Jan

14

One is always amazed at how useful and insightful the customs of the British Navy are. It was equivalent to mutiny there when a captain proferred a dinner at his table to a junior officer and the junior officer declined (except when a matter of gallantry was involved). How often I've invited a junior officer to dinner and it was declined and a month later I found the junior officer had performed or was about to perform an activity punishable by death by the articles of war. What other nautical or martial customs can you think of that would truly be useful to incorporte in everyday life?

I am writing a review of Nigel Davies' new book. It's so good, it's unbelievable. He's distilled the wisdom of markets, martial arts, psychology and chess into a lesson for all of life and boards.

Pete Earle writes:

What better place to start than the naval tradition of keeping a (Captain's) log book, of course. Recording the events of the day, successes, failures, incidents and accidents in such a way that one — or their successor — can peruse them at will, and in so doing be better prepared for the future. I don't know a single serious, professional trader who doesn't do this, and the practice extends far beyond financial markets.

Tom Marks jokes:

Who amongst us hasn't at some point over the years sailed past a woman or two on whom they they'd love to apply a cajoling variant of this old British nautical custom.

George Parkanyi lends a hand:

Here's a useful summary of such Royal Navy customs and traditions.

Apparently one of the traditions for a warship entering a foreign port was to fire all their guns, shoot their wad as it were, to show that they were coming in unarmed. (I wonder if this analogy ports to dating?) Also, when two foreign warships met the custom was to sail at each other and fire off a broadside volley before coming abreast, basically for the same reason "Hi, how are you, I'm unarmed". But I'm wondering about those warships that had three rows of cannon. OK, you fire your first row "Hi, how are you? I'm good too", and then once broadside you empty the other two rows into the passing ship. Surely some sorry captain has the dubious distinction of having been the first to learn that lesson the hard way. "Oh, you didn't get the memo? We're at war."

Aug

27

The most amazing thing about markets to me is that no matter how many previous instances I have, I can never find days that are anywhere near the ones we are currently having. The S&P is moving from x day highs to y day lows with impunity and alacrity and then hanging on the balance scale at the end of day when Zeus decides who will win.

Peter Earle replies:

I remember reading a book several years ago about Roger Bannister and his breaking of the four minute mile in 1954. At the time there were any number of physicians who predicted that the record was physically impossible to break; one predicted that Bannister's heart would explode in accomplishing such a feat.

I was reminded of this in both watching (and hearing) that, once again, in a seemingly inexorable march of highs (and lows), world records were broken throughout the Olympics in Beijing.

It bears mentioning that the events themselves have changed greatly from year to year: not only in the rise of professional Olympians, undistracted from a training (indeed, a living) regimen by employment, formal education or social duties, but as well in the structure of the events themselves. Engineered swimsuits, deeper pools, vacated end lanes, and other such changes in swimming events alone have contributed to the aforementioned increase of extremes.

So too, in the markets: that the year-over-year outdoing of previous records in extremes have as much, if not more, to do with the character, fragmentation and specialization of market venues; the "democratization" of access to various markets, bringing millions of additional opinions and hundreds of billions more dollars in; the rise of electronic, in particular algorithmic trading; better/faster processing speeds in technology; and the like, ad infinitum — than of any intrinsic quality of markets.

Kim Zussman ponders:

Like global warming, it is hard to measure whether the market becomes progressively and durably more efficient, or just temporarily stations in an efficient regime. Presumably the proportion of outperforming trader/investors who persist over long periods must go down if markets get more efficient, but that number ought to be hard to get, in that widespread knowledge could discourage the hopeful machine.

Anatoly Veltman adds:

I'll give you another factoid: TY (10-y Treasury futures) lost 10% of Open Interest on the Fri, Aug 22 drop. We just found out that FV (5-y Treasury futures) gained almost 10% of Open Interest in Tue, Aug 26 slow trade. Any connection to the recent abandonment of 10-y as the benchmark?

Sep

24

Hedge Funds and Private Equity Alter Career Calculus

“I don’t think you will see M.B.A.’s less represented in executive suites, but you may see M.B.A.’s less represented in the lists of the world’s richest people,” Professor Schmalensee says.

