May

24

Relative to the Swedish Riots …

MFM Osborne reports in his biographical notes which I have the pleasure of reading, that it is much easier for an American to get published in a European Journal than an American one. His paper on the migratory behavior of salmon could not find a publisher in the US but it was gladly received in the Journal of Experimental Biology in England. Similarly for his seminal work on the flapping behavior of insects, and browning motion in stock prices. One believes it is part of a general tendency for the grass to be greener on the other side of the street. We are all taught to defer at once to those of discordant belief, especially if they believe in the idea that has the world in its grip, i.e. that the pursuit of happiness should be punished by death, or eschewed for a better world above. However, when we see it on the other side of the street, we are free to note it but have to cover it up and excuse it here, as in the confession of the three murders by the brothers before the bombing. 

Gibbons Burke writes: 

"But Jesus said to them: 'A prophet is not without honor, save in his own country, and in his own house.'" [Matthew 13:57]

May

22

Glass ContainerDailyspeculations.com is pleased to announce that our co-founder Laurel Kenner has opened her new business Glassery.com purveying useful, beautiful, and safe glass products, many of her own design.

I have used many of these products and found them functional, attractive, and benevolent.

May

20

This chart of 10 Yr Treasuries reminds one of the very kind companionship that Mr. Pitt provided to Aubrey and myself up the lazy river in Disneyworld Orlando a year ago. One wonders whether there are any regularities in it. vic

Anatoly Veltman comments:

One may observe the consecutive higher lows throughout the multi-year uptrend. One concludes that any first lower low will serve to produce technical downtrend of significance; at that time get out. Easy money!

Jeff Watson adds:

I'll say it again, the mistress never gives away, "Easy Money," and there is no such thing as easy money for the non-Flexion.  One suspects that those who make "easy money" in the market have some kind of Faustian Bargain in effect. I have to fight  tooth and nail for every quarter cent.

John Netto says:

Jeff- start studying market positioning and how the market is structured before large Econ data releases and Fed announcements. Being aware of this will point out asymmetrical situations which tend to provide profits at a much higher  velocity.

Jeff replies:

John, thank you very much for the most enlightening market lesson I've had in 35 years of trading.

Vic Niederhoffer is skeptical:

One is content to eke out any profit let alone one at a higher velocity. When I can unravel the meaning of Mr. Netto's post, I mite be poised to become a wealthy man.

John Netto clarifies:

The Chairman has asked me to provide further detail on what specifically i'm referring to by putting oneself in trades where  the velocity of P and L can appreciate at a greater intensity based on identifying market asymmetries.  Take the most recent nonfarm payrolls number. During the beginning of the week we saw estimates around 150,000. The day before  we saw ADP miss … estimates were then lowered for the nonfarm payrolls number from 150,000 to 140,000 by the Street.

We saw a rally in the bond market and some weakness in equities with the S and P sitting around 1585. This was the first sign  of how the market was positioning for what was believed to be a weak jobs report.

The number beat consensus coming in at 165,000 and with the market surprised by the results and positioned the opposite way,  bonds sold dramatically and equities put in a gap up, go up day - with neither of those markets returning to the scene of the crime since. As a professional trader supporting myself from my trading P&L, understanding market positioning is one of the  big ways I generate P&L. The aforementioned example was particularly lucrative.

May

19

Woodson reminds me of the trader who holds a losing position 10 days in a row until it totally ruins him. He stays with Smith despite the fact that he's a loose cannon,loses the ball by relaxing on offense, goes 1 for 6 from floor continuing his usual shooting percentage,has Anthony giving up as he unbelievably notes Smiths bad play, gives a gratuitous technical foul, and generally tries to get his game back when the season is at a precipice. Yet Woodson stays with him regardless the way a trader holds a losing position until he goes broke. Its pathetic to see this stubbornness. The worst thing that happened to Knicks aside from the sullen Ewing resonance on the team and the three point holdover from Antoni is the lucky game winning shots that smith made at the beginning of the season. One remembers the winning shots he made, two, but he lost 10 or 20 games with the same shots later in the season.

Craig Mee adds:

The cowboy really doesn't have a place in this day and age of professional sport or markets. Players are way too fit and every part of their game is looked at and tested to expose any edge the opposition can utilise. The question now is how on earth are things going to evolve in the next 10 years as the last 10? For sport or the markets … and is there a way to foresee this and be better for it, in knowledge or profit.

May

18

The regularities in fixed income seem much less numerous than the regularities in stocks. What is the cause of this?

First one market goes down much in one week, then another market goes down the next week. Is it random or predictable ? Last week it was gold.

Is there an all seeing eye that looks for ways to inspire mish and churning in markets that learns from recent outcomes and paths of scores in vivid sports events?

The growth in the belief in the value and inevitability of the world state has preceded the decline in gold.

The gold is down 7 days in a row and this has happened only 4 times since the new millennium. But it is unlike other markets except bonds. Why?

number of runs of 7 or more
in new millenium

market      up runs         down runs

bonds       9                 3
sp         40                 7
bunds      11                16
dax        21                10
nas        41                13
gold       18                 4
crude      14                18
euro(fx)   15                10
yen        15                10

The number of bonds you could buy with one spu (i.e the stock to bond ratio) and the amount of gold you could buy with one spu (i.e. the stock to gold ratio), are at 5 year highs. What does this portend? Are there any other ratios of moment and are they predictive?

Why have central banks which used to be in general antithetical to big stock market rises become so favorable to them, to the extent that many of them are buying equities themselves?

What is the frequency of scandals as a function of the duration before and after major elections?

What are the seasonal tendencies of the outbreak of wars as a function of weather?

The nikkei to spu ratio was once 60 and fell to 7 and is now 9.5. Does it show trends? ( one must check these numbers).

The vix is at 12.5, and all who have sold puts on stocks have made fortunes since 2008. How will this situation be rectified?

The euro at $1.28 is in the lower half of its 1.60 to 1.20 range since 2005. Is the Troika getting an itchy finger? And do they like to see the US wealth prospering at their expense?

And just one more: Is there a point in life and markets, where all resistance to pressure to succumb ceases as in Beauty and the Beast or a market rise of a certain % in the case of stocks or a decline of a certain % in the case of bonds? The danger of relying on a equilibrium ratio comes to mind with the ratio of stocks to bonds at a 6 year high.
 

Veteran trader Anatoly Veltman adds:

You cite the same poignant reason for the recent Gold demise as was the Palindrome's predictive opinion voiced way before April 2013. Of course, the clincher was the fact of the relative over-valuation of Gold as a currency on its way to $1921 peak in 2011.

When Gold is high, i.e. over the latest decades' boiling points of 500-800 USD - it trades as a currency on a cross against other majors. The USD is still a premiere reserve currency, and EUR and JPY represent the next largest economies. Note that against the JPY, Gold is still holding near the all-time record!  

Now, there would be some change in Gold's complexion if it traded under its current marginal production cost of $1100. We might see producers' moves to shut down, hedge, finance, etc. The world average production cost is estimated anywhere in $550-800 range, and those levels are simply unimaginable given the growing distrust of the world's population toward fiat money. It's not impossible, however, to have a spike down there one day: under a scenario that world Central Banks were to reach a consensus - and lighten up. Curiously, such consensus could only come about if your current concept of the sudden universally found "belief" were to fall on hard times. I'm sure this logic is somewhat counter-intuitive.

Yet, in the near-term, a lot of back and forth trading is guaranteed to happen. Just like the May 6th of 2010 stupendous one-day range in stocks has basically contained the price discovery that followed over the next months and months -so may Gold be mired in a range not far exceeding it's mid-April spike. Gold's done exactly that for a full month already; and with allowance for a few currency spikes, we are likely to see Gold at current  levels again by summer's end.

May

18

Gauss's book on least squaresSam Eisenstadt has mentioned that he likes to use a potpourri of overlapping, multicollinear monthly changes in the S&P to predict future price changes.

It would be a good thing to see what predictivity there is in regression models of monthly changes that extends and augments, one thinks.

.

. 

May

18

Everything in the market is path dependent. You can have the best insights, the best trades, but if you do it this week versus next week the whole thing is different. Had I not done this or that when the adversaries were lined up against, I mite be flying and wealthy. Is there any doubt that if all these scandals had not been revealed a few months after the election, the outcome would have been different. Even the man who turned 10 thou into 50 million in his IRA could have won. vic

May

17

Whenever a market I was long goes way against me and I sell at the market, (if one had a Xantippe for a wife - it would be her demanding one get out before the weekend — or else) , I have Tom Wiswell saying to me, " Now you're Thinking ". After he put me in a untenable position.

Now you're selling.

One believes that there will be many conservatives without romance this weekend. vic

Alex Castaldo adds:

I spoke to my mother today. Eighty four years old. "I read it in the paper a week ago that you shouldn't buy gold or bonds. They are going down".

May

16

I just had a modern Finnigan happen to me. I got to sleep long a commodity that I had a profit on when I fell asleep but I left my limit orders to buy well below the current price in. I heard a computer ring tone 12 times waking me up. I am reluctant to get up because I know that means that I have a substantial loss and one limit order below after another must have been filled. But one must face the music. So I drag myself up, (I hadn't slept for two days as was long another commodity that refused to budge while I waited for the hoped for rally in it in vain.) So I get up finally, reluctantly, meanderingly, and walk outside my room. To my relieve I hear Toria shouting, "dad, I'm locked out, please let me in. Are you home?". The ring of the door bell is exactly like the ring of the computer. So with relief I make my way to the computer. Sure enough, the price has fallen to right above my limits and I have lost just as much as I would have if I had not mistakenly thoought the ring on the door bell was the ring on the computer. One hopes that I've made myself clear.

May

15

The round numba is never a penumbra. Today's example: Gold.

May

15

One has to admit that Smith is the perfect exemplar of the regression fallacy with the luck being ephemeral and the skill a constant expectation. Whenever he plays and hits some lucky shots, the Knicks are sure to try to give it to him the next game and lose as the luck vanishes. What a terrible player he is, almost as bad as the other regression fallacy, Robinson, who at 4'10 likes to fight with all the bigs and is guaranteed to lose for Chicago. They should have special brands on people like that in Basketball and life so they could not cause continued damage. The forecaster who is hot is generally like that. The regression fallacy tintype should be distinguished from the useful idiot. People like Kaufman and "you know who" would be on this. I "got a little list".

Tyler Cowen writes:

I say Miami beats Memphis in six, which is OK for NBA ratings.

Smith simply isn't any good in the playoffs when others are playing real defense. The preferred model is that some individuals have zero or negative productivity in key situations.

Plus Jason Kidd woke up one morning and was 56 years old, all of a sudden.

Regards,

Tyler 

Scott Brooks writes: 

Looking at this strictly from the "what is best for the NBA" perspective:

What the NBA wants is a NY/Miami and OKC/SA semi-final.

Then a Miami/OKC final…..although SA would be alright too as they have Duncan. However, OKC has just a bit more star power right now, so I give OKC the edge.

And with all due respect to NY…….. Even though NY has the more attractive population base, Miami just has too much star power (and a pretty good population base).

A Memphis/Indiana final would be a disaster….but the good news is that even if Indy can get past NY (which is very possible), they ain't getting past Miami.

May

15

The bonds are down about 6 points in the last two weeks. Worse yet, those who bought at the auction a week ago, actually have a loss. There's a famous incident where a great cricketeer was up by 1 run, and then on the last pitch, he rolled the pitch to the batter instead of hurling it. The epithet "it's not cricket" is appropriate to the temporary loss that the flexions and colleagues at the bank have. One would imagine that the upside down man is persona non grata. But more important, who was the player that did the dastardly deed. One believes it was in the mid 70s the last time that the bonds discommoded the colleagues, but what was the team and the player?  

Can you top that? What is the most disgusting incident in the history of (the market) relative to Trevor Chappell rolling the ball you can recall in the market? Was it the mingling of funds without retribution by the Governor? Or the flash crash before the French Inside trading before Leeson announced? To me it was being blindsided by a high bid for bonds that I took from Michael Lewis's firm right before the flow of funds man announced his bullishness. What's yours? 

Update: A kind correspondent says it was Ian Chappell. Worse yet it was a game among the colonies, New Zealand vs. Australia. One can only analogize it to the IMF not being paid back first on account of a bad debt or a country in the EC defaulting on its debt. "It's not cricket". The rain in Brussels might preclude taking the mistress out for a fish dinner.  

Craig Mee writes: 

Victor,

Ian would gasp at being associated with this (as well as most of the nation)… his equally talented brother Greg Captaino instructed the third brother Trevor to do the dastardly underarm deed to "prevent New Zealand scoring the sux they needed to tie"

wiki the "underarm bowling incident of 1981".

Anatoly Veltman writes: 

I'm afraid to say: buying a single lot of SP futures near October 16th, 1987 close. On that triple witching Friday, which followed the relentless two-week decline, the floor rumor had it that one Palindrome had accumulated an outsized long position (the whisper number I heard was over 10,000 lots). I traded Gold and Silver, which closed an hour and half before the SP. Feeling lucky from my metal profits, I decided to take my first plunge into stocks. I thought to myself: if a trading legend is compelled to accumulate that much into this close, then this must be an exceptional value. Still, the novelty of buying stocks and the discomfort of taking a Long position period, made me limit my experiment to a single lot.

Well, as history books will tell you — Black Monday's opening gap down was the largest in all of the preceding stock index futures history! And wouldn't you know it: a very rare opening signal developed by an exclusive research group of like-minded younger traders stared huge in my face that morning. The signal had three conditions, and that's why it would occur so rarely:

1. If a market dropped big into the close AND

2. If the sentiment survey diverged (I.e. went up) AND

3. If a market subsequently gapped down big against such bottom-picker sentiment

Then you must SHORT that gap-down opening!!!What made my one-lot Long the worst position I've ever taken in my trading career was that instead of executing this rare Shorting signal of mine on that Monday morning - I had to digest my damning stupidity of following somebody else's silly Long of Friday. Another younger trader, who was not burdened by any silly Long, did execute the Shorting signal and doubled his Short position once the SP opened down around 260.00 and proceeded to plunge lower. Lo'n' behold, that day ended up printing 190.00; and the younger trader has become the Robin Hood that the community admires today…

anonymous writes: 

I worked for the 'Robin Hood' you mention in your comment below for 3 years.

Although quantitative types such as I believe that he is an example of survivor bias I must say this — I have never witnessed such ferocity, focus and ability to cut losses with alacrity as I saw him demonstrate time after time. (In all fairness I was not fortunate enough to work alongside the Chair at NCZ back in the day….)

A genuine trading talent.

Anatoly Veltman replies: 

Yes, and therein another lesson: that the "survivor bias" is not entirely random. Were you part of that Liberty Plaza office that sported the sign: "Maximize size, minimize risk!"

That particular trade carried the trademark of the genius: nimble lightly to Short a potential bubble over 330.00; adding substantial Short that melted the 300.00 phantom support a month later; and finally doubling up below the 260.00 where the black hole of no bids guaranteed the break of 200.00 before the bell could save the day!

May

14

A warning in Latin from Jeff's son perhaps could serve as a motto for us in the future— a motto that one wishes one had hardwired in his being:

Aleatores Omnes Moriuntur Rupti

(all gamblers die broke)

May

14

One walked past the Sherry Netherlands hotel tonight where the boy wonder, Jesse Livermore, took his life. The fact that The Reminiscences of a Stock Operator is considered one of the best books on investments ever written is guaranteed to happen. Anyone who follows his advice and example is 100% certain to go broke. His pyramiding, leveraging and vig paid were each in themselves 100% certain to cause his entire stake to go to the stronger hands and flexions and top feeders like the "banks". Naturally the book is recommended as the bible for new traders to read. I am chagrined when people come up to me and say that aside from Reminiscences, their favorite book is edspec. Fortuitously, I believe that none of the other authors on this site have had that horrible experiences. Nevertheless, just walking by the hotel, and seeing the models from Fifth avenue that the boy wonder wined and dined on his yacht walk by, just as leggy and beautiful as in his day 100 years ago, made me shudder. I saw a balding man dressed in nautical attire and a top hat exiting the hotel and I whisked Aubrey away and changed my sweater as soon as I got home. 

May

13

A famous fixed income trader alerted the public via social media in somewhat existential terms that he was bearish on bonds stating several points after the peak of 1 week ago that the bull market was no longer intact. It elicited this thought from a old speculator. It is surprising to see someone who presumably holds many hundreds of billions of dollars long in a portfolio reveal such a thing. A big speculator I knew well often discusses his views on the market and the world state. And while he would never buy before a bullish pronouncement, he certainly would not sell. That would be unfair. And while insiders in general don't always buy before good news, they are often loathe to sell before good news is announced. Thus the surprise. This is human nature. In any case it elicited the thought "never ask a barber if you need a haircut".

Alex Castaldo writes: 

Some old timers I know are talking about how this reminds them of the day Henry Kaufman and Albert M. Wojnilower turned "bullish" on bonds. Probably there are not many on the SPEC_LIST who remember those days…

Victor Niederhoffer replies:

One wondered that day whether the houses that they worked for became long before the 4 point rise at the 9 am announcement. And one wonders whether the upside down man alerted his colleagues with the 2 trillion position of his turn to the bearish side before the tweet. One noticed a 1 1/2 point drop on the day following the refunding of 30 years before the announcement, a greatest decline ever. My former friend the large speculator turned from bearish to bullish that day as now "the great Henry had changed the playing field and we're in a bull market". His change was very sagacious as the bonds went up about 10 or 20 points the next 6 months. I must confess that I did not participate in that move as I felt that I had to go with my numbers.

anonymous writes:

Apropos the recent social media expressions about bonds, could this be like a paranoid man who fears his wife is cheating on him? He subconsciously wants to catch her in the act so he can finally know that it is over. 

May

9

Prigioni is so much better for the Knicks than Smith who hit a few lucky shots at the ends of games in the regular season that people remember and has lost a million games with the same shots that people don't remember.

Prigioni, when he's on the floor for the Knicks, has taken 60% of their shots with assists but only 30% with assists when he's off the floor.

Bonds and S&P were both up yesterday, so stocks were up with an assist. They like this much better than fighting the Fed model when they're at the new high with a Smith like bonds pushing them down for the future.

May

9

Cicadas leave the depths below to mate on prime numbers every 13 or 17 years so as not to be eaten by predators with normal life cycles of 1 or 2 or 3 years. One wonders whether other living things in nature have such prime cycles. The market has prime cycles. It likes to do overnight what a person that has to sleep can not take advantage of. If it's down big one night, and you cant sell a position, then it knows you can't stay up the next day or two, so it will go up to let others but not you get out of the position the next day. The idea can be generalized one thinks. 

Scott Brooks writes: 

Another thing to consider is the confluence of cycles leading great highs or great lows.

The year was 1998 (give or take a year or two) in MO. We saw the normal group of Cicadas make their appearance as always in the summer. But that year, we saw something that we only see once or twice a century. We saw all the groups of Cicadas make their appearance at once.

I remember the normal soothing sound that I fell asleep to at night as a child become a constant irritating and often uncomfortable non-stop drone of Cicadas looking for love.

My backyard was often a fog of Cicadas flying through the air. The carcasses littered the ground and the trees. It became almost impossible to even walk a short distance outside with several Cicadas landing on you. Of course, they were harmless, but that didn't matter. It was a little freaky to know that you were surrounded by millions upon millions of Cicadas many of whom just wanted a place and decided to make you that place.

Although I didn't try it, I'm sure that if I were to have stood perfectly still out in the yard for any length of time, I would have had dozens, if not hundreds of Cicadas covering my body.

I had never seen anything like it in my life before. It was as though the world had become a horror movie with Cicadas starring as the monster that ate the Midwest.

I have lived through Cicadas' highs and lows. I believe I prefer the normal years, when their population is steady and stable and they lull you to sleep at night with melodic song.

