to watch it uninterrupted while trying to finalize a 1040. This is truly a great show. Here's why:
What a great, great show. Perhaps you've heard of it.
12-Apr-2006
Thoughts on Regression and Divergence, by
Mark Mahorney
It has occurred to me that all technical analysis, whether it be contrarianism, trend following, regression analysis, or a statistical probabilistic approach relies on consistency and structure in the markets. If a company has a stable growth rate then logically that the stock would on average appreciate at a consistent rate. Less stable prices, volatility, implies opportunity at the extremes may be uncovered via regression analysis. If a company has a stable growth rate then the stock price should be expected to be relatively trendy, with a strong correlation to the growth rate. But, the more unstable, volatile, and random, a company's growth rate is, the less we know about where a stock will regress too or the direction a trend might take if any trend can be discerned at all.
When I look around and observe commonly held beliefs about technical analysis, trend following or contrarianism as the case may be, I seldom see any correlation being applied to fundamental information. I see this huge chasm between the two major disciplines. I see black and white. I see traders following what they perceive to be trends or bucking trends randomly. A stock has gone up a lot, whatever that means, and some traders think it will keep going up, some think it has gone up too much and take the other side, others believe the stock will regress to some arbitrary moving average.
All things being equal, a consistent and predictable company should have a relatively predictable stock, and when it is bouncing about irrationally it could reasonably be expected to regress to stability, regress to the rational, to the truth. Of course in the real world companies aren't perfectly stable. There are many unknowns from competition to macroeconomics and macro shifts among asset types. Traders that don't take these things into account try to ride trends that don't materialize when some factor or another changes the outlook causing the trend to reverse, or they expect the price to regress to some meaningless arbitrary average.
Regression to what?
The statistician, however, studies the volatility and produces probabilistic price expectations that, whether they realize it or not, correlate to the relative stability of a companies fundamental information and how it's influenced by outside factors. The statistician studies the probability of success and failure. Everyone else just guesses.
But even statistical analysis relies on consistent behavior, that stocks will not be much more or less volatile than in the past. There you get into Taleb's territory, black swans and all of that, what is the probability, or the expectation, that a stock price will behave unexpectedly? Can you diversify away that risk?
By my way of thinking, it comes down to balancing the intake of information. I want to know why things are happening, but not let myself get overly caught up in the minutia happening such that I lose sight of whether or not events are within the expected norm or not.
Yishen Kuik notes:
The most consistent and predictable company with the most consistent and predictable cash flow schedule is a Treasury Note, and the price of that is clearly volatile and unpredictable to most.
Because future short term rates are not easily predictable, the discount rates for future cash flows are not easily predictable. So even the exercise of clipping fixed value coupons yields a fluctuating present value, much less having to deal with further uncertainty of how big those coupons will be, when they will occur and what is their growth rate.
12-Apr-2006
Proven Player or Flash in the Pan, by
Mark Mahorney
And GM was a proven player, a forever, and Toyota got called up and was a flash in the pan. Now GMs like the guy who stayed in the game too long refusing to go out on top. Companies though are more like race horses than baseball players, put out to pasture, and carved up when they croak. If they're really good they get put in isolation with occasional conjugal visits to make more really good race horses.
12-Apr-2006
Comments on a Trend Following Discussion,
from Victor Niederhoffer
An interesting discussion appears on Elite Trader. The discussion starts with a recommendation of James Altucher's third book Super Cash, about how to make money. He suggests that trend following is not a viable strategy and that it won't be around in 10 years and apparently points to the recent results of the major trend followers for support. Many elite traders responded to say that this doesn't take into account the normal ebb and flow in any results. Others wrote in to say that European trend followers are still doing very well, or that modern trend followers who have adjusted their numbers do well, or how can you say that trends don't exist, pointing to silver. Others wrote in to say that such tests as the variance ratio test shows that there are trends. Also, that certain trend followers are billionaires.
One responder wrote that he found that all fixed systems are easy prey to the flexible and fast moving. That MFM Osborne first wrote about this in 1964. Also that Larry Harris made the same point in his magnificent book Trading and Exchanges, and that The Secrets of Turf Betting showed how just when any system was looking great, it was guaranteed to fall into oblivion.
The respondent also pointed out that trend followers face very large transactions costs, and that there is a reasonable working hypothesis that when one market is out of line with the other, it will fall back into line, as market moves cause loss of energy and disruption to the forces that have the world in their grip i.e., plucking the goose with the least amount of hissing. The moves create hissing and might make it harder for the balance of power between the parties that provides the semblance, the facade of checks and balances, and individual initiative that incentivizes people to work hard and contribute to the robbing of Peter to pay Paul that is at the heart of everything.
Of course, belief in this last point is not a necessary prerequisite to believing that exacerbated moves in any market tend to be reversed, or that transactions costs from following the trend are much greater then going against, or that any systems that are easy to reverse engineer, like all the trend following systems, are easy pickings for the market makers who are so very good at making money against adversaries whose moves are known in advance. (Sort of like the one sensible thing that I've ever heard the wild man on tv say, which is that it's easy to make money by selling short his recommendations on day one after he makes it, but by day three things have settled back to where they should be).