So is business school a waste of time, or worth it for a young person starting out in a career in finance?

Peter Earle replies:

Getting an MBA was helpful for me as my academic background was in Comp Sci and History and, despite having read every book I could get my hands on, there were many gaps I needed to fill. Plus — although far less than 10 or 15 years ago — I'm told that for a sizeable number of finance/economics/business positions it remains one of the criteria used by HR professionals to screen a large stack of resumes on a "first pass" before digging deeper.
 
I wouldn't describe it as a waste of time, but in retrospect my career wouldn't have been much different without it. Your mileage may vary.

James Lackey asks:

What is the outcome you desire? If you want to work for Goldman you'd better start early to get into Harvard. If you want to work for the government, make connections early, be a clerk. The military, do ROTC. If you intend on working for yourself, it's best to get started early.

Without Vic and Laurel and their circle of influence, many of us would have missed out on the contacts we have made. To find a circle of erudite benevolent friends, perhaps again the Ivy League is the place to be. I was very lucky to be at the right place at the right time to meet Vic and Laurel.

What is the point of business school or being a businessman? What is your definition of success? Mine is the ability to do exactly what I love to do as a career, profit from meaningful work. Yet the huge catch: I do not want to answer to anyone.

Alston Mabry writes:

U of PThese days one must also be wary of the University of Phoenix effect. The Apollo Group has made a pile of money offering distance learning courses and degrees, and now nearly every traditional higher-ed institution is trying to compete. Distance learning wasn't invented by Phoenix, but they have used it to change the industry.

One upshot of this is the lowering of standards in many situations, especially when a degree program can be offered online and/or at night, to working professionals whose employers are willing to foot the bill. There is an incentive for the students to just "get the degree," and a big incentive for the institution to just collect the fees and definitely not to flunk anybody. Actual education, learning takes a back seat.

Henry Gifford writes:

How To SucceedA few years ago I spent some time at the business school at Columbia University. I was studying math for a few years, in a different building, but when my classmates wanted to study together, they usually wanted to meet in the library at the business school, thus we spent a lot of time there. The male students said they wanted to study there because the females there were better looking than elsewhere on campus. The female students said they wanted to study there because the library was the nicest on campus, and the male students said the females wanted to be there to meet a male who had high earning potential.

I sometimes read the student newspaper for the business school, and attended a lecture or two, which I think gave me some sense of what was going on. My clearest memory was of an article about a business school trip to an African country. The first day the students met with an economics minister, the next day they went on a tour of a coffee roasting facility, and the third day they went on a tour of the local Coca-Cola bottling plant, where their van got stuck in the mud. The reporter was skillful in vividly describing the complicated interactions and various stregnths and weaknesses of the different people involved with pushing the van. Then they spent the next five days at a resort on the coast, and the article ended with a request for donations to send money to help the country out of its endless cycle of corruption and poverty.
 
AfriqueI wrote in suggesting the best way to help the country out of poverty would be for someone to write a business school newspaper column analyzing the various stocks offered for sale in that coutry's stock market. The column could discourage buying stock of companies run by less honest management, and encourage each student to buy five or ten dollars worth of other stocks, thereby creating a source of income that the local corrupt politicians had little power over, and a source of experience and possible profit for the business school students. For some reason my letter went unpublished.
 
The newspaper also made it clear that students in each class were put into small groups, to encourage stronger connections between students during school, and after, when they could help each other get hired or promoted. There was also a lot of mention of the positions held by graduates, implying the purpose of the school was to have alumni provide a leg up for recent graduates. I saw little or no mention in the newspaper of actual business principles, theory, strategy, management, or sources of information on these topics.
 
AnimalI was left with the feeling that it was a large fraternity house subdivided into smaller clubs, which served mainly to prepare people for corporate culture — the right way to act, how to talk without saying anything, when it was neither appropriate to be silent, how to maneuver through the office/group politics, whom to challenge and whom to back down from, etc. All the skills nescessary to survive in a large organization, obtain connections that would be useful there, and have a chance to start at a level significantly above the bottom. I thought the school would be very worthwhile for anyone interested in those things.

