Jan

24

IRVING FISHERHere is a great article: "Thoughts on the End Game" by John Mauldin

The brilliant U.S. economist Irving Fisher first highlighted the fact that an economy's debt level could have a deleterious impact on economic growth if it is, in fact, excessive. At $3.70 of debt for every dollar of GDP, U.S. debt is excessive (Chart 1). Fisher pointed out that the unwinding of debt levels results in prolonged economic distress, and we certainly agree. In 2009, the book This Time is Different - Eight Centuries of Financial Folly, by Reinhart and Rogoff, shed new light on the role of debt by compiling a database that looked at financial crises in 66 countries over a period of 800 years. The main standard in explaining more than 250 crises studied is whether debt is excessive relative to national income, even though idiosyncrasies apply in each case. They reiterate that this old rule (excessive debt) continues to apply, and this time is not different.

Jan

21

A picture from the Google vs. Ebay cricket matchWatching cricket (or the same could be applied to baseball for the Americans or football for the Europeans and Brits…and South Americans and…) I have often considered how structured and polished the performances are– clean batting, clean bowling and clean fielding.

When is a risk taker going to be coach? When will some one bring the advantages of risk and a polished team into play?

Indecision must bring opportunities.

Why couldn't a fielding team (that's getting flogged or maybe not flogged) start to miss EASY field returns, but have a back up plan–thereby allowing for the batting team to be lured into a second run and capitalise on the often poor communication between batters looking for a run out.

Many other ideas and ways of creating opportunities to take advantage of a situation could be put in play. It seems most areas are not being explored.

Markets certainly don't have those problems with a muliple of false break outs catching everyone on the hop, and whether we like it or not, keeping the game interesting.

Dec

18

Is the blood, sweat, and tears and more importantly, repetion worth it? At what stage do you say, once mastered–there's nothing more to be gained, it's like a chore now, your energy is getting weaker and your soul being drained? At what stage do you determine, like a trade, positive flow against negative flow, are there too many pips and not enough 5 baggers? At what stage does the occasional good going out be worth the crap of reduced positive flows coming in? There must be a law of diminishing returns here, once the student learns the lessons that need to be learned, and learns what the matrix is and why it exists. Why hold on for that last 1% of no doubt ego gratification.

I looking at people staying around too long in there chosen careers, sports, whatever …

It seems it's important to move on, lessons learnt, and the path to the next destination will hopefully be somewhat clearer. Luckier for me on the trading front that that decision of moving on doesn't have to be made!

Riz Din comments:

I quite like the idea of maximising my utility and exiting when the marginal returns are greater elsewhere, of getting 80% of the easy results and moving onto the next activity where I'll pick up another 80% in the same time that it would have taken me to get the remaining 20% in the first activity. This dim-sum approach reminds me of the episode in Seinfeld where George Costanza learns about the showman's approach of leaving on a high and employs it to great effect:

Jerry: Showmanship, George. When you hit that high note, you say goodnight and walk off.

George: I can't just leave.

Jerry: That's the way they do it in Vegas.

George: You never played Vegas.

Jerry: I hear things.

Of course, much depends on the activity and one's objective, for there are many ventures where the structure is more akin to a tournament and the spoils go to the victor. Here, going 80% of the distance is fruitless. It is as Al Pacino says in the film Any Given Sunday, that life is a game on inches and you do everything you can to gain that extra inch, for it is in the tightest of margins that you find the difference between living and dying, between winning and losing.

Almost every decision we make is a like a trade, with an entry and an exit, but too many times we enter into life's positions without thinking about our exit. It's different strokes for different folks, but that doesn't mean we shouldn't stop to question our motives, asking how much is enough, if it is ever enough, or how little is too little, if it is ever too little (so long as you keep on giving it your all and do not fade gently into the night?). Likewise for mastery of an art - while I admire the patient, Eastern philosophy of practising a simple task over and over, I also know that this approach is not for me. Here's a quote from an article I read about a Japanese knife maker:

'I will stop making knives when I stop learning something new and I haven't stopped learning in the 90 years I've been making knives'.

Maybe the greatest sin to simply carry on doing what you do as an avoidance strategy. By keeping busy you are avoiding confronting yourself and straight up asking yourself whether your actions have the value they once they did, if at all. In this situation, time eventually decides on your behalf, and one way or another, you get carried off. You've stop being the master of your destiny and have fooled yourself into thinking that you are still making the right choices - an impossibility if you have stopped asking yourself the right questions.

Dec

7

Gregory (Scotland Yard detective): "Is there any other point to which you would wish to draw my attention?"

Holmes: "To the curious incident of the dog in the night-time."

Gregory: "The dog did nothing in the night-time."

Holmes: "That was the curious incident."

Dec

7

I was wondering if one could be taken off the street, with no experience, and taught to be a profitable trader. My father says no, with a few added conditions. He believes there's a genetic component combined with many early childhood predictors that indicate a propensity for success in trading. He cites games, sports, competition, and the willingness to accept risk as major predictors of success. He also believes that if one doesn't exhibit these characteristics by adolescence, it would be very improbable that one would become a successful trader later on in life. He also says that mentors are not enough if you don't have a "fire in your belly." My uncle, on the other hand, says he could take a monkey off the street and teach him how to trade successfully within a year. What do you think?

George Parkanyi responds:

I think the question becomes can you teach creative thinking, self-motivation, self-discipline, courage, patience, and self-confidence? If you believe that these can be taught (which I do, but it's not simple or easy), then I believe you could teach someone to successfully speculate. Good ideas and opportunities abound in speculation and are recognizable to many people, and the mechanics of trading are fairly straightforward. But actually implementing them and managing the risks are altogether something else.

Also I think that to be good at anything you just have to do it — warts and all, and make the necessary adjustments as you gain experience. You would never be able to teach the things I mentioned above without a heavy dose of hands-on application.

Paolo Pezzutti writes:

I agree that being good at sports and in particular at sports competitions is an indicator of predisposition to trading. Determination, ability to remain focused, to implement a game plan, to understand weaknesses and strengths, the self-confidence that allows to take reasonable risks with a winning attitude and so forth. However, that there is not only the "fire in your belly" component. I do not think that one can trade only by instinct or intuition. There are also analytical qualities that are more intellectual and less related to the guts. Can technology help somehow? However, if one is a great mind and finds certain market inefficiencies that a computer can exploit, does one need to have the great athlete's qualities? Those who develop successful algorithms need to to have the "fire in their belly"? I am not a trader so I cannot say for sure, but I tend to believe that mechanical trading can be successful. Besides that, if your father believes that he could teach a monkey how to trade in a year, I think I am better than a monkey and if he wants he can try with me!

Craig Mee replies:

No doubt a few of you have heard of Dennis and Eckhardt… these days different rules, different times, maybe if there had been tasty markets for it, before the rules of ever changing cycles kicked in. I believe Richard Dennis has struggled to replicate his results.

Dave Goodboy replies on behalf of Michael Covel: 

M Covel"Whether you agree or disagree with my book The Complete TurtleTrader it is one of the most unique "training" experiments ever conducted on Wall Street. It is the true story of literally taking novice traders off the street, injecting them with trading rules, and then watching millions be made. 25 years later it is also interesting to note which of the originally group thrived and which imploded. As far as the genetic component debate goes there are some great books out now about "talent" (see: "The Talent Code" and "Talent Is Overrated") making a very convincing case that success is far less genetics and much more about deliberate practice –which backs much of my research."

- Michael Covel

Dec

6

Just got back from my almost annual Asia run, this time including Malaysia-Langkawi, Singapore, Thailand's Phi Phi Islands, and the not to be missed, Bali. After spending three days in meetings in Singapore main business district and comparing it to my year working there in 04-05, I can certainly say the place is booming. For a start many of the Aussie financial houses are sending staff north. They certainly don't have to be pushed out the door, with Singapore's low tax rates. The English aren't far behind with many distressed at the way the government has recklessly pursued social equality in expense of the countries financial situation. They too are arriving in size.

The place is full of energy and with the warmth of the tropical heat. The few expats I spoke to gave little thought to returning to the homelands soon. I don't think I have seen busier beaches anywhere in the world than after arriving at Thailand famed Phi Phi islands. Speedboats parked offshore allowed the free sand to allow others to load and unload willing punters. The place is magnificent although the touring hordes were slightly distracting. Malaysia Langkawi holiday island was certainly thriving with Asia's low cost carrier AirAsia, jetting people from all parts of the orient to its shores providing a low cost getaway for many from the major hubs.

Bali as always was warm and endearing. The place is changing rapidly, with developer friends on the island telling me the Russians are in, and the Arabs on the close island of Lombok pushing money in many directions. Certainly on flying out of Asia's shores you get the feeling your heading the wrong way.

Chris Cooper adds:

Regarding Bali, I am living about half-time there now. While it is true that foreigners may not hold title, methods have evolved which allow foreigners to purchase and control the property, which amounts to the same thing. Certainly there are many expats who have done so. It is the same in many other countries. Once you have liberated yourself from the idea that you need to hold title in your name, many more things are possible. 

Nick White comments:

I have never come across a person who has invested or had major business dealings in Vietnam, Thailand, Laos, Cambodia, Indonesia, Bangladesh, etc, who would consider doing it again–whether it be hard assets or financial ones. They are a bit like the southern baltics — you just don't know who you're really dealing with on the other side. Singapore, Malaysia, Hong Kong, Japan, South Korean, and Taiwan are all fine. 

Nov

30

Just thinking that there may be a correlation between the more countries one has traveled to, and the less arrests for unlawful activity one has, especially for violent crimes. i.e there is greater perspective on the part of the individual.

This of course must be tested (and could be a hard one to test). The market comparison could be that the greater the number of global countries trading a market, the less volatile it may be…. though distribution of this volume could be a key.

Nov

3

If there ever was a day right out of the Iliad with Zeus deciding with his balance scale whether to let Achilles or Hector win the battle, i.e. the bulls or the bears win, it was today [2009/11/02], and not until 3:59 did the scales finally tip. What was it that caused it? Why did the junior operative from  the Fed state his worries about the banks? C only has 250 billion in cash, the most of any firm ever. What were the forces that led to this fourth reversal?

Craig Mee comments: 

Maybe the force was a market close to a previous low, in a overextended (?) selloff… The shorts' nerves became thin after a day of yours mine, and the bulls held out as stops could be more well defined.

Nov

2

50 200 MAI don't want to touch off a quant vs tech battle, but was interested in thoughts about the use of moving averages. The claims are seen so often in the media for example as 50m/a has crossed the 200m/a as bullish or bearish. As quant this is easily testable, but is there some fallacy built into the assumption, checking once premise. As an average of levels over some period is this overly sensitive to a large event that may have happened at the beginning of the period, or as new data are added and taken away from 200 days ago. This seems a drawback. So on an unchanged day the 50m/a could cross the 200m/a, so it is a lagging measure. I have not used them much but interested in testing and what the merits might be if any. I am prepared to buy a round if venturing too far from our charter.

Craig Mee comments:

Normally people use exponential moving averages which put more weight on the most recent numbers, however it must be noted when looking at technicals from any of the major houses, one day they may be looking at the 50 day exp m/a, the next day the 20 day exp m/a, next day 16 and so on. There seems to be little uniformity and who's to say the market's in a 50 day cycle or 20 or whatever, no doubt this will change at any rate, it must be proven, as to the reason it's used , and this is never done. 200 day just constitutes a longer term trend number. Could be 167 or 198 for the purpose. They may have more of a chance to perform some sort of return in a slower moving stock or short-end rate market, but for futures markets, there is way too much given away on the turn (i.e. consolidating flat markets forever paying away the spread to get in and out.) It's much the same in running a moving average over your profit and loss on a trading system as a filter , normally what you'll find is that the major gains are made on the swing, for that's when markets are extending, and if you're not in then you're not in!

Victor Niederhoffer comments :

Not to mention that it is extremely spurious and dangerous to your wallet to see cycles in moving averages.This is due to the Slutsky-Yule effect, a consequence of regression to the mean, creating false cycles.

Anatoly Veltman suggests:

The best M/A use I know of has nothing to do with crossovers, or even with price charts' current levels vis-a-vis averages. It has to do with current slope of all averages in an optimized pitch-fork of three averages. The method was originally described by Stan Weinstein, as applied to longer-term stock strategies. I’ve had positive results applying the general overriding idea; and over the years, I’ve worked with people who did optimization and chose a pitch-fork of 14-, 30- and 50- day pivot simple M/As. Furthermore, a few effective signals were developed: dubbed Moving-Average Fake-Out Trade and Moving-Average-Divergence Trade, at the time…

Oct

13

The economist and historian Ralph Davis estimates that the supply of sugar from the Caribbean into Britain rose from three or four thousand tons a year in the late fifteenth century to over two hundred thousand tons by the 1770s, or an increase of over fifty-fold. (The Rise of the Atlantic Economies, Cornell University Press, 1973, p. 251, 255).

Though sugar is coming off a solid hitout at the moment, and new lows have been seen, it may be one area that should be considered if booming emerging economies do not implode — though no doubt acreage, supply, weather and uses need to be considered.

Jul

24

It sounds like all the qualities to you need to be a success in front of the screens "or in life in general " are mentioned here ..

From a Sidney Morning Herald article about cricket:

"It is very fitting that a man of Justin [Langer]'s calibre takes this honour because when you break a record of one of the greatest individuals, that being Sir Donald Bradman, it has to be by a man of quality," Hayden said last night.

"He epitomises class, perseverance and persistence and the quality and culture of the baggy green, and his work ethic is second to none. I'm very, very proud of Justin because these results are not a fluke. It's about all those qualities that include determination, perseverance, leadership, integrity and honesty. …."

Jun

18

Should golf pros who want to win a major, practice in cold wet windy annoyingly uncomfortable environments?

Should surf pros who want to win the world title do the same, train in crappy onshore beach break conditions?

…so when it's game on, they will be so happy to be warm, and comfortable and hungry for the win?

Should we traders be in cramped humid stuffy rooms, with no daylight, to reinforce the value of money and stay focused?

Scott Brooks disagrees:

Professional athletes as well as military personnel should practice/drill in the worst conditions so they can thrive in the best conditions. But no one performs at his peak in these conditions.

Drilling and practicing are very different from actual live game day executions.

Traders aren't forced to trade in bad conditions. We should trade in conditions that optimize our ability to think clearly and perform.

There is a big difference between drilling/practicing and actual execution of a task. Trading is real life execution. Game days are real life execution, Battle is real life execution. You don't want to be at anything less than your best when it comes time to execute.

If you're a professional athlete and it's raining on game day, both you and your opponents have to play in the rain. If it's the day of the battle and it's freezing cold blizzard, both you and your opponents have to execute in those conditions.

But when you're trading, you don't want to put yourself in a less than optimal situation. Your opponent has probably created the most comfortable environment that he can to optimize his mental acuity. Why would you want to give yourself the handicap of being uncomfortable?

Create the "peak performance environment" so that you have the highest potential to reap the greatest rewards for yourself and your clients.

Riz Din adds:

A documentary series recently aired in the UK that provided insight on the natural life on the small South Pacific islands. In these small islands, life has evolved in strange ways, producing several instances of flightless birds for example. Unfortunately, after many many years of comfortable living, the introduction of new predators onto the islands wreaked havoc.

I agree with Scott that the physical conditions should be optimal, but I would add that the mental aspect needs to be tended to well, as complacency can spell death when market conditions suddenly turn, strategies stop working, etc. Better to retain the ability to fly, just in case.

May

2

Here is a fascinating read on how to beat a 20% vig from Contingencies magazine. To whet your appetite:

"By the time he succumbed to pulmonary embolism in January 2008 at the age of 62 Woods and his pioneering partners in computerized horse betting had transformed the nature of the sport in one major world market and spawned and industry that is still lengthening its stride around the globe. According to his obituary in The Australian, Wood’s fortune was estimated at $670 million at the time of his death."

Michele Pezzutti comments:

Quoted from Contingencies magazine: “The only way to develop a consistent long-term winning system is to either have the unbelievable luck of making the right guesses on enough races or to know something the rest of the public doesn’t.”

One of the thing I liked most about this story is that the information is actually out there for everybody, there aren’t people who have a competitive advantage on information availability. Alan Woods has built a competitive advantage over the public starting from the same knowledge base, which was under everybody’s eyes but unseen by most.

But how sustainable is this? If I liked horse betting, I wouldn’t bet anymore after knowing that a lot of people have a competitive advantage over me. You could argue that this is true also for financial markets (maybe even worse, as information might not be really available to everybody). That’s correct, but a bet is a single shot– either you lose or win. In financial markets, duration of a bet is generally unlimited (provided that your capital allows it or a company does not go bankrupt) and positions can become profitable also after being potentially a loss. Moreover, if a company generates value, every investor will benefit from that.

Craig Mee writes:

I was speaking to a mate about this guy, his reply:

"It’s a sad story actually. I read about this bloke in last year or the year before Business Review Week Australia's Rich 200. He had sent a letter to the BRW asking for inclusion in the Rich 200. The BRW naturally thought it odd someone would want their wealth on display and also thought it odd they had never heard of the guy before. In his letter he professed to be worth about AUD700mio and said he could prove it with a list of assets all around the world. He said he was waiting to be in the top 10 before applying but unfortunately things were taking a turn for the worst as he had been diagnosed with cancer. He died six weeks after he sent the letter.

A guy who chased a dream and succeeded………regardless of the end…….he had a cracker life."

Dec

19

After collecting Euromoney magazine's "Best Bank in the World," Santander described itself as such in full-page newspaper ads. The same bank now accounts for almost a quarter of the $13 billion potential losses European investors have said they may incur after Madoff's arrest. Santander said it won't compensate clients because Madoff's investments were a fraud.

Nov

19

Kicking goals in Rugby Union and trading may have more in common then one may think. As the Australian chosen goal converted Matt Giteau said during the week, "rhythm and authority" are the two crucial attributes in rugby, and not changing your style every time something goes wrong, leads to a high percentage of success. With trading, being able to keep reloading and staying in the game, and having a well thought out "run up," and confidence (authority) staying high due to no rule breaking, i.e good risk reward trading, sets up the platform for success. No doubt lots of traders look for the edge in strategy and keep changing it too frequently, when the platform for success is right before there eyes.

Substituting trading for kicking/kick in the following quotes by Matt makes pretty good sense:

"I think kicking can get complicated at times. But it doesn't need to be. "

"I suppose if you do miss a kick, it's very easy very to fall into a trap and change something straight away."

The 26-year-old has landed 50 shots from 58 attempts in 2008, including 16 straight at one point, at a conversion rate of 86 per cent. "I feel as though I'm striking the ball better and more consistently. That's the biggest thing," Giteau said. "There's been times where I may have kicked well one week and the next week been a little bit inconsistent. "This year, in particular, I've been really pleased with how consistent I've been." Giteau said he hadn't altered his style this year and was merely practicing what former Wallabies kicking coach and good friend Ben Perkins had preached during his stint with the national team. "Rhythm and authority are the two things Ben taught me," he said. "Things don't change a real lot. I think kicking can get complicated at times. But it doesn't need to be. "It's just being consistent and trusting your run-up. I suppose if you do miss a kick, it's very easy very to fall into a trap and change something straight away. "But I think this year I've tried to focus on the same thing each kick and so far it's worked for me."

source

Aug

5

The equity market is bit like a coil being unleashed at the moment (2008/08/05, 1pm)… With only very small vibrations; market participants are desperate to get in, but with very selfish market longs underpinning it and they will not let others in the door…. A bit like a schoolchild, who has been bullied for months and finally getting his own back.