The contributor said that because of survival bias, it was difficult to make an exact accounting of how much the major CTA trend following funds had made in recent years, but that he estimated it at perhaps -25% on 10 billion dollars. He also said that one shouldn't take anecdotes about this or that trend follower being a billionaire as proof of their success because many trend followers were very wealthy as a guaranteed feature of the fees that they took, and the tendency to make high returns with small amounts of money under management and low returns or negative returns when the billions chasing alpha, or commission houses marketing their funds for extra commissions flowed in. That contributor did not mention the actual results of the publicly held marquee trend following funds that folded, that was run by a famous large former soybean trader, as case in point albeit the cognoscenti might have inferred that he had that in mind.
That contributor said that he had received serious and worthwhile criticism for his views denigrating all trend following on the grounds that many of the biggest trend followers implicitly or explicitly took out 8% or so in fees from the total assets under management each year, and that the respondent should be computing the before fee returns of trend followers rather than the after fee returns in his efforts to find out if regularities, and non-random properties of trends existed.
All in all, I found the many points of view very educational containing many meals for a day, and interesting anecdotes to share with the kids similar to those about the famous trend follower from Lake Tahoe, who can see a trend so clearly from across the room, and who gives psychological counseling to those such as I, who have never been able to find a mechanical system that they can adhere to with impunity.
P.S. The Elite Trader site has about 50,000 contributors to it, discussing many threads of interest of the day and fray for traders. I find the discussions very good at generating fruitful questions to ask and answer. There are experts among them on almost any topic, and I find that by the time they work thru a particular thread, they are excellent at separating the wheat from the chaff, and exposing ballyhoo. Many of our own are already on it, and I would recommend the site to all who are interested in questions and answers about trading threads.
11-Apr-2006
Ecological Stoichiometry, by Victor Niederhoffer
* Webmaster's note: Vic came across this book review in our archives and was reminded of how outstanding the book was that we've decided to republish his thoughts for our newer readers.
The book Ecological Stoichiometry by Robert Sterner and James Elser contains a land mine of provocative hypotheses about the way humans and the environment react that might provide the basis for a big and highly profitable view of markets. It combines the most powerful ideas of science; natural selection, the periodic table of elements, conservation of matter and energy, positive and negative feedback, the central idea of molecular biology, and the ecosystem to explain how chemical elements come together to form living systems. It pays particular attention to the constrained proportions in which substances react. Most of the chapters concern the balance between the composition within and the composition without and what makes for homeostasis and growth. A favorite chapter is "Stoichiometry in Communities." They answer the question, " How could we know before we observe them together when species will react strongly or weakly, or even change their interactions from beneficial to inhibitory or neutral. We saw several examples where even the sign and magnitude of ecological interactions changed according to stoichemetric balance. There is so much to know in this world and so little time to do it; the components of the balance sheet of companies relative to the totals available in the economy, the movements of interest rates, stock markets and foreign exchange. These changing interactions might be well considered from this framework.
11-Apr-2006
Movies: A Review of A Dispatch from Reuters (B&W 1940), by Easan Katir
An accurate biography of Julius Reuter, and the story of how he founded his eponymous news agency, beginning with a flock of carrier pigeons in 1850 delivering stock prices between Aachen and Brussels. Some nostalgic scenes of early European and London exchange floors, and how having prices a few hours early allowed traders to garner great wealth. He scooped all other newspapers when he relayed a major speech by Napoleon as it was being delivered, and later beat them again with news of Lincoln's assassination seven hours before the rival agency, allowing his financial backer to sell short before the news was confirmed.
Edward G. Robinson, usually cast as a tough-talking, cigar-chomping gangster, plays the highly ethical and entrepreneurial Reuter. Robinson was occasionally a guest at my grandparents' home in Beverly Hills, and they told me how he was the most humble and gracious of men, completely different from his gangster roles. In this film, the viewer gets this sense of his real personality. .
11-Apr-2006
Uplifting Words, by Dr. Janice Dorn
In an age where technology is accelerating at
exponential speed, people are hypertasking, hyperactive, hypertexting and just about everything else which
leads to neurochemical hypomania, addiction, anxiety, depression and various
states of disease, it behooves one to step back and take heed of what your body
and brain are telling you.
What is serenity and how do we achieve it- even for a few moments every day?
The cardinal principles are simple, but not easy. Every day is a new beginning, a time to start again, to renew, to look in the mirror and decide-- in the first three minutes-- what your goals are for today. You are what you say to yourself as your face is staring you in the face. Just as trees have dendrochronology, so do your face and your body. Rigidity, obsessiveness, anger, paranoia, joy, anticipation, and every conceivable emotion show in the set of your face and your body. You are what you make yourself. It is about you and no one else.
What can we do each morning to make ourselves better human beings, and to allow ourselves to evolve in a way that is effortless?
Every week, I pick one day to send myself a note saying something nice about myself. I take the note to the florist and ask the florist to include it with roses which I send to myself. What a delight when the flowers arrive and I see what nice words have been written about me!