Jared Albert remarks:

For me B-school has provided an invaluable education. Whether it helps with job searches in the future I can't say. But I'm coming out understanding so much more of why the world works the way that it does than I did when I started.
 
I will say too that for a person who goes to a good school full time, the recruiting benifits are enormous in the industries that respect an MBA degree. But it is critical for a person going full time to go in knowing where they want to go afterwards as summer internship recruitment starts in the first few weeks of the first year and typically the summer internship leads to an industry job the following year.
 
So, like everything, it depend what you want to do with the degree.

Vin Humbert writes:

I've just started a Masters in Financial Economics programme at Oxford. I think the curriculum (as well as the physical surroundings, which are lovely) will be a good backdrop for my current stage as a student of the markets — after several years of balancing a law career with studying the markets, I'm moving towards being a full-time trader.

Orientation started today so I can't really say too much yet about the extent to which the programme is meeting my expectations. It's a pity they use MATLAB instead of R — but just as musical training in one instrument can have benefits on another instrument, I think the MATLAB finger exercises will be useful.

And, indeed, just as Jared says, classes haven't even properly begun yet and I am already supposed to be looking for a job for after my graduation in July!

Jul

25

Reading the Bond Guru's August 2007 Investment Outlook, I'm forced to consider the psychological condition known as Stockholm Syndrome, whereby individuals in close proximity with those exerting power over them come to not only sympathize with but in some cases actively defend and endorse their captors.

Peppered with class warfare ("private equity and hedge fund managers.. aided and abetted.. at the expense of labor") and the politics of envy ("trust funds," "inheritances," "ego-rich donations" described as "egregious and wasteful"), one wonders: does years of contact with Treasury officials, central bankers, federal/state/municipal politicians, perhaps coupled with immersion in the detailed study of government statistics and the consideration of various parties' policies, inevitably lead one to an appreciation for, or embracing of, statism?

East Sider adds:

I think the Bond Guru is positioning himself to take Sage's spot as the "own man" cited by the press as promoting pernicious state activity despite seemingly capitalist credentials.

When I read the Bond Guru's article, I thought of my many track friends that bad-mouthed the sprinters. The sprinters were often headed for big bucks in the NFL. They were blessed with the right talent to make big money. You see the same thing with the old guys in three major sports complaining about the youngsters now getting the big dollars. These complainers think that they where in the "athletic" business. That they got paid for their competitiveness. What they miss is that they are in the entertainment business. Their game just is not as entertaining as the major sports games have become.

Russ Sears adds:

He thinks he is in the investment business, just like them. What Gross misses is he is in the risk-taking business. No doubt his is a good investor, perhaps better than the guys pulling down the bigger bucks. But he is not a good risk taker.

But what else it reminded me of was when I first married my wife. We would go visit some friends, farmer daughters. The farmer wife would join us staying up late, playing card or talking. While the farmer sat in the back of the house flipping channels to find the most depressing newscast available. As only tired but intoxicated with life young girls in front of a young guy can, they would giggles and laugh in such fits till the old farmer would yell, "stop that laughing out there! You girls are driving me crazy!" Then I would hear latter that the girls got a stern lecture on being so unproductive and frivolous. It was probably the most productive night of the month on that farm.

In short he forgot how to enjoy life, enjoyment’s infinite value, and forgotten how motivating that can be.

Ronald Weber writes: 

I believe one should just see him as a good salesman doing his job, in his case: selling bond funds! And for people to buy his funds he needs of course to spread negative news flows.

Actually, he does a pretty good job at sales; but somehow most of the investor’s community take him way too seriously as a "financial prophet"! I like to think of him as a good "dramatic" entertainer before Leno’s Tonight Show and after a noisy day from the "neo-comic" NBC/Bloomi/Analysts crowd! 

Jun

23

There is a proposal before congress (H.R. 2755) to abolish the Board of Governors of the Federal Reserve System and the Federal Reserve.

Jeff Sasmor adds:

This is the second time, it seems. The first time was in 2003.