Pitt T. Maner III adds:

You have to wonder what the collateral, human irritation effects will be this time with the billions emerging from Brood II. More crime? More accidents? People who are even more sleep deprived than normal? An increase in the sale of ear plugs? Might be interesting to look back for things possibly associated/correlated with the 17-year cicada cycle (1996, 1979, 1962, … etc.)

"US Braces for Billions of Cicadas" :

"The insects, though harmless, are considered a nuisance both for their size and sheer numbers, not to mention the noise pollution that has been measured at up to 94 decibels, loud enough to drown out the sound of overhead planes according to the Associated Press."

(but they do have a couple of positive effects):

"Additional effects linked to the cicada mating swarms include higher yield for fruit trees, beneficial tree pruning, as well as an increase in bird populations."

Oh, and by the way:

From the Dept. of Stork/Baby statistics.

Who knew there is a "cicada market theory"? If only some of the critters could make it into the city!:

1) "The Wall Street Cicada Index"

"The large insects — which emerge every 17 years — turn out to be great news for the market. During years when the critters appeared — going back to 1928 — stocks posted an average annual gain of nearly 21%, roughly double their historical average. That's a far better track record than most active mutual fund managers enjoy, the majority of whom tend to lag the market average over time." and 'Standard & Poor's market-data guru Howard Silverblatt agrees. When MarketWatch called to sound him out this morning, it turned out he'd already thought to check out the cicada market theory and had been pleasantly surprised by the results. Of course, that doesn't mean he's rushing to buy. Just like when we gaze at the stars or tea leaves, it's easy to read too much into stock market returns, he warns. "You can prove anything you want," he says. "Start with your answer, and I have the data to prove it."'

2) But the "flash crash" of May 1962 would have occurred during a cicada emergence too.

May

7

This article echoes a nice perspective on the American Revolution with a Harvard Princeton twist.

"When Austerity Pushed American Colonists to Revolution"

Stefan Jovanovich retorts: 

This is bad history. The Stamp Act was repealed in 1766, and the Royalists were completely in control. The few attempts at rebellion that happened after repeal were horribly unsuccessful; Sam Adams even lost his position as party boss of the Southies. When Ethan Allen arrived in Philadelphia to ask for supplies to reinforce the Green Mountain Boys' control of the New Hampshire Grants (what became Vermont), the Congress told him to do a full inventory of the cannon and powder that Allen and Arnold had captured at Ft. Ticonderoga. Why? Because Congress was offering to give it all back. The Revolution was anything but inevitable. But for the Battle at Breed's Hill, it would not have happened; even Concord and Lexington would have been papered over (warning - Stamp Act pun) if Gage had not decided to try to capture the colonists' two useless cannon that "threatened" (sic) his ships in Boston harbor. But, after Bunkers Hill, it was on. The 2,000 British soldiers suffered 55% casualties (the colonists' first volley was sot at a distance of 15 yards), Gage wrote to London asking for reinforcements of 30,000 men, the Congress decided that they had to get in front of the mob so it could be a parade by sending Washington to Boston, and the arrival of the cannon from Ticonderoga forced the British to abandon Boston. London did send the 30,000 and more but not to Boston but to New York.

How any of this applies to Cyprus is beyond me, especially since it is doubtful that the EU countries combined could currently mount an amphibious invasion of 3,000 men, let alone 10 times that number.

May

6

Dear A.,

You might want to know some day how you were at 7 years old and what the paths and choices for the future looked like. Perhaps it will remind you some day of the good old days. You love to sing and one of your favorites is "The Good Old Days". "Like the hopes that were dashed when the stock market crashed. Ha ha ha those were the good old days". It's hilarious when you sing it and just before that line you turn around and look at me sheepishly.

You are by all accounts, the most affectionate and gregarious boy that ever lived. You radiate happiness to everyone about you. Many people have told me that they feel like a second father to you and that they'll promise to take care of you when the time comes. Wherever you go, you enter into conversations with strangers and store people. And you love to squeal with joy when you connect with someone on one of your favorite things.

You are very sensitive and aware of the emotions of others. And you have lots of empathy for those in need. You believe that even fish deserve sympathy and won't eat them because you think they're endangered. (I hope you change your mind about this because eating fish regularly is a necessary condition for a long life I think). You walk out of all movies if anyone's getting hurt and you hate superheroes for that reason. You like to be helpful around the house and to garden and cook and help anyone in need. You are particularly caring of older people in old age homes who you like to visit and always ask about you, and also for very young kids who you treat very protectively and gently. The ability of yours to inspire love is good for you.

The most important thing in traveling the path to success aside from hard work, proper organization, ability and health is to have proper mentors. I had great mentors in Barnaby , Lorie , Redel , Wiswell . You will have great ones from among those that love you. Do be sure to be properly appreciative and mentorful. The favorite things for you are singing, chess, scrabble, squash, baseball, music, counting, eating sushi, playing games (both computer and board), reading, biking, skiing. You do the first nine every day. Also recently you have shown the influence of your heritage in music. You have started to play songs by ear on the piano, you can sing many of the patter songs from Gilbert and Sullivan from memory with perfect enunciation and you can play 7 songs on the violin even though you don't practice and only take lessons twice a week.

Some stories about them might be easy to remember in the future, and help make sense of where you are. I ask you, "what's your rating in scrabble." You say, "it's 2200." "How did you get there?", I ask. "Well, I beat someone very good. He wrote the book I read. He was the world champion." I ask, "did you tell him you were 6?" "No. I didn't want to embarrass him. How do you spell embarrass."

A typical chess story of yours. You love to go to Washington Square to play chess with the hustlers. You often beat them. And you love to jump from one table to the other commenting on the games as you play them.  "That's a wasted move. It breaks up your pawn duo and puts you offside. Now your pieces are all apart. I think you can resign." The chess players love you because you are creative and appreciative, and dynamic and vocal– qualities that pervade everything you do. Your parents read to you every day and you love to read yourself. You said to me the other day, "I can't believe that some people don't love to read and find it boring. There's always something so interesting in it. I could read all day".

The first time I knew you were a genius was when Mommy took you to Italy, when you were three, and she said "He didn't stop talking the entire trip."It's true. Wherever you are, you always ask questions. You have to ask about every new word you hear, every joke that people are laughing at, every way that something works. Actually there was another time when you were 3. We were riding the bike back from 59th street to your apartment which is 120 blocks away. When we got to first street, you turned to me and said, "we've gone 59 blocks. In another block we'll be at the -1 block, and that will make it exactly half." I should mention here that you can do all the squares up to 100 in your head, and can multiply most two digit numbers in your head using quick math techniques, and this never ceases to amaze your friends and their parents. Yes, you are very good at math, and take the Stanford course each day, and are just about a week or two away from completing your fifth grade exam, where you got a 77 on your last one, which is very good considering how easily you are distracted, and how you often have 20 computer chess games and related conversations and 15 scrabble games going on at the same time. As uncle Roy said about you: "he's a chip off the old block". What he meant was you are in the line of geniuses and renegades in our family like great grandpa Martin, grampa Artie, Roy, and nephew Ian.

You take lots of lessons each day and week. Chess about twice a week from Raphael or the hustlers or the chess teacher, squash every day from me or Hisam, piano and math from your mother, violin and baseball from Anthony, Chinese from Jane, swimming and chemistry from Mr. Rook, tennis from Nemanya, two science classes from Jodi, history at the museum. And each weekday you always find time to play board and computer games with Doc. Sometimes you'll flop down on the bed when you're at home and say "I've just had 4 lessons in a row. Give me some time to do a little thinking on my own." But as your mother says, "Sometimes he'll flop down and claim to be tired. But he always has plenty of energy for chess, scrabble, and the odd computer game. I have to take the mouse away because no computer can withstand him.

He eats banana pancakes every day for breakfast, and remembers all my mistakes like when I burned the rice or when the butter spurted all over, and goes into fits of laughter years later. He always asks what is funny when I laugh at something and he doesn't get the joke. He is extremely social and a real ladies man. He writes notes to all his girl friends, calls them on the phone when they're not taking lessons themselves, and he often says to women, "you look very nice today all dressed up in fancy clothes".

I have to mention here that Raphael said after your second lesson that he thinks you could be the world 7 and under champion. Raphael has taught Kamsky and many other champs and won from Bronstein and Alekhine so he knows what he's talking about. And Hisam your occasional squash teacher whose brother is world number 1 said, "I think A. will be the best 9 and under in the world shortly also." I know a little about squash, also, and I am amazed that you can hit a backhand with tremendous power down the line. When I was 7 I couldn't even hit a backhand, and I was able to beat most adults at that age at handball and paddles. You also hit a beautiful bull whip forehand down the line which you're learned from watching racketball on youtube.

Your singing teaching experience is not without its highways and by ways. You tried out for the Met Opera children's chorus and had a great audition singing happy birthday perfectly and getting all the intervals correct when you had to repeat them, but then you were so pleased with your performance that you jumped around the room the way you do from chess table to chess table, and the teacher had to ask you if you wished to go into another room. Perhaps he did not realize that you like to learn at your own pace in your own way and time and express your joy when you hit the bulls eye.

Yes, you are somewhat unruly. You like to talk during movies and shows that we have been taking you to since you were 2 (you were asked to leave South Pacific on each of the 5 times we took you there). And you sometimes like to jump on the table or lie down when you're in a class with others, and when you're playing baseball, you cover all the bases on every hit when you're in the field. Perhaps this is a trait you inherit from your father. Whenever I didn't shut up in class, I found myself in the principal's office. "You should know better he'd say to me. Your father is a cop." Doing one's own thing runs rampant through our families. I brashly announced to the revered squash coach Jack Barnaby the first time I saw him: "I am going to be the best rackets player in the world in that other game you teach before I had even played it" and your mother took a year off when she was 18 traveling around to night clubs and bars making her living playing the piano and singing blues songs she wrote. I don't think you would like going to a traditional school very much where you have to listen to the teacher give a lesson on things you already know or aren't interested in. You like to say to me, "Why should I listen to you when I know so much better what I want to do then you do. You're such an autocrat". Teachers wouldn't and won't like it when you say that to them.

One of the favorite things you like is business. You love to talk about the pricing of your mothers glass products, and how much inventory she should buy. You asked me at the age of 4 if I was bullish or bearish on gold and I said "bullish because it went down a lot yesterday. And you said, "but what about the previous day. Did you test it?". You are good at selling lemonade. And you love to Tom Sawyer up to passers by, and buttonhole them and ask them if they want to buy a very good lemonade, only 25 cents. All the people in my building are always asking me, "When is A. going to sell lemonade again. We like it".

I should mention that you are very fortunate to have two families that you love and love you very much. You love to do morning and afternoon things and evening things with your mother. You cook, you bike, you read, you learn things together, and you do everyday things like getting proper clothes and haircuts and buying food and supplies, and go to the Dr. You love to do weekend and afternoon things with me and Susan and your sisters. Often you will go for walks in the woods, mountain biking, banana grams, gardening, sledding, soccer, baseball, air hockey, chess, and cooking bread with Susan in just one day, back to back. (Sometimes I wonder if she still recognizes me because she's so busy). You are particularly close to Kira and Toria and often follow them or lie under their locked doors so that you can copy their dance steps or hear their stories or play games with them. I love to see you hugging your mother and the Connecticut family when you see them but I sometimes feel bittersweet that they are so good at playing with you that you often prefer their company to mine. When I try to read the book of the day to you, you often run away from the table saying "I know what books I want to read and hear better than you. Why are you so dogmatic?". You often ask me, "Why can't you let me have more fun?". I guess the reason is that I don't have that much time left to parent and teach you, and I want to provide a foundation, a base of operations for the rest of your life while I am young and energetic enough to transmit it. I love you very much, and the few things that I can do that I learned from my father, mother, grandparents, and siblings, I want to get into you before it's too late. Regretfully, I am the type of father that can't do all the things that men and kids are supposed to do, especially boy scout things and art things. I know my weaknesses, but fortunately between Mommy and Susan and your friends, John and Rose, who we go on a few trips a year with, and your friends, Doc, nannies, and teachers from the past, they can fill in what you didn't learn from me.

One of the most important things to learn in life is "to be unaware of your ignorance is the sickness of the ignorant." And even more important is to know that everyone is different and everyone has different abilities. Those who are good at something often specialize in it and excel at it. If you want to be a champion at something, specialization is necessary. The world works that way with people choosing to do the things they're good at. Then the whole pie gets made by the separate people that are good at things. Those two things, specialization and division of labor and the ability to choose and trade with the specialist people in their divided slots make the world a very good place.

Perhaps you will remember your seventh birthday which was a typical thing for you. You started it with a bike ride from river terrace to 59. Then you played bananagrams and fisher chess with Susan, then you rode to the Museum of Math , where you built Sierpinski tetrahedrons, then you subwayed over to Nobu for a sushi party, then you biked back to 59, went to the Jackie Robinson movie, (which you said you were going to hate until you saw him stealing home when you squealed). Then we went to the best burrito place, your favorite meal, you slipped in some minigolf at Arman's birthday party, and then we bought some big pizzas and cake which we had delivered to the hustlers at Washington Square, and we had a surprise birthday party for you and them there where they had their first square meal outside of The Salvation Army and you beat a few of them at chess as you jumped around and kibbitsed all their games.

Okay, enough of the past. Lets turn to the future. You love to ask me about the stories that connect my past to the future. I think it might be good to put a few of our favorites down so that they might guide you and provide a base for the future. One of my favorites is the time I won the North American Open in Mexico in 1976. I had 20 injuries that final match, ranging from having Mexican disease to cramps and jock strap burn and Sharif hit me in the head full on with one of his crazy top swing follow throughs and gave me a concussion to boot. Then he got his contacts jammed and I was entitled to a win by default. Instead I told him I'd wait a week for him to get back on the court, and I waited 3 hours and then won it fairly as he came back stronger than ever. I won the Unesco sportsmanship award for that and met the four horsemen of France for that, but that's another story. The story illustrates that hard work and perseverance will win the day. And always give the other side a fair shot. Artie always gave the opponents the benefit of every doubt and call when we played. And he'd say to me "if you need it that much, you should work harder. It's only a game".

Another story I like is in EdSpec about how grandpa Martie wrote a letter to the football coach when he yanked Artie out of the game. "How could you dare to take all American Niederhoffer out of the game when he was the only one to catch, kick, and block the ball with impunity throughout the 3 to 42 loss." The coach read the letter to the players in the locker room, and my father was so embarrassed the rest of his playing days. They always kidded him and called him All American after that. Yes, but if your parents won't stand up for you and think you are the best in the world, who will? You will find in life that the ones you can trust and rely on the most are your parents and very close relatives, and everyone else you will find will be very likely to let you down in the pinch. I have carried on the tradition of defending my children with letters and one time I wrote a similar letter to Martin to Galt's teachers when they wouldn't let her in a talent show because her moves were too dynamic. I pointed out to her teachers that because of their own failure to achieve greatness, and lack of self esteem, and their oneness with the idea that has the world in its grip, i.e. that all outcomes should be equal and that the individual doesn't count for anything, and the purpose of life is sacrifice, they were threatened by the greatness they saw in her. I did use the word maggots and envy in talking about their personages, and for the rest of the time Galt and Katie were at school, the teachers called me Mr. Noriega, the terrible dictator from Panama in retaliation.  (By the way, Galt did get in the talent show after all, as people who lack self esteem are often cowards at heart and they didn't want to have the story of their suppression of talent get spread around).

I got hundreds of stories to tell you like that which will guide you in life. And many of them are in EdSpec. I'll tell you more from day to day. However, I would suggest to you that you should read stories to learn and remember things about life. And there are born story tellers like Louis L' Amour, Ring Lardner, Patrick O Brian, Victor Hugo, Jack Schaefer, Alexander Dumas, Mark Twain, whose books we are beginning to read to you who will make your life scintillating and memorable and inspire you to greatness and heroism. Well, I think you get the gist. Life can be a very beautiful thing if you work hard, play at things, learn from the greats, do some good reading and music, pursue your fantastic talents, and try to be happy. You will learn as my father said to me when I was your age, "the old buck is not so bad" and all the things I try to father with you are done to put you on a proper path for a life that is great now and in the future.

Love, dad

The Hobo responds: 

Rx for an everyday Niederhoffer from a hobo

Your letter is good and v. valuable. but u don't want to hear that.

reactions and suggestions: surprised he's gregarious.

you take him to Washington square to play chess– what a treat if he likes it.

'have 20 computer chess games and related conversations and 15 scrabble games going on at the same time'– impressive not because he can do it, but because he wants to.

suggestions for sports: judo, aikido, wrestling, gymnastics. more individual sports since he's social enough.

no tap water, no fountain drinks…

he must learn at least one foreign language or will lose a majority of thoughts in the context of words.

don't make girls a curiosity. explain them or he will want to explore them, and it's a waste of time.

he must continue to travel outside the country for perspective in all things.

expose him to poverty & more slowly to the sordid and let him make up his own intelligent mind.

appeal to his logic on all matters and keep emotion secondary.

u are at fault for not supplying him to date w/ The Memory Book by Lucas & Lorraine.

home schooling is better exactly for him unless there's a school w/ peers, which is unlikely. he will naturally bond and develop below his mental giantness unless exposed to your usual diet of transient specialist geniuses. a public school will stunt his growth; the best private one will turn him into a state champion; home schooling into a national.

Important- 'I should mention that you are very fortunate to have two families that you love and love you very much.'

'expose him to monthly situations that demand 'hard work, and preference will win the day'. he will acclimate to the difficult. the gains can only be learned the hard way, as our sometimes good chairman Mao says, 'through a little bitterness in life'.

'you always ask questions'- indicates he has a big 'I am' to fill, and a drive to become what he may. your job is to provide the smorgasbord environment.

explain what 'thinking outside the box' is. he does it, but knowing it will expedite many thought processes.

he needs logic puzzles: how to get a fox, bag of grain, chicken across the river; bear walks by a house w/ four windows & you look out a window and the bear is white– where are u; found a coin dated 94 BC– it's fake.

he is old enough to take the big step: list the priorities in life. let him do it. review annually. it can be altered, any plan can.

he's a chip off the young block.

the most valuable sum up comes in the middle: this letter will 'help make sense of where you are'.

May

3

One searches for regularities, vis a vis the current release, knowing that other important things like the minutes are apparently leaked to important people like heads of banks and lobbyists and journalist before its announcement. When I wrote about my chagrin concerning this, many readers wrote back to me and said "how could you be so naïve. Of course that happens for this release and that release also." It reminds one of how I felt when I played against someone twice my size and strength in junior tennis when I was 12. But one searches for regularities that might signal such assymmetries in information and notes that there have been 22 small up openings as of gmt 800 before the release and 20 small down openings. The standard deviation of the sub move the rest of day is 10 in both cases which is normal for any day regardless of a ananoncement. And one notes that there seems to be no departure from randomness the rest of the day vis a vis expectations after the down and up with an average move less than 0.1 % in both cases.

The one thing one does note is that stocks and bonds are both close to their all time high. Stocks are close to the round of 16000 as is the nkikkei close to th round at 13900. Gold is close to the round of 1500 at 1476 and the yen is 2 away from the round of 100 at 9800.The euro at 131.00 seems to be at the level where the troika wants it. None of the rounds have been breached. You might say from all the numbers that the markets are very happy. One would only hope that the strength of our economy matched the strength of the markets. When B was asked how he was feeling he always answered "for a poor musician as well as expected." One feels the same way but is bewildered playing against these strong opponents.

May

1

I have reviewed the HBR forthcoming study, predicting the next big thing. The data it uses are based on data from mid 2002 to mid 2005. In an era where markets can move 10% in a minute or two, with high speed computers and printers avaiable to even the most non-computer person, it is amzing to see results based on just 3 years of data 10 years old. Certainly the question emerges as to why they didn't use more current data or more than 3 years. The query relating to selective starting and throwing out negative results arises.

