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Daily Speculations The Web Site of Victor Niederhoffer and Laurel Kenner Dedicated to the scientific method, free markets, ballyhoo deflation, value creation, and laughter. A forum for us to use our meager abilities to make the world of specinvestments a better place. |
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June 2005 Posts
6/30/05
Humility, by
Julian Rowberry
In real life we need to act on our theories, so it's right or wrong, 1 or 0, good or bad. Pick one, act. Assess it. Repeat.
Recently a young Australian was drafted #1 into the NBA. He declared, among other things, that he is the 'best basketballer to have come from the country', if 'you want to play NBA, play US college basketball, not NBL (Australian basketball league)'. These things are painfully obvious. The Australian media rubbished him for declaring the truth, and not assuming the 'false humility' public relations approach.
Whilst humility is the opposite of arrogance, it lives in the same stead. A misjudgment of value equally as costly. Why it should be encouraged, is beyond me.
Kevin Bryant adds:
Balance is critical in all things. The absence of humility means arrogance. Just when we think we have a hot hand and begin to believe in our omniscience, we get bit by the proverbial snake in the grass because our heads were too high in the clouds.
GM Nigel Davies responds:
The only thing that matters to someone's performance is whether he's objective.
Apparent arrogance can be nothing more than a statement of fact. If someone knows he's good at something, why should he not recognize this fact? The only point at which it becomes dangerous is when self-belief gets ahead of reality, when people believe their own legend.
Excessive humility, if genuine, can lead to underperformance. And false humility is much worse.
Kevin Bryant replies:
Apparent arrogance and true arrogance are two very different things. True arrogance, the state of being overly convinced of one's own importance, is by definition a state not in touch with reality.
6/30/05
A Fine-Looking Bunch
L to R, top: Doc, Tom, Wiz, Chair, Duncan, Professor; bottom: Ace, Susan, Dude
Photo by Ming Vandenberg
6/30/05
Humility, by
Julian Rowberry
In real life we need to act on our theories, so it's right or wrong, 1 or 0, good or bad. Pick one, act. Assess it. Repeat.
Recently a young Australian was drafted #1 into the NBA. He declared, among other things, that he is the 'best basketballer to have come from the country', if 'you want to play NBA, play US college basketball, not NBL (Australian basketball league)'. These things are painfully obvious. The Australian media rubbished him for declaring the truth, and not assuming the 'false humility' public relations approach.
Whilst humility is the opposite of arrogance, it lives in the same stead. A misjudgment of value equally as costly. Why it should be encouraged, is beyond me.
Kevin Bryant adds:
Balance is critical in all things. The absence of humility means arrogance. Just when we think we have a hot hand and begin to believe in our omniscience, we get bit by the proverbial snake in the grass because our heads were too high in the clouds.
GM Nigel Davies responds:
The only thing that matters to someone's performance is whether he's objective.
Apparent arrogance can be nothing more than a statement of fact. If someone knows he's good at something, why should he not recognize this fact? The only point at which it becomes dangerous is when self-belief gets ahead of reality, when people believe their own legend.
Excessive humility, if genuine, can lead to underperformance. And false humility is much worse.
Kevin Bryant replies:
Apparent arrogance and true arrogance are two very different things. True arrogance, the state of being overly convinced of one's own importance, is by definition a state not in touch with reality.
6/29/05
Monkey Business, by
Tim Hewson
Being a monkey isn't as easy as it used to be: gone are the days of swinging from trees, drinking cups of tea and starring in movies with Clint Eastwood. Now you gotta turn to academia to earn your keep.
Research done at Yale shows monkeys share the same "irrational" tendency to risk aversion as humans, i.e. for two equal outcomes people will prefer the choice of avoiding a loss to making a gain.
On thinking about it, why is this behavior termed "irrational"? In a society and economy based so much on personal relationships and interactions, reliability and consistency ought to be preferred and looked to for guidance over average outcomes, be they "irrational" or not, no?
How does the baker explain to his customers, after they pay, there is no bread today as his flour supplier didn't deliver, but on average, when he does show, he delivers as much flour as the guy who turns up everyday, and next time they come he'll give them twice as much bread, so net net they'll be no better or worse off?
Surely the more rational behavior is that which enables participants in a market to go about their daily business as efficiently as possible, and a precondition to this is having reasonable expectations of the behavior of your counterparties, Those who are reliable and efficient and provide a good service prosper, while those that do the same "on average", but in none of the above ways go belly up.
6/28/05
CBOE Fears Low-Vig Options Trading Will Cause Eyestrain, from the Assistant Webmaster
June 28 (Bloomberg) -- The Pacific Exchange, the fifth- biggest U.S. stock-options market, will reduce the standard gap between the buying and selling prices of all contracts it offers to a penny, from the current minimum of a nickel. 'We worry about our major data vendors' being able to handle something like that,' said Tom Knorring, vice president of trade processing at the CBOE, in an interview last month. 'The exchanges themselves would have trouble gearing up for it. And you are going to run into the unreadable screens: either your screen couldn't keep up or if it could, your eyeballs couldn't.'
6/28/05
A Niederhoffer in History, by Laurel Kenner
In keeping with my practice of reading all I can on the history, economy and art of places I visit, I bought a sun-faded book called The Bull of Minos from a rack outdoors in the small Cretan village of Krista. It's an account, first published half a century ago, of the excavations in Troy, Mycenae and Knossos by Henrich Schliemann and Arthur Evans.
When I reached the passage that appears below, I started to smile. Other readers will recognize in it, if not the denomination and the inebriation, the scholarly bent and catalytic role in others' lives:
[Heinrich Schliemann] had to leave school at the age of fourteen and become an apprentice in a grocer's shop in the small town of Furstenberg. 'I was engaged,' he wrote, 'from five in the morning until eleven at night, and had not a moment's leisure for study. Moreover, I rapidly forgot the little that I had learnt in childhood; but I did not lose the love of learning; indeed I never lost it, and, as long as I live, I shall never forget the evening when a drunken miller came into the shop.' The miller, whose name was Niederhoffer, was a failed Protestant clergyman who had taken to drink, which, however, 'had not made him forget his Homer; for on the evening that he entered the shop he recited to us about a hundred lines of the poet observing the rhythmic cadence of the verses. Although I did not understand a syllable, the melodious sound of the words made a deep impression on me. From that moment I never ceased to pray to God that by His grace I might someday have the happiness of learning Greek.'
Schliemann went on to amass a huge fortune as a trader in Russia, California and elsewhere. By the age of 33, he spoke 15 languages, including modern and ancient Greek.
My opinion is that the miller wasn't drunk, just... exuberant.
6/28/05
Target Shooting, by Andrea Ravano
I have cultivated some intense passions along the course of my years. One of the first and more powerful has been free pistol 50 meters target shooting. Besides the difficulty of the breathing process, controlling the nerves that move your fingers, keeping your shoulder relaxed, the most difficult part is, in my opinion, to lower the arm, saying to yourself not to shoot. In fact, while aiming, your arm and hand are never still. The gun passes from left to right, up and down, with the slowest movement possible, underneath the target. Never completely still. That is why the decision to fire is so complex: you never know if you are in the 10 point region, the 9 or worse. The tough part is to tell yourself you are wrong and must start over again the aiming process. I find many an analogy in the financial markets, where the most difficult part is to recognize a bad trade from a good one. Buy low and sell high, or the opposite, are never a good measure of your judgment as the math and stats of the markets are stirred in a complicated mix of emotions and feelings called a human being. The Japanese hysteria that drove the Nikkei to 42,000 should have stopped much earlier, yet in those days you would have missed a tremendous rally if you sold the market high. The same applies to almost all tradable instruments ranging from the black tulip to the Nasdaq. In the end, though, the real mistake is always not to shoot.
6/28/05
Wearing Two Hats, by
Jim Sogi
I work two "jobs", but am lucky in many ways:
The main thing is to have the right priorities in life so that life is in balance. That is the key. Health and family first. At the end of the day, nothing else really matters.
6/28/05
Moneyball, by Dan Grossman
Seems to me intuitively, without counting, that a major reason for the Yankees' loss to Baltimore last night was their extreme managerial reluctance to use Rivera, their closer and only reliable reliever, except in "save" situations or when the Yankees are ahead.
With the score tied 4-4, the Yankees brought in Stanton to pitch the bottom of the ninth, who promptly gave up a home run to Baltimore. Rivera had been warming up with Stanton, apparently for use when and if the Yankees scored in the ninth, tenth, etc.
Assume for example:
What's an easy way to mathematically calculate whether my intuition is correct?
6/28/05
La Dolce Vita, by George Zachar
BN 10:05 EU Urges Italy to Use `Rigor' to Lower Budget Deficit
No creature with a more complex neural net than a planarian can read this formulation without laughing. Now, since Brussels knows "Italy", "rigor" and "budget" cannot go together, and global political/economic elites know the same, and Brussels knows the elites know this, what's the point in making the statement? They are knowingly lying to people who know they are being lied to. It is a very Soviet phenomenon, and a scary foreshadowing of what may well be Europe's future.
6/28/05
Kazuo Koike and Goseki Kojima's
Lone Wolf and Cub, Reviewed by Will Huggins
Short version of the scenario: The main character, an assassin named Ogami Itto, has been hired by the five gunsmiths of the Shogun to kill off another gunsmith working to develop new weapons. During the relative "age of peace" instilled during the Tokugawa Shogunate in the 18th century, guns had moved from being pure instruments of death to being highly decorated, overpriced implements shown off by the Shogun's riflemen. When he realizes he is doomed, the gunsmith gives his parting speech. The parallels to investing seem obvious, along with the omnipresence of ever-changing cycles:
The nation is at peace, strife forgotten. Luxury and pleasure rule the streets, and our people wallow in decadence! Yet the Nanban barbarians prime their cannon and hungrily eye our land. The fires of war already flicker in the south! In times such as these, the true warrior gathers his arms and horses, and does not forget the arts of war! Only a fool would join hands with the gunsmiths of Sakai and have me killed for his own gain.