Scott Brooks remarks: 

I'm starting to become a Ron Paul fan. But I'm worried about what I've referred to as the Russia effect, meaning that Russia melted down into chaos after they went straight from socialism to capitalism resulting in anything but a capitalist society.

As much as I want to abolish the IRS and 99.99% off all government agencies, what thoughts are there on us melting down into chaos if that were to occur, i.e., abolishing the fed?

Stefan Jovanovich writes:

"Russia melted down into chaos after they went straight from socialism to capitalism" is not a very good description of what happened after the U.S.S.R. formally dissolved.

Runaway drunkenness, near demographic suicide by abortion, absenteeism rates that made Lordstown look like a Toyota factory, extortion so much a part of ordinary life that someone's not demanding a bribe was cause for paranoia, had all been part of Russia life even before the defeatism and self-doubt that came after Afghanistan. Scott's post assumes that Soviet governmental authority had some moral force in 1988. It had none.

None of us can predict the future, but I would argue that the odds for Russia's future are as good as those were for what used to be known as West Germany in the 1950s. Then there were no local German politicians who could pass muster as anti-Nazis, and the new republic's democracy was a very brittle artifact. If Russia's current leadership seems tainted by associations with the old tyranny, that situation is little different from what was happening under Adenauer.

Ironically, Scott is far more likely to see Ron Paul's monetary regime created in Russia than in the U.S. I leave it to those who really know about currencies to correct my usual amateur errors, but it seems to me that the ruble is the one world currency that can currently be seen as being entirely backed by a gold/petroleum standard. 

Alex Forshaw writes:

Hmmm…with regards to Russia, the so-called "free/ democratic institutions" that "evolved" were anything but. It's one thing to have measured, organic evolution of a free press and robust markets as the US did. But in Russia, the robber baron tycoons immediately built up media machines to massage their public images.

Putin destroyed Russian "free media" because it was Boris Berezovsky's tool, and Berezovsky probably achieved greater control of the Russian economy than the Politburo did (with lots of help from Chechen gangsters, car bombs for his competitors, Russian government force, and other ridiculously coercive methods).

Stefan Jovanovich adds:

The admiration that the official American press (Time, WP, NYT - the usual suspects) showed for the "free/democratic institutions" that Professor Sachs helped "create" (sic) has its historical match in the obtusely wrong-headed enthusiasm that the Jeffersonian press showed for the progressive insanities of the French Revolution. 

Scott Brooks responds: 

Both Stefan and Alex are doing a better job of making the point I was trying to make. These countries were run by demagogues, despots, and gangsters who simply changed their styles, but ultimately remained in charge. They changed from being in charge in the form of a government to being in charge in the form of being the most powerful gangster. The gangsters, of course, whether under the guise of a legitimate government or as just plain gangsters, were able to manipulate powerless people because the gangsters had made them dependent on them.

In the US we don't have gangsters in charge per se, but we do have a system where a large group of people like welfare recipients (no offense intended) who are dependent on the government. So I ask if a country can go from a "dependent system" to one of independence overnight? If not, then how does one move away from that system? 

Alex Forshaw replies: 

If by "welfare recipients" you mean agribusiness, the tort bar (and to a lesser extent other unnecessary functionaries which use "the law" as an excuse to siphon money from businessmen who would otherwise have no need for them) then you're getting somewhere

Just in personal experience, I'm 21, I trade about 150k total in political futures (snobbier people would call it "gambling," I laugh at the pseudo-distinction). To get even the most rudimentary legal structure (a "pooling of interest") to facilitate moving the money offshore, (because it's simply stupid and/or prohibitively expensive to risk regulatory harassment over high-risk, novel securities trading in the United States, without the economy of scale of a tens of millions of dollars of a capital pool), I had to utilize the services of two accountants and a securities lawyer.

Fortunately I had friends of the family to do it for me, but what about someone who isn't as privileged as I am? Legal overcomplexity is an incredibly high fixed cost/ barrier to entry in this country.

And I don't even have day to day interactions with other people, unlike the Korean immigrants in DC who got sued for $100 million because they refused to give a lawyercrat a $1000 new suit, or the cerebral palsy doctor ruined by John Edwards.