The measure used to test their thesis is an amazing one that one has never seen before even though I worked with Zarnowitz on many of his forecasting studies and have kept up with subsequent work in the field: "(they) calculated for each forecaster, the proportion of forecasts that were more than 20% above or below the average prediction… When the average outcome was more than 20% above or below the average prediction". ?????? Huh? They find that the correlation between this measure and the average forecast error was 0.53. Naturally by chance, when the proportion of above average relative to actual is high, then the average outcome for these forecasters is going to be bad.

There are also several contrived experiments that the authors carry out to set a foundation for their empirical study and a few appeals to Bayes rule for standard forecasting that are contained in the opening pages. However, in view of the statistical biases in their results, the short and untimely period of their data collection, and the consonance of their results with the idea that has the world in its grip— that egalitarianism is the goal, and that all variations in outcome are due to luck and unfair initial endowments, we can see why  Harvard would find such a study propitious.

Apr

30

"Those well-known experts who had pulled off a big windfall by going against the tide and winning were, over the long term, the worst at forecasting."

That sounds understandable to me, and there is a research to prove it.

The original article on Harvard Business Review requires registration.

Victor Niederhoffer writes:

This article provides confirmation of the idea that has the world in its grip. Egalitarianism prevails. Especially at Harvard. I will have to read the article to see all its biases. But it was guaranteed to be published in the HBR.

Rudolf Hauser writes: 

Not having read the HBR article, I cannot comment on that particular study. But I would note that the nature of the forecast and time frame are important considerations. The news article did note that the study only looked at three years of data. If the forecast related to only quarterly trends the conclusion that it might have just been a fluke forecast could be valid. But say someone had predicted the financial collapse we saw in 2008 with valid reasoning but was off in timing. In that case his or her forecast would be wrong for part of the time but someone who acted on it might have had some years of underperformance but avoided the debacle that was to come. That forecaster might be someone to listen to in the future. But even being right once for the right reasons does not mean that the person will be correct all the time on such major calls or even that they will ever be right again. In the end, one should listen to the reasoning but make one's own decisions.

Apr

29

1. Never try to make money the same way twice in a row.

2. Don't trade inactive markets.

3. Don't assume that the relation between your two favorite markets will stay the same from year to year.

4. Be alert to big minimums on Monday as they tend to reverse.

5. Try not to sell markets that have big drifts upwards like stocks.

6. Try to go with with the central banks.

7. Be one with the idea that has the world in its grip and be on the side of the market that will further that grip.

8. Never go for small profits as the vig is too great relative to your gain as a %.

9. Don't trade when a loved one is very sick.

10. Round numbers will be broken.

11. Play the yen to break 100 and the S&P to break 16000 and Apple to swing from below 400, e.g.

12. Gold has been a store of value for a long time. When it gets hit hard, think of all the people in the world and the institutions that use it for insurance.

13. Don't sell premium in the grains as they move explosively.

14. Never trade so that you exceed your margin. (You will have to get out at the close unless it moves in your favor and that makes you weak).

15. Don't listen to tips or try to follow fast moving operators as you won't know when they are going to change positions and how strong and on what basis their views are made.

16. Let your profits run after you have a big loss and get back to even sell to the sleeping point.

17. Don't take positions that you plan to extricate from in inactive trading hours.

18. After or just before a major announcement don't use limits.

19. Only buy the worst markets or stocks at the end of a quarter or year.

20. Never trade when you're out of the office or on vacation or on a whim.

21. Beware of trading when the market is going to be closed and you will not be able to extricate from your position like European markets when they close for a month around Christmas.

22. Don't short big up opens.

Okay, that's a start. Hopefully, I am more adept at this kind of thing a trader should know than I am at the things a man should know.

Apr

25

There has been a run of exactly 5 up opens (i.e. a rise from yesterday's close to today open) in the S&P [see price sheet below]. This has been bestowed upon us 15 times in the last 4 years. Strangely this is not unduly bearish at all for subsequent periods (exactly 6 up opens in a row occurred 9 times). The number of runs is consistent with randomness. Does this have anything to do with the news that central banks all over the world are increasing their stock to bond ratios on their balance sheets (i.e. they're buying stocks as well as bonds with the money they print?). What is the long term outlook for such a shift?

John de Regt writes: 

Hard to say, but the bond and stock purchases might one day be unwound, which would cause markets to fall. That said, the Fed might very well hold their debt securities to maturity, and never sell off.

Apr

24

I found the paper, Stochastic Hydrology, lecture 24 to be the best discussion of extreme values very useful in finance I've found. It uses the time between successive maximum events as a base to calculate the probability that a maximum will be exceeded by simple and relatively understandable and useful things that a person can calculate and count with pencil and paper. It ends a rather time consuming search for such a method.

Apr

23

I have been considering whether there is any evidence that socially responsible businesses are better investments than profit maximizing ones. Most of the research points out that it is hard to define profit maximization because short term and long term maximum paths might differ. The concept of risk and return is also relevant with higher return often decreasing the chances of surviving. The duty of a company and its directors to its shareholders, and their incentive to do better for themselves and their shareholders by increasing earnings also plays a part. The concept of dead weight cost is also relevant which is minimized when marginal cost equals marginal revenue and the pricing is such that the demand curve intersects the supply curve at the profit maximizing price. I found this article on going for fourth downs refreshing and provocative in this area.

Rocky Humbert writes: 

I think this is an important subject to consider and the current academic literature does a comparatively poor job. For starters, there is no satisfactory definition nor rubrics of "socially responsible businesses." The monikers of "sustainability" and "green" and "sensitive to communities" are difficult to quantify to say the least. And frustrating to understand in many cases. A chemical plant that dumps its toxic waste into the backyard (while poisoning its workers and neighbors) is?? clearly maximizing short term profits at the expense of long term profits. And it's clearly socially irresponsible. And it will eventually fail. In contrast, my office landlord just installed infrared soap and hand towel dispensers in the bathrooms (presumably to be green), but will they have a good ROE on this? I have no idea. Will they attract new tenants because this is a "green" building? If the rent is the same, I suspect yes because some # of customers get incremental utility from transacting with socially responsible businesses. In contrast, no one (reasonably) gets incremental utility from transacting with socially irresponsible businesses.

The "duty of a company and its directors to its shareholders" is a decidedly American concept. The reality is that torts and taxes and regulation mean that the actual implementation of this duty may in fact include social responsibility. Things have changed over the past 100 years (for better or for worse). So — the answer to the chair's question must be: if the cost of being socially responsible is small, then socially responsible businesses MUST BE better investments. If the cost of being socially responsible is large, then it's less clear — and there is the free-rider problem.

Rishi Singh writes: 

I had the benefit of hearing the current owners of the Empire State building give a talk on going green and increasing revenue a few years back. Their synopsis was that going green for the sake of going green was too expensive for the marginal benefit (e.g. solar panels). Instead, by gutting office space, adding insulation, different windows, and light sensors to turn off lights, they improved the quality of the offices and significantly reduced utility costs at a reasonable cost. By adding these features they could charge higher rent while also improving their green footprint and returning to profitability. An example of market forces awarding the cheapest implementation of reduced energy usage.

Susan Niederhoffer writes:

Some thoughts:

1. His point about short term vs. long term is very important … because long term you see/pay for your short term decisions. Conscious Capitalism companies are long term focused. We have used as proxy for good companies, 100 best companies to work for, or some other third party list.

2. Your heading reveals a trade-off mentality, that it's either or. That's not what we've found. It's possible to keep looking for solutions that make ALL stakeholders better off (and most CC companies include the earth as a stakeholder to avoid those nasty externalities). Even if it costs in the short run, doing the right thing will pay off over time. Patagonia is a good example.

3. CSR is often the crony capitalist trying to tack on a beneficial marketing strategy to get on the green bandwagon (his landlord). You have to dig deeper to sort out which companies really mean it.

4. Transparency is getting harder to avoid. Companies that delay finding out about the negative impact they have in their supply chains and fixing them will pay when their customers discover and put it on twitter. Brand loyalty is hard to buy.

5. You will have fun debating these with John at Junto. Keep up the research…but better read the book too.

Russ Sears comments: 

The problem also is there are many "socially responsible" businesses that are not to be believed. The customer wants to do business with a business that is on the loyal side of the prisoners dilemma. It signals that they value repeat business, and this one transaction will not be be maximized at the customer's expense. In other words, a properly designed social response shows that the business considers itself to be in an infinite set of transactions. It will take less now so that the great great grand kids can make up for the small cut they give back to society. Like Zacheus the tax collector, if they miscalculated and took more than their share, they will return it 4 X what they took.

The problem however, is that often a social responsible business is really doing a slay of hands. Like Capone gifts to the Opera, or LiveStrong gift to healthy living.

Also sincerity is terrible difficult to measure, but it's something many individuals think they are better at than they are. Like ants, they are to be trusted because they give off the scent that they are from the same "tribe".

Apr

23

I feel like Pitt looking through the current issue of Nature which has a million ideological articles about biology, including a purchase for 60 million of a 2 million Mendeley company, a start up that involves 2 million users sharing and using research papers, an article about Gosling who used paper clips to take the photo of DNA that Watson and Crick used without mentioning to discover DNA. A non-ideological thing from Nature of relevance: "Discoveries take ego, genius, conflict, inspiration, and fierce ambition. But they also need, the hard graft of PhD students who beaver away late into the night and improvise with what they find in the stationery cupboard." Of course articles on how trawling is depleting our fishing stocks, how Greek science is being depleted because we don't give it enough money, and paeans to Obama for funding based science and his budgeted increases in research spending, (but a slight slap for not funding more basic science), and a strident denunciation of those who would wish for deficit decreases, the new secretary of the interior who will "oversee" 200 million hectares of public land and 700 million of land offshore, Sally Jewell (a personage good to know), an article on how we shouldn't use synthetic science to destroy the rain forests, an article on an unsung pioneer of classification who showed that structure and uniqueness is more important than DNA in classification, 2.3 million paid for Nobel prize medal of Francis Crick, and how coelacanths' genes can tell us how we got from the water to the land. Much going on in biology, and much has the idea that consumes our world to make man small in it. 

Apr

23

One of the most beautiful things I've ever read is the biography of Marie Curie by Eve Curie, Madam Curie. It shows true scientists at work. It's the portrait of one of finest marriages ever. It is a model of what a good biography should be. It provides a great depiction of emigre life in Paris in the 19th century. It shows the force of an indomitable will to discover. It makes you cry when Pierre Curie is killed by onrushing horses on a crowded Paris street. It shows how chemists had to work when they needed to weigh, and touch and bottle and see everything in order to make discoveries. It shows how two new elements plutonium and radium were discovered. It shows the ossification of science in France. It amazes one as everyone connected with the Curies won Nobel Prizes or became Presidents of Poland even though they were the most self effacing scientists that ever lived, refusing all awards (she got two Nobels, and she deserved it, not like Linus Pauling.) I keep going back to it to see what a loving scientific family should be like. The father read literature to them every Saturday and spoke 11 languages.

Apr

23

There is always something new to someone with many gaps in knowledge like mine. And the minimum spanning tree which I saw in an astronomy article "bootstrap, data permuting and extreme value distributions" by Suketo Bhavsar (which I couldn't understand but sent to Dr. Z  as he could and Mr. Grain who could also understand it and it seems like a very good thing for technical analysis. But I will have to study it when not losing in market (all too rare). 

Kim Zussman adds: 

The article is unfortunately significantly beyond my boundaries. Observationally I would worry also about what we can see vs what is obscured by interstellar dust, but presumably they adjust by using infared (which penetrates dust better).

But I see your point vis traded price path:

"The Minimal Spanning Tree or MST (Zahn 1971) is a remarkably successful filament tracing algorithm that identifies filaments in galaxy maps (BBS; Ung 1987; BL I). The technique, derived from graph theory, constructs N - 1 straight lines (edges) to connect the N points of a distribution so as to minimize the sum total length of the edges. This network of edges uniquely connects all (spans) N data paints, in a minimal way, without forming any closed circuits (a tree). In order to distil the dominant features of the MST from the noise, the operation of "pruning" is performed. A tree is pruned to level p when all branches with k galaxies, where k < p, have been removed. Pruning effectively removes noise and keeps prominent features."

Victor Niederhoffer writes: 

But it's descriptive right? I don't see anything about how to use it as predictive?

Kim Zussman replies: 

They seem to be trying to lift signal (filaments) from background noise. Do you think some market moves are signal and others noise?

Victor Niederhoffer responds: 

Yes. Like when bonds and stocks are both up on the day. The green on our chart or a break of a round number. Like an orgasm. But I can't understand the astronomy of the Indian paper so can't unravel it. 

Apr

19

One of Tom's favorite proverbs was "it's good to have a system even if it's a bad system". I made some very rare profits the last two days with the theory that the Boston situation was a cover up of Mideast activity and was able to profit from a few news announcements and reactions thereto with that theory but the theory was wrong and I was wrong and (one is seeing the Mikado tonight). At least having a system prevents you from being oscillated out by stops or excessive vig or ephemeral things unrelated to the theory which are wrong too, I think. 

Apr

19

It strikes one as wrong that governor Deval Patrick said "there will be no vengeance but accountability." I had the displeasure of hearing him speak at a Milton commencement of my daughter when he was a mere student out a few years with a hateful message that at least saved me from ever contributing to Milton again.

Anonymous writes:

The reason they picked the wrong place to terrorize is that there will be tremenous amount of vengence.

Because, marathoning, is only for those in great shape. And Boston, with its qualifying standards, is only for the elite of the elite.

The best and only true vengence is success. They have just unleashed an enormous amount of motivation in every runner's strong and true heart.

Apr

18

It is good to know from the Blodget interview that 142 people including bank and public relations people get Fed releases 1 day in advance on an "embargoed basis". As Willie Sutton said when the Dodgers lost to the Giants, "makes you want to turn yourself in to headquarters". No wonder the market tends to go up the day before favorable employment releases et al.

Craig Mee writes: 

"Embargoed basis"… looks like the medicos do it too. So much room for shenanigans:

"In the case of a trial that I already know I probably want to cover, I will often ask the PR person if I can get access to the slides beforehand, and I assure them that I fully intend to respect the embargo. In most cases my request is turned down, for any number of good reasons: the company doesn't have the slides, the investigator is terrified of an embargo break, etc. But often enough the request works and I'm able to save a lot of time and effort during a busy meeting by preparing some of the work beforehand."

And from the tech stock crowd (from June 2011):

"And there's one more big problem with embargoes: newsmakers haven't been holding up their half of the bargain. Part of the gentlemen's agreement is that if a reporter or a news organization deliberately breaks an embargo, there will retribution. The company or PR firm whose embargo got flouted is supposed to exclude the offending reporter or organization from future embargo offers and pre-briefings. But I don't see that happening any more. TechCrunch, in particular, breaks embargoes with total impunity. Like codependent spouses, companies and their PR reps always seem to rationalize away the breach and go back to Arrington's crew with the next confidential story.

You can't fix the embargo system with more embargoes. It's time—for me, at least—to walk away from the whole bankrupt system."

Apr

17

There are some traders who make money based on news events. Please tell me how an analysis of the recent news could have been beneficial to traders who analyze news. The first reaction was a drop of 1 % in the last hour in S&P and a rise of a corresponding amount in gold. The reaction overnight was the opposite. Why was this news so bullish overnight? Is all news just an opportunity to do the opposite of the initial reaction? What do you think? Is there a systematic way to profit from news announcements? The 9-11 was not a temporary thing. Was that the clue?

Steve Ellison writes: 

I would hypothesize that any market reaction to a news event that triggers strong emotions should be faded because of the availability heuristic (people tend to give too much weight to dramatic but rare events).

I would also hypothesize that any market reaction to government statistics should be faded, since they have margins of error and are often significantly revised later. However, when I tested this proposition using the government report that routinely provokes strong market reactions, the monthly US unemployment report, it was not clear there was any edge to trading in the opposite direction of the S&P 500's move on the report day.

Jeff Watson writes: 

I generally don't fade USDA crop reports after they come out and grains are offered limit down. However, I've been known to buy wheat right at the top just before the report and have it go limit down on me. I hate that feeling as the noose tightens when the trapdoor opens. In fact that just happened to me on the last go-around.

Alston Mabry writes:

How do you test news events? First, you have to immediately and accurately evaluate what effect the event "should" have, ex ante. And then at some future point in time, compare the predicted to the actual effect the event "did" have, ex post. As there is no objective measure to use for the first step, you wind up simply testing whether or not you're any good at predicting the effects ex ante.

Steve Ellison writes: 

I tested using the following logic. If the absolute value of the change from Thursday's close to Friday's close on an unemployment reporting day was greater than the median of the absolute value of the daily change in the previous month, I assumed the market was reacting to the unemployment report and selected that day. For all the selected days, I backtested a one day trade entering at Friday's close and exiting at the next trading day's close, positioned in the opposite direction as Friday's net change. That is, if the net change on Friday was positive, the hypothetical trade was a short. The results were consistent with randomness.

Sushil Kedia writes: 

News is a rare commodity in today's world. We are inundated with broadcasts today. Any media missives that bring by a communication of fact and those amongst the fact-set that are beyond the expected may still have some market moving value. The durability of that fact or how out of line of anticipations it was may perhaps have some effect on how much and for how long the prevailing state of prices will be affected. Those broadcasts that provoke emotion are likely that are worth inspecting a fading trade. Whether news of war, crop-failures or any such genre' of information flows that produce an instant or moment of endocrinal rush.

The fine art of speculations rests on anticipations. Broadcasting media would never report what is coming to happen tomorrow, but only what may have (no guarantee that the broadcast is totally factual, since we have more "viewspapers" today than newspapers) already happened. Those who rely more on figuring out what they ought to anticipate on such resources are often the food for those who would rely on these broadcasts to figure out where the likely dead bodies will be buried. Price may not have all the information of what keeps happening every moment, but does have more information than any other resources of what is expected to happen.

Event Study Method may be a decent tool to evaluate the statistical behaviour of specific kind of events that occur repetitively with varying outcomes and of studying the repetitive actions of specific mouth-pieces than of studying erratic and randomly occurring news.

In a highly inter-connected markets' world and where the risk-free rate itself has a volatility the comforts of isolating non-random abnormal returns' evidence too is fraught with risks of playing on a frail advantage that keeps fluctuating in its expected value with ever-changing cycles if not fading away. Thus, it seems fair to me rather than an over-simplification that the most important factor for the next price is the price at this instant or any distant instant is the price at this moment and in the prior moments.

Rocky Humbert writes: 

I have one secret on this subject that I will share. Well, actually it was explained by Soros and Druck as the "Busted Thesis Rule." I think I've written about this previously on the Dailyspec.

If there is a news event that SHOULD BE unequivocal in it's meaning (i.e. bullish or bearish), and the market after a bit of time starts going in the opposite direction to the consensus meaning, then it's a wonderful opportunity to throw your beliefs out the window and go with the short-term direction. Many important big moves start this way. For example, XYZ is bullish news, yet the market after a little pop starts going down, down, down, …. don't fight it. Rather, "Sell Mortimer Sell!" P.S. I learned this lesson the hard way when Bell Atlantic made its ultimately ill-fated bid for TCOMA and Bell Atlantic's stock when straight up instead of what it "should" have done … which was go straight down. I won't describe the censure I received by my legendary boss at the time. Amusingly, neither of these companies still exist. Bell Atlantic became Nynex which became Verizon. And if memory serves me, TCOMA was bought by AT&T when they got into the cable tv business…

Gary Rogan writes: 

In a similar type of episode, when 3Com spun off 5% of Palm thus giving it a market valuation, and the resultant value of Palm significantly exceeded the value of 3Com that still owned 95% of Palm, this marked the end of the dotcom era.

Apr

17

Okay, the 142 bank pres and public relations people have the minutes already to be released to public in 10 minutes. Bonds are up and stocks are down. Germany is getting killed. Which way will the release to the non-flexions affect bonds stocks and gold. I've been buying gold whenever it drops as I believe that the bank deposit confiscation has to be bullish for gold as are the trend followers short.

Anatoly Veltman writes: 

Rocky is patient at $1390, getting ready to pull trigger on test of $1320.

