My Mother was an identical twin. Twins often one right and one left handed, and have other differences in thinking. But also one also gets more nutrients in the womb and one is more healthy than the other. I could always identify my Mom in her childhood pictures as the frailer looking one. She died of kidney cancer at 57 and my Aunt is very healthy at 73.

On a lighter note, while Billy may be right that : "Only the good die young". The contrapositive to this, I remind those that dismiss exercise, is: "Only those that died old lived badly". It is not all about the age.

Aerobic exercise is the one proven way to grow brain cells. The new cells can strengthen the neuroplasticity of the brain. This helps the "old" keep learning new ways to think, keeps the brain forever 21.

Carder Dimitroff writes: 

I just returned from my nth trip to visit and help my dad. He is living in a gold-plated senior community with lots of amenities and support staff. Previously, my mother-in-law lived in a similar community.

My stays with my dad are usually 3 or 4 days. He does not want to rush and he has a long list of "must-do's." Altogether, I've spent about 30 or 40 days living on the campus.

I know other list members have had similar experiences. Without personally witnessing the daily life of a senior, nobody could possibly understand the hopes, fears, challenges and life of the nation's elderly.

Let me share some observations. Others may want to comment, so feel free to offer your thoughts.

1. Diet: Most, like my dad are thin. Few are overweight. I saw no one critically obese. While plenty of great food is offered, I suspect many are skipping meals.

2. Exercise: The facility offers a fully staffed and modern gym. They also have outdoor facilities. They are rarely used. Most seniors need core and upper body strength to transfer. They don't see new exercise regimens as an opportunity to restore or maintain their health. Nobody runs.

3. Sunshine: Spend a few hours a week outside and one or two pills can be eliminated.

4. Medicare: Leave it alone. Yes, these are all wealthy people. Most are self-made. Nevertheless, they all believe Medicare is something they earned.

5. Medical care: Left to their own devices, they are not big consumers of medical care. Their attitude is: "If it ain't broke don't fix it, if it is broke, don't tell anyone." Their biggest fear is the facility's medical center (a separate skilled nursing facility). Most will hide medical issues fearing they will be forced into the [gold-plated] medical center.

6. The end: While good health is a requirement for admissions, many realize this is it. They know this is their last stop. It is a sobering thought (even for me). They also know they are no longer significant contributors to society, particularly these residents who are largely hidden from public view.

This is our fifth family member to take this trip. I've concluded the best option is to eat nutritious foods, exercise and get out. Like James Fixx, I want to live well until the end.

Sam Marx writes: 

I am up there in age and would easily fit into one of these seniors communities. I trade stocks and especially options. Financially I'm very succesful. I feel that trading, especially options, has kept me mentally alert and healthy. 

I pay a lot in taxes, it seems more every year, so I guess I would be judged still as contributing to society, whatever that means. 

I live in a gated community in Florida, and the younger residents are always asking me for financial and trading advice. 

A colleague who taught at college with me never trading and seems to be mentally regressing. The "youngsters" don't care for his opinions or to discuss anything with him.

For those of you that trade, don't fear old age. Active trading contributes to mental health and alertness.



I believe the stock market sell-off was in anticipation of the "Sell in May and Go Away" syndrome.

Further, because of low interest rates, the investor has nowhere to go, so the market will stabilize and be choppy until November.

After November 2013, the bull returns and finally ends in 2014.



 I have been wondering, is there any strategy for slots? I know there is a lot of strategy for blackjack and other casino games that is applicable to trading but I've never really read about/considered slots. My quick online searches returned nothing very scientific. I assume slots have a routine (low) payout ratio. I wonder how random the results are (the conspiracy theorist in me is highly skeptical, especially of video slots).

It seems the time to play would be after a string of losses as the payouts do need to come. Sort of like counting in blackjack, you could watch other players on machines, wait for them to lose a lot and potentially assume the odds were going up. It also seems (much like old horse racers) the best recipe would be to bet a consistent amount. Watching players I see bet sizes swinging all over and a lot of loss. Usually it is bet big, lose, reduce size, win, up size, lose, repeat until broke.

Bets could vary but only as a constant function of capital (I.e. 1 with 10 in capital, 2 with 20, etc). This would be subject to casino limits but would probably beat changing size due to martingale risk. I also figure different machines would have different odds. Best to play the machines with the highest odds. The scratch lotto for example publishes the odds of their games in ny, I imagine one could find similar publications with slot odds.

Next I wonder how stop losses could be tied in. Would it be best to use a set number of losses to move to the next machine. When playing with house money should you let it ride or use a rolling stop. Rolling stop sounds better. Also if you had a big win it stands to reason that machine was not going to be paying out big soon so you should cash in and move on.

This all may be virtually impossible too unless there were teams working in shifts (people have to sleep) but casinos don't.

Welcome any thoughts or ideas. I know slots aren't sexy like table games but the anonymity and lack of fellow players makes them fun at times (but it would be more fun to walk away up money).

Will Weaver writes: 

If slots are random they don't have a 'quota' of payouts… and as in flipping a coin, every iteration holds the same probability. So there shouldn't be any advantage. But I know nothing about the machines other than they probably are not completely random, though closer than would generate an edge.

Sam Marx writes: 

If they are electronic slots, I believe they use some sort of random number generator. So I've had the theory that if there was some way to determine the formula used, then they might be beaten.

Craig Mee writes: 

Watching the payout numbers on a screen a long time ago when a technician was working on one– this was a poker slot– showed the payout to be approx 80% before double up, and after double up it went down to the low 60% if memory serves me correctly. When playing I took the strategy of banking all my small wins due to this, and doubled up on any large wins i.e 4 of a kind and the like. From there I would work a stop at flat after doubling the stake (if I won my doubles) and then a trailing 20% stop of total win one tripled my initial stake. It seems to let you have a plan, and walk away, rather than the guy next to you, tipping money into that feeder all night. If you must play, then having a plan of attack is the most important aspect, so you bank or your stop goes off …quickly…and you're out of there. 

Jeff Watson writes:

There s one great slot strategy that hasn't been touched on. The best way to win at slots is to not play at all. Even the places that offer 98% payouts. What they are really saying is that for every $100 you feed through the machine, you will get 98 dollars back. The vig is too tough for me, or any other sensible person, for that matter. One has noticed that the really easiest games of chance usually have the highest vig. Things like wheel of fortune, chuck-a-luck, slots, and keno all have outrageous vig and should be played by no one. Save your money and go to a great show.

Pitt T. Maner III writes: 

 Along the lines of the slots thread, here is some info about roulette strategy:

1) Under normal conditions, according to the researchers, the anticipated return on a random roulette bet is -2.7 percent. By applying their calculations to a casino-grade roulette wheel and using a simple clicker device, the researchers were able to achieve an average return of 18 percent, well above what would be expected from a random bet.

Read more

2) "There have been several popular reports of various groups exploiting the deterministic nature of the game of roulette for profit. Moreover, through its history the inherent determinism in the game of roulette has attracted the attention of many luminaries of chaos theory. In this paper we provide a short review of that history and then set out to determine to what extent that determinism can really be exploited for profit."

full article here.

Chris Cooper writes:

The most obvious and effective countermeasure is to disallow betting after the ball is released. The casinos allow betting after release because customers like it, but if they have any doubt it is a simple matter to change that practice.

Secondly, Thorp's original work (and mine) were based on finding wheels which were not quite level. After he hit a few casinos successfully, he found that the number of out-of-level wheels decreased. The paper cited in the original post details an approach for level wheels, but notes that more accurate timing is required.

Plus eV roulette did make it to book form, if not the front pages, by a group from Santa Cruz. More recently, a Hungarian was purportedly successful to the tune of over one million. My paper many years ago is lost to the ages, but in any case you can learn much more by reading the paper cited in Mr. Maner's post.



 Any opinions on Sears Stock SHLD?

Barrons had a positive article on it last week but the shorts keep shorting it.

Down 2 Yesterday.

Somehow I find it difficult not to be in Ed Lampert's corner.

Anatoly Veltman writes: 

Maybe this is off-topic re: stock purchase, but I'll throw in an Alan-esque: in advance of seasonal clothing change-overs this year, they marked down 85-90%, even off fashionable labels.

Jeff Watson opines: 

A common mistake retailers do is to mark things down, give up gross profit, all in the order of increasing the sales numbers. Giving up gross is a bad, bad thing. In retail, if something is not sold at full price, it is considered to be shrink. Shrink is very bad in the retail game. I went to Sears this week and bought 3 pairs of Levis, for $16 each and 3 pairs of nice Dockers for $19 each. I saw Sears selling name brand surf trunks that I know cost them $16 wholesale, selling for $4.99. Sears is giving clothes away. I wish their sales would extend to the Craftsman line, their electronics, or their appliance line, which was only 25% off the big ticket items.

An anonymous contributor adds:

A common mistake is to think that Eddie is about retail, Eddie is about cashflow liquidation and control stock. Is Berkshire about Textiles? He has now also filed on the Gap and Avon. Sears was always about the owned commercial real estate and durable goods, but the internet and housing bust crimped it. He also has filed on Autozone and Autonation (Sears automotive?).

his MO has been to buy 50% of the float of a stock that he could LBO completely, but then to drive cashflow into stock repurchases while cutting CapEx. My personal opinion is he is planning to eventually put all these pieces together.

The technical issue then becomes the expiration of his 5 year lock-up for investors that Goldman raised the money for, therefore I would not be surprised by a large 4th quarter in the stock.

His stocks trade more like a corner or pool operated stock. The reality is they are no longer public stocks they just happen to trade on an exchange–stocks like this used to be called footballs and to understand the trading one must understand the personality.



 I just read that the CEO of BAC is going to donate $50 Billion over the next 10 years to fight climate change (global warming).

I thought BAC had financial problems.

The concept of man-made global warming is now being challenged by a growing group of scientists.

As for climate change, we've always had it.

At one time icy Greenland was green.

Also, at one time we had the ice age and ice covered vast areas of the North American continent.

In my opinion, the only logical reason for this action by BAC's CEO is to curry favor with Obama.

Maybe that's why the CEO spread the donation over 10 years, anticipating an Obama defeat in Nov. and then BAC's CEO will retract the offer.



 I recently visited a Dr. and when I got there, the nurse asked me to fill out a computer questionnaire that took 1 hour to fill out. After I filled it out, I was asked to sign a statement that said such things as "you will not be paid for filling out this questionnaire, the contents might be used by commercial factors, there are unlimited people in the survey" and a hundred other things that gave it a false aura of legitimacy.

I am wondering to what extent the false aura of legitimacy pervades our field. The classic example is the elections in a marxist or democratic regime, or the government institution that's there ostensibly to protect you from harming yourself but is really a gate for preventing competition from small and new entrants into the field. The committees in the markets to maintain order and proper pricing that are really arenas for the members to mark the positions in their favor, and force out the non-members through margin changes and rule changes comes to mind. The rules against competition in all fields, the licensing requirements, and for example the ethics tests that one must pass in certain fields. How pervasive is this and what is the relevance to our field?

Sam Marx writes: 

I agree that the urge not to compete in a fair open market if one is able to set up a monopoly or obtain an advantage is there, and it's a part of human nature. I believe that it cannot be eliminated entirely but there are some changes that would help. I also believe that lying and cheating obtained a large impetus and some begrudging approval when the graduated income tax became constitutional. Therefore, a recommendation I would make is to do away with the graduated income tax and have a flat income tax or replace the income tax with a sales tax. I don't expect to see any of this in my lifetime however. 

Bill Rafter writes: 

Sham credentials. There exist a variety of market-oriented groups whose stated purpose is to identify the truly worthy. However all they really do is confer the aura of legitimacy on those in need of same, while providing income for the executives at group headquarters and hoodwinking the public. The group is frequently a "non-profit", adding more prestige. The legitimacy is conferred by letting the novice fork over not-insubstantial funds, taking a few tests and eventually getting the rights to put letters after his or her name, provided he stays a dues-paying member of the group. The orientation of the group can be fundamental, technical, quantitative, retirement planning or risk aversion.

My personal observation is that some market-oriented groups are worthy, and those which do not offer the paid initials are the best.



 We are well into the Triple Crown season with just one race left to go. It's been fun for me so far as based purely on the name I liked I'll Have Another early on in both Derby Futures as well as Santa Anita. Now we have a decent shot at a real Triple Crown winner as the horse is one of the better closers we have seen in a few years and the length of the Belmont Stakes should favor the him. We have been disappointed several times since Affirmed in 1978 so we shall see what happens in two Saturdays.

I have always been a huge fan of horse racing, racetracks and all the associated depravity. Some of my fondest memories of the past decade are the trips we used to take to Keeneland in Lexington Kentucky every year for the Bluegrass Stakes. Lexington is a town founded by Irish gamblers and is made to order for me. A diverse group of traders, investors, professors and other assorted ner' do wells used to assemble for a long weekend of horse racing and bourbon drinking with the expected adventurous and occasionally disastrous results. I guess we all outgrew the trip or just got to busy but they will be telling some of those stories at my funeral in fifty years or so!

I don't hit the races or even the poker table the way I did in the past. A combination of marriage, kids, getting older, and the end result of the earlier explained IRR have kept me from wagering and whiskey in the quantities of days past. I still follow the ponies however and am always cognizant of the lessons learned at many racetracks and card tables over the years. A day at the track contains lessons in statistics, psychology, marketing, and a host of other scientific disciplines. Many of these I have found to be directly applicable to the markets and to life its own self.

The track contains many of the elements of the financial markets. You have the touters and system developers who look for the answer and failing to find it sell their services to others. It was Tom Ainslie who pointed out how these systems develop in his book on handicapping. *" A longshot wins a race. A disappointed bettor consults his Form and discovers that the longshot had been timed at 36 seconds in a breezing three-furlong workout a couple of days ago. No other horse in the race had worked so rapidly so recently. Powie! A new system is born!"* How many of these have you seen in the stock market. Someone curves fit data to show that the winning stocks of the past had a particular characteristic or price pattern and a brand new newsletter and web site is offered to investors as the answer to all their problems and a sure fire path to short term wealth. In truth none of it works any better on Wall Street than it does at the track but selling easy answers to greedy people has always been a source of profits for stock market and horse racing system developers.

Then there are the people you meet at the track. You have the bleary eyed beer soaked despondent souls who pick up discarded racing forms to search for a long shot winner to just get them back to even so they can start over again. They won once and hit some exacta or trifecta bets, usually by luck and have been chasing that short term success for a lifetime of almost and faded in the stretch. There are those who offer an informed opinion on each and every race with all the certainty of the Delhi Oracle. They bet each and every race and brag of their fantastic winnings before hopping in their classic car (a 1988 Buick Riviera with balding tires and cracked windshield) to head off to their luxury furnished studio apartment with a spectacular view of the railroad tracks and oil refinery. The stock market is full of these folks as well. The oracle of the last market cycle and the expert who never loses are everywhere on Wall Street and I am never sure if their hearts desire is to get to the winners circle or just drag as many others into their pool of disgrace and desperation as possible. Whichever the case, they are to be avoided in life, at the stock exchange and along the rail.

 At every track I have been into in my life you can always find a few gentleman, usually older who sit through the race scribbling notes in their racing form each and every race. With the exception of perhaps a close friend or two they do not talk to anyone else or engage in the tip sharing and" who da ya like?" camaraderie of their fellow rail birds. They watch, take notes and perhaps sip a cold beer, or more likely a coffee. They wander off to the paddock before each and every race and the vast majority of the time they return to their seat to scribble some notes without bothering to place a bet. On rare occasions they get up, go the window and make a bet. These are the ones who have figured out the game. They only bet when they see an advantage and are more likely to fly over the grandstand than tell you how they derived their advantage. This is similar to investors who don't see the need to trade every day and only pull out their wallets when they have an edge and prices are favorable enough to offer a high probability of long term investment success.

One such astute gambler was among the best of them all. Pittsburgh Phil had a distinguished and successful career as a horse bettor. He once said *"Playing the races appears to be the one business in which men believe they can succeed without special study, special talent, or special exertion."* This is the case in the markets as well. So many people sit down and read a book or look at a chart and think that they, of all the speculators, traders and investors who came before them, have figured out the answer to market success. They do not study, research, or test and care little for other opinions. The worst thing that can happen to these people is initial short term success that makes them even more confident in their flawed opinions. Eventually the all go spectacularly bust. If this was easy everybody would be rich.

Phil, whose real name was George Smith also once said *"Know when to put a good bet down and when not to." *This is not only the best advice for horse gamblers but stock investors. Just because the window is open does not mean you have to get in the action. Patience pays at the racetrack and in the stock market. Just because they open the casino down at Wall and Broad does not mean you have to trade. Once a year or so you will get a steep decline in stock prices that carry 10 to 15% lower. Every few years you will get a gullywhumper of a selloff and prices will fall 20% or more from the highs. That's when you want to invest your cash. Keep in mind the excellent advice not only of Pittsburgh Phil but Henry Clews in his investing classic, 28 Years on Wall Street as well. *"But few gain sufficient experience in Wall Street to command success until they reach that period of life in which they have one foot in the grave. When this time comes these old veterans of the Street usually spend long intervals of repose at their comfortable homes, and in times of panic, which recur sometimes oftener than once a year, these old fellow will be seen in Wall Street, hobbling down on their canes to their brokers' offices. Then they always buy good stocks to the extent of their bank balances, which have been permitted to accumulate for just such an emergency."*

 When I was a more frequent visitor to the track I used to look for horses that were stepping down in class in a race. I looked for a horse that had run middle of the pack races in higher dollar stakes race and are now stepping down a bit. If I could find a horse in a $50,000 stakes race that had run a few $100,000 races and had placed third or fourth I was interested. Racing against lesser competition the horse had a strong chance of running well and the past performance figures against better horses usually gave longer odds than should have been the case. The biggest ticket I ever cashed came from finding two of them in one race and hitting a badly underpriced exacta. It also provided a pretty steady diet of simple win tickets over the years. To me this is a lot like buying fallen angel stocks. Former blue chips that have had a reversal of fortune and fall into single digits have provided a fertile shopping ground for winning stocks over my career. It also applies to people. I am more comfortable being associated with someone who has fallen or failed and gotten back up to run again that I am with someone who has yet to taste defeat and disappointment. These temporarily blessed souls usually think it is their brilliance rather than circumstance that has so blessed them. When the fecal matter hits the the fan as it always does they are apt to become unreliable partners or friends in my experience.

If I was betting on a rainy day I always wanted to look for the mudder in the race. Some horses like Storm Cat just love the mud and run very well thought the slop. I have seen horses that need a taxi to reach the finish line on a dry day win by 10 lengths when the rain is falling and the mud is thick. This plays out in the stock market as well. Even in a crappy market and economy like 2008 there were some companies that will benefit from current conditions. In 2008 as the world and portfolio values sank like a well-ventilated submarine companies that catered to low end bad credit consumers did very well. AaronRents, Dollar Tree, Wal Mart, Family Dollar and others that catered to the broken consumer saw their stock prices do very well. Last year it was energy stocks and companies that sold to a resurgent upscale consumer that ran to victory in a flat market. In every economy and market condition there is a group of companies that will benefit and buck the trend.

There a lot of comparisons found at the track that apply to markets and to life. That sleek looking thoroughbred that goes off at short odds may win a good percentage of the time but if you bet him every race he will take your wallet for a ride. He will do well for his owners but gamblers will go broke betting short odds. The same can be said of buying high growth issues at very high multiples and trophy wives. The feisty little colt at long odds that has run well in the past but is under bet can make you a fortune. So can stocks that are experiencing temporary difficulties or just ignored by the investing public. The stunning high maintenance slut queen at the bar may attract all the attention but it is the good looking smart quite woman in the corner that will make you happy man for decades of life. Flash and short odds does not reward in any endeavor as does substance with a high payout.

I love the race track. Not only is it enjoyable and some of the best people watching you will ever experience but you can gain an MBA in Investing and Life $2 at a time.

Sam Marx writes: 

But how does one overcome the 17% edge that the track has?

The stock market vig was high in the days of fixed commissions but now you can have the edge in certain markets such as options especially options that are traded with a penny spread. 

Tim Melvin adds: 

The article is not intended to suggest one make their living at the track. Merely that there are lessons to be learned that may be applicable to markets and other areas of life…

Stefan Jovanovich comments: 

Tim's wonderful piece is better advice than some of us deserve. At the risk of being one of the beer-soaked wretches who used to hang on the rail at Hollywood Park, I have a "fallen angel" tip for the $2 bettors that even meets Tim's ''fallen angel" criteria: AMAT. And, if you want to make it a 2-horse parlay, add KLAC. The foundry business is like coking coal in the 19th century– ugly, unattractive and essential, as Mr. Carnegie and Mr. Frick well knew.

Sam Marx writes: 

From my experience of going to the track, always with a friend who talked me into it, I found interesting characters and observations there.

But I never bet there, even at the $2 window. Same with slot machines at Vegas or A.C.

Logically I know that a $2 bet would've given me something to root for, increasing my enjoyment at the track for a small amount, but my aversion to betting when the edge is against me is almost of a religious intensity.

To learn about markets and trading psychology when young, I'd recommend the stamp or coin market. If you know your markets there and try to avoid having the urges of a collector but as a trader and buy at close to wholesale prices, you'll do well.
Tim's piece was a very enjoyable read but I don't think horse players are the best source for learning about markets.




 I just read The Atlantic article "The Man Who Brok Atlantic City" about Don Johnson the blackjack player who once took $ 6 million in one night from an Atlantic City casino. It was a great read, and I think any one who asks questions about how to be a trader or an investor should read it.

One amazing thing I learned is that Johnson figured out how to drive the house edge even lower. Through hard negotiations he got it down to (by his estimate) just one quarter of one percent. That’s super close to dead even — but still not quite enough. And then came the coup de gras. With some negotiated loss discounts on top of that — agreements for the casino to reimburse a certain amount of if Johnson lost — he actually flipped the overall edge in his favor without the casino realizing it.