Weapons have a life of their own. Make one weapon, and a second appears to defeat it! A third one to make the second obsolete. Yet they seek simply steal my designs and copy them! They hasten the day when all are obsolete and our nation lies undefended
The cutting edge isn't the weapon. The cutting edge is skill, the endless effort of the inventor. If this truth is forgotten, our land will lie as tangled as grasses in the wind, and the nation will fall.
6/28/05
Mortgaging Our Future, by George Zachar
The Mortgage Bankers Association reported the adjustable share of applications fell to 30% in the week ended 6/24, exactly as one would expect in a flattening yield curve environment.
LATEST RATES Fixed 30-year 5.47% Fixed 15-year 5.06% Balloon 7-year 5.42% Balloon 5-year 5.68% ARM 1-yr Treasury 4.42%
I expect the hysteria about naive borrowers' "getting trapped" in adjustables will be replaced by hysteria about something else.
6/28/05
Forty Fewer for Primal To Scream At, from the Assistant Webmaster
TheStreet.com Shuts Independent Research Brokerage (Update1) June 28 (Bloomberg) -- TheStreet.com Inc., which operates a financial-news Web site, closed its Independent Research Group LLC brokerage unit, citing new regulatory requirements and the slow pace of the unit's growth toward profitability. The brokerage business employs 40 people, mainly at the company's Wall Street headquarters, and accounted for about 13 percent of revenue last year, the company said in a statement today.
6/28/05
Mr.
Jefferson, by J. T. Holley
Some say Mr. Jefferson contended that manufacturing would be the death of civil society. Actually Mr. Jefferson had a nail factory that employed 25-30 of his slaves, so he did know a little bit about manufacturing. To go along with his loves of reading and messin' around in his gardens I would assume that he'd rather be doing something else than workin' the second shift at his factory meshing out nails. He also had a unique way of incenting his employees who produced or worked harder at production. He would buy them a red coat or give them select cuts of meat for their effort. I would also argue that we never moved from agriculture to the extent that manufacturing took its place per se. Still to this day through the efforts of farmers we crank out more butter beans, potatoes, corn, tobacco and what not than probably any other country. Manufacturing is something that was added and existing GDP wasn't replaced, and just because India took the lead in cotton production doesn't mean people weren't using cotton gins to produce more than they had before. Wealth to Mr. Jefferson was valued in more ways than just plain coin or currency or how many nails that he sold. He about broke himself equating land to net worth. If he needed to get liquid and create cashflow he just sold a couple of acres or slaves. G-d ain't makin' much more land, and those slaves, well they were literally family. The concept of wealth and money to Southern farmers was something entirely different than that of a Northern industrialist. Plenty of people Mr. Melduke keeps countin' getting laid off regularly in the South in the plants of tobacco, textiles, and such. Do you think they sit on their tails unemployed and just collect checks while laid off and outta jobs? No, they are being productive, sowing seeds and planting gardens to can vegetables come fall harvest to sustain their lives and live for the next wave of whatever plant, business, or idea comes along and be employed again.
6/27/05
Mr. Dow 5000 Pounds the Table,
Critiqued by George Zachar
This recovery is different because it was spawned and subsequently nurtured on the back of asset appreciation alone. Greenspan and company have high hopes that investment and then employment will ultimately kick in and work their self-sustaining magic one more time, but jobs and investment these days go to Asia at the margin, and domestic animal spirits have been squelched by the looming inevitability of reduced returns on risk capital in a low interest rate world.
Rick Ackerman rejoins:
I don't sense much table-pounding, only a blunt and unrefuted assessment of an economy that has been growing more sickly and dysfunctional with each passing month. If there is empirical evidence to suggest that the weakest economic recovery since the Great Depression has been catalyzed by something other than rampant asset inflation, then by all means please share it with me.
I'd be most interested in an explanation of why new borrowings approaching $3 trillion in the last six years have failed to engender any meaningful growth in a key macro component, net fixed capital investment; or how, in the complete absence of household income growth, consumer spending has come to represent as much as 86% of claimed GDP growth during certain periods.
To me it seems factually beyond challenge that the economy is being sustained by prodigious borrowing alone, borrowing collateralized by a steroid-fed asset class whose grossly inflated value the Fed chairman would have us construe as wealth.
And keep in mind that Mr. Dow 5000 is a raving bull compared to Mr. Dow 700.
Jim Sogi replies:
Empirical evidence exhibit list of a country running well with prosperity, health, justice, everything a Utopian society and economy could ask:
This is the best of all possible worlds.
The nattering nabobs of negativism have forgotten 1974. When was there a better time economically than now? Not to say it will last forever, but things are good now. The sky is not falling. There is nothing wrong, and in fact many positives. There will always be opportunity for the optimists, while Chicken Littles will be fodder for the wolves.
6/28/05
Summer Interns From
Birinyi Associates Visit the Chair
6/27/05
In Vino Vertitas, by Kim Zussman
A small group of specs met for dinner Friday at 94th Aerosquadron Restaurant at Van Nuys Airport, including Jeff Rollert, Steve Ellison, Tyler McClellan, and a handsome, urbane dentist. It was a great evening, fine food, wine, and friendships that included a number of long discussions. Some topics:
A grand evening, with great thanks to the Chair.
6/27/05
Splendid Isolation, a New Essay by
Dr. Ross Miller
6/27/05
Shanghai Surprise, by Yishen Kuik
Heard about this from my in-laws in Shanghai:
The official numbers for the salary of a Chinese worker are often misunderstood by Western analysts, because it is customary for the Chinese company to clothe, feed and house its workers. The take home pay is usually savings. Even middle level managers bill most of their living expenses to the company. While this is not enough to close the gap with Western paychecks, it should be noted by the careful analyst.
Adi Schnytzer replies:
To my understanding, this is a special feature of Chinese communism and not Third World practice, but I may be wrong. Further, in many communist or socialist countries, it was/is difficult to make sense of wage data, since workers often had two jobs, some fictitious but paying a salary, for example in academia, or they received extensive benefits of other kinds. Sometimes this "complexity" was deliberate government policy, to keep one group from knowing what another earned and thus to prevent leapfrogging wage claims.
6/27/05
Fascinating?, by GM Nigel Davies
I have one question about Thomas Johansson's book The Fascinating King's Gambit, which is highly acclaimed by club players. Does fascinating help us win our games?
Laurence Glazier replies:
No, it doesn't help us win, and that suggests two aspects of chess, as the beauty of some historical sacrificial King's Gambit games may be important to us as works of art, and though the winner's strategy is subsequently disproved these games stay famous. To my detriment as a player, I used to love exploring new twists in openings I knew at heart were unsound. Now I would seek chess beauty more in problem compositions than by playing the game itself.
GM Nigel responds:
I agree but I'd put it slightly differently. I think fascination helps with immersion but not mastery, and it's the mastery that helps us win. Amateurs remain at the fascination stage through either conscious or subconscious choice. One theory I have about the 'why' is that looking too deeply at any endeavor forces us to look at ourselves as a reflection of our efforts. And most people don't want to do this.
6/27/05
The Elephants Return to the
CBOT
6/27/05
A Renaissance Man, by Kim Zussman
Paul Winchell passed away last Friday at 82. A Renaissance man, Paul was known as an inventive entertainer but also entertained invention:
Winchell was also an inventor who held 30 patents, including one for an early artificial heart he built in 1963 and then donated to the University of Utah for research. Dr. Robert Jarvik and other University of Utah researchers later became well-known for the Jarvik-7, which was implanted into patients after 1982. Among Winchell's other inventions were an early disposable razor, a flameless cigarette lighter, an invisible garter belt and an indicator to show when frozen food had gone bad after a power outage.
I was lucky to have known Paul for a number of years, and we always enjoyed his polymathic tales, quick wit, and the occasional book or lamp projected with the life of one of his characters.
6/27/05
The
Kelo-Based
Land Rush Begins, from
George Zachar
With Thursday's Supreme Court decision, Freeport officials instructed attorneys to begin preparing legal documents to seize three pieces of waterfront property along the Old Brazos River from two seafood companies for construction of an $8 million private boat marina.
A Brooklyn Spec adds:
I remember being in 5th and 6th grades and having hours of civics lessons focusing on the concept and virtues of 'eminent domain'. Later I realized that the reason for these lessons was to ease the way for the destruction of a part of our neighborhood to make way for the approach to the Verrazzano Bridge. I remember trying to convince my father that the state had the right to do what they were doing, how it was for the good of all. He told me how Fascism took hold in Italy and how one of the most effective tools was to brainwash the school children.
6/27/2005
Dick Sears Weekly Review
It Isn't Fair
6/25/05
Silver Queen, by Tim Melvin
Driving down Route 8 here on the island as I do every Saturday of early summer, I finally saw what I was hoping for: Farmer John's produce stand was filled with buckets showing the green-clad ears I've waited to see since early last fall. The first of the summer sweet corn was in. Farmer John's stand has been here for 30-some years and his kids still come home from their Ivy League schools to work the register and supply Kent Island with the finest of summer eating: melons, tomatoes, cherries, strawberries. If it grows, John has it. He's always first in with the good outdoor grown corn. Hothouse sweet corn is to real Silver Queen as Arch Crawford is to the scientific method. Only one course of action open to a dedicated foodie like me. Now, I like fine foods and elegant dinners but my true expertise lies in serving up platters in the cooking style known around these parts as Chez Redneck.