Victor Niederhoffer writes: 

Rocky a lot more astute than me perhaps because he has a bit of the idea that has the world in its grip in him from his days at the 'Bank' and his love of trend following. One passed their headquarters near the scene of the crime yesterday evening and it was replete with canine k9 4 footed operatives.

anonymous writes: 

One can imagine the scene:

Fed: Honey, I would love to be with you but we have to lay low a few days after the press got pictures of us together.

Banker responds: If that is the case, you and the D. C. boys have fun by yourselves. Give me the checkbook and I will go home to L.A. to shop. Call me when you decide you need the markets to go up again.

Rocky Humbert writes: 

For the record: I am flat gold. If Cyprus (or any other country) could cure their ills simply by selling gold, there would be no ills. My recollection is that the Korean housewives were selling their gold wedding bands to support the Won … during the 1997 financial crisis over there. Korean bonds were yielding 15% at the time. And I bought a few as an investment. That worked out ok. I am not buying the bonds of Cyprus, Greece or those other places. The wealth of a nation is in its land, its laws, and its work ethic. Everything else is a speculation.

Gary Rogan writes: 

"The wealth of a nation is in its land, its laws, and its work ethic."

Brilliant! I would add "respect for its just laws" to the list. May those who want to reward millions of those who broke the laws of this country by giving them the very object of their law-breaking and by making them a part of this nation give this some thought.

George Parkanyi writes: 

This is not scientific, but my feeling on gold is that given government interventions (manipulation is such a strong word) in markets these days, they can't exactly let that turn into a complete rout either. Fear is fear. Gold was supposed to be the haven of last resort. If people see that collapsing then there is the sense that there's nowhere to hide. The panic could transfer to other markets. It's not behaving as it "should" under the circumstances, which further calls into question in people's minds what the hell IS going on? And what is this action discounting - massive deflation? Governments sure want that idea to spread. This is one of the reasons I'm still holding fast to the core position - though I've taken stop-outs on portions. Not large enough portions to avoid a big hit. But it is what it is. The gold stocks are really getting creamed as well. Solid producers trading like penny stocks. Unless deflation IS ultimately our lot, I'm smelling blood in the streets (some of which is mine) and screaming bargains.

I think the odds are good for a sharp reversal rally. If things go really bad in other markets, that's where they'll be looking to cash out rather really pounded down precious metals. And gold is an international commodity - still highly valued in many cultures. This crowded-trade unwinding behaviour I think could reverse very quickly, very soon.

A commenter adds: 

Was the fall in Gold the result of some bigger thing that I am unaware of, and did someone smell a canary that has been dead for a few months and was the first to find out triggering the selling?

David Lilienfeld writes: 

Let's take a look at what's known:

1. Europe was weak going into 2013, but the dimensions of that weakness are becoming evident. The collapse of auto sales in the EU, the episode with the Cypriot banks (which I still don't understand why the Cypriot government didn't say, "Fine, Germany, we're leaving the euro, we have all these euros in our banks, our new exchange rate is X, and now you have a big mess on your hands, much as we do on ours; don't like that? Fund us!), the coming episode with Slovenia, followed by Spain, Italy (if it can figure out who is the government) and France. Then there's the farce previously known as DC. There's the leader of North Korea trying to demonstrate that there is testosterone flowing throughout his veins. The dimensions of many of these has become evident recently. The degree to which China is slowing down and the degree to which the US housing "recovery" might slow down have also started to clarify recently. I won't get into the potential for a repeat of a SARS-like outbreak in East Asia.

I don't think the canary's been dead for a few months as much as it had a massive stroke, followed by resuscitation from cardiac arrest a few times (OK, OK, it was many times), and it's now brain dead and being maintained by artificial life support, ie, it's dead but it doesn't know it. Or the canary's been dead for much longer than a few months.

There's a lot of bad stuff that's gone on the last few months, and the extent to which the market in the US is near its all-time highs is a wonderful gauge of nothing so much as the power of denial. How there could be as much complacency as there's been (a topic of recent interest on this list) is something I don't understand.

Craig Mee writes:

If you haven't noticed, the first stop for gold was the width of the consolidation. I bring you information on laying of track to take into account expansion and contraction. We must work out what size volatility or influences allows for temperature rises and falls.

EXPANSION AND CONTRACTION.


1611. In laying track, provision must be made for expansion and contraction of the rails, due to changes of temperature. As the temperature rises the rail lengthens, and unless sufficient space is left between the ends of the rails to allow for the expansion, the ends of the rails abut one against another with such force as to cause the rails to kink or buckle, marring the appearance of the track and rendering it unsafe for trains, especially those running at high speeds. If, on the other hand, too much space is left between the rails, the contraction or shortening of the rails due to severe cold may do equally great harm by shearing off the bolts from the splice bars, leaving the joints loose and unprotected. The coefficient of expansion, i.e., the amount of the change in the length of an iron bar due to an increase or decrease of 1 degree F. is taken at .00000686 per degree per unit of length. 

Apr

17

Vis a vis the impossibility of threading the needle. There is a great short story by Sholem Alechem called "The Competitors". The gist is that two fruit sellers enter the bus always at the same time. She in the front, he in the back. They fight like cats and dogs. They curse at each other. "He has the rotten fruit. All the highest prices, the unhealthy ones" "She is a crook and beats her children. She takes all the money and runs around with it. Her stuff has molds and she doesn't keep it refrigerated. She was ordered to stop by the commisar and that's why she's here". Eventually he trips her and kicks her down the stairs and all her fruit goes tumbling. A good Russian helps her pick it up. "Why do you always do it on the same bus. Why do you have to fight with him?" "Who, my husband?".

Apr

17

I should add that many people mistakenly come to me to ask for advice on trading. At the junta, where I turned over the moderation to Gene Epstein, he likes to refer to me as a philanthropist. So at the end of each junta, about 20 people crowd around me asking me for philanthropy to them. Another 20 request a meeting with me to get my advice. But I don't have good advice. And I don't have a minute in the week where I'm not trading or parenting with my 7 kids. If one had a minute, it would be nice to say hello to the significant other, especially when one doesn't have a losing position. However, that's so rare that it's not worth talking about.

Many mistakenly see that on occasion I luckily beat the odds and make a small profit and come to me for a little guidance as to how to take out a little profit from the market. It seems so easy and the hourly wage is so great relative to what they make. I note that my average swing from day to day is often greater than my father's total earnings in his life time. That's a terrible lure to many people. But you can't make a profit nor have I ever seen one who could unless you buy and hold, unless you have a tremendous quantified and updated date taking account of all sorts of statistics and randomness and ever changing cycles. Then you have to be there 24/7 to implement it because the swings that are good only last for seconds and if you have job or like to have lunch or dinner, that's incompatible.

Of course other than buy and hold you can always invest with a hedge fund. But… but… but… . By the time, an operator pays his sales force, and his administration, he has to charge 20- and 2. Okay, suppose he can overcome 1- % a year vig, and make 2 % more than the market's 10%. That gives you 12 % before fees and 10% before vig. What's left for you the investor? I reiterate, one feels like telling those who wish to join the fray, come with me to Rockaway or the Hamptons to the ocean. And I'll hold up my hands like King Canute and say, "I am as incapable of helping you, and you are as incapable of making a profit other than buy and hold as I am to stop the waves".

Jeff Watson writes: 

I tell people they are better off going to Vegas then trying to trade. At least if you blow a couple hundred grand, the pit boss will give you some comped meals, a couple of shows, a room, hooker etc. The market mistress doesn't even give you a kiss before or after she "takes advantage of you", and you certainly don't get comped. 

David Hillman writes:

When people ask me how I make a good living out of my business and appear to work so little at it, I say "If you have 35 years to listen, I will tell you every detail of my career and if you can figure out how to make that work for you, maybe you can do the same." Thankfully, I get no takers.

When people used to ask for investment advice during the salad days when a monkey with a computer could make 30%+ with 'buy and forget', I would say "Oh, here's what I'm doing." I stopped with that and started saying, "Sorry, I don't give anyone investment advice anymore." Now, I say exactly what Blodget says in this piece [forget Task, he's the straight man]. It is nothing really new or different from what many advise, but it cuts to the chase, lays it out and makes the case in a very impactful way. If you have 5 minutes, it's worth a look….I wish every investor could see this.

Peter St. Andre writes: 

I don't see that Blodget's conclusion follows from his premises. Yes, the short-term trading game is rigged, but that doesn't necessarily mean that index funds are the right approach for individual investors — maybe long-term / dividend investing is best, maybe permanent portfolio, maybe other things (depending on the investor's mindset, patience, discipline, intelligence, etc.).

David Hillman writes: 

I won't debate this, because I'm not here to try to convince anyone of my correctness nor of Blodget's, nor do I care what anyone else thinks, but I will comment.

I don't think it's BS at all. While I can't put the stats on the table, I'd bet something close to the 80/20 rule applies to whom he's speaking when he talks about the "average individual investor" and those who could be investors.

The suggested alternatives, stock picking, dividend investing, etc. require, if not a lot, at least some knowledge and sophistication. Most have little to none of either.

Unlike the astute types here on the list, there's Billy Joe Tireiron, who has an 8th grade education, works second shift at the plant and picks up a few shifts a week at the 7-11 in order to sock a little away. He's not a dummy and may know a little about saving, but knows a nothing about investing.

And, there's the systems engineer who is highly educated, brilliant at his job and spends 80 hours a week at it, but knows nothing about investing and has no time to learn.

There are plenty of individuals like those out there who are smart and good at what they do for a living, they may know about wine, sports, history, art, whatever, but are clueless about investing. I'm sure we all know a ton of them personally, I do.

So, when do these guys have the time to learn about stock picking and/or dividends, and where're they to go to get good advice that is in their best interest? What the heck do they know about investment strategy, short or long term?

When the chair and I first met 11 years ago, I told him the story of a family member, a well-educated person with a master's degree and whose well-educated engineer husband handles their investments, who said to me "We made $1,000 in the market today." I told her they only 'made' $1000 if they sold and took their money off the table. These are very bright people and somewhat market knowledgeable, but still didn't realize there is an important difference between paper money and cash.

Or take a guy who knows very little. He hears dividends are the way to go. So, he buys 100 shares of a commercial REIT at $10/share that's been consistently throwing off a dividend of $1.20 for years. He thinks "well, this is a consistent 12% return, it looks safe, and it's better than the index fund that averages 9%. When the share price falls to $8.00 and the dividend remains $1.20, his yield rises to 15% and he thinks "wow, my dividend is up 25%", but then fails to consider his depreciation of 20% which gives him a net negative total return.

What are the alternatives available to the average guy, one of the 80-percenters, who wants to invest? They can buy into the marketing hype of online brokerages that tell them 'we'll give you all the tools you need', but still have no time to learn and understands half or less of what they're reading. They dive in nonetheless and lose.

Or, they buy some hot stocks or funds because some personality screams a recommendation at them on TV or they read about them in a financial rag a few months after the fact when they're no longer hot. Or, they're sold an annuity by a bank which benefits more than the client from that option, or a whole life insurance policy by an insurer as an 'investment', which we know it is not.

Or perhaps they go to a commission-based financial planner who takes their 6% off the top and they're upside down from the get-go on every dollar they invest. That may be better than the others or not being in the market at all, but why start out upside down? Instead, they can, as Blodget advises, invest in a low-cost index fund, paying 1/30 the 6% entry fee and taking advantage of the long term drift.

Blodget may be generalizing, which is all one can do in a 5 minute webcast, but he does quite clearly make the distinction between the disadvantages of short term trading and the advantages of long term investing for a pretty broad audience. He's making the same case the chair was and has been has made for years.

If one doesn't buy into the drift, fine. But, it's not 'big bad wolfing' nor bad advice to say "hey, average guy……don't swim in a shark tank, don't buy into the hype, instead, play it safer, minimize your costs and go with the drift." Besides, there are some morons out there who should be scared into caution rather than gamble their family's future.

If we want to nitpick, Blodget may fail in saying "the ONLY way for the average guy to make money in the market long term is low cost index funds" rather than to say "there are other reasonable long term strategies that may work for some, but if you have no idea what you're doing and have no time nor inclination to learn, going with low-cost index funds is the best bet to maximize your return over the long term."

And, he probably also should have said "this advice does not apply to the Spec-List where everyone is brilliant and knows what they're doing and many will think this is BS." ;-)

Apr

17

Many of the markets that one trades have an unerring capacity to avoid giving one a profit. If you hold a position over night, they move so much that you can't hold them without staying up the whole night, for two days in a row, which for most people is impossible.

Other markets only let you get out of a position when it's going to go in your original direction by a fast 1 or 2% like the S&P over night today. If they won't let you out then they are ready to go down 150 bucks like gold yesterday.

When you try to trade them in normal hours they go back and forth so that your vig on a small sized position taking account of the back and forth is inordinately large to be unprofitable.

When I trade gold, I find that it likes to move a fast 10 bucks in 2 minutes every now and then so you can't leave limit orders profitably to catch the reversal. If your position is too large, it will move so far against you that you will be margined out, especially over night when you don't have data to provide a buffer as to which way it's going. If you happen to have a position in the right direction and it moves a fast 10 bucks in your favor, why then it's impossible to get out. Within 1 1/2 bucks because only 1 or two contracts is bid or offered within 30 cents, and by giving up that much of an edge to trade a reasonable number of contracts, you lose your expectancy. If you trade with a small size, then the hourly wage from doing all the work is less than a construction worker.

Worst of all are the markets where just a few hardened members on the rules committee make the markets. Many of the options markets are like this. They will maneuver the prices and the rules against you so that it's impossible to make a profit at the settlement or hold the position through it because of marks and margins against you.

If you trade for small gains and losses, that's worst of all because the high frequency people are ahead of you on each tick, so by the time you pay the bid asked and take account of the fact that you never get your limits until it's way against you like in the old pit days, you're giving up infinitely more vig than at Vegas.

The book on baseball betting says that you only pay 2 1/2 % vig on baseball betting, much less than any other market or our market. However, you have to live in Vegas to speculate there, and they treat you like a persona non-grata there and the chances for being comped or otherwise ennobled are close to zero.

Gary Rogan writes:

This just tells me one more time that being a long-term investor, specifically in stocks is the thing to do for all but the very best. Yesterday was a bad today, today is a pretty good day, but do I care? Not really, other than it's more pleasant to see a lot of green than a lot of read. I do care that there is nothing good to buy, but can I do anything about it? No. Like in fishing, I just hope that sooner or later the situation changes, in the mean time watching the drift with noise superimposed on it is like watching paint dry, but a special kind of paint that doesn't dry in a monotonic fashion. So the "mistress" to me is nothing but paint that dries in an unusual fashion.

Apr

17

It is interesting to speculate whether there is a seasonal tendency to go down on the due date for the service and whether there is a corresponding seasonal for the subsequent days. One noted a revulsion in the air on those days in the past. One notes 3 April 15 and 4 April 16 literally that were down and a not insubstantial move the next day with 7 of 7 up a not insubstantial amount. 

Apr

11

1. There are some days that it is good to play at net with a short backswing and some days to play a full court game with big backswings and tremendous top.

2. The feeling of elation from recovering from a loss is much greater than any other gain of similar magnitude, i.e. it feels much better to go from 1 million down to 0.5 million down, then to go from 1 million up to zero.

3. Many of the markets are close to unchanged at the open, i.e. stocks, bonds and gold after tremendous moves yesterday.

4. The yen is at 99.70 yen per dollar and will have to top 100.00 for a cycle to be requited.

5. The sports betters and the market betters do not update their statistics enough to take account of ever changing cycles.

6. Woodson is a great coach who could teach all heads of firms a lot. It is such a contrast to see him trying to proactively assist and support his players on the sideline than the horrible image of Antoni with his smug smile of defeat as he holds his breath and keeps a stiff upper lip pacing on the sidelines as his team is murdered because of some bias he developed from 20 years ago playing in Sicily not taking account of the changing nature of the game.

7. Since the corn sold at a premium of 15 cents to wheat versus its normal 50% level to wheat, wheat has recovered by about 100 cents relative to corn.

8. The Nikkei is now 1000 points below the Dow, and a year or two ago it was 4000 below and 15 years ago it was 20,000 or so above. Does that spread move in trends?

9. It was kind of the f(lex)eds at the central banks to relieve all bearish news about bonds before the auction so that their clients would not even be temporarily discommed this time by the auction. Presumably this is necessary to maintain the 2 trillion or so foreign holdings of us bonds?

10. The VIX hovers about 12 and all who sold premium over the last 5 years have made a fortune, and it will be interesting and terrible to see how they give back all their profits as Sandor mentioned everyone in the pits has done so since the beginning of time. When will The Sage's holdings suffer the same fate as almost every other conglomerate in history.

11. The ratio of DAX to S&P, now at 4.96 having fallen from 5.5 is close to achieving it's 5.0 homeostatic level, thereby showing the forces of consilience between European agrarian policies and our own.

12. It is interesting to contemplate the swings of gold between 1600 and 1550 as it moves inversely with stock markets showing its abhorrence at the 1550 level of egalitarian policies or fear of them at the other. The increase in stock market wealth should cascade into other markets like the metals and oil and wheat.

13. The Knicks have won 14 in a row but they rely on the 3 rs and Melo, and such one dimensional reliance generally and statistically loses in the playoffs as one dimensional activities tend to lose in all other sports and life.

Apr

9

I admitted I was powerless over my affliction to taking small profits.

I made a decision to turn myself over to the care of those who affably might help me as God has helped others.

I made a searching inventory of all the losses I have taken.

I admitted to other human beings especially the spec list the nature of my wrongs.

I am ready and willing, but perhaps not able, to remove these defects.

I humbly ask all my supporters and friends to help me remove them.

I have enumerated the many millions that I have lost and beg forgiveness from those I could have helped had I not had this affliction. My family would be a very wealthy family and would not have to worry about such things as homes and educating their kids had I not succumbed.

I promise that I will make amends to them except when doing so might lead me closer to the grave and a nondescript and economical old age home.

I will continue to take an inventory of my lost profits and exacerbated losses, and when I transgress I will admit it. Readily.

When I jog, and have a peaceful moment, I will meditate on my past transgressions.

I will share the awakening of my profits, if any, with my colleagues so that others afflicted with this ailment can practice the principles necessary to correct.

And I will count. If this affliction manifests itself in day of week effects, than when the two day move is down seriously and the one day move is up, there should be a rise the next periods. I find of the 152 most similar events in the new millennium, the average decline the next days is -0.05 %. When the two day move is up seriously but the one day move is down, there should be a decline. I find the average move the next day of 132 such events is 0.03 %. I find similar random results for intra day manifestations of this terrible affliction. So I will meditate and count some more. 

Russ Sears writes:

An integral part of the 12 steps is accountability. You don't slip off the wagon because you don't want to have to admit it to the group and your accountability partner. Further, you recognize the triggers and you call the accountability partner to talk you down from the ledge.

In October in Canada, I attended an Enterprise Risk Management Conference where several heads of large Risk Management Departments talked to the group. It appears the regulators have adopted a system of 3 level of "challenges". That is they document times risk rules were broken and mistakes were made, either unintentionally or by bad processes at 3 different levels.

The first level was self or departmental reporting. The second level was outside department but internal to company (either internal controls or internal customers) and the 3rd level was external auditors. Each level was expected to have some "challenges" and write up how to improve them, and give a degree to how material or risky the error was. The right number of challenges and the degree of rogue risk was determined. Too little challenges or no serious violations were considered not taking risk management seriously.

The problem is, however, that this only prevents errors or rogue risk happening at the lower levels because it is a top down approach. But most companies fail because of strategic risk. Often in hindsight it is clear the strategy was guaranteed to make money short term in exchange for taking on crippling unavoidable long term risk.

This became clear to me when the Citi Risk Manager talked…The preamble to the "dance while the music is playing" quote played in my head.

They knew the housing market was a bubble ready to burst… But they also knew there was massive bonuses to be made before it struck and destroyed most of their company's equity.Nobody at the lower level was allowed to "challenge" their strategy, no matter how clear the fraud was to these lower level people.