House management got played by a math shark. So how did all these casinos end up giving Johnson what he himself describes as a “huge edge”? “I just think somebody missed the math when they did the numbers on it,” he told an interviewer.

Sam Marx writes: 

The article stresses that the player, Don Johnson, did no card counting.

If true, he may have used the Basic Strategy with a few of the newer techniques , plus the concessions he received to get the edge.

Card counting is primarily used to determine size of bet and to a lesser extent to vary the Basic Strategy under different counts.

Beating the House and varying the size of the bet are the two things that give away card counting.

However, varying the size of the bet may be somewhat hidden by betting the same amount from hand to hand but after a winning hand if the count is positive then just the let the original bet plus the winnings ride, as letting a winning bet ride is a technique used by many gambler who are not card counters and usually does not cause the House to be suspicious.

The article does not indicate if Don Johnson varied his bets.

If the article is true, he may have been a big winner even with a small edge , because his bets were huge and he may have quit before playing many hands and with luck may have had a good streak during those few hands he played.

The article is interesting, it may be true or hype.

I would like to know more details.



 I was playing Texas Hold'em Poker online yesterday. For about an hour, I had some very good wins. Then my wife came in from outside, and we had the Valentine's greetings. It was for less than half a minute. During this time, someone called all-in. When I discovered, the software followed the bet for me when my response was timed out. So I lost it all.

Things of this nature happen more often and more easily than we think. This is just another alarm for me to take the lesson seriously.

Jeff Watson writes: 

The real lesson here is to not play NL poker games. The risk of ruin in any NL game approaches 100%. Limit poker is much better for your longevity and bankroll….provided you are a good enough player to have an edge. If you don't have an edge, stay away from the game. This applies to any game, market, sport, or activity that is competitive in nature and has a win/lose outcome.

John Netto comments: 

Jeff, I have a different perspective in the limit vs. no-limit game discussion. As you hit on, much like trading, issues like bankroll, rake, skill of opponents, and ability to extract the greatest amount of expected value all play a roll. When discussing the risk of ruin in a No Limit game, it is important to qualify one game vs. a career. Limit hold'em can impede the ability to extract bankroll from weaker players who will egregiously overpay to chase draws or call after they have been beat. Over the life of a professional speculator, forsaking this volatility can come at a cost of giving up even greater alpha (we are trying to push the efficient frontier up and left, not down and right)…

In fact, playing no-limit tournament poker vs. no limit cash games is a different discussion all together, considering the variance as a professional tournament player vs cash game player (almost akin to being long gamma vs short gamma strategies in the market).

The reason why I am a professional sports bettor, former cash game no-limit poker player, and commodities trader is the ability to put myself into asymmetrical bets and judiciously control my bankroll. In fact, as unfortunate Leo's misfortune was, operational risk is a part of trading and poker. Many poker sites will give the option to check or uncheck the "call" button. There are benefits and drawbacks to both situations.

Sam Marx writes:

 Can you imagine the damage a Flash-Crash would do if it occurred on an Option Expiration Day.

The previous Flash-Crash caused damage but much of it was later straightened out. But on an Option Expiration Day the damage might be insoluble

Ralph Vince writes: 

On a similar note, given this creeping-up market of recent weeks, Prechter's prediction (which, I am not discounting one speck) I was thinking this morning how the 2008 crash closely correlated with Obama's imminent election (please, I am not arguing political idealogy here. I do not care one joy who is in charge of the Magic Kingdom and it means nothing to me at all).

Rather, given the landscape of the political backdrop here (and making the giant assumption that a large part of the drop of 08, planet-wide, was a consequence of Obama's imminent ascent) should I be en guarde for perhaps a replay of this into the Summer? Does anyone concur to a recent complacency regarding a rapid, precipitous drop similar (or worse) than '08 ?

Enjoy the etouffee,

Ralph Vince

Stefan Jovanovich adds: 

These Presidents did not lose reelection during a war, but they did choose not to run again: Polk (the Treaty of Guadalupe-Hidalgo was signed in February and the last troops left Mexico in August 1848 but Polk had already announced that he would not stand for reelection), Johnson (Lyndon, not Andrew) and Truman. Eddy's Mom has the 30 months and out rule; if a war lasts more than 30 months, the incumbent President is in trouble. It seems to apply. The military winners have been Jefferson (Franco-American naval war), Madison (1812), McKinley (Spanish-American), Eisenhower (Korea) - none of whom had a war last more than 2 years while they were in office. That leaves Lincoln (who only won because of the votes of the Union soldiers themselves), Roosevelt (by 1944 everyone in America knew it was Roosevelt's last term and the Republicans invented the Michael Dukakis of their history - Dewey) and Bush I (which I think has to be discarded because 3+ person races throw out all the rules - vide 1860 and 1912). The only winner who has clearly violated the 30-month rule was Bush II. My explanation for that anomaly is that the Democrats lost because John Kerry was still trying to prove to himself and the world that he really earned all those medals he put in for. (Of all the issues on which to base a challenge, why would anyone choose: Incumbent reservist draft dodger vs. fake war hero?)

That leaves Obama. I agree with Prechter in his thesis about social mood; the arrow of causation runs in the opposite direction. The markets will tell us the fate of the President. So, if Ralph is right, elephants will be dancing in the streets in November.




 The first hat was the blue Policeman's hat worn by my father. I thought it made him look a giant and one dared not dispute his authority. I learned from him that the hat was a universal symbol of authority and respect. And that it was made of a sturdy felt that protected the head from falling objects, blows with a stick and even gun shots. The hat came in handy whenever I got into trouble in school. Artie would go into the principal's office with his hat on, and his holster, and ask the principal if he had read me my rights before disciplining me and extorting the confession from me. The funny thing is one of those encounters got me into Harvard. Although I was very good at tennis and college boards, Harvard accepted only a handful of Jews from all of Brooklyn in those days, and I didn't have the 100 average that thousands of other National Junior champions among applying Brooklynites had. But the principal was so incensed by my father's visit that he wrote on my application that Harvard should not admit me. The man who interviewed me had been exposed to a similar blackballing and was so incensed that he insisted as a big donor that they admit me.

 In those days, indeed throughout the history of our republic until 1950, everyone wore hats in the winter. But near the beach, at Sea Breeze Park on W. 4th street, where the checker tables were, it was customary to take the hat off when the temperature was above 80. There was one person however, who a crowd always stood behind, who never took his hat off even in the summer. I learned that it was Tom Wiswell, the world go as you please checker champion. I eventually took weekly checker lessons from him for 20 years. He wrote to me once, "I wore my hat, I won many tournaments, Wylie was the first checker teacher and I will the last. It's time for me to take my hat off.". At the age of 85 he suddenly lost his memory and I never saw him again. But I will always love him, and I will never take my hat off again, except when in the presence of a lady, or if I ever patronize a lady of the night for the first time, in his honor.

 My next encounter wiith hats came at the foot of my grandfather Martin, who was genius court interpreter that spoke 50 languages at least. After working as chief accountant for Irving Berlin's music firm, he became a highly successful speculator in stocks, channeling most of his trades through Bache and Company. Like some of his descendants however, he had one major failing. He liked to trade on 20 times leverage and when the depression came and many stocks fell 20% in one Black Friday, he lost everything. He was always studying the market thereafter and loved to buy the can't misses, true blues like Western Union and Radio and Trolley and Canal which were the blue chips of his day. He told me for my Bar Mitzvah that he would buy me 10 shares of any stock I liked under 10. I asked him what was the best for the long term, something that I could hold onto for growth and peace of mind until I went to college, and that was near 10. Hat Corporation of America he told me, people will never stop wearing hats. They make them in all varieties. There are thousands of uses. And they have a monopoly on all the machines that are necessary to make them. You can wear this one for ever and sleep well with it under the bed. "But Martin," I said, "I read that there were 110 hat manufacturers in 1900 and only 7 left today. Hats have been in a decline since 1900 because people don't want to be formal any more and they don't walk to work." "Never Mind," he said, "the time to buy a stock is when it's out of favor. They have a new method of manufacturing where they substitute a resin for the felt that totally automates what was once a hand made process." Hat as it was called never spent a day above 10 after I bought it and like Union and the others eventually receded to below 1 before being delisted and declaring belly up. 

Whether it was because of the car, or the many overhead vestibules, hats have continued their decline ever since. They received what the owner of the HCA called their death blow when Kennedy became president because he never liked wearing a hat. When Cavanaugh the owner told him he had ruined the hat business, Kennedy took to always holding a hat but never wearing it.

T.K Marks comments:

 At the end of each evening my father would gingerly place his hat in its box on the top shelf of half (quarter) of my parents' closet.

Infants should be handled so delicately.

It was a Homburg if my memory serves correct.

The thing would sleep there, upside-down in its comfy confines, till the next day's dawn came around.

Then both it and he would be off to catch the Long Island Rail Road so that they would both be an hour early for work.

Rudy Hauser comments: 

Given all the talk of hats, I should perhaps add my own comments since I have been wearing hats for many years. Back when I was young I did not wear hats. But after one snowy day which I encountered with a bare head, I decided to wear a hat in the winter. I choose a fur hat made with relatively inexpensive rabbit fur. Drafts from air conditioning in trains that aggravated an allergy induced sinus headache caused me to add hats for the remainder of the year. In the moderate temperature range of spring and autumn, I wore a derby hat I purchased at a very reasonable price at the South Street Seaport for a few decades. Unlike a true derby this was made of soft rather than hard felt. In recent years I have worn a better quality Homburg. In the summer I wear a Panama hat. It has the advantage of helping keep the head a bit cooler in the sun and protecting my face from sunburn.

As to the impact a hat has, back when I was an economist for a money management firm, I would go down to Washington on occasion with a small group arranged by an economist/political analyst consultant consisting of a small number of his institutional clients to visit with government officials. One member was a distinguished lady who was the political policy advisor of a major mutual fund complex. She had once remarked (not to me directkty) how my presence with my derby added a certain dignity to our group. One of the Panama style hats I wore was not a true Panama and was rather flexible, creating its own unique sharp from long wear. My boss and colleague had indicated that it was time to have it replaced. We had both attended a meeting of the Mont Pelerin being held in Cambridge as his guest. Chuck had made the remark in the earshot of a fine classical liberal of the British peerage, who remarked that the hat had character and should be retained. I often hear compliments on my hats on the street. This even applies to my very old and worn rabbit skin fur hat, whose black dye has faded and now is a shade of black and brown with little bits of the fur missing. My attitude is that it still keeps my head very warm, and should I be discarded just because I have lost hair and what I have left is turning gray? Since my response to the latter question is in the negative, I see no reason why I should treat the hat differently.

But the hat business has clearly suffered greatly. To my knowledge there were only two very good quality hat stores left in Manhattan, and the one on Madison Avenue in the 40's closed well over a decade ago leaving only one on Fifth Avenue around 30th Street. There is (or at least there was as I am not sure if it is still in business) a hat store downtown, but the selection of quality hats is not that great, although it did have many lesser quality hats. There is a cigar store on Lexington that has high quality hats, but its selection is very limited.

Sam Marx comments: 

With the government backing them (and Peter Lynch saying good things about them ), even FNM seemed indestructible.



 I am researching and reviewing my contact with hats over a not uneventful life. I am considering their value, their uses, their symbolic significance, the great people I know who have worn them, the hat corporation of America I bought as my first trade, the hat that Tom Wiswell always wore to prevent sunburn and cover up baldness, the hat that Shane wore that made him an icon, the hat that the accountant in Monte Walsh wore that Hat Hendersson just couldn't resist noting was just right for a pistol shot, the hat that I wear now to show my respect for those previous, the man I called Hats H.  because he always had a million different conflicts of interest while working for us. The importance of a hat outdoors in the West to shield from rain, sun, and the elements. Et al. What value do you see in hats these days? What anecdotes? They seem to have gone out of style because of the automobile. You don't need protection from the elements any more. Also they're hard to store. How do they relate to markets?

Alan Millhone writes:

Mr. Millhone

Dear Chair,

I remember well the hat Tom wore. The ball cap I wear has a board on it (see picture). The Market trader might wear such a hat to remind them to look ahead and make the right moves (trades).





Sam Marx writes: 

On the subject of "Hats". I am reminded of the aversion that John F. Kennedy had to hats and the picture that has stayed in my mind, since 1961, is of his carrying and not wearing his hat at his inauguration. I believe it was his attitude that caused the downswing in hat wearing in the U.S.

Tim Hesselsweet writes: 

 Seems like a good example of ever-changing cycles. The hat has been making a comeback for the last several years. Kate Middleton has become a popular figure and she frequently wears hats. Upscale department stores like Saks now carry a large selection of hats as well.

Alston Mabry responds: 

Yes, but…mens hats are a different dynamic:

Look at this photo of mens hats at a Liberty Rally in Columbus Circle, 1918, and mens Hats at the Horse Races 1920s style, and 1950s Men with hats.

Scott Brooks writes: 

When I graduated high school, the guy who measured my head for my mortar board said, "Young man, I've been doing this for 35 years and you have the biggest head I've ever measured".

 As a result of my freakishly large cranium, hats rarely fit me. I wear one from time to time, but only out of necessity, and occasionally for functionality.

Necessity is when I need to keep my bald head from burning in the sun or freezing in the winter or dry in the rain. Never under estimate the insulating and protective qualities of hair.

Functionally is because I need a hat when I hunt to keep the sun out of my eyes when I'm scanning for game, peering through my scope to place the cross-hairs on the shoulder of my intended quarry, or placing the aiming pins of my bow in the middle of said quarries chest cavity.

I avoid hats otherwise as I can rarely get one big enough to fit. If I wear one too long, it gives me a headache. Therefore, when it comes to trading, if you see me placing a trade while wearing hat, fade my position as I'm likely making a losing trade because my mind is clouded by the hat that is squeezing my brain all to tightly.

Pete Earle writes: 

I wear a hat, and have for seven or eight years. When I began to wear one, I expected to be lightly razzed by friends; that not only didn't deter me, but never occurred. Instead I've received unexpected compliments, and over the last few years other have seen a higher frequency of hat wearers in Manhattan, Washington D.C., and even when I'm down in Auburn and Atlanta.

Christopher Tucker writes: 

The grandfather of my best friend from college was one of the kindest and most sensible men I have ever met. He was a traveling sales rep for the John B. Stetson company. The man always had the best (the absolute BEST) hats.

GAP Capital comments:

 Born and raised in Chicago, so "hats" remind me of only one person…Dorothy Tillman!!!

Anton Johnson writes: 

"By some accounts, Christopher Michael Langan is the smartest man in America……….he has a fifty-two-inch chest, twenty-two-inch biceps, a cranial circumference of twenty-five and a half inches–a colossal head, more than three standard deviations above the norm"

Esquire article on "The Smartest Man"

Alan Millhone sends another photo:

Here is Tommie Wiswell with his trademark hat tilted back.  Might also been used to keep
overhead light from his eyes while he focused on the many boards.














Russ Herrold writes: 

 I am traveling, and so cannot conveniently post, but I placed orders this week for a new Stetson, a couple of Fedora designs, and some other … I forget …and have in my car, for the conference I am at this weekend, easily 5 or so, which I use both for their protection of my head from the cold, and also so I can 'do some branding' work in the community the conference represents (I also have other 'branding' in my clothing, and appearance), such that people I deal with, who don't know me by sight, can recognize me anyway.

Marion Dreyfus adds: 

I think I am fairly well known as a hat person, and have been since I wore unusual chapeaux /to synagogue and school when 12 or 13.

Aside from style and stating an individualistic aspect, I think a hat harks back to a gentler, more mindful age, perhaps 100 years ago. It also keeps the head, inside of which are all these excellent ideas and scenes for a better tomorrow and a niftier evening today, comfy-cozy. Hats also show, oddly enough, respect. Hatless men in the 1970s were declaring their freedom from the mindfulness of suit and hat, and perhaps we are the poorer for having abandoned hats.

They also keep milliners in funds, and milliners I went to grad school with in the early 90s were aghast at the drop in hat-wearing citizens, alleviated only by temporary crazes or fads that fade as swiftly as they arise.

As a biker, for me, even mild days produce a breeze when one is on that leather seat, and a hat prevents sunstroke and sun in one's eyes as well as too much wind over one's head.

In the Orthodox world, wearing a hat connotes one is married, so it may be foolish of me to wear hats, because i communicate a status I do not currently entertain. But i do like the fashion and focus statement being made by wearing a lid, many of which, actually, i create myself.

Finally, one can maintain a superior air of mystery in a hat, which is impossible to the same degree in a hatless state.

Alan Millhone adds:

What really amazes me on hats are the clods at football games I attend who don't remove their head cover when the National Anthem is played.

Ken Drees muses:

 The baseball cap trend: rappers wearing the caps askew, wearing caps with logos of designers and companies, wearing caps for status/advertising, caps as gang signal, wearing caps in restaurants/indoors, wearing hoodies in lieu of caps, caps as fashion, caps on backwards, caps with brim curved just so, it all has to do with being cool. Lebron James wears Yankee cap to Indians games–it's all about me, fool.

Gary Phillips writes: 

"Wearing a cap backwards is a baseball fan tradition that started with Yankee fans. It wasn't because they liked Yogi Berra, either. The Yankees and Red Sox have a century-old rivalry. A group of young guy Yankee fans, around 1980, took the train up to Boston to catch a couple of games. Boston fans are loud and boo other teams. The young Yankee fans were seated in front of loud Bostonians. The New Yorkers didn't want to start an altercation, but made statement. Those guys turned their Yankee caps around backwards to show the Bostons that they were Yanks fans and proud of it."

Anton Johnson writes: 

On baseball's rally cap superstition:

"A rally cap is a baseball cap worn while inside-out and backwards or in another unconventional manner by players or fans, in order to will a team into a come-from-behind rally late in the game. The rally cap is primarily a baseball superstition."

And hockey's Hat-trick.

Victor Niederhoffer writes:

It would be nice if this worked in the market. But then the adversary could always tell if you were weak or strong, especialy if signals could be reflected from the hat. I was surprised to see that in all the uses for hats I have collected, including flopping the rump of your horse, and fanning a fire, and collecting water from a stream or the rain, I did not see many variants of using it as a signal to get a cab or alert a Native American that a interloper was near, or to collect bets, or to conceal a salt shaker. This latter is particularly effective in the west because to ask a man to remove his hat is akin to a date with boot hill. 

Gary Phillips adds: 

 Surely not a hat, barely a cap, let us not forget the kippah or yarmulke. The Talmud says that the purpose of wearing a kippah is to remind us God is the Higher Authority over us. He alone is Lord of Lords and King of Kings. When we pray and worship with our heads covered, we are saying that we are in total and complete submission to the will of God Almighty now and forever.

I was recently in the hunt for 2 of the crocheted variety for my 2 and 4 year olds to wear to school. My elder son demanded that the kippah be white with a blue Magen David. The synagogue gift shop was unable to fill our order, so I turned to a higher authority - E-bay. As J. Peterman would say, it is 6" in diameter — one size fits all. Handmade in Israel with a *very small* fine stitch. The yarmulkes are from Israel and are made by people who have made Aliyah; low income and handicap people, generating income to make a living.

I grew up and observant Jew until I had my first taste of bacon and blondes, and I never looked back. However, I now find myself lighting the candles, saying the hamotzi, and making Kiddish on Friday nights… Nice.

Jim Sogi writes: 

 A hat is essential in Hawaii to keep off the sun, rain and wind, to keep glare out of your eyes, and at night on the mountain for warmth when it gets cold. There are different hats for different situations. A baseball cap is good all around since it keeps the sun off your face, stores easily, can be worn in a car and is cheap and stays on in a brisk wind. A good brim hat is good to keep the sun and rain off the back and shoulders as well. A nylon hat is light and can be washed. A waterproof rain hat is good for extended rain, and a light nylon brim is good for hot sun. A small brim bucket with a strap is worn in the water while surfing to keep intense sun at bay for hours in the water, and to stay on in the surf. A knit or fleece watch cap is good for boating at night or sleeping in the cold. A helmet is good for sports to protect the skull from boards, rocks, trees and impact. The Original Buff is an adaptable piece that can be worn as a hat, scarf, or facemask. A balaclava is good for winter conditions and can be used as a hat, or face mask in windy conditions. I must have 20 or more hats.

As with all equipment, each type of hat is specialized for specific conditions, and there is not one that is good for all conditions. As with markets, its good to have specialized systems and rules for the differing conditions or cycles and no one rule is good in all conditions but must be tailored to match the expected conditions.

Rudy Hauser writes:

I do not wear a hat indoors with the exception of trains and planes or if there is no good place to put the hat. If there is a draft from air conditioning it helps to keep me from getting a headache. But more important is that unless I just want to hold my hat in my hands there is no good place to put it. I prefer to read, not hold a hat. I once made the mistake of putting a Panama hat in the overhead rack in a plane. The motion of the plane bounced it around enough to ruin it. That gives me little choice but to wear it. If I have a hat without a brim, such as my winter hat, I can a do take it off aside from trains which are not that warm.

Bill Rafter adds: 

 Glare, particularly from lensed overhead lights or high-hat floodlights can cause headaches and eyestrain. That can easily be counteracted by wearing a baseball cap or other large-brimmed hat indoors. I have kept one at my desk for decades.

For years I noticed that whenever I saw a certain actor & director, he was always wearing a hat, even indoors. Then I saw him entering a food emporium at a ski area and he removed his hat. I immediately understood why he always wore one — his particular baldness aged him at least 10 years. So his vanity choice was either a wig or a hat, and he chose the hat.

Hats indoors also provide a level of anonymity for those who do not want to be recognized in an airplane or robbing a bank.

My first "real" hat was a Homburg, which was required for one of my college jobs: pallbearer.



"The Momentum Effect in stocks was discovered by Jegadeesh and Titman" - A finance pundit

How about some credit to Value Line which was using price momentum in its Ranking System all the way back in 1965, long before academia provided recognition? See Fischer Black's "Yes, Virginia, There is Hope - Tests of the Value Line Ranking System", which dates back to the early 1970s. I'm proud that I was there in the early days.