So, let's see..
It's in the 90s today and sunny, combination that produces sunsets of Technicolor perfection. A feast, a sunset walk along the bay: it is summer at last here on the Chesapeake. If you can be here by 7:00 and aren't afraid of an ill-tempered puppy that weighs as much as you do, come on over.
J. T. Holley replies:
Old Bay seasoning sprinkled on an ear of Silver Queen corn drowned in drawn butter is heaven. I highly recommend this concoction. By the way, a lesson for novices: BBQ sauce isn't a marinade. It's a sin to marinade chicken, beef or pork in BBQ sauce then throw it on the grill. Basting is the proper technique. That's why they call it finger lickin' good.
Mark McNabb adds:
And some food for the ears:
6/24/05
Know Your Enemy, by Nick Marino
My son is a black belt and serious student of karate. At first, he had trouble winning sparring matches, even though he is quite good -- powerful and aggressive.
My advice after studying the game was:
Furthermore:
6/23/05
Fun in the EU, by Laurel Kenner
It's been lots of fun to read the local press coverage of the arguments over the EU redistribution scheme known euphemistically in standard US newspaper jargon as the budget. Here in Greece, the new budget would give olive farmers a subsidy of 1750 euros, about 90% more than what they received now. The catch is, they have to give 1100 euros back if they grow any olives. Most aren't expected to grow any olives.
The farmers are unhappy with their current subsidy and have been embarrassing the politicians by organizing tractor blockades of highways. Meanwhile, olive exports are booming. Extra virgin olive oil, a luxury 20 years ago, is now common in grocery store chains.
In five years, the subsidies will end. Hey, the party has to end sometime -- doesn't it?
6/23/05
Looks Bearish, by Pam Van Giessen
In a town in southern California last night, a bear sighting was called in to the police.
In a village in Holland, a bear warning was issued. Scientists descended to investigate paw prints, and track the elusive animal since there are no bears in Holland. Photographs of said bear were distributed.
And in another town in the U.S. a "bear warning" was posted with photos.
In all three cases the "bears" were actually dogs. Newfoundland dogs, pretty much the most gentle canines to grace this good earth. The photographs distributed were of said dogs, and in the last case it was a 7 month old puppy. In the first case, my friend, out walking her dog, nearly fainted when the police descended on her with spotlights while she was out for her nightly stroll with man's best friend.
Sometimes bears aren't bears, even when photographic evidence is submitted.
6/23/05
Gait Analysis, by Saurabh Singal
A gait is a characteristic limb coordination pattern used in locomotion. And gait analysis is the quantitative study of gaits with direct applications in orthopedics and robotics.
Animals with different number of legs have different types of locomotion. For example, horses have four main types of gait: the walk, trot, canter and gallop. These are characterized by the sequence of movement of different legs and also their timings. In a walk, each of the four feet rises up and falls on ground independently. In the trot, the diagonal foreleg-blackleg combinations rise and fall together. Trot takes two beats, canter takes three beats and galloping and walking take four beats.
Most insects have six legs, and they have two basic gaits: the tripodal gait and the metachronal wave gait. In the metachronal wave, each leg lifts only when the leg behind it is on the ground, giving the appearance as if a wave is spreading. In the tripodal gait, one tripod of either the front right leg, middle back leg and back right leg or the front left, middle right and back left leg are on the ground and the other tripod lifts and moves forward.
There are also research initiatives to use gait analysis for identifying different individuals, in the same way as fingerprints are used. When a foal is only four months old, gait analysis can predict its chances of becoming a champion race horse. At this point the purchase price of the foal would be less than later on, when its potential is more widely known.
Champion swing dancers can identify a good dancer quickly. Champion racquet players such as Chair need only watch a follow-through to determine if someone is a good player. Chair has commented that economy of movement and compactness of style characterize world champions in different arenas. Since markets also move in different gaits at different times, sometimes in lethargic listless gaits, sometimes at a canter and at other times in galloping strides or Lobagola stampedes, I wonder if studying the science of gait analysis can help speculators?
6/23/05
Overheard by a Savvy Fed Watcher
At a cocktail party last night, an equity portfolio manager told me:
We use the Fed model, and stocks have never been this cheap relative to interest rates. Then you look at how easy it is for private equity types to borrow real cheap, lever anywhere from 7:1 to 20:1, pay up for a company, tidy it up a bit, and then either pay themselves an enormous cash dividend, or flip it back out.
Is it that easy? Maybe I'm in the wrong business...
6/23/05
Bob and Weave, by Jim Sogi
Our kick boxing teacher always told us to keep moving.
In trading, don't present a fixed target trying to do the same old thing over and over. Bob and weave. Count the different patterns. Change it up. Don't step into a punch and put your stop one tick under the prior low. Don't just stand there. Move your orders. Things moving fast. You should too. After four days of the same price close, do you think it will be the same thing again tomorrow? Will the market just stand there and take it?
6/23/2005
Ask The Senator, a Continuing Series
Q: S&P floortraders calculate actionable trading areas based on a pivot, which equals yesterday's (H+L+C)/3. Are there any predictive qualities to this calculation?
A: That pivot formula is very old. I showed it in my my 1966 book and I lifted it from Owed Taylor's work of the 1930's. The values may have some merit but in a reverse fashion. I have tested it, and I actually use the points on a few occasions, but not at all as they are supposed to be used.
Send queries for the Senator to senator<at>dailyspeculations<dot>com
6/22/05
Pillow Talk, by George Zachar
Bizarre interview with Andrea Mitchell, i.e. Mrs. Alan Greenspan, just now on the Imus morning radio show. She's a NBC reporter, and spent most of the time talking about inside-the-Beltway intrigues, but then she offered this:
No one expected $60 oil to have no impact on the economy. It's a demand shock, and not a supply shock, and people are happy to pay and keep going.
In a zillion years of listening to her on Imus, I have never heard her comment on what is apparently her husband's thinking. One can simplistically read this as saying the Fed has dropped the notion that high energy prices, for now, constitute an inhibiting tax on the consumer/economy.
6/22/2005
Howl, by Roger Arnold
The Road to Riches Is Called K Street: Lobbying Firms Hire More, Pay More, Charge More to Influence Government, By Jeffrey H. Birnbaum, Washington Post Staff Writer, Wednesday, June 22, 2005; Page A01 -- To the great growth industries of America such as health care and home building add one more: influence peddling. The number of registered lobbyists in Washington has more than doubled since 2000 to more than 34,750 while the amount that lobbyists charge their new clients has increased by as much as 100 percent. Only a few other businesses have enjoyed greater prosperity in an otherwise fitful economy.
an oldie and status quo story from the recession proof town
thanks to the us taxpayer
yes the revolving door from public to private sector is booming
while greenspan and snow say let them eat cake
the supremes take away their homes
we can at least claim to not be europe or japan
the refrain in unison is it could be worse
jefferson said people get the government they deserve
all we need to do is look in the mirror
6/21/05
Volatility, by George Zachar
I assume the counters all see the new move lows in VIX, VXO and VXN. Debt marts too are seeing vols scraping along/near recent lows.
Though off their narrows, credit spreads have resumed their inward grind again, and monster-sized mortgage issues, like FNMA 5%, are trading special in the repo/roll market.
This has all the earmarks of a liquidity-driven, cash is trash, wall of money chasing ever-shrinking alpha, environment.
It's a good time to re-think/shock-test positions and the premises behind them, as quarter-end/half-year approaches.
Famous market commentator Han Solo sums it up..
The Senator adds:
Note that the bull markets that followed the crash of 1929 rallied on less and less volatility, as expressed by average weekly or daily ranges. It was not until volatility picked up that the bull markets of 1933-37 and 1942-1946 ended. The same thing was true following the crash of 1987.
6/21/05
Media, Media, Media, by
Kim Zussman
Often while driving I listen to KNX, a local AM station which has a Business Hour program. Usually the topics relate to stock sectors, asset allocation, personal finance; likely useful information for most listeners. Recently the emphasis has shifted to "the housing bubble", and today a UCLA economist claimed that California housing is 30% over-priced.
I was less interested in the content than the content of the interest. Perhaps these are the lazy days of summer, with stocks flat for the year and breezes sans anthrax spores. Leaving talking heads and hungry ears worrying about which asset classes are most inflated.
The first foray into counting was 4-years ago when subscribing to Louis Rukeyser's Wall $treet. He claimed journalistic access to the best and brightest analysts and managers, and (for a slight fee) would pass this onto us readers (who would not trust a man who is pictured on 1$ bill). Each issue contained a list of stocks and mutual funds picked previously, along with performance since selection. Only I noticed that with some frequency stocks were dropped for various reasons. Using back issues it became clear that only losers were dropped, and performance including them was worse than indexes of my own.
A second foray was monitoring the dart-throwing contest in WSJ, originally suggested by random walker Burton Malkiel. However it seemed inconsistent with theory that managers were beating the darts. So I emailed the good professor M, who kindly replied that manager out-performance was the announcement effect and it would disappear if performance were measured from a day after publication.
Barron's was better than Rukeyser; with more in-depth econospeak, and favored companies popped nicely on Monday. (Investment thesis: a spy at Dow Jones publications to leak the picks on Friday).
A Semiotic Spec adds:
Every day, pretty much without fail, the first thing I see in the morning is the cnn.com front page, and its primary image and headline are of a bombing in Iraq, with a couple of US deaths.