In short, there are some risk rules that should never be broken, no matter how high you get. These may change as the circumstances dictate but they should always be defined. Allowing everyone to hold you accountable should be part of the any trader's 12 steps.

Chris Tucker adds: 

Is there a twelve step program for traders that habitually get out too soon?

(20 minutes to close): "Daddy will you play with me?"

"Umm, give me a couple minutes honey" says he. "Let me sell this first."

He groans but dutifully closes all positions. "What are you selling?" He makes a half-hearted attempt at explanation. Then heads outside for frisbee and badminton.

Then comes in an hour later and berates himself in disgust.

He never called his sponsor so there was no one there to say "Just hold it 'til the close bud, you can do it!"

He makes dinner all the while promising that he'll do better tomorrow. That he'll call his sponsor. That he'll keep at least one contract open, even if it kills him.

And he wonders, deep down, if he really can. Or is it going to go on like this forever.

Rocky Humbert writes: 

Mr. Tucker's whimsy is actually a profound question which is not easy tested:

Over a trading career, which is better: Exiting too early or exiting too late? Over a trading career, which is better: Buying too early or buying too late? (for a long only investor)

I would argue that for most fundamentally-oriented investors, the true killer is buying too early. I believe there are mathematical underpinnings to this. Perhaps other have a rigorous analysis of this problem. I've never seen this debated on the Dailyspec.

Ralph Vince writes: 

I think it depends on how you size your way in. I find I am infinitely better to be too early — on exits as well as entries. But I scale in, gingerly, one toe into the kiddie pool at a time. But this is, essentially, entering and entering on limit orders, whereas to be late at both ends, is essentially entering and exiting on stops.

I'm very interested in your thought process as to why that would be more advantageous.

Apr

8

Nice run of 12 reversals in a row in SP. Reminds me of how Irving Redel would always call up Susan after the market went down 5 days in a row —- "Is Victor okay?".

Alex Castaldo adds:

Today [2013/04/08] the S&P was up! The run of reversals continues!

Apr

8

Aubrey Niederhoffer has an excellent singing voice. He likes to sing "Those Were the Good Old Days" from Damn Yankees. The Bad One sings about how he enjoyed it when "the rack was in fashion. The plagues were my passion". When he gets to the part "like the hopes that were dashed when the stock market crashed" he always looks around three times and turns to me with a sheepish smile.

Apr

8

It is amazing how much more sophisticated the analysis of sporting events and things like sabermetrics are then the rudimentary kinds of analysis that are used day to day by practitioners and—-(one looks around three times to see if any woman's sensibilities might be offended)–sits in our field. 

Apr

8

The stool pigeon was often tied up to a stool to attract other pigeons to be shot. Perhaps the President has seen such used as a decoy in his duck hunting forays. Are there activities in our markets that attract us to our death. I remember during Oct 19, 1987, I noticed a 0.25 move from the open at 11 am in stocks and bought massively based on what turned out to be an erroneous print. Often since then I have seen markets hit new lows like bonds the preceding 2 months to this, and then rise to astronomic heights. Similarly for the grains last year that took a temporary bit of change from Mr. Grain at the corn 5 buck level before doubling in one of the greatest bull moves in history. Recently it was gold that plummeted below 1542 before rising a fast 40 bucks in the next two days. Are these general quantitative tendencies? It would seem asymmetric as a rise tends to peter out much more gently than a decline. Does it relate to the necessity of abandoning all hope before rebirth can occur, as in Isiah's Job. How does it relate to romance and markets per se? Inquiring minds find it interesting.

The thoughts are engendered by a reading of the excellent book Six Sources of Collapse by Charles Hadlock. The book contains a mathematical practitioners insights into dealing with collapse as a consultant for Arthur D Little for over 25 years. It contains chapters on the futility of predicting unpredictable things, crowd and herds, evolution and collapse, instability, chaos, non-linearity and networks. Great diagrams and easily accessible mathematical examples provide a framework for each chapter. It's everything that a good accessible mathematical treatise on a important problem should be.

The one weakness is that it is a bit naïve about markets, but much less so than the ponderous and impractical and self aggrandizing treatments that have come down the lakes from the derivatives expert. Hadlock has the excuse of not being a practitioner in markets, and it's counterbalanced by his truly systematic hands on knowledge about environmental disasters and waste disposal. The kind of book that every young mathematician interested in applications should have. Highly recommended.

Apr

8

The book Applied Longitudinal Data Analysis for Epidemiology by Joseph Twisk is a useful and accessible review for everyone who studies series that have repeated measurements of a subject, person, stock prices, earnings, or markets over time. The methods discussed take account that high values in one period are not likely to be followed by random high or low value in subsequent periods, i.e. the observations are not independent. Such studies are usually found in the medical field where patients are given some treatment and the effects are measured over time. A good example would be how do the various components of diet affect health for a group over time.

There are numerous examples in our field that spring to mind. How do the fortunes of companies devolve over time based on their earnings? How do the fortunes of different markets develop over time? What are the factors that influence the standings and consistency of performance of baseball teams across a season? The book contains methods that are accessible to anyone who has had a basic statistics course and is interested in time series. It starts each chapter with several easily understood examples of longitudinal studies with a few measurements of an outcome like weight gain for each subject. It then shows how to analyze the data assuming the outcome is continuous, dichotomous, dependent on time, dependent on other predictor variables, spaced equally or unequally. It gives a graphical example of each technique used, then shows the model used to analyze the data, then gives statistical output from standard software program that are the results of the analysis, then gives an explanation of the results.

The techniques used are almost always simple extensions of regression using three or four basic computations—- the sum of squares within a subject, the sum of squares between subjects, the sum of squares between groups of subjects at different time periods, and the simple linear regression of how the variations between the above are related to other variables.

There is a very accessible notation used with hardly any nested subscripts or unusual Greek letters used.

Chapters and sections on the design of experiments,nonparametric analysis of the observations, relations with other variables, how to define change and ferret out causality, dealing with missing data, tracking the observations over time, calculating proper sample size to come up with a reasonable likelihood of finding a significant difference appear. The techniques used are generally those that appeal to ones' common sense. They are simple extensions of the t test for measurements between a few groups, and the stability or time dependence of the subjects over time. Rank correlations of the Spearman and Kendall kind are frequently used.

The way to do all these analyses with the software packages Stata, Spss, Spida, and MLwin are shown for all examples. There is a nice discussion of how to use two relatively new techniques GEE and random coefficients. Both of these techniques take account of different slopes and intercepts that might apply to the subjects under study.

I found the book very educational as a review of how to use simple statistical techniques for the study of change over time. The analyses are very different than those used for survival studies. They have great applicability to the kinds of things we study in markets or psychology but are rarely used. All of the techniques and analyses could also be carried out with repeated random samplings from the data. I highly recommend the book as a learning tool for students of change, and a model for teaching modern and accessible methods of statistical analysis. 

Apr

3

Many bearish things about gold lately. That it doesn't go up with no inflation, that we're in recession. That the dollar is going up. That there is great overhand of stocks. I am reminded of a question that I always ask when we hear rumblings that we are going into recession and someone suggests that it is bearish for stocks. I always ask, "what does that have to do with the likely outcome of the stock market? Will the drift be lower or higher?" Oh, I haven't tested that is the unspoken answer. Same for gold. I have not been averse to considering speculative buying of it on all the dips and one is not averse to upholding the spirit of Gavekal idea that it is good to consider things of that nature when caught in Africa by natives, or in large deposits by flexions. One notes a 20 day minimum and is not averse to considering expectations thereafter even before Dr. Zussman runs it on small tab.

Kim Zussman writes:

Using ETF "GLD" daily closes (12/04-present), new instances of 20 day lows were defined as the first 20 day minimum in 20 days. For these new 20 day lows, the return for the next 5 day interval was positive but N.S.:

One-Sample T: next 5D

Test of mu = 0 vs not = 0

Variable   N   Mean    StDev   SE Mean          95% CI            T      P
next 5D   32  0.0012  0.0317  0.0056  (-0.0102, 0.0126)  0.22  0.828

However 7 of the last 10 instances of new 20D lows have been followed by 5 day periods which were down: 

Date next 5D

02/11/13 -0.027

12/04/12 0.007

10/15/12 -0.005

06/28/12 0.018

05/08/12 -0.040

02/29/12 -0.004

11/21/11 0.021

09/22/11 -0.067

06/24/11 -0.009

01/07/11 -0.007

07/01/10 0.011

03/24/10 0.025

01/27/10 0.020

12/11/09 -0.003

06/22/09 0.017

03/10/09 0.022

01/12/09 0.047

10/16/08 -0.109

07/30/08 -0.032

03/20/08 0.022

08/16/07 0.010

05/10/07 -0.014

03/02/07 0.008

12/15/06 0.011

08/17/06 0.012

06/01/06 -0.026

02/13/06 0.026

12/20/05 0.050

10/20/05 0.026

08/30/05 0.031

07/06/05 0.002

03/22/05 -0.001 

Anatoly Veltman writes: 

Fantastic work, as always. Now, I will ask a few skeptical questions:

1. So you test a historical period which saw the price move from $400 to $1600. Wouldn't you expect bullish historical results of a purchase made just about any random day?

2. So we're having a market in 2013, bouncing around on any piece of planted news from Cyprus, from EU, from Putin, from Japan, from Fed, from WH, from investment banks, from fund characters (the ilk of the upside-down), etc. How will one adjust one's timing of statistically catching the falling knife - given that the timing of such leaks (releases) has significantly changed from the test years?

3. Also, the market mechanism has changed in those 8 years, on two fronts:

-the increased weight of ETFs vs. bullion/futures
-the increased prolifiration of HFT exploratory orders

My gist: it's good to have a study, but there are plenty of caveats that call for increased amount of discretion.

In fact, here is my idea: I've observed this to work at an increasing rate  since the transfer of investment capital from public into the coffers of the banks and funds has been initiated by the Central authority.

So Gold drops too quickly from $1600 to $1563, which rightfully piqued the Chair's interest in the wee hours. So this is what investment banks, playing with unending public capital, do (for a 24-hour play): they buy momentary cheap Gold and sell Oil against it (got to get the quantity mix right). Oil could not be considered cheap following last week's straight rise. Works plenty of times. And when it doesn't (really, once in a blue moon), a short term spread position becomes a longer term hedge, then the books may get cooked, then a rogue trader is disclosed, etc. who knows…But a good statistical trade to be sure. I like it.

Jason Ruspini adds:

If it seems like HFT is degrading certain strategies over time, there might be testable differences between different futures exchanges that support different order types. For example CME supports stop-limits without any additional software, but Eurex and TSE do not. ICE natively supports ice-berging, most don't. HKFE and SFE only support limit orders natively. Does the performance of benchmark momentum or reversion systems on equity contracts differ between these exchanges (without applying slippage assumptions)? They aren't apples-to-apples of course but if HFT has polluted the microstructure for certain strategies, it seems like something should show-up here, even if many participants have ways to create the other order types.

CQG Order Types Supported by Exchange

Ralph Vince writes: 

Interesting points Jason. Timely too, I believe.

When market meltdowns occur, the technologie du jour is the scapegoat. In 1929, it was margin accounts. In 1987, program trading. Tomorrow, HFT.

Not that HFT caused the meltdown, but the fact that they stepped aside and enormous air pockets formed in the faveolate theatre of perceived liquidity.

Apr

2

One notes a 10% drop in corn in 2 days and wonders what the impact of that on various markets is.

Jeff Watson writes: 

Since 2007-08, farmers have been upgrading their operations due to higher grain prices. Farmers have increased storage to the point where they are more likely to store their grain than pay storage at the local elevator. In general many have made capital improvements like crazy due to high grain prices, cheap money, and increased value of land. The benefit of the lower grain prices is that the consumer will have more money to be able to buy more pick-up trucks, etc. The cattle operator will also benefit with lower feed prices (which will increase his margins), which will be passed along to the consumer. This has been a very historic bull market in grains in it's longevity.

Mar

29

One queries whether Passover, Yom Kipper, or Rasha Shauna is bearish for stocks and will say a prayer of atonement and share a torte if it turns out not so.

Anatoly Veltman writes: 

You mean Sell Rosha Shana Buy Yomkippur did out-perform Buy&Hold?

Ralph Vince queries: 

But what about Passover? What about the full moon and a shorting a (very) quiet market?

Jeff Watson writes: 

Back in the pit days, during a quiet market, locals would start selling the market down to where it would trade and order flow would start coming in.

Anatoly Veltman writes: 

Can this be a way of creating "real world" demand?

Jeff Watson adds: 

Sure, the grain companies use this same concept in the reverse to bid up the front month to get farmers to kick out some of their stored grain into the market. Right now look at may corn/wheat spread. It is treacherous and the big grain companies are slugging it out with that spread. I'm avoiding it like the plague, just like I avoided that gold/platinum inversion 1.5 years ago that went out to $150. Too rich for my blood. Very rarely does corn trade premium to wheat. Vic even asked me about doing the trade when corn was 2 cents premium to wheat(where wheat usually commands a 50% premium to corn). I told him I wouldn't touch that trade with a 10 foot pole. In my case, fundamentals and gut instinct kept me from stepping on that land mine. It's been fighting for a week, and I just prefer to be long a little May wheat and have some other months and exchanges spread. I hate risk, and also hate gambling unless I'm the house.

Anatoly Veltman writes: 

The gold-platinum, of course, was entirely different as no Gold is ever consumed. It went out to at least $225 (we should ask Rocky if he knows the high tick, and how long the price was available). To my recollection, the spread double-topped in unusually brisk manner, i.e. the record prints didn't last more than overnight.

Richard Owen adds: 

What is it about spread trades that make them so treacherous? Gold/plat, corn/wheat, the Volkswagen stub, etc.

Is it because the mis-pricing is so "obvious" that people get greedy? Because it's a matched trade, they allow too much for a positive hedging effect? And because they want to trade the spread, they focus too much on maintaining the relative basis, rather than using risk-management appropriate to a gapping short, even if it screws up the net position?

Rocky Humbert writes: 

IMHO the reason the spread trades are dangerous can be attributed to several phenomena:

1) Price Anchoring and false assumption bias. People believe that just because the spread between X and Y has been bounded previously means that this is a law. In the case of stocks, in the fullness of time, it's a good bet that every stock must eventually either merge, get taken over, divest or go backrupt. Otherwise, one stock would take over the world. This means that if you are long GM and short Ford (because it always traded within X bucks), you will eventually blowup. And because GM/F is a mean reversion trade, it has the typical person adding as it goes against you. Can you trade around it and get out at a profit? Sure. But that is intellectually dishonest versus the original motivation. I suspect trading around the position is, in reality, what most profitable spread traders do. They don't put it on, add to it and wait for total reversion. In the case of commodities, there are short-term supply and delivery issues, so even if you are conceptually right, if the convergence doesn't occur before the contract expires, you will incur a permanent loss since the mis pricing doesn't exist in the next contract. That's the case with C / Wheat right now. Corn is at a premium to Wheat in May. But at a discount in all of the other months. So you need to get the price and the timing right. Or you will lose money.

2) Difference versus percentage. I find that people look at the spread as X minus Y. They often ignore X / Y. As prices rise and decline sharply, the ratio becomes more important. But it's not how most people's minds work. For example, a 2 cent mispricing when corn is at 250 is quite different from a 2 cent mispricing when corn is at 736. Oops make that 695 (limit down)

3) False Volatility Assumptions. Assume the price of X0 and the price of Y™ and you are trading X versus Y. And assume that the spread moves up and down $1. People mistakenly think in terms of $1 on 100 … and that's not a big move. In reality, you are trading the spread of $1 and so when it moves to $2 , that's a 100% change — no different from Apple going from $444 to $888 . Don't laugh. I can't tell you how many people fall into this intellectual trap.

4) Butterfly traders. Before interest rates were pegged, I used to chuckle at the 2/5/10 butterfly traders in the bond market — who would do the trade in MASSIVE size. And they'd talk about how the 2 was cheap to the 5. Or the 5 was cheap to the 10. Deconstructing the butterfly trade revealed that (almost all of the time) the P&L of this popular duration neutral curve trade moved with the direction of the 5 year. So it really was a bet on the 5 year rising and falling. And everything was dwarfed by that.

When I was worked with Kovner, he always hated spreads. He would say that it's hard enough to get one trade right. Why add to the aggravation and try to get two or three trades right?

Mar

27

Lives there not one spec here                                                 
whose profits have caused all hope to disappear                                 
who's meager talents and frailty                                               
would not qualify him for disability

Here are some good definitions on the 54 million American with disability.

David Lilienfeld writes: 

That's an ADL-based definition, and includes persons with Alzheimers, Parkinsons, and several other conditions–including osteoarthritis, which is prevalent among those of us over 50.

Scott Brooks writes:

Still, that's 17.25% of the population. That's 1 in 5.8 people on disability. That number should give even an ardent liberal like David pause.

We have over 15% of American's on food stamps (of which many are both on disability and food stamps).

We have 40 million on SS.

How many taking Section 8 housing? How many others "entitlements" are we paying out?

TBTF bailouts.

How many government programs can even an ardent liberal find in the budget and say, "the government shouldn't be doing that"? I'll bet there's more than a few.

Let's start a contest and all throw $100 into a pot. The winner is the person who correctly identifies the "straw that broke the camels back".

Stefan Jovanovich writes: 

David's liberalism is to be treasured. Liberals have been the people who — throughout American history — got the rest of us to admit that the country had a problem. The difficulty is with their command and control solutions — public education, for example. Penitentiaries (thx friends), planning for land use, minimum wage and child labor laws, drug laws — the list of foolish solutions is endless. (I am not saying these are David's). The "welfare" problem is real — there are tens of millions of adults who are too slow sick or stupid to be profitably employed. That is the problem; what we constitutionalists have to do is find a solution. Offering up the market is a good way to begin the diagnosis but by itself it is the same kind of malpractice that had doctors blaming ulcers on their patients behaviors.

Russ Sears writes: 

Rather than disability a better definition would be unrecoverability. What spec still here has not had their dreams shattered more than once and has not, after some soul searching, found the strength to get up and learn from it.

Frankly, hope is fickle, fleeting, but it only appears to be extinguished. After a few hard runs in the woods and a few days time, hope has always reappeared and shown a path to turning the pain into greater future strength. Not that the path shown is ever easy or sure, but it has always reappeared, sometimes 360 degrees from the path I thought was the way previously.

Running has taught me that training is mastering recovery. 

Jeff Watson writes: 

And right away, getting back up on the horse after he's bucked you and cracked a couple of ribs is very important. Or, when you are surfing in huge waves, wipe out, break your board, and suffer a three wave hold down and nearly die, grab another board and paddle right back out….who knows you might get the ride of your life.

Mar

27

Review of Trading Bases, a story of Wall Street, Gambling, and Baseball by Joe Peta

A timely book here just ahead of opening day, http://tradingbases.squarespace.com/. Peta relates a lifelong love of baseball and statistics, his experiences as an equity desk trader for Lehman Bros. (15 years) and his subsequent battle back from a horrifying injury sustained by being run over in the streets of NY by an ambulance –as if his Lehman experience wasn't enough to endure. He suffered a "Theisman grotesque" leg break that left him depressed and basically rehabbing alone in his NY apartment with wife and family living on the west coast.

His passion for trading snuffed by not being able to work, hopped up on pain meds, and trapped in the apartment leads to him to watching more sports than ever before. A baseball lover at heart and a statistical junkie, Peta finds a reason to wake up in the mornings. He decides to try his hand at making a statistical model that would identify edges for baseball team wins and losses that would provide him with a betting edge over the Vegas Line.

Peta eventually creates a hedge fund that bets baseball games that returns 41% in 2011 with similar daily volatility as the S&P 500. The book outlines Joe's views on gambling. Baseball is his preferred niche since the juice/spread is the smallest in comparison to other sports, the ability to use statistics to get an edge is available, and the natural alignment between the better and the team– rooting for your team to win versus the convolution of winning and beating a point spread.