Sam Marx replies:

Mr. Eisenstadt,

I'm a Value Line Subscriber to its Stock Service and its Option/Convertible Service. They deserve credit for being early in using momentum and earning changes for stock prediction. Mark Hulbert still rates it highly. I understand W.E. Buffett recommends it for a data source.
However, I feel they have become somewhat stodgy lately and other services/newsletters have become very competitive offering data Value Line doesn't. MorningStar and Zacks for example.

I believe Value Line Stock services should expand its services to include earnings data, earnings surprises and stock's intrinsic value.
Their Option Service is loaded with information that I've found very useful. The man in charge, Dr. Larry Cavanagh, took over a simplistic service and made it truly professional. If you know how to use the data, it is the best buy in an option service. He also has done a fine job with the convertible service. I also commend you on your service and contributions in making the Value Line Stock Service the success it became.

Trivia question for you; Way back before Value Line started their convertible service/newsletter, when we both were young men, there was a trailblazer convertible bond newsletter. It was the only one I knew of or could find back then and I found it useful. Value Line went into competition with it and eventually put them out of business. I believe it was published in Long Island and as a hint the first letter of its name was "R".



Thumbs-up, the inverse of professor Robert Shiller's cyclically adjusted price-to-earnings ratio — or CAPE — was greater than the yield on a long-term Treasury. When Buffett wasn't crazy about stocks, the opposite was true.

Steve Ellison writes: 

Using the 12-month forward top-down earnings estimate for the S&P 500 of 93.75 published by Standard & Poors, the E/P for the S&P 500 is8.25%, 4.5 times as high as the 10-year Treasury bond yield.

Jordan Neuman comments:

Historically large stocks have an 11% ROE. The S&P's book value of 594 implies about $65 in earnings. Discount by the Baa rate of 5.2%, not the treasury yield, and you get 1250. With the S&P at 1136, the discount in this measure appears to be the widest since 1974.

Most of this list's valuation parameters are positive but I still can't stop the bleeding.



Theories propounded by market experts are sound but very few people profit by them because when once caught in the maelstrom of stock speculation, the average man becomes more or less mesmerized and at critical moments his conservatism, his resolutions, and his theories all take flight.

One doesn't agree that the theories of market experts are sound. Most of them relate to meals for a day, and selective memories of things that seem reasonable. They don't take account of ever changing cycles, and the fact that whatever worked 3 years ago, which is the average minimal time for a theory to hit a book and become popular, and reported by the services, is very likely to have an opposite effect at the current time.

People become mesmerized by overtrading against their ability to lose. When they lose too much, they get stopped out by their brokers or their partners. Holidays are particular times that people get stopped out of or mesmerized because they don't wish to ruin their holiday, wait for the extra day of risk, or their partners tell them such things as "are you going to ruin another July 4th by watching the market every second of the day, and worrying about paying the bills?". It's happened to me.

The real secrets of stock market success remain locked up in the bosoms of a few who are too busy to write, and too rich to feel the need of writing.

The secrets of stock market success are to have a good foundation, strong at the base with heavy capital supporting it. The banks can have stock market success because they are able to leverage themselves 100 to 1 and borrow at the funds rate, and be bailed out by their current, former, or future colleagues but most don't have that ability. Thus, the market is a series of highs and lows with the weak getting extricated by lack of a proper foundation at each gyration.

One of the worst things is to read about the best great things I did in trading as if the trades were recurring, they wouldn't be written about or if they aren't recurring then probably you should do the opposite the next time. Even if I had a method that worked, I couldn't reveal it because my partners and family would be upset with me. I don't have a method that works, although if so many of my former colleagues didn't borrow my methods of using statistical interrelations of multiple time series varying ever hour of the separate days, I believe that such a method might have had legs. There are doubtless other methods of making money in markets, but one finds that the edge that HFT boys with their better equipment and capital have on individual stocks precludes such methods for short term in individual stocks, and the long term purchase of stocks requires deep insights above and beyond the average that it is unrealistic to expect one person or group to sustain over different market times.

Many of the rich people I know are happy to be interviewed on television as they can talk their book and get people to follow them so they can increase the wave they started by talking to their colleagues and brokers after they put their position on. Also, to show that they are common people, supporters of the masses, in favor of redistribution, so that their natural adversaries at the legislatures and the service will realize he's a fellow traveler. The others who know how to make money are careful never to reveal a thing as information flows so quickly and it just takes a few big funds or traders to turn something profitable into oblivion.

The gyroscopic action of the prices recorded on the ticker tape produces a sort of mental intoxication which foreshortens the vision by involuntary submissiveness to momentary influences. It also produces in some minds an effect similar to that which one feels after standing for a considerable time intently watching water as it flows over Niagara Falls. Dozens of people have committed suicide and been dashed on the rocks below after so watching.

I am not familiar with the research that supports this tendency to suicide but I have experienced similar sensations. And there does appear to be some contagion in suicides. As prices go against one, I believe that the latent self hate of many people for their sins is manifested and they achieved their desire to go broke to atone for their sins. The tendency to suicide when watching a trend is something that would seem to have market implications as new contrarians are drawn in to be thrown into the abyss by going against the flood time after a certain mesmerizing flow. To be continued. Only on p.13 of my notes on book so far. 

Sam Marx writes: 

I agree with these observations and analysis.

There's one way that still works in getting rich and that is to buy cheap. W.E. Buffett still does it, and so does Trump.

Making a fortune by the statistical approach is much more difficult, however, if you're lucky enough to get in a new game, such as options in the '70's and '80's ,or 21 in the '60's math works fine.

Having been there, done that, I'm not as math oriented in my trading as I was before and I try to buy cheap.

I found Hagstrom's book on Buffett helpful when trying to buy cheap.

However, I have my eye on a relatively new game that I'm studying to see what can be done there statistically.

From a great psychologist Laurel and I serendipitously learned from:

Hi Vic,

Traders in Eurupe are much more focused on the European woes than the US traders. As a result, they've been much more bearish, would it not be for their conviction that a massive monetization of debt will ultimately save the day for bulls.

I absolutely love the notes you've taken. The idea of themes setting themselves over a period of time to be followed by their opposites is such an important one…HFT has seemingly speeded that process.

The Niagara suicide phenomenon is a tricky one. Is it a leap out of mesmerization or a leap out of guilt and atonement? My own observation, fwiw, is that something additional can be at work. Many traders tell me that they would rather lose on a move that they incorrectly anticipate than fail to participate in a move that goes their anticipated way. In other words, the pain of opportunity cost is greater than the pain of actual loss.

From this perspective, the most painful scenario is one in which a river becomes Niagara and one is not riding the current. I've seen traders sell stretched markets to the downside, buy upside breakout after breakout, and refuse to exit trades moving violently against them simply because they could not bear to miss the move they think may happen.

At some point, it does have a quality of Japanese seppuku: out of honor they will stay with their failing positions and fall upon their financial swords. From that perspective, perhaps it is better to die with one's convictions than to have abandoned them and face the shame of missing their fruition.

Your idea of "foreshortened vision" as a result of mesmerization of watching the screen is absolutely true. I tell traders that we inevitably trade the time frame that we watch: it's a natural function of (often flawed) human pattern recognition. Trance states are poorly understood and appreciated, and I suspect much paradoxical trader behavior might be explained by the lapsing of critical, rational consciousness and the hypersuggestibility of the trance state–especially among daytraders. Hence the worthlessness of most psychological intervention with traders: one cannot solve problems while in a different state of consciousness from the ones in which the problems occur.

- A psychologist

Victor Niederhoffer writes:

- P.60, The Psychology of Spec:

It may here be explained that the mental attitude of a "sold out bull" toward a rising market is much the same as that of a bulldog chained in his kennel while a dog fight is going on outside. A speculator may stand by and view with unruffled complacency the most enormous profits of others in securities that he never owned, but if one of his own pet stocks continues to advance after he has sold out. It not only reflects the error of his judgment, but the remorse he suffers, in contemplating the additional sum he might have made dampens all the pleasure of reflecting upon the profit he actually did make. Reluctant to admit such a costly blunder in judgment, determined not to be surpassed by his fellow-traders, and fused with the victor of his recent exploit, when Union Pacific was selling about 215 the "sold out bull" put in an unlimited order to buy five thousand shares. When his broker on the floor of the exchanges began bidding for this amount of stock, the crowd instantly surmised that some big operator was being "squeezed on the short side, and before the purchase was completed the price had jumped to 229.

The sold out bull eventually died on the Bowery without benefit of friends or money to pay for the funeral.  "The lodge had to pay for the funeral" and my father might have had to carry him down from his Bowery walk-up to the morgue.

The whole subject of regret theory and contrafactual reasoning is so diffuse that it can explain any phenomenon and predict nothing. On one hand, it explains the tendency to take profits too fast as being a feature of regretting to lose what one has. On the other hand, it explains why people buy too high or sell too low from the standpoint of missing the big move. If such a phenomenon as "sold out bull" exists in real life, then it should lead to excessive moves when markets set a new high after many have sold out at lower prices. It would explain why support and resistance is always broker. Why when an area of great volume of trading at a price occurs, and then the price is exceeded, the bulls become more agitated and buy. I've seen papers that say that regret theory supports the notion that "support and resistance barriers should not be broken. A good study of the psychological literature is contained in this paper.



I go away for a week to eat BBQ in North Carolina and look what happens. Tyler, with his very good brain, dives into the political swimming pool that is already more than half empty. Can't we go back to discussions of savings vs. capital and the definition of the gold standard?

Social Security payments go directly to the people who had at least 40 quarters of payroll employment or self-employment tax payments; but it is unfair to call them "transfer payments". The gross payouts are simply the return of the money paid in plus 1% per year. We can debate whether or not this is a munificent reward to geezers in a ZIRP environment; but using the label "entitlement" hardly seems appropriate. People were legally required to pay the taxes into a Trust Fund that Congress dedicated to old age and disability payments; if the Treasury's bondholders are entitled to get their money back, it is not unreasonable for Social Security beneficiaries to expect the same treatment. In a steady state world where the Federal government matched revenues against expenditures and there was no net increase in debt, the returns of and on capital - i.e. Social Security payments, with administrative costs - and interest on the debt (excluding debt held by the government itself) are 25.88% of the 2011 budget.

The actual "transfer payments" - Medicare and Medicaid - are 26.08%. However, to argue, as Tyler does, that these payment represent "net largess" to old people is more than a bit of a stretch. None of the payments go old people except for the doctors who are still practicing. The money goes to hospitals, nursing homes and medical practices and the bureaucracy that regulates them. It is not a lie to say that these payments represent a net benefit to the patients; but the money does not go to them. Just as the defense contractors and bureaucracy and non-combatants swallow 90%+ of the costs of "Defense" even in a time of war, the academic medical service complex are the people who actually get the cash we old folks are supposed to feel guilty about. BTW, the Department of Defense is now in 2nd place in transfer payments in the name of the greater good; it receives 20.13% of the 2011 budget.

The real theater here is in the notion that these extraordinary expenditures have net benefits anywhere near their costs. It is what the public school teacher unions do when they argue that the salaries and bonuses paid to them are an "investment" (sic) in America's future.

Tyler is also wrong about the demographics of American voting. We "old white people" (sic) have shifted our preferences towards the Republicans by a grand total of 4% over the past 2 elections; more than 43% of us are still gullible enough to believe Nancy Pelosi has "saved Medicare". It is only in academia and among black-skinned voters that the "homogeneity" Tyler attributes to "groups" has come true; they vote 90%+ for Democrats.

Sam Marx writes:

As insane as it is, 50% of the potential taxpayers pay no significant income tax.

Stefan Jovanovich replies: 

Nor can they. The lower half of all people who earn money in the United States through wages or self-employed work have family net worths of less than $30,000 and a net savings rate of 0%. They are poor even if they think of themselves as "middle class". The nation's tax revenues, excluding employment taxes, come from the upper half because they are the only people who have the cash. If the Left has a massive hypocrisy about the net benefits from government expenditure, the Right has one about the capacity of the losers in our economy to pay up. Conservatives are right to complain that the Earned Income Tax Credit is largely a scam; but they are as blind as any professor to the reality of where the money goes. It goes to the income tax preparers– whose fees can easily net as much as half of the refunds received - or at least they did in the good old days when I had friends in the retail tax farming biz.



U.S. Economy: Payrolls Grow at Slowest Pace in Nine Months, Bloomberg News  

If he had honest press perhaps the paragraph(s) in question would read something like this:

Policy makers, who in the past were confident that the measures they were undertaking would result in much lower unemployment than we are seeing today, had to fall back on their generic and meaningless refrain and warned to “expect the unemployment rate to continue to decline but the pace of progress remains frustratingly slow,”  It is clear that the policy makers have no idea what they are doing or that their highest priority goals are at odds with their stated goals.  We are thus dealing with a bunch of corrupt liars because we do not believe they could be this incompetent.

These policy makers have borrowed around $4 trillion and printed trillions to supposedly bring the economy back from the brink.  While no one can know what would have happened to the economy had they not done so, their competence has been shown to be lacking by the frustrating pace of the recovery and a multitude of predictions that have not come to pass.  Many economists believe that the actions these policy makers undertook only worsened the overall financial situation, and that the real goal of these actions was to pay off their political allies.  Many economists also believe that the Stimulus was a corrupt failure and Quantitative Easing traded a brief but sharp recession for a prolonged one, while simultaneously creating inflation risk should the economy ever recover.  Some economists also believe that the real purpose of TARP was to save the politically connected bankers and not to stabilize the economy.

The uncertainty these corrupt policy makers are created is believed by many economists and businessmen to be the real reason why unemployment remains stubbornly high.  Yet like possessed zombies they only ask for more of the same.  In addition, they are using class warfare language to justify raising taxes, something very few economists believe will result in any improvement to the economy.  Also like possessed zombies, they are using widows and orphans rhetoric to justify refusing to cut spending. It is clear that their minds are not open to free-market economics.  Two big questions arise: what can be done to get rid of all of them as quickly as possible and how can their shenanigans be covered in the mainstream press?  We should also ask ourselves a deeper question: how could America, the bastion of capitalism, become a fascist quasi-dictatorship without a lot of alarm bells going off?

Sam Marx writes:

The one thing that I’m missing in this High Unemployment/Recession period are the interviews/coverage of those in misery because of job losses.

Funny how in a Democrat administration the media do not interview the unemployed, the homeless, the displaced, families in misery, etc.

This administration is causing great misery in our country because of its Socialistic economic policies and it’s not being covered by the media..

A record number of families are now on food stamps. There is misery in many parts of the country.



 Is it perhaps an indication of the media's solicitude for the current President that every poor economic report is termed "unexpected"?

While poor economic results under the prior President were somehow not so surprising since he was such an incompetent boob?

Kim Zussman adds: 

As with many time series this month was similar to the prior month, which was different from the month before.

Victor Niederhoffer adds: 

All are part of the regression fallacy.

Ken Drees writes: 

So now we wander into "needed and now expected qe3" type thinking and should not the market go up due to this stimulus?

Sam Marx adds:

Three Thoughts on the Reported Unemployment Rate.

1) The Unemployment Rate is probably higher than the government reported.

2) Compared to the Reagan Recovery this Administration's economic plan is a failure

3) With Socialistic Policies you have high employment rates and I don't see much hope for great improvement.

George Zachar writes: 

As luck would have it, Bernanke delivers one of his regular reports to Congress next week.

No doubt, this report will put that question high up on the agenda, and he'll be spending the weekend formulating his response.




 I don't know much about options, but can anyone explain to me why expiration days seem to have lower ranges and absolute volatility? I haven't quantified this but that's my impression and I read something about it. Are there figures for biggest option strike. I've heard stories of why this might have some sort of effect on underlying price. Thanks.

Sam Marx answers:

One of the reasons is what is called "pinning" where stocks close to their strike prices will trade around that strike price and get pinned to it. This is not true in all cases but occurs often enough to decreases stock swings.

There have been scholarly studies on this and you can read more about it in the book Trading Options at Expiration by Jeff Augen.

Phil McDonnell adds:

I do not actually know if expirations have lower volatility and reduced ranges or not. But IF it is true it may have something to do with pinning. Pinning has been identified in several academic studies as being a real phenomemon. Basically it involves the stock closing at or on a given nearby strike price which happens to have a large open interest. Essentially the stock gets stuck trading at the round number with greater likelihood than on other days.

Option strategies such as sold straddles, calendar spreads, butterflies all reap their maximum profit at a particular strike. So the incentive could be there for flexionic manipulation. Or it could simply be a product of all the competing cross currents which occur on those days.

Sam Marx replies: 

It has been tested and reported in academic studies.

As a starting point I refer you to Trading Options at Expiration by Jeff Augen.



 What will the bottom look like for US housing?

Sale-hungry, real estate agents tout low interest rates as the best time to buy, and that of course would be today. But are we at "the" bottom? I say we are not. Here are some bottom recognition themes that I would expect to see if the economic contraction continues and the bailouts ultimately fail with high commodity prices persistent.

1. First time home buyers (young couples) will turn to consolidated renters-move in together and share an apartment. The average age of 1st time buyers will trend higher. First timers under a certain age may need a 30% dp and a co-signature.

2. Prevailing sentiment sentence: "You own a home, you are either rich, old, or crazy".

3. Why own a home, there are no tax deductions anymore?

4. Real estate agents will be scarce.

5. Most unsold homes consolidated under a government/bank/insurance entity, General Homes (GH)?

6. Large sections of most all major cities like Detroit will have huge inner city areas bulldozed clean of empty homes. People living in homes on streets that are scheduled to be wiped will be given an equal or greater value home in a different part of the city that is earmarked for urban homeowners.

7. Large corporations or entities will purchase huge city open acre zones to rebuild gated communities and downtown oasis business zones that will be the new coveted land. These areas will be far from the urban sections that house the remaining hangers on.

8. "Owning a home is an anchor. In this economy mobility is key."

9. In the event of natural disasters, like the recent tornado, that wiped a town in half. New act of God clauses will be written into insurance and fema guidelines to get those people who have been made homeless to not rebuild but to migrate to unsold homes nearby owned or not by GH. This will take homes off the supply list.

10. Imagine a terrible new Madrid quake-Diaspora of population will take large amounts of homes out of supply due to no rebuild rulings.

11. The cost of home maintenance and upkeep due to raw material pricing will make it even more difficult to build new homes or maintain existing ones, although labor will be lower in cost for these services due to high unemployment.

12. Saving up very large down-payments and/or paying for a home in cash will be in vogue.

13. Neighborhood demographics will be very important in determining where to live. Longevity of intact healthy home zones will be key to long term stable values and reselling ability. Questionable areas with unlived in homes, many elderly, poor schools will continue to decay.

14 Home with an empty lot next door will be more common. Empty lots may be turned into garden zones, for neighbors.

15. Farms make a comeback since the home's value may depend on its own earning potential. Urban farms are already springing up in some inner cities.

16. The decision to buy a home will be considered as one of the most important in one's life.

17. Corporations may decide to buy bundles of cheap homes near work locations to rent to employees. Offering living quarters as part of total compensation will ensure home upkeep, intact resale zones, and ultimately profit.

18. Your carbon footprint will be taxed based on your home's energy characteristics. This would lead to high efficient energy themes, smaller homes, and conservation of utilities. This will reflect disdain for older homes and lead to the reduction of older homes through teardowns. Increased EPA restrictions on remodeling are happening now.

19. Lowes or Home-Depot, Sears, one will be gone or combined.

20. You will have to pay a real estate agent a trip fee to be shown a home.

21. Expect further consolidation of real estate companies.

22. Home Builder bankruptcy filings will increase, expect a big name or two to go away.

23. Gated communities will become more the norm. Knowing your neighbors will be an important theme in terms of security and safety.

24. The starter home section of the market will devolve, breaking down into a more energy efficient, higher quality home. The move up home will become the new permanent home for most. The high-end homes for the wealthy will cost more, be taxed more and will not change much. As the middle class shrinks the homes will be more straddled-either higher end or junk/rent.

25. Condos, a double edged sword -great when filled and no vacancies, bad when values are down and vacancies must be shared as a burden to all association owners-will either thrive as high end high security safe zones or be bulldozed. The condo concept may merge with the home zoned concept. Fort thinking may surface where a condo buyer may want to pledge too not sell for x years-getting a place in the fort is what counts.

26. Homes far away from employment areas will suffer. Long commutes will be a large factor in a buyer's mind. Homes in solid employment zones may be coveted and handed down from generation to generation like apts. in NYC, or old plantations in the south.

27. The amount of crime relating to copper thieving and siding pulling will come down due to lack of hood home supply and or higher security of homes still intact.

28. Home security, already a growing sector will grow in terms of round the clock surveillance -google home watch, automated stun defense systems, etc. Castle doctrine shooting of intruders will increase.

29. Pet ownership will drop since less homes and more people renting which usually employ no-pet clauses. Large eating-machine pets and high vet bill pets will shrink. The McMansion has died and soon the black lab will be a memory. Animal hoarders will be prosecuted severely.

30. Remodeling for college return grads will be even more in vogue. Mother in law suite, will become elder child accommodations.

31. As more home based businesses increase watch for the home office deduction to vanish, to further tax the homeowner.

32. Double houses will take on a charm once again if near safe areas or employment zones. Owner occupies half and rents out the other. Security, tenant control and income stream makes this concept more appealing. Builders may build new double homes with upgraded features-this may be a budding area of green cutting edge trend for builders, a healthy niche.

33. Concept homes for divorced persons who need to stay in same home with kids will evolve.

34. Foreclosures start to dry up as the eventual end comes into view.

35. High interest rates return and cement the death of housing and the bottom will be in. Home ownership will be considered a luxury.

Sam Marx writes:

I live in FL, and 5 or 6 years ago we had 2 back to back hurricanes in my area and for the next 5 or 6 months, Waste Management trucks could be seen hauling away the debris, lots of branches, etc.