Jul

17

Pull towardNever in my life do I experience such a force, an intense unbelievable drive to right my wrongs in the quickest form possible by doing something completely and utterly insane, as when my account suffers as a result of a poor trading decision, outside of my trading plan. In line with James Sogi's piece "Mistakes were made" and its reference to Cognitive Dissonance, and how a chain of events can spiral out of control, I believe it's not the initial mistake, and not adhering to your trading plan, that causes the major issues in remaining profitable and being successful. It is the subsequent immense urge that wants to right these wrongs, and drive you into oblivion.

The human seems to be at its weakest at this time, or maybe the natural competitiveness to stay on a righteous path and motor forward is the primitive instinct. However what I do know is that it takes every bit of my will power to fight this urge, and it only loosens its grip when I have a success and have the account moving back in the right direction.

This could explain why a lot of people do a lot of stupid things, as they meander through life without any discipline plan or focus: we need these to take stock and have something to measure against, when all goes pear shaped. Without a game plan, we are all doomed.

Riz Din adds:

On the occasion when trading off-plan blows a massive hole in one's account, I have experienced another base sensation that reminds me of some personal accounts of gruesome shark attacks. The adrenaline rush is so strong that these people sometimes feel no pain during the worst of it. It's nature's anaesthetic. One man describes a feeling of almost beautiful serenity, knowing his time was up as he bobbed about helplessly in the water, but feeling no great pain. This chap was apparently saved by dolphins and went on to have hundred of stitches. If you live, the pain comes later. 

Jul

17

UPDATE 2-Nigeria locals blow up Eni oil pipeline, output shut…oil rallies $1.5 [news headline]

As I sit and watch Crude rally a buck and a half off the back of the headline above, I wonder what will be the attention span to traders on this headline, how long will it hold their focus (Can this even be measured… does it vary market to market? Can information like this be collected, grouped and categorised for further study? ) before their mind moves elsewhere and either the massive long position that has been built up within trend for the last 6 months + looks to continue yesterday's liquidation, or whether the bulls will resume seizing control at any opportunity.

May

27

MotoAfter just arriving back from a two week visit to Vietnam (from Saigon to Hanoi), Bali, Singapore and Malaysia. there was a few thoughts which reverberated through my mind.

Bali is coming back from its tough times in finally good shape and after several terrorist bombings more and more big name brands have moved into the main tourist area of Kuta. People were present in all areas I went to, and the island, while still holding its charm, is certainly one of the best value, wonderfully scenic and frendly serviced tropical holiday destinations I've encountered. This was my sixth time there since 1997, and have seen a lot of changes in these 10 years.

Singapore is undergoing a building bonanza. Two casinos are going up, and Western expert participants from all over the world have arrived in mass, driving up rental prices (with apparently a lot of companies now not allowing the employee to take the saved rental money in cash, and so by allowing players just to hit the offer). Singapore real estate agents are notorious for showing expats ludicrous prices, often four times inflated (I was offered my condo at over 3200, four years ago, and we settled at 1300/month). Expats' friend are now complaining in the last year they have received letters from landlords saying, "your lease is up, your rent is doubled, if you cant pay get out." Condos are going up everywhere (and old good ones are being torn down to be rebuilt with more units). But the island nation was at is finest while I was there, great weather, great food, great service, and a lot cheaper in living cost then old London town.

In Malaysia we enjoyed some great golf at a luxury resort for next to nothing by UK or US standards, and the place on the hour journey up from Singapore looked wonderfully clean, though my traveling companions from Singapore assured me all is not quite right with many problems with the ruling United Malays National Organization party.

Vietnam is a country going places, at the footsteps of China roaring to its north, the country is moving fast, Saigon is a bustling new city, while Hanoi, still holding a more conservative approach, is breathing its own fire with rapid expansion and an influx of a lot of development money from Japan, China, and other local Asian powerhouses. I witnessed massive new manufacturing developments and condo developments pushing the perimetres of the city in all directions and people are enjoying the new direction and thriving on the speed.

In Siagon as I forced my way across an eight lane road with traffic going in all directions in a city of four million motorcycles, I soon realised there would not be a safe Western time to traverse, but I would have to take the Eastern approach of just entering the cauldron, and while keeping a steady pace the traffic would meander around me as I safely exited on the other side. I realise that risk management and trading and crossing nerve racking traffic in Asia, have a lot in common. Softly softly.

Apr

14

Even though Immelman, won this mornings Masters by three strokes it wasn't without a few quick heart beats.

His preshot routine looked a tad nervous through out, however it gave him just what he needed, at a time when maximum anxiety wanted to play with his mind.

The most telling moment for traders however was the lay of his ball after his drive on the 18th fairway. The previous three holes hadnt been kind, and after he drilled one up the middle on the last hole he must of thought the worst was now far behind him, and victory was his. However as is the case more often than not, this is a journey until the the very end, and his ball came to rest( in the middle of the fairway) in a large divot! How his heart must of sank. This Green Jacket and with most outcomes really wanted in life was going to come, if at all, kicking and screaming. Well now the rest is history , he spoke with his caddie, talked about yardage, looked at various shot options, then years of experience held out and he drilled his second shot onto the dance floor, and victory after two regulation puts was his. The comparisons with trading , that is holding risk steady, take smart options and having a well defined pre trade routine are Im sure self evident, but there maybe no better sport to compare with then 18 holes of golf.

…. as I watched it , I thought of the John Dalys of the world, and the OJ Simpsons and believe that it is by far the better option, to not be the most gifted athlete, but be the one who has worked his fingers to the bone every step of the way, and all those life experiences will deliver in the end, and make you in more ways then one, all the better for it.

Sam Humbert adds:

My takeaway was a bit different. Browsing the morning newspaper, the spin was that Tiger had failed — after #11, he coulda/shoulda converted the 'energy' from his birdie into a back-nine run…

From NBC sports:

Even Woods seemed baffled by it all, just as he had been all week. Woods might have been the only player at Augusta National who wanted the wind to blow, but when it, did he couldn't take advantage of it.

This strikes me as analogous to the after-the-fact market commentaries on Bloomberg et. al. that are so often ridiculed by the Specs. In fact, Tiger shot ~5 strokes better than the average of the other leaders on Sunday, and, had he been fewer strokes behind coming into the day, would have been lionized by the media his heroic effort, shooting par on a very tough day, as others crumbled, capped by a clutch put on #18 to seal the victory, yadda yadda. .

Apr

10

Is the Subprime mess one more indicator of the devil may care, not my fault, no care no responsibility, times we are living in? Are the Fed bailouts the ultimate back up to keep this poor social situation alive, leading to a poor thought process for the next rogue trader, head fund manager, and for that matter retail trader sitting down at his platform.

Is this ultimately leading to a internal breakdown of our own risk mismanagement on our own accounts even though at the end of the day it's us on our private accounts and we will be ultimately responsible.

How can we change the situation - When is someone going to stand up and say, "I'll take the hit , I'll wear the pain , It was me!"

Janice Dorn explains:

Maslow's hierarchy of needs is often shown as a pyramid where people go from the base to the apex in terms of what they focus on. The lowest level (base of the pyramid) reflects the most basic human needs– food, health, sleep, physiological needs). The next level is shelter and safety from danger. The next three have to do with belonging (love, affection, socialization), esteem (self and from others) and-finally-the highest state is self-actualization (evolution to a higher consciousness, authenticity, achievement of individual potential, transcendence, creativity).

Humans are unable to progress to the higher levels when they are preoccupied with the needs of the lower levels. In order to distract people from higher levels, one need do nothing more than threaten their basic needs. When people are focused on their basic needs, they do not have the capacity to deal with powerful issues such as personal responsibility. They are too busy focusing on either feeding themselves, dealing with illness or worrying if they will have a roof over their heads tomorrow.

Throughout history, the best way to strip power from a person is to divert their progress up the pyramid by doing something that forces them to stay "stuck" near the base of the pyramid.

We are not evolving. Rather, it appears that there is a not insignificant amount of devolution occurring. As long as we look to "the powers that be to get us out of this mess, the less chance we have to move through the bottom two stages and get on with creative evolution. We will, as a nation, remain, worried, frightened, and sick. The way that power was taken from kings was to poison them. They did not die, but they stayed sick and thus fell down the pyramid to the lowest level.

The person that must stand up and take the hit and wear the pain is the person who looks back at each of us in the mirror. If we cannot do this, we will turn to everyone else to rescue us, to fix the mess, to take care of us, to save us from ourselves. The war against personal responsibility and individual empowerment is in full force. We are unraveling.

Alex Castaldo notes:

I was surprised by the headline in the Financial Times on April 10 "Banks take blame for crisis".  Maybe there is hope after all. 

Russ Humbert offers a deeper perspective:

While nobody wants to take responsibility for the sub-prime mess, the media has certainly laid blame at the feet of the capitalist. "Capitalists acting too aggressive", "Capitalists only out for their own self interest", are a couple of the "causes" I have heard from the media. However, if the origins and the incentives in the sub-prime markets are studied or in other words the true "cause" is explored, it clearly was due to the markets letting socialism creep into their midst.

The timing of the GSEs entry into subprime seems highly suspect.

The deterioration of underwriting standards can be understood, if you understand the rating agency or risk management was graded almost solely on industry average and industry statistics. Such "pooling" of risk management might as well been pooling of agricultural production. What happens is nobody works. It was a mad rush to capitalize on others' efforts.

Thankfully, the capitalist inspired puts in the contract led to most of those irresponsible enough to think they could get a free ride on everybody else's risk management efforts paying the price. The capitalist insisted they had a least enough skin long enough that they couldn't ignore it without getting caught. Thankfully, some of those capitalists caught this problem early enough and are driving a hard bargain to make sure this mess gets cleaned up fast and making sure it won't happen again. While this may be a high price to pay, just imagine if those aggressive capitalists hadn't all dived in at once. The march to socialism might have been slower, but like a boiling a frog, this would have slowly allowed the GSE's to eat a cancerous toxin, driving them to a slow painful unavoidable death. Or if the short sellers had not been allowed to price the actual risk, those executives responsible would have crippled the banking system and the economy for perhaps a decade, bleeding but not admitting wrong doing to stay in power (as happened in Japan).

Capitalist was the cure, socialism the cause.

Apr

7

This is the fourth close within one point of the close five sessions ago, and those proceeding four sessions have all closed within three points of that close as well — maybe one for the record books. After a 3.5% gain, one may expect some consolidation – though is this taking it a bit far.

J.P. Highland adds:

The way the overnight session traded and the sustained action above 1380 made me think the S&P would have a good move and maybe test the early Feb highs… but the 9:30 open was a little disappointing and the following breakout attempt ran out of gas way too fast.

Nothing left but to keep hustling.

Mar

17

Is this the real price?
Is this just fantasy?
Financial landslide
No escape from reality

Open your eyes
And look at your buys and see.
I'm now a poor boy
High-yielding casualty

Because I bought it high, watched it blow Rating high, value low Any
way the Fed goes Doesn't really matter to me, to me

Mama - just killed my fund
Quoted CDO's instead
Pulled the trigger, now it's dead
Mama - I had just begun
These CDO's have blown it all away

Mama - oooh
I still wanna buy
I sometimes wish I'd never left Goldman at all.

I see a little silhouette of a Fed
Bernanke! Bernanke! Can you save the whole market?
Monolines and munis - very very frightening me!
Super senior, super senior
Super senior CDO - magnifico

I'm long of subprime, nobody loves me
He's long of subprime CDO fantasy
Spare the margin call you monstrous PB!

Easy come easy go, will you let me go?
Peloton! No - we will not let you go - let him go Peloton! We will not
let you go - let him go Peloton! We will not let you go - let me go
Will not let you go - let me go (never) Never let you go - let me go
Never let me go - ooo

Feb

16

When looking at a snapshot of a particular sport which you are attuned to, you can tell in an instant whether the person displayed is an amateur or a professional.

It's a bit like the markets. If you watch a market move day in day out, you can look at it at any one time, and have a reasonable "feeling" of how this market is set up.  If you rarely look at a particular market you don't have that feeling and are trying to make decisions based far too much on assumptions to do with how your core market may have performed (and not this particular one).

It is important I would say, to not try to trade too many markets, when speculating, as each has its own rhythm, and you must know this inside out. It is useful to ask whether any market snapshot in time, is the work of an amateur or a professional.

Jan

23

I get the feeling on days like we have seen recently, that it is a total battle between the bulls and the bears, ie who is going to win on the day, with this being signified by being on the positive side of unchanged or the negative side at the close.  Coming back from a strong deficit will not be seen as win for the bulls unless they make it over the line- and vice versa. The acceleration of the market into unchanged and away from unchanged throughout the sessions is brutal on the turn.

Vince Fulco ponders:

One wonders what the approximate level of blended Treasury rate is that is low enough to bring out the asset re(allocators). I don't think pension funds can meet long term liabilities with a 3.45% ten year! 

Nov

27

Cold Reading [book]In Practical Speculation, Vic and Laurel identified a number of ways of making deceptive non-verifiable predictions, and described techniques for marketing stock prediction abilities and systems. I came across a good supplement to such methods by Ian Rowland in "Full Facts Book of Cold Reading" (2nd edition, 2001). What is "cold reading"? These are techniques used by magicians and palm readers to deceive their victims, much as many market participants are deceived by the same techniques into believing the practitioner has a method to predict the market. I will try to give some market examples applicable to the current situation from top news sources such as Yahoo Financial, CNN and my own repertoire.

1. Rainbow Ruse- Have one trait and, at times, the opposite. "The bad news out of the financial sector will continue to flow, and on the days that it does, the market will take a hit", said Chris Johnson, chief investment officer at Johnson Research. "But select stocks will outperform the rest of the market", he said, "particularly in technology".

"Robert Loest, portfolio manager at Integrity Funds, said that a late December rally could depend on what the Fed does on Dec. 11." CNN

2. Barnum Statements- General statements that fit most people (combine w/ forking). "I think we're going to have a tremendous amount of volatility and basically stay in a trading range until we get information on first-quarter earnings," said Dan Genter, president at RNC Genter Capital Management." Yahoo

3. Fuzzy Fact- General broad statement likely to be right. "An end of the year run is not necessarily off the table," said Art Hogan, chief market analyst at Jefferies & Co. He said that Wall Street still needs to work its way through a lot on the financial side. Yet, the broad selloff of recent weeks may have primed stocks for a bigger bounce back, particularly in the areas of the market that are unaffected by the credit market mess. "But there's no question of volatility," he said. "It's going to be very bumpy through the end of the year." Yahoo

4. Good Chance Guess- ("I see a blue car" or "a house with number 2 in address") I see the number 1450 in your near future. Me

5. Lucky Guess- Make 2, 3 parts. If hit, then wow; if miss, they'll forget. 1400 is going to be a support area, unless it breaks through. Otherwise, so we are likely to see some resistance at the 1450 area and if broken a run at 1500 again and then possibly new highs.

6. Push Statements- State something wrong and keep pushing it! The subprime scare is pushing stocks down and may spill over into the general economy causing recession and global slowdown.

7. Russian Doll- Statement with many possible layers of meaning; keep working till get hit. Market participants were concerned about Wall Street sold off sharply Monday as concerns about a weakening credit market wiped out investors' enthusiasm about strong retails sales over the holiday weekend. For a brief period today, there was a twinge of optimism that the stock market would be able to score back-to-back gains. Reports of stronger than expected retail traffic over the Thanksgiving holiday contributed to that view. However, it wasn't long before concerns about the financial sector (-4.1%) took hold again and knocked the market down to size. Briefing.com

8. Peter Pan/Pollyanna- Tell them what they want to hear. "After years of living happily beyond their means, Americans are finally facing financial reality. A persistent rise in energy prices will mean bigger heating bills this winter and heftier tabs at the gas pump. Job growth is slowing and wage gains have been anemic. House prices are sliding, diminishing the value of the asset that's the biggest factor in Americans' personal wealth. Even the stock market, which has been resilient for so long in the face of eroding consumer sentiment, has begun pulling back amid signs of deep distress in the financial sector." Fortune

9. Certain Predictions- No time frame. The market is very likely to make new all time highs despite the recent sell offs.

10. Likely Predictions Unlikely Predictions- The abandoned baby pattern seen earlier in November was similar to the pattern that preceded the big August sell offs.

Self-fulfilling- "You will make a new start" The market may see new lows before turning higher and cause uncertainty among traders creating risk.

Vague Prediction. "The market is now looking toward 2008 and a slowdown, and I find it hard to believe that we can have a year-end rally," Mendelsohn added.

But hey, there are some reasons why Wall Street might see a typically upbeat December and an end of the year "Santa Claus" rally. (From Cnn Money) (predict both sides, always right if market up or down)

Unverifiable- The pull back to resistance level provided support for the overnight rally. The Asian traders encouraged by strength in the yen decided to bid up the SP in the night market. Me.

Larry Williams adds:

Larry WilliamsThe biggest part of cold reading is called 'pumping': asking questions that give a clue to the correct answer; it is very effective in allowing someone to think you knew.

Most cold readers rely on a 11 psychological traits from a study done at the University of Michigan, traits we all share, that can be made into specific statements. The cold reader will use the first three on client A, the next three on client B , etc. so they don't hear the same thing.

Here are a few…

There is someone from your past you wish you could talk with again

There are issue with one of your parents (pump comes next, usually boys are with dads) I see a parent with long hair… they reply yes ,my mother (you agree and look very wise) or if they shake their head and the reply is, 'your mother was not the one it was your father.'

my favorite:

growing up there were s-xually awkward times and you still have unsettled areas here.

Word games can be very impressive in the right mouths.

Craig Mee replies:

Thanks Larry… I remember watching a show on this topic many years ago, which opened my insights into these people… and the following day I was an extra on a Gatorade commercial , which went on for hours, at some point I found myself, next to a very attractive young lady, analyzing what could it be that made her sit here at 2am in the morning for some spare cash… (For me no doubt it was to bolster trading capital!)… so I surmised that she must be there for a specific purpose, ie need the extra cash for something special, I then thought OK, lets go with a wedding, and she either needs a new pair of shoes or a new dress. Well at that point I turned to her and said, "who is getting married and what colour are the shoes you are buying!?"… well I struck gold, and she was beside herself… Certainly a great way to start a conversation with the opposite sex as well!

Jul

24

One of the qualities by which a client rates his bank or broker on is the ability to work things "quietly" — execute an order in a discretely to achieve a good fill. This is because participants are generally unaware someone out there has a buy or sell order and won't strive to squeeze you. In that respect, anonymity is a good thing.

Yesterday I was booking a hotel on a website, and came across a variation of this, where top hotels are willing to unload inventory at knockdown prices, but they do so "anonymously" through an intermediary website. They want to sell a few extra rooms, but don't want to publicly quote the price because it will impact their pricing power.

I considered going with one that offered a reasonable rate and gave general details about location and specs of the room, but at no time before paying would I know they name of the hotel. It mightn't sound like a big deal, but if I were handing over a few hundred Euro, I'd like to know more about the premises. In the end I didn't pull the trigger — I went for somewhere a bit more expensive, where I knew what to expect.

Afterwards, I thought about it and asked whether I lost out on a good deal and whether this anonymous selling is a good idea and will succeed. My own view is it won't, because hotel rooms are among the most expensive transactions people make regularly on the Web, and travelers are quite risk averse when booking. They want reassurance — number of stars, brand name, location — before paying, and are quiet skeptical about descriptions (I can tell you from experience there is nothing regal about the "Royal Hotel" in Tipperary town).