Stefan Jovanovich writes:

I will let Alex speak for himself, but that is not the point I was making, Scott. No ordinary Russian thinks that the changes over the past 20 years have been merely a change of styles by "demagogues, despots and gangsters".

For one thing, there is now actual freedom of conscience. (Yes, I know the Russians are giving their own national faith preference and have been less than open to proselytizing by Westerners; but that is a world of difference from the situation that had Jews, Seventh Day Adventists, and devout Orthodox regularly jailed simply for what they believed.) It is also now possible for people to have savings that are not controlled by the government and private land ownership.

These are real changes for the better that have affected millions of people, and they are occurring. But at the same time the conditions of actual life continue to be dreadful. As for the question of dependency, that seems to me a near universal. I have never known a libertarian who actually turned down the offer of a good government job. As the first Mayor Daley once said, "Everyone wants a little honest graft."

No society has ever reached that peak of pure individualism that Ms. Rand dreamed about, but we can hope for a world with enough contending interests to limit the amount of loot that any one group can haul away. 

Gordon Haave remarks: 

Russia went chaotic, yes. But most of Eastern Europe did not. Why? The rule of law. Besides, there is no reason why abolishing the Fed would create a chaotic situation.

George Zachar writes: 

Russia went from a closed-economy kleptocracy to an open-economy kleptocracy. The commanding heights of Russian industry never saw capitalism. The looting, aggregation, and export of its wealth are well-chronicled. Using the word "capitalism" in the context of Russia is to deliberately smear the term as gangsterism. 

Peter Earle comments:

The Federal Reserve, when set up, was ostensibly created to maintain a stable value for the dollar. Looking at the 90%+ drop in the value of the dollar since the creation of the Fed, I'd say there's reason to doubt their somewhat self-serving perspective. A look at Panama, where there is only nominally a central bank, may be instructive as well. 

Stefan Jovanovich continues:

When Queen Elizabeth I came to visit the United States after WW II, my grandfather, who was born in Old Serbia, wrote about the news to my dad, who was born in the coal camp near Ludlow, Colorado that has now physically disappeared. In his letter Tata wrote to his American-born son that "your queen" is coming for a visit. What he meant was that Americans, regardless of their origins, end up having an Anglo-centric view of the world - at least as far as Eastern Europe is concerned.

The Hungarians, who were fervent Nazis and are more completely thorough anti-Semites than anyone to the east, got a better press in London and New York in 1946 than our allies, those awful Russians. They still do. The economic successes in Eastern Europe - Croatia, Slovenia, Poland, Hungary and the Baltic states - have far more to do with their proximity to Germany, Austria, and Scandinavia than with any special qualities of jurisprudence in "eastern" Europe.

For their citizens and for the average Rumanian, Serb, Bulgar, and Ukrainian, the rule of law is no better than it is for the average Russian. What is better for all of them is that now the police are merely corrupt; they are no longer true Marxist believers dedicated to liquidating all class enemies. 

Gordon Haave adds: 

Russia went chaotic, yes. But most of Eastern Europe did not. Why? The rule of law. 

J T Holley asks:

Can't we simply start with the IRS first as a warm-up? 

Gabriel Ivan writes:

Having spent the first 20+ years of my life in Eastern Europe (Romania) and being exposed to the first 13 years of transition from communism to capitalism, I can second Scott's comment about the melting into chaos in all Eastern Europe, not just Russia. The looting was mind-blowing and cannot be explained if you didn't live it.

With rampant inflation, no social net whatsoever for maybe 80% of the population and opaque legislation, I'm surprised things didn't get more explosive in all these years. I personally witnessed two national distribution companies with strong brand names and infrastructure vanishing in two weeks due to central bank's policies on the exchange rates. And this was '99 - '00 after 10 years of "free market economy".

Unfortunately, fundamentals haven't improved much despite the real estate boom and commodity prices run-up masking an economic growth that is not healthy. High profile businessmen - bank presidents - still get shot in daylight in Bulgaria, (the country is a member of EU for six months now… what a joke) due to their affiliation to organized crime (there is no other way to run a business). Imagine Sandy Weill getting whacked in a drive-by shooting to understand the strength of their banking system.