I know it sounds ghoulish, but investments in Waste Management type companies in the tornado belt area might be a good investment.

Pitt T. Maner III writes:

I remember a run-up in the price of a small powerline repair company (don't remember the name) that did work in the SE and maybe on some of the Carribean Islands after Wilma (?).

Powerline repair, telephone line and tower repair, etc. can come into play after big hurricanes particularly since the wind speed and forces are often higher as you move above land surface.

In West Palm Beach there was a rather dramatic example a few blocks away where heavy power line cables running in a north-south orientation started swinging and ballistically broke and cracked what looked like strong, rebar-encased concrete poles. Several very large electric support towers collapsed out in the Glades too.

After a big storm, there can also be a multi-month need for rental equipment to cut, clear, and load vegetation and debris and to rebuild structures.

It seems like it took 6 months to a year to clean up after Andrew.



 An interesting holideasonal is that there have been 13 big up opens on holidays since 1999, the last being July 6th, 2010, and 11 of these 13 were up a further nice amount, averaging 1.2 % by the close of the subsequent day. (the gig on average was up at that time in retrospect).

Sam Marx writes:

I have become interested in quantitative studies similar to holiday studies just mentioned, determining best trading days of the month,( last I heard it was last 2 days & first 3 days of the month ), predicting next day's move, repetitive run patterns, etc. etc.

I'm interested in finding any websites, articles, books, etc. that discuss these topics.

I remember Fosback and Merrill did some work on this type of trading many years ago (late '70s ) but I was mainly involved with options then, still am.

Back then I started a study of gap trading but did not follow through as making money trading options profitably on the exchange floor was just too easy and data were more difficult to obtain then (no internet). I could trade options profitably then without knowing anything about the underlying stock.

The Stock Market Almanac has some of these studies that I'm exploring , and their Table of Contents is my starting point. However , I've already found 2 of their studies that I believe are in error. However their 6-6 month strategy is interesting although I believe the so-called "Good" period is now starting earlier than Nov.1. The last "Good" period started on Sept. 1.

I've expanded my trading to include value stocks along with options, but I'd like to enlarge my trading to include more quantitative trading.

I welcome suggestions.

Victor Niederhoffer adds:

One is reminded of Beethoven's remark to Rossini when the latter came to pay a courtesy call to b, while Rossini was the greatest star in Europe and B was on the wane. "Stick to comic opera," B told him. The seasonals on a perspective basis are most non-predictive. But they look great in retrospect.



 What % of NBA games these days are won by the team that puts in the first point, and can this be generalized to markets?

Jeff Watson writes: 

My grandfather used to tell me that a fist fight among boys was usually won by the kid who got in (not threw) the first punch. As an aside, I wonder if markets are susceptible to rhetorical sucker punches? 

Russ Sears writes:

In distance racing it is the opposite. You do not want to be out front at the start. This is especially true at High School races and at the big road races. Too much adrenalin spent at the beginning will waste it. The amount of aggression used at the start, may vary from sport to sport. But might I suggest that one on one sports or team against teams are different than sports like running or poker and trading where it is not just about beating the guy closest too you. You don't want to crush your opponent but use them or propel you to the front.

 On the other hand you must be watching for signs they can hold the pace. Exhaustion can be contagious if the pacer slows, all follow. Plus you must have confidence in your plan and stick to it. Do you beat all with a kick or do you win with a blistering last mile?

Having thousands chasing you can be a rush, but it is also very draining to wear the target on your back. You take the wind hardest without any wind blocks and you are also wasting mental energy setting the pace.

What I think all the comments below suggest is there are really 2 questions you need to ask yourself…How aggressive do you want to be at the start? And the second one is how intimidating should you be?

As Scott implies below, thugs will nip at you until they know you are or are not armed. But to answer these 2 questions in most civilized matter, you have to know yourself; be confident in your capabilities and and equally realistic about your limitations.

In racing, poker and trading, patience is the key. Be aggressive when you truly have the edge. Believe in yourself enough to wait for that edge.

What may be more fruitful questions are: what are the signs that the opponent has started too fast? And what are the signs that they are exhausted? 

A Mr. T.C responds: 

I spent years running, and I choose to disagree a bit. I don't know what type of resume is required, but I did manage two state championships and posted a 4:12 mile time in college.

Going out first doesn't always mean having to go out fast. Runners settle in as soon as someone takes the lead, whether it be track or cross country. If you can use just a quick burst at the beginning to get the lead, you can then set the pace you need in order to win. If it buries others, then great, but if you not, then you know what you have in terms of a kick when it comes to the finish because you set the pace.

Losing stinks, but there is nothing worse than losing and still having something left in the tank. That can happen if you let someone else set the pace, and you can't outkick them. Why? Because they set a pace knowing they could still have a strong finish. Yes, there are rabbits, but they are pretty easy to ferret out. They sprint out too far, too far, plus in any race you should have a pretty good idea of who your competition is not just who are the participants are. The wind is a factor, but only when the wind is actually a factor. Giving yourself some distance gives those behind you no benefit. They will hit the same wind. The idea of having to chase someone down can be tiring, and mentally it can crush you if you catch them, then they pull away.

The real key is any race with hills. A leader can really stretch a lead on the hills. It is where races are won and lost. I can tell you from experience, you do not want to be chasing on a hill nor do you want someone else to set your pace on a hill. If you have the discipline then being in front means you do not have to catch anyone else, and you merely only have to run the race. The same race you've trained for day in and day out. The same race you've run in your head so many times.

When I was good (and believe me when I say I am not good anymore), there was a span of 12 races that I did not lose (it was the 800m for those that care). In that time, I did not even trail a single lap. My first loss came when I altered strategy and ran with the pack. Through a combination of injury and mental roadblocks, I didn't win again after that…until the 4:12 road mile in which I never trailed. It is rarely about adrenalin. It is about preparation, planning, and running your race. And no, for some, it isn't from the front, but for others, they become almost unbeatable if you give them even an inch.

Russ Sears responds:

 Yes, there definitely are times to be the front runner. If you are better than everyone in the field and know it, taking the lead, pushing the pace is the way to go. Winning 8 races in a row shows that you had out grown your competition which does happen in high school and college. But as you imply, if a rabbit sprints to the lead let them go. The goal is not to win the first 100 meter, but the race.

A 4:12 mile would never have happened without preparation, planning and running your race, but also a personal record also never happens without digging deeper and find something extra within yourself at the end. As a 2:58 1200 meter runner, but only a 4:05 miler; I did not have a kick. So I understand that often you do not want to leave it down to the last 100 meter and you beat them when you can. But having to lead from start to finish sets yourself up for mental roadblocks in tough races.

Finally, I must disagree somewhat about the hills. If you are clearly better than your competition then the hills may further show this. But if your competition is equal or slightly better than you, extra resistance of the hills prevent you from putting too much distance between you.

On my hill workouts, I would practice relaxing at the punishing pace up a hill. In a race I would let my equal push trying to get away but near the top when the heart rates are at the highest, I take the lead. After the peak I then tried to stretch the lead on the level or down hill parts.

As a high school coach, kids would often think that we did hill work so we could beat the competition on the hills. So they would try to demolish the competition on the hills. But I would tell them it was to withstand the hills, and learn to relax while still giving the most effort, so that you can beat them when they are hurting the most. It is like buying the dips or taking out the cane.

Sam Marx writes:

4:05 is very impressive.

The greatest mile race I ever saw was Roger Bannister defeating John Landy at the Empire Games in the early 50s. For those of you unfamiliar with these names, etc., Bannister, of England, was the first one to run the mile in under 4 minutes, a major athletic feat at the time. John Landy, an Australian, broke Bannister's record shortly thereafter.

The two greatest milers in the world, both of English background, by a strange quirk of scheduling would then shortly meet thereafter and compete at the Empire Games.

In their race, Landy had the lead on the 4th lap going around the turn and looked over his left shoulder for Bannister. As Landy was looking, Bannister darted past him on the right took the lead for the last 100 yds and won.

It was the first time two men ran the mile in the same race in under 4 minutes or the first time anyone ran the mile in under 4 minutes and lost.

Maybe the film clip is on the net. An exciting race to watch and historic.

Russ Sears adds:

The distance runners are posting some incredible times. Granted the Boston marathon was wind aided point to point course, but simply amazing.

Thimes remained flat and perhaps a bit slower from 1985-1994 then times started dropping again.

Some of it is in the new training methods, some is due to the coaching available to most that show a promise, some is due to more ways to make a living while still coming up the ranks, and some may be due to the drugs available, but I suspect many of the best are clean, and those that aren't add motivation.

Jay Pasch writes:

Jeff, quite the interesting post as my father coached the same thing, and being small in stature, that it's not the size of the dog in the fight but the fight in the dog, and to work in tight, inside, where you have the advantage.

Scott Brooks writes:

Having grown up in a "rough" neighborhood and in light of the fact that I've been stabbed 3 times, I have always found that the best course of action was to avoid the fight at almost any cost.

I learned early on in life that there are "guys" out there who don't see the world the way 99% of the people do. They don't feel pain or fear like like 99% of the world. They are capable of a level of brutality and violence that is, quite simply, mind boggling. The way they fight and the things they are willing to do to their opponent in a fight is truly scary. They win fights because they are willing to go to a level of violence that 99% of the people in the world are not willing to escalate too.

My brother and three of uncles were "those guys". I witnessed them do things in fights that was truly stunning. My uncles grew up in one of the worst toughest neighborhoods in St. Louis. They were, hands down, the toughest guys in that neighborhood….no one was a close second to them. Two of these uncles were only a 2 - 5 years older than me.

 I remember one time when I was around 12 years old, I was over at my grandmothers house visiting. I was playing down the street from her house when these 4 guys came up to me and started to "accost" me. They surrounded me, started shoving me around and telling me to give them my money, and that they were going to beat the $#!% out of me. Basically, I think they picked on me because they didn't recognize me (they left the rest of the guys I was playing with alone….all of whom were from the neighborhood). One of the thugs asked me what I was doing in their neighborhood and I told them I was visiting my grandma. They kept picking on me. I was really scared and my mind was racing as they were starting "the process" of beating me up. It was then that a possible way out of this situation occurred to me. I asked the guys if they knew my uncles. They, of course, didn't care about knowing my uncles. So I said, you don't know my uncles, Mark and Kerry?

The next moment became frozen in time. You could have heard a pin drop. They immediately stopped shoving me around and all they stood perfectly still, first staring at me with a shocked look on their face, then their eyes began to dart from side to side looking at each other with the same stunned look on their face.

They immediately began to back peddle. They became my best friends and let me know that they were just joking around and were just messing with me. They said they were good friends with Mark and Kerry and that there was no reason to tell either of them. The "fear" in their eyes and their body language was as visible as lava pouring out of an erupting volcano. The mere mention of the names "Mark and Kerry" was like flipping on a light switch in a dark room. These guys who were just getting ready to steal my money and beat me up, who quickly became my friends, were now really anxious to leave the area as quickly as possible.

What happened next was really interesting.

When I saw my uncle Mark later in the day, I told him what had happened. He asked me to describe the guys who tried to mug me. Mark knew exactly who the guys were. Mark told me to stay at the house and he left. He returned some time later with bloody knuckles. He said he took care of the problem and that no one in the neighborhood would ever bother me again.

He was right. I was never bothered again. I saw those guys a few times after that. They not only never bothered me, they were semi-pleasant, while at the same time trying to get away from me as quickly as possible.

Between the level of violence that my uncles, my brother were capable of administering, I have decided that avoiding a fight is always the best policy….why take a chance on running into someone like my brother or uncles.

And anyway, even if you get into a fight and whip the other guys butt, if lands one good punch, you'll be laying in bed for the next week saying to yourself, "yeah, I won that fight, but man oh man, does my broken nose really hurt".

Call me a wuss if you want, but know this: I've been in more fights than most and had my butt WHUPPED by numerous people……and I never enjoyed any of them. I'll take "avoid" over fight any day of the week.

Sam Marx writes:

I grew up in the Weequahic section of Newark NJ, in the '40's (popularized in Phillip Roth's books).

We didn't fight we sued.

Steve Ellison writes:

I find it nearly impossible to literally score the first point in the market because of the bid-ask spread. If I hit the ask, chances are the next transaction will hit the bid. If I have a limit order to buy, it will not be filled unless the price is going lower. The best I can hope for is the analogy Mr. Sogi once made to a football play: the quarterback always has to retreat a few steps from the line of scrimmage to start the play. Similarly, the strategy on a hockey face-off is to draw the puck back to the defensemen so they can establish puck control and start a play.

Vince Fulco writes:

I often dream of being in the inner circle particularly under the scenarios of a nice outsized move off the O/N lows before the cash session. Then cash opens, declines all of 1/2 pt quickly, stops on a dime then zooms higher doubling the overall move.

Steve Ellison writes:

There are interesting parallels to the three choices for commerce posited by William J. Bernstein in his book A Splendid Exchange: trade, raid, or protect.



 Much ink was spilled over the recent "downgrade" of US government debt by S&P. A second-order effect — which has obvious and important business consequences — occurred with much less fanfare.

S&P's downgrade of the US Sovereign was accompanied by a similar downgrade of the five most highly rated US insurance groups: USAA, NY Life, Northwestern Mutual, TIAA-CREF and Knights of Columbus Fraternal Benefit Society. All of these insurers were previously AAA, but along with Uncle Sam, they were downgraded to "negative outlook."

"The ratings of these five US insurance groups are constrained by the sovereign rating on the US because the insurer's businesses are concentrated in the US, and domestic assets account for a large proportion of their portfolios," S&P wrote in a news release (which didn't make the front page of the Wall Street Journal.) "We factor direct and indirect sovereign risks — such as the impact of macroeconomic volatility, currency devaluation, asset impairment, and investment portfolio deterioration — into our financial strength ratings. The rating and outlook on the US constrain the ratings and outlooks on these five insurers. If we were to lower our ratings on the US, then we would also likely lower our ratings on the insurer[s]."

As S&P's singles out these five insurers (which survived the recent financial crisis with hardly a scratch), it demonstrates the capricious nature of S&P ratings (i.e. why is Northwestern Mutual more vulnerable to macroeconomic volatility than GE, Berkshire Hathaway, and Chubb?), and it also underscores some longer-term consequences should the US Sovereign lose its AAA. Put simply, an insurance company's ability to compete and write new policies is directly related to its credit rating. If/when S&P further downgrades the US Sovereign, these insurance companies will be among the most obvious innocent, first victims.

Sam Marx comments:


Would you say that there's politics involved with the people at S&P who do the ratings?

Imagine the effect on the presidential election that could be had if in late October 2012, they actually downgraded U.S. Government debt.

Russ Sears writes:

If the first law is survival, you have to wonder if the threat of the "nuclear" option was a response to the rumors of Congress taking away the rating agency immunity from investor lawsuits.



 The talk recently about evil men, the Titanic Thompsons, the Barnies, the Madoff's, the flexions et al…. the …., has led me to consider that it might be interesting to consider what is an evil and benevolent market. As a start, consider that when a market creates a bust, and then goes back to where it was, many weak players loses everything at the expense of the strong, and had they held out for just a little longer, they would have been whole. How would you gain footing on such a quest, and what predictive, and insightful ideas might derive from such a quest?

Sam Marx adds:

What I find interesting and somewhat overlooked is that getting into a stock after a crash and near the bottom can result in profits of 200%, 300%, 700%, or more and that trivializes the attempt at 18% returns which seems to be today's holy grail as attained by Harvard, Yale, etc.

The formula seems to be get out of a bull market when it becomes fully priced, even if it has more to run as Jos. Kennedy Sr. did in 1928, a year before the crash, and then bargain hunt (vulture invest) strong undervalued companies or in Kennedy Sr.'s case NYC real estate.

Timing and valuation are the keystones. But who are the good timers?

Steve Ellison writes:

Robert Drach, a commentator who has appeared on Nightly Business Report, has said that the stock market is an evil mechanism that transfers wealth from individuals to wealthy institutions during panics.

Jeff Watson writes:

But the fact that the public rushes in means nothing to me. Without any judgment on my part, it does not matter to me if the public makes money in the game, it only matters if "I" make money in the game. The professional spectator has no interest in whether the public will make money, or if society will benefit from his speculations, he has a personal interest in that he will make money. Society will benefit from that man's speculations by increased supplies, better availability of product, and all the other good things that result from speculation. The public is just betting that there will be a greater fool to come along in the future to ensure that the public makes a profit. (see Greater Fool Theory). Those evil hands earlier described are just running up the market and ensuring their profit now. Really, the difference is just in the time frame, "Will I make my profit now by running up the market and catching the public, or will I buy the market now and hope that a greater fool will come in and bail me out at a later date." Gaming the market, running the market, goosing bids, camouflaging positions, and fading offers, protecting bids, protecting positions…….none of this is evil or larcenous unless there is dishonesty or fraud involved. The market is just a huge game with many different smaller games being played simultaneously. The public is playing one game, the small spec is playing another, the spreader has his game going, while the broker dealer might be playing an entirely different game. Sometimes, the players don't even know which game is being played, and they are the ones that have no business being in the game. But unless dishonesty, fraud, or cheating is involved, none of the game is evil. 

Stefan Jovanovich writes: 

 Our esteemed surfer could have been a railroad man.

After William H. Vanderbilt, president of the New York Central Railroad, arrived in in his private railroad car in the yards of the Michigan Central Railroad in Chicago on Sunday October 8, 1882, a freelance reporter, Clarence Dresser, entered the private car and asked to speak to Vanderbilt. (In his memoir, Melville E. Stone, who had been the head of the Associated Press, described Dresser as "one of the offensively aggressive types—one of those wrens who make prey where eagles dare not tread. Always importunate and usually impudent.") Vanderbilt's interview with Dresser began by Vanderbilt's saying that he was in the middle of eating dinner but, if Dresser would wait until he had finished, he would give him a minute. According to Stone, the interview continued as follows:

"But it is late," Dresser said, "and I will not reach the office in time. The public—"

"The public be damned," Vanderbilt burst out. "You get out of here!"

John Steele Gordon says that Dresser tried to sell the story to the Chicago Daily News, where Stone was then editor. When the night editor refused to print the story, Dresser went to the Chicago Tribune, who ran the story the next morning. It was reprinted throughout the country and became the scandal of the year; and to this day, the only quotation for which Vanderbilt is remembered in Bartlett's. Here is the version of the interview Dresser sold to the Tribune:

"Does your limited express [between New York and Chicago] pay?"

"No, not a bit of it. We only run it because we are forced to do so by the action of the Pennsylvania Road. It doesn't pay expenses. We would abandon it if it was not for our competitor keeping its train on."

"But don't you run it for the public benefit?"

"The public be damned. What does the public care for the railroads except to get as much out of them for as small a consideration as possible. I don't take any stock in this silly nonsense about working for anybody's good, but our own because we are not. When we make a move we do it because it is our interest to do so, not because we expect to do somebody else some good. Of course we like to do everything possible for the benefit of humanity in general, but when we do we first see that we are benefiting ourselves. Railroads are not run on sentiment, but on business principles and to pay, and I don't mean to be egotistic when I say that the roads which I have had anything to do with have generally paid pretty well."

Vanderbilt's nephew, Samuel Barton, was traveling with his uncle that day. His version of the interview, as told to William A. Croffut, who published a biography of Vanderbilt in 1886, went like this:

"Why are you going to stop this fast mail-train?"

"Because it doesn't pay. I can't run a train as far as this permanently at a loss."

"But the public find it very convenient and useful. You ought to accommodate them."

"The public? How do you know they find it useful? How do you know, or how can I know, that they want it? If they want it, why don't they patronize it and make it pay? That's the only test I have of whether a thing is wanted—does it pay? If it doesn't pay, I suppose it isn't wanted."

"Mr. Vanderbilt, are you working for the public or for your stockholders?"

"The public be damned! I am working for my stockholders! If the public want the train, why don't they support it?"

in his article for American Heritage magazine (September/October 1989) John Steele Gordon notes that Vanderbilt had said things that matched much of what was printed in each of the versions of the Dresser interview. When Vanderbilt gave testimony to a committee of the New York State Assembly in the 1860s, he gave the following testimony:

"I have always served the public to the best of my ability. Why? Because, like every other man, it is my interest to do so, and to put them to as little inconvenience as possible. I don't think there is a man in the world who would go further to serve the public than I."

"My system of railroading is … to take care of it just as careful as I would of my own household affairs, handle it just as though it was all mine; … and take good care of its income; that is my aim, you know, and give that to the stockholders."

Vanderbilt, controlled the largest railroad company in the world. He never took a salary as president of three railroads; he paid himself solely out of the dividends on his shareholdings. By the time of his death he was, by his own calculation, the richest man in the world and, as he told a friend, "I would not cross the street to make another million." Harper's Weekly estimated that Vanderbilt's fortune exceeded the total value of all assessed property in Nebraska, Colorado, Nevada, and Oregon combined. In his own calculations Vanderbilt did concede that the Duke of Westminster might have a slightly larger fortune ($200,000,000 vs. his $194,000,000); but Vanderbilt thought his was the greater actual wealth because the Duke's landholdings paid less than 2 percent while his own portfolio of government bonds and railroad securities paid 6 percent, Vanderbilt's investment income was roughly a million dollars a month at a time when a middle class salary was $80-90 a month. When he suddenly died in 1885, the report of his death was the only story on the front page of The New York Times.



 Burton Fulsom in his book The Myth of the Robber Barrons shows that many of the great industrialists of the 19th century, the ones that didn't get government help like Harriman and Fulton, but the independent productive geniuses like James Hill, Cornelius Vaderbilt, The Mellons (My friend Dan Grossman wrote a great review of the recent Mellon bio), and the Scrantons and the Rockefellers were great men who opened up new vistas of consumer benefit and weath.

It totally disproves the myth that has the world in its grip, and things like the Palindrome who calls them crook capitalists. We know who the crook capiatalists are today, and they're not the men like Steve Jobs, and many others.