Moreover, the hotels are over a barrel, because if an anonymous five-star hotel is offering rooms at 75% off, people think it can't really be that good, of there is something fishy; and if they are only slightly under a similarly priced but known hotel, people will pay that slight bit more to avoid uncertainty. So they are also looking for information in the price.

Sam Humbert writes:

When I've used PCLN for hotels, I've gotten, broadly speaking, good value for money. Generally there's been a reason a particular hotel traded cheap-to-the-curve — construction noise from building a new wing, or the pool's closed for repairs. Also I've found desk-clerks exude bad juju when you check in/out on a PCLN reservation — they don't view you as a "real customer" who's loyal to their hotel brand.

Craig Mee adds:

Reminds me of a friend who was a manager of a world-renowned hotel chain. Two things he told me –

1. He told his hotel counter staff never to give poor service, even if there are discrepancies with the bill and customers are disagreeing. What he said made perfect professional sense, "once you're committed to not charging the customer for the said amount from a business standpoint wear it on the chin and be as nice to that customer as any other." Then he added quietly, "besides, it's usually the cleaning staff taking liquor from the mini-bar, not the patron."

2. Specials are special on the menu for a reason; don't go near them. They usually jazz up something that is "on the way out."

Jul

22

I'm sure the Rio trade (well at least the myth) was alive and well on every major exchange floor in the world. It was the last salute, the final straw. When a local trader had just about lost the lot he jumped in a taxi, called his "give up" broker to buy maximum size at the market, and when he got to the airport he made the same call. But this time he asked for the price. If he were in the money nicely, he told the taxi to turn around and head back to work. If not he was on the next one-way flight to Rio!

Today I watching the final round of the British Open, Andres Romero, to name but one professional golfer, had the same sort of explosion, but this was with plenty of cash in his account. He was leading with two holes to play and in trouble, so he goes for the Rio (a difficult low percentage shot). The outcome was no longer in contention — a four shot turn around and a big opportunity, maybe even a lifetime opportunity kissed goodbye!

Admittedly, the trader in trouble is driven by sheer panic. But for the golfer in control it must be too much adrenaline, too much confidence, and how much this victory means that drives everything else literally out the window.

Next time anyone thinks about gearing up above and beyond what they should do with their account size, it may pay to watch a rerun, of the 2007 championships final holes. If the pros are trying it and failing, then best we mere mortals stay right away.

Riz Din writes: 

It was beautiful watching how the final two holes at Carnoustie humbled so many players. Romero rose and fizzled like a firework. He took crazy risks toward the end but he had already taken quite a few wild shots on the back nine, and had been rewarded with endless birdies after pulling off one magical putt after another. Before he walked on to the final two holes, I caught him almost laughing to his caddie; even Romero was bewildered at what was happening. Perhaps it felt like an out of body experience. So, come the final two holes, should he suddenly change his game or keep on playing as he had been? Golfers, like tennis players, are a superstitious bunch, and I can see why he chose not to moderate his game.

In trading I believe it is important to set limits and parameters and to modify these constraints only gradually, but in sports the self-reinforcing cycle of the 'mind game' component seems considerably stronger, and it just didn't seem right to deny the gift from the gods of a 'hot streak'. Importantly, Romero didn't seem upset one bit at the end but was highly emotional and what he had achieved. It seemed to be a rare situation of where a player may have had to play below his capacity (at the time) to ensure a win, and brings about many questions about motives and objectives (playing your best vs. winning).

The other lesson came from Open champion, Padraig Harrington. Before the playoff, he sunk the ball into the water twice on the final hole. Watching him play through the 18th, you couldn't tell whether Podraig was playing for a double bogey or a birdie. He gave it his best right at the point when it seemed to be over. Maintaining one's composure at this turning point is very difficult - even Tiger mumbles curses as things go downhill, before switching right back. I believe it is crucial in succeeding in life's competitive endeavors, regardless of the eventual outcome. 

Jul

19

I looked at the depth in cm of snowfall per year in the Thredbo ski resort in Australia, from 1968-2006. The average was 193.925.

It appears to me that you want to be a buyer at 100 cm and below, and a seller at 280 cm and above. After the two worst years, 1982 and 1993, depth increased for the subsequent three year period, and after the worst year on record ever, 2006, 2007 is turning out to be one of the best with powder everywhere in the mountains.

As a trader, it may be possible to come into the chalet market after a season like 2006 and buy up all the leases for the following three years, at bargain basement prices, as the doom and gloomers take hold and global warming reaches fever pitch, only to sublet as the bumper season the following year begins. Alternatively in the record years, sublet any holdings in advance and hit the South Pacific tropical islands for the much earned rest and relaxation!

Jul

17

Every night after the U.S. markets close I get the tube out of the London Square Mile, to my home in London’s West Side. The problem is that there are four alternate destinations and if you are not lucky enough to get your correct tube, then it’s usually better to get off and get the bus half way to your destination, then mess around with some untidy station changes.

The bus I get comes every 10 minutes, and for the last three weeks, I have been in constant draw-down. I get off the tube and every bus but mine comes past, with my number 22 finally showing up on or about the 10 minute mark. But I knew it! This is a numbers game! The longer I stick at it, the more chance I'll hit pay day. And finally it happened. Last night as I strolled up the escalators and crossed the street, the 22 pulled up at the bus stop. After three whole weeks of pain there was my savior; there couldn’t have been a quicker transition.

Good things await those who are prepared to stay in the market.

Jul

17

'No Sun link' to climate change
By Richard Black
BBC Environment Correspondent

A new scientific study concludes that changes in the Sun's output cannot be causing modern-day climate change. It shows that for the last 20 years, the Sun's output has declined, yet temperatures on Earth have risen. It also shows that modern temperatures are not determined by the Sun's effect on cosmic rays, as has been claimed. 

The "greenhouse" hypothesis is that the increased CO2 levels are preventing the sun's heat from being radiated back out into space. There is no doubt that this is true. What is still in question is the magnitude of the effect and the likelihood that there are other contributing causes to the fluctuations in earth's surface temperatures.

The hypothesis about cosmic rays is a theory about another contributing cause. The difficulty with both the hypothesis about cosmic rays and its rebuttal is that neither side has a time series of data with sufficient length to be a reasonable basis for any robust conclusions.

In the last 20 years the data show that there has been a negative correlation between the sun's energy output and the earth's surface temperatures. But (the economist's other hand) the data from the period leading up to 1980 show a strong positive correlation. So, the debate has hardly been settled either way. Saying "we still don't know" is probably the bravest of all positions to take on these matters; you can be guaranteed to have arrows in your back and your chest. 

Craig Mee notices:

Read the sunspots.

The mud at the bottom of B.C. fjords reveals that solar output drives climate change — and that we should prepare now for dangerous global cooling 

Jul

15

I take the subway to work daily. While not the most prestigious means of transportation, it is definitely in my case the most practical, economical, and time saving. I happen to live three subway stops from the beginning of the line.

By the time I catch the subway, it is usually full with no seats available. Sometimes, I am in dire need for a seat to get a little nap, especially if I am caught trading overnight. An hour nap can do wonders in my case.

Out of this need I become more creative about finding this precious vacant seat. Knowing that the previous two subway stops to my own have only two sets of stairs closer to the front end of the train, I started walking all the way to the opposite end in hope that most people will go for the closer compartments. This is in fact the case except oddly enough that the farthest compartment is always packed.

My reasoning in this case is that most people play the same game I do hoping for the precious nap and seat. However, three cars away from the far end seems to be day after day the optimum solution to this game. Now that I choose the optimum car successfully, sometimes I still am not lucky enough to get a seat unless one of the passengers gets off the train.

I start analyzing the passengers’ profiles trying to figure out which ones are likely to get off the train first to sit in his or her place. This is not an easy task but some knowledge of the city and behavior can do the trick. For instance, I stay away from all people over 30 in business suits as chances are that they are headed to my same destination. Once this category is eliminated, I try to eliminate all university students by guesstimating their ages simply because four out of five universities are located downtown (at the end of the line) so the odds are clearly not in my favor there either. I try to spot two age groups. High school students and under since parents most likely prefer to send their kids to nearby schools so it is unlikely that this group will travel all the way downtown for schools. Also, the elderly group is most likely not traveling far either. This whole process usually takes few seconds since I usually get lucky enough to get a seat before we reach the next stop.

This process is very similar to gaming the mistress although I admit it's never this straight forward with her. Incentive, incentive and incentive. I play the market for monetary profits and only profits. I don't care what philosophical reasoning a speculator would give you a la George Soros; the bottom line is that it is all about the monetary reward. It is all about the nap in the case of my subway trip.

I always try to figure the line of least resistance in speculation, the car with the fewest passengers. This is usually the road least followed by the public. In search for prosperity, I have to copper the public play at all times (by going to the opposite end in the case of the subway), but sometimes the simple contrary play is not good enough to win the game. A little tweaking is often needed. In the subway example I had to go to the third car from the opposite end and not the last since some smart passengers figured out the "simple" contrary play by going straight to the last car.

Timing is also a very critical factor and can make all the difference between a win and a loss. In the case of the subway one has to process some information and position oneself accordingly in a few seconds before reaching the following stop. Flexibility is also a key to successful speculation as no fixed system will beat the market forever. In the subway example, my game plan is different on the way back home since a different crowd is taking the subway at that time.

Ever-changing cycles also plays a great role in this game. The last car was full as the public got wiser and I am sure the third will be one day and a new game plan and system will have to be developed.

Knowing who you are playing against is critical to any speculative game as is the case of the passengers' profiles of this subway. An extensive knowledge of the markets you participate in is essential to your success as is a knowledge of the different subway stops and what they represent to different passengers.

I will end this post here as I reached my subway stop and have to vacate my seat for the next player.

Sam Humbert comments:

In my Manhattan years, I'd often give up my seat to a person of gender or age. For me, the psychic pain of sitting whilst a pregnant woman or pensioner is standing outweighs the benefit of sitting down. Often I'd get the fish-eye from my fellow New Yorkers — they were silently thinking "he must be mentally ill." I'd sometimes make eye contact and explain "I'm not originally from New York," and this would calm them.

Craig Mee adds:

Watching commuters pile into the tubes in London, there is sheer brawn! Doors open at the station and boom, some people are fixed on the destination, i.e., empty seats and God help anyone getting in there road. Funnily enough this is usually concentrated to a certain gender. Some people like to try and muscle markets around too!

Chad Humbert adds:

1. Watch for mothers with small children. Sometimes a child will scurry, and the mother will have to leave her seat to retrieve him. Voila! Open seat!

2. The elderly are often slow. I've found I can often simply beat them to the open seat by walking somewhat faster. If I'm careful, I can make it appear that I passed them inadvertently. "Oh, were you going to sit here? I'm sorry! Do I need to move?" Most of them want to be polite, and they insist that I keep the seat. Copper the elderly.

3. I've found that the handicapped seating rules are rarely enforced, and when they are, it's just a small fine. I pay that fine many times over with the extra trading profits I generate from feeling refreshed after a nice nap.

Yishen Kuik offers:

Mr Saad's comment on how the farthest caboose is not the optimal choice because of gamesmanship, but rather some not so inconvenient caboose reminds me of a well known behavioral finance game.

Ask 100 people in the audience to pick a number between zero and 100. The winner is the one whose number is closest to two thirds of the average.

Eggheads will zero in on zero, but that answer merely demonstrates deductive abilities without canniness.

People with a more limited appreciation of convergent series might pick 33 instead, based on the assumption that the average will be 50. People able to think one more step ahead might pick eleven. People able to think one more step in the convergence series might pick nine, and so on.

The real challenge of the game is to guess the distribution of this gradient of deductive powers among the audience and weight one's answer accordingly.

e.g. If you think half the people in the room will guess 33 and the other half are extremely bright but guileless and will guess zero, you should guess eleven.

So perhaps if the challenge is given in a lecture room at MIT, guess one (zero is pointless because of the likely pot split). If the challenge is given to the general public, guess between ten and fifteen.

Philip Tetlock, whom I'm reading currently, reports that the most common winning answer is thirteen.

Barry Gitarts contributes: 

Here are a few of my subway gaming experiences as they relate to the market.

Gain an edge by counting - I use the grip mats markers to note where the train doors open when the train stops, so next time I will be standing there well in advance of the train arriving. This prevents others from being the first in the door. This takes several observations, because the train never stops in exactly the same spot, but it’s remarkable how close to the doors you can be. Standing on different parts of the platform to observe which cars are the emptiest helps in figuring out which car you would want to focus on.

Work harder then the next guy and be prepared in advance - Even if you are the first in at your door, there will be others coming into the same car through other doors, competing for the same seats as you, this is why you must start looking for empty seats through the windows as the train is still pulling in so you know exactly which seat you need to go for, instead of walking in, looking around and then going for a seat. Those two seconds are the difference between sitting and standing.

Know the relationships between markets - I find that sometimes, especially during rush hour, it makes sense to take a different train one stop away from your destination so one can catch the transfer one stop before the mob boards.

Capitalize on the public fears long after the threat is gone - Unlike Mr. Saad, in my case the last two cars are the emptiest, because the train I take starts in a more unfriendly part of the city where people wouldn't want to be caught sleeping in the last car, so when the train gets to midtown, every car is packed like sardines except the last two which are near empty.

George Zachar strategizes:  

As someone who sits most of the day in front of screens, my subway priority is not getting a seat but minimizing total transit time. I have a mental map of where the stairs are at my destination, and maneuver to get closest to the doors that will open nearest to my exit route.

Market lesson? Different players have different goals. Absolute or relative return? Style box restriction? etc. 

John Floyd adds: 

I spent one of my school day summers as a messenger in Manhattan. To increase efficiency I learned the exact subways, waiting positions on platforms for door openings, and the correct cars to place me near an exit that would easiest to get me to my destination. I did this for as many of the routes I traveled as possible.

The numbers of possible routes in terms of subways, exits, etc. are myriad. The proper choice allowed me to be the first off the car and up the stairs, oftentimes placing me right inside the building I needed to reach. This was an added benefit as I avoided the often hot, humid, and crowded streets. I would estimate that this on average increased my efficiency by 20-30% at least. Conversely when I rode my motorcycle across the country I looked at the map once in the morning to get a general idea on the direction I wanted to head and roads I might want to take and then just drove. My efficiency of time probably dropped by 50% but my efficiency of pleasure went up by equal.

When traveling now I try to use the time to read, listen to books on tape, or use the time as a period of thoughtful reflection. I do this mostly because I find it most productive for me given I do not find the sleep comfortable or useful to me in modes of transport. I can understand others find it as a useful battery charger that allows them to be productive later.

So I would extend the logic and say that while the goals –profits, learning, etc., may be the same, the path and methods to getting there may be very different. I think another important point is that one needs to decide and focus on what works best for them, as it may not be the same as what works best for others. 

James Sogi comments:

We don't have subways here in Hawaii, but I try to find the best time to find uncrowded waves for surfing. The best bet is to take my boat to spots such as the nearby national park that has nice waves, but only with a long walk and even longer paddle which weeds most out. The boat takes me to the front row spot and a short paddle, with refreshments waiting.

The other method is to go right after lunch, but before school is out and before workers get out. That seems to be the old guys’ slot, and usually only one or two old guys like me are left still surfing.

The other odd thing, is that even if its crowded, many in water can't see where and when the wave will form and break. If you calmly paddle to the spot where the wave will form as you see it coming over the horizon before anyone else realizes where or when it will come, you will be right at the right spot as it breaks without paddling and catch the perfect wave with a single stroke without effort at the perfect spot while all the crowd is scrambling around trying to catch the wave in the wrong spot.

This of course takes about 40 years water experience and have obvious market application as well. Study of the bottom, which many in water don't bother looking at, triangulation of shore navigation aids, like palm tree lined up with volcano peak and far point, and timing of the waves and sets all help find the ideal entry point. I guess it’s like standing at the right spot on the subway platform.

Another method if the waves are small, or really big, is to use a big board. All the kids ride short boards and only have one board, so if the waves are mushy they can't catch rides, or if the waves are big, they can't catch rides, and with 12 different boards for each micro category of waves it’s easier to catch the nice ones. So really good equipment helps.

Another method is to exercise and train even when the waves suck, so when the waves come, you are in great shape and can charge while the kooks are gasping for breath. Of course pros like Shane Dorian exercise all day long lifting weights, and after surfing five hours, swim around Tavarua Island twice. Geeze.

There are a million ways to beat the crowd. The last one is move a million miles away. The market still reaches here in about 89 milliseconds. 

Victor Niederhoffer extends:

These posts on how to get a good subway seat are a fine pyrotechnic display of native ingenuity. Presumably many of our readers, in their days as poor shavers, also had to apply these techniques to finding parking spaces, especially if they lived in urban areas and didn't want to pay $50 a day for a garage. What I'd like to ask, however, is how these ingenious delectations could be applied to getting a seat in the market. When someone is forced to get out at an unfavorable price, how do you know it's coming, like on the subway, and how can you take his place at a very favorable position to you? One hint is to study Michael Covel and his gurus.

Allen Gillespie replies:

In my experience, a sign of an open seat in the markets frequently presents itself when everyone sells a stock from news on a single company. A recent example is the retail selloff following SHLD's news — only to have WMT, HD, and retails sales numbers lead the market higher a few days later.

Questions I always try to ask myself in those situations:

1) Is the news company-specific or general?
2) Is the bad news the result of good play by a competitor?
3) Did the valuation make the news appear more important than it really is?
4) Which companies have future catalysts? 

Hany Saad contributes:

A fund manager using a trading system that has been losing for more than three consecutive reporting periods is usually a good bet, especially if the majority of fund managers trading the system fall into the switch trap by moving to a different system (usually a very thorough read of the fund prospectus is necessary in this case). They usually give up on the first system at the exact wrong time when it is on the verge of a big win, falling into what Rob Bacon warned against in his wise words "beware of the switches", leaving a seat wide open for the wise observant player.

The same reason I wager that trend following will make a killing next year with the only reservation being that it should be on the long side. 

Barry Gitarts adds:

I have tried to predict who would get up on the train, but such efforts have usually been futile. Instead I stand ready, knowing that anyone could be the next person to get up and I'll be ready to run for the seat. Of course this works better standing in the part of the car where there are fewer people, since there will be less competition for that seat when someone does get up.

In the market, this is like predicting the next big selloff. I can't predict when it will come, but I can be sure I have sufficient reserves for when the opportunity presents itself. As in the subway, this may work better where it is less crowded, and in stocks/markets with less media/analyst coverage. 

Jul

9

While watching the Wimbledon final (what brilliant tennis it was!) I noticed that on every mis-hit the player doing the mis- hit won the point, usually within the next one to two strokes.

Point being — when a market changes its rhythm don’t believe you have a better winning situation. Cut the position, as the whole set up has now become an unknown.

Jun

9

I wonder if "covering shorts" is a more predominant activity on Fridays than going long. And I wonder what method could test this. We see this today in debt markets for home builders' bonds, covered shorts, but not long buyers.

Bill Rafter adds: 

I don't have any proof, just a feeling that you would find Fridays to be mean-reverting, or reversing the Monday to Thursday action. But most of my feelings are wrong, which is why it's important to do the testing.

Craig Mee writes:

Climatic selling at its best late in the week saw the markets rates and equity finally break into a gallop and suck in some big ones after months in a slow well control trot. With so much energy now exerted, it looks like Phar Lap, will now look to please the crowd and not the punters. 