There is absolutely no doubt in my mind that the motivation for the low-level violence by the anti forces in Iraq is simply to keep bloody images in the US press every day, in the hope the US public will do what it did in Vietnam: leave the innocents to be slaughtered.
I believe this is obvious, upon reflection, and that the US press knows this, and is a willing accomplice. They would willingly, indeed gladly, see a return to mass murder in Iraq, and a ratcheting-up of terror against US targets, to weaken W and bring the Democrats back to power.
This is, of course, widely believed on the right. But, given the death spiral of MSM ratings/circulation, this notion seems to be seeping out into the broader population.
6/21/05
Grandad, If You're Listening, by
Nigel Davies
I recently discovered that some relatives of my wife were investing some money for our three year old son. Their choice of instrument? Premium bonds. For the unenlightened this is a bond which pays out a small amount of money in the form of a monthly prize draw. The 'attraction' is that you can win a million pounds.
Premium bonds are not a new thing to the Grandmaster dynasty. My grandfather bought me 8 quid's worth of premium bonds when I was a similar age to my son (early 1960s) which I forgot about until one moment in my chess career when cash was particularly short. I'll never forget phoning up the premium bond center, hopeful that these premium bonds had netted one of the huge unclaimed prizes. Was I in fact a rich man?
How much had they actually won? Nothing. Not a penny. The original investment of 8 quid was still worth 8 quid, less 30 years inflation of course.
There's nothing I can do about my Grandfather, who has long since passed away (though if you're listening Grandad, why didn't you buy me some stocks!?). But is there anything (within reason) to be done about the still living relatives?
6/21/05
Steganography , by Saurabh Singal
Steganography, which literally means "covered writing" differs from encryption in that while encryption uses cipher or code to protect or conceal the contents of a message by scrambling them before transmission, steganography works by concealing the very existence of the message. Clearly, detection of an encrypted communication between an unsavoury party (known terrorist or enemy agent) and a previously unsuspected person is going to put this person under suspicion. This is would be adequate reason for criminals to use steganography tools.
Simon Singh describes some historical methods of steganography in The Code Book. These included shaving the head of a courier, writing the message on his scalp and letting the hair grow; writing a message on a wooden writing tablet and coating it with wax. In later times, people would make pinpricks below certain words in a newspaper cutting and then mail the cutting to the recipient.
But nowadays, electronic methods of hiding information have evolved. At its core, electronic steganography hides or embeds a message inside another file which is called "cover image file" or "cover text". Together, the two are called "stegotext". Encrypting the message and then embedding it is common. Many programs are freely available on the internet that allows one to embed a text message inside a picture. The container file can be a text file, or a picture or audio/video file. Similarly the embedded message can also be a text or picture.
Here is how one common technique of hiding one image inside another image works. First, the image is represented in the RGB format, i.e., each pixel is represented as a (R, G, B) triple and there are three bytes per pixel. Changing the least significant bit has the smallest impact on the value of the 8-bit number (byte). Therefore if we embed an image in the least significant bit of each pixel of the container image, the changed value of each of the three bytes in the (R, G, B) triple will not change too much. Hence, the stego'd image (container image + embedded image) will not be visually too different from the original container image. To recover the hidden image, one performs the reverse operation, i.e., the stego image's least significant bits are used to re-construct the hidden image. The reconstructed image is degraded but sufficiently clear for many purposes.
Detecting the presence of hidden messages has also been the focus of much research. As the insertion percentage increases the statistical nature of the jpeg coefficients differs from usual and this can be basis for detection. For example, it is known that in monochrome images, the entropy is usually between 4 to 6 bits per pixel. An image with an embedded message such that the observed entropy value observed is to have deviated from the usual by chance alone, is the basis of an approach. Some detection systems actual test the properties of least significant bits for departures from usual Other approaches utilize knowledge of the statistical properties of JPEG images certain transforms of an image are taken and chi-square tests on the resulting coefficients are performed. The resulting chi-square statistic indicates the probability of embedding.
What can we learn from a study of steganography? First, the least important places might make good holes to hide stuff. But as in any scheme of deception, once the adversary knows we might go for the least obvious approach, the least obvious will become the first place the adversary will look for. Secondly, what appears innocuous to the eye may actually be important; and we should rely on statistics rather than visual examination to guard against the possibility of deception - looking at charts to make investment decisions is dangerous. Paying attention to measures like entropy or moments can signal departures from the usual. And of course, deception might be particularly effective when its very existence is not suspected.
6/21/05
Book Review by Victor Niedehoffer:
Data Driven Investing by Bill Matson and Mitchell Hardy
Data Driven Investing discusses techniques used by the authors to turn approximately $0.6 million into $4 million over the period July 2000 to December 2004 by investing with margin, in the main in nanocap value stocks. The authors' methodology in motivating their results reminds me of a piece of silver I own where a mad painter rides an octopus on top of a squid with sea monsters jumping up at him from a turbulent sea. In more familiar terms, its like what you would end up with if you had a magnet and Googled every academic journal for an anomaly, every issue of the Stock Trader's Almanac for a seasonal, and every technique in every book in the last five years with a system to beat the market, and all of these were made of iron.
Here are just some of the techniques that the authors
tested and/or used to select the buys in their portfolio:
The managers also buy put options when they think the market is likely to go down, especially during June to September, and they sell Friday afternoons.
There are no statistics on the variability of any of the techniques. And the authors rely on Compustat data that assume perfect knowledge of income statement and balance sheet figures as of the end of the year they invest in.
While the authors understand that data have survivorship problems because the small nanocaps that had been added as of 2000 were not selectable prospectively, they apparently don’t realize that using perfect knowledge of earnings is guaranteed to lead to value's beating growth because of the regression bias, and unexpectedly good earnings leading to subsequent price increases when they are announced. The authors also don’t seem to appreciate the principle of everchanging cycles, or numerous other biases that would take longer to enumerate than the previous list of techniques used.
The authors intend to create a video library of information on companies, including plant tours and management discussions of financials, and this is to be applauded. And they intend to schedule 52 fundraising events per year until they've raised $3.25 million, with 5% to be given to Babson College.
I'd recommend this book highly for teachers of investment classes who wish to use it as a take-home exam. "Comment and criticize."
The authors have kindly agreed to comment on this review. And many of the analytical deficiencies I find in the book do not deflect from what may be the practical value of the book. Indeed, I might be tempted to open a trial account with them myself. However, the problem with techniques that are not properly scientific is that it's impossible to separate the wheat from the chaff, the permanent from the transitory, the recurring from the everchanging. That is the great tragedy of this monumental effort so marred by multiple comparisons and look-back biases.
Coauthor Bill Matson replies:
To the extent you found fault in our work, it appears that the problems generally arose from our being insufficiently clear in making our points. We will certainly take your comments to heart in future editions. In particular, we should have been more emphatic in making the point that we only bet on anomalies that are likely to be sustainable. Sustainable anomalies are likely to arise from such things as:
When we backtested with Compustat data, we assumed perfect knowledge of income statement and balance sheet figures as of the beginning (not the end!) of each year whose returns we tested. As we admit, this introduces about one quarter's worth of look-ahead bias; however, we also note that side-by-side comparisons with O'Shaughnessy's lagged data (from What Works On Wall Street) are consistent with our major conclusions.
Coauthor Mitchell Hardy adds:
Data Driven Investing was intended to help individual investors make money in the market, not as a work of scholarly erudition. We're practical men, not theoreticians, hence the "Data Driven Test Portfolio." To the extent our book lacks scientific precision, that was intentional in that we purposely avoided presenting any advanced statistical analysis that might have limited its practical utility to a wider audience.
Also, it should be recognized that it's probably impossible to explain with scientific precision an activity as complex as the management of a real money portfolio encompassing more than 10,000 trades involving hundreds of individual stocks. A lot of different ideas went into the mix, and if we didn't nail down our every assertion with enough analytical rigor to please our most sophisticated critics, so be it. The proof of the pudding, it is said, is in the eating, and we have been dining rather well off our 890% returns. Anyone who reads, understands, and applies the ideas we presented in our book would likely do pretty well.
Regarding value versus growth stocks, there are, of course, numerous analytical and practical difficulties, not the least of which is defining just what is meant by a growth stock. A mechanical approach that might work to define a value stock (e.g. low P/E) tends to break down in picking growth stocks. A high P/E stock might be a growth stock or it might just be an overvalued stock. People who invest in growth stocks tend to think they are smart enough to pick companies whose earnings really will grow fast enough for long enough to justify the high prices those stocks typically command, but "smartness" in this case is hard to define quantitatively. We've made a lot of money by trading on "unexpectedly good earnings" announcements, but the bar of expectations is generally set very high for growth stocks; they really have to perform to create unexpectedly good earnings, but the penalty for unexpectedly poor earnings can be severe. Having said that, the effect of one quarter's worth of look-ahead bias on the significant differences we've observed between the returns for low price ratio (value) stocks and high price ratio (growth) stocks does not materially affect our conclusions.
Lastly, I rather like the image of the mad painter atop the octopus, etc. I've never heard my coauthor described so aptly.
6/21/05
Ten Variations On
The Theory of Least Effort, by Victor Niederhoffer
Article:
Human Brain Applies Law Of Least Effort When Solving Problems
Old Speculators’ Association Forum:
Markets and the
Theory of Least Effort
Number of 10's Number of 1's
in lead digit in final digit
10 4
9 8
8 2 2 8
7 none
6 1 2 3 4 6 6 777 9
5 00 11 22222 3 5 6666 899
4 0 1 222 3 4 5 7777 8 999
3 0 0 11 2222 3333 44 5 666666 7 8 999
2 0 11 3 0 3 4 5 6 77 88 9
1 0 0 3 4 55 6 7 8 999
0 4 7
Why no 7's and why none above 104? And so many thirties.