Joe explains his model with care, logic, and facts–backing up his assertions with anecdotes, experiences and back testing in terms of the body of baseball evidence from the historical stat stockpile. He builds on the pioneer work of Sabermetrics, Bill James, and Nate Silver. In general his system uses time tested relationships of team win/loss records, runs allowed/runs scored, starting pitching assumptions, WAR/PECOTA analysis, and more. He relates his journey on a monthly basis showing his results, the breakdowns of what went right and what went wrong, his acceptance of a "lumpy" higher return than a smooth more accepted rate of return by clinging to the belief that reversion to the mean will occur–eventually. He uses a concept called "cluster luck" to identify "lucky or unlucky" pockets in team's prior records that should be ignored and removed from overall estimates. This is a key to his being able to form an opinion against the betting line of under or over valuation. His model then picks matchups that should be bet on and he uses a very systematic approach to determining the amount of the fund to bet on any one game–essentially using fund manager skill sets.

One notable opinion of his describes his fondness for "skill sets displayed" versus the recording of errors (mistakes committed and sometimes unfairly attributed). He uses SIERA (skill-interactive ERA) for pitcher evaluation and special modeling for playoffs and interleague games. He also walks the reader through his decision making process for when to tweak the model or when to stand pat—. Over tweaking will result in removing the natural capture of mean reversion. Joe has a friendly writing style and comes across as genuine, interesting and likeable.

I think any spec would like this quick reading book–you will learn something here about baseball stats and baseball betting theory; you may well enjoy the woven storyline of his trading career experiences as these snippets and stories move betwixt his model outlining. It is written for an above average mind, but its not too heavy to put someone off who doesn't deal with wall street or modeling on a daily basis. I read ever page, every micro-print footnote, and every end note.

Ken Drees adds: 

I could not find a section or passage by memory or a reference from the index to overall management influence on single game outcomes or win expectations. One chapter deals with playing from behind and how "small ball" played to cut a two run lead to a one run game is a bad practice–playing not to lose instead of playing to win–giving away your upside to get a better feeling that you are "doing something"–almost like a job justification strategy–manufacturing a run, playing to tie instead of win. Peta backs this up with data –pages 204-206. Obviously management is taken into account when overall seasonal expectations are determined. But the managers don't play on the field so they are not highly considered in Peta's analysis. I would think possibly it may come up as a side data point in the playoffs –having more of a weighting than regular season. It may be that widely popular managers may in fact swell a line up for a team and thus give you a better opportunity to make money against–like the NY Yankees as Peta points out are a marquee club who usually get premium priced in certain situations regardless of true odds.

Interestingly –he bets both national and American league games–turns down activity during interleague play since data is less deep for those occasions and also scales back during the playoffs.

In the chapter, "Focusing on the Wrong Data", Peta parts company with "a total lack of regard for management/soft skills mentality" that some of the sabermetric followers employ. He cites a player's manager, Ron Washington of the Rangers who is loved by his players and who makes a critical decision in game 3 of the world series tied one game a piece. He Gives veteran Torrealba –a 2011 95 game starter at catcher, a "deserved" start over the much better performing player at that time during the season, Mike Napoli. He juggled the line-up and in Peta's opinion weakened his team in two ways in order to give one player a "deserved" start over giving the other 24 players there best chance for a world series game 3 victory and series lead.

So maybe Peta does give some weightings in his model –maybe when playoffs and world series are in the prime-time spotlight managers can be exploited by bettors for their traits–both good and bad.

Victor Niederhoffer writes: 

I agree with the excellence of Trading Bases. The author is very brilliant, and very likable. And his discussion of what went wrong at Lehman is the best as well as his college essay on the central funding department, which almost got him fired, and his well deserved hatred of the boxing head at that firm, who gave him a one sentence interview before hiring him.

He assumes you know a reasonable amount about baseball trivia and it's helpful if you read the annual issues of the baseball prospects and are familiar with the pythagorean theorem of Bill James. The author was a star trader of tech stocks at several firms before being hit by a ambulance and turning to his first love after being fired by the Japanese and carried out in his wheel chair. A great book. I second what Mr. Drees said about it. 

Mar

25

To expiate for one of my greatest sins, the tendency to refrain from holding a position with a profit, I have been reading many articles on Loss Aversion, in marketing, law, and psychology. Here is a simple one [18 page pdf]  that covers many of the basics. 

How can one's decisions be less harmful and more rational? When you're given a good, you often will sell it at at least twice the price that you would buy it for. This explains so many things like bid asked spreads and free trial offers. I would like your input on how to reduce the harmful effects of loss aversion. How does it relate to risk aversion for example?

A commenter writes:

If managing money, will it work to objectively identify clients with those biases? (Larger sample size to train on.) Then one day see yourself as a client.

David Lililenfeld writes: 

Changing behavior is one of the hardest things one can do, but as most successful marketers will tell you, it can be done in almost any circumstance. There are apps for the iPhone (I can't speak for Android) which have succeeded in getting people to exercise or lose weight. Perhaps you might adapt one of them to suit your need.

a commenter writes:

Creating a graphic representation of the effects of loss aversion manifested by repeated failure to properly execute a specific trading system, especially holding onto the inevitable losers for the duration while grabbing profits on positive MTM positions before they fully develop, should drive the point home.

Viewing the terrible transformation of the equity curve should be enough to cure the speculator of the detrimental affliction.

Richard Owen adds: 

The simulations of St. Petersburg's bet are explained according to a computation of concave utility or an asymmetric loss reaction plus max payout. It seems that rational expectations man creeps into even psychological bias literature and perhaps indicates the sometimes impractical nature of academic analysis. Why is the most likely explanation not someone being offered the bet, thinking "I don't know what you're talking about, but I'll wager anyhow for fun", and thus their average wager was some median of $5, $10, $20, $50, people's intuitive level for mouth bets.

Victor Niederhoffer adds: 

Yes. If loss aversion is pervasive, then it should show up in regularities relating to price moves. The situation is complicated in futures where one person's long profit when price goes up is the short's loss. The endowment effect which is caused by loss aversion or the tendency to connect with what you own, could lead to holding something too long. The reference point effect, which is that people base their decisions on where they are, a variant of holding onto the status quo is also a factor. When there is a profit, a different type of endowment effect plays then when there is a loss. Especially when there has been a big loss and it turns into a profit, the loss aversion effect is greatest I believe. I have been trying to quantify various regularities relating to these sometimes conflicting and ever changing effects in the market, and perhaps it will not be a total loss. Thanks for the suggestions that my confession has elicited, and I apologize to all of you for my transgressions in this regard in the past. Had I not made such transgressions so often in the past I believe I would be a wealthy man. I am also open to the stages of confession of a sin from alcoholics anonymous, and perhaps I am at one of the stages by confessing my sins to a support group hopefully of ones who have conquered this terrible tendency.

Jeff Watson adds: 

When I get in a trade, I look at the size of what I have on, what the market looks like, is the market going to have the wind at my back, and then I pre-determine where I will take a profit, add more position, or at what specific price will I take a quick hit and get on with it. I do not deviate from that loss plan, ever. I might get getting nickeled, dimed and vigged to death, but the slow torture the market gives me is much preferable to trading by the seat of my pants, being consistent leaker, or blowing out spectacularly like I've seen so many do.. Taking my first loss quickly is the only rule in the book I don't break. It allows me to sleep well, and sleeping is important to me. That being said, whenever I'm in any marker, I always pay too much for it or sell it too cheaply. It's worse whenever I make a foray outside the grains, since other markets are outside my comfort zone, trading in them for me is strictly gambling, and I'm not very good at gambling.

Ralph Vince writes: 

The St Petersburg Paradox is a false argument, one that assumes that rational human beings arrive at conclusions based on mathematically "correct" asymptotic answers. But we do not operate this way, rather, in an amazing an beautiful twist, our minds operate based on a notion of horizon, a finite period in which to operate.

This is the reason you will board an airplane to get to your destination (bet case) even though you know it could crash (worst case). The mathematical expectation for such (the same formulated expectation used in assessing the St Petersburg Paradox — the sum of the outcomes times their probability) would assign an outcome so infinitely negative to the prospect of death, that even though the probability were so minute, the expectation would still be so negative that you would never board that plane.

Yet, in order for that minute expectation to manifest would require X trials, X flights, and X is a VERY large number relative to how many flights you will take in your lifetime — even for a commercial pilot.

And we innately know this! This is the very decision-making mechanism that allowed our early ancestors to descend from the high branches and onto the savanna at the outset of our long journey. Asymptotically, it was a bad bet. To innate human reasoning, it was a god bet.

So especially if we are talking about someone "betting for fun" or participating for the hell of it, we can not look at things through a lens focused on the infinite asymptote, but must focus on a finite horizon. The St Petersburg Paradox itself now solves readily.

Christopher Tucker writes: 

For my part, I find that on the frequent occasions that I kill a position to early, it is because I am paying attention to the wrong data. I am either paying too much attention to either:

- the profit or loss - focusing on the number of dollars or the percentage of capital
- the wrong time frame

The time frame is a huge one for me - I enter trades using criterion in a longer frame and then drill down to look for an opportune moment in a shorter time frame to pull the trigger. The problem for me is that I tend to remain looking at the shorter time frame and exit too soon or with a stop that is too tight. It is very much akin to missing the forest for the trees.

Much the same can be said in my main business of air traffic control. Rookies tend to pay attention strictly to proximity, which is critical, but tend to not pay attention to speeds, vertical speeds or properly anticipated speeds based on a solid knowledge of aircraft types or the current terrain. A Boeing 747-800 may fly at a reduced speed while climbing to get above an area of turbulence, but the moment he is above it or levels off, you can bet heavily that he will accelerate and very quickly at that. By the same token, high performance business jets like Gulfstreams and Learjets can be counted upon to climb rapidly (sometimes extremely so), especially if they have been in level flight for a while and are itching to get higher.

The key for me is paying attention to the right things. Profit and loss are important, time frames are important, but they may not be the best indicators of the overriding theme.

Steve Ellison writes: 

We have many times discussed path dependency. As the paper says, "[R]eceipts are naturally encoded, and responded to, as gains and losses from a reference point. So a pauper who wins $10 million in a lottery may be ecstatic with her staggering $10 million in net worth, while a dot-com tycoon whose $100 million paper fortune shrinks to only $10 million in a week may kill himself, distraught over having only a pathetic $10 million in net worth."

As an example from a different field, consider a baseball pennant race. If team B was 7 games behind team A in August, but has pulled into a tie by late September, what are the teams' psychological states? Team A's clubhouse has the atmosphere of a funeral, while team B is brimming with excitement and confidence. I have not put pencil to paper, but I grew up a fan of the Boston Red Sox, who were usually team A, and it seemed that team B nearly always prevailed in such situations. Logically, the recent past should count for nothing because the teams have exactly the same records, and only the future games will determine the winner.

Gary Rogan writes:

Why isn't this a choice between two diametrically opposed systems: either a buy and hold, where there is no special characteristics attached to the winner or the losers, or a mathematical system that has some predetermined dispositions at any time for a winner and a loser based on some quantitative criteria. When it's something in between, that ambiguous choice and regret enter the picture.

Dan Grossman writes:

Probably not many here, but there are those of us who at times own securities until they are long-term, and sometimes refrain from taking profits early because of the pressure to wait for long-term gain tax treatment.

Perhaps a retrospective study of such an investor's stock purchases that are significantly up after (say) three months, comparing annualized return of those stocks sold after one year, compared to those sold short-term.

Sushil Kedia comments:

Loss Aversion emanates from the desire to enjoy profits without having to respond to losses. It is a manifestation of an ill that returns can be generated without undergoing adverse excursions. Loss Aversion is placed within a fantasy that the majority suffers much more frequently.

Risk Aversion respects the law of diminishing marginal utility of risk. It acknowledges well that returns are feasible only upon a readiness to respond to adverse excursions.

The unwillingness to respond to adverse excursions results in all of the sins that traders can eventually end up doing, including losing more than what they are entitled to on any one adventure or set of adventures in the markets. Killing a position too soon is also a manifestation of loss aversion only, with a variant that one is averse to losing the profits away. I would surmise the opposite of this sinful loss aversion is not loss seeking behaviour, but merely loss acknowledging behaviour.

Risk aversion seeks to undertake an additional unit of risk only if a larger unit of return can be added. A relationship similar in nature to diminishing marginal utility thus makes for a maxima that is likely to be the optimal level of risk for a method, strategy, approach, history, future or portfolio. Loss aversion however is not only playing against the odds, but is rather an exponentially growing risk relationship. For an example if a 20% loss needs to be evened without being closed a 25% favourable move is required and so on and so forth [x loss needs x/(1-x) gain immediately to get even]. There is no optimal point possible in this relationship and the approach can and does take the indulgent down to zero.

For now, I would say Loss Aversion is driven by ego as to what the market should do, whereas Risk Aversion is driven by humility as to what the market may do.

a commenter writes: 

Continuing to hold a profitable position (long or short) is trend following: the expectation of movement in the same (profitable) direction.

To the extent there is aversion to losing profits (and closing out too soon), this risk should be compensated and may in part explain profitable trends.

Craig Mee writes: 

I think it's hard to naturally run trades when mean reversion is so frequent and we can't guarantee when the trend will change and the law of ever-changing cycles kicks in. So to counter that, it makes sense to trade in multiplies. Take half risk off almost straight away on the first push, bringing the chance of a scratch trade at worst, rather than a loss higher on the curve… though if the market does run, particularly in fx or higher range markets, subsequent setups can present opportunities for adding further. So a case of give and take I suppose, when from the outset nothing is guaranteed.

Phil McDonnell writes: 

We have had numerous discussions on this venue regarding stop losses. Part of the surprise from those discussions is that using a stop loss will double your odds of having a loss in the amount of the stop loss.

However the same is true for a profit target. Using a profit target will double your probability of having a gain equal to the target gain. The reason for both phenomena is that in a random walk half of all such trades will get reversed after hitting the target or the stop. The fancy name for this is the Reflection Principle.

Jeff Rollert responds to Jeff Watson: 

I have to tell you, having the wind at your back is not the fastest point of sail on a boat, nor the least risky if the waves are coming from your stern. Please google and study canoe sterns for a discussion. I bring this up only in context of its use.

I find many sailing "descriptions" along with those in climbing mountains to be misapplied. In both cases the getting into the trade is over weighted vs the exit.

As Hillary implied, he point of climbing is to live after coming down the mountain. That math would overweight the sell decisions.

I tip my hat to Lowe passing recently. Like Hillary and Norgay, he had balls and lived to tell the story. I highly recommend "Touching My Fathers Soul" in that spirit…who unlike Mallory was ill prepared and long of ego.

Gambling in climbing, is being unable to leave the mountain without summiting. Sailing has its parallels. So do the Marines.

Mar

20

One notes that a little counting is always good.

Since 1996 

………………….Expectation next

………..Number…1 day…10 days

new lows  249     2.8       9

new highs 538 -1.0        1.3

No need for Mr. Zussman on this. And put Faber in a box with Spencer.

One defined a new high as any 40 day high based on closing prices and a new low based on any 40 day low based on closing prices. One notes that the Faber study quoting some colleague was on pre 2007 data. But one doubts that their results would have been different had they bothered to count rather than talk about the data base back to 1790.

Mar

20

The following (copied from Mebane Faber) is so counterintuitive that it's worth considering. I don't think in these terms, and there could be outliers that explain the phenomenon. But (if they did the arithmetic correctly), it is what it is….

Source:

Should You Buy at New Lows? Or New Highs?

So we tested which strategy works better: Buying near 52-week lows… or buying at 52-week highs. We looked at nearly 100 years of weekly data on the S&P 500 Index, not counting dividends. You might be surprised at what we found… After the stock market hits a 52-week high, the compound annual gain over the next year is 9.6%.

That is a phenomenal outperformance over the long-term “buy and hold” return, which was 5.6% a year. On the flip side, buying when the stock market is at or near new lows leads to terrible performance over the next 12 months… Specifically, buying anytime stocks are within 6% of their 52-week lows leads to compound annual gain of 0%. That’s correct, no gain at all 12 months later. Using monthly data, our True Wealth Systems databases go back to 1791.

The results are similar… Buying at a 12-month high and holding for 12 months beats the return of buy-and-hold. And buying at a 12-month low and holding for a year does worse than buy-and-hold. Take a look… 1791 to 2012 All periods 4.3% New Highs 5.5% New Lows 0.9% The same holds true for a more recent time period, this time starting in 1950… 1950 to 2012 All periods 7.2% New Highs 8.5% New Lows 6.0% History’s verdict is clear… You’re much better off buying at new highs than at new lows. You might not agree with it… but it’s true.

Victor Niederhoffer writes: 

That's a shocking result. Heavily weighted one might think to the depression period and the 2008 period, and probably not taking into account durations from hitting the new lows. i.e. the 1st new low in a period or the tenth. Probably even more copacetic to the trend followers with individual stocks.this is how Rocky and I first met, but I don't think he remembered it. A loss of mine was reported in the papers and Rocky wrote to me to memorialize what a woeful idiot I am. I wrote back saying "You seem to take great pleasure in my losses et al". But as you know, you can never win a dispute with Rocky. Now we're friends again.

Scott Brooks writes: 

I have been privileged to buy the low and sell the high on multiple occasions. It's all those other darn trades in between that drag down my return.

I had a friend tell me once that there are 50 perfect days in a year….. a bluebird sky, cool temperature, perfect humidity, occasional slight breeze (you know the kind of day I'm referring too).

Most people make the mistake of living for those perfect days. The key to a great life is to make the best of the perfect days when they arrive. And the way you make the best out of those perfect days is to make the best of the other 315 less than perfect days per year.

It's about having a good positive attitude so you can make the best out of whatever you get. And they way you do that is through practice…..you practice and practice and practice…..until a positive attitude and making the best of things becomes habit.

So make the best out of our less than perfect trades, for they are the ones that are ultimately going to define you as a person and a professional.

Jim Sogi writes: 

Amen to what Scott says. In surfing you got to go on the crappy days so you are in good shape when the big waves come. You can't just wait, like many do, for those rare perfect days. Then they are so out of shape they can't make the drop and have no legs.

Alston Mabry writes: 

I'll assume the data for 1791-1950 is more troublesome, so let's just consider this result:

1950 to 2012

All periods 7.2%

New Highs 8.5%

New Lows 6.0%

The obvious question is: When do you sell?

Jordan Low writes: 

It seems that there is never a good time to sell. You can beat 6% by say investing in short term bonds. It has to be short enough for the turnover of the strategy, so say duration of less than 1Y.

Also, the new high strategy has not really worked since 2000 with the market risk-on/risk-off, so are we in a new "regime"? Or do I keep to the strategy and pray that I will end up ahead 60 years from now — i.e. not a repeated game, you get one dice roll!

Ed Stewart writes: 

I have noted that including historic t-bill rates or alternative short term rate benchmarks as an estimate for return while in cash dramatically alters the return of long term timing models. However, I am not sure if t-bill or similar has been a fair estimate of cash holding returns - I am sure others no much better than I do.

With regard to the article idea, It does seem to be the logic of a simple trend model - something like Long on first close in top X% of range 52 week range, Flat when close in bottom X% of 52 week range. A bunch of rule sets similar to this (some type of very long term trend indicator or look-back) seem to give similar results - and like was mentioned much of the benefit comes from missing a small number of significant market declines.

In other periods (like the 90's) the models can trigger whip-saws that would likely have frustrated many "believers" at that time into giving up on them - which of course means they would have missed the benefits that accrued since 2000.

In thinking about timing models, one real benefit is that they provide a framework for the panic instinct while including a signal to get back in. The problem with the public is that they can panic, become traumatized, then never get back in until years have passed (if ever). In other words, even if one is skeptical about the future performance of timing models, such models might be a useful tool if the realistic alternative is very poor money-weighted returns with a near certainty (rather than the theoretical return of buy and hold).