May

22

For the last week I've been using public transportation. It is an interesting slowdown in life. You are forced to sit back, wait for buses, trains, and ferries to come. They then slowly meander around the loops and turns until they get you to your destination.

It's made me think that at times you may need to move from equity index trading to short-term rates in order to slow down and smell the roses. With less volatility, more windows to gaze out of, and interaction with a higher proportion of the general population, I achieve a broader viewpoint.

May

17

Its is my hypothesis that overnight markets are not as efficient as day sessions, which leaves certain opportunities to gain an edge.

It appears overnight market are used heavily, by the big money to contain risk, with any left field events bringing the resident allocated night hedger into the frame. Certainly it seems that this person will quickly size up the situation, and usually will take the safest option to hedge the desk book.

When all traders are back on deck the next morning, a group decision can be reached about the state of the "book" and what the best way forward is, however an individual without the collective input of his peers is reluctant to push any boundaries. Whether this book is being covered by a person, who is allocated to do the job overnight in the home country, or is passed to an overseas desk, (to a certain extent this is inconsequential), no one will usually trade against the status quo, and risk having to explain themselves.

In Australia, once a month, there is the same" jouno guy", who mentions his thoughts about the immediate interest rate environment, in the the financial papers — released about midnight Sydney time. The local overnight bond market will react in line with the risk, regardless of whether any credible sources are quoted. However the next morning board meetings are held, the collective view is exchanged, and surprise surprise, more often than not, the previous night's hedges are lifted.

This must be tested with specific numbers, and not withstanding the size of the overnight market and its draw on overnight participants from different regions … but one view against many can become quite intimidating.

May

1

Is a market that doesn't test previous highs on a breakout (over x amount of time) telling us something, therefore should we add a certain % of higher risk on its next foray into blue sky after a measured period of consolidation, if indeed it does not give us "that pullback?"

Some markets just take off and never let you get back in … maybe on ones that do this a different trading appoach is needed rather than the feeling "I've missed it."

Apr

15

Lately the local paper has had front page headlines on how to eradicate a growing seagull problem. But tonight I witnessed a newfound appreciation of their skills.

The seagulls flew along next to me at the front of the boat against a very strong headwind. Using light reflected off the water to sight fish, and then using this stiff breeze they swooped down to nail their prey. After missing more times than not, they built enough speed that they actually glided back into their original position to undergo the same sequence of events once again. Those who persevered were rewarded as we came into port and the boat speed decreased, and the success rate became much higher for those who were successful using the power of the headwind to increase speed and fly away from the pursuers.

From a market viewpoint they reminded me of counter trend traders in a roaring market. They waited for the right setup. But time again they failed with only the odd one being successful. As the momentum of the market slowed, more and more were able to get the prize, however, it wasn't a meal for a lifetime, just enough to keep them in the hunt for next time.

However, some smart ones, like Jonathon Livingston ("begin by knowing you have already arrived"), instead of going the whole journey waited near port where conditions were more favorable, and just traveled the last 500 meters in, where the success rate increased exponentially, maybe something to consider for us all.

Apr

9

I thought some might be interested in the following title: "Speed Mathematics - Secret Skills for Quick Calculation," by Bill Handley (published by Wiley, interestingly enough). Although completely discovered by accident, this book may actually have changed my life, and has taught me a valuable lesson about perceptions in life and the markets. I'd like to share it, if I may.

Aside from the useful techniques in the book, the most valuable lesson learned is an indirect one: The most hopeless seeming situations may carry the gravitas they do largely because a specific problem owns a person, rather than the person owning their problem. This limitation may then be continually reinforced -usually by a combination of self and external influences (teachers, friends/family, culture, market etc). The key to victory over this persistent problem seems to lie in finding a solution that is non-standard for one's particular predicament. Sometimes you can search far and wide - and apply! - a standard solution with no joy. But that doesn't mean the answer isn't out there. Indeed, the biggest problem in one's life may be overcome by some very simple solution that is heretofore hidden/overlooked.

The techniques I discovered in this book are not new, but I have had twenty years of discouragement and resignation over some of my math skills. I believed I simply wasn't "quantitative." However, at any time I might have stumbled across this technique and many things may have been different. As persistent and pervasive as the problem was, so was the solution. Within 30 minutes of learning the new technique, the problem that had haunted me for so long was solved. Most important, the problem wasn't with an intellectual limitation I thought and believed I possessed. Rather, the problem was the techniques I was applying to overcome that "perceived" limitation. Within a day, I actually saw a new and exciting path for my life - all because of being shown a way of "owning" and changing my "limitation." My brain was the same, but my methods had changed.

I think some of the biggest limitations to overcoming problems are rooted in pride. It's a tough thing to seek help in a way that damages your self-perception (such as consulting a basic math book to overcome problems with basic computation). But what a small price to pay! How many of the problems that we face - the ones that threaten to overwhelm us - could be easily solved by a yet unconsidered solution or a person we've not yet met? What would be different in your life if the biggest limitation you had were removed? I can tell you from first-hand experience, it is a most exhilarating feeling.

Sometimes a problem may truly be beyond our powers to change. We're all frail, with diverse randomness/future-coping mechanisms. We must be vigilant of our true weaknesses, but we must be equally vigilant of those "false" weaknesses that we have accepted as part of the fabric of our reality. For all that, discoveries such as the one I made may give some hope that the tide may yet turn favorably. Some may just have lost hope in the possibility that a solution could be closer than they think - and may even be hidden by their own hubris.

There are numerous other insights that arise from this foundational idea, but those can be left to the meta.

Craig Mee adds:

Yesterday somebody mentioned to me about buying a birthday gift. They couldn't quite find the right object they had in their mind. This person commented, "I've just got to let this go, and get the idea right out of my mind or I'll never move on."

Maybe in markets at times this could be a good idea. Sometimes it seems that we spend too much time analyzing the outcome without spending enough time on the suitability of the initial conception.

Apr

9

Are traders the only people who can learn to totally control their emotions? Is sport something that we will always emote to due to things seemingly out of out control, even considering the most disciplined among us still make frequent errors? For example: consider Tiger Woods after poor shot selection on the 17th hole at the Masters.

"Honestly what the hell just happened" - I'm sure many of us say this daily, but the number one golfer in the world?

Mar

29

On looking at the way some overnight, particularly Asian equity markets trade, and their relationship to the U.S. markets, i.e., Dow or S&P, it would be an interesting experiment to test say the average maximum range move in the Dow. An example would be comparing settlement to extreme high or low, to the corresponding move on the overnight Aussie market in order to gain an average rate of volume between the two. When this varies greatly a meal may be presented.

For example, last night the Dow was off 140 at the extreme, and the Aussie equity futures where only off 33 on the extreme (which on optic observation is a minimal move on average over x range). Subsequently on the day session, today, the market rallied all day from the open. You could throw in a filter such as gold (as the Australian market has a reasonable leaning to resources), with gold being up five dollars overnight (a large sell-off on the index was very much against the resource sector).

Mar

27

I'm not sure where the numbers truly are when it comes to the housing bust of the recent bubble. However, I can tell you it has had a very small affect on this area and our absorption rate is healthy. Homes in the ranges of 1.2 to 4.5 are moving along in a normal pattern of sales. They are projected to jump by 12% and we are on track. One of our projects, 2100 acres of land (956 unimproved), is looking at a fair market value of 158 million. We have 14 buyers who are currently in the running for our property and expect bids to come in shortly.

The sub-prime situation has hit the lower income and mainly ethnic groups in San Antonio. Yet, I do not see a slowdown in midsize to high end homes any time soon. In fact, both West Coast and East Cost monies are flowing in to purchase homes and land.

Of course, I expect somewhat of a bump eventually, due to many sellers not going being able to unload their homes in the up and coming market. I also figure that sellers will not want to write checks, at closing, to buyers, and will sit and ride whatever storm is brewing.

Not only is the bust bringing boom to the home sales market in the South West Region of Texas, many corporations are moving into and around the city of San Antonio for the economic reasons such as inexpensive and abundant land, cheaper labor, and weather.

I came to this region two years ago to capitalize on the next recession, the next long and harsh bear market that will hurt the east and west coasts job market and real estate market, and cause individuals to migrate to less expensive areas. I think my timing was early but I know I am on the proper track.

Nonetheless, the bust is nothing but boom in the southwest region. In fact, the proposed 14-lane highway called, the Texas Trans Corridor is looking to bring in more real estate money. I will find out more in two weeks when we have a lunch with Congressman Gonzales to discuss the NAFTA and commerce.

Craig Mee adds:

Certainly in greater Sydney (Aus), where the housing market broke down earlier than the States, middle to high-priced houses on the coast have had a relatively solid floor bid. The poorer areas (and last into the "bubble") are coping with the worst of it. 

Mar

26

I was lucky enough to view the film, "I'm Your Man." It is about Leonard Cohen and billed as "an intimate look at the songs, poetry and life of one of music's most celebrated and influential troubadours."

What an amazing intriguing and humble character he is, representing all the traits needed to push beyond imaginary boundaries into the next level of introspection. The amazing performances of featured muso's is mind-blowing.

Mar

22

Last Friday I caught a train that went through 1000 kms, inland, south of Sydney to Melbourne (in Victoria, Australia's southern state).

I couldn't believe the state of the land, it was as dry as a bone through the entire distance, with everything a yellowish brown. Although we may get the odd downpour in the major cities, drought is a persistent problem.

Mar

22

In one of Patrick O'Brian's typically hilarious touches, in HMS Surprise, Maturin is on a rock collecting boobies with Nichols, before he is eaten by sharks due to despondency over his wife's infidelities and the typhoon. He tells Nichols about an Urdu English phrase book he is reading. "I believe it must have been compiled by a disappointed man." Here are some phrases:

My horse has been eaten by a tiger/leopard/bear.

All my money has been stolen.

I wish to speak to the collector.

The collector is dead sir.

I have been beaten by evil men.

I wish to hire a palanquin. There are no palanquins in this town sir.

Yet salacious too

Woman, wilt thou lie with me?

I immediately thought, what would a comparable phrase book be like for a trader entering the speculative arena? Perhaps it would include the following examples:

I have no money left. I lost everything when my stops were elected right before it turned.

The margin clerk is off duty sir, so it is not possible to delay getting your money.

The locals have given me a beating in the market.

I wish to enter a market order to sell. — There are no market orders possible sir. It's limit down.

There is 5000 bid ahead of you.

You are filled at your price, and I'm afraid it has continued down.

Yes, it went through your limit, but we're going to get them to take that price down.

Goldman against you on the offer 10000 to go.

It traded at that price, sir but there was a fat finger error and they're canceling all the trades at your price and below.

The Fed just acted and I'm afraid the market is very much against you.

I suggest you use stops next time on your orders, sir and that way your losses will be limited.

It did trade at that price, but your order was canceled at 5:30 due to computer bookkeeping.

Price hit a pivot point and immediately gapped 2% against you.

A domino effect was triggered and it went against you.

Sorry, that fill was for your brother not you.

They revised the previous months number against you, and I guess that 's considered more important now.

I'm afraid you were in over your head.

Your order was rejected by the compliance department.

You can't take money from your account until you get back to initial.

It was too late to cancel sir.

I am open to other appropriate items for such a phrase book.

Allen Gillespie adds:

We listened to the tape and it went against you.

Craig Mee writes:

Only in trading the Mib (Italian index futures) "yes sir, it opened higher than your sell level, but due to the mathematics of the opening print, nothing done"

I haven't quite worked that one out.

George Zachar adds:

It's a fast market. Nothing done.

Markets went subject just before your order. Nothing done.

That printed on globex. Your order went to the pit. Nothing done.

We don't show that expiry on our system.

That account is closeouts only.

Fed funds options? The local is in the toilet.

There is no market in that spread, sir.

Mar

14

I have written before about meaningless statements in finance, like "overdue correction." This sort of thing is not unique to finance, however.

Someone flipped his Mustang over the median and ran into a truck in Oklahoma City today. I am watching the news right now. The police say "speed was a contributing factor." Well, isn't speed a contributing factor in every automobile accident? How does one car hit another if speed is not a contributing factor? I suppose that if a car were parked precariously on the wall of a parking garage and the wind blew it off and it fell on to a car below that speed would not be a contributing factor, but that's about the only example I can think of.

What they mean, of course, is that excessive speed was likely what caused the accident, i.e., the idiot was doing 100mph around a turn and lost control. But if so, why not just say that?

It reminds me of the two years I spent on a federal grand jury (one or two days per month). A DEA agent was before the grand jury telling us about a drug bust, and he emphasized that the suspect had a "saleable amount" of cocaine.

I asked him what a saleable amount was. He said "He had X grams, and that is enough to sell." I said "But isn't any amount of cocaine a saleable amount?" He said "Well, he had X grams."

I said, "I understand, it's just that you didn't say that he had 'an amount' of cocaine. You said he had a saleable amount. I am trying to determine what the cutoff is for a saleable amount. If he had the tiniest amount on the eraser on a pencil, would that be a saleable amount"

He said, "Well, yes, you can sell any amount of cocaine."

And I said, "Well, that is my point, the phrase 'saleable amount' has no meaning, and you just use it for effect."

He started to say something, and then the Assistant US Attorney stepped in and stopped my line of questioning. Something also happened when I questioned the definition of "packaged for sale" when it comes to drugs. In short, unless it is scattered on the floor, it is packaged for sale.

Craig Mee replies:

I recently drove with my father. He has much driving experience, though he hadn't been on a highway for quite some time. With me in the passenger seat, he was tailgating cars at 100kph, not something he has normally done. The perception of distance and safety for him has obviously been impaired, as has sensing trouble with cars braking in front of him.

The relationship to the market is this: Having a good understanding of trading and knowing what needs to be achieved may be fine. But diminishing perceptions and feel for the market may interfere with results over time and might lead to a major disaster if not detected early.

My father also recently mentioned to me that life and death situations which he narrowly avoided in his youth, and did not think too much about at the time, had recently come back to haunt him in the shape of dreams and waking up in cold sweats.

Being on guard and aware of changes taking place is paramount.

Nigel Davies adds:

Consider how someone knows he's driving too fast. Speed tolerance varies greatly from one person to another. For me it's when I feel tired after the journey because of the stress. My body's telling me I wasn't fully in control. Of course, here in the UK there are so many speed cameras now that it is difficult to get so stressed without losing one's license.

Can this be applied to markets? Are constant feelings of market-related stress due to "lack of control" an important message from our bodies? 

Sam Humbert notes:

From After the Race, in James Joyce's 1914 collection Dubliners: 

The car ran on merrily with its cargo of hilarious youth. The two cousins sat on the front seat, Jimmy and his Hungarian friend sat behind. Decidedly Villona was in excellent spirits, he kept up a deep bass hum of melody for miles of the road. The Frenchmen flung their laughter and light words over their shoulders and often Jimmy had to strain forward to catch the quick phrase. This was not altogether pleasant for him as he had nearly always to make a deft guess at the meaning and shout back a suitable answer in the teeth of a high wind. Besides, Villona's humming would confuse anybody: the noise of the car, too.

Rapid motion through space elates one; so does notoriety; so does the possession of money.

Mar

14

I am both an investor and trader. But looking at my results I should probably only be an investor. It is not easy to trade with a full-time job on the side.

As an investor I am 100% long with my stocks. I will stay 100% long no matter what. I can sell a stock, but only if I am able to find a better one to replace it. I am not going to sell because of the overall market. Actually, I could sell if it goes up 130% like Shanghai last year. But I am never going to sell because it has been going down.

Today, my investments are down 2% from 12/31/2006, and down 10% from February intraday peak equity. I don't care the slightest bit. They could go down 30% and I wouldn't care either.

I am not crazy. There is a very good reason for this stubbornness.

I started investing seriously in stocks in 1996. Since then there has been a crisis in 1997, another one in 1998, and one of the biggest bear markets in history in 2000-2002. I was investing with a mix of stock picking, market timing, style timing, and small/big timing. Believe it or not my market timing allowed me to sell at all the intermediate tops in 1997, in 1998, and in March 2000. It allowed me to avoid the bulk of the bear market in 2000-2002. I came back too early in August 2002, sold in September, came back at the exact bottom in March 2003!

With this nearly perfect timing, you would think I have impressive compounded returns. That couldn't be further from the true. At the end in 2005, I did a complete audit of my 10-year record. It was prompted, among other things, by some things I read on the Spec List, mostly from the Chair but not only from him. So thank you guys for your down-to-earth audit-prompting approach.

Results of the 10-year audit:

Market timing resulted in dramatically lower volatility and draw-downs than the market; but who cares? It resulted in only a 2% over-performance compared to the index. In terms of absolute returns, beating the index by only 2% is ridiculous. It is incredible that even though I caught most major tops and bottoms in 10 years, I only over-performed by 2%. Even more sobering is that if I had kept the first 10 stocks I ever bought and never sold them, forgot them and never done anything else, my over-performance would have been 4%.

How could this happen? Well, that's very easy:

First, I caught all the actual tops, but also about 10 of them which never turned out to be tops. The market continued higher and I missed part of the move. Second, even when the top was an actual top and I was flat, it created the problem of knowing when to get back in, which in most cases occurred a bit too late. Third, buying and selling too much is created a lot of friction in the form of commissions. Over 10 years, the amount paid in commissions can be really impressive.

Based on this I decided to be always 100% long. I am not timing the market, styles, or anything any longer. I still hope to continue beating the market by a couple percent a year from stock-picking (probably more beta than alpha). I don't care if the results are more volatile. This is largely compensated by a huge decrease in workload and worry. Freed time can be dedicated to more useful pursuits, like learning to trade.

Jaime Klein writes:

I have, well, had, two now only one extremely financially talented relatives. The late one, when told I was going into the financial business, laughed rather rudely, I thought. And noting so many of my family members were already in that line of work, he asked me who was going to bring home the bacon. Well, he said, seeing as you're determined, I'd give you this bit of advice: Never buy a stock if in your lifetime you don't see it returning your original investment to you annually in dividends. And if they're any good, they only pay two percent.

Absurdly enough, his own results were so far beyond this as to make this counsel seem the most conservative expectation possible. He was probably 30 years ahead of the sage into Coca Cola, which he obtained by selling Minute Maid to them for stock. He never sold it except to buy the occasional Goya or Renoir, or make a charitable donation to Harvard or MIT.

I was aware of only two other plays: one was a quick flip which his partner told me netted over 100X in less than three years. The other was selling United Fruit, which I imagine he paid near nothing for, to Eli Black, right at the top back in the conglomerate heat of the '60s. I can't remember much about the foolish and ill-fated acquisitor except that he defenestrated himself shortly thereafter, taking his briefcase along with him.

Anyway, it's been my pleasure, while unfortunately lacking in outstanding talent myself, to have met so many ingenious and interesting people in my all too brief 65 years. One of these days I'm hoping I'll learn something from them. But in the meanwhile, it's always fascinating, albeit particularly in the political and religious arenas sometimes quite alarming, to see how clever so many people are.

From Scott Brooks:

Volatility is a terrible measure of risk. There is no risk on the upside of volatility. The goal should be to reduce all down side volatility, thus my patented investment strategy of buy low and sell high (Green List/Red List post from several months ago).

In all seriousness, I am fixated on the discovery of ways to mitigate downside volatility while participating in most of the upside of volatility. But since I'm far from the smartest person on this list and have been told in no uncertain terms that it can't be done, I feel like I'm fighting an uphill battle. Still, who knows, maybe there is a way!

I've never been one to give up just because others say it can't be done. If I listened to others (like my guidance counselors), I'd probably be laying carpet back in Maplewood, going to the corner bar, watching COPS every night, and aspiring only to be the "Maplewoods, King of White Trash."