To be continued. Your suggestions and augmentations appreciated.
Sushil Kedia responds:
The theory of least effort, in all its possible manifestations revolves around the concept of the path of least resistance.
Even revolutions, wherein individuals may endure much more hardship than in the prevailing order, are incited and sustained by mapping individual minds to a collective emotion that appears to be the path of least effort in obtaining a much larger comfort which otherwise is seeming improbable.
Resistance to collective thoughts or collective action which when minimized have produced more lasting and richer outputs. Mark Twain in America or Shakespeare in Britain or Kabir in Indian all have a common characteristic in producing long-lasting literature because their choice of expressions (words and ideas) related to the masses, producing least resistance.
Thoughts, principles and philosophies originating even from the sciences have found resistance of the highest order when the communication was such that was offering a high resistance for the masses to understand. Scientists who could convert their findings into a readily usable 'invention' were embraced and those who let complex-theories hang in there met with proportionate resistance. Needless it might be to illustrate here the example of Copernicus's landing in jail. His thought being right he was still wrong in the theory of least effort.
I assume that the human mind which has evolved through inheritances of wisdom (ability to apply gathered intelligence), has been getting increasingly codified with the evolving perception of the physical reality. So if mankind has seen water finding its level and has considered it to be a law of nature, the mind too is conditioned with these observed laws of nature. The path of least resistance and thus the theory of least effort is at the centre of all perceiving we humans may have been through generations. The brain thus operated by the mind, seeks methods of least effort.
The unending rise in the popularity of P/E ratio is because of its simplification of a much more elaborate discounted cashflow value since the mind on average operates on the theory of least effort.
Let for a moment it be granted here that price is discovered at any given moment of time when the vector sum of all existing and expected bets in the market turns zero; where each of such individual bets is a vector represented by individual willingness & individual ability (classical demand & supply ideas).
If one were to choose what most others have chosen to do or are willing to do, one could hope to be rewarded at best the same as these most others after taking care of the vig. The collective vector sum of willingness (that keeps fluctuating as explained by the idea of reflexivity) and ability (that too keeps moving as per reflexivity) produces a mammoth resistance for the vig to be collected. Hence, the market in turning this vector sum to zero, moves away from the consensus.
Therefore, to get extraordinary rewards one might have to find that point of least resistance where either collective willingness is overstretched and/or collective ability is overstretched.
Trendfollowers as also the contrarians are then both the birds of the same flock since both seek the path of least resistance. The first seeking to profit when majority action is high on ability and low on willingness (read as disbelief or confusion) thus making the trend prevail. The latter seeking to profit when the majority action is high on willingness as compared to the prevailing ability thus starting diffusing yet another consensus while letting the market mistress turn the vector sum of all existing and expected bets into zero.
Tom Ryan responds:
My variation on least effort as it relates to markets is that the path of least effort for the marketmaking ecostructure to extract the maximum level of vig from its participants is to encourage as much turnover in positions and volume as possible. For example I would not be surprised to see by the end of my lifetime an additional set of option expirations at start of month as well as third week. Anyway, the path of least effort to encourage high turnover is to create maximum uncertainty in participants just prior to a calendar effect such as the close of the day, the last hour of the week, the last day of the month, last week of the quarter. And lately with the market so flat in the last week right before earnings announcements and end of quarter this looks like another attempt to sow uncertainty and a set up for a bout of early July volatility.
6/21/05
What a Great Life Story!, from
Henry Carstens
6/21/05
Quiddities, by George Zachar
6/21/05
Turn, Turn, Turn, by
Jim Sogi
Full moon, summer solstice, highest tides here in memory. As the summer turns, the garden plants all start to seed. Many changing cycles on such a day.
6/20/05
Blackjack and Options, by Rick Ackerman
I went to a seminar a while back, intrigued by the promoter's claim that any idiot could make money using his option system. I've traded puts and calls on and off the floor for nearly thirty years and have always found it quite challenging, particularly as a retail customer, to achieve a positive expectation of just 1-2%. I wrote up the seminar's well-marketed plan in my daily advisory service, soliciting positive comments, but received only negatives from disappointed grads.
The first guys to strike it rich on the options floors were blackjack players: Ken Uston, Doc Reppert, Ed Thorpe, Blair Hull et al. Guys who had wearied of having casino thugs looking over their shoulders all the time. But the options game has gotten much tougher over time, and, casino goons aside, the thought of a steady 3.5% playing Revere High-Opt against a five-deck shoe makes me nostalgic for the Trop, Sands, Riviera and Flamingo.
6/20/05
Primal Scream Stock Screen, by Big Al
Do people still watch CNBC? Evidently, there are a few who are watching between 6-7pm Eastern. I have been one of them more than once. Primal Scream's show has three basic elements:
The action is in Primal's own stock picks, mostly when they have small market caps. If he picks something the size of a HAL or SLB, there isn't much of a reaction (exception: SHLD). But look at the 10-day charts for BEAS, TIBX, OII, GW, SWKS and MLNM, and you can see quite clearly when Primal recommended them, whether you watch the show or not. You can actually see the stocks pop on the after-market ticker at the bottom of the screen.
Pam Van Giessen replies:
Do people still watch? Sort of, a little. Ratings for Primal's show are the highest ratings CNBC is pulling right now, but at something like 180,000 viewers, that is not much. Consider that 60 million people tuned in for The Beverly Hillbillies in the 1960's. CSI garners about 22 million today and Donald Trump brings in 15+ million. I bet HSN gets more viewers than Primal Scream.
Jeff Sasmor adds:
It's also fun to fade the picks of popular newsletters, some have skillions of subs and proffer picks of low-priced low-float stocks that often move the day after the picks appear via email.
Not as entertaining as watching Primal's veins bulge as he hits the sound effect buttons.
6/20/05
Wooden on Leadership,
Reviewed by Jim Sogi
Wooden on Leadership is one of the most profound and insightful books I have read. Though I have never played basketball, this highlights the important lesson that wisdom can come from many different areas, not just your own area of expertise. Wooden lists the basic building blocks of success. Their applicability to trading is clear.
6/20/05
Down and Out in Paris and London, by
George Zachar
Non-financial European observations from my recent trip:
Paris:
London:
6/20/05
Cake Cutting Algorithms, by
Saurabh Singal
A and B want to divide a piece of cake into two equal parts; how do they do it so that each is satisfied he got at least a fair share? Cake Cutting Algorithms: Be Fair If You Can by Jack Robertson and William Webb is a book that answers questions such as this and discusses related but more complex problems.
The classic solution to the question posed above is called "cut and choose": one person divides the cake into what he estimates are two equal parts and the other chooses a piece. It is straightforward to see why this works.
But what if there are more than two people? Or instead of equal halves, it is agreed to divide the cake in some other proportion, say a third to A and the rest to B? These are the types of problems that the field of "Fair Division" seeks to answer. Incidentally, this branch of knowledge was started in the 1940's by the famous Polish mathematicians Banach, Steinhaus and Knaster.
The problem of fair division for more than two players is more complicated than one might assume at first sight and the authors present several plausible schemes that fail. After pointing the drawbacks of these, they also present several algorithms that will work. I will describe two of them that I found very elegant.
In the Moving Knife Algorithm, a knife is continuously passed over the cake from left to right and the first person who thinks the portion between the starting position and current position of the knife is 1/N, can shout "stop" and he gets that piece and drops out. This step is repeated on the remaining part of the cake and the remaining N-1 players. When only one person is left he takes what is left.
In the Trimming Algorithm, Player P1 cuts what he estimates to be a 1/N of the cake. This is passed to players P2, P3, Pn successively; any player who thinks he has been passed a piece bigger than 1/N trims it so that the reduced value is exactly 1/N in his estimation. When the piece reaches the last player, he can either accept it or else this piece is given to the last person who trimmed the piece. This person will drop out. The remaining N players will repeat the procedure with the remaining cake and as before, when only one person is left, he takes whatever part of the cake remains.
If two players are to divide the cake in non-equal parts, say 2/5 to A and 3/5 to B, it may be tempting to "clone 2 of A" and "clone 3 of B" and apply the above algorithms, but the authors point out that if the ratio is irrational, say A gets 1/sqrt(2) and B gets the rest, then there are fundamentally different approaches needed.
The book also discusses fair division in settings under disagreement, i.e., scenarios where different players disagree about the value of different pieces of the cake, and the authors show that in these situations there is always a solution where there exists not only a solution such that everyone believes he got a fair share but also there will be some part of the cake left over. As a toy example, if A estimates the value of the two pieces as 40% and 60% whereas B estimates them as 60% and 40%, then giving A the second piece and B the first piece will result in each getting a piece he believes to be bigger.
A more realistic example presented in the book shows the serendipity of disagreement. Suppose N persons have claims to equal shares of a property bounded on the north by a lake (curvilinear, irregular boundary), to the east and west by vertical boundaries and to the south by a horizontal road. They agree to have equal access to road and beach; how does division proceed so everyone is satisfied? The authors suggest (and prove the correctness of) a really interesting algorithm. Each person is given an aerial picture of the real estate and told to divide it into N equal parts. If there is complete agreement, that is, when all the pictures are superimposed, the markings made by each player is identical to that of every other player, then it is trivial. But the more intriguing result is that if there is not complete agreement, it is then possible to give each player a division he estimates to be a fair share and at the same time, still have some land left unassigned.
How this is done employs a fascinating algorithm and is described (as well as proved) in this book, which alone made it a worthwhile read for me.
As in any book of algorithms, there is analysis of the number of steps (or number of cuts) needed for cutting the cake, what is possible or impossible in a given number of cuts.