I expect the majority of "emerging markets" money managers to be separated from their wealth in the foreseeable future due to their lack of due diligence and reliance on official statistics.

Jun

19

My boss had an intimate friend who was formerly in the cordage business. I used to hear them talking about how he had sold out his plant for about four times its worth of stock of the National Cordage Co., and how this trust would absorb everyone in the cordage trade, and soon have a monopoly. One day I heard my bosses friend say "when the whole thing is rounded up, that common stock will double in value and pay ten percent a year."

This was good enough for me. Here was an insider who knew all about the stock, giving his intimate friend this rare piece of information. That my boss was himself  convinced was evidenced by a check which I saw the next day, made payable to a firm of stock brokers and for an amount just equal to the value of 500 shares at the opening price for th National Cordage Co..

All hesitancy on my part now vanished, and at the noon hour I hustled up to my brokers office, sold out every share I owned, and put my last dollar in to Cordage. I was staking everything on this venture, and thought of all the things I would do with the money I was going to make. So carried away was I with the proposition, that I departed from my heretofore inflexible rule, and asked my broker on what margin he would carry the stock. His very conservatism saved me perhaps from what might have been a worse fiasco, as he refused to buy it except for cash.

After I bought cordage, it didn't seem to have so much resilience as I hoped, but I thought of the vast negotiations which were going on, and how the value was being added to daily, unknown to the outside public. But there's no use going over the details, everyone knows what happened to me and my cordage. It went from 90 after I bought it, to one, in the panic of '83. It went to pot along with General Electric and a lot of others.

To cap the climax, my firm was so crippled by the loss of capital sustained through the senior's investments in Cordage (shades of Imclone), that it was obliged to go into liquidation, and I lost my job … It was at that time that I changed my ways, and I became a specialist in panics.

– The Ticker, August 1908.

After this loss, the author realized that when they wanted him to buy, and the price was high, they never showed any of the bad points. When they wanted him to sell, they never showed any of the good points. He became a specialist in panics, a cane investor if you will, and became a millionaire in a few years, which he documents in the subsequent two issues of the Ticker.

I find that cane investing still works. Indeed, whenever the fake Doctor or his ilk try to bear things down, there is a scare about interest rates or plague or war, and the market reacts: it's time to hobble down to Broad street again.

Peter Earle contributes:

These are great accounts to follow. In the building of my own collection, which I hope to either auction off on the 100th anniversary of the Big Wind (about October 25 - 28, 2029) or perhaps donate to a free market economic research institution (The Von Mises Institute, most likely), I recently scored a great coup. I purchased, from the Dayton Public Library, the entire run of the Magazine of Wall Street from 1920 to 1972. I'm reinforced in my assessment of their great value in your citing of them. 

Mar

23

Imagine if you will a very bad year in the stock market with a substantial rise in interest rates. Imagine, too, the elders of the stock market having to go to the Palindrome en masse to beg him to buy back his tremendous line of shorts stock, and begging the bearish insurance company, conglomerate hard landing guy, or media forensic accountant, to say a few bullish things to prevent stock from falling to zero.

That situation sounds somewhat similar to the present except it was 1907 not 2007. In 1907 the S&P fell 40%, from ten to six, and the elders went to Boy Wonder, Jesse Livermore to buy back his shorts. Also, interest rates went to 200% rather than the five percent inversion of today.

I felt that a study of the backdrop and concerns and intricacies of how investors tried to make money in the aftermath of that environment might teach us some lessons about how to navigate 2007. It also might provide some food for thought on what we've learned in 100 years. I turned for guidance, therefore, to the Ticker Magazine of 1908. It was a 50-page monthly edited by Richard Wyckoff, similar in its concerns, articles, and advertisers to many we have today, like Stocks and Commodities, Active Trader, or Futures.

The first issue could have been written today. Except that like most things written 100 years ago, it seems to be focused on a much higher common denominator, i.e., the literate investor population of their day. I find all their articles just as timely today as when they were written, and often their insights seem much more useful than comparable journals of today.