From Craig Mee:

I accept these results, however…

Plenty of you know a lot more about stocks then I do. But I would like to offer here that a two percent increase in returns and with this, the opportunity to be out of the market in major declines, represents to me some nice sleepy nights.

With a bit of fine-tuning maybe marks can be picked slightly better on entering and exiting longer term positions. But on that black swan event, when something may drive the market into a huge selling spiral, I believe for me at least it may be worth that extra agro.

From Kim Zussman:

Similar but less quantitative self-assessments:

1. At least in US, taxes bite deeply into putative alpha (or masquerading beta) if you trade vs buy and hold.

2. Concur that most effect was lowering volatility. You will get lower volatility with stocks<100%, and pretty much always lower returns. Looking back, you will regret not being 100% stocks, but during the ride you live happier <<100%. Thinking about a big down year as a future possibility feels a lot different than having one.*

3. Besides drift, the reason buy and hold works is that there is too much temptation for the vast majority of people to time the market. It is unnatural not to check your investments, and not to be tempted to act on them. People don't like it when their million $ port becomes worth $800,000, and sell before "losing it all". Then it turns around and people don't like missing up 30% years, and buy back in. The hope-panic-irony cycle makes the market rise over time only for those not riding the emotocycle.

* The abstraction of future pain and foolish willingness to fall in love is nicely summarized by the late Sam Kinnison.

Jack Tierney adds:

I was invited to a dinner party but expected very little. The guests were getting thin on top and hefty through the middle. Our host was dressed in colors that defy the known spectrum and civility was to be shown the greatest horse's rectum. So we mingled and we spoke and mentioned our positions. I mooted that I was all in cash and was swarmed by five physicians. "Perhaps an evil humor attacked him on his flight or maybe he's an infidel who has yet to see the light." Their concern was very real and they needed to be consoled so I admitted that in addition I owned a little gold. Screams and wails followed and the panic gained momentum.

To quell the crowd I shouted, "Wait, I also own argentum." Now that they were fully aware of these judgmental flaws they ripped away my velvet gloves and exposed my hairy paws. They marched me toward the door when the host yelled out to quit, "Why this poor benighted soul has never heard of drift."

So began my lessons and I've brought them to the south, a bearish thought may cross your mind but never cross your mouth.

Abe Dunkelheit adds:

Bruno's post was very interesting. I made exactly the same observation. Market timing lowers volatility but doesn't guarantee any substantial out performance. And yes, one's first ideas tend to be much better researched than all these other in and out decisions. Never to sell them would have turned out the best in my personal case also.

And there seem to be people who don't make any professional impression and live a very retired life who tend to buy and hold and accumulate incredible returns without doing much.

I know about a guy in Switzerland who was retired and did it with wine. He bought all these Chateau Mouton Rothschild wines for USD 500 a bottle 10 years ago and they now go for USD 10,000 at auction because rap stars and Russian mafia are pushing prices up. I only know about this guy because I was one of the sellers. I had bought my bottles for USD 300 and thought a cool 60% gain in less than two years could not be wrong. He had an incredible cellar with all these wines, but his house and car and his whole appearance were very modest.

Another example I know about is a guy who was jobless and lived on social security, but had saved several hundred thousand euros [back then deutschmarks] and invested them through the accounts of his children. He put it all into Deutsche Telecom at the IPO and cashed in a 600% profit during the Internet boom. That was his one and only investment.

Mar

7

As I look at a chart, and wonder the next move in the great spectacle of global markets, an old prop trading colleague's response comes to mind.

In his words: "I asked my five year old daughter, 'where do you think this is going,' as I held up a chart which had a reasonable bias from lower left to upper right on the page. Then came the response 'don't be silly, Daddy, it's going up!'"

As I look to fade markets — which for some reason feels like a natural instinct to me, maybe due to the usually more volatile response of these pullbacks, this memory has saved me lots of hard currency.

There's a lot to be said for the uncomplicated power of youth.

Feb

13

Here are a few interesting points on the upcoming TV program, Living Old.

"The bad news is the price that they will be paying for the extra decade of healthy longevity, is up to a decade of anything but healthy longevity."

Within the next 25 years, the number of Americans 85 yrs of age and older will reach 60 million.

A few rough calculations have me assuming that this is currently the amount of people in the U.S. 65 and over. I realize we have spoken about health care as being a future booming sector, but 20% of the current U.S. population being 85 and over is astounding.

One key point: of all the elderly people interviewed, the lady who looked the "most with it" was a 94-year-old stockbroker, still belting orders down the phone, and yelling at her broker not to chase it…superb!

Feb

11

The back of my brain has been telling me for the last month of price action, as I glance through the numbers, that gold and the U.S. dollar are no longer best of friends (or at least reverse market indicators).

It appears to me that gold and the dollar index had a ambiguous correlation in the past, but all this has changed recently. Through the last month, gold has put on 8.3% (+55.9), while the dollar index has actually added .03% (basically flat).

I believe the Chair has shown in the past that relying on these inter-market relationships will lead to a diet of two-minute noodles. It looks like another one, at least for the moment, joins the graveyard.

Feb

8

The book titled The Oil Factor outlines a number of key points. Of note moving forward is negative price action. Oil this time last year was trading around 64, now it hovers around 58. If the March and April equities sell off materializes this year, and oil stays relatively flat from here (at least without any major shocks), there looks to be far too many positives not to open up the cupboard and polish up the cane.

When oil rose by 100% or more over a 12-month period, stocks during the next 18 months experienced an average monthly decline of 27%. (Sample period 1973-2003. That is to say, if oil rose by 100% 15 times, then this figure is the average of the percentage decline in the markets of the 18 months for those 15 years.) The smallest decline was 13%. It, too, wasn't straight down. There where times when stocks rose. But the average maximum gain of stocks following 100% rise in oil was only 4%.

Therefore, over 12-month periods where the rise in oil is greater than 100%, results of the following 18 months returns in stocks average are: 27% loss and 4% gain. Further breakdown as follows:

·    50-100% increase in price of oil: average loss 11%, average gain 17%

·    25-50% increase in price of oil; average loss 7%, average gain 25%

·    0-25% increase in price of oil; average loss 3%, average gain 21%

·    Less than 0% increase in price of oil; average loss 1%, average gain 30%

Feb

6

Maybe its time to run a water portfolio for the coming year….

I believe a recent post pointed out water utilities could narrow this down, as I believe a recent post mentioned this would be a good area in the field. A unit of General Electric will on Tuesday announce its first investment in the European water market, signaling its belief that water could soon rival the energy sector as a destination for infrastructure investment.

news.moneycentral.msn.com

Feb

6

If a market trades with regular volume of 20 lots a side, and trades fairly rapid fire throughout the day, you can bet your kids college fund on the fact that if a market then goes 2 lots on the bid and 80 on the offer and holds there for 4 x plus of a time period greater than the normal time of an execution without the small volume being given, that offer will be lifted pronto.

You can almost count it 1 … 2 … 3 … mine.

Victor Niederhoffer writes:

 This is a most interesting and creative observation that suggests many fruitful extensions. It may be the best way to show that volume matters - of course it's the opposite way from what is usually thought. Still, Justin Mamis had similar speculative insights.

Hanny Saad writes:

Very well stated and I agree with you [Craig]. Do you care to take a stab at what you think might be happening behind the scenes? 

Craig Mee replies:

There're probably a few options here, but certainly at times you do have one or two key buyers or sellers driving the market. When this happens, the small retail traders will lean against solid offers time and again. This will continue until a situation develops where the market has traded through several levels and where no more small sellers are there to be found, yet the one or two hungry sharks are still circling. Thus you get the situation, whereby we have only two on the bid (all retail punters are now already short or have been burned trying to lean against offers) and 80 on the offer. Thereby no one hits the bid, market holds, 1/2/3/ bang… the big fish can get size on and lift the offer….

So, in a nutshell, one reason this happens, I believe is due to one or two large corporations shipping in volume for a hedge (though I'm sure the list could offer other reasons). And if you have big enough pockets it can often pay to fade this move. Its not, however, always a smart move, unless you have a direct line to God.

Bruno Ombreux writes:

"[A]nd if you have big enough pockets in can often pay to fade this move, however its not always a smart move…"

That's one thing I've seen a few times when I was a professional oil trader. It is entirely anecdotic and not testable, but relevant to the subject. The nice thing about being a professional, is that one has people on the floor, and they comment on what's happening like, "Goldman on the bid for 10,000 lots."

Now, in the 1990s, 10,000 lots WTI was big size. And if it were Goldman, and not their commodity subsidiary J. Aron, it meant they were acting as brokers for a fund that was an outsider. When professional traders tried to move size, they rarely showed it that way. They worked it all day long, preferably through several floor brokers, to hide one's intentions.

What usually happened in bygone days, is that a lot of small people tried to front-run the 10,000 lots, on the theory that a big buy order is like a free call option. They probably expected it to be taken piecemeal, if it were to be taken, which would leave time to sell and get out if the size showed signs of being eaten away. And if the market went the other way instead of filling the order, it was free money.

But instead of the order being eaten piecemeal, we often got information like, "Hess just booked Goldman." Which meant a commercial filled the 10,000 lots in one go, probably for hedging purposes.

The market moved toward size and the result was that all the frontrunners saw nothing below, and got into a panic. It cascaded as they hurried up out of their longs and the market collapsed. It can be really fun if it happens a few minutes before the close.
 

Feb

3

To make money in longer term holds, you need several things to work in your favor:

-A market that trends well, and fundamentals that lend themselves to this condition.

i.e. commodities - the time it takes for inventory build up once resources are called upon,

interest rates - the four year business cycle/election period that lends itself to market moves being ongoing once trends change (and certainly lately at least, a federal reserve which promotes transparency that contains volatility which reassures market participants),

equities - the upward drift (taking long trades only), which may be due to many things however if companies do not make money and they don't stay in business; with technology moving forward, and manufacturing becoming cheaper, companies' ability to excel is greatly enhanced (the human desire to better themselves will be ongoing … we are not static creatures)

- With these underlying conditions, the trader slowly moves from a point of disadvantage to a point where he can cope with the cost of the churn … he can make suitable and ongoing decisions whereby he may move into the front seat at the movies.

This allows for greater than 50% of trades to move into the positive camp, and with multiple contracts on board, several escape hatches for the trader present themselves.

Of these 50% winning trades, if even 80% are scratched out against the the loses and only 20% move forward to multiple gains, the account balance should begin to move from the bottom left to the top right of the page

With persistence, consistency, discipline and patience, victory can be ours.

Jan

31

Since 1980, it has only been three years since we have not seen a year (as of '06) where there has been a significant sept. - dec. clear out of longs (using a variety of available weekly trend change indicators). These years are '03, '96 and '93. Of these years, the Dow finished relatively flat for one of them, which was in '93, and the bid for the other two were in '96 and '03.

In particular in '96, after the market had three relatively strong years, it still posted strong gains in '97 without a sept. - dec. sell off.

In all three years, however, the April hoodoo's came through the following year before recovering, maybe not a significantly strong sample, but maybe of interest nevertheless.

As the chair suggests, it may be a case where as the volume attracts volume, strength attracts strength.

J.T. Holley comments: 

So remember, as good as counting is, it ain't gonna change what happens tomorrow. So protect your stack (your portfolio) and never lose your stake (all your net worth and ability to invest). No odds are worth losing everything. You gotta live to play another day. -Sb

There are 52 cards in a deck with four suits.

66 stocks make up the Dow Composite with Industrials, Transports, and Utilities (3 suits). Playing Dow Theory is like playing the classic 21 cards a piece "War," meaning totally random and no strategy involved unless you're a cheater.

If you really want to step back and take in the big picture, there are 3000 stocks (operating or not) roughly on the NYSE and 2000 stocks on the NASDAQ NMS. This is what makes up the deck we call the Willshire 5000. That's it. All you have to do is know how many players are sitting down at the table like American, Fidelity, Vanguard with billion dollar portfolios, and then remember that it's like blackjack with ten decks. Most of the big guys don't take positions with numbers around five's and three's. This means that there is maybe 0.55% or 0.33% of a mutual fund that has 300 stocks in its coffers with one or two reserved for cash. I'm sure if you'd like to do the work, you could form enough hypotheses and tests to come up with something fruitful. I mean it's only 5000 stocks right?

Victor Niederhoffer adds:

These days, there is talk about it's having been 978 days from the last 10% decline, how the maximum is just 1050 et al, and ha ha, the day of reckoning is coming, and things like the decline in oil prices are going to cause the Fed to join the doomsday camp and knock the stock market down by raising rates because things are so good with energy prices going down that they have to act et al. Thus, no matter which way energy goes, it's bad for inflation. There are many statistical errors with the above reasoning that go far beyond the always suspect former Tennessee research outfit that was bearish all through the 90's because stocks were above book value the way they were in the 1929 era. It's a good statistical exercise that we all might profit from considering that it involves conditional expectations and predictions given a certain extreme range of an independent variable without knowing the form of the distribution itself. For others, the statement might better be bruited about among the 150 reasons to be bearish and to go against the drift among the good colleagues of the weekly financial columnist and his fellow performers. For those who would like to shed some light on the line of reasoning itself, what's required is a bit of counting. What is the life expectancy and the expectation given that you have reached a certain number of days without an x% move? Books on survival statistics are a great help here with our favorite being The Statistical Analysis of Failure Time Data by John Kalbfleish (Wiley Series). Not knowing the secrets of Rebecca, pi, or key level analysis, one has counted such expectations. The good news here is that like the crocodile or the oak tree, or Chorus Line, or Shakespeare himself, the longer a stock market goes without a big decline, the greater the expectation of going further once a threshold is reached.

J.T. Holley offers: 

Instead of utilizing survival statistics to attempt to predict the non-randomness of a -1% day or worse, how about looking at the frequency of the 2% up days that are hopefully gaining? We took a long spell of oct. '03 to june of '06 some 682 days in between the last time. Then the latest run is 156 days without one. It's always eyeopening to see how in the trenches, the smaller (quarters or thirds) up days on a histogram are winning the war in the quarterly battles of the war called drift.

Jan

30

The exercise of counting something by hand always teaches much more than can be learned by allowing a computer to do the work, and, even with a computer, I always like to enumerate the observations in order to go over them one by one.I believe that this type of attention to detail is what everyone should do when they are trying to improve or win at anything.

The same type of counting that one uses in cards, to count the number of aces and picture cards that have already been played in a game, is what I was doing last night to look at large daily moves in the S&P. Where have all the big moves gone?

In the following study I defined a large move as a daily percentage change of one or more either way, in S&P futures.

Number of large moves by period:

Jan. - June '03 — 51

June - Dec. '03 — 24

Dec. '03 - June '04 — 24

June - Dec. '04 — 21

Dec. '04 - June '05 — 17

June - Dec. '05 — 13

Dec. '05 - June '06 — 15

June - Dec. '06 — 09

There were an average of eight and a half large daily moves a month in the first half of 2003, and then four a month through to December 2004. There were three a month from the beginning of 2005 to the middle of 2006, and one and a half per month in last six months of 2006. Finally, January and February 2007 have two and one large moves respectively.
During the four years I looked at there were 91 large declines and 85 large rises. With the market going up about two percent a month, the small changes tended to be rises, and the big changes were skewed positively overall.

There was a tendency in the most recent years for the big declines to cluster. The expected number of big declines per month since 2005 has been one and a quarter. If the big declines were independent, the probability of finding one month with four of such is 0.01, and the probability of finding one month with five of such was 0.002 Despite this there were two months with five declines and one month with four.

There was a tendency for the months that had a higher number of large declines to also have a higher number of rises . Starting with 2004 there were four months with four or more large declines, and during these months the average number of large rises was two and a half, versus the regular average of one and a quarter. Such a difference has a twelve percent probability of arising through chance factors alone.

Except for the first six months of my study, when there were seven or more large changes in per month, there was no evidence for serial correlation of the data, with the only three months with a high number of large changes recently being April 2005, and May and June 2006. The former was preceded by a very normal month with just 3 large daily changes.

There have only been three declines of one percent or more since November month end, which occurred on December 12th, January 3rd, and January 25th. Each of these declines was exactly 1.17%, amounting to exactly 16.90 points down. During this two month period since November end, there have been no occasions where there has been a rise of one percent of more.

Since July 2006, there has not been a single month with more than two large day moves, and such a period has only occurred twice before in recent history.

Such are the regularities that emerge from a simple hand and eye study, and one has doubtless missed many more.

Craig Mee quotes an article from the WSJ: 

Is an End in Sight for the Dow's Long Run?

By many yardsticks, stocks are getting stretched. Perhaps the most convincing argument: It has been 978 trading days since the Dow Jones Industrial Average has seen a 10% decline from a high, the second longest such run on record, says Ned Davis Research. The Dow has gone 135 trading days without a 2% decline, the longest stretch since 1958.

The Fed's pause in rate increases last summer helped propel the latest leg of the advance. Why the market has risen for more than four straight years is less clear. A stable economy has clearly contributed, and other factors also seem to be helping.

A big reason for the gains: a strong run of corporate profits. Another key is low interest rates. Since October 2002, when the rally started, the yield on 10-year Treasury notes has averaged 4.3%, well below the daily average of 7.1% since 1962.

But there's reason to wonder whether these drivers might falter. In the latest round of earnings reports, roughly three times more companies in the S&P 500 have issued cautious guidance than on average, says Thomson Financial. Meantime, the yield on the 10-year note is creeping close to 5%. Last spring, when the yield on the 10-year note topped 5%, the Dow gradually fell 8% over two months.

If earnings waver, or if long-term rates keep rising, the Dow's long run could end.

Jan

22

It has been alluded to that during the Tennis Open, when a player is in trouble with injuries, cramps, or dehydration, instead of the opposing player finishing him off (which obviously seems like a great idea) … the match spirals into a seesaw affair. Is this due to the fact that only so many people possess that killer instinct, and people actually feel "sorry" for their opponent? … or does the tempo and hitting of the game change that much that the "fit" opponent loses direction and momentum, and thus finds himself out of sorts?

The parallels to the market, i.e. being able to take advantage of a winning period and putting the foot on the accelerator when able to … or being in a winning position only to observe changes out of left field, effecting normal market cycles, and status quo, are maybe self evident … Do traders go for the kill while maintaining risk parameters when in a good position or has the market mistress blown the minds and the trader's account so that many times before, they are worried where the next serve will land?

O wise humanity, terribly wise humanity! Of thee I sing. How inscrutable is the civilization where men toil and work and worry their hair gray to get a living and forget to play! -Lin Yutang

Victor Niederhoffer comments:

Mr. Mee reminds me of Yvonne Goolagong in that he's such a natural for trading. I only wish I had his ability so that with the hard work I am accustomed to, I could go very far. He writes about the Australian Open and notes that many matches where one side is injured ends up being very close or actually losing to the healthy. Racket sports is the one subject I am truly an expert on so I would like to comment on it. I have often been involved in games where my opponent is injured. One of the National Squash champs of my day had a tendency to faint in the middle of a match, go out cold for half hour and then come back and play much stronger. I knew about this and always redoubled my efforts when the game started, and won because of that. Sports Illustrated had a full page picture memorializing the victory. The market has that same tendency of playing possum, which of course is widespread in the natural world, and is covered in most books on camouflage. Since I'm not an expert I will leave it to one of our naturalists to generalize and model. However, the market of course has encapped this tendency. It frequently pretends to be totally weakened and attenuated. This is a snare and a delusion. The tendency can be quantified in many ways, and were it not for the Minister's ever vigilance, one would do so.