There are other interesting situations, such as envy-free division where every player gets by his estimate a fair share and also believes no one got a bigger share than he. Also described is the envy-free dirty job division, where N people have to do a dirty job, everyone feels he is allocated no more than 1/N of the dirty job and also that no one got a lesser share than he.
Pareto Optimality is discussed. There is an example where the authors discuss how to make risk free bets, i.e., when there are two players who have different opinions on the possible result of a sport match, how it be possible for a third player to structure bets with both of them so as to assure himself of a riskless profit.
Jim Sogi adds:
M. Osborne in The Stock Market and Finance from a Physicist’s Viewpoint discusses the functions of supply and demand and price. An excerpt is enclosed below on the issue of cake cutting. The point that I have been struggling with is that supply and demand do not seem to apply to price distributions on SP futures on the daily/weekly price distribution. Why if price is lower does not volume go up at the lower price, but rather concentrates in a bunch in the middle values, closer to average or vwap. Some other factor other than the 'law' of supply and demand is at work. These may be functions of time, managerial functions of dnlm, outside issues such as college tuition due, death, closure of markets, and structure of market participants, the globex algorithm... What is the reason that the practice does not follow the economic 'law'? This occurs on a larger time frame as well. The lower price does not always create higher demand. The movement of the inside market does not always appear to be a function of supply and demand in globex, but some other factors are moving price. I will address this issue with tick data later related to this afternoon's breakout from the morning range. Here is what the physicist asks on the cake cutting issue.
6/19/05
Oil Price, by Andrea Ravano
The first time I heard about oil scarcity I was 15 years old, and the Arab/Israeli 1973 war had just ended. The embargo followed and in Europe we experienced the famous car-free Sundays, but mostly consumers started looking for fuel efficient cars, heating systems and industrial production plants. I remember my mother's Fiat 850, a super-compact model, circa 1970, burned the same amount of gasoline as a Mercedes SW 3000cc of 2005. In those days we listened to Cassandra predicting the end of Arab oil reserves by 2010, only perhaps to justify the greed of "oilers" to earn a fast buck. Now, 2005, here we go again with the barrel skyrocketing under the same pressures, and Italians have discovered that most of their diesel engines run on oil of colza! It took oil about 20 years to return to $40 per barrel. The problem is: when are we going to short, $60, $70 or $105 (not $100, mind you) predicted by Goldman Sachs?
6/19/05
Jim Sogi's BBQ Sauce Recipe
3/4 cup soy sauce
3/4 cup sugar
3/4 cup water
3 inches fresh ginger, chopped
1 clove garlic
1 tbsp sesame oil
6/19/05
Korean Barbeque Ribs, by Martin Lindkvist
As I was making the BBQ sauce described by Mr. Sogi, I heard my better half on the phone with one of her friends: "Martin will go to New York in early August, as he is part of this...". She could not find the right word to describe the Spec Party and instead continued, "Well, he is attending a meeting." Then I heard her continue, "Sect? No, I would not call it a sect...", and I chimed in "Yes, it's a BBQ sect!", at which she laughed heartily.
She laughed until she sat down, but when she started eating...
The BBQ was a great success. And to understand my joy one has also has to understand that I am not usually successful in the kitchen. And of course here is where the application to trading comes in. With the right recipe you can be a success both in the kitchen and in the markets. By choosing the right cuisine (market), the right dish (method), carefully noting that the right dish changes depending on a lot of things such as which guests you are having (changing cycles) and following a proven recipe (a method which has stood up to some counting), we stand a better chance of attaining success.
6/19/05
Identifying the "Public," by
Ken Smith
Much ado about the public is ubiquitous, here and elsewhere. Who is the public? The guy on the streets with white socks, the gal with the flowered skirt, the bawling child in the stroller?
Not in terms of the market mistress. The mistress, at her commanding heights, considers the public to be all the thousands of mutual fund managers, the hedge fund managers, the insurance company traders, bank traders, pension fund traders. In short, as far as the mistress is concerned the public is an assortment of money managers.
The mistress does not concern herself whether the guy with white socks washed them this week or last. The mistress does not concern herself whether the gal with the flowered skirt is wearing panties. The mistress does not concern herself whether the bawling child needs attention or has dirty drawers.
No. The mistress of the market is intensely focused on money managers, upper level traders, Ivy League employees of white shoe establishments. When sly innuendos, disparaging remarks, comedic repartee, and downright nasty animadversions are said about the public it is not, by any realistic meaning, a reference to the common citizen.
Who's fooling whom? The public doesn't have the kind of cash the mistress requires for her diet, a very, very rich diet. The fooling is of the self. It is money managers. They are the public. They have the people's money. They are the new suckers. Is that a strong term? Well, who is it that the market mistress makes fools of? Traditionally that ignominious word has been applied to the man on the street, the guy with white socks, who always bought and sold at the wrong time, thus feeding the affairs of the market mistress. But here, in this new understanding, we see and come to realize the truth, a new paradigm.
Money managers are the public. That's it. The mistress gets her abundant needs met by money managers, not the public as we traditionally understand the term. To speak of the public is to speak of money managers.
6/19/05
Chess and Trading Opinions, by
Nigel Davies
On the subject of opinion there is something strong chess players tend to do which might have an application to trading. The words I stand better are never really uttered in the internal dialogue. It's a statement that carries too much permanence when it is verbalized because a retraction has to be made if the assessment is changed.
I'm having trouble describing my impressions but one of my students recently wrote about it in this way:
Dear Nigel, The ideas were flying last night and that was great. It's interesting the way you look at a deep line in a quiet position, seriously trying to find best moves, but not thinking that it is the truth about the position, just as an experiment to illuminate the nature of the situation. And you call it "just playing with the position".
Translated into trading, one might decide that the market has to be bought and then act on this, but without ever uttering the statement I am bullish. I believe this may make it easier to stay light on the feet.
6/18/05
Backgammon Stop Loss, by James Humbert
I just played two of the most amazing backgammon games I have ever played, and what transpired, back to back, has to be the most excellent example of "never give up", "winners never quit", winning while facing statistical impossibility, you name it.
I was willing to throw in the towel in the first game, yet my opponent and great friend reminded me that "you never know what can happen, you just never know", so we continued on. The board was screaming gammon or backgammon. I removed my stop from the game, and with average dice, came all the way back, and gammoned my friend. What happened in the next game, as you can imagine, was the exact same thing, but I was on the losing side.
Obviously, stop-losses are a way to protect yourself when you make the wrong decisions, or the market is ruthlessly taking your capital from you. This board game instance and market survival are incredibly different situations, but it brings about the question that is never easily answered: "When is time to call it quits in a trade?"
Over the last seven or so years, the professional hedge fund investing community gradually and increasingly has shifted to a "do not lose money" (DNLM) mantra. Events such as LTCM, Julian Robertson's shorting tech in the late 90s, the Russian debt crisis, etc., have forced managers to do monthly, or even biweekly, reporting to their investors. Tight stops are more and more apparent in the market. "Let's not be too wrong, and just survive and boost AUM" is the widespread strategic focus. I believe implementation of such strategies is stripping alpha from the marketplace, or you have to be willing to take on a heck of a lot more risk to capture it, but DNLM prevents you from being rewarded with the ever-more illusive alpha.
I went into April with the most bullish call I've ever made, buy the homebuilders, and with 3-4 to 1 leverage, one bad day was enough to scare the heck out of the powers that be. Being encouraged to get flat, or should I say, forced out, resulted in the obvious: to Friday's close, my beloved Hovnanian ran approximately 40%.. .
A Major Quant replies:
This DNLM mantra observation is dead on, but of course this would imply the lack of stop-loss use. A DNLM mandate requires a (very) left skewed distribution (right skewed would entail losing money often) and clearly these are the stock-in-trade of the hedgefund crowd. Stop-loss implies right-skewed. Prevalence of stops would also create higher vol, of course.
Steve Wisdom adds:
The relationship between the seasoned hedgefund trader and his assorted FoF/MoM/allocator/advisor/private-banker clients is well-analyzed by French fabulist Jean de la Fontaine (1621-1695) in his fable Le Meunier, son Fils, et l'Ane.
One English-language variant is:
A man set out on a trip with his son and their donkey. His son sat on the donkey's back while he walked along beside them.
They passed through a town. People stared at them and said, "Did you see that? That strong, young boy is riding while his aging father has to walk."
Hearing this, the man swung his son off the donkey and got on in his place. On they went.
They passed through another town. People stared at them and said, "Can you believe that? The man rides on the donkey like a king while his little boy grows weary running by his side."
Hearing this, the man got off the donkey, and both father and son walked, leading the donkey by the reins.
They passed through another town. People stared at them and said, "What fools to walk when they have a donkey they could ride!"
Hearing this, the man put his son on the donkey and got up behind him.
They passed through another town. People stared at them and said, "How cruel, to make that poor animal carry the weight of two!"
Hearing this, they dismounted. By this time, the man was very angry. He put his son on the donkey's back. "This is the way I left home, and this is the way I will continue," he said.