Many years ago, I came across a writing which has sustained me through triumph and tears. A worn copy of it is with me always :
After a while you learn the subtle difference between holding a hand and chaining a soul and you learn that love doesn't mean possession and company doesn't mean security. And you begin to learn that kisses aren't contracts and presents aren't promises and you begin to accept your defeats with your head up and your eyes ahead with the grace of an adult not the grief of a child. And you learn to build your roads today because tomorrows ground is too uncertain for plans and futures have ways of falling down in mid-flight. After a while you learn that even sunshine burns if you get too much so you plant your own garden and decorate your own soul instead of waiting for someone to bring you flowers. And you learn that you really can endure that you really are strong and you really do have worth and you learn and you learn. --Veronica A. Shoffstall
11-Apr-2006
The Importance of Goals, by Victor Niederhoffer
In "The Seven Habits of Successful People," Steven Covey lists "beginning with the end in mind" which leads to the importance of having goals as the second key habit. A good way of remembering it comes from Alice in Wonderland. "Would you tell me, please, which way I ought to go from here?" said Alice. "That depends a good deal on where you want to get to..."
The importance of goal setting for achieving success leads one to wonder if the market has any goals. Covey suggests that goals be relevant, so that you can avoid distraction. To me the most relevant goal is a move, since wherever you are, you're always interested in where it is going as that will lead to profit or loss.
As a first step in defining a relevant goal, I decided to start with something simple, something that a humble person like myself might achieve, a goal of 1 point a day in the S&P. To put first things first, I thought a win-win scenario might be 5 points in a week or 10 points in 10 days or 20 points in 20 days.
It is recommended by Covey in Habit #5 that you seek first to understand. "To diagnose before you prescribe." Guided by this, I thought that I should start by asking some questions so as to understand better.
How hard is a goal of 1 point a day to achieve? And if you haven't achieved it for a while, how long can you expect to go without success? What's your life expectancy, and expectancy of a move to the next failure, and how does it change after failures and successes?
Let's start with a market move of 5 points up in 5 days using daily data from the beginning of 1999 to the end of March 2006. The positive goal of +5 points was achieved on 793 out of 1,804 days and the negative goal of -5 points was achieved on 874 days. This ratio of 1.1 in favor of achieving the negative goals is consistent with the 100 point decline in adjusted S&P during the period.
The question now emerges as to life expectancies. The following survival table gives some proactive relevant answers.
Life expectancy in days to next 5 point move after
not having achieved goal over last X days
moves
Life expectancy For + 5 Pt Moves For - 5 Pt Moves
to next success
after failure of days # Obs Life Exp. # Obs Life Exp.
1 180 5.8 180 5.3
2 128 6.7 126 6.1
3 108 6.8 109 5.8
4 99 6.3 93 5.6
5 90 5.8 83 5.1
6-10 262 5.6 231 4.9
11-15 92 5.6 64 5.5
16-20 40 4.0 26 4.9
21-30 12 2.8 12 2.6
There is a hopeful message in this data. After a failure to achieve a successful 5 point move for more than 5 days, the expected number of days to the next success keeps getting lower declining to 4 days after 16 days of abstinence and 2.8 days after a long period of 21 or more days without a success. For those who are waiting for the decline, after 21 days without one, the life expectance until the next one occurs is a mere 2.6 days. Regrettably for such bears and bulls, the 21 or more days of abstinence only occurs 12 times each in this data.
The preliminary results of this study of failures, survivals, and goal setting moves is that if you only wait long enough, and then play for a successful achievement of your goal, on either side, you will have your day and achieve your goal.
P.S. As for the more proactive goal of achieving a profit, whatever the duration to success is, i.e., the expected move (+ or -) that follows a period of abstinence, one will have to run this by the office of the Minister.
11-Apr-2006
The American Frogs, by Nat Stewart
I think most of the Mexicans who come here, are coming here for the same reasons most of our ancestors came here. for opportunity, and a chance to make a better life. Government seems to have set up a tariff with regards to immigration and work visas to the extent that many poor Mexicans are willing to risk life, pay large amounts to guides, etc, in order to get here, rather than going through official channels. I wonder, if 100-200 years ago if such barriers existed as we have now and, if the ease of travel existed then as we have in the current situation, what the situation would have been like?
Has there ever been a time when immigrants did not in some way disrupt the established order? Has there ever not been a time when group differences of the incoming population were not an easy target for ridicule? Something wrong with "that culture" that made it less than that of those who arrived sooner? Different words or insults, same old same old. Has it ever been different?
Here in Chicago, working class Mexican families travel to Lincoln Park on weekends to have family outings and cookouts. They bring BBQs, soccer balls, and all sorts of games. Is it an eyesore that creates irritation, or is it a pleasant sight to see families happy together enjoying their likely one day off? I think it is a choice, and not always easy. It has annoyed me on occasion, but, in the end they are enjoying the space, creating laughter for their children on a special day, and I am just jogging by as I might any other day of the week.
I for one have a hard time thinking someone who leaves familiarity for the opportunity to work hard and improve one's life to be deserving of scorn.
I walked through the heart of the huge Chicago demonstration. It was peaceful, and I saw as many or more American flags as Mexican flags. People are proud of who they are, but by and large they also seemed to love America and what it stands for.