Scott Brooks adds:

In the natural world, it almost always comes down to experience. But before experience can occur, luck comes into play. Here's what I mean.

I have reached a point in hunting where killing a deer is not hard, whereas years ago, it was much more of a challenge. I've written about my first hunting experience and a few experiences thereafter, and the bottom line is that I simply get lucky.

When I'm hunting, I come across game all the time … young inexperienced deer that have never encountered a hunter. Many times, I can tell that they know I'm there … they can just sense something. Since what they sense has never been associated with danger to them, they ignore it. Since I'm not hunting these young inexperienced deer (too easy to kill), I let them go. They live another day because of luck (not because I let them live, but because they got lucky to cross my path and not one of the hunters on my neighbor's property who certainly would have shot them).

When dealing with an older, more experienced animal, it is a whole different ball game (whether buck or doe). These animals have a much higher sense of what danger is. They have learned what to pay attention to. They have almost developed a sixth sense to know when danger is present.

I have watched nice bucks coming into my stand, with the wind in my face (meaning they weren't going to wind me and pick up my scent), and I've been sitting perfectly still and have been completely camouflaged. I know the deer can't hear, see, or smell me, but then he stops. He goes on high alert. It seems as though every nerve in his body is like a highly sensitive radar, searching for whatever it was that alerted him. He may never look at me. He may never cock his ears in my direction … but he knows I'm there. There are a myriad of perfectly logical reasons as to why he senses me. For instance, when I walk in the woods, my pant leg brushes against a small bush, leaving the slightest amount of scent … and the wind (that seemed favorable from where I was sitting) blew that slight amount of scent his way … maybe the smallest number of molecules necessary for his olfactory system to sense it … and that one little molecule triggered a reaction in his brain that said, "Danger!". So he freezes, assesses the situation and slowly, carefully slinks into the brush, moving back the way he came (because there was no danger in that direction), and becomes invisible in a tangle of the wild. He won that battle.

The longer one has been around as a trader, the more likely his sixth sense is more highly developed and attuned to the very subtle nuances of the market … the more likely we are to pick up on the scent of danger … or said another way, because we are more attuned to the scent of danger, we need less molecules of "danger scent" to detect and recognize that danger.

As to camouflage, this is an interesting subject. When I hunt, I am in full camouflage from head to toe. You would think that this is pretty simple … slap on some army greens and go to the woods, but nothing could be further from the truth. Camouflage, proper camouflage is an art … it is literally a detailed process that begins way before going into the woods, continues on the trip out to the woods, all the way through the actual hunt, including the exit.

Simple camouflage is meaningless. Anyone can slap on army greens and go hunting. As a matter of fact, for the most part, the pattern of the camouflage doesn't matter. If I've done my prep work, I could go out into the woods in blue jeans and a shirt with muted colors, such as grey, brown, green, or even blue. As long as I'm sitting very, very still, the deer is not likely to see me. It is my opinion that the color pattern of the camouflage that I'm wearing has less than 20% bearing on the outcome of the hunt (maybe less than 10%).

Deer are basically brown with no real camouflage coloration or patterns, yet they are very hard to see.

On my farm, we keep statistics of deer sightings. Some hunters on my farm simply see more deer than others? Why is that? It is because most hunters are like inexperienced traders. They simply don't know what to look for. You see, most hunters look for "a deer." As a result, when they don't see "a deer" their mind registers nothing … when in reality, there was a deer right in front of them.

When I hunt, I don't look for deer. I look for movement. I look for a glint of sunlight off an antler. I look for a horizontal (the deer's back) in a vertical world (trees, weeds, switch grass, etc.). I look for the flick of a tail. I listen for the slight crunch of a leaf. I study my surroundings, and because of years of experience, I am more likely to figure out where deer will be, or where they will be coming from and/or moving to. Deer don't jump up and say, "here I am."

When you trade, you have to understand that the market never says, "here I am, buy me now" (and if it did, well then it would be too late). You have to look for the nuances in the market. You have to find the "glint of sunlight off the market's antlers" or see market movement, and see it before anyone else (or at least very many people do).

You see, when I go into the woods camouflaged, I am as camouflaged as I know I can be (and hopefully I'll get better over time). I've done my research. I know that scent is the deer's biggest defense, so I will be as scent free as possible. I will wash my clothes in scent free detergent and dry them in a scent free dryer (there is a whole process involved that I won't go into at this time just for this step). I take a scent free shower with scent free soap (what about my towel, was it washed and dried scent free and stored in a scent free plastic bag … another detailed process I'll skip for now).

Getting dressed … I do not want my clothes to touch anything that would give them a scent … and I do not want to sweat either (remember, I'm in my house putting on very warm clothes so sweating can be easy … therefore, I have a system of dressing that will keep me from getting sweaty … again, I'll skip that for now).

What about my breath? That's the biggest scent maker on my body as I have no choice but to breathe. Therefore, I brush my teeth with baking soda and I take four chlorophyll pills everyday (sometimes more) during the whole deer season.

As I go into the woods, I know I'm gonna have to take my time so I don't sweat … but I will perspire, at least a little bit. Therefore, I spray myself down with scent reducing spray.

I know that even though I'm careful, I'll rub against brushes and leaves (it's pitch black in the morning going into the stand and at night coming out … so I will rub against a few). So how do I combat that? I like to find cow patties, the fresher the better, and then I tromp right through them, getting manure all over my boots. Then, using my boots, I rub the manure all over my pant legs to act as a cover scent.

There is far more to this process (I'm even thinking about writing a book on the subject) than I will go into here, but I'll spare you all the details. The key is that I go into the woods prepared. As a result, I see more deer and harvest more big deer.

One must realize that trading/investing/advising is a lot more detailed than just showing up and buying. There are many nuances that one has to learn to recognize. There are many forms of deception that the market mistress employs in order to separate you from your money.

And you have to remember that in the market, not only is the mistress trying to separate you from your money, there are predators everywhere, that are hunting you too.

You must be willing to work hard, study hard and prepare hard, and develop your sixth sense. It takes years of practice, trial and error, a thick skin and a willingness to lose money … to get to the point that you can make money, and make it consistently.

There are many more analogies and correlations to be made. I'll save those for another day … as I said, I could write a book on scent alone … and scent preparation is only a small part of being a great hunter.

Just like _____________________(fill in the blank with whatever "one thing" you want) is only a small part of investing.

GM Nigel Davies offers: 

To the best of my recollection, only Tony Miles was the first to use the injury ploy in chess, with one of his best wins being on a stretcher. In minor form, the same tactic worked for me in St. Vincent 1999 where I was on crutches. It was especially useful that there was much snow and ice around, so I was sliding around looking especially vulnerable. Now in a game not involving legs, this really shouldn't matter, but I'm sure this has an effect on the opponent's primal subconscious. It says 'victim' and he sees red.

You can see a similar effect with the pretty pouting Russian girls sitting at their boards in Washington Square. Female players often seem to try and look vulnerable on purpose. It's also worth noting Stefanova's tendency to wear off the shoulder tops, which alone probably adds some 50 points to her rating.

The other main ruses include getting into time-trouble if your position is bad, though I must say that many people are wise to this one now and know what their opponent is up to. More subtle is the idea that if you are black and have a knight on c6 and want to bring it to d7, ceteris paribus, it's better to go to b8 rather than e5 as optically your position looks much weaker.

Russell Sears offers: 

Basically, the whole point in distance racing is to run your opponents into the ground, and then leave them. You learn to sense your opponents falter by subtle clues. His breathing rhythms change, the turn is not taken as sharp, and the hill is not met.

I once wrote of the poor high school girl that had Indiana's State Cross Country race in the bag, until she looked back and saw she had a big lead with 200 meters left. You saw her pace slow, then her form crumble, and the weight of the race hit her all in a few yards. With 100 meters left, she was staggering and weaving back and forth, and with 50 meters, she was down on the ground.

In the heat of the race, your body is in equilibrium. Once you let up the lactic acids and other poisons hit you, your heart slows. I always try to coach kids by telling them that if you want to hurt less during a race, push yourself harder rather than ease up.

An expert at this was Todd Williams. He would train with 400's at sub 60 second followed by 400's at near 70. In a race against fellow USA guys, he would rip the competition up, as they, knowing he was the one to beat, would try to key off his pace.

But then again I have been in many races where the pace, heat, wind, cold etc. were the real problems, and once one succumbed to the elements, it was like one was finally excusing himself early from a bad dinner party. They all soon follow. The last one standing is often the winner, despite staggering in at the end.

I remember a classic duel between Bob Kennedy and Todd Williams I saw at the Indianapolis US Nationals. Todd was better at the 10,000 meter and Bob at the 5,000 meter. When they met at Bob's hometown at his specialty, they went out running the first six laps of the 12.5 lap 5000 meter in sub 4:00 pace, despite it being in the 90's and the track temperatures in the 100 F. By about 3000 meters, Todd collapsed and Bob continued on and won, but barely hung on at the end.

Basically, if you are not prepared to lead or go into it alone with conviction, they can easily suck you into their vortex, and send you into a death spiral. It matters little if the staggering competitions are real, feigned or imagined.

Jan

22

Read how the Apple iPod index is replacing the BigMac one in Index Trumps the BigMac.
 

Jan

18

EUR/USD, by Craig Mee

January 18, 2007 | 1 Comment

A quick observation …

Since the start of 1995 through 2006, the opening week of the year in eur/usd has been the extreme (HIGH OR LOW) for the year nine out of 12 years … Will ‘07 follow this suit?

Tom Downing comments:

This looks pretty nonrandom to me notwithstanding the arcsine effect.

Define S as the number of years (out of 12) in which the min or max falls within the first week … In 10,000 simulated 12 year periods, here is the distribution of S when price changes follow a standard normal distribution: (mean 0, standard deviation 1):

S       N        Prob       Odds

0     988     0.0988     10.12
1     2504   0.2504      3.99
2     2984   0.2984      3.35
3     2145   0.2145      4.66
4     951     0.0951     10.52
5     324     0.0324     30.86
6     86       0.0086     116.28
7     16       0.0016     625.00
8     1         0.0001    10000.00
9     1         0.0001    10000.00
10   0         0.0000      NA
11   0         0.0000      NA
12   0         0.0000      NA

In only 1 of the 10000 simulations did at least 9 years of the 12 have a min or max within the first week.

If you assume some sort of drift (for example, since 2002 euro/$ mean = 3.3 pips with standard deviation of 68 pips/day), the probability of having at least one first week min or max increases, but the probability rapidly drops off after S=7:

S       N         Prob      Odds

0     579      0.0579    17.27
1     1814    0.1814     5.51
2     2789    0.2789     3.59
3     2460    0.2460     4.07
4     1473    0.1473     6.79
5     628      0.0628    15.92
6     210      0.0210    47.62
7     44       0.0044     227.27
8      3        0.0003    3333.33
9      0        0.0000      NA
10    0        0.0000      NA
11    0        0.0000      NA
12    0        0.0000      NA

Another approach would be to estimate the probability of observing a first week min or max in any given year (conditional on a price change distribution), and then calculate the probability of having at least 9 successes out of 12 trials under binomial distribution.

Vincent Andres adds: 

EUUS_W.DAT : column = OPEN 02/01/1995-25/12/2006

        WEEK_1 WK_MIN WK_MAX   DIFF
1995 1.2040  1.2040   1.3422   0.0000
1996 1.2740  1.2250   1.2837   0.0097
1997 1.2400  1.0556   1.2406   0.0006
1998 1.1091  1.0762   1.2085   0.0329
1999 1.1756  1.0098   1.1830   0.0074
2000 1.0133  0.8352   1.0256   0.0123
2001 0.8956  0.8437   0.9472   0.0516
2002 0.9016  0.8613   1.0100   0.0403
2003 1.0225  1.0225   1.2184   0.0000
2004 1.2352  1.1790   1.3444   0.0562
2005 1.3313  1.1709   1.3576   0.0263
2006 1.1854  1.1834   1.3353   0.0020

Read more here.

Sam Humbert adds: 

I took a quick look at this as a finger-exercise. Below is R code with some user-tweakable parameters, currently set to roughly mimic Tom's work (though I took a clean-room approach; didn't use Tom's code as a base). The idea, as suggested by Tom, is to find the "probability of observing a first week min or max in any given year," which is "Prop" in this R script, and turns out to be .177 (I'm sure Dr. Phil or others could find a closed-form solution) and plug this into the binomial, thus chopping out an order of magnitude of computing. The results I get are almost exactly Tom's, so either his work is correct (as usual) or he/I made the same mistakes.

Days<- 252 # Biz days in a year
Year<- 12 # Number of years
Week<- 5 # Biz days in a week
Sims<- 10000 # Number of sims
Data<- apply(matrix(rnorm(Days*Sims),Days),2,cumsum)
Prop<-sum(pmin(apply(Data,2,which.min),apply(Data,2,which.max))<=Week)/Sims
Prob<- round(diff(pbinom(Year:0,Year,Prop,F)),4); Prob<- c(Prob,1-sum(Prob))
Odds<- round(1/Prob,2)
data.frame(S=Year:0,Prob,Odds)

Days<- 252
Year<- 12
Week<- 5
Sims<- 10000
Data<- apply(matrix(rnorm(Days*Sims),Days),2,cumsum)
Prop<-sum(pmin(apply(Data,2,which.min),apply(Data,2,which.max))<=Week)/Sims
Prob<- round(diff(pbinom(Year:0,Year,Prop,F)),4); Prob<-
c(Prob,1-sum(Prob))
Odds<- round(1/Prob,2)
data.frame(S=Year:0,Prob,Odds) 
     S          Prob      Odds
1      12    0.0000     Inf
2      11    0.0000     Inf
3      10    0.0000     Inf
4      9      0.0000     Inf
5      8      0.0002     5000.00
6      7      0.0016     625.00
7      6      0.0088     113.64
8      5      0.0352     28.41
9      4      0.1023     9.78
10    3      0.2113     4.73
11    2      0.2948     3.39
12    1      0.2492     4.01
13    0      0.0966     10.35

Dec

12

As I left the Singapore trading floor, (as computers took over), I turned to a local Singapore trader and mentioned I might board a plane to Shanghai, and see what riches may behold me, his response “don’t bother, the bid offer spread up there will be totally soaked up. There is no thought process of hey he’s not a bad guy, adding a little bit of value, lets give him 2% of the cut it just doesn’t happen” …. Since the Aussies are in East Timor, go and try and export coffee or cane sugar out of there, you’d have more luck making a dollar”

This has always stood firm in the back of my mind, reinforced by Chinese New Year, in Singapore, when on going to work at 6.30 in the morning their was a group of 100 locals standing outside the UOB Bank at Raffles rubbing the money machine and the outside of the bank for luck and prosperity. I’m with Jim Rogers — the Chinese to all appearances are bigger capitalists than any of us westerners, and the dollar is king.

We had a fine Junto Meeting featuring Wharton Prof. Francis X. Diebold on December 7th. More than 100 were there to hear Diebold and participate in the discussion on market volatility and risk. We enjoyed meeting and chatting with many Daily Speculations readers, and look forward to our next event. Video of the event should be on the site soon.– Vic Niederhoffer and Laurel Kenner

George Gilder, editor of the Gilder Technology Report, will be our Junto guest on Thursday, January 4th. His topic is “Supply Side Investing.” As usual we will meet at the General Society Library, 20 West 44th Street — between 5th & 6th avenues in midtown Manhattan. We will chat, socialize and discuss beginning at 7 pm, and Gilder will start at 8 pm. Admission is free and you can bring as many people as you like. — Vic Niederhoffer and Laurel Kenner

Dec

11

Specs, may have something more to add here, but flat tax certainly seems to be riding the wave. Below is an article from The Global Guru entitled ‘How to Profit From the Flat Tax Revolution.’

Steve Forbes is probably the most public advocate of flat tax regimes around. In his book Flat Tax Revolution, Forbes discusses how simple flat tax regimes cut taxes, spur economic growth, and put a stop to a culture of tax loopholes. Forbes recently discussed his ideas at the London Junto — a monthly gathering of leading London investment professionals that I sponsor.

The philosopher Arthur Schopenhauer observed that: “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” The ‘truth’ of the flat tax is self-evident to every country that has adopted it. It’s ironic that it is most ridiculed in developed Western economies. A recent IMF report dismissed the flat tax as “something of a craze,” adding that “the flat tax has been marked more by rhetoric and assertion than by analysis and evidence.”

That’s just bunk. Countries that have implemented flat tax regimes have seen both tax revenues and economic growth rates explode. They also have been home to some of the best performing stock markets in the world.

In the first half of the 19th century, the flat tax was the norm. The first calls for a “heavy progressive or graduated income tax” came from Karl Marx in his 1848 Communist Manifesto. That the majority of countries that have flat tax regimes today are the former Communist countries probably has Karl Marx turning in his grave in Highgate Cemetery here in London.

The contemporary flat tax movement got its start in the mid-1980s with the publication of the book, Flat Tax, by two Stanford and Hoover Institution economists Alvin Rabushka and Robert Hall — the latter my macroeconomic theory professor at the time. Perhaps no economic policy of the last 20 years offers a better example of John Maynard Keynes’ much quoted observation that:

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly is understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”

That the idea of a flat tax could spread from Silicon Valley to Estonia — within a decade, no less — is remarkable. At the time Rabushka and Hall’s book was published, Estonia was still part of the Soviet Union.

“New Europe” has been the pioneer adopting flat taxes. With the exception of Hong Kong, every country in the world adopting the flat tax has come from the fringes of the old continent. Celtic Tiger Ireland was first out of the gates lowering corporate taxes to zero in the 1960s. The result? In less than a generation, Ireland’s per capita GDP now exceeds that of Germany, France and the UK.

The Baltic countries of Estonia, Latvia and Lithuania adopted flat tax regimes in the mid-1990s and have recorded Asian Tiger-like economic growth rates ever since. Russia introduced a flat tax in 2001 and tax revenues doubled. Others like Ukraine followed in 2003, Slovakia in 2004, and Romania in 2005. The tiny Former Yugoslav Republic of Macedonia adopted the flat tax regime only a month ago. The flat tax remains on the agenda in several countries including Costa Rica, the Czech Republic, Mauritius, Mongolia, Poland, Slovenia, Greece and Croatia.

Yet opposition to flat tax regimes in “Old Europe” remains intense. Angela Merkel was forced to back down from her flat tax position to win her post as German Chancellor. Germans associate flat tax regimes with “Amerkanische Verhältnisse” (”American circumstances”) — what they perceive as armies of workers condemned to a life of poorly paid indentured servitude at McDonald’s. In the UK, both the opposition Tories and the Liberal Democrats considered briefly incorporating flat tax policies into their party platforms. Sadly, both have backed away ahead of elections in spring 2007. Ireland’s success raised jealous hackles in the necks of EU bureaucrats. But after the EU forced it to raise taxes in the 1990s, Ireland eventually stood up to EU bullying and cut corporate taxes back to 12.5%.

The bottom line? “Old Europe” will budge only when its hand is forced. When neighboring Slovakia adopted a 19% flat tax in 2003, the Austrian government cut corporate income tax rates first from 50% to 34% and then to 25%. This policy not only kept companies in Austria about to defect across the border, but also attracted new ones. Today, Austria’s economic growth rate is double that of Germany and perhaps explains the presence of 50,000 German guest workers in the country.