The first issue starts out with an excellent article, Mistakes of Investors. The mistakes are divided into excusable mistakes and inexcusable ones. The excusable ones are what we would call those that occur from the vagaries of change, where the investor has taken all precautions and done his due diligence. "If his reasoning has been wrong, or if unforeseen events bring disaster, it is a misfortune. Not so, however, with "willful mistakes."

Here's Cushing's classification of of willful mistakes to avoid.

  1. Avoid inside information.
  2. Never make an investment on enthusiasm or excitement.
  3. Use your own judgment.
  4. Pay for info rather than getting it for free.
  5. Consider earning value and market value. The man who buys real estate looks to the enhancement of value more than to earnings.
  6. Don't lose confidence. The investor hears rumors of impending disaster, which, if he would reflect upon, he would see would have no effect on his security. This applies to bank runs.
  7. Stay away from names. (Even then there were touts and promoters.) No high sounding titles can make it a success if it lacks the true qualities of success itself.
  8. Don't put too much reliance on advertisements, especially red paints.
  9. The losses through mining investments (not tech) are greatest. Beware of promoters who have no reputation to lose.
  10. The greatest mistake is one of pessimism and doubt. Never let your mind fall into that chasm. Do not think because you have lost money in one investment that all are unsafe.

The most interesting article to me in the first issue was by our old friend Roger Babson, written in 1908 about bank loans. He says that when the proportion of loans to investments gets too high it's bearish and when it's too low, it's bullish, but on a time series basis for all banks, and cross-sectionally between banks within a year. He gives yearly figures from 1860 to 1906 to verify his point and then shows how the panics of 1873, 1894, 1890, 1893, 1898, and 1903, were accurately forecast by the ratio.

The key ratio he uses is 50% loans to assets, which was "In 1873, the ratio of loans to resources first exceeded 50%. Consequently a panic occurred by the spring. Another panic occurred in 1903. Again the western farmer came to the rescue and owing to bountiful crops, the recovery continued until 1897 when interest rates exceeded 2200% a year."

Thus, Babson preceded Boltan Tremblay, Colonel Ayres, the bank credit analyst, the fake doctor, and many other greats in relying upon these credit ratios more than 100 years ago. It's overdue for a test again today.

A final article in the first issue is archetypical of articles of today. A retired engineer has a mathematical way of predicting swings in markets, and shows with a chart how his method caught "the immediate trend of each market, and the beginning and end of the longer price movements, and whether stocks are being accumulated or distributed based on a balance between the volume of price movements and volume of transactions."

He catches the full movement by "eschewing selling on strong rally, and bucking an upward trend, but instead waits until the rally has run its course and the downward movement has actually begun." In that modality, let your profits run. He seems to have captured in 1907, exactly the essence of the main methods of trading futures of today, including the methods used by most CTAs and most of the books written about trading.

In addition to these articles, an excellent article on bucket shops, the harms of short selling restrictions, how a floor trader makes money, and ticker talk rounds out the issue.

I'll augment this with further insights from the subsequent issues, as they're too good to miss.

Peter Earle writes:

After a couple of years (1907 - 1911 or so), Richard Wyckoff's Ticker became the Magazine of Wall Street, which was published until 1970. In all fairness, and perhaps unsurprisingly, in its last 20 or 30 years it was but a shadow of its former self.

Wyckoff lost control of the Magazine of Wall Street in the midst of a messy divorce from his former secretary (and by that time editor of the MoWS), Cecelia, in the late 1920s. After moping about and writing for a few years, he started a small bi-monthly magazine called Stock Market Technique which ran for the last three years of his life, ending in 1935.

They are extremely rare in their original unbound format.

Bruno Ombreux writes:

The inventory at Global Investor Bookshop offers a good flavor of the market in the early 20th century, and it's true it has not changed. Some articles and some books have been reprinted.

Mar

15

Ephemera from a Famous Wall Street Haunt.

…The first printed American bill of fare is issued by New York's 5-year-old Delmonico's Restaurant at 494 Pearl Street and lists as one of its most expensive dishes 'hamburger steak.'