11-Apr-2006
Arbitrage & Collaboration, by Mark Mills
Some thoughts on the Kelly formula, arbitrage and philosophy inspired by reading Fortune's Formula and 141 Jackson St.:
One can avoid these delusions by taking the view of an evolutionary biologist:
As Fortune's formula suggests, one can look at markets in terms of "efficient markets" or "gambling." "Gambling" in the light of "information theory" becomes the decision making process upon which language is based.
As Steidlmayer says, price is the messenger rather than the message. If so, the message is a directive to act: "buy," "sell" or "hold." This is the underlying suggestion of any agent speaking to a second agent. The process of deducing the message is always going to involve gambling.
The mystery for many evolutionary biologists is cooperation (given the notion that evolution is guided by ''tooth and claw"). In this light, collaboration is as impossible as arbitrage. Perhaps there is more of a relationship between collaboration and arbitrage than one sees on the surface.
10-Apr-2006
The Perfect Sacrifice in the Market Ecosystem, by
Jan-Petter Janssen
Generally, in nature about ten percent of the energy from one level in the food chain makes it to the next level. Let's assume the market works about the same way.
I propose a rule of thumb saying that ten percent of your profits should be lost to commissions, market makers, bid/ask spreads and so on. If you lose more (while being profitable) it may be because you have not considered the black swans. If you lose less you are either too conservative, or just better than the competition. In the latter case, you will most likely make a super profit until your increasing impact on the market forces your sacrifice towards ten percent.
Just to make it clear, if you don't bargain for an edge or try to minimize the cost for every trade, the poor house is very near. But you should lose ten percent despite this. With black swans, I think an example is the scalpers who make a lot of small profits before they suddenly suffer a devastating loss.
I think being a lion is not any easier than a gnu. Nature has made it easy for a gnu to eat, but their big concern is to avoid being eaten. The lion, on the other hand, has no concern about being caught by a predator, but only the fittest lions will kill enough prey. If this is not the case, the populations will converge towards balance. So being either a gnu or a lion is irrelevant. Being a good gnu or a good lion is essential.
To conclude, if my reasoning is correct, the super profitable trader giving away less than ten percent of his profits to the market ecosystem will grow. When he reaches the ten percent sacrifice he will either have to find a new niche, accept a normal return or increase the sacrifice to maintain the super profit. If he goes above the ten percent sacrifice some rare event will sooner or later catch him.
10-Apr-2006
A Brave Beginning, by Victor Niederhoffer
In Albert Nock’s Memoirs of a Superfluous Man, one of my five favorite books, he describes an incident of election night at the Wigwam, a venue I have passed all too frequently recently on my trips to the Lutheran Medical Center of Brooklyn.
Some devoted patriot very far gone in whisky wandered up in our direction and fell by the wayside in a vacant lot where he lay all night., mostly in a comatose state. At intervals of half an hour or so he roused himself up, apparently conscious that he was not doing his duty by the occasion, and tried to sing the chorus of "Marching Though Georgia," but he could never get through the first three measures without relapsing into somnolence. It was very amusing. He always began so bravely and earnestly, and always faded out so lamentably.
Nock goes on to say, "His sense of patriotism and patriotic duty still seemed as intelligent and competent as that of anyone I have met since then, and his mode of expressing it still seems as effective as any I could suggest."
Lamentably, I was reminded of this brave beginning by Friday's stock market performance. The S&P futures opened at 1318, quickly moved to a five-year high of 1322, but then ended down at a five-day low at 1304. How many hopes were dashed? How much tragedy was felt for example by those trading the 1.3 million mini S&P contracts traded that day?
To gain some steadiness of the feet, and to do my patriotic duty by the occasion I took it upon myself to examine such renditions for the past six years.
What we had was an outside day, where the high was higher than the day before and also the low was lower than the low of the day before. Let’s call that an outside day of 1. But also the day’s high was higher than each of the two previous days, and the day’s low was lower than each of the two previous days. Let's call that an outside day of 2. Similarly for an outside day of 3 and an outside day of 4. The following table shows the performance of the market on the days after such degrees of outsidedness since the beginning of the century.
| Moves 1 Day After Outside Days | |||
|---|---|---|---|
| Length of Outsidedness | # Obs | Expected 1-Day Move | Variability |
| 1 | 188 | -1 | 15 |
| 2 | 47 | -2 | 17 |
| 3 | 16 | -1 | 20 |
| 4 | 6 | -11 | 22 |
* The move after the outside day of 4 on Jan 3 2000 was -54 points.
One predicts in light of this variability that many a devoted market patriot will be three sheets to the wind tomorrow. And considering the imminence of that great day we share our vital spirits with the Service, such devotions will continue for at least five subsequent trading days.
10-Apr-2006
Movies: Thoughts on "The New World", and Adapting in Trading and
Life, by James Sogi
“The New World” is about the colony of Jamestown. It would have been more interesting to have the details of the survival life back then than 30 minutes of Pocahontas romping through the field with the wind in her hair Hollywood style. The European immigrant’s lifestyle and rigidity led to starvation while living amid plenty. “Some traditional scholars of early Jamestown history believe that those pioneers could not have been more ill-suited for the task. Captain John Smith identified about half of the group as gentlemen who knew nothing of or thought it beneath their station to tame a wilderness.” They would put fish into a hole hoping the corn would grow so they could make bread, and starved, meanwhile, ducks and fowl and game were abundant. The Europeans who immigrated were used to and apparently knew how to prepare grains as a staple and their narrow focus limited their ability to obtain nourishment. Many starved.