But if Slovakia and Austria got it right, neighboring Hungary has gotten it remarkably wrong. Hungary recently raised corporate taxes. The results have been predictable. One entrepreneur I know simply closed his Hungarian company and incorporated in Wyoming over the Internet. If taxes were, say, a flat 19% as in Slovakia, he would not have bothered.

The flat tax is about more than just economic growth. Flat tax countries also have been a terrific place for investors to make money. The Russian stock market has been the best-performing market in the world since it adopted a flat tax of 13%. The Austrian market has been the #1 market in New Europe over the past five years. Turns out making money is about good policy and not geography. I’d invest in “Flat Tax Fund” over an “Asian Tiger Fund” any day. To me, that truth is self-evident.

Nov

27

I propose One of the biggest problems of trading successfully is the in-built work ethnic, that is instilled in “us” at an early age. This may be something which is regional or religious based, but I believe this certainly works against us when looking to apply discipline to allow for a nice gradual equity curve.

Being from the “west” and school’ed, fed and watered from day one in the pursuit to work hard, thus achieve , reproduce and run a successful family, is I believe not conducive to allow the best characteristics and education to become a trader.

To sit for long periods, and hold the gun, during normal working hours, even though you may of been cleaning the gun and burning the midnight oil looking into research , number crunching and the like, and have done the time, still does not prepare the individual for long periods of holding positions without lifting a finger. These positions also, maybe out of the money, in the money, flat for weeks, before a solid explosion in volatility takes off, where unless risk and money management procedures are solidly adhered to, the human conditioning of work work work, starts to take over, and interferes with correct operating procedures to gain the most out of the position. So in reference to discipline I believe this relevance should be centered on, more so because it is what predominantly disables it.

It could be argued regions, where less importance is placed on routine and normal work practices, could produce interesting results , which of course does nothing to take away from the need for a suitable trading plan and approach to trading.

Tony C. adds:

I have often tried to explain to the young uns’ how I can be wrong most of the time and still make money … and that is a problem with trading.

Typically, you go through 16+ years of schooling, where very early on you quickly come to learn that getting anything less than 9 out of 10 right is a sort of mediocre performance, and getting anything less than 7 out of 10 right is failing … and results in an 80 year old practically blind nun, (who inexplicably possess an arm like Koufax’s), nailing you from across the room with a felt eraser …

Which is to say, you become conditioned.

And then you engage in a profession where getting 6 out of 10 right results in great riches, and even getting 4 out of 10 right results in a more than comfortable living [if you gain 61 cents the 40% of the time you’re correct, and only lose 39 cents the 60% of the time you’re wrong, … and you play often enough.]

So, folks that did reasonably well in their main activity in their formative years are fighting 16+ years of conditioning.

“Geez, I’m right only 4 out of 10 times, I must be stupid to be wrong so often … my success is all luck, I’m a fraud”, etc, etc. If only we could all think like baseball players.

Nov

5

Several days ago on this web site there was an article regarding The Melbourne Cup. I had to see it for myself so on Saturday I attended Derby Day. Here are a few thoughts I would like to share:

Happy but Out of Pocket
Before the Carnival, I guessed the services would be overpriced. So I budgeted by placing only one Australian $50 bill in my pocket. I promised myself that I would not place bets on horses as I know nothing about racing. I kept this promise. The price structure of the complementary goods of gambling and alcohol was impressive, or dangerous is probably a better word. Champagne was ridiculously overpriced, while beer was much more affordable. It is my opinion that the beer priced at $6 had two purposes: to get patrons intoxicated so they would gamble more and to squeeze the last coins out of the unlucky pockets of losers. The small plastic bottles of champagne sold for $30 were effective in reclaiming money from any lucky winners.

The Grace Equilibrium
Everyone puts on their most beautiful outfit for the races. For men it’s simple. I only spent a minute donning my olive green Italian suit. Girls on the other hand, have been planning, shopping and using their creativity for weeks to come up with the most gorgeous dresses and graceful hair pieces they can find. I have never seen so many eye-catching combinations of colors, shapes, flowers and feathers. I wonder why hair decorations are so rare in today’s daily society. Since almost no one wears them daily, an individual woman would feel silly sporting one. However, if women wore these decorations daily they would collectively be more graceful. Maybe a small spark (designers, stars, wake up!) is all that’s needed? Tons of money could be made on decorations and designer hats if incorporated into daily fashion.

The Opposite Seasons
We are the first generation that can relatively easily cut down the four seasons in a year to just two. By having one home in each hemisphere, one can have twice as many friends and can experience the magic of spring and comforts of summer twice as often. For business this becomes a problem however. In most industries moving all staff members twice a year would be impractical. But I do see an opportunity here for some firms, especially small firms with young (childless) employees doing online business. Possibly a good way to attract the brightest minds without paying the highest salary? Offering a country swap and endless sun? I think this opportunity exists as long as there is an asymmetry between the number of firms operating this way and the fraction of people who would suit this unique lifestyle.

Craig Mee replies:

Just a quick reminder, Australia’s biggest horse race, “The Melbourne Cup”, is November 7. In 17 of the past 22 (and 11 of the last 11) years the Australian share market has closer high on the day. The average gain has been close to double the average loss. The effect on human emotion and share buying in the midst of one of the happiest days during the year in Australia cannot be under-estimated.

Oct

31

I am attempting to consider the analysis of jokes, e.g. James Lackey’s often stated “…get the joke…” as an aid to market analysis. The work of Arvo Krikman on Contemporary Linguistic Theories of Humour has been helpful. He divides this analysis into:

  1. Incongruence theories; the intersection of two different planes, incongruities, contrasts.
  2. Linguistic theories; those based on similar phonics or normal interpretations.
  3. Freudian theories; those based on the theory of the effect of humor on the recipient in allowing release.

There are many events associated with markets that make one wish to roll on the floor with laughter. The selling out at the exact low, the attempt to make a profit without risk, the guarantees of profit, the attempt to make money the usual tested way that leads to oblivion because the cycles have changed, the assurance that the fund is in great shape the day before it fails, the loss of an estate built up over 60 years with one trade, the failure by one tick to make a good profit with a limit order, the trader that calls you with a seemingly good bid or offer that you trade on right before a number or news event or earnings report terribly against you that its 99% they knew about when making the quote, the change in position based on an economic number that’s completely random, ephemeral, and certain to be revised in your favor as soon as you get out, the market move that occurs way before the news, the constantly one sided analyst who explains every event, no matter how improbable as supporting his view, the forecasters who can’t forecast, the Chinese Wall that supposedly separates the buy and sell side and advisory role of Wall Street, the constant backdrop of explanations for the market moves and reasons to extricate from positions when buy and hold would be so much more appropriate, the shooting stars and falling comets, the attempt to couch a bearish sentiment in bullish terminology, the profits that can come from disaster and the losses from triumph, the inevitable fall from the top of yesterdays superstars, the inevitable results of overconfidence, the tweaking from the recommended 60% weighting in stocks to 58%, the flimsiness of the foundation for many runups or rundowns, the executive of the public company that chisels a hundred bucks on his expense account or dating of options when his salary is $100 million a year, the investments that’s made partly for reasons that make one unpopular in the hallways of the service that you lose your entire stake on, the commentator that’s always bearish who relies on the broken clock to be right once, the fundist who hits the top when his sector finally goes his way and receives great public acclaim for it.

All this humour, and so much more, which I call upon readers to contribute, calls out for a general theory of market humour which is falsifiable and predictive, and helpful to the trading process.

I am more partial to a mathematical theory which strangely I haven’t seen, i.e. most of humor seems to be based on two events in some sort of probabilistic relation to each other- contrasts, collisions, unusual couplings, ambiguities, startling events et al. usually of a pithy nature. That’s it. When an event A given B is highly likely, P(A|B) is near 1 and B occurs and not A occurs or P(A|B) is near 0 and B occurs and A occurs, that’s usually the foundation of humor. Alternately if P(A|B) is much higher then P(A|C) and A occurs, but even though it’s much more likely that B occurred, C really occured, then that’s another Bayesian revision sort of humor. A linguistic aspect of humor typified by the bronchial joke must also be considerd. That’s the joke where a very attractive young man with a bronchial condition knocks on the door of his Dr.’s house and whispers to his very attractive young wife, “Is the doctooor in?”. “No, come right in she says”. That would be typified by P(A|C) is much higher than P(B|C). C occurs and then B occurs but not A.

J.T. Holley responds:

The one that jumps out to me is the old formula that is not defined but given as:

Tragedy + Time = Comedy/Joke

The key being what is the definition of a tragedy and equally important what is the appropriate time elapsed?

Looking at 1819, 1837, 1906, all the “Black Days” in ‘29 - ‘32, Oct. ‘87, 10/27 in ‘97, ‘98 Ruskie, the Internet Debacle ‘00-’02, one would say that we have had our tragedies. Throw in the Hunt Bro’s, Nick Leeson, and now Brian Hunter and you have more to poke at, but is it appropriate? Is the punch line the drift that the Mistress gives? It ain’t funny when you lose, especially money. The further we do get away, time has a wonderful way of healing due to our tenacity to come back. The bear camp doesn’t see the tragedies as lines in the joke; they don’t even get to laugh with giggles of resiliency?

I am so glad that I have the Holley genes that makes me have a love of peanut butter on my pancakes, and a smile on my face. This has always been thrown back at me as a sign of not being serious about life, but I can’t act or see life any other way than as Nock stated “as it is” with that smile.

Jimmy Buffet wrote the line “if we all couldn’t laugh we’d all go insane”.

I was thinking that the opposite of the formula above is also a wonderful joke the market provides if you have a sick sense of humor:

Comedy/Joke + Time = Tragedy

How many think they can trade/speculate but really haven’t any clue and submit their money to the Mistress? They give and as Vic states “lose more than they have any right”. This is the sickest of sickest jokes involving the markets due to the plethora of examples many more times than that of Tragedies listed above. Maybe that’s a key to those that have been Body Snatched? They aren’t aware of the part they play in the joke?

Sushil Kedia adds:

  1. Newspapers : All newspapers that cannot refrain from offering explanations of market moves post-facto. Particularly the electronic screen famous for its dark- back ground-orange text, despite its outstanding analytical tools.
  2. Experts: Columnists, newsletterists, bar-waitresses, friendly cabbies all espouse opinions worth only the size of their exposure to the markets. The world doesn’t want to get the joke because the formal from such ones are the experts who are selling ideas which as though would otherwise still be getting rich on their own.
  3. Margin of Safety : So bad that one holy grail is believed to be truly existent since the wealthiest of the the investors seems to have actually implemented this but nothing else.
  4. Insider trading regulation: the assumption probably supporting such expenditure of effort is that one day they will be able to or willing to put to end from where information on each thing begins! End the beginning? What’d be leftover then?
  5. Free markets: well to put the idea getting my mind for a while on this core issue finally a joke: girl fights up with her boy saying he is being much of an easy flirt. Boy laughs back saying, “Well, you are quite a believer in free sex. Aren’t you?” Girl yells red-eyed, “free sex! My foot” Boy says with a deep cold sigh, “well just tell me then what have you started charging ?”

James Sogi responds:

Humor has the element of surprise, the unexpected. That’s what the market gives, the unexpected. Its never what you might think it is, its always something else, something counterintuitive, not what you expect. And it knows ahead of time what you are going to do and sees you coming. Like the thread on the group mean, the group knows everyone’s secrets, for it is theirs. The market trains you to go the wrong way, feints, always gets you off balance. You need to be a step ahead, look over the horizon, over your shoulder. You can’t be a step behind, reactive, you have to lead and take the initiative. Following is too late. The reflexes are not fast enough to defend in the market, you have to punch first, and let the others in the market defend, and have that split second initiative advantage. On longer terms get that strategic edge moving the troops first,. Like lack says, don’t let the joke be on you. You have to beat it to the punch line. Why do you think its called the “punch” line? Just like a punch, the reaction is always slower. Got to beat the market to the punch, bob and weave, come in low. Keep your distance. Always protect yourself. It really not all that funny except in a self deprecating sort of way.

Tom Larsen replies:

While I was working as a no-advice broker, a Texan who had added several spreads to his option position, told me: “I got myself so I don’t know what I want the stock to do”. Maybe it’s funnier when I say it out loud with a drawl. In any case, it shows how people think they have a simple financial product figured out and then realize that they are in over their head. Some people who hear this are laughing at the guy who seems inferior, but thinking, “this could be me!” Or it could be reminding us to not get too cute with our positions. Don’t take on more complexity than necessary. This is probably just a variant of a common form of joke where we laugh at somebody who gets confused. Superiority humor?

While working as an option market maker in the pit, it was common for traders to deconstruct the trading day in the brokers lounge after the close. During one such conversation another market maker told me that during the day he had been so desperate that he “would have paid anything for those puts. Fortunately no one would sell them to me.” This is very deep for me, and reminds me that sometimes you can be unaware flying full speed toward disaster, and the only thing that saves you is grace. and it reminds me not to panic. This joke is probably funny because of the reversal implied as the speaker is clearly aware of his good luck. It’s like the feeling you get when you tell someone about the near collision you avoided on the freeway. There is a release, relief and relaxation at the end.

James Lackey responds:

Why did god make chartists? To make weather men look good. The mistress of the markets can make traders look so foolish at times, it is much better to laugh than to cry. Your only as good as your last trade. However, your next trade might be your last, make it a good one.

The worst market jokes are those that everyone has known for years. The market makes “you feel” like a child. You start your joke to friends: a priest, Jesse Jackson and Clinton are all on an airplane that is about to crash. Your Dad, the old man immediately chimes in and crushes your joke “only two parachutes get back to work!” They have heard them all before.

The joke is “housing is a disaster, the consumer is all tapped out” the news tape blinks Bulletin: “US Housing lowest level in 30 years.” The market immediately goes to the punch line. The old codgers come in, at the market “take it and bid it.” The time and sales boys say “my limits never get filled all size trades the offer all day, who knew?”

Perma bear brain teaser: Bond prices fall as traders sell bonds to buy relatively cheap US stocks.. .interest rates rise, consumer sentiment falls, bonds rise on slowdown fears, stocks rise due to lower interest rates and future uptick in consumer spending, bonds fall as traders sell bonds to buy stocks. Market rallies 6 weeks in a row on short covering.

We watched Yes Men last night. The movie is a Sundance comedy. A couple of jokers start a website to mock the WTO. To their delight no one actually reads the website and offers them speaking engagements. They mock “free trade” and the “government of, by and for the corporation.” Their last speech they had to regrettably cancel their presentation to Australian accountants. Their reason for a program change was the WTO was to be disbanded. The post interviews with the seminar participants was hilarious. “its great to see an organization admit their faults, scrap the program and restart from scratch.” I was laughing so hard my wife called upstairs to see if I was okay! I said yea this skit is hilarious. Now the sad joke. She says, “that is good Jimmie, that is the first time Ive heard you laugh in 6 weeks” yes Jennifer as you have heard, the markets were strait up for 6 weeks.

About two weeks into the fall rally, the headlines read Ford Motor company might go private. All the talk of how bearish and difficult SBOX is for public companies we thought, wow a double bullish whammy for the indexes. IPOs are far more difficult, the cash flow rich, no growth, dead money stocks are going private, a simple reduction in supply. All that index money must be reinvested in the market. Ill buy the next pull back. What if there is no pullback? Joke is first down move was after a huge “made in China,” bank IPO.

Speaking of Chinese stocks…Is it possible to make an ETF of Chinese stocks that are unregisterable on the NYSE, yet float the ETF as a “Chinese investment”. Oh the joke is an ETF on private equity.

The daytraders joke they are never right, why bother? The funniest joke is everyone can be right if they wait long enough. You might go broke waiting, but eventually you can be right. Funny debate between admitting your wrong or the market is right vs. your right, just too early. Of course we strive to be rich rather than right, until your rich, right?

The worst market joke. Get even post from Mr. Clive. From the Yra Harris interview….Inside the house of Money:

The worst thing you can do in a trade is try to get back to even. I call that the “prayer trade.” I can spot guys on the floor who have it on because they shake back and forth, basically in prayer, mumbling, “oh, please God, just let it come back to me. Let me break even.” What is that? Break even? That’s a loser. I’m not in this business to break even. There’s always opportunity in the markets, so forget breaking even. If breaking even is your goal, you’re not trading anymore.

Rick Foust on traders:

Here is a short one that reminds me of some trades/traders.

Question: What is an Ohno bird?

Answer: A bird with 5 inch balls and 3 inch legs. When he comes in for a landing…

Quick followup.

I have this placard on the instrument panel of my Cessna.

“TAKEOFFS ARE OPTIONAL. LANDINGS ARE MANDATORY.”

Craig M. shares a market truism:

The best joke of all is that the market allows you to think you actually know what you’re doing at times, and while you may profit during these times you never ‘make enough’ and when you lose it seems even worse. The actuality is that you never really knew anything in the first place.

Oct

18

For those interested in the recent move up in agricultural products like wheat and corn, you may enjoy this read by Jim Sloman. Here is an extract:

The Great Plains of the United States is the world’s bread basket. Half of all the grain exported in the entire world comes from the U.S. Great Plains.

Beneath the Great Plains is a vast underground reservoir of water called the Ogallala Aquifer, laid down through eons of geological time. Water drawn from this aquifer through millions of wells has helped to greatly increase grain yields in the last half century because the water can irrigate crops whenever and wherever desired.

Similarly, there are vast underground aquifers beneath the farmlands of China and India-who along with the U.S. account for half the grain grown on the planet-as well as in many other countries around the world.

The experience in the United States is being replicated in these other countries. That is, water from these gigantic aquifers has been tapped in the last 50 years to greatly increase crop yields worldwide, particularly on lands that are dry or somewhat dry.

However, there’s a catch. The increased use of electric and diesel pumps since 1950 has hugely increased the amount of water that can be brought to the surface, but in doing so the amount of water in these deep aquifers has been dropping.

I certainly know that things here in Australia (the drought) haven’t been this bad for a very very long time, from the West to East Coasts almost all areas — cotton, wheat, and fruit crop lands –are in dire straits and most have had only one decent season in six years. And the weather and rainfall are worst than ever. (Sydney has just had its hottest October ever with consecutive days of 35C)

Prof. Gordon Haave replies:

This story is a little bit alarmist, at least as far as the U.S. goes. The U.S. has been harvesting its aquifers for a long time now, and the decline has been slow (although I suppose that is a relative term). What is obvious, although not mentioned in the article, is of course that aquifers are replenished over time. Now, we might be taking water out faster than it is being replenished, but it’s not like one day the water runs out and there is no more. The required cutback might be rather small.

The real problem, of course, is simple economics. Scarcity dictates that the sum of wants for any particular good that is free is greater than the supply. Property rights, the free market, and the rule of law overcome the scarcity problem.

However, property rights have not really been extended to aquifers in any meaningful sense. Extending property rights in some form or another will solve the aquifer problem, but of course those who get something for free have a strong interest to lobby the government to keep it that way.

J. T. Holley replies:

I would definitely like to say that the “invisible hand” of Smith shall take care of overage of price and the underage of water. Latin America is slowly and rather quickly in other aspects becoming the “bread basket” of the World. In the “Global Economy” in which we all chip in, food is Latin America’s contribution. Need I mention most U.S. restaurants in the last five years having “Chilean Sea Bass” on their menu’s? Also, Julian Simon if alive might make a bet with you concerning the upswing in prices of corn, wheat and such? I certainly will sell you some long term calls if you’d like? Desalination will most certainly be a technological breakthrough in years to come with entrepreneurs flooding (no pun intended) the space in my opinion. If we can produce “grass seed” for my yard to make “drought resistant seed” then I assure you that corn and wheat can be accomplished in the same manner.