Who else would you nominate as the opposite of the cronies? Let us come up with some good ones in honor of Rocky's Humbert's request for us to honor the creation of value.

Alston Mabry writes:

Deng Xiaoping and John Doerr.

Also here is something interesting from the original foreword to The Robber Barons, by Matthew Josephson, first published in 1934:

When the group of men who form the subject of this history arrived upon the scene, the United States was a mercantile-agrarian democracy. When they departed or retired from active life, it was something else: a unified industrial society, the effective economic, control of which was lodged in the hands of a hierarchy. In short, these men more or less knowingly played the leading rôles in an age of industrial revolution. Even their quarrels, intrigues and misadventures (too often treated as merely diverting or picturesque) are part of the mechanism of our history. Under their hands the renovation of our economic life proceeded relentlessly: large-scale production replaced the scattered, decentralized mode of production; industrial enterprises became more concentrated, more "efficient" technically, and essentially "coöperative," where they had been purely individualistic and lamentably wasteful. But all this revolutionizing effort is branded with the motive of private gain on the part of the new captains of industry. To organize and exploit the resources of a nation upon a gigantic scale, to regiment its farmers and workers into harmonious corps of producers, and to do this only in the name of an uncontrolled appetite for private profit — here surely is the great inherent contradiction whence so much disaster, outrage and misery has flowed.

…and from the Foreword to the 1962 edition:

In the crisis years of the 1930s economic intervention by the Federal Government was employed on an unprecedented scale, not only in the interests of human welfare, but also to regulate and control the masters of capital who, by their excesses and bad leadership, had helped to bring about the debacle of 1929-1933. At that period a critical literature also arose (of which the present work may perhaps be taken as an example), providing background material to the men of the New Deal.

Of late years, however, a group of academic historians have constituted themselves what may be called a revisionist school, which reacts against the critical spirit of the 1930s. They reject the idea that our nineteenth-century barons-of-the-bags may have been inspired by the same motives animating the ancient barons-of-the-crags—who, by force of arms, instead of corporate combinations, monopolized strategic valley roads or mountain passes through which commerce flowed. To the revisionists of our history our old-time moneylords "were not robber barons but architects of material progress," and, in some wise, "saviors" of our country. They have proposed rewriting parts of America's history so that the image of the old-school capitalists should be retouched and restored, like rare pieces of antique furniture. This business of rewriting our history — perhaps in conformity to current fashions in intellectual reaction — has unpleasant connotations to my mind, recalling the propaganda schemes used in authoritarian societies and the "truth factories" in George Orwell's anti-utopian novel 1984. 

Sam Marx writes:

Every time I'm in NYC going up the ramp at Park Ave So. I see the statue of Cornelius Vanderbilt and I'm reminded of how he created a shortcut to California by way of Panama.

After the California '49 discovery of gold, increasing the migration there, he cleared that thin strip of land in Panama, placed boats on the Pacific side and transported passengers by boat from NYC to Panama, horse and wagon to the Pacific and then by boat to California, thereby saving the long and dangerous trip across country or around South America. No robber baron in that endeavor.

Pitt T. Maner III writes: 

How about Ray Kroc? McDonalds in the news for hiring 50,000 new employees this month.

Kroc created a new kind of fast food with McDonald's, implementing Henry Ford's assembly line idea into his restaurants. He also utilized standardization, a business tactic that he used to make sure that every Big Mac would taste the same whether a person is in New York or Tokyo. Kroc also revolutionized the art of franchising, where he set strict rules on how the food was to be made. These strict rules also were applied to customer service standards with such mandates that moneys be refunded to clients whose orders were not correct or to customers who had to wait for more than 5 minutes for their food. However, Kroc let the franchisees decide their best approach to marketing the products. For example, Willard Scott created the internationally recognized figure known as Ronald McDonald to improve sales of hamburgers in the Washington, D.C. area. Kroc established various foundations for alcoholics, and also started the Ronald McDonald House foundation.

Jeff Sasmor writes:

A later Vanderbilt created one of the first concrete roads in the nation, the Vanderbilt Motor Parkway . Some remnants remain, my wife and I used to bike on a part of it that I believe still remains between Cunningham Park and Creedmore hospital in Queens NYC.

Allegedly the VMP was the first road designed for autos only.

A much later Vanderbilt, a great^n granddaughter, used to work for me and my partners in the early 1990s, but got fired because the wife of one of my partners got jealous of her good looks.

Jeff Watson writes: 

 Jay Gould was my favorite robber-baron, although he was deeply flawed, and a vile and disgusting cheat. One could say that Gould had an inner drive and a pronounced sense of pluck. Getting his speculative stake from the ashes of the Panic of 1857, he astounded the financial world with his decades of manipulations. His railroad corners were amazing. His attempt to corner the gold market resulting in Black Friday was something out of a novel, His bribery to influence legislation was legendary. His chicanery with using forged stock certificates set the bar for all other cheats and swindlers. He controlled Western Union. His corners in the Chicago commodities markets were equal to those of Armour, Cutten, and Gates.. As bad as he was, he still managed to combine a bunch of railroads together and creating value by achieving a better operating scale. I have problems with the way he treated the help, but at that time, laborers were very shabbily treated. Finally, when Gould died, he had an estate of $75 million dollars, so he must have done something right.



 1. One would think that the universal brotherhood of central flexions would work to create a positive ambiance at the open market meeting today, with helpful comments from any flexions with big positions in Asia vis a vis electricity et al.

What is the evidence that rebalancing asset allocations between bonds and stocks on a monthly, quarterly, or yearly basis leads to non-random results?

Does dollar cost averaging lead to better outcomes than random buying?

2. It is an interesting sidelight that with all that's going on, the greatest turmoil and tragedy in at least 3 years, the market dropped a quick 1/2% before the ridiculously unimportant NABH housing market index for fear that ???? It would be down or something. What fools these mortals be. And what better demonstration of the ephemeral nature of the public.

Anatoly Veltman writes:

It reminds me of an old hilarious caricature, illustrating a TV anchor going: "The markets world-wide plunged over 90% of their value on astronomers' confirmation that history's largest asteroid is on inevitable collision course with Earth. They have rebounded sharply midday on rumors that the Federal Reserve may lower the Discount Rate".

Sam Marx writes:

Thank goodness for the ephemeral nature of the public.



 The more one studies the markets, the more one is convinced that the hallmarks of a con are very useful in unraveling the possibility of making a profit. In this regard, I found the article "Con Ed" which features the insights of Todd Robbins, where he talks about spotters, the 3 h's of cons: hide, hype, and hate, and the direct relation between misery and the extent of cons to be helpful. I find that prices often have the hallmarks of con when they break through a barrier, showing you that it has overcome a difficult hurdle, and thereby gaining trust and confidence. Also, the spotter, the person that makes you confident by showing you his trust in the deal. So many CEO's, analysts, and newspeople play that role.

The article features the common adage that you can't cheat an honest man, or the related it's always the greed of the mark to get into something with an unfair advantage as a important precondition. How much evilness lied in most of the victims of the Catskill, Palm beach, Riviera, Long Island con who all must have thought that they could front run the market making operation downstairs. The importance of giving the mark excessive praise, which in most cases would be a short term profit, and is related to the principle of ever changing cycles would be another one.

The whole subject of flexionicism as a variant of the big con needs to be studied and quantified.

Sam Marx writes: 

The missing data for such a study are the successful con games that are never discovered.

There are probably a load of Ponzi schemes still operating.

In fact a Ponzi scheme, with luck and some skill, could turn out to be a big winner for both the manager and "investors", especially in a bear market.

In a successful classic con game, at the backend, there is what is known as the "blowoff" where the victim has lost a bundle, doesn't realize he's been conned, and actually is convinced he has to keep quiet about it or he'll wind up in jail.

Henry Gifford writes:

My favorite book on cons is The Gentle Grafter, a collection of O'Henry's short stories on the topic.

Many entertaining scenes of con artists arguing over whose specialty is more moral and noble, and the entertaining justifications they come up with, meanwhile constantly conning each other.

George Parkanyi finally asks: 

What is a flexion anyway? I see the term used here liberally, and it seems to have nothing to do with the dictionary definition (which has to do with bending limbs). And is "flexionic" even a word?

Gary Rogan elucidates:

This is Victor's explanation:

From the book The Shadow Elite by Wedel, Ganini. Former fed officials. Former high treasury officials with private access to the sqaush courts and executive dining room. Presidents of colleges, former and current, who worked at high positions in the treasury and fed staffers privy to the daily conference calls at which all upcoming releases are discussed high executives on Wall Street, who are consulted about the economy for their feedback by the treasury and the fed. Big owners of newpapers from Nebraska who dine on coke and dairy cream. Counterparts and their operaitve from other central banks that our treasury and fed discuss the upcoming policies and release with on a need to know basis so they will not be surprised and will know how to act and put things in perspective for their flexionic pursuits a home. Operatives within the agencies that prepare the numbers and especially those who make final adjustments on them.

Rocky Humbert writes:

I agree that unquestionably, and right under everyone's noses here, absent the savoir vivre of Madoff, that there are many Ponzi schemes still operating. One good whoosh will shake them out here (I am aware of one which I am certain of, massive in size, and I can only laugh that this one is still out there prowling in the deep).

Unlike Madoff, these other funds are not primarily comprised of Jewish investors (in truth, Madoff did have some Arab soverign wealth fund money too, but the majority of it was from the Jewish community) so when these monsters explode I would look for an entirely different reaction this time.

We were speaking of cons on a previous thread in a related list. I predict after this next manager explodes, the investing world (not necc "the public," we're not talking about hoi polloi here) will wake up and realize that if the manager has access to the money– it might be a con. Managers do NOT need access to the funds.

Sam Marx adds: 

I believe that it was in Barton Biggs' book Hedgehogging that Biggs described a club of money managers, large investors, etc. that he belonged to that would share financial information unknown to the public. But if anyone related information that was to the divulger's advantage and detriment to the divulgee (new word?) the divulger was blackballed.

Would this be considered part of the "Shadow Elite"?



There was an interesting segment on 60 Minutes on 64 year old Bill Walters who apparently is a very successful professional gambler in Las Vegas who uses statistics and inside information to be a winner.

I never heard of him before. Any thoughts or more information on this gentleman.

William Weaver writes:

Billy Walters…betting the opposite side of a weak line to change the spread and then simultaneously hitting multiple venues for much larger orders before the line is updated.

Not too long ago when the price discovery of metals markets was floor-based, dealers would do the same exact thing, or at least try to, all day long. They would have a couple of different brokers in the pit each bid for a 100 lots of silver knowing that the locals would in turn bid in front of them a half-penny higher. All the while the dealer had a customer on the phone who doesn't have access to the floor and has no idea what is going on other than the prints on his screen. The price goes up and the dealer unloads his physical inventory to the customer, a presumed buyer.

If the customer is a presumed seller, say a producer, the routine is reversed.

It's all perfectly legal, and not remotely unethical as the dealer stuck his neck out by putting large bids or offers out there that could very well have been hit.

Such a seeming advantage is all part of any market's ecology and does not come without a price. There's always some barrier to entry, a hurdle that first must be overcome before exerting that kind of leverage.



 "Better by far that you should forget and smile than that you should remember and be sad." Christina Rossetti

Featured on 60 Minutes and dubbed "the Human Google" by Good Morning America, Brad is only the second person ever studied for HYPERTHYMESIA, an extremely detailed memory for the events of his life.

It is a nice song too, but do we really want to remember everything intensely: a cautionary fictional (I think) story from Nature .

"The pressure to succeed steadily increased and so did the need to stay alert, to focus relentlessly. I prowled the smart-drug chat-rooms and message boards. During the day I traded stocks and shares, during the night I was trading ideas and experiences. I learned about stacking and cycling, optimizing the stimulation and minimizing the side effects. All of us avidly sought the pot of gold at the end of the pharmacological rainbow, an eidetic memory, capable of perfect recall. I got the drugs from incurious online pharmacies."

And are there virtues to be found in the ability to forget? also a good read here.


The default view in the epistemology of forgetting is that human memory would be epistemically better if we were not so susceptible to forgetting—that forgetting is in general a cognitive vice. In this paper, I argue for the opposed view: normal human forgetting—the pattern of forgetting characteristic of cognitively normal adult human beings—approximates a virtue located at the mean between the opposed cognitive vices of forgetting too much and remembering too much. I argue, first, that, for any finite cognizer, a certain pattern of forgetting is necessary if her memory is to perform its function well. I argue, second, that, by eliminating "clutter" from her memory store, this pattern of forgetting improves the overall shape of the subject's total doxastic state. I conclude by reviewing work in psychology which suggests that normal human forgetting approximates this virtuous pattern of forgetting.


"At first glance, AJ might appear to have an enviably good autobiographical memory. But closer examination of the case suggests that though we naturally assume that increased access to stored memories (less forgetting) would amount to an improvement to memory, this is not in fact the case. There are two points to note here. First: Though it is natural to assume that a \better" memory would provide us with a signi cant cognitive advantage, this is likely not the case. As Parker, Cahill, and McGaugh point out, AJ's exceptional memory has provided her with no apparent advantage in daily life or in her studies; nor is it helpful on IQ tests and the like (2006, 48). And at the same time, AJ's unusual retrieval capacity carries heavy cognitive costs. In particular, she \spends much of her time recollecting the past instead of orienting to the present and future" (2006, 48).An increased retrieval capacity comes at a price: time that would otherwise be spent on other cognitive tasks is devoted to retrieval; time that would otherwise be spent acquiring new knowledge is spent simply processing \surplus" retrieved memories."

Sam Marx writes:

The 60 Minutes program piqued my interest in people who have this super memory as a natural talent. It is obvious that there are people who are super geniuses in certain fields such as chess, music, math, etc. Maybe Thomas Edison was a super genius, he certainly accomplished a lot. Super geniuses in these fields can be easily discerned.

There may be super geniuses in other fields, business for example, but luck and other variables may affect their success.

I once knew a fellow who was just a clerk on the trading floor but he could complete the NY TIMES crossword puzzle in minutes. He was amazing. Maybe he was a super genius in just this one field because he never advanced further than that of a clerk.

These study of these super geniuses may someday lead science into creating a race of super geniuses to hopefully help mankind.

I've wondered as I watched football is there a super genius offensive director who can anticipate the moves of each defensive player for each offensive play he calls, a Prof. Nash in the booth.

Ralph Vince writes:

About your last point–No. Great offense — like great chess — or brilliantly playing a
mediocre bridge hand– requires the element of surprise moreso than
knowing what all the pieces might do.

"Surprise," is anticipatating what most are quite certain will happen,
fienging it, then taking advantage of that en masse, not individually.
-Ralph Vince 

T.K Marks writes:

 My recollection of Jerry Lucas' memory methodology is that it had much more to do with technique than talent. Something he readily admitted. There's an old axiom in legerdemain: A magician never tells. Lucas told. Heresy happens.

But, first of all, Lucas was delightfully different from the get-go.

While on the Knicks he played center so far from the basket that the other team's defender would look confused as to what to do because if he went out to meet Lucas he effectively just took his own team's best rebounder out of the equation. Therefore it would oftentimes appear as if Lucas was playing offense undefended. A bizarre sight to behold.

My first brush with his mnemonic capabilities though was when he demonstrated his ability to recite pages from a New York phonebook to Johnny Carson on The Tonight Show.

Intrigued by how he was able to do that, I read some of his materials. He freely provided how one could easily and quickly memorize long lists of objects and actions in precise order by using rhyme and incongruity.

It worked like this. There was a rhyming scheme linked to the number of the sequence of items/actions to be memorized. For instance, 1 corresponded to gun, 2 to shoe, 3 to tree, 4 to door,…8 to gate, …44 to knock on a door….

Rhyme resonates in memory and Lucas, a luminous soul, knew this. As such, It was very easy to learn the initial rhyme key, and one could readily extrapolate further from what was provided.

The second part of the equation involved somehow associating the number-linked rhyming sequence with the object or action to be memorized. And the incongruity involved helped make it stick as an image.

For example, if the second thing to be remembered is a bottle of aspirin, the memorizer pictures in their mind a bottle of aspirin in a shoe. That's an unlikely scenario, and that's what helps make it stick. And just keep on going. If item 8 were a cat, picture a cat walking up and opening up a gate to a country estate. If item 44 were a rogue politician, picture him knocking on the door of a convent for a shakedown donation. The idea obviously was to make it as incongruous as possible, provided it remained consistent with the rhyming key.

It was remarkable how quickly this information could be retained based on this easily learned technique. So much so that I fondly recall as a kid having a little fun with my father as soon as I learned it. I said, Da, write down 20 items and I bet you I can recite them back to you in less than 5 minutes. Frontwards, backwards, randomly, any way you want. He said, no way you can do that in 5 minutes.

After we concluded the little demonstration, he asked — demanded actually — how his kid had just done that. Told him I couldn't tell him. It was magic.

He smiled.

I sensed as well that there was also a little "magic" involved in the 60 Minutes piece on autobiographical memory. Some of subjects too quickly and unsolicitedly mentioned what day of the week it was when asked about what had transpired on a random date. That suggested a key-scheme gimmick peculiar to days of the week in any given year. And with such, a presumption of legitimacy in a larger sense.

But there were other non-scientific methodologies mentioned as well. The least of which was certainly not the fact that the lead reporter, Leslie Stahl, had remembered midstream that she just happened to know well one of the final 5 subjects, actress Marilu Henner, and so brought her into the tiny sample group.

She just happened to know a 1 in a supposed xx million shot? How is that not curious.

I was initially intrigued by that piece when I had first heard that it would be aired, but after watching it, found it to be much more science-cum-show biz than peer-reviewed journal. The editorial board of The New England Journal of Medicine would get them on the Leslie Stahl/Marilu Henner abject lack of randomness angle.

One would hope.



 Hi everyone,

Watching an episode of Pawn Stars. In reality I like to see what items people bring to the pawn shop to either sell or pawn.

The owners seem to a have large shop full of all kinds of collectibles. My main concern is Rick (owns shop with his father ) constantly has to call in outside experts to evaluate or verify authenticity. To be in that business you better know a little bit about ephemera and coins and ball cards and cast iron toys and still and mechanical banks as knock offs are everywhere that antiques have risen in value. Also include art.

Is this like the Market trader having to rely on others to make important buy or sell decisions and not learning on their own to make critical educated decisions?



Sam Marx comments:

I've watched Pawn Stars a few times & the gullability of people when they need a loan is amazing. It's like watching a car accident. Also, I would venture that the average of all the IQ's of people pawning items is below average. I would also guess that the vast majority of those items pawned are never redeemed. Confession: I pawned an item once, an emergency, but I took it out of pawn 2 days later.

I know that junk car yards are connected to find parts between themselves, it's like having a vast inventory. I don't believe pawn dealers are connected this way.

Has anyone ever thought of working a deal with these pawn brokers and putting their items on an internet website. Something like an Ebay for pawn brokers or maybe they are doing it themselves ?

Thomas Miller writes:

This show is a great example of the ageless advice "never try to bullshit a bullshitter" you'll never win. I suspect most pawnbrokers love the art of haggling and would rather sell to someone one face to face to use their skills to get the best price, rather than through internet auctions.

Art Cooper adds:

Related to this, see the article "Payday Lenders Go Hunting" on p. C1 of today's WSJ, on the expanding operations of such companies as Advance America, which make unsecured loans at annualized interest rates as high as 391%.



 This is guaranteed to happen if you're giving your money away to charity without tax at death, and have climbed up the slippery slope by avoiding service payments yourself, and if you are person to invest in government guaranteed high yield convertible preferred.

Gary Rogan writes:

Even judas goats aren't usually this obsessive-compulsive about their assigned task.

Sam Marx writes:

What Buffett leaves out when he says that he pays a lower tax rate on his income than his secretary is that the lower tax rates on the dividends he receives is because they've already been taxed as corporate profit.

If Buffett feels the really rich (over $500 million I'll assume) should pay more taxes, then he should write a larger check to the govt. as an example.

An Anonymous Writer writes in: 

With all his businesses set up to help the rich avoid taxes, (of course, those that sell these products often make more than 50% of what is "saved" without the change in tax risks the avoiders face), or to take advantage of the heirs when the business man dies with his lending of last resort status, he will scoop up the widows and orphan bargains. (Nobody will scream too loud since they are rich widows and orphans.) No wonder he wants to tax the rich more. And he's screaming because he sees the Republicans are going to get their way.



There's an interesting chart illustrating Livermore's point that when a market goes above a round number (1000) it is bullish. Gold approaching 1400, - round numbers at 1200 were temp turning point but runs through other 100s show no tendency to reversal. A whole study has to be done with as is data on individual stocks.

Alan Millhone writes:

All I know is reg gasoline over three now and killing the average citizen. Gold will push two the way things are faltering.

Ken Drees writes:

I am not hearing the gas price complaint yet as it seems that many are very conditioned in the high 2's and even the low 3's may seem not worth complaining about.

I think a round "4" handle on the gas price will start up the wailing and gnashing of teeth this time around.

Sam Marx prophesies: 

$4 gasoline will occur at or before the 2012 election.



 I'm sure we'll never agree on who was the best but I ask you not to forget Minnie Minoso. He had some great stats although he never had an opportunity to play in the "bigs" until he was 28. (And continued on until he was 65.)

What made Minnie stand out was his determination to get on base. If the White Sox really needed a runner or Minnie was in a slump, Minnie had the sure-fire way to get on base.

He just stuck his head over home plate and took one in the ear, got up, and jogged to first (and frequently stole second). Led the league in this category 10 times, Never saw that in the Yankee Clipper, the Man, the Mick, or the Splendid Splinter.