As opposed to the dung beetle who with Sisyphian stubbornness clings to his single narrow minded task of pushing his pile of dung around, even when it is removed, man’s ability to prosper is his ability to adapt. To the point, the adaptable person is able to utilize varied styles in a single situation to reap maximum benefits. The army, the boxer, the racquet player, the pitcher that utilizes a varied styles in a single session has flexibility and an advantage over the opponent who will not be able to pin him down, or may not be able to adapt to the change ups. We have seen this in many of our “Connections” discussions. In the martial arts there are the hard straight punch-kick styles, the circular, the soft styles, the grappling styles, weapons, and the spiritual. All have their advantages in the circumstance, but the best at least know the many styles, perhaps master a few.
For the trader there are many profitable styles. As with any discipline it is very hard to master more than a few at any level of comfort over years of development, but the payoffs are worth the effort. In a day, a week or month in a single market there are different styles, and many more among the different markets. Proponents of one style often are critical of the practitioners of other styles. Some say find a single style and stick with it, but the ability and flexibility to adapt with several styles is beneficial. The larger firms of course have staff to populate the specialties, but for the sole operator flexibility and knowledge of and the ability to use differing styles is helpful to prosper. The changing cycles demand the ability to change styles with the cycles. Knowing the weaknesses of the style is essential to avoiding blinding defeat. Many styles are represented on the List. Why starve when there is plentiful bounty surrounding us everyday in many markets.
09-Apr-2006
Big Stock Blues, by Victor Niederhoffer
The S&P 100 index is a cap-weighted index based on 100 constantly updated big stocks. Its history over the last six years, typified by its level of 836 on March 31, 2000, and again in September 2000, approximately 600 at year-end 2001 and 587 today tells a distressing story of underperformance and lack of confidence.
The index has a small amount of turnover in it, so its 10 best performers over the past five years, from March 30, 2001, to March 30, 2006, is pretty indicative.
10 best (% chg) 10 worst (% chg)
Rockwell 399% El Paso -82%
Allegheny 251 Ford -72
Caterpillar 224 AES -66
Norfolk So 223 Lucent -62
Burl North 174 GM -59
FedEx 171 Time Warner -58
Harrah 165 Bristol Myers -56
Xerox 154 EMC -54
Black & Decker 136 Merck -51
Lehman 130 Unisys -51
Some other famous disasters: AT&T (-40%), Pfizer (-39%) Comcast (-36%), Eastman Kodak (-29%), CBS (-26%), Intel (-26%), Sara Lee (-17), GE (-17).
An article in the April 17 edition of Business Week, “Blue Chip Blues,” interviews the clueless former basketball player at GE and Intel executives who wonder why their stock performance is not as good as their governance or earnings performance. The anomaly is deep; on average, the earnings performance of these 100 companies has been pretty good, up approximately 50% during the period. A typical sobering story is GE, with earnings up some 50% during the period from the year 2000 to year 2005.
One has several thoughts on the matter. First, is that the terrible record compared with the small-cap and midcap companies of 13 to 14% a year shows that the public is always behind the form. Almost every best-selling book on the market has extolled the views of Jim Collins or the Sage that big and tried and true is best, and the best way to make money is just to sit tight with a company that can’t miss like Coca Cola (-7% in the last five years), that people are going to buy regardless of changing tastes or dietary habits because of its strong brand.
The second thought that comes to mind is that this was guaranteed to happen because the companies at the top of the ladder are those that have the least risk of falling into bankruptcy and thus should have the least return, based on everything that modern finance theory and practical experience has taught – i.e., that risk and return follow each other. The third thought is that many of the top companies were hurt by the fact that they stored earnings in a silo from many years before, and were able to smooth earnings out by selling assets at propitious times in the past, but now with the revelations from Enron and all the restatements, it’s no longer so easy to fool us with that trick.
The S&P Index itself makes a good attempt to track with proper statistical adjustments the performance of the large companies and it tends to prove the point I have made over and over again, as exemplified by the prospective Value Line study, that growth beats value in all the prospective-based studies.
It is interesting to speculate if the top 100 stocks will continue to lag behind representative entrepreneurial and flexible companies among the remaining 20,000 or so public companies in the future.
09-Apr-2006
Barenboim Reith Lecture, from
Laurence Glazier
Interesting lecture last night on BBC about Daniel Barenboim's thoughts on the nature of music. Notes and silences (rests) have their meaning in in context of their neighbors. When starting to play a piece which begins on a secondary beat, one joins the music as if it were already there. Timing and speed is critical.
Trading metaphors aside, he is thinking about the influence of music on society. My view is that the renaissance and romantic musical periods have played a very significant role in the evolution of Western society, though I can offer no proof of that, and it may be false logic (i.e. discerning a correlation when there is only coincidence in simultaneous developments).
His idealistic West-Eastern Divan Orchestra will be sorely tested should Hamas ban music, but how would the world differ if classical music education were central in schools, and much as I admire the passion of 20th and 21st century composers I mean training in performance and composition of pieces using the chord changes of popular music and classical harmony.