A commenter writes: 

 I take the view that when any sign is known to the market, it will start to disappear; and when it is no longer a sign, it will start to reappear.

I would think it applies to this case as well. The advantage of buying at market high is not news. When was it first exploited? Were the turtles first known to the public for doing this? In the 90'es?

But anyhow, I think a plot of the returns across the time span is more meaningful (and clearly more revealing) than the average. With that, I presume that we will see the advantage of buying at market high is diminishing in the recent decade. More meaningful I think would be how much it has diminished so that we can anticipate the future when it returns.

Russ Sears writes: 

I suspected that the results depended on the period looked at. Kim gave the 250 day period results. But what happens in other periods. I looked at the S&P index from 1950-2013, with cut-off dates determined by period's length. I defined it a "first new high" if there were X day high within X days. and looked at the next X days log normal returns.

5 day period
avg     0.14%    Stdev    2.18%
         count  avg next period      T
new low  1006   0.06%                (1.24)
New high 1004   0.29%                 2.14

25 day period
avg      0.71%   Stdev    4.77%
         count  avg next period      T
new low   208    0.99%                 0.85
New high  179    0.86%                 0.44

50 day period  
avg     1.40%   Stdev     6.75%
        count   avg next period      T
new low  100     1.16%                (0.36)
New high  96     0.87%                (0.78)

100 day period  
avg      2.78%  Stdev     9.67%
        count   avg next period      T
new low  44      3.69%               0.63
New high 35      4.51%               1.06

500 day period  
avg     13.42%  Stdev    21.96%
        count avg next period      T
new low    8      8.33%              (0.66)
New high   7      7.24%              (0.74)

Mar

19

Robert Shiller, the oft-quoted Yale professor with a valuation approach that is bullish for a few hours once every decade (or so), appeared on my Bloomberg terminal late yesterday:

BN 03/18 *SHILLER SAYS STOCK MARKET IS 'OK INVESTMENT' STORY TO FOLLOW. –KARA WETZEL-0- Mar/18/2013 14:27 GMT

BN 03/18 *'I'M SAYING GO FOR IT,' SHILLER SAYS OF STOCK MARKET STORY TO FOLLOW.–KARA WETZEL-0- Mar/18/2013 14:27 GMT

BN 03/18 SHILLER SEES NO EVIDENCE OF A TURNING POINT IN HOUSING (Video)-0- Mar/18/2013 15:09 GMT

One ponders the definition of an "OK" investment from this celebrated professor? As to a "turning point":

turning point 1. a moment when the course of events is changed the turning point of his career

2. a point at which there is a change in direction or motion

3. (Mathematics) Maths a stationary point at which the first derivative of a function changes sign, so that typically its graph does not cross a horizontal tangent

4. (Mathematics & Measurements / Surveying) Surveying a point to which a foresight and a backsight are taken in levelling; change point

Victor Niederhoffer writes: 

One has had the displeasure of going one on one with the Professor while he rode his stationery bike. I got him to admit that his topsy turvy 10 year correlations were absurd as they show negative correlation with future price changes for previous years, but positive correlations for current years. I also pointed out the retrospective nature and part whole nature of his data from past years on which the basis of his work was done. He held up the possibility for a while that certain pareto processes or stochastic integrals had this tendency and then indicated that his work on p/e was not very significant and had not been updated. He did not consider me an important personage at that time, (I believe Lowenstein was there to add insult to injury), and at lunch which I paid for, he showed his contempt for me (probably justified) by directing all his attention and talk to the profs at the table. Subsequently I believe he realized that he had devoted quite a few pages of one of his bearish book showing that values were crazy because the dividend model would not have been as volatile as actual prices to some of my work on world events. To add further insult to injury Prof Lo had a similar experience with him when Lo was not as respected as today.

Mar

19

One is reading The Six Sources of Collapse by Charles Hadlock. It's a mixture of very sophisticated teaching for the common man of statistics like the extreme value distribution with naïve examples relating to markets. It's everything that the experts work is not. A man trying to teach and learn rather than hold up his own greatness and everyone else's weaknesses. A nice discussion of herd behavior and the usual stuff about the game of life and complexity from New Mexico. 

Mar

18

(NYT) "Clippers 93, Knicks 80: Clippers Overpower Knicks as Their Skid Reaches 4 Games"

It's pathetic and funny to hear Smith as the go to man and spokesman for the Knicks as he is the cause of all their misery being the world's worst and not equal to any opposing counterpart. By relying on him, they're guaranteed to lose. On that vein, before game, Kidd was receiving some lessons in shooting threes from the Clippers shooting coach. The Clippers were so confident of winning, they showed sympathy and gave lessons to their adversaries. Okay. What's the relevance. It's like a technician explaining why he missed a call, and why his range forecast which just missed by 1 or two points before it went the other way by 30 points was off by a little. When one played doubles, it was always wonderful to have an opponent taking 80% of the court when he couldn't compete with us. That's the way the other teams must feel when they play the Knicks and Smith is their go to man.

Mar

18

What do you think of the new way of serving a la Kane where they serve from the right, leaning all the way to the right side wall, and then move the left foot to the middle like a dance step and get the torque from the lateral motion as well as the hips?

Bo Keely replies: 

Of course a righty does it from the left side, but the purpose I think is two: lateral movement confuses the receiver because the eyes are moving side to side and suddenly the ball comes at a straight on. And, from the server´s standpoint, when he starts the move he begins the second law that an object in motion tends to stay in motion, and moving across the service box allows a longer travel before the hit compared to stepping toward the front service line. An analogy is the high jump technique of trotting parallel to the bar for a few steps and suddenly springing 90-degrees at it to leap. These laws of motion work all the time. I just came from bodyguarding a mug victim at the waterfront. We needed backup a few minutes ago, so I called a friend. He showed up with a syringe and vial of dessicated diamondback rattlesnake venom that was "enough to kill everyone in iquitos". What´s this for, I asked. In a move quicker than my eye could follow, his hand raised vertically 6¨ and whipped around horizontally to strike my left jugular, but fortunately he didn't load the syringe. I told him, that would kill the guy– instead load it with frog sappo to paralyze him, and he´ll lay in the gutter as an example where he robbed the victim with a sign on his chest, that I just printed out from the computer, ´Do not molest the tourists!´- the lone ranger´. 

Mar

15

I got a rook who sits behind me. And occasionally in the heat of the moment when getting oneself out of a trade I mistakenly close the whole position out and his gets closed out also. And if it goes in his favor after I hear him sighing and shaking his head and frowning and holding up his hands in Yiddish disgust, and rocking back in his old squeaky chair. I am reminded of when I played squash doubles with Vic Elmaleh who was 40 years my senior. Whenever I missed a shot, he acted exactly the same. Would hold up his hands in disgust and mutter imprecations under his breath. "It was yours. Why weren't you there". (One reason was that I was covering 75% of the court.) We won the national doubles 43 years ago (losing more points than we won in the process. Every match a 5 gamer). I still hear him complaining.

Mar

14

Written in honour of all splitters, rookies and lookbackers:

A common pursuit in decision making is to compare data of many kinds and find the best way of separating the observations into different classes.

For example you mite be considering what are the factors that contribute to long life. Weight, height, mid range of parents age , % of meat consumed , exercise mite be the variables. You mite find that when parents mid range was above 140, and meat eaten less than 2 times week, and exercise more than 5 hours a day, the longevity is 10 years higher than the average.

Trees are usually used to separate the groups. An example picture of such a tree is here: [pic ] Lots of good pictures of such trees and a discussion of a typical tree sort is in An Introduction to Classification and Regression Tree (cart) by Roger Lewis. And programs like CART and AID and many modern variants are widely used in medicine and markets. In fact all market people systematically or implicitly consider such problems. When does the market go up? When gold is down more than 10, when bonds are up more than 100, and the previous 5 day sp move is between -1% and 0 %? The problem is that there are many variables to consider, and many levels at which one would reasonably split the data.

A good starting point in considering such problems is to note that when there are two mutually exclusive groups X and Y the variance of the difference between means is the sum of the variances of the means. The variance of a mean is the variance of an individual observation divided by the number of observations. For example, consider the average move in sp during a day has a sd of 10 and variance of 100. If you take two independent samples of 10 from such a distribution , the variance of one mean will be 100/10= 10 and the variance of the difference between means is 20. The standard dev of the difference is 4.4 What does this mean in practice? One will round. A 50% confidence interval in which 50% of the observation range is 0.65 x 4.4 = 3 points on either side of the difference between means which we'll assume to be 0. That means that by chance half of all the observations will show a difference in means ranging from -3 to +3. To find a region where 95% of the observations lie, ie. A 95% confidence interval we'd multiply 2 x 4.4 =8.8. In other words to find a difference that has less than a 5% chance of occurring thru randomness we would have to find a difference between means of 8.8 on any binary split.

But of course that's not all. Normally we look at 2, or 3 or 4 different splits to find the one that gives the greatest difference. It turns out that if we look at the highest of two differences, the average difference is 1.5 times as high as for one difference. In other words by randomness , the standard deviation for the highest of 2 difference between means is 1.5 x 4.4 = 6 a 50% confidence interval assuming randomness for the highest of 2 differences is 0.65 x 6 or from -4 to + 4. A 95% confidence interval would be between 2×6 and -2 x 6 i.e. between -12 and +12.

Now there were several assumptions made in this analysis. We assumed normality. And we didn't take account that there is sampling without replacement for one. And there are two cases: you look at the algebraic difference (2 tailed test, as above) or you try to maximize the *magnitude* of the difference (the 1 tailed approach). To get a good handle on it, Doc and I simulated what would happen if we divided up 20 random observations from a distribution that had a mean of 0 and a standard deviation of 10. This corresponds to the most frequent and typical thing one does when dividing up stock market changes in points (S&P rises or falls by about 10 full points a day). We then took two random subsamples of 10 each and calculated the mean of each of the two groups of 10. We then looked at the absolute value of the average difference between means when we repeated the process 1000 times. It turns out that the average absolute difference between means is 3.5 for a single split (this 3.5 absolute difference is in line with the std dev of 4.4 previously estimated)), 5 for the highest of two splits, and about 6 for the highest of 3 splits. This leads to incredibly high differences that you must be aware of when you split data to have anything more than a 50% chance that the difference occurred thru luck alone. To be 95% sure that you have something departing from luck for the highest of 3 splits you'd need a difference between the groups of 10. As the numbers in the group get less than 10 ,i.e. for a second or third split, the numbers would get increasingly large. This is a warning to all who search for regularities in data using methods that are implicitly or explicitly like tree sorts. By vic and doc.

Here is a more extensive table of simulation results

Table 1
Col A: number of observations being split
Col B: number of splits considered, best one is chosen
——-
Col C: mean absolute difference generated by best split (in S&P points)
Col D: standard deviation of absolute difference
Col E: lower 5% confidence interval
Col F: upper 95% confidence interval

20 1 | 3.56 2.66 0.27 8.65
20 2 | 4.97 2.67 1.24 9.81
20 3 | 5.84 2.64 2.07 10.55
20 4 | 6.45 2.55 2.84 11.05
48 1 | 2.26 1.72 0.18 5.63
48 2 | 3.25 1.71 0.90 6.40
48 3 | 3.75 1.66 1.36 6.78
48 4 | 4.20 1.68 1.79 7.24

Table 2 same as above but
Col C: average (algebraic) difference between means (in S&P points)
Col D: standard deviation of difference between means

20 1 | -0.06 4.61
20 2 | -0.13 5.62
20 3 | 0.01 6.42
20 4 | -0.07 6.88

Let's try to apply this to a typical example.

The 30 year bonds each day have a move of about 80 points.i.e a move from 142 exactly to 142 and 26 /31. Call that the stand dev . Let's say you have 100 observations of bonds in your sample. And you split it into two equal halves based on whether gold is up the previous day or down. The variance of any mean difference would be 6400 x2 /50 =256 . That gives a stand dev of 16.

Turn to the prob that a standard normal deviate will be between -z and + z. the prob is 50% that a normal deviate will be etween -0.65 and + 0.65, the prob is 90% that a stand norm dev will be betweeen -1.6 andd +1.6. Thus if you find a difference that's less than 0.6 x 16 = 10 its 50% chance, and its 90% chance to be 1.6 x 16

Mar

14

There's a rather direct and rather readily understandable paper that's the standard for non-statisticians trying to asses the difference between such things as test-retest correlations, difference between means of binary splits, and agreement of two successive measurement of individuals. Completely related and very similar to the binary split cart essay of Doc and me. But no consideration of sampling without replacement, small number of observations requiring a t distribution, simulation of actual distributions of differences, or adjustments for highest of n differences. Bland statistical methods for assessing agreement. Lancet 1986.

Fabrice Rouah writes:

Another great resource in this area is the textbook by Joseph Fleiss, Statistical Methods for Rates and Proportions, now in its 3rd edition.

Mar

14

"Super duped" about an old professor who thought he was going to find romance with a beautiful model who he met on the Internet. Instead he carried her suitcase of a white drug. Apparently he confided to her, and what must have been the beautiful reporter that interviewed him, that because of his co-authorship with many who won the Nobel prize, it was a 50% chance that he would win the Nobel also. Anyway, he's in prison now in Buenos Aires. And the prison guards always greet him with "hey Professor, have you won the Nobel yet?

Couldn't realize the resonance of that until I remembered from edspec… the letter my grandfather sent to the football coach. "When you have an all American like Artie Niederhoffer on the team, how could you give the ball to anyone else or let anyone else make the tackle". The coach read the letter in the locker room. And from that time on, my dad had a new nickname. " All American". We met one of the team at Lundi's 20 years later. "Hey, All American, how's it going. Caught any more touchdown passes lately?".

Mar

13

It was kind of the fixed income boys to give a little rise today (3/13/13)  in their markets, after 6 days of unremitting decline cover 3 big points (144 to 140 1/2 in the bonds rather than making those poor longs wait for the 10 year and 30 year auctions Wed and Thurs. Why were they so kind? Could it be that they wished to preclude them from participating in these upcoming tests of the strong? 

Mar

13

One was reading today again, Frederick Forsyth's The Day of the Jackal, and as you recall, the search of the French and the English to find the potential assassin from the Dominican Republic which involved such things as examining all passports issued in a 1 year period, all stolen passports, all hotel reservations, all dead letter passports issued, all gun makers, all disguise artists, surveillance on the Italian consulate, torture by electric shock, use of escorts and truth serum to unravel the extent of the plot and many more things that I am too unfamiliar with intelligence to understand,—-okay, the type of effort that was mustered here is far beyond what we undertake to find the regularities in the markets and the profits thereof. The same would go for the efforts to test and hold constant the various hypotheses in scorecasting. We should be very humble in connection with our limited efforts in our fields compared to others, and redouble our efforts to get on some kind of level playing field. Recall that the favored bailed out institutions are hiring space and manning their redoubts with the best and brightest they can find, who one competes against. Perhaps they do not work the long hours of those in The Day of the Jackal or examine millions of pitches like the scorecasters, but they have the advantage of unlimited capital to back their positions, the abstinence from fear of margin calls, apparently the ability to hide their losses in many cases from their superiors, and asymmetric bonuses if they make compared to the very mild raised eyebrow if they don't feather the nest. 

Mar

12

After one made a bad move in checkers, putting oneself in a hole and finding oneself in a most untenable position, Tom Wiswell, would look at one, somewhat sadly, nodding his head with a frown, "Now you're thinking". (why didn't you think a few moves ago). Okay. The bonds have gone down 6 days in a row and the stocks up 7 days in a row. A nice six percentage point divergence to another new high in the bond stock ratio. Today, I sought to sell bonds after they went up a little. I can hear Tom saying "Now, you're selling". I bought a little stocks overnight. And I hear Tom saying with reluctant disapproval "now you're buying".

Mar

12

One of the most valuable things I learned from the Chair is how not to do a study.

Let us summarize how to do a study. First define a pattern or event of some type. Then calculate the expected return subsequent to that event when the event happened. Then compare that return to the returns for all other non-event time periods. Do a t-test to establish significance at the 95% level.

That said the real problem is how can we insure ourselves against the possibility of biasing our study or otherwise completely messing up. the first thing that comes to mind is to never include data in your decision process that was not known at the time. For example Enron went bankrupt and then several years later after an audit the financial results were released showing that the original releases had been fraudulent. You cannot use the adjusted data based on the argument that it is the best data. Only the original data was known at the time so you must use that.

The same thing goes for price data. You have to use the prices that were known at the close if you are doing a buy at the close study. You cannot use retrospectively adjusted prices when the data is adjusted later than the supposed decision was made.

Always use tradeables. For example the S&P 500 index does not trade as an index. The S&P futures do and SPY does as well so one would use either of them as data for your study. The reason is that individual stocks can have stale quotes. Some of the smaller stocks in an index do not trade nearly as often as the larger caps. Thus the index can be behind the true position of the market. The tradeables trade and thus are subject to arbitrage that tends to keep them in line with the real market level.

This is a short list of things not to do. However it is representative of the fact that it is harder to learn what not to do than what to do. Other contributions would be welcome.

Victor Niederhoffer adds:

Always simulate what the chances were that your observed results were due to pure luck and take into account the path that your results would take and what that would have required of money management.

Consider the impact of retrospection on your results. The human mind is capable of ascertaining many regularities that occurred in the past, and is good at uncovering them in a study after the events occurred, but not very good at uncovering predictions based on new data that they are not already privy too. Never use range forecasts as they don't tell you whether you would have made or lost. Be aware of the difference between description and prediction, and statistical significance versus predictive distributions.

Never be overconfident. Do take account of the drift in your data, and the shape of the distributions you are drawing from. Mr. T, is not very good if only 2 or 3 observations removed from your sample would change the results.

To what extent are the regularities you believe you have uncovered been extant in the literature or the knowledge of shrewd fast moving traders. That changes things. What is the extent of regression bias in your results? 

Alston Mabry comments:

Something else, basically another riff on the Chair's comments: I find that statistics like means and correlations are, of course, useful, but they almost always hide important, idiosyncratic structure in the underlying data. In a sense, summary statistics are "intended" to do that, but I find it useful to unpack them and examine the structure in the data series, how the summary stats change over time, etc.

Anton Johnson writes: 

A couple of important things to consider.

Large changes in outcome resulting from small adjustments of a parameter is a sign of over-fitting and usually bodes badly for real-time results. Sometimes eliminating or finding a suitable replacement for the sensitive parameter will result in a more robust and usable model.

As a general rule, the number of parameters used in a study should be FAR fewer than the number of resulting trade signals.

Ken Drees adds:

Coach Bob Knight's new book The Power of Negative Thinking mentions "NO" being safer than yes. You can always more easily change a "no" into a "yes" versus the opposite–deciding to change your mind from positive to negative.

The gist of the book is to tamp down the uber positive thinking crowd–no, you can't do anything you want, no, you can't magically power your way to a fine end. PONT, Power of Negative Thinking is how Knight coached. He explains it that you must limit faults, limit mistakes–if we don't do these things then we have a chance to win. He keys on dealing with negatives to achieve a positive. He must have come across a lot of less disciplined approaches to coaching in order to come up with an against the grain type philosophy (PONT).

A lot of his points are probably already in the quiver of the sharpened spec. His hyper worried routines, careful study of the opponent, downplaying of good fortune and constant moving of yesterday's win into the rearview mirror broadens out into that persona you conjure when you think of him–that brooding face, those searching eyes–never smiling. The idea of "can't do it" was probably the most different from what we hear today–most are afraid to say "can't–that it means "I won't". Knight loves the honesty of a player saying I can't understand that assignment, or I can't push myself any farther. I would not recommend the book to cross over into speculation, but it's a quick read and there are more than some items to enjoy.

During it, I thought about player health in relation to speculating. I am my own coach. It's a luxury to have someone call your number and sit you down for a breather, to know you may need rest over more drill. How do I know that I am playing/ trading fatigued—only after a poor result? Knight seems to have the keen memory still in gear. There are some interesting stories about his games and Big 10 accomplishments.