Stefan Jovanovich writes:

Yogi Berra - Minnie Minoso story: Whitey Ford was starting for the Yankees and they were playing the White Sox when they had their great 1950s team. Ford throws the first pitch - a fastball - and Luis Aparicio lines a single to center. Nellie Fox comes up and Ford and Yogi decide to switch to the curve ball; Fox hits if off the right field wall for a double, Aparacio scores. Minnie Minoso is next; and they decide to go soft ball. Minoso hits the change-up into the left field bleachers. 3-0 White Sox. Casey Stengel decides to invite Yogi to join him in making a visit to the mound. "How we doing, boys?" he asks Ford and his catcher. "Well, Skip," says Yogi, "Whitey's mixing up his pitches." "Yes," says Stengel, "but how is he doing?" Yogi answered: "I can't really say. I haven't caught any yet."

Jeff Watson comments:

Not wishing to diss the Mick who's easily in my top ten, but my favorite person in baseball of all time would have to be Ty Cobb. Not only was he was a great rough and tumble, aggressive ballplayer, he was a sagacious trader who died rich off of his investments. Cobb had a "need to win," part of his make-up that came straight from his gut– it's too bad that he had more than a few character flaws. But then again, one could make an argument that his flaws were a sign of the time….apologists make that argument for Jefferson all the time. 

Tim Melvin writes:

My favorite Cobb story from wikipedia:

Cobb's competitive fires continued to burn after retirement. In 1941, Cobb faced Babe Ruth in a series of charity golf matches at courses outside New York, Boston and Detroit. (Cobb won.) At the 1947 Old Timers Game in Yankee Stadium, Cobb warned catcher Benny Bengough to move back, claiming he was rusty and hadn't swung a bat in almost 20 years. Bengough stepped back, to avoid being struck by Cobb's backswing. Having repositioned the catcher, Cobb cannily laid down a perfect bunt in front of the plate, and easily beat the throw from a surprised Bengough.

Sam Marx writes:

It is usually agreed that Ted Williams was a better hitter than Joe DiMaggio, but what quality is it that allows a lesser hitter, like DiMaggio, to have hitting a streak of 56 games whereas no other hitter ever came close. I believe DiMaggio also had other long streaks of hitting in games including when he was in the minors. 



 This article on income mobility will put in perspective the malaise affecting our economy. It's the 40 % from each of the lower 2 quintiles who moves to the top 2 quintile that has made us beautiful and created the jobs and responded to the past incentives, and dolorously "prefers not to" create jobs and value now.

Australian Nick White comments: 

This is a great country. Being back here the last few weeks just reinforces to me how lucky America is– even if you're in a perceived funk right now. This is the country where anything can get done…that's not the case in any other western nation. You have freedoms that you take for granted every day (even post legislative amendments that may have eroded them more than trivially). You have every type of geography and lifestyle. You have 36 different choices of one brand of orange juice fer crissakes! (which you can drink while watching one of thousands of tv channels).

I don't know much, but I know that if America continues to focus on the the things that got them to here– without trying to reinvent the wheel– you will all be just fine. The only danger I see is increasing reliance on form rather than substance– but this is a malaise of the world in general, not just the US. 

Rudolf Hauser writes:

This data on income mobility does not give us a complete picture. Large gains or losses from realized capital gains/losses, special bonuses payments, decisions to take long breaks from work, etc. can all influence results for any one year. One would also expect income from most careers to advance with experience and age. What would be interesting to see but probably very difficult data to obtain would be an average of five years of data say at age 50 with those relative income positions of those households income compared with that in the same period in the lives of their parents. I suspect that there would be a good deal of upward income mobility demonstrated by such an analysis, but it would nonetheless be most interesting to have that evidence.

Russ Sears writes:

Isn't this the premise of the sitcom "The Big Bang Theory"?

A group of nerdy physicists meet their neighbor, a beautiful blond girl waiting tables at the cheesecake shop… but even she is hoping to become an actress.

But you miss the point– from the Will Smiths to the nerds in physics to the marathon runners to the Saints QB, they are all incredibly talented, even the WS geeks, not just the WS geeks.

And as someone seen how letting a small business owners put the money back into a sport can revitalize: it can change how everybody developed talent. In 1992 The US marathon trials were a joke, but these guys changed it.

The world will never know the talents that were not developed for lack of a few dollars, but I have seen first hand how thin the pie can be sliced at the top, and how a few centimeters thicker can change everything. 

Jordan Neuman comments:

It is interesting that you mention the varieties of orange juice. I just read The Paradox of Choice which argues that our lives would be better if we did not have so many choices. The varieties of grocery items was the author's starting point.

It would not matter unless such ideas had support in this Administration. The references to health insurance in the book are illustrative. And I found the interview with the author in the afterword absolutely chilling. This professor was sure he and his "expert" friends knew better.

Larry Williams writes:

Living in the US Virgin Islands means giving up many choices in foods, clothes, cars, etc. I have found that a wonderful thing; it causes one to focus on what is really desired (that can be ordered from off island). It makes for a simpler life style and turns ones attention from man made consumables to the ocean, the trade winds, local markets and such.

Sam Marx comments:

I remember one of the escaped English spies then living in Moscow, when asked what he missed most about England, he replied Lea & Perrins Steak Sauce.



 In the 2010 Stock Trader's Almanac on pg. 52, there is an article entitled "Take Advantage of Down Friday/Down Monday Warning".

The gist of the article is that because of the importance of Friday and Monday as trading days a down Friday followed by a down Monday is Bearish.

It seems logical and they printed the data to "substantiate" this conclusion. Their table of data indicates the market is down anywhere from 18 to 54 days later.

I wanted some more immediate and more definite results that I might use, so I tested where is the market 5 days after a Down Friday/Down Monday for the years Feb. 1993 to July 2010 .To my surprise I found that on average the market is not down but up 5 days later and this occurred approximately 60% of the time.
I tested it further for 10, 15, 20, 25, 30, 35 days after a Down Friday/Down Monday.

With the exception of 25 days later, the market was up all those other days.

The market was slightly down on the 25th day but was up again, slightly 30 & 35 days later.

I have not broken up the test into smaller time segments to check the hypothesis further because I was truly disappointed.

Bruno Ombreux comments:

Just the numbers 18 and 54 are suspect. They smell of cherry-picking.

But there is an even bigger flaw. It is that it doesn't make any sense. One could forgive people not knowing about multiple hypothesis issues. They require education. But throwing away common sense as they do, is a different matter.

Why would something that happened today impact the market 18 to 54 days later? And not in between? When we all know that if there are dependencies they are very weak and vanishing with the passage of time?




DJIA1. One notes a too smart by half breach of the round today in the DJIA. What fools the g_ds must think the mortals must be.

2. For yet another time, the bonds have suffered a grievous decline before 10 and 30 year auctions, threatened breaching the 4% and 5% levels, and bounced back with alacrity to levels that do not threaten the economy. How many times can history repeat? One is reminded of Crocodile Steve who always said that when he ran the show, the crocs were particularly vicious because they all remembered it was he who caught them. Thus, he never entered the arena at the same spot twice as they waited in ambush for him at the last place.

3. We frequently talk about what fields as disparate as rodeo and radio can teach us about markets, but not as often do we consider what we can learn about life from markets. One has been considering the general question of happiness. What can we learn about it from markets?

Here's a interesting gambit. It is well known that after monthly maximums the variance of the move in the S&P the following day is considerably less, indeed 1/5 as great as the variance after monthly minima, and a mere 40% as great as after normal days. The standard F tests for comparing equality of variances by looking at their ratios, which has a critical value of 1 at the 1% level of significance show that these divergences are quite impossible under randonmess. What does this tell us about human happiness, and yes, what does it tell us about markets, also taking into consideration that the maxes occur twice as frequently as the mins over the past 15 years. 

4. "The Knicks never lead, falling behind 4-0 in a sign of things to come" in losing 118-90 to Portland on March 31. What can we learn from that?

Jeff Watson writes:

Steve IrwinA corollary to point number 4. In 1969, the Chicago Cubs were in first place all season long. At the beginning of September, they had a 84-52 record and were a solid 5 games ahead of the NY Mets. By mid-season, the Cubs were already getting ready for the series, and they even wrote many songs about them.The Cubs choked and lost 17 of their final 23 games while the Mets went on a tear with a 23-7 record, overtaking the Cubs and ultimately finishing 8 games ahead. The Mets ultimately went on to win the World Series, while the Cubs quickly regained their status in the cellar. Still, Chicagoans love the Cubs, win or lose, as there's nothing like a good day at Wrigley eating hot dogs, peanuts, cracker jack, and plenty of beer to wash it down.

Nick White responds:

I immediately think of case studies of Olympians– especially Olympic Champions– as they try to adjust back to normal life, post-Games. It's not an easy transition. Post-competition depression is a real thing and the market being what it is, probably can teach us much about how to handle ourselves after a major peak or trough.

Livestrong gives a good summary of the problem:

Many athletes spend years preparing for a narrow window of opportunity–a college career, the Olympics or professional sports limited to certain ages. Intense preparation, daily practice and adjusting life to meet the sport's needs may dominate an athlete's life. After the particular event, an athlete may lose his sense of purpose and have a hard time reintegrating into a routine that does not focus solely on the sport. An athlete may experience depression if he is unprepared for the transition.

To follow the example you provided, on the day (or weeks) following their victory, Olympic champions are unlikely to go 'round the village, find their competitors from the event they just won, and then challenge them to repeat their world-best performance again…there's consolidation, reflection, relaxation. An entirely appropriate response. Without further stimulus there is rapid atrophy and de-training. There are dozens of studies of the de-training effect. With well-timed, appropriate breaks there will almost certainly be the possibility of greater physiological improvements (see any of the literature following Bompa et al on training macro, meso and micro - cycles).

This sounds remarkably like the behaviour of the market. The sports physiology literature probably has much to teach us about the extrema of markets and the conditions of extension in such situations.

Furthermore, not everyone puts themselves into an intense period of stress and competition that they have been preparing for for a prolonged period of time, yet the market does this reasonably frequently. So, being a collective representation of human emotions and biases, it's probably fair to hypothesize that the manner in which the market responds after minima or maxima is probably a fair aggregate of how we can expect humans to behave on aggregate when experiencing highs or lows in their personal lives. Hence the market can perhaps teach us something and, from that base, we can then perhaps devise strategies to more efficiently handle such periods in our personal lives.

What also of the incidence of disorder when a highly focussed instrument loses its purpose–temporarily or permanently? But, your proposed study begs a question of logic– is it possible for the market to teach its creator something directly? The market doesn't have independent existence from its participants or a character of its own any more than a violin is capable of playing music lest someone pick it up and play it. So is it better to just to review the behavioral literature directly?

Rocky Humbert writes:

The question posed is a variation on the much debated question as to whether stock markets decline faster than they rise. The past 19 months are additional fodder for those (including myself) who believe that they do.

Because the phenomenon of lower volatility at monthly maximums is much less prevalent in commodity futures markets, I posit that the phenomenon is related to the three facts: (1) that the S&P is a "net long" market; (2)fear is a stronger motivator than greed; (3)stop/loss sell stops are more prevalent than take/profit limit orders.

I'm not being facile when I observe that the reason most people own stocks is to make money. Hence after markets are rising for a time, most people sit back, relax, and enjoy the ride. However, when markets are declining, the fear instinct kicks in– and people feel the need to "protect their gains," "stop the bleeding," or the all-too-familiar, "I can't afford to lose any more money."I would additionally observe that markets which go a long time without a correction have more violent corrections. This can be quantified and is consistent with all of the observations above.

I have been an unabashed bull on these pages for the past two years, largely because I believe that the valuation and sentiment at one's entry point are the best determinant of one's long-term return. I am now growing more cautious– and just as I was buying stocks on a scale-to-oblivion in February, 2009, I am starting to sell-long on a scale-to-oblivion now. I am not shorting. Rather I simply observe that the same simple and timeless logic that predicted a 5 year double-digit return during the dark hours, now predicts a low single-digit return over a 5 year time horizon. I wish I knew where the S&P will be in a week, a month, or a year — but any claim of that ability would be pretense.

Ultimately, the markets' lesson of the past 24 months has once again been, "Be greedy when others are fearful, and be fearful when others are greedy."

Sam Marx writes:

I believe one more stock market action occurs that was omitted in paragraph four. That is in a rising market when there is pullback or slight sell off, buyers come in to buy the dips and the market starts its upward climb again.

Fear kicks in when the market continues to dip, maybe around 10% down, and then selling picks up.

Steve Ellison writes:

Many athletes go into sales after their playing days are over. In sales, like athletics, all that matters is performance, and the top salesman makes far more money than the VP of sales. Some sales managers go out of their way to hire athletes because athletes are competitive, disciplined, and focused. 

Jeff Watson adds:

There were a lot of athletically inclined people on the trading floors back in the day. It took an athletic person to handle the rough and tumble of the pits, even the smaller pits. A four hour trading session in the pit would be like a 15 hour shift in any other job. It was absolutely physically and mentally exhausting. 

Rocky Humbert writes:

 One answer might be that miners are lured into a false sense of security when their canaries are singing a cheerful melody– comfortable in the knowledge that the levels of methane, hydrogen sulphide, and carbon dioxide are within acceptable bonds — but over time, becoming increasingly oblivious to the growing risks of mining-induced seismicity and unstable mine stopes– until there is a violent catastrophe.

Likewise, the increasing happiness of market participants in a low-volatility, monotonically rising market are like the miners with their singing canaries– the violence and magnitude of the potential, but unpredictable and unknowable and unnecessary tragedy is directly related to the length of time between tragedies as the institutional memory of previous tragedies fade. The miners are alert after a recent tragedy, but after months/years of traquility, the happiness may mask carelessness.

The recent tragedy is probably still too fresh in the institutional memory to be immediately repeated — but those with excess liquidity were able to profit from the most recent tragedy, and those with excess liquidity will be able to profit from the next tragedy. These men are like spiders — patiently waiting for opportunity that only occurs once every several years.

The wisest man can see the future, he is indeed a happy man.

Victor Niederhoffer comments:

One would adduce inspired by the token liberal rocket scientist that the ratio of variances during the past 3 years has been 9 as opposed to the paltry 5 previously addresses. And his very interesting post brings back many pleasant memories of the meetings of the Royal Society adduced by O'Brian. A certain member when talking about nondescript features of this or that mollusk on the Mauritius was well known to steer the transactions and his talk into a discussion of the nesting y practices of a certain species of bird that I believe liked to test in coal declivities. What does the reduced variance following the bigs have to do with the tendency for declines to be more violent? A talk at the Society might be apt.

Stefan Jovanovich writes:

What miners have been saying is that "yes, setting off explosives will shake the ground" but it does not "cause earthquakes or increase their frequency". The miners - poor fools - have some direct experience with the amount of force it takes to move rock so they find the direct causal association between their cat-scratchings in a litter box and an earthquake a bit laughable. What defeats their sense of humor is the realization that "mining-induced seismicity" is yet another scientific theory whose postulate is close the mine. "Mining induced seismicity" in the sense that blasting = greater probability of earthquakes has not been proven; on the contrary, most of the statistical evidence suggests that this is an affinity fallacy: man-made explosions shake the earth, therefore naturally-occurring earth-shaking is caused by man-made explosions. The quality of science that accepts this fallacy seems to be on a par with the fans of CO2-induced global warming. (What a surprise!)

What has been helpful is to measure earth-movement activity as a predictor of roof-falls using fuzzy logic.

Of course, CO2 is a problem in mines, but it is not a "worry" compared to methane. If the ventilation fails, then people die from the same cause that occurs when they fall into a brewing vat or get stuck, without an oxygen supply, when cleaning out a grain storage bin or cargo hold. It the lack of oxygen kills them, not the CO2. Acidosis is unpleasant but it is not often fatal. The reason they put CO2 in fire extinguishers is that it is the one safest, most non-toxic gas that can be stored and then used under pressure to displace the oxygen supply.



Penny BlackFeb 10 was the first "snow day" in New York in three years where kids don't have to go to school and when I was a boy, we greeted the snow days with alacrity as it meant we could hop on the subway and visit the stamp dealers on Nassau Street and spend a quarter on some rarities. Apparently there are few if any stamp collectors left among kids today because other activities crowded them out. I base this on direct testimony from Stanley Gibbons and the fact that there are no stamps offered for sale in the newspapers anymore as well as published reports from stamp magazines themselves. This is a tragedy since stamps provide so many benefits in geography, art, history, economics, categorization, collecting, and patience, foreign exchange, printing, and topical interests.

In honor of the snow day, I thought I should enumerate some trends I have noted from my reading of the literature. Dimson is seminal. There is a seminal paper on investment returns from stamps available that does for stamps what DMS and Fisher, Lorie and Ibbotsen have done for stocks. They report that the returns from stamps over the last 100 years have been about 2% a year worse than stocks and 3- 4% above bonds. Adjusted for systematic risk and standard deviation the returns are comparable to stocks. There are so many important and intriguing points covered in that paper that I must refer you to the original. However, a few that I noted are that stamps hardly have had a down year during the last 100. The cost of getting in and out is about 25%. The returns from high priced stamps are similar to those of low priced stamps. The boom years for stamps were 2008 and the late 1970s and like stocks these days they have a few 20 year periods where the returns have been flat especially during the early first and last 20 years of the 20th century. The market for collectible stamps is 10 billion a year, higher than the fine art market in total. The number of collectors is about 50 times higher in Germany per capita than in the US: 1 in 20 in Germany versus 1 in 1000. There are an estimated 20 to 50 million collectors in China. It was previously illegal to collect stamps in China under Mao so there is a surging demand especially for the old issues that none in China were allowed to buy. The price of many low priced issues in stamps has appreciated more than the high priced issues becuase people didn't take good care of them. A nice example are the first stamps issued in the US and the Columbia Expedition sets. The price to weight ratio of stamps is among the highest in the world and part of their value is their portability. The upside down fixed income "Sponsor" has bought 100 million worth of stamps and believes that their value is correlated with GNP. Dimson has a nice set of regressions showing the systematic beta of stamps about 0.2 when adjusting for various Fisher type effects in lags in pricing. (The Dimson and Spaenjarie article)

Stanley Gibbons has a nice index of the 100 rarest British stamps, which are the most collectible, as is their silver, and this correlates well with the Dimson estimates, even though there is much spurious lookback effect in it. There is general agreement that the current collectors in stamps are those who were introduced to it before the 70s and now have the income to augment their portfolios. Very few new collectors are coming in from the US and England. In view of the 25% transaction cost of buying and selling stamps, one could not recommend them as an investment. A good investor would never see his stamps because the values regrettably depend almost entirely with a range of 500% for the same stamp based on condition. Thus, only long holding periods like the 40 years that Dimson uses would seem appropriate. But in 40 years the demand from the kids of today would seem to be likely to be small because they don't collect now or even know what a letter is in many cases. If one were going to invest, one would probably confine his activities to German speaking lands and Asia, and England which still is the rule of the sea as far as collectibles goes and is likely to maintain that edge. One should not rule out the changing value of stamps as a hedge against increases in the service rate on gains and lifetime earnings. One would be interested readers' thoughts on this alternative asset.

Sam Marx comments:

Don't buy retail. Place classified ads in Linn's, bidding close to wholesale prices and/or join the NY Stamp Dealers Club and buy close to wholesale there. If you know stamps it is hard to lose money but the amount you can make is small compared to stocks. In my opinion, if you still want to get involved in this type of endeavor, coins are a better choice. Spilled coffee can destroy your stamp investment.

Alan Millhone commments:

A MMy stamp collecting began one Christmas when I was seven and my parents gave me a Coronet stamp album. I still have it and over the years have expanded my collection. Guess at heart I am a collector and the upsurge in values has been a side benefit. As in all collectibles condition is important. One never has to apologize when selling quality items. To date I have never sold anything from my collection. None of my grandsons have any interest in stamp collecting. My daughter collected some as a youth but quit. I look at stamps as little pieces of paper with bits of history printed on each stamp. Stamps are an excellent way for youngsters to learn about countries and where they are on the map. Something many youth cannot do today. As a youth I dealt by mail with HE Harris , Zenith and Garcelon stamp firms. Stamps could be used today in grade school as a teaching tool. Queen Elizabeth maintains the Royal Collection. Spink etc. has helped the Royals add to this most valuable collection since the Penny Black was introduced. I don't collect any modern stamps and the early US are beautiful esp. newspaper and periodicals. My best friend is Greek and we collect the early Hermes. I like to get out my stamps in the Winter months. I like early stampless covers of my area. Penny post cards and post cards depicting Checkers ( a cross collectible). Cut squares is another area I like and Trieste A and B and AMG-FTT. Stamps as you said is a yearly multi billion dollar business. Auction firms like Greg Manning is publicly traded and deals with collectors all over the world.

Rocky Humbert responds:

A slightly different way at looking at this is the fact that domestic postage rates have handily beaten inflation since 1958. Last February, I went "all in" and purchased a trove of USPS Forever Stamps. (My local postal clerk was perplexed, to say the least.) See: ,  Yet if one extrapolates the trend of the last fifty years, this "investment" will handily beat CPI inflation going forward. The Chair's cited paper is interesting. Yet before drawing any conclusions, one should study how stamps have performed compared with other ephemera … such as private letters from Abraham Lincoln, Ronald Reagan, and Hank Paulson. Given the rise of email and the demise of private letters, one might speculate that collecting the written letters may have a historical significance and scarcity value in the future that bests the postage stamps? Details on the forever stamp:

Russell Sears writes:

While I do not know the first thing about stamps collecting, the Chair's story reminded me of my 3rd grade winter in Titusville, PA. It was close enough to Lake Erie to get hammered by lake effect snow. I would take all the money I owned, (under 15 bucks) and go to the bank and ask for rolls of pennies, nickels or dimes. Shift through them for collectible dates.

The wheat backed pennies, were still fairly common in change. While the silver nickels and dimes quickly grew scarce. The rare one I found were treasured, more than the bought silver. I can still grab a handful of coins shake them and tell you if one is silver.

The ladies at the bank were always gracious and used the machines to re-roll them when I returned a pile of pennies to the bank. Most likely because I was the rare customer on those snowy days, and it was always evident that I walked/ran that mile to the bank on entering.

However, my interest in stamps, now is for the art work. Stamps and their press have some of the best miniature work available.