The bill of fare (the word menu will not be coined until next year) offers a 'regular dinner' at 12 cents and lists hamburger steak at 10 cents (the same price as roast chicken or ham and eggs; regular beef steak is only 4 cents, as are pork chops, corn beef and cabbage, pigs head and cabbage, and fried fish. Roast beef or veal, roast mutton, veal cutlet, or chicken stew are 5 cents)…

Nov

10

When you start out in a game, a fight, a competition or a trade and right off the bat make a mistake or two, it puts you “on the wrong foot”. It’s a stumble coming out of the gate. You are in bad frame of mind because of making errors. You are fighting to catch up. These two factors set you off balance, not on the right foot, not leaning forward into the trade, off balance slightly, unable to attack strongly at the prime opportune time to attack when the opponent is weak and also off balance. These problems are compounded by distance and time. In longer term events this balance issue is critical in maintaining the correct mental attitude. Then at the end of the trade, you are so glad to be past the trouble caused by the original errors, you end badly as well. Champs don’t make mistakes right off the bat, or if they do, can overcome them and put them behind, make the extra effort and come from behind. That’s what makes them champs. How do you fight back, when you are weak, and behind?

In everyday endeavors, a regular discipline can help avoid the occasional errors. Errors are going to be part of every human endeavor, so it is important to be able to work with the situation and come out productively in the end, especially in areas that require judgment calls. Perfection is not possible. Admission of the error is important. Denial can cause further, irreparable damage.

Peter Earle responds:

With respect to preparation, and since you mention fighting — an apt field, indeed, for cultivating trading metaphors — I am reminded of an old boxing truism revolving around coming in dry: part of the informal intelligence casually gathered by cornermen (and sometimes fighters themselves) on the way to the ring and while waiting for a fight to start is whether the man across the ring is perspiring or not. This can sometimes give a clue as to how seriously he is taking the match/his opponent, how adequately he has warmed up, and even his level of anxiety.

If one’s opponent appears to be dry, sometimes — depending upon how he is known to perform under pressure — the game plan can suddenly shift; not, as may have been planned, to engage in a multi-round chess game, applying increasing pressure, but instead to come in with guns blazing at the open.

Though examples are numerous, I’m reminded of the mid-1990s undercard fight between John Ruiz, who would eventually become WBA heavyweight champ, and David Tua. Tua’s corner, noting Ruiz’s stiffness and lack of perspiration, urged Tua to jump on Ruiz right at the open… with resounding success.

David Lamb replies:

Frederick the Great started off on the wrong foot, but he never thought so. He just retreated for a few weeks, came back after doing some readjustment at home in Berlin, and accomplished what he first set out to do.

During his first campaign (at the ripe old age of 29) he led (very literally) a part of a two-columned Prussian army toward Neisse, the strongest Austrian fortress in Silesia. I now quote from the book on Frederick the Great I am reading (written by David Fraser):

“Both wings of the Prussian army ultimately converged on Neisse, where they found an Austrian garrison prepared to resist. There could be no question of exposing the troops to methodical siege operations in the conditions of winter and after trying, without success, intimidation by a ferocious ten-day bombardment, Frederick decided to leave Neisse… to return to Berlin, which he reached on 26 January. He had lost only twenty men in all.”

While back in Berlin he acted as if all was going as planned. In other words, he seemed not to worry too much about momentary setbacks. He acted as if they were the undesirable fatty parts of a great T-bone steak: He wouldn’t eat it, but regularly expected it upon ordering a steak. He even wrote all the neighboring Kings and Emperors that everything was going great and they could back him up or not. He acted alone, acted first, and never hesitated. But he never gave up once all his homework was done and all the data was aligned his way.

Furthermore, perhaps Frederick never felt he was fighting back, or on the wrong foot, or playing catch up. Perhaps the feeling of vulnerability and weakness and initial loss is what places the competitor at a disadvantage, not necessarily his actual numeric disadvantage.

Stefan Jovanovich responds:

Christopher Duffy, an exceptional scholar, wrote a fine book on Frederick the Great. I have not yet read Duffy’s new book on the Somme, but the people I trust think it is the most important book on WW I in decades.

Archives

Resources & Links

Search