09-Apr-2006
Various Thoughts on Position in Chess, by
GM Nigel Davies
Position Assessment: A Difficult Aspect
One of the most difficult situations in chess is when you can formally count many advantages in your position but when you put them together they add up to a disadvantage. For example one might set up a position as follows:
White: Pawns h2, g3, f2, d5, c3, b2, a3
King g1
Rook d2
Bishop a2
Black: Pawns h6, f5, f6, e5, c5, c7, a5
King f7
Rook b8
Knight d6
One can count many advantages for White here - Black has two sets of doubled pawns, White's bishop APPEARS good (the only pawn which is on a White square is on d5), he has bishop against knight with pawns on both flanks etc. But Black is nevertheless better, and this is an example of why computers have such problems with our little game.
20 Ways to Lose Good, Equal and Bad Positions
Good Positions:
Level Positions:
Bad Positions:
It was much easier to think of ways to lose a won position than an equal or bad one. And this is reflected in what 'should' happen over the board.
Strong and Weak
Strong players become weaker through lack of a challenge. Weak players remain weak through lack of talent. Good positions become bad through their lack of potential. Bad positions are blessed by the fact that there's lots to improve.
09-Apr-2006
Round Number Theory and Smallmouth Bass, by J. T. Holley
I have recently finished Smallmouth Bass: An In-Fisherman Handbook of Strategies , by Sura, et al. for the second time in one month. I am brushing up for the spring season on the James River. As I read the text--the sentences and phrases of the distribution, life and patterns of the smallmouth bass, smallie, it is amazing the similarities and the striking resemblance to that of the round number phenomenon in trading and statistics.
The smallie is a "homebody" by nature, rarely roaming around a river, lake or reservoir during the year like other fish do. Unlike most other fish they stay in fairly limited areas. Because of this they must have all that is required to live and prosper in that limited range. The necessities in a smallie's life are "opportunity to reproduce, find comfort (quality habitat, adequate water quality, and temperature), and obtain sufficient food". They must be able to find these conditions within a fairly limited area to thrive and survive against nature and competition.
These groups of smallie's are based in distinct areas of the bodies of water they live in and aren't ones to travel far once they have attained everything they need. This makes them vulnerable to being caught! The fish aren't shaken very easily from these spots by much. The most common example of migration are caused by drought or low water and also they move during floods. It was very interesting to read also that "when fish are removed from a home range and released at a distant point usually return to a home area".
Lastly they stressed with fisheries the smallmouth have had forced multiplication of their kind. But, few environments offer the conditions mentioned above for their proliferation to take place. So even though the smallie has a fairly wide range of distribution today it is rarely the dominant fish in that distribution of which makes them less likely to be the principal fish.
Wow, when looking back at my notes the round number theory popped into my noggin'. Are we smallmouth bass? Do we simply choose round numbers when asked our weights because of convenience or is it just like the smallie in that we are "homebodies" and like to be around that number for comfort and ability to obtain food? When trading to bids and asks fight to find the "spots in the river" where "reproduction, comfort, and sufficient food" is located in that being liquidity and action. Do trades tend to stay in one area and not migrate or move much but only when droughts force us out or the flood of a bull market pushes us up to the next higher round number?
Food for thought at least.
08-Apr-2006
Davis Cup Report, from Peter Gardiner
Earth, Wind and Fire. The Beatles. The Rolling Stones. Snare drums, tom-toms, and sticks. A concert? No. The first match of the Davis Cup quarterfinal, between Chile and the US in Rancho Mirage, near Palm Springs.
One grass court sunken between four temporary grandstands, each of which were half the size of the old grandstand court and West Side Tennis Club, where The US Open was held before it went disco. Close, intimate. Maybe 2,000 people, tops. I had driven out during what I feared might be the last of the first match between James Blake and Fernando Gonzales, only to find the fifth set was just starting after Blake had blown a 7-6, 6-0, 5-3 lead, and found himself looking at a 7-6, 6-0, 6-7, 4-6 scoreboard, hundreds of red Chilean jerseys in the stands, and an opponent who didn't seem to be the least bit fazed.
The temperature was about 80 degrees, and the grass court, chosen by the host US team, had been baked in a dry, intense sun for two weeks, and appeared to be playing very true and hard, with few if any of the spastic bounces so common to grass tennis.
Why grass? The inside word was that Andy Roddick had lobbied heavily for its use in order to increase his edge over Gonzales and his teammate Masu, who, while good on all surfaces, are known to prefer hard courts or their native red clay.
There was only one problem: whatever surface you play on, you have to want to win.
Even though Blake managed to get up 2 breaks in the fifth set, and lead 4-1, he seemed to be sleep-walking, tentative on his approaches, trying drop shots from the full run on the base-line, hitting his ground strokes so short as to be almost apologetic. I was close enough to the court to see the stiffening joints and weakening resolve so characteristic of court fear spread like a toxin through his body. Even after winning a point, his shoulders slumped, his gait was arthritic, his hands in a constant motion of restrained appeal to the tennis Gods. And this was when he was winning.