Plus the interest in special commemorative editions always catch my interest after the press have stopped.
I think the interest in the 50 states quarters and bicentennial quarters may signal that these limited edition and artist designs may be the future of trading stamps, In this large volume nearly reproductive limitless world we live, uniqueness can thrive.

Victor Niederhoffer responds: 

I would add to the erudite Floridian's remark that the vigorish of 25% that Dimson notes, which is in line with or ever too small versus the reported P&L of Gibbons, does not take into account the grading differential where if you bring a stamp in to sell it's very fine but if you buy it, the condition is perfect and flawless, adding another 25% at least to the vigorish.

Alan Millhone comments:

On grading, perhaps a discussion of "slabbed" stamps and coins is warranted on grading services in business today.

Alston Mabry comments:

Does not take into account the grading differential where if you bring a stamp in to sell it's very fine but if you buy it, the condition is perfect and flawless, adding another 25% at least to the vigorish. Certainly reminds one of:

Strong Buy




Strong Sell

and the increase in churn thus promoted.



I have a question regarding Bollinger Bands. Is there such a thing as Double Bollinger Bands? That is when the stock goes down and touches the first Bollinger Band ring, you buy, but if the stock does not reverse itself and continues downward, you sell out when it hits the second Bollinger Band ring.

Jim Sogi writes:

Buy and Read John's Book, Bollinger Bands by Bollinger. He explains all the various signals there. He's a member of the list, so I will tout for him. My only comment, is that like other indicators, they are retrospective. They are better than most because of the prospective expectation of persistence of volatility. My theory as I have propounded here is that concurrent market internals are helpful if not better than many retrospective guides, and even prospective guides from prior data used alone especially on a short term horizon or at least for execution.



 Given the current mortgage rates and the fall of the housing market, I want to purchase my first home. Since I am stationed at Fort Hood in Texas, I have been doing heavy research in the Killeen / Harker Heights area. I thought I would ask for some advice. I spoke with Tim Melvin about this earlier, and he mentioned that I should never pay more than 10 times the annual rental rate of comparable houses. Does anyone else have any other good valuation metrics like this or have any knowledge / advice that would help me out as a first time homebuyer?

Legacy Daily replies:

I have found 10x to be used in two cases:

1. High house prices relative to rent — get one to cool off and think more clearly about an investment and do additional homework 2. Low house prices relative to rent - get one to jump in without thinking clearly on a "bargain" investment without doing any additional homework 

Some initial questions worth clarifying:

1. Is this a home or a leveraged investment? a. home — ignore rules like this and find the best place to live, raise a family, pursue happiness… b. leveraged investment — do enough homework to be confident enough about the decision to ignore all general rules.

Assuming investment:

2. What is the holding horizon? What future plans could interfere with that holding horizon? 3. What is the appreciation potential for the country, state, county, city, town, neighborhood, subdivision, this property…? I have not yet been able to come up with sufficient justification to buy for income alone when it comes to residential real estate. 4. What segment of rental market would the property (subdivision, neighborhood, town, etc.) attract? Is that the segment one wants to serve? Real estate agent needed to rent? 5. How predictable is the income stream? How would economic booms/busts affect it?
6. What are the worst case scenarios? What could go wrong?
7. Financial analysis — P&L, tax impact, financing options, downpayment flexibility (very illiquid), initial estimated repairs, etc. 8. Legal analysis — zoning issues, easements, property title issues, locality department issues, neighbor issues, etc. etc.

Couple additional points:

1. Decent real estate attorney representing one's interests can save from numerous headaches (especially true in foreclosure/short sale cases). 2. Avoiding a buyer's broker saves one money, gives additional negotiating room, makes the seller's broker more willing to work extra hard for the deal. 3. Inspections are money well spent, even if one does not end up buying the property. 4. The market is generally very efficient (yes even during this recession). Why has the property one's considering not sold yet? etc.

I hope you find this useful.

Jim Rogers writes:

The rule of thumb I've heard used is 1% of sales price should be equal to or less than comparable monthly rent (that's a little more aggressive than Tim Melvin's measure, especially when you factor in the mortgage tax shield). I'd say, use either and stick to your guns.

Sam Marx replies:

Don't trust what the real estate broker says about a house's value or price. Do your own research.

Try to find prices of recent sales of similar houses in same neighborhood.

Check with the local banks to see what houses they now own and what are their asking prices.

If you can go to foreclosure sales, do it, not to buy a house but to get an idea of what the market in houses is and remember those prices when negotiating with a broker.

I don't recommend buying at a foreclosure unless you're experienced at it.

Don't be shy about making offers 25-30% below asking price when dealing with a broker.

Watch for estate sales, the heirs are motivated sellers.

I don't know your area, maybe it's reached a bottom, but in FL, housing prices are still too high. The stock of St. Joe Land (JOE), FL's largest landowner, was 69 a few years ago — now it's 15.

Phil McDonnell advises:

 Buying a first home can be a frightening prospect. It should start with a realistic look at your needs. How many bedrooms and baths do you need now and in the future? If your life involves one or more women strongly consider the extra bath. If you have the skills a fixer upper my be of interest.

I frequently advise my Realtor wife on the statistical aspects of our local real estate market. Pricing in this market is especially tricky. It is a declining market but that also means buyers have much more negotiating leverage. To measure your local market ask a local Realtor for the latest stats on number of homes on the market and number of sales in the last few months in your area of interest. For a normal market this is about a four month supply of homes at the current monthly sales rate. In this market it is running about 10 months of inventory per home sold. Hence the declining prices as sellers compete. One should consider staying out of the market until the inventory show signs of declining. However do not be fooled by a one month decline in local inventory. Buyers in the Seattle area are negotiating prices an average of 4% below asking. Get the similar number in your area.

As a buyer in this market it is best to view the prices as a price distribution. Suppose we have ten houses in your area. But only 1 will sell in the area in the next month. Clearly it is most likely to be the one that offers the best value on a relative basis. The other nine are over priced for these market conditions. By staying on the market for another month they will probably lose something like 1% in value per month.

There is an old saying in real estate. One should buy the least expensive house in the neighborhood. Generally this is true. After numerous regressions on homes it can be said that among comparables the most important single factor is square foot of the house. For the best resale find out which area has the best schools. Even if you do not have kids the people who ultimately buy your home may have them and it will help resale in the long run.

Check out all the government mortgage deals and tax subsidies. They are offering a tax credit of up to $8,000 for first time buyers. 30 year fixed rates are below 5%. The military may offer even better deals. Remember the $8,000 credit is only paid the following year via a refund so you do not have it to use as a down payment. It is more beneficial the smaller the house you buy. I saw a recent home sold for something like $80,000 in Killeen. The $8k represents 10% on that home, but only 5% on a $160k home.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Henry Gifford adds:

Home prices, in general, are still falling in the US, therefore waiting will probably bring lower prices.

As property prices fluctuate, one sign of high prices is easy loans. Times when prices are better tend to be times when loans are hard to get, with of course reasons for this relationship. But, as an affiliate of the military, there are sometimes special deals available to you that are not available to other people, which means you can be one of the few buyers out there at a good time to buy. Some of these loan deals only exist on paper now, as the price limits and interest rates make them impractical, therefore nobody talks about them, but because they are government programs which get updated slowly, and usually out of sync with the market, they can be really good deals at times. Therefore there may come a time when you can get both a good price and a good loan.

Buying near a military base involves risk of base closure (I owned a whole bunch of houses near a base that closed) or downsizing, and since you're in Texas where there is lots of land, upsizing the base won't put much pressure on prices - people will simply build more houses. Perhaps you can ask around inside the gates to get a feel for this.

Buying and selling property involves large costs for brokers, taxes, title insurance, etc., which penalize short term ownership, meanwhile you can get transferred to another base at a moment's notice, which puts you in the position of being in a hurry to sell. If, instead, you buy a commercial property, you can own it as long as you live, with far less management headache, which makes owning it while living elsewhere more realistic than renting a house to someone.

Phil McDonnell responds:

I think the truth in this statement is based on a defect in the way people perceive value. Suppose the average home in a neighborhood sells for $500k but yours is worth $400k. Then if the average goes up to $600k the innumerate masses will think that all homes have gone up $100k not the 20% they really should have. When they do this the $400k home appreciates by 25% not 20%. In other words people add when they should multiply by a percent increase factor.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

David Hillman writes:

Another part of that defect is focusing on the value of the improvements v. the value of the land.

Some years back, a close friend bought a lousy house on a great piece of property in the best neighborhood. Even though it was a prestigious address in a 'branded' area, he got a deal on the property because the house was so undesirable. The plan all along was to demo the house and built a new one to suit, which is exactly what he did. He had realized the land was worth perhaps 90% of the true total value of the property before the new construction.

Many county auditors, etc. have searchable tax records online with the assessed values of land/ improvements parsed out. One might use that to figure a reasonable estimate of market value of land v. improvements. Don't forget the old saws apply….'land, they're not making any more of it'….and….'location, location, location.'

Bill Egan writes:

In the last 10 years, I have bought three homes and sold two. Did not plan to, but that's the way it worked out due to job changes. Sold both houses in < 1 week for a profit despite forced timing. We were not in subprimeville, either, and the last sale was 2001 before the real estate madness.

My wife and I kept resale value in mind because you never know what can happen to you. We made sure we bought homes that were average to excellent on the following criteria:

  1. School quality
  2. Exterior appearance and interior layout — good and normal
  3. Quiet, safe neighborhood that looks good
  4. Reasonable size (3/2 or larger)
  5. Likely demand due to commuting routes/distance to jobs

For example, I was working at a biotech in NJ from 1999-2001. We bought a 3/2.5 in a newer development, nice neighborhood in Burlington County, right next to an average-quality elementary school. However, the area was less horridly expensive than the homes closer to Princeton, where I commuted to. There was strong demand from people priced out of the homes closer to NYC/Princeton.

Rich Bubb replies:

1.  look at the neighbors. C-L-O-S-E-L-Y… look at the state of their domiciles (even getting "invited-in" for a look see if at all possible), and the state of the upkeeping… especially the immediate next door folk. You might end up living next door to your own personal nightmare. Believe me, it is Not Enjoyable. Even after almost 20 years. Thankfully everyone else on the entire block is somewhat more sane and respectful of their neighbors than my nextdoor nightmare. Or to put it another way: you might get the best deal that no one else could stand…

2. if you really know somebody in the real estate biz (my sister is an agent), have them look around for you. she got her daughter's family a fabulous deal in a great neighborhood. Or to put it another way: sometimes real professionals Do Know what they're doing.

3. look long at the deal, bid low for the deal (Game Theory might help a little here, here is a cool intro), then be prepared to walk away… even if not doing the deal means you'll have to go back and start the whole search-etc process all over again, and don't put pressure on yourself or let anyone pressure you into buying. My wife was not prepared to walk away from her last car purchase. She still got a good vehicle, but she could've strengthened her bargaining position by uttering the words, "Let me think about it." And then purposefully heading for the door. We went outside and argued between ourselves about leaving. She *wanted the vehicle*. It cost her almost $5k more than I wanted her to pay.

4. Consider the cost of long term ownership. I mean, Really figure it out… what's the cost of x, and y, and z, and can you afford it if those costs all hit at once.

5. Tangentially to #1 above, if there'll be kids living next door… would you:

(a) invite them in?, or

(b) chase them away?, or

(c) start scouting for really out-of-the-way burial sites?, or

(d) let them borrow your most deadly power tools?

Just mentioning this as my siblings and I were the 'b-c-d' and almost always the Never-more-than-once 'a'. And the neighborhood's less-than-model parents would often let their barbarians-in-training train at our place… Or to put it another way: your neighbors' kids might have fiends, er friends, worse than they already are…

Hmmm, karma might really exist…

Russ Herrold adds:

A anonymous blogger, 'Benjamin.Publicus' on Thomas Paine's blog  had this this observation:

… The author lives in a community that is (or was) at the epicenter of the mortgage crisis. The developer aggressively marketed the homes to young, first time home buyers, many of whom renters. No money down, own instead of rent, mortgage payments the same as the rent, etc, etc. The development was started in 2001, so the first wave of 5 year ARM's hit in 2006.

…and it goes on from there.

I have spoken to that author (and a couple others) about contributing to DailySpec, but he has been busy.

Dr. Herrold is Principal of Owl River Company, a high-end Unix consultancy

Rich Bubb adds:

As mentioned previously, my sister is a real estate agent. following are her comments on home shopping & buying.

Get a Real Estate Agent to represent YOU as a BUYER. Sign a contract as such. Tell them what YOU want.

There are surely things important to you that you would like to have in one of the biggest investment decisions you will make.

TAKE NOTES of likes/dis-likes of each home you view. re: Basement, Garage, Four Bedroom, Square Footage, LOCATION. I stress location because it can make or break the satifaction of your purchase.

Drive through the neighborhoods you are considering at different times of the day to see what the atmosphere is.Pay attention to the neighbors up keeping of their property. Schools?, established neighborhood?, new additions? child / adult ratio?
Comparison shop, don't just jump at the first home you look at just because you can afford it. Ask your agent to provide you with a CMA (a market analisis of a surrounding area - 5 mile radius ).

Get pre-approval from your lender, look at homes a bit higher than your range and offer LESS - the worst that can happen is, they will say NO or counter-offer and you may wind up with a nicer quality home.

BE Strong in making the decisions of your offers. Be prepared to give and take.

Then BE PATIENT thru the purchase process which seems like it takes forever because we are a see it, buy it, want it now, kind of people. It is a process that is in place to protect you. re: CLEAR TITLE

Again, don't just settle for a home, get as close to what you want as possible.



Sometimes one sees almost every conceivable variations of prices during the year. It's like an evil genius had a bag of tricks and never had to repeat one exactly the same way. I wonder if it's possible to turn this around and assume that there is a finite number of tricks, possible variations that will occur and then predict that the ones not used yet will eventually be used. This becomes particularly relevant for people who look for repetitions of past patterns and in days like this find that there is nothing similar to it in history. Regrettably, that is true almost every day. There should be some creative ways of testing this.

Bruno Ombreux comments:

We could look at market entropy, in an information theoretical sense:

Code every possible pattern in bit form, eg 1110011000111

Measure entropy.

See if the market is maximizing it, this would be the "Second Principle of Market Dynamics".

We could also have a Prigogine's Theorem analog i.e the market is forming patterns that will minimize its entropy production.

Sam Marx adds:

As an analogous situation, I believe that slot machines, keno games, etc. have their results or numbers selected by random number generator formulas. I always thought that if one is an expert on the existing formulas or was able to generate a random number generator formula based on a series of outcomes then he could beat the game.

I realize that the casino could easily thwart this in keno but it would take additional work on their part for the slots.

In the stock & futures market, I understand there is some pattern recognition software now available. I have no experience with it.

James Sogi writes:

Maybe sampling something simple like variance over the last couple days might give one a clue. Volatility clusters, and lack of volatility clusters, and variance of volatility within those clusters or length of the clusters, or the survival rates. Again the replacement issue and the assumption of independence clash. The replacement assumes independence, but a cluster model assumes some correlation.

 Vincent Andres comments:

A related (and very important) topic is the number of stable patterns achievable by a set of interconnected nodes. On this topic, a worthwhile read is Stuart Kauffman. Kauffman's work is rather well presented in a chapter of Deep Simplicity: Bringing Order to Chaos and Complexity , John Gribbin, Random House. 2005. ISBN 1-4000-6256-X. 



News, from Sam Marx

December 15, 2008 | 5 Comments

The Man-Made-Global-Warming hoax continues.


AP PANIC: 'Obama left with little time to curb global warming'…'cooling trend illustrates how fast the world is warming'…



Montana's -29 easily breaks record…



Many elements of the fraud charges against M would seem to have applicability to markets. The macher thing, where he was seen as a "macher," a big-hearted big shot. His denying to some people the favor of taking their funds. His friend the tall partner who would mention at clubs that "Bernie earned me 12% this year and he's not open to the public but I can probably get you in." Cialdini apparently calls this a triple threat fraud where someone else mentions how great M is, and then you don't investigate because it would be an affront to the accomplice (who you don't know is getting a fee), and you use all your energy to see if you can get in rather than to investigate the performance. Amazing is that we've all been subject to reports of returns in the security field that seem way out of line with those actually achieved.

Sam Marx comments:

In addition, because M owned and ran a large brokerage firm, the "mark" would feel that his investment was getting some illegal inside advantage that resulted in high returns, such as front running. Most, if not all, confidence games rely on the greed of the mark. You never hear about successful Ponzi Schemes that have been successfully unwound.

James Sogi writes:

That's a good point. Its the reverse of the survivor bias. Let's call it the loser syndrome, where the losses are hidden, as the successful con, the mark doesn't know he's been taken. Further if he does, he doesn't want to blow the whistle because of either romance, his own complicity or blameworthiness. On a more common scale, the denial syndrome often glosses over and forgets failures, losses, defects, losing trades, that extra drink

James Goldcamp writes:

The surprising part of this to me is much less the regulatory overnight or lack thereof, but the third party fiduciary roles. Where was the administrator and the auditors of the funds? How could this have happened? Will it turn out that he invented counterfeit bank and Prime Broker statements and if so did he personally have the technical means to do so? (Unless he was his own PB, but it's hard to believe any reasonably sophisticated investor like Tre~0nt would buy into such a set-up). I have to ask, how did the trial balance, balance?

Victor Niederhoffer requests:

Let us never forget the human tragedies here. I cry when I read the letters of people who had their life savings or wealth or retirement or plans ruined by this. My goodness, what a terrible crime and way to live one's life.

Ronald Weber writes:

Tragic indeed, but I can’t help to quote the good old Livermore, almost one century ago, on the average investor:

“He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.”

“There is profit in studying the human factors-the ease with which human beings beleive what it pleases them to believe; and how they allow themselves-indeed, urge themselves- to be influenced by their cupidity or by the dollar-cost of the average man’s carelessness. Fear and hope remain the same.”

“Investments were not wanted. The demand was for easy money; for the sure gambling profit.”



peony seed podI wonder what nature has to teach us about how it recovers from natural disasters vis a vis the current market decline. Does the process of recovery and change after fires and floods and earthquakes and hurricanes have anything to teach? I looked at the methods of seed dispersal at the Botanical Gardens recently and it made me think again that IPOs at times like this must be priced at implicit returns of 100% a year or more. I also wonder whether there are insights from the Stockholm Syndrome here with people who are the source of the disaster being greeted with love and votes and money? How does romance come into the picture? I return to the subject of catalysts in markets. Are there some agents that are sufficient to cause big changes in markets that come ahead of everything, e.g. a big move in oil that precedes a violent move in stocks? When will asset allocators begin to compare the returns of stocks versus bonds and find that their portfolios now have gone up by 20 percentage points from before in terms of their allocation to bonds? That's too much, other things being equal, even if the expected rate of returns were not changed. I can't help but think that Alan Greenspan's confession that his belief in free markets was wrong is an example of the "Old Man Syndrome" a la Cyril Burt's wanting to have the most identical twins in his study, combined with George Zachar's "your own man said you were out." Does the average politician really believe that raising the rate of contribution to the Service will raise revenues or or is just an example of rent seeking and public choice theory at work where they look out for their own personna above all, and to what extent is the likely increase in this contribution under the now 10 to 1 favored new administration a major contributing cause to the current past meltdown? What is the cause of those fantastic moves at the close that are so ephemeral and dysfunctional to all who are not properly capitalized and money-managed? Most of all, I wonder what my mentors at the University of Chicago, Jim Lorie and George Stigler, would say about the current carnage. Would it undermine their faith in markets?

Sam Marx writes:

Something I noticed about market that I tried to avoid when I had traders working for me is that the market rewards and penalizes on a continuous basis, but "employed" traders and executives are usually rewarded on a yearly basis.

Dick Fuld of Lehman, Stanley O'Neil of Merrill, Frank Raines of Fannie, et. al., received yearly bonuses, so their goal was maximizing the yearly profit while neglecting the carry-forward risks. If they had to leave a large portion of their bonuses or profits in escrow, as did my traders, to be carried over from year to year, they wouldn't take excessive risks and the market would be more stable.

Alex Castaldo adds:

The study of how nature recovers from natural disasters such as forest fires or floods is called the theory of succession and was developed by one H. C. Cowles.  Wouldn't it be a strange coincidence if he was related to the Alfred Cowles III who studied stock market forecasting.



holidaysWhy do you hypothesize the Tel Aviv market rose before the holiday? Yom Kippur prayer, as Prof. Schnytzer suggested? What else do they know?

Adi Schnytzer comments: 

I simply couldn't come up with a better hypothesis. I guess you get so low that up is the only feasible direction left, right?

Nigel Davies responds: 

I think there's a flaw in this logic. The concern here is 'system failure,' which if it happens can mean that the profits from being short may be worthless anyway. Who knows, under some kind of post system martial law, short-sellers might even be rooted out and put on trial…

In my view there are two long bets; long the system's surviving and long personal/familial survival in some post-apocolyptic nightmare. So the most reasonable hedge is to buy survival items like freeze-dried food, blankets, medicine, weapons, a horse, some chickens and a couple of goats.

Anatoly Veltman adds:

A VeltmanYou are thinking of V-shaped bottom. Of course, other shapes of bottoms have occurred in history of every contract.

V-shaped bottom's dilemma is that environment created in course of a rout doesn't facilitate one's large reversal position - even if one correctly times reversal. The entire ecosystem deflates; so due pay-off will not be mathematically possible in favor of the bottom picker.

Theoretically, this should not be the case vis-a-vis a trendfollower, who correctly stays short all the way down, possibly even pyramiding. Except in 2008 — when shorting became restricted.

Sam Marx adds:

I agree regarding Cramer but in this downdraft we don't know how far it will go even if stocks are undervalued now. But stocks have a tendency to overshoot at opposite ends.

In '87 when there was a one day sell off of approx. 23% I was clearing through a firm that had its start in commodities and the head of the firm was almost in tears claiming that the stock market was vicious compared to commodities. He gave up clearing and bought a bank in Chicago.