Oct

10

Could markets' price action be directly related to their nations' overriding mindset? For example, German markets might be influenced by a society which:

1. Performs duties meticulously but can go overboard.

2. Has a degree of arrogance.

3. Suffers somewhat from melancholy.

Could we have a set of adjectives which describe major countries e.g.. US, UK, Germany and Japan, and have them directly related to the distribution which occurs during a trading day. For example, could the German mindset above represent efficiency but a tendency of pushing markets to extremes?

Oct

10

Lately, I've been contemplating the lessons that I've learned in my life, with special emphasis on the things that I learned, believed, and found out later were wrong.

I wonder what I don't know now that is hurting me as a father, businessman, husband, etc.

For instance, I never bothered with counting. I relied solely on technical analysis and my ability (or what I perceived as my ability) to recognize patterns and tendencies. If this list has taught me anything (besides the necessity of counting), it is to test my premises and try to falsify.

Let me give you an example of something that happened to me over the 4th of July weekend.

My family went down to our lake house for the week. We went over to the Current River to sit on the shore and let the kids swim.

I absolutely hate doing that. I hate the intense heat coupled with the bugs. I hate sitting on a gravel beach. I hate getting grit in my swim trunks (it always seems to find its way into uncomfortable areas).

But what I hate most are the types of people that are there. Now before you judge me for what I'm about to say, please hear my confession to the end and my followup request for forgiveness.

I didn't like the people that frequent those gravel beaches. I don't like the way they act, the things they do and they way they behave. I don't like their lifestyle. I simply don't like much about them. Basically, they were the epitome of white trash.

I was sitting on the gravel beach, next to my dad, step mom, and 4 year old. My wife and older 3 kids went downstream about 200 yards to play on a rope swing (swing out from shore over the river and let go…lots of fun, if you're a kid).

The people on the upstream side of me were listening to some country music that I didn't like, were guzzling beer, and chain smoking (I hate the smell of smoke). The people on the down stream side of me were smoking and guzzling beer, and listening to some weird bluesy thing that I didn't like (please note, all these people drive their cars right to the shore line and turn on their stereos). The people on the sandbar behind me were listening to Lynrd Skynrd which I do enjoy, but couldn't hear too well because of the other idiots' loud music…but that didn't matter because the Skynrd crew was directly upwind of me, so I got to smell their smoke.

The conversations that were occurring around me were enough to make me want to jump and strangle them all. "My stupid boss was b!+ching at me again, for being late. But I was only 1 minute late, so I wanted to tell him to #$%#^$$ off" Basically I was surrounded by the inane conversations of low IQ, low personal drive, low self esteem, lazy, under educated, union mentality, entitlement mentality, tattoo adorned, chain smoking, alcoholic wife beaters, who's lifetime highlight was when they were on COPS! Yes, typical white trash.

At least that's what I was thinking. I know that's harsh. But it's what I was thinking.

I guess I'll confess right here that I have a hard spot in my heart for white trash because I grew up with them, played with them, fought with them (read: got my butt whupped), got stabbed by them 3 times, and was bored with their inane idiotic low IQ conversations.

Anyway, back to the story.

I decided to walk down stream to watch the kids swing.

As I got within 100 yards of the rope, I watched my 7 year old son, Hunter, take his turn for a swing. He walked way up the hill with the rope, ran down, kicked his legs up and started his swing out over the river. Unfortunately, he held the rope to low, so when the rope snapped taut, Hunter went crashing into the water right at the edge of the shore.

I watched him climb out of the water with a pained look on his face and could see him mouthing the words, "ouch, ouch", and holding his leg.

My 11 year old son David walked over to Hunter to see what was wrong. David's eye's got real big and he started screaming to his mom, "Mom, get over here, Hunter is hurt". At first Gwen didn't know what was going on, but when David yelled, "Mom, Hunter is cut bad, I can see his bone", Gwen sprang into action. She turned to yell for me to come over and help as she was running out in the water to get to the other side of the river (the rope swing was on the opposite from where we were).

I turned to one of the one of the people that I had classified as white trash and handed them my hat and sunglasses and asked them to "hold this". They did so without hesitation. As I ran out into the river, I was contemplating how to get Hunter back across. I saw a "white trash lady" with an inner tube. I was going to ask her for the inner tube, but I didn't have a chance to ask as, she was already running towards me with the tube saying, "Take this across to get the boy".

As I was swimming across, I noticed another man was ahead of me almost to the other side already. He ran up on the other shore where my wife, Gwen was already with Hunter. He ran up and said, "I'm an off duty police officer, let me help".

Now as a rule of thumb, when someone is hurt, you're supposed to stay calm and let them know everything is going to be ok. This "white trash off duty police officer" took one look at Hunter's leg, and dropped the F- Bomb, "Holy F###". But even with that faux pas, he took charge. He grabbed Hunter's leg, and applied pressure, got a wrap around it.

I finally made it to the shore, and saw that things were as under control as they could be with Hunter, so I started to strategize how to get him across the river.

At that moment, a group of "white trash canoeists" were coming across the river. A whole group of them!!!

The first one to make said, "Put him in here, put him in here, we'll get him across". So I picked up Hunter, cradling him in my arms, with the "white trash off duty cop" still applying pressure to his leg and waded out into the current.

When I got to the canoe, the "white trash lady" in the front jumped out and said, "get in here", helped us in, got Hunter and me situated so I could apply pressure to his leg, and her husband started paddling us across. I have no idea what happened to her, except that I could hear her yelling at her husband, "Paddle faster, paddle faster".

It was then that I noticed, as I'm paddling with my right hand, and holding Hunter's leg with my left hand what was happening in front of me, upstream.

A whole group of canoeist were coming downstream, but in front of them, blocking the way, was a whole bunch of "white trash people". They were directing them to the shore and out of our way. I heard several other "white trash people" yelling upstream to another group of WTP to bring down their power boat to get us upstream (actually it was the group of WTP that was smoking, beer guzzling, and listening to some weird bluesy music right next to where I was just sitting 5 minutes ago) that had the powerboat. They started coming down stream to help.

By this time, we were in shallow water (maybe thigh deep). All of a sudden, WTP started running out into the water, getting on both sides of the canoe, grabbing it, and pushing it up stream.

I was yelling up to my father, "Bring the Ranger down, Dad, unhook the dogs and bring the Ranger down" (we had my Polaris Ranger with us at the Gravel Beach). Unfortunately, my dad didn't hear me. However, that didn't matter. Some WTP ran up to him, told him what was happening while another WTP was unhooking the dogs from the Ranger.

My dad jumped into the Ranger and started coming towards us. As he's driving down the gravel beach, WTP are moving their chairs and coolers out of the way so he could get by.

When I saw him coming, I told everyone pushing the canoe upstream to get us to the shore, which they did. I jumped out and grabbed Hunter and started running up the gravel beach.

Just as my dad and I met, and I was putting Hunter into the Ranger, handing him to his mother (I have no idea how she got there), a WTP ran up to me and said, "Here you go buddy, good luck with the boy, the nearest hospital is in Ellington". The reason he said "here you go" was because he was running toward me to give me back my hat and glasses.

I have no idea what happened to that inner tube that fine lady shared with me. I have no idea what happened to that canoe, that off duty cop, the person who gave me my hat back, the people who pushed the canoe, the people who directed the canoe's toward the shore, the guy in the power boat who tried to get to us…I have no idea whatsoever. I don't think I would recognize any of those people if they walked up to me and said hello.

All I know is that the same people that I was just looking down upon as white trash with just short of disdain were the ones who had, without question, jumped up and helped me rescue my son from his precarious situation. They had given of themselves and helped me and my family!

I wonder, how many more blind spots do I have in my life? How could I have let myself get so blind so as to not see the goodness within people? How many other areas of my life am I missing out on opportunity because of preconceived erroneous notions?

How does this effect my trading? Where am I lacking wisdom, or worse yet, where am I ignorant and don't know that I'm ignorant?

I am on a mission to find those blind spots. I want to then falsify and remove them from my life.

In the meantime, I owe all those wonderful human beings on that gravel beach an apology.

Craig Mee replies:

I offer that, being in situations you are used to, (ie WTP having probably most holidays and weekend breaks in the same areas ) breeds familiarity and confidence and thus a solid framework, for moving into top gear and showing a professional evaluation of the circumstances when needed. Though bring others in with no knowledge of local condition ie, depths, drop offs, road access, and the like, and they will fail miserably , no matter how good the intentions. > > Maybe the old adage of , trade markets you know, and in a crisis where, most downside will be, you will surprise yourself, by how well you dealt with it.

The President of the Old Speculators' Club responds:

A friend of mine who reads this column asked me why I was writing a three-part series about "rednecks" when there are so many other things going on right now that are worth writing about. It's a worthy question. And there are many reasons why I consider the discussion of "redneck" America timely. Here are just a few:

1. The slow transition of our economy from one fundamentally based on domestic manufacturing and production to one based on technology and services — that imports its hard goods from other countries. This has implications for the future of such typical "redneck" (and largely unionized) vocations as factory work, trucking, mining, auto assembly, etc.

2. The cultural shift that's challenging (some would say marginalizing) such historically mainstream American institutions as the practice of religion, heteros-xuality, opposite-s-x marriage, military service, citizenship, firearm ownership, private property rights — and scholastic, athletic, or workplace achievement through competition. Many of these things are staples of "redneck" life.

3. The fact that America is currently at war (or at least militarily engaged) on multiple foreign fronts. As you've just learned, this has major "redneck" ramifications.

Basically, my overarching point in devoting so much ink to "redneck" America is to show just how integral to the American fabric (and economy) these people are — no matter how distasteful that fact may be to many who are now front and center in the mainstream media. And indeed, many Whiskey & Gunpowder readers who rendered feedback on the first two parts of this series wrote in with their own positive anecdotes and affirmations about the shunned, yet vital majority these pundits call "rednecks." But a few criticized me for not painting the whole picture of this huge segment of Americana.

Oct

4

Interesting that in Sydney's property market, the last area of housing to increase in price was from the socio-economically disadvantaged, and these guys were still buying when the richer suburbs had pulled up stumps. Now they are left with massive drawdowns and problems on a number of fronts, i.e. employment and servicing loans.

This seems to be a classic example of what to look for when analyzing where a market is in its cycle of price discovery — the least educated and responsive are last in.

It also reminds me of working on broking desks for years and dealing with major banks over significant U.S. figure releases. I surmised that there was a four tier response in price action over these numbers:

1. Locals with their own screens hitting bids and offers as these figures came out.

2. Bank Dealers on telephones (as it was overnight in Australia) being told what the numbers were, and dealing accordingly.

3. Bank Dealers asking to be rung after the numbers, and subsequently placing bets.

4. Retail customers calling in , and believing they where on the pulse as they only called five minutes after the numbers were released.

In reference to No.1, a bank dealer (who had recently seen some locals in action) said to me "I will never ever trade over a number again, after seeing the execution skills of those Locals, I am just too far off the pace!"

Sep

21

I have  read a couple references to the Equinox and just too many cases to not to at least be respectful.

Legendary trader WD Gann claimed that more than any other day Sept 22 marks a turning point in capital + commodity markets. September 22nd (Friday) as a cycle date is Autumnal Equinox. The window includes the day before and after.

Could it be Natural Gas? Amaranth's long positions are probably squared now. Finally gas can rise? Could it be oil? Arbor's DSI Matrix shows oil's bullish sentiment at record lows as the price hits 9 month lows.

Could it be stocks? The Dow is just 200 points from an all time high. S&P trades are at a high for the year and the highest since February 2001, but in yearly resist 1301/1338.

Could it be bonds? The US 10 year is at a 6 month low yield.

It could be that the Autumnal Equinox passes without hitch, however it is worth noting that the few days around September 22nd have in the past marked major highs/lows and markets are trading at extremes.

Dr. Kim Zussman responds:

This looks like a testable question, so for a quick look I used SPY daily closes (yes, with dividends, including effects of deletions, additions, etc) since 1993 in the following scheme:

At the turn of each month, I noted the high close of a period of 7 days centered around the 22nd of each month. Then I compared this high with the high of a 40 trading day period centered on the same day. If there is a match, then the high close around the 22nd is a "major high" (not to be confused by anyone growing up in the 60's), and then note the month. Thus, if highs occurring around the 22nd of each month are major highs, and these are more common around the autumnal equinox, we would expect September (month 9) to dominate. BUT here is the list of months when highs around the 22nd corresponded with centered 40 day highs:

1
2
3,3
4
5,5,5
6,6
7,7
8,8
10

OK, no Septembers. Nor Novembers or Decembers.

My bet on margin is that equinoxes correlate best with calendar dates when the sun spends nearly equal time above and below the horizon.

Sep

19

Does fear in sport , as in the market put your opponent in the drivers seat? or does it depend on the personality of the warrior / trader, as to how this will effect the final outcome? I forward to you an article from Buenos Aries:

We hate Hewitt, says Nalbandian — From correspondents in Buenos Aires. September 20, 2006.

FORMER Wimbledon finalist David Nalbandian stirred the seeds of animosity ahead of the Davis Cup semi-final clash between Argentina and Australia by claiming his teammates don't like Lleyton Hewitt.

Hewitt has been at the centre of several spats with Argentina over the past few years and the ill feeling has grown to such an extent that he has reportedly employed two Australian bodyguards for the trip to Buenos Aires this week.

"No-one is friends with Hewitt and he does not worry me at all," Nalbandian, who was beaten convincingly by Hewitt in the 2002 final at the All England Club, said.

"We won last year over there (4-1 in Sydney) and now we will win here."

There had been talk that Hewitt would pull out over security fears but Nalbandian thinks his presence in the team will make little difference.

"With Hewitt, this tie will be a little more difficult but that doesn't change much really," added the world No.4.

"Whichever team comes here to play knows that at home, we are very strong, and now we have a great chance to make the final."

Argentina captain Alberto Mancini echoed Nalbandian's sentiments, claiming the circus surrounding Hewitt's appearance would not distract his team.

"The issue of Hewitt and his security (which includes six local security personnel) is something that everyone is talking about but it's not something our team is worrying about," he said.

"We respect Hewitt but my players can beat him."

Earlier, Argentina's Jose Acasuso blasted Hewitt for overreacting to the perceived animosity he will encounter.

"Hewitt seems to think that he's come to Iraq, that they are going to plant a bomb," Acasuso said.

"But we're not bothered because this is the circus that he wanted to set up. Nothing's going to happen and we shouldn't pay any attention to it.

"We're just worried about Argentina. Whether Hewitt has one bodyguard or 500 bodyguards, that's up to him."

Former world No.1 Hewitt, who was named alongside Mark Philippoussis and doubles specialists Wayne Arthurs and Paul Hanley for the tie, had previously expressed reservations about playing in the tie because of security concerns.

The bad blood between Hewitt and Argentina began at last year's Australian Open when Juan Ignacio Chela took exception to the Australian's histrionics and spat at him as they changed ends in their third round match, copping a fine for unsportsmanlike conduct as a result.

John O'Sullivan answers:

Yes and no, if we take cricket as the sport in case. There are few more exciting sporting spectacles than a contest between a hostile fast bowler and an aggressive batsman in international test cricket. A truly fast bowler is capable of delivering the 5 1/2 oz hard leather ball at speeds approaching 100mph. Over a 22 yd pitch that takes just over 0.5 seconds to arrive at the batsman. The batsman must select and execute his shot in that very short interval. Remember that in cricket, it is perfectly legitimate for a fast bowler to deliver a "bouncer": a short pitched delivery aimed at the batsman's chest, throat or head. Obviously, the aim is to intimidate and unsettle the batsman. Often a simple, straight ball aimed at the wicket will follow. This is a classic fast bowling sucker punch - a scared batsman will fluff the shot, and get bowled out.

From personal experience I know that no other sporting experience produces an adrenaline surge like going in to bat against a really fast bowler. The ball may be traveling so quickly that you can barely see it. In the amateur game the pitch may well be uneven, leading to dangerously unpredictable bounce. As a batsman you know that when the bowler releases the ball it may well be flying toward your face or ribs at 90mph half a second later. If you get your shot wrong, you'll get hit, and it will hurt like heck.

The fear causes a massive adrenaline rush. As a batsman you must harness that rush, as it sharpens your perception and quickens reactions. You must concentrate totally and absolutely on the ball in the bowler's hand as he runs up. And you must try to play freely and naturally.

When an aggressive batsman faces a hostile fast bowler, they will seek to dominate each other. The bowler will bowl bouncers to intimate the batsman. The batsman may "hook" those bouncers. The hook shot requires tremendous nerve and skill. The batsman doesn't attempt to duck or swerve the ball, but stands in line, allowing it to approach his face. He then plays a cross bat shot hitting the ball high, behind and to the right ("to leg") just as the ball comes on to his face. If he can execute this shot correctly he will score heavily, and dominate the bowler. If not, the bowler dominates, and the batsman may be hit in the face.

All batsmen where padded gloves, pads on the legs and a "box" to protect the groin. In recent years helmets have become common place. Less confident batsmen may add arm guards, thigh pads and chest guards.

The more heavily padded a batsman is, the less free his movement. Helmets can hinder vision. So the more protection a batsman has, the less able he is to apply technique to deal with the threat.

If a batsman is confident in his own abilities, he won't hinder his movement with too much protective padding. Market analogy: confident traders will not use stops.

A great batsman must have natural ability: eagle eyesight, quick reflexes, strength and nerves. Market analogy: a great trader must be a quick & confident thinker and have iron nerves.

A great batsman must practice endlessly. He must have a complete array of shots that he can select instantly and instinctively in response to the bowler. One can only learn by doing over and over again. Market analogy: a great trader's instinctive reactions can only be honed by being in the market in all conditions.

Cricket is a team sport, but a lopsided one: the batsman is on his own against the 11 men of the fielding side - the bowler, the fielding captain, and the fielder are all conspiring to get him out. The batsman stays alive and prospers by wit, skill and judgment. Market analogy: the trader relies on his wits to survive against the combined force of the market.

One mistake, and the batsman is a failure. To be a success, he must get it right over and over again. One error, and the batsman gives a catch to the fielding side, or he is run out. Or he is bowled out. To build a big innings, to score heavily, maybe a century, he must get it right over and over again. He might face hundreds of deliveries from several bowlers over the course of several hours, with the fielding side constantly conspiring against him, in order to build a big score. His concentration must be unremitting, and application of technique fluent and correct. One error and he is gone. Market analogy: the successful trader must constantly make correct judgments on placing, pulling and sizing orders and positions. One mistake and he is underwater, maybe even wiped out.

Craig Mee responds:

I believe the great Vivian Richards who averaged 50 runs every time he walking out onto the pitch with bat in hand, and faced some of the fastest bowlers ever to play the game, never wore a helmet in international cricket. Maybe the answer lies here, in this one individual, though I believe he may have been two standard deviations away from the mean, as the downside of getting hit, well for us mere mortals, is 'there goes the account.!'

Adi Schnytzer comments:

Although, to be fair, the nastiest fast bowlers in Richard's era were on his team! Donald Bradman, the greatest batsman that ever lived, and by a fair stretch, claimed in an interview that he was only ever hit once on the body by a ball! He wore no body protection to speak of and evidently needed none. Even the fast bowlers were scared of him! I once saw Richards make 200 in a Test match at the MCG and watching that innings I could not help wondering how anybody could ever make 300 in a Test in one day (Bradman at Leeds way before my time). Watching his interviews, one gets the feeling that the man had no need for adrenalin at all.

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