Coach Knight will definitely tell you "No".  

Leo Jia writes: 

Very interesting, Ken. Thank you for sharing.

There seems to be some rationale in being positive. As I understand it, when one says "yes, I can do it" and envisions the actual doing, he actually plants a seed in his subconscious brain. The subconscious brain can be more powerful in many ways than the conscious. So planting a seed there is to use the additional powers of the brain, which are not accessible by the conscious mind normally, and thus increase one's chance of achieving a goal.

Mar

10

As usual the reports of employment with all the adjustments to the economic numbers, coming from the government employees at the department chaired by the leader who likes her kids to sing the iron anthem, are designed to increase the importance of the department of the interior and redistribution and vote buying as Nock and Tollison and the public choice people said. First, the revised number from last month (which are 100,000 or so lower than previously reported) + the current number are very poor. And the total is about in line with the past dismal figures. (when will all these revisions be taken into account so that there is not such a big opportunity for the public to do the wrong thing).

The decrease in the unemployment rate comes from all the people who are not looking for jobs because they are on disability or given up hope. Third, the numbers are designed to show that when the rate goes up, they can attribute it to the fact that the survey was taken before sequestration (the economics chair has said this and important pro spending leaders of all sexes have it in her or his talking points already), so that when they report worse numbers in the future they can say it was because of the dreaded effect of reducing gov expenditures over 10 years by 800 billion rather than the fact that the numbers themselves are random.

Kim Zussman writes: 

"What is then the connection between these numbers and the market?"

1. If unemployment and GDP numbers continue to improve, Oval Occupier takes credit and proving that higher taxes are pro-growth
2. If it worsens, it can only be due to House Republicans protecting the rich
3. If unemployment and GDP numbers continue to improve in a world without investment alternatives, stocks go up
4. If it worsens, time for more QE - which is now well known to be extremely bullish for stocks

Paving Wall St for Hillary (sorry Ross).

Richard Owen adds: 

Always get long a fraud short you think is going to print above consensus. Men with gold filings and lucky silver dollars like their trading sardines.

Also, the disenfranchised pipe welder is the new fifties housewife. Instead of the little woman adding her own egg to the betty crocker brownie mix, the oxy acetelene operator adds his own self pity to a bottle of Jack Daniels. Growth in the fifties was still pretty good.

When Kruschev met Nixon and fulminated that Russia would outpace the US inside of seven years, it is easy to look back and laugh. At the time, much harder to be sure Russia wouldn't win out.

Mar

10

Scorecasting: The Hidden Influences Behind How Sports Are Played and Games Are Won by Tobias Moskowitz and Jon Wertheim is one of the best books for market professionals to read. The authors categorize all kinds of situations in sports and show how they effect the outcome. There are main themes on the endowment effect, value of blocked shots, rounding errors, bias by class and race, home advantages, officials giving the home team the advantage, importance of superstars, value in draft picks, importance of overtime advantage, influence of drugs by race, pressure and length of time away as a determinant of accuracy, the hot hand myth, and others. Each chapter starts with an anecdote about a game, and then shows how to quantify how factors covered in the anecdote can systematically be quantified.

It's a model of how market people should consider the markets. All factors that might influence the results are counted and controlled for. It suggests a million hypotheses about what affects the market. The path that leads up to the outcome is highly relevant in all sports, as it is in markets. It's not just where you are relative to the start but how you got there, coming from behind or being ahead. The home court advantage is consistent in all sports over all time periods, in all geographic areas. Suprisingly it has little to do with travel weariness, or the enthusiasm of the fans, or the idiosyncrasies of the park. I can hear all the sports fans saying, "but, but, but". However, the authors test all likely hypotheses to see what is really happening.

They attribute it to officiating bias. The officials don't wish to be berated, and wish to give the home team the edge on disputed calls.

The statistics on baseball are particularly interesting since they have the exact trajectory and outcome of each pitch, and can see when the umpires made bad calls, and the batters and pitchers made accurate pitches or swings.

It leads directly to such tests as whether back to back wins are more common over weekends or during the week, or during holidays. That's the kind of thing the authors routinely study. They have a nice page or two on how these factors affect markets.

In particular they talk about undervalued and overvalued stocks the same way, the general manager thinks about overvalued and undervalued players. Their discussions of market factors are regrettably shallow, as they talk about earnings misses and earnings surpasses and exact hits without testing the effect or its changes. As always, the people in one field present very interesting hypotheses that should be extended and quantified in our field without the expertise to apply them accurately in other fields. But their ideas are very suggestive and opens up a wide canvass for all who have the desire and persistence to apply the tests accurately, taking into account the principle of ever changing cycles.

The chapters on going for it, particularly the endowment bias of hating to lose what you've gained much more than loving to win are particularly telling and poignant and should be read over and over by market people with a view to eliminating this pervasive bias from their activities. Overall the authors have done a great job, and I would add this book along with Horse Trading, and The Principles of Professional Turf Betting, and Monte Walsh and Atlas Shrugged as 4 of the 10 best books for market people to read.

Mar

10

It's an ill wind that blows no good. The enclosed article on the size and growth of government by Thomas Garrett and Russell Rhine contains an excellent discussion of why government grows by 350% per capita per 50 years or so. see figure 1. It shows that the sources come from the recipients of lump sum payouts, and the monopoly status of governments.

One wonders what a comparable discussion of why the Fed's balance sheet and powers would grow. Part of it comes from those that directly receive the aid, the banks, failed companies, and flexions who receive the most valuable thing of all, the heads up and information on what they're going to. The other part comes from the constant accretion of power, money, and perks that goes with increasing one's activity. But how could this best be memorialized and related?

Mar

10

A recent talk by Brink Lindsay at the Junto was a perfect example of what should not happen at a talk. It consisted of a sophistic proof that Krugman's thesis that some post war years were much more golden than some more recent years because of more government regulation and greater equality is mispecified.

There were so many things wrong with the talk. The audience was totally inappropriate for the talk. It was a spread sheet, power point presentation where none of the audience could see it, understand the data points, or check the veracity. Even if the premises had been worth discussing, it would have been totally wasteful. No wonder so many people fell asleep, left the talk, vowed never to come back to the Junto, and were completely silent.

However, worse yet, the premises themselves of the talk were completely off base. The basic idea rested on two premises. That some 25 year period after World War II had higher growth, and that it was caused by more intrusive government. How in the world someone could say that gov. was more intrusive in that period than now is ridiculous. There are hundreds of measures of government intervention that could be used, and almost all of them would show that gov. is more intrusive today. Take government as a share of the economy, or the extent of the federal register, or the tax revenues taken as a share of income, or the extent of entitlements and unfunded debt, or the share of cronyism.

Second, the talk was filled with selection bias and data bias. Of course you can take a measure like productivity or pre tax income and find 4 points, a starting point, an ending point x year later, another starting point a few years after that and another ending point, where based on some opaque measure of income, there was a small differential in the growth rates. It has to be true with random numbers.

Hopefully, I will never subject the valuable time and efforts of the Junto attendees to anther talk like this, and that Brink who is a reasonable scholar and has written many good books will not waste the time of audiences in the future with sophistic and inappropriate talks like this in the future.

Here's a good discussion of government intervention which it would have been useful to use as a foundation and base, and would have given the audience something useful to take home with them. I see tables on federal spending per cpta, cabinet departments, human resources, a breakdown of federal expenditures by sector showing that physical resources shares has increased, state and local government expenditures, vote trading, bundling, and government size, and many other valuable topics. It's a model of what a talk to a general audience should have covered. 

Brink Lindsey responds: 

Dear Vic,

Thanks for writing — I appreciate the opportunity for follow-up discussion. And thanks for sending along the article from the St. Louis Fed — it is very interesting and I had not seen it before.

I do not believe, though, that the article in question supports your objections to my analysis. Yes, real government spending, both overall and per capita, has been on a steadily upward trend. But if we are looking at the effect of government spending on growth — and it was the effect of government policy on growth that I was addressing in my talk — then the proper measure is government spending as a percentage of GDP. The only relevant figure in the article is Figure 3, which shows only federal spending as a percentage of GDP, and it shows that federal spending fluctuated fairly stably between 15 and 20 percent of GDP through both the Golden Age and the Long Boom. No increase at all till the Great Recession. The composition of spending changed signficantly — from heavy on defense to heavy on entitlement spending — but the implications of that composition shift for growth are unclear.

For total government spending as a percentage of GDP, see this useful website.

Total government spending was somewhat higher in the Long Boom than in the Golden Age — around 35 percent of GDP on average as compared to around 30 percent. That rise is mostly due to a big increase in state and local spending on education.

But surely this isn't the answer to the puzzle. However you want to measure overall economic performance — the growth rate of GDP per capita, labor productivity (GDP per worker hour), or total factor productivity (GDP per unit of labor and capital) — the Golden Age beat the Long Boom hands down. The slides I presented didn't satisfy you on this front, but I challenge you to find any measure of overall economic performance that shows the Long Boom outperformed the Golden Age. Here, for example, is a chart on labor productivity.

Not even in the period of fastest productivity growth during the Long Boom (2000-2007) did growth equal the average productivity growth rate during the Golden Age. And I can't even imagine an argument which ascribes all or most of the fall in performance to rising state and local government spending.

Government spending on its own can negatively impact growth by supplanting private activity in an area — e.g., crowding out private schools with government schools. But in general, providing free stuff to people doesn't darken their economic prospects; the real problem lies in having to pay for all that stuff with taxes. However, if we compare the tax regimes of the Golden Age and the Long Boom, I think Golden Age tax policy, with its confiscatory high marginal rates, was more distortive and anti-growth than tax policy since the 1981 Reagan tax cuts. I don't even know what the argument would be for the other side.

So if you are correct and overall government policy in the Long Boom really was much more anti-growth than in the Golden Age, the main culprits must be found on in regulatory policy, not spending levels. I'm afraid that all attempts to quantify the burden of regulation are more or less problematic, and all rest ultimately on qualitative judgments about the effects of this or that regulatory policy. What we can say for sure is that there was a significant shift in the composition of regulation since the 1970s — a dramatic reduction in old-style "economic" regulation of prices and entry, counteracted by a big increase in "social" regulation of health, safety, and the environment. Old-style regulation directly restricted or prohibited entrepreneurial entry and blocked the transmission of market price signals; by contrast, social regulation merely burdens competition with extra costs. Add the fact that health, safety, and environmental regulation's main brunt is borne by economic sectors that are shrinking in importance for other reasons (specifically, manufacturing), and I believe the balance of evidence clearly favors the conclusion that the overall regulatory environment of the Long Boom was less hostile to growth than was the overall regulatory environment of the Golden Age.

So, as I read the evidence, the puzzle still remains. Thus my search for non-policy reasons why the Golden Age outperformed the Long Boom. Perhaps you still find all of this utterly unconvincing, but at least I hope you understand a little better where I'm coming from.

Thanks again for inviting me to speak at the New York City Junto.

All the best,

Brink

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Mar

7

An amazing day (3/6/2013). Volume of 150 billion in futures. And a close exactly equal to open and 1 o'clock. Total range 8 points on day. Just 1/ 2% from low to high. Like a great athlete who wins but never moves or a tree that always araranges each branch so that the leaves get the maximum of sunlight. A day that the mistress can collect from everyone without having to in any way discommode herself. A magnificent courtesan. 

Mar

7

One of the dangers of having a rookie on your team is that the rookies like to find regularities based on looking at every interval, every magnitude, every market, every combination thereof of x variables, and every time period. It's truly a search of implicitly hundreds of thousands of possibilities to come up with a regularity, fifteen on say 40 observations that has about a 5% chance of consistency with randomness assuming it was the only 1 selected. The problem is that they seem so good in isolation before you realize it was the fruit of a tremendous number of look backs, complexities, and multiple comparisons. I strive to tell them "Simplicity." Read Zellner. Another good thing to do is see all the biases from using cart or regressions trees of automatic interaction detector, and all the safeguards built into those methods, —- and of course they overfit, and multiple classify and are only recommended as preliminary by the authors. But …. but…. how destructive it is to receive one of these regularities during the middle of the day… especially when you have a position on the opposite side from the rookies. Proffer. What lessons can we derive from coaches that treat the rookies with grave skepticism like Woodson who calls Shumpert "Rook" and all the players that haze the rooks endlessly to prevent them from interfering with the natural order of things.

Jeff Watson adds: 

I have a rookie close to me and he tends to over-think things and makes grandiose predictions. I keep sending him back to the drawing board because he's not scientific and usually wrong. I love when he says if A is happening then B must happen down the road…..but then again it's not his capital at risk. Rookies, if they are lucky, are taught rational thinking, but sadly aren't taught that the world and the markets are very irrational. I think in the future that every assistant I hire in the future will list "Phone Clerk for a bookie" on his resume.

Richard Owen writes:

I found this article very applicable. 


PLOS Medicine: Why Most Published Research Findings Are False 

Mar

7

One has a subscription to Nature magazine. A weekly. And it's very scientific. Has about 15 "letters" each week, with an average of 42 authors for each letter. Titles like "specialized appendages in furzanhuliirids and the head organization of early eurathropods". (link ). You would think that with articles like this that each article would not be propaganda for more funding and egalitarianism. But I've found that in order to get into the publication, it has to have a conclusion like exact quote: "Evolutionary rescue from extinction is contingent on a lower rate of environmental change". 6 authors. They had a great pitt article on influence of rain on agricultural productivity with 100 authors in the last issue, and it showed that no matter how much rain there was, the productivity was about the same. The conclusion of the authors was not that the ecosystem adjusts and is very adaptable, but that in the horrible conditions of drought that are predicted and caused by the greenhouse gases, that because the efficiency is the same, we are in dire need of more government funding and transparency. One wants to cry. 

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Mar

4

Herbert Spencer was known for his many unusual hypotheses, all of them untested except for his automatic stair climber. Galton remarked that Spencer was subject to more terrible moments than any as many of his hypotheses were tested by members of The Royal Society and confronted with facts that disproved them. I felt the same way recently with a hypothesis based on trying to capture the vig. If only one could make money by capturing the vig rather than paying it. Well, of course, one of our own, and many others have concluded that selling the etf's short would do the trick. They must pay fortunes in disguised big asked spreads, commissions, churning, sales costs, management fees, assets held in abeyance, and general sluggishness relative to prices paid at the end of days. Well, I decided to test it to see exactly which ones and how to do it. I was ably assisted by 5 or 7 of the best minds and researchers that I know. They did a great job. And one came up with the best methods of doing it, when, and where, and how to rebalance. Finally the only stone left unturned— how much it would cost to do it. The fact that the hypothesis turned on. Regrettably, turns out that borrowing is very costly, so costly in fact that it ruins the profitability. One knows what Herbert Spencer felt like when the Members gave him their sympathies, and raised their eyebrows at the Athenium as they passed him in the Reading Room.

A commenter writes: 

Thanks for breaking this down. A successful HFT once quizzed me on ETFs, without revealing the purpose. I now hazard a guess that their purpose was indeed on the flip side of what I first suspected After all, they may not be forced to borrow. The interview also included the intricacy of what I had capitalized on for decades: the obligatory decay of certain contracts, primarily Wednesday nights, due to two-day banking settlements. I suspect they have eventually figured out how to arbitrage both.

Steve Stigler writes: 

Very nice. You of course recall the passage from Galton's "Memories". Here is a paragraph from a paper of mine in 2007 where I used it:

In the 1860s a small group of young English intellectuals formed what they called the X Club. The name was taken as the mathematical symbol for the unknown, and the plan was to meet for dinner once a month and let the conversation take them where chance would have it. The group included the Darwinian biologist Thomas Henry Huxley and the social philosopher-scientist Herbert Spencer. One evening about 1870 they met for dinner at the Athenaeum Club in London, and that evening included one exchange that so struck those present that it was repeated on several occasions. Francis Galton was not present at the dinner, but he heard separate accounts from three men who were, and he recorded it in his own memoirs. As Galton reported it, during a pause in the conversation Herbert Spencer said, ³You would little think it, but I once wrote a tragedy.² Huxley answered promptly, ³I know the catastrophe.² Spencer declared it was impossible, for he had never spoken about it before then. Huxley insisted. Spencer asked what it was. Huxley replied, ³A beautiful theory, killed by a nasty, ugly little fact.² (Galton, 1908, p. 258)

Gary Rogan writes: 

These days what seems to be popular is for inconvenient facts to be killed by theories, and for the arguments to be about whether the theory is beautiful or ugly. 

Mar

4

There are numerous books on Survival Statistics. Here's a good one. And this one that covers trials that end before all patients have the disease. The hazard rate is the failure rate, and it's the key opposite of the success rate. It has simple statistics to determine it's departure from randomness and estimated confidence intervals. I don't like to use cox regression as it's a mixed bag of log, and multiple comparisons that isn't meant for the distributions we deal with. Nor does it do anything but add another 3 names to the 30 average names in all medical papers these days. It obscures the expected life expectancy from the treatment which should always be the end point rather than the phony stuff about succumbing to disease or not. Similarly the expected duration from failure to success which is in the program that so many on this list have relieved from me, is not a very good measure either as who cares how long if the expectations don't jive.

Mar

4

In honor of Pitt.

Smithsonian has an interesting article on Darwin's house that might be of interest to specs: "The House Where Darwin Lived". 

Darwin lived there with his 10 kids and wife for 40 years, and the home adapted to his research and family. Here are 10 things that we might learn from Darwin's house about speculation.

1. Bear in mind at the outset that when Darwin was asked by Galton to fill out a questionnaire concerning his main talents in the 1850s, Darwin said his main talent was speculating in the consols.

2. Darwin established a routine. Every day was mapped out the same way for 40 years. Walk before breakfast, work until 11 am. Walk the dog. Listen to wife Emma read the family letters. Lunch. Read the newspapers (to check on his holdings and plan future speculative undertakings and to see what important flexions he could get on his side. Take a nap. Work from 4:30 to 6:30. Small dinner. Play backgammon or billiards. Listen to wife play piano. Such a routine enables you to speculate when you are prepared and not to let emotions interfere.

3. He listened to music every day. The wife played very well. An interlude to take the mind off the fray of the day, and to enjoy another language, gives one insight into the battle for investment survival.

4. Play some backgammon with the kids. Important to stay young at heart or else you'll be unable to adjust to the new things and ever changing cycles.

5. He had a secret mirror to warn of the approach of uninvited guests so he could absent hide and pretend not to be home. (Gino Paoloochi had a similar trick, although he often supplemented it by always wearing a hat so he could say "of glad to see you. Sorry I am just going out.")

6. Darwin always studied his worms, and beetles each day. We are part of a community with nature, and the same principles that govern nature apply to speculation. Trollope's maid who worked as a governess for Darwin confided to him that she felt very sorry for Darwin as he was so bored that he spent hours at a time just sitting on his sand path, with his looking glass studying worms.

7. Plant a seed properly and a strong oak will grow. "It may be doubted whether there are many other animals which have played so important a part in the history of the human race than these lowly organized creatures".

8. Keep good records. He kept notebooks with all his observations including the play of his children. He watched them play and laugh and cry, keeping notebooks of the human animals they were.

9. Live near the exchange. Darwin lived only 15 miles from London so he would be able to attend the important meetings of the societies, flexionize, and keep in touch with his brokers, and solicitors.

10. Always be ready to change. He was constantly building new paths and extensions to the house as he had to keep up with the change in his circumstances.

In closing the story about the Down House in Kent which is open to the public, the author cites some poetry by Darwin which is timeless and bracing for all speculators.

It is interesting to contemplate an entangled bank, clothed with many plants of many kinds, with birds singing in the bushes, and various insects flitting about, and with worms crawling through the damp earth, and to reflect that these elaborately constructed forms, have all been produced by laws acting upon us. Thus, from the war of nature, from famine and death, the most exalted objects which we are capable of seeing, namely the production of the higher animals directly follows. From so simple a beginning, endless forms most beautiful and most wonderful have been and are being evolved.

— keep looking »

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