6/18/05
Hard Work, by Jim Sogi
Power and grace. Those who have achieved mastery of their craft perform with power and grace, making moves of great difficulty with apparent ease, executed with strength and individual flair. Young tennis champion Henin-Hardenne, sensei aikido master Ueshiba, surfer Shane Dorian: all perform feats of strength and astounding speed with apparent ease that belies years of painful training, many setbacks, losses, doubt and sacrifice. The road to mastery is long and hard. A highly ranked tennis player once said it takes about five years to learn the basic skillset of almost any human endeavor and to perform at journeyman level, whether in sport, carpentry, law, trading or cooking. Surpassing journeyman level requires continuing devotion, love and passion. Each day, continual failure on the road to success is another reason to quit, another reason to make excuses, another reason to rationalize, slack off , blame others, and avoid personal responsibility. Masters continually train, learn, reinvent, re-examine every aspect of their areas of expertise, and the quest becomes not just an examination of a sport, profession or avocation, but a quest to learn who we are as humans, the nature of our existence and purpose. This quest marks the achievement of success. As John Wooden says, it is not the comparison with others' performance, it is doing the best that an individual is capable of. As Batman says, we are not defined by who we are inside, but by what we do.
6/18/05
Attention Bias, by Kim Zussman
Is the herd of investors too attracted to current attention-grabbing stocks, or by analogy, market moves? Is it human nature, in combination with limitation of search/testing capability, that leads many investors to stocks with spikes in volume and/or price?
Terry Odean looked at this and found that individual investors, in contrast to institutional investors, were more attracted to big volume and price moves. Individuals were net buyers of both large one-day drop and large one-day gain stocks. This is consistent with "attention bias" for both contrarian and momentum investors, which Odean goes on to suggest gives poor results in either case:
We argue that many investors solve this search problem by only considering for purchase those stocks that have recently caught their attention. While they don't buy every stock that catches their attention, they buy far fewer that don't. Within the subset of stocks that do attract their attention, investors are likely to have personal preferences contrarians, for example, may select stocks that are out of favor with others. But whether a contrarian or a trend follower, an investor is less likely to purchase a stock that is out of the limelight. Professional investors are less prone to indulge in attention-based purchases. With more time and resources, professionals are able to continuously monitor a wider range of stocks. They are unlikely to consider only attention-grabbing stocks. Professionals are likely to employ explicit purchase criteria perhaps implemented with computer algorithms that circumvent attention-based buying. Furthermore, many professionals may solve the problem of searching through too many stocks by concentrating on a particular sector or on stocks that have passed an initial screen. We test for attention-based buying by sorting stocks on events that are likely to coincide with catching investors' attention. We sort on abnormal trading volume, since heavily traded stocks must be attracting investors' attention. We sort on extreme one-day returns since whether good or bad these are likely to coincide with attention-grabbing events. And we sort on whether or not a firm is in the news. Consistent with our predictions, we find that individual investors display attention-based buying behavior. They are net buyers on high volume days, net buyers following both extremely negative and extremely positive one-day returns, and net buyers when stocks are in the news. Attention-based buying is similar for large capitalization stocks and for small stocks. The institutional investors in our sample especially the value strategy investors do not display attention-based buying. Our theoretical model, which is based on the assumption that some investor purchase decisions are influenced by attention, predicts that when investors are most influenced by attention, the stocks they buy will subsequently underperform those they sell. We find strong empirical support for this prediction. Not only does attention-based buying not benefit investors, but it appears to also influence subsequent stock returns..... The attention-based buying patterns we document here do not generate superior returns.
Currently, retail investors can access trading platforms such as Tradestation, Metastock and Cybertrader to identify technical patterns in individual stocks. So a contrarian strategy in such an environment would be to eschew attention-grabbers and invest in the unremarkable.
In a world of investing dominated by hedge funds, perhaps there are analogous, but more sophisticated, attention-grabbing stocks, patterns, and anomalies being arbed and leveraged to the point where the only good strategies will be the ones that aren't good historically.
6/18/05
Counting Playboy, by
Marion Dreyfus
Here's some counting and compiling on the run of Playboy magazines, from inception in '53 up to today. It may answer some of your questions. Compiling it was instructive -- but is there a deeper pattern evident under these mounds of, ah, flesh? Read on.
6/18/05
Fatherly Advice, by
Jim Sogi
On Father's Day I think back to some of the things my father told me. My father was a lawyer on Wall Street and Park Avenue for 40 years. When I first started my career he told me something I've never forgotten: "Don't worry about the money. Work hard. Do your best. The money will come on its own."
He's right. Money is not the goal of a profession or a job. It's a byproduct of hard work, character and integrity. In trading, profits are the byproduct of hard work, enthusiasm, development of personal character and integrity. Doing the right thing in the market is not making the most money; it is doing what is appropriate for the market. Seeking more money can lead to loss or frustration.
Another thing he told me: "Work hard on the small cases at the beginning of your career. The issues are the same and just as important. The only difference between the smaller matters and the big cases is the number of zeros." In trading, the trade of a handful of contracts is the same as one of hundreds. The only difference is the number of zeroes.
6/18/05
Review by Victor Niederhoffer:
The Hidden Language of Baseball
I hasten to recommend The Hidden Language of Baseball by Paul Dickson. It's about how signs and deception have influenced the course of baseball. Did you know that there are about a thousand secret signs given in a baseball game? The infielders signal the outfielders, for example, on where every pitch is going. Umpires signal their colleagues to come to their aid when a manager gets overheated. A squeeze play involves about 10 signs starting with the coach to the batter to the runner, back to the coach and the hitters, and then from the opposing catcher around the merry-go-round to his fielders, and then a pitchout or a strike -- and the whole thing starts over again.
The book leads me to consider the influence of secret signs on markets. Sure, there are the anecdotes about how spotters were paid to wait by the elevator and signal up to the floor when the silver and gold trader for the Hunts was on his way up to buy 1,000. On the IMM, a Nasdaq broker had signals in his shoes so he could front-run any big orders coming in from the public. And there are the white shoe brokerages that apparently make a business of reading signs from their research department and the customer order flow so they can steal the signal.
But what about signs that we can all read. in the first hour of trading on Monday, like the lead-off batter in baseball? Is it significant? Do things in markets occur that can be tested that have analogies to the transmission and stealing and reading of signals in Dickson's excellent book? I declare it open season for such studies and request my colleagues and others to contribute quantitatively and qualitatively to the fray.
Art Cooper replies:
It's more like quarterly window-dressing, in which small purchases are made (though they otherwise would not have been) in order to increase the market value of pre-existing major positions.
6/17/05
Milano Malato, by the
Senator
Is there any hope for Europe and the EU?
I just checked into my hotel in Milan, a stone's throw from the Crown Jewel of all the Duomos. I needed to press a shirt and pair of slacks, no iron in the room. was told "it is impossible" to iron in one's room. Darn, I've been leading a dangerous life traveling. Was told housekeeping would be "right up" and I said "good, I have a TV show I have to get to." They arrived... after the third call. My clothes never got back in time so I looked crumpled, as usual, on camera.
Just got back in my room, sputtering about the $120 cab ride from the airport, pondering the fact that a seminar-giving friend of mine says he can't do them in London anymore as the hotel makes more than he does.
Wondering if I've just become an old-man cheapskate, I reflected more on a newspaper story that says the average person in Italy wants to retire at 50. Fifty!... Geez, the fun was just beginning at that age.
Then I saw it, my nicely pressed one shirt and one pair of pants, just pressed, not washed, not dry cleaned... and the bill for $24. Yes, $24. And did I mention the porter who showed me into the room? When asked where the DSL line was, he took my computer and tried to plug it into the thermostat.
This not not just one bad trade. I've seen this over and over, over here. Asia and the US, heck Mexico, will eat these guys alive.
6/17/05
Chair's First Annual Office 9-Ball Championship,
Westport, Friday 6/17 8pm
The Championship, with the Assistant Webmaster serving as Host and Referee, was a smashing success, full of drama and excitement.
In the first men's match, Henry, whose father was once billiards champion of East Berlin, showed excellent form, technique and consistency, making short work of Ari and emerging as the man to beat. Next, controversy arose in the match between Chris and Tim when, well into the long, grueling match, Chris needed to use the restroom, and the Host invoked a house rule that the Host can fill in for an unavailable player. When the Host ran off the 7, 8 and 9 balls to seal Chris's victory, Tim appealed to the Referee, but his protest was denied.
Next up, Dude broke without success and handed the stick to Tom, who sank the 1, then comboed the 2 into the 9 for a lightning victory. Dude, who was ousted without taking a shot, bemoaned the single-elimination format to the Referee, but found no succor. Then an overmatched Professor fell to Wil's steady, workmanlike play, and he echoed Dude's complaint about the tourney format.
The winners matched off in a round of four, producing the evening's greatest upset. Henry looked invincible against Chris, running off the 1, 2, 3, 4, 5, 6, 7 and 8 balls, but he scratched on the 9, and when Chris made the free-throw, stunned silence fell over the crowd. Next was Will and Tom. Will's play showed improvement proportionate to beverage consumption, and he wore Tom down in a tough match.
In the men's final, Chris's momentum coming off his shocking win over Henry, and fueled by the crowd, proved too much for Will, and Chris took the men's title.
The women's bracket featured solid play from both Ming and Amanada in a match that could have gone either way. But in the end Ming's steady nerves earned her the women's crown.
Finally, everyone was on the edge of his seat for the long-awaited overall championship between Chris and Ming, a see-saw battle finally decided when Ming carried the day with a long, difficult cut shot on the 9. The crowd erupted in cheers.
Afterward, by popular demand Henry played the Host in an exhibition match. An exciting battle featuring clever bank play was resolved when the Host rattled out a makeable 8 ball, leaving a clean 8 and 9 ball layout that Henry finished off in style.