Once Gonzales decided, 'yeah, I'm tired, I'm down, it looks like I'm going to lose, but what the hell,' whatever powers of movement and resolve Blake owned ran out of him like blood from a gushing wound. He is a good guy, James Blake. A talented player. A coming star. And it was a sad, pathetic effort, almost grotesque in view of his ability. No fight.
And Gonzales just pounded one huge forehand after the next on every opportunity, being careful to avoid over playing or pulling the trigger too soon, using his backhand slice on return, his topspin from the back, not over hitting, but very purposely pushing Blake around the court. And when the opportunity came, no hesitation. No fear of failure. Just all out, unremitting, focused attack, even if the opening happened to come on Blake's first serve. But a smart attack, not a kamikaze. He wasn't going to give it to Blake; he would make him earn it.
On serve, Gonzales was equally impressive, alternating between a 125 MPH heater down the middle, and an extremely effective 90-100 MPH slice wide to the deuce court. It was a perfect use of variation in speed, spin, and placement to keep an opponent off balance. Mostly, he stayed back, but sometimes, he followed it in. And guess what: Blake found out that they can volley in Chile these days.
Then we were four hours in and it was 6-6. Somehow Blake staggered through and managed another break, only to serve for the match and fold. They sparred another round, and Blake is broken for the final time, as Gonzales, the supposed clay-courter hammers home an ace for the match.
There is no mistaking the lesson of this match: if one is afraid to lose, it is impossible to summon the strength, creativity, energy and control, which inhabit and drive one's greatest talents. You cannot surprise yourself, and therefore, you will surprise no one. Fear of losing is so natural, so common. We all feel it. And it can produce no victory. For victory, you gotta' play like you want to win, and really mean it.
08-Apr-2006
Blackjack and Markets, by Steve Leslie
Blackjack is a very unique table game. It is the only game offered by a casino that can be beaten over time by a skilled individual . All of the other games offered from slots to roulette to dice to baccarat are guaranteed losers if you play them long enough. It is a worthwhile chore for the investor to study the game and apply the knowledge to stocks.
There are two steps in winning at blackjack. The first step is to play basic strategy with the hand that you are dealt. Basic strategy was developed initially by Ed Thorp and described in his book Beat the Dealer in 1962. The information Dr. Thorp revealed has since been expanded upon by other writers yet "Beat the Dealer" still stands as a breakthrough in the game of blackjack and a good primer.
Prior to that blackjack was viewed largely as a game of chance. He used computer models in order to determine the best statistical way to play a dealt hand vs. the dealers up card. Since the player gets to see one of the dealers cards, a decision to take a card or stand on the cards they have would be based on imperfect information. Statistically you know that app 1/3 of the cards in the deck count as 10 so you typically make an assumption that the dealers down card is a 10. Therefore if a dealer is showing a 6 you assume that his total is 16 and by the rules of the game he must take a card. This type of information will help you determine the play of your hand.
If you play "perfect basic strategy" your odds of winning assuming you make the same bet each time are a little less than 50/50. About the same as betting the pass line in craps or betting on a color in roulette. To make money in the game you need to acquire the skill in the second step.
Since blackjack only uses a finite number of cards, there are times when it is to the advantage of the player and times when it is to the advantage of the house. This is where card counting comes into play. In one of the easiest card counting methods to use, Card counters assign a value to each card for example 3, 4, 5, 6, 7 are assigned a plus one. 10, Jack, Queen, King, Ace, are assigned minus one. When there are more high cards in the shoe, it is to the advantage of the player. Conversely, when there are more small cards in the deck it is to the advantage of the house.
By simple representative counting, counters can then determine when the shoe is in their favor or hot and when the shoe is against them or cold. What they then do is put more money into play when they have the odds in their favor and put less money into play when the odds are against them. Played at the highest level a counter ends at an overall advantage of 1.5% against the house. In real terms, if a player makes an average bet of $50 he will expect to earn app. $75 per hour. That's it. An eight-hour session will yield around $600. Of course along the way there will be some major fluctuations and dry spells when the player will give much of his bankroll to the house. Most of the time the cards are in a such a tight range that neither player or house has any real advantage. It is only when things get really out of balance that a player can make money. Most of the time he is just passing chips back and forth waiting for something to happen.
The same thing happens in stocks. Most of the time they just sit there in a tight range no real trend has developed. The chips are merely being moved around. Nobody has a distinct advantage and then something happens that causes the balance to be disrupted. It might be a release of a new product, an unexpected purchase by a customer, a myriad of events. Suddenly the stock begins to adjust to the new information and the price takes off. That is the time to move for the speculator to take advantage of the imbalance and put their money into play.
The analogy to this market seem striking. Right now neither party has an advantage so the market goes up a bit and then comes back a bit. chips are just being passed back and forth. Things will change by some external event they always do and the odds will shift again to the players favor and money will come back into play. The patient one will recognize this and reach in his account and commit capital to his/her position. For further discussion on blackjack I would recommend Million Dollar Blackjack, by Ken Uston.
Interesting note is Dr. Thorp went on to start one of the first hedge funds in 1969 and has accumulated a significant fortune as a result of his outsized performance.
Nat Stewart responds:
"The analogy to this market seem striking"
The notion of counting is an obvious analogy, especially here. What do speculators count in the market to determine what the running count is, and when to put down a bet? Isn't this type of question a large part of what the list is about.
Rather than having a single deck to count, or even the decks at just our table, we seem to have many decks, decks at different tables impact each other, and we search for new relations between the decks and within the deck. We search for new specific counts to use, yet often different different counts can turn out similar as conceptually they are of the same family. Can different counts be classified together by conceptual characteristic when looking for significance to a market pattern or phenomenon?
"When there are more small cards in the deck it is to the advantage of the house."
What is the market analogy? trading in the middle or a range rather than a range extreme? Maybe the big cards are like the larger price fluctuations that create states of advantage/disadvantage that the spec can take advantage of. Maybe a warning against grinding it out for small profits-fluctuations when one is not the house? I learned this in PracSpec. but, as is my usual had to bang my head against the wall before moving on.
"Played at the highest level a counter ends at an overall advantage of 1.5% against the house. In real terms, if a player makes an average bet of $50 he will expect to earn app. $75 per hour. That's it. An eight-hour session will yield around $600."Is this type of computation less useful to traders do to the changing cycles? Even if less useful, does it still have some merit?
"It is only when things get really out of balance that a player can make money"This seems to suggest trading when our market counts are also at relative extremes. Yet the perfect trade for me at least seems to never show up, when it does its easy to think "just a little more" and if I wait too long for it or am too demanding I miss the trade except those times I suffer a winners curse. When i set a limit closer, It is easy to look back and wish one had held out longer.
"The same thing happens in stocks. Most of the time they just sit there in a tight range no real trend has developed. The chips are merely being moved around. Suddenly the stock begins to adjust to the new information and the price takes off. That is the time to move for the speculator to take advantage of the imbalance and put their money into play."
This seems to suggest a momentum strategy for stocks, would a similar or opposite strategy work in index with regard to news adjustments? When price is impacted by new information, does our running count in our other decks have an impact on the future distribution?
John Lamberg offers:
Rick Ackerman comments:
Most of the top blackjack players migrated to the CBOE after it opened in 1973, and Thorpe himself had traders stationed on several option exchanges from their respective beginnings. The card counters eventually abandoned blackjack simply because the odds were better on the options floor. Also, compared to the thuggish pit bosses of Las Vegas, SEC regulators were relatively avuncular.
Of course, with relatively few rocket scientists in the game 30 years ago, option premium levels were stratospheric. For one, at- and near-the-money calls were so juicy that one could put on butterfly spreads for a net CREDIT. In retrospect, it's hard to believe that this situation could have existed for as many years as it did. The beginning of the end was in the early 1980s, when airline pilots and dentists were enticed into partnerships that used riskless spreads to roll taxable income forward each year.
Blair Hull, who later founded Hull Trading, may have been the most successful option trader of them all. He had also been one of the most successful card counters, using a system called Revere Hi-Opt II to win at blackjack. Traders often like to boast that they don't care which way stocks move, that they'll profit regardless. Blair was one of the few guys who really and truly didn't care, and the strategies he used were typically free of directional bias. For example, he wrote a program that took the randomness out of option exercise, allowing him to sell naked puts and calls an hour before they expired at (in percentage terms) exorbitant prices.
By the way, roulette can be beaten by systems play, but the technique is even harder to master than the ones employed in blackjack.
Bruno Ombreux adds:
I looked into blackjack at some point. I don't think it is possible to make a living playing this game. I am not even sure it is possible to beat the house.
A long long time ago, when Thorp first published his findings, players could get an edge over the casino, But casinos are not charities. They are businesses who make money by exploiting favorable odds. Don't think for a minute that they haven't read all the gambling books, aren't employing statisticians, aren't running experiments and simulations, aren't using the latest marketing techniques and aren't maximizing their profit.
Since Thorp, casinos have changed their blackjack rules. Over the years, they suppressed early surrender, increased the number of decks, changed the number of cards cut out of play, and more importantly, moved to non-random shuffles and limited shuffles. This is best explained in Patterson's: "Blackjack: a winner's handbook". I've got the 1990 edition and haven't played since the mid-nineties. I am suspecting this book is already obsolete in terms of techniques used by casinos.
A bit more on casino shuffles. Blackjack basic strategy is based on the premise that cards are randomly dealt. This is not the case in real life. Cards are ordered in brand-new decks. Some shuffles are more thorough and better than others at creating randomness out of initial order. Also, simulations have shown that one needs 7-8 shuffles before the deck achieves near randomness. In the nineties, casinos were using shuffles that are poor at creating randomness, like the zone shuffle. They were also limiting the number of shuffles before decks are discarded and replaced by new ones. Some shuffles are designed to completely destroy card-counting strategies. They result in "-1s" and "1s" clumpiness. People who come to the casino with only basic strategy and card-counting knowledge are bound to lose more money than ignorant gamblers.
In order to maintain a modicum of edge over the house, players have to go beyond basic strategy and card counting. Patterson suggests such things as shuffle-tracking, team play, use of miniaturized computers... As I said, this is probably already obsolete. Today's edge, if it still exists, must be so low and such tedious work, that one can make more money and have more fun flipping burger