Men's
Henry --\ Henry
Ari --/ --\ Chris
--/
Chris --\ Chris
Tim --/ --\ Chris
--/
Dude --\ Tom
Tom --/ --\ Wil
--/
Wil --\ Wil
Professor --/
Women's
Ming --\ Ming
Amanada --/
Championship
Chris --\ Ming
Ming --/
6/17/05
Stubborn as a Mule, by Andrea Ravano
In the current discussion on growth versus value stocks and the Sage, I would like to share with you some thoughts about the history of my family. My great-grandfather was a man that would not stop easily in front of obstacles and challenges. He wore big moustaches and was an olive oil producer who lived in and around 1850-1870, great times for people innovative with a strong will to improve their standard of living. He was among the first in the Genoa region to switch from animal-powered mills to steam powered machines. Great-grandfather was extremely successful and managed to get for himself and his family a better economic environment and way of living. But with this success story I always asked myself, without getting an answer of course, what happened to the price of mules, the animals that used to move the oil mills? As all olive oil producers switched to the new machines to match competition, I suppose that the price of mules must have fallen quite sharply. The point is here to understand if, going back to those days with a time machine, you and I would have bought shares at cheap ratios and falling prices of mule producing companies, or would we have preferred to invest in the more expensive-looking steam engine producing companies? And how would statistical analysis have helped us in figuring out going short or long the mules market? Maybe it wouldn't have helped at all. Maybe a simple, straight to the point line of reasoning would have been a better tool for decision making. As someone wiser than I used to say, if I cannot explain my theory to the crowd than it is possibly false.
6/17/05
Recent Gains Can Slim Down, by Allen Gillespie
Bill O'Neil has some quantitative and some qualitative ideas worth testing, so I thought I'd put this on the radar. He defines a climax top, which he says is how 8 out of 10 of the Best of the Best top, with the following characteristics:
There is one hot group coming close to meeting many of these criteria by month end, if not within the week.
6/17/05
A Picaresque Tale, by Bruno Ombreux
I want to tell the tale of my early career. It is very comical but also contains a few lessons.
After graduating, I spent a quick couple years in Africa, but soon decided to get back to France. My first job was as a financial analyst. You have to understand that I had never studied finance, only math and biology. They just hired me. I don't know why. But I ended up making recommendations on companies although I didn't have a clue what I was talking about, from the commanding height of my 25 years.
The same year, 1986, I did my first stock trade. This was actually a selling trade. My grandfather had just died, my Mom had inherited stock in his company. She figured that since I was working for a bank, I knew something about the stock market. Wrong guess. She asked me to sell the stock. It took me six months to sell; it was illiquid and I had quite a lot to sell. I just used the same limit order at a round number, 10, for six months. There you have it. Resistance at round numbers. Selling from a major shareholder.
A bit later, I had my first few savings and decided to invest them in mutual funds. The week I decided to invest was the first week of 1987. I was lucky because I had invested in funds with a mix of stocks and bonds. Stocks went down but bonds went up the day of the Crash. I guess I had good reflexes back then, because the day of the Crash, I was at the bank selling the funds I had just bought a few days before. I did the honorable thing and took my losses, which is actually a good thing to do and not obvious when you are inexperienced. And I was lucky because the losses were small thanks to the bonds.
Fast forward three years to 1990. By then I am working in the finance department of a major oil company. I get an internal reputation as a derivatives wiz. They ask me to become an oil trader to help the oil derivatives guys who are losing a lot of money due to rolling in contango. Even though I still don't have a clue about trading, I accept the job, one month before the first Gulf War. The market gets into backwardation immediately after I become a trader. Our book, which was down $15 million the day I joined, ends the year up $120 million.
Management thought this was largely due to my contribution. In their minds, I turned the book over. Wrong guess. But thanks for the special bonus. I can confirm today that I am entirely not responsible for the large profit. You'd have to thank Saddam Hussein. But I took the money anyway. And for the next few years I was considered a superstar within the company. A completely undeserved reputation.
I read Vic's first book and liked it a lot, but since I read so much, it was diluted in the immensity of my readings. Last year, I had a bit of spare cash. I told to myself that I should diversify and try some new things. So I decided to trade sector rotation in a dedicated book. Don't ask me why. One month later, I was down 12% in my sector rotation book. Two months later I was reading Vic's second book which has a chapter about sector rotation and states that it is mean reverting, and that you should test before trading. This made perfect sense too me. That's how I found this site.
6/16/05
Chess Values, by Nigel Davies
One of my personal revelations has been to acquire a greater understanding of how someone's values can affect his thinking. I knew this was the case in chess but never imagined it would also apply to something as "simple" as world finance.
But if the Sage played chess how would I suggest someone try to beat him?
If he didn't have published games, I'd study the man. I think the lunch auction on eBay says a lot about him, that he wants to be seen being doing the right thing (his public persona is important to him) but at the same time isn't motivated by a spirit of generosity (why not just give the money away?). I also sense something darker (why would someone with such apparent respect for 'value' would have someone else pay $200k to have lunch with him?).
Creating a game plan from this information, I'd suggest playing something provocative enough that it would be an embarrassment to him not to win, whilst at the same time obliging him to sacrifice some material (i.e., give up 'value' for the dynamic 'growth' of his position) in order to exploit it. This would nicely drive him nuts if the right vehicle could be found, not easy to bring off in every game but now and then it should be possible.
What would it be best to avoid? Relatively simple positions where you'd be material down. Although he might mis-assess value versus dynamism, I believe he'd play any position with a material advantage with great care and enjoy every minute of it. What's more he'd probably call his friends over to the board.
Summing up, he's a tough old grinder you'd need to tease and confuse. Try to use his bias towards value against him by threatening to take one of his pawns - you can be fairly certain he won't be sacrificing anything at any time unless the win is arithmetically clear.
6/16/05
Pocket Rockets, by Victor Niederhoffer
Don't underestimate the brilliance of Adam Robinson's recent book The Rocket Review Revolution: The Ultimate Guide to the New SAT and the value for a lifetime of teaching kids to focus on bottom line answers and estimates.
All of Adam's books are a perfect realization of the contrarian persona in real life. He shows you how to understand the average test-givers Joe and Pam, what they want you to do so they can ply their trade, and then how to go beyond that to reach the top of the class. Adam inspired me to write a program that applies his techniques to beating the market mistress at her own game, and especially to prevent her from making you always answer the hard questions wrong,. We still use the approach today.
I found Adam's discussion of how to write an essay educational on many planes:
The end result is: you learn how to answer questions, to get to the bottom line, to estimate, to guess, to focus on what counts in tests for admission to college, in the market and in life itself.
6/16/05
Know Your Enemy, by
Jim Sogi
A couple of decades ago, when I was getting back into the martial arts, I was working out at a friend's Tojo. A guest was there and we were sparring. In my inexperience and as a lower-level practitioner, I entered the match aggressively. The "guest" was non-aggressive and backed off as I pressed, wildly at times. At a one point during one of my attacks, he let me punch, pull me in as I swung, grabbed my head when I was off balance, and smashed his knee into my face, not hard, but enough to teach me a lesson I have never forgotten since. Know your enemy before you engage. I didn't know him or his skill level and entered aggressively, foolishly. Except for his graciousness, I could have been severely injured. Don't expect the same courtesy in the marketplace.
In the markets, though identities are not shown, participants have footprints. Study them well. Know who your enemies are. Know where they hide, and where they are looking to put you down and catch you off balance. Always maintain balance, in attacks and in defense. Don't get involved over your head. Always protect yourself. When you see an easy opportunity, a sign of the opponent's weakness, when they are off balance, go aggressively for a strong win. Always leave an exit open in case you fall into a trap.
Musashi would deliberately show up an hour or more late to a fencing match. He would wait in secret and watch. Then opponent was already off balance and out of joint. Sometimes showing up late for the match can be to your advantage. Wait, watch. Pick your spot to attack when the opponent is least able to defend.
Nigel Davies replies:
In chess we can look our opponents' games in databases; in markets we can analyze historical data, whilst in fights I guess you should watch the other guy fight or at least move. So when your opponent in this fight was backing off I suspect he was checking you out. I do the same if I don't know my opponent, trying to glean information from everything about him from the moment he sits down at the board.
But here's the question: Was the lesson here a matter of not knowing your opponent's strengths or not knowing yourself? The latter may be more universally applicable; every game is a dynamic in which the opponents vary but we are the common factor. And our errors manifest themselves in different ways against different opponents unless we get to the root cause.
Bruno Ombreux adds:
I practiced some martial arts, although not at the expert level. I have a slightly different experience. From what I've seen, the best moves don't involve analysis at all. You don't really think about them or about your opponent.
In Kendo, there is what they call kitaiken, which is the fusion of ki (spirit), tai (body) and ken (sword). When kitaiken happens, you act automatically.
It is not at all a Zen-like emptiness of the mind. The mind is perfectly aware of what is happening, but it is a spectator of the kitaiken, rather than an actor.
The resulting moves are fast, fluid and beautiful, and the opponent generally is beaten. This state comes from training. After repeating the same move hundreds or thousand of times, it becomes a reflex.
The same thing can happen in short term trading. Sometimes I make kitaiken trades. They come automatically, I find them beautiful and generally these trades are successful.
Ken Smith responds:
Experts in martial arts have learned by experience and that's the best teacher. I do not know martial arts. The only fighting I've had to do was down-and-dirty street fighting, where no one is a gentleman. I never practiced. I am quite certain a practiced martial arts individual would put me out of business in a minute. On the other hand, that's not the kind of individual I fear, in general. Because a philosophy, a way of life, a style of character, comes along with martial arts practice. And they don't go around picking fights. And I don't and never have.
Jim said know your enemy. That is possible if, as in his story of the Master, you can observe the enemy. It is not always possible to know your enemy. Prisons and the streets are full of persons who can be your enemy and you will not know it until you have been struck. A mugger does not give you an opportunity to get to know him, his style, his courage.
The best one can do is be on the aler