I saw Mike Huckabee on Cavuto's Saturday program say that a "knowledgeable" friend of his suspects "economic terrorism" is behind this sell off.

In the end, undervalued stocks with growth potential will come back in price. That's the basis of Buffett's large purchase of KO (Coke) in '87. The stock was driven down by being part of an index where arbs bought the index future and sold a stock basket that included KO.

In '87 on the floor after that big one day down, I sold overpriced far month out of the money calls and bought an equal number of shorter month calls at the same strike price. Both were grossly overpriced. The plan was when the volatility dropped because of time the spread decreased and I unwound them. As a saving grace if the stock started to move up the volatility would've dropped and I could also unwind at a profit.



I have been partially invested in Canadian Royalty Trusts for 2 years that have returns above the risk free rate.

Does anyone have any opinions or insight into this type of investment?

From what I've read their high return rate seems secure as long as oil is above $50/ bbl.

Alan Millhone gives a quick assessment:

Oil above $50 ?  I suspect you are safe for decades! 

Stefan Lewellen replies:

I know nothing about Canadian Royalty Trusts, but I can recall many instances in the past where a seemingly "risk-free" investment offering high returns has actually led to heavy losses.

One must remember that as the price of oil drifts higher, the economic story behind developing alternative energy sources becomes more and more compelling. These projects may not make any economic sense at $50/bbl, but at $150/bbl they may be quite profitable. At some point, such substitutes (or some other new development) will reduce the demand for oil – and oil prices will decline appropriately. Whether this happens in six months or twenty years is anyone's guess, but the fact that there is some non-zero probability that prices will fall below $50 makes this a strictly risky investment (in my opinion). If the probability of low oil prices is extremely small relative to the return premium over the risk-free rate, this could still be an excellent investment – but I'm not sure I would classify it as an investment of the risk-free variety.



Since 2001 Morningstar has been rating stocks based on a Buffett-esque philosophy, including the usual Buffettisms like "moat" and "margin of safety".

In February they published a report card on how their ratings have been doing:

Here are the reported returns for their top ranked stocks*, along with the returns for the equal-weight S&P:

Mstar *The percentage returns for Morningstar are based on buying when a stock gets the highest rating, 5, and then selling when it falls to an "average" rating of 3.

A regression of Morningstar returns vs S&P Equal Weight returns gives:

(Morningstar return)=(-5.6%)+1.35*(S&P Equal Weight return)

In short, Morningstar was beaten by the S&P Equal Weight index in terms of both absolute return and risk-adjusted return.

I do like Morningstar. Their product is a really convenient and cheap way to get snapshot information on both stocks and mutual funds. I'm also impressed that they were honest and didn't try to bury this report, and that they compared upfront their returns with the S&P Equal Weight (rather than Cap-Weighted) Index. That is the appropriate benchmark for them because when they calculate their own performance, they weight their own picks equally, rather than by capitalization.

Still, it's yet another proof both that stockpicking is not easy, and that chanting Buffettisms (or even trying to apply them using a team of professional analysts) doesn't necessarily help.

Steve Leslie writes:

As I recall, Morningstar's 5 star rating system for mutual funds is backward-looking. They take the last three year returns and then break it into a quintile rating system. You are correct in that poorly performing funds can be victims of the style they employ rather than a reflection of their management skills and prospects going forward. Back in the 90s the 5 star funds were Van Waggoner, Aim, Janus and some of the really highly charged mutual funds everybody wanted these because of their raw numbers. Nobody wanted anything to do with value funds. The tables soon flipped and the high fliers fared very poorly in the bear market crash through 2003. Value funds took over, and then international funds. Interesting fact is that 80% of funds purchased are through a brokerage firm. Most likely due to the work involved in finding a mutual fund, evaluating it, and purchasing it. When I was a broker, we used Thomson Financial research as our database to evaluate funds. Schwab and Ibbotson have some pretty good mutualfund programs and tools as does Lipper. Kiplinger's Magazine is a good source to find quality mutual funds.

Sam Marx offers:

I like Morningstar because in all of their stock reviews they include a calculation of the stock's intrinsic value and indicate what type of moat the stock has.

Morningstar, however, is still in the last century when it comes to downloading their lists, such as screened items, portfolios, ranked stocks, etc., to Excel. Except for one very limited item no downloading to Excel is available.

Morningstar's attempt to cover options is very sparse.

Meanwhile their main competitor, Value Line, is excellent when it comes to covering options and downloading their lists to Excel. Value Line, however, needs an upgrade of the contents of their screen lists.



CanaAs a very serious collector of art, I see people buy art for the purpose of investment all the time. I'm asked to give my opinion on the worth of a particular piece of art a few times a month. When the public sees headlines touting record price for Van Gogh, Renoir or Matisse, they rush out to buy art for investment. Some major companies have also put the shareholders at "art market risk" by owning large collections of art for investment purposes. The cottage industry of consultants that has sprung up dealing with the art investment field is full of swindlers, thieves, liars and cheats. The consultants, dealers, and auction houses are the ones who profit, not the average collector. Even some reputable dealers have been known to sell fakes, such as works by Dali, which are 99% fake (except for his signature). While it is possible to make some money in the art market, it is very improbable for the collector to profit. A collector should stick to buying art he loves, has beauty, wants to display forever, and is willing to bequeath to a relative or museum upon death. The art hanging on our walls and in our collections is owned by history, and we are merely the caretakers of the art. Incidently, despite the spin by Sotheby's and others, the mid-range market for good Impressionist art is rather soft. There are also some good prices to be found in the Old Masters. I used to tell my lovely wife that the price of good mid-range art fluctuates inversely with the number of margin calls on the Street.

Sam Marx remarks:

PollockI believe a lot of modern art is a fraud. Jackson Pollock's splatter paintings — how can anyone take them seriously? Yet they are sold for millions of dollars. A painting (not a Pollock) hung in the Museum of Modern Art in NYC for a number of years before it was discovered to be upside down.

Marion Dreyfus critiques:

Your grasp of modern art is not strong; if you know the continuum of the field's development, you would not say that. It marks a yahoo sensibility, alas. There are fraudulent practitioners, but Pollock is not one. Suffice to say there are less well researched and annotated and revered artists around to pick on. In general, if you are going to pick on frauds and fakes, better to pick on a very current artist whose chops are not yet firmly implanted in the historical record and universally accepted.

Just as there are 'collectors' without an ounce of sophitication in what they are amassing, there are quick-buck artists eager to make use of the investing/collecting sensibility when they adjudge the market to be a bunch of gullible wallets circling for a kill.

And though it sounds foolish, because much of modern art is nonrepresentational, if the artist is not present while the museum hangs the piece, it is forgivable if the canvas is not the way the artist intended: The average viewer could not tell which side was intended to be down, which up, so one ought not hold the museum guilty for such an understandable error.

Sam Marx retorts:

What makes Pollock’s work worth millions? One critic called Pollock's work colorful "wallpaper designs." I don't believe Pollock precisely measured the hole he created in the bottom of the paint can and a slight change in the hole size in the can of paint that he was dripping from would've resulted in a very different painting. If you don't have a precise control over what you're doing, I have doubts about it as a masterpiece.

Michael Bonderer assays:

RothkoSam, easy boy! Kindly try to put Pollock specifically, and the Abstract Expressionists of the budding NY School Artists more generally, in the context of post Hiroshima/Nagasaki, post WW II ethos and emerging Cold War ethos of the late 40s and early 50s, to understand their aesthetic and important place in global art and their brilliance. Particularly interesting would be for you to trace Pollock's pre-Abstract Exprisionist work to see how he as an artist developed and emerged as a leading Abstract Expressionist. As the atom's understanding came to mass consciousness, you will see bio-morphic imagery present in many artists' work, including Pollock's. This gave rise to the 'explosive canvas' of Pollock and others and the magnificient 'color-field' work of Rothko, as they all came to grips and a better understanding of where we as a society were going on a certain level from 1945 to the present. Collecting and investing in art is an aesthetic and a lifestyle, and to do it well you really have to immerse yourself, e.g., Paris in the 20s and 30s, NYC in the late 40s, 50s and 60s, LA and SF Bay area in the 50s and 60s and 70s and the LA Chicano art of the 70s and 80s and now Shanghai today with its phenomenal present day contemporary pieces and artists. Sam, I kindly direct you to the Art Tab on Costco's web site!

Lon Evans adds:

Should this be 1910, Sam, you’d be offering to pass on any available Van Gogh.

Adam Robinson offers:

Cana Alas, what's not strong is modern art's grasp on what moves the human heart.

If anyone wants to take up the affirmative position that modern art resonates with the human soul and psyche anywhere near as much as does any Old Master painting, I'll take up the negative banner onto the debate field with gleeful alacrity.

As a rule of thumb, in any field of human production, whether art or literature or essay writing or science, I lay it down as axiomatic that the time and consideration that ought to be accorded to the appreciation and evaluation of human products is proportional to the time and consideration that went into their creation.

Some might argue that talent or brainpower ought to figure in to the calculus of merit, also, so for those who like to quantify things, let's say,

PT x BP/T = k x CAT (production time of creation times the creator's brain power/talent equals some positive constant times the claim on an audience's time)

Show me a piece of art — or an idea even — that took two years of a human being's life to conjure and produce, and another that took two days, and the assuming the talent of the creator's to be the same, I'll give the later maybe 1% as much of my time weighing and appreciating as I will the former.

Michael Bonderer explains:

Tang ZhigangAnd therein lies the adventure and challenge. To effectively emmerse oneself into the Shanghai art and media cognoscenti and find the Shanghai Pollock and Rothko and Diebenkorn. Scour the streets and allys and lofts for the work-product of the Tiananmen-inspired dissidents and new-found 21st Century Shanghai sensabilities. Maybe even find the Costco art-mill progenitor and take him out for tea and latte and pick his brain. He may be nothing more then a knuckle dragger, but then again, he may point you to a street that is having a new showing Friday night.

Jeff Watson responds:

There are some prefectly dreadful works from the Old Masters out there. Just go to the Prado or Louvre, and you'll see plenty of examples. While I'm not a fan of most modern art, I do like some of it, and have one piece in my collection. Good art is good art, in any genre, be it music, literature, or theater, and the heart will respond to to what's good. Some have pre-existing opinions on the merits of a certain genre, and it could cause them to miss out on something beautiful. Pre-existing opinions have cost me a lot of money in the market over the years, and this has taught me to sample everything, and keep an open mind.

Steve Leslie ponders:

Why is it that a painting of a nude is considered artform when a photograph can be considered pornography? As an addendum, do I need Freudian therapy if I am a fan of Robert Mapplethorpe?

Why would someone spend millions for a stolen work of art yet know in advance that he may never reveal it for public viewing?

Along the lines of burglary, How can billions of dollars worth of artwork be stolen every year and vanish for decades?

What happened to all the artwork that the Germans plundered from France, Italy, Denmark and other places during World War II and has not been seen since?

Where does someone draw the line between art and garbage? Along those lines what, defines Dali as a genius and not mildly psychotic?

Was Andy Warhol an accomplished artist because he drew for Campbell’s soup labels or in spite of it?

Who else thinks that Frank Frazetta is genius personified?

Are dogs playing poker classified as modern art, especially with the Phoenix-like rise in popularity of the game?

Do velvet Elvis paintings increase in value?

Alston Mabry postscribes:

I enjoy using artwork as wallpaper on my computers. Two very good sources are Mark Harden's Artchive and WebMuseum. It is crucial to get a good scan, that has decent color saturation and sharpness. For example, Hopper's Cape Cod Afternoon from WebMuseum, in which the colors are very rich, and you can actually see the grain of the canvas.



PolaroidPolaroid's announcement last month that they will stop making film is a timely reminder that the world moves on and that those who want to survive must move with it. All that's left now is the usual bit of nostalgic kicking and screaming.

This reminds me of one of the habits of International Master Bob Wade, OBE, who is still playing tournament chess in his late 80s. He makes a point of not keeping trophies, saying it would make him live in the past.

Sam Marx reminisces:

I formerly worked at Polaroid in '56-58 as an engineer in the polarizing film department. (Had no relation with the camera or instant film divisions). We were making the lenses for sunglasses and polarizing material for the government.

Polaroid was then located in two buildings exclusively in Cambridge across the street from MIT. Actually you had to walk across the MIT grounds to get to Polaroid's administrative building on Main St. This was before the move to Route 128.

It was a very progressive company guided by the inventor businessman Edwin Land. He developed the method to produce polarizing film in wide strips while still in college, Harvard, and then dropped out with his professor (George Wheelwright) to start the company. In the mid '40s he invented instant film and the Polaroid Land Camera.

Kodak damaged Polaroid's business by coming out with their instant camera which the court decided a number of years later was based on Polaroid's patents and had to pay Polaroid, but the damage was done.

Recent digital photography really put a virtual commercial end to the Polaroid instant film process and by then the Polaroid's driving force, founder Land was dead.

I remember in Dec. 1956 at the Polaroid Christmas Assembly when Edwin Land made the following announcement," All the major problems to develop color film have been overcome and it is now only a matter of time before we have it commercially". After checking with a friend from NY who was high up in the chemical research division, I went out and bought 200 sh. at 40 OTC. It dropped to 30, I sold 100 sh. in panic in what I now recognize as a selling climax, but kept the other 100 sh. I believe in '59 it was trading for 110. I sold the 100 shares a few years later.

By the way, Polaroid color film did not come out commercially until 1963, six years after Land's Christmas announcement.

As a small note, Edwin Land drove a black 1956 Ford Convertible with a continental tire kit on the back which I thought was pretty racy for the head of a large corporation in the '50s.



DaHRiFDisasters and Heroic Rescues of Florida by E. Lynn Wright recounts the stories of 22 disasters in Florida starting with the Sinking of the Plate Fleet in 1710 and ending with wildfires in 1998 and a constellation of four hurricanes — Charlie, Francis , Ivan and Jeanne — in 2004. Florida is particularly prone to natural disasters because of its geographical position between the Gulf of Mexico and the Atlantic Ocean and its 12,000 miles of rivers and streams. However, the extent and prevalence of the disasters that have visited it seems to go over and above its geographic and geologic characteristics involving what seems to me a manifestation of the kind of character, promotion, and hopefulness that is engendered by warm weather, and extensive beachfront and recreational activity.

The author believes that a common characteristic of all these disasters is carelessness, ignorance, negligence, and greed. I would add that an aura of utopian thinking that nothing could go wrong as well as a lack of appreciation that the same disaster can strike twice,and a failure to appreciate that many seemingly improbably events are linked and that their conjunction is much more likely than normal multiplication of independent probabilities might suggest.

Take the Veterans Rescue Train Wipe Out of 1935 as an example, where 600 veterans imported to build a highway paralleling the Flagler East Coast Railway were drowned by a tidal wave hurricane in a rescue train. There was the utopian idea of creating work by building a public structure with inexperienced workers without local knowledge at the heart, faulty weather forecasts of a tropical disturbance that turned out to be 200 mile an hour winds, the event occurring on Labor Day, when the holiday caused hours of delay in gathering workers to get the train to the Ismeralda rescue site, usually reliable equipment that this time turned out to need repairs, a torn cable that held them to a standstill, a crane that got entangled with the train that took another hour away, and then finally a 20 foot tidal wave that did them in.

Many of the disasters seem to have signaled the beginning of real estate disasters shortly thereafter. For example the Great Citrus Freeze of 1895 came when central Florida and Daytona were in a boom stage with the orange crops adding revenues to the vacation homes and farms in the area. Developers Deland and Stetson were so sure of the boom that they guaranteed all the real estate buyers their money back. But a freeze came on Christmas Day in 1894 and ruined the citrus crops, and then when the growers relaxed, as they at least still had the trees and had lost only their income for the year. But two months later they were visited with an even worse freeze that destroyed all the fruits and seems to have cast a pall on the area. As the Tampa Time put it, "The Beauty is all gone from Florida. Everything is dead."

Similar declines in real estate followed the Capsize of the Prince Valdemar in 1926 in Miami, which seems to have had a direct causal link with the real estate bust in Florida in 1927 and then the stock market crash in 1929, and subsequent Depression. The chain of events is eerily similar to those playing out today, at least to the extent that the real estate bust caused the stock market crash. Perhaps the flooding of New Orleans will be seen as playing a similar role in the recent chain to that of the closing of the Miami Port caused by the Prince Valdemar.

The 22 disasters that are recounted in this book provides a good caution for all investors. Utopian visions have time and time again been dashed. Disasters that seem totally impossible occur with astonishing frequency.

Sam Marx explains:

HurricaneI lived through hurricanes Jeanne and Francis, that were 2-3 weeks apart and made landfall within eight miles of each other. This was a highly improbable event. The hurricanes were Category 2 when they passed over my house, but may have been a low Category 3 (130 mph) when they made landfall.

Because of the new building requirements of 1992, (Andrew was the motivator), the damage to my house was minor.  Most of the damage was to the trees. Records indicate that the last Category 3 in this area occurred over 50 years ago in Jupiter, 20 miles south and none ever recorded north of here in the last 90 years.

The heavy damage occurs on beachfront property, which Florida Governor Charlie Crist now wants to be paid for by all US taxpayers. I live 14 miles from the shore, and with the hurricane history of the area and the new building code I feel safe, but who knows. You take the great weather with the hurricanes.

The safest type of construction is a round house made of poured reinforced concrete with reinforced glass windows on raised ground. The roof is the most critical part of a house in a hurricane and it should be firmly secured to the reinforcing rods in the poured concrete.

Jeff Watson adds:

Sam makes some excellent points about the new building codes that are required in Florida. On my key, just south of Sarasota, there is strong evidence of the new codes that are being enacted. Builders are tearing down the existing homes and building new McMansions, employing much reinforced concrete, and adding elevation. From a visual perception, it is obvious that 200+ mph winds are factored into the designs. The new housing on this key is built on such a grand scale that it has changed the whole vibe of the place. Meanwhile, our 1926 cypress wood Conch House stands out as the lone reminder of what once was. Our cottage has survived many hurricanes, tropical storms, and fires without missing a beat. The designers did a good job on our cottage 80 years ago. The floors were built with a slight peak in the middle of the rooms, to allow storm surge water to run out of the house. Living at the beach, one must appreciate the grand forces of nature, the temporary aspect of existence, and man's insignificance in the whole scheme of things.

John Tierney marvels:

SurgeVic wrote "Disasters that seem totally impossible occur with astonishing frequency," and someone added "All of this drags down property values in storm prone areas of the USA."

Why is this surprising? By definition, a storm-prone area should have lower property values and higher insurance premia. Storms in areas that have been historically prone to them are neither unusual nor disastrous. "Disaster" is a term we apply to occurrences that result in the loss of human life and, increasingly, the loss of wealth. More properly, these are natural and inevitable phenomena — they are, if you will, part of an unbreakable cycle.The cycle may be ever-changing but it is certain that these periodic maladjustments will continue to occur. And those who are uninsured, under-insured, or who paid too dear a price will be hurt — again and again and again.

As it is in nature, so it is in the market. Bad times are inevitable and as fat tails occur with greater frequency than our probability tables would estimate, we must learn to expect the unexpected. We must also realize that government intervention cannot alter the unalterable. On the contrary, intrusive government in its paternalistic actions, encourages re-building where any building, except by those willing to assume all the risks, is inappropriate; and, in the markets, continued Federal action (reaction?), has encouraged the same groups and individuals to rebuild their castles on sandy soil.

Without this insurance, these occurrences would be just as unexpectedly frequent, but less harmful to the general population: the ultimate guarantors of poor fiscal policy. As Davy Crockett, a noted Tennessean, stated of his fellow  Congressmen: “Money with them is nothing but trash when it is to come out of the people. But it is the one great thing for which most of them are striving, and many of them sacrifice honor, integrity, and justice to obtain it.”

Steve Leslie writes:

HurricaneI moved to Florida 25 years ago and have lived in the same town since. I live on the Space Coast, equidistant between Jacksonville and Miami and 60 miles southeast of Orlando.When I first moved here, our city had swinging bridges that spanned the intracoastal waterway. They have long since been replaced with modern bridges. US1, a major thoroughfare, was two lanes and now is six lanes and cannot be expanded further. Most of the beachfront property has been developed and great restrictions have been imposed to slow down further building directly on the beach.

Commercialization on A1A is unmistakable and is beginning to look more like Daytona Beach than the sleepy town of Indialantic it once was. Beach erosion is a real problem and threatens property that has been around for decades. Laws have been passed to reduce lighting on the beach to avoid confusing loggerhead turtles who come ashore to lay their eggs.Wetlands have been exploited by real estate developers, and the challenge is to protect wildlife and retard the erosion of the Florida wetlands. The Florida panther, crocodile and alligator have been threatened species as are many other wildlife. Clams which used to thrive in the intracoastal have long since disappeared.

Probably the most profound real estate phenomenon in Brevard County is the largest manufactured home community in the state. Over 5,500 people who live in manufactured homes there. Many more manufactured home communities dot the county. This is a striking point considering the fact that Florida is particularly known for its hurricanes and unpredictable weather, especially lightning and tornadoes.

Florida is now the fourth-largest state in terms of population. Along with this come remarkable challenges. By all accounts, the trend will continue and populations will rise especially in the Latino community. Despite of what many think, not everyone in Florida is rich. There are vast pockets of poverty, especially in the Miami, Jacksonville and Tampa, that will continue to expand.

Yes, lessons have been learned, new building codes have been imposed, insurance laws tightened, yet it is like the horizon that one never reaches, it merely continues onward. There is a human cost to all thus that just can't be quantified. Yet I live here and this is my home and I will probably stay for some time. I hope I will adapt with the times and not become an anachronism.

Ken Smith extends:

LightningLightning strikes are another hazard in Florida. Discovery Channel once aired a story on a lightning belt in Florida. Government and university research people have placed structures in that belt to study lightning.

I am always excited by lightning storms, thunderstorms. I thought Florida would be ideal for living under them. Once my wife and I sat in our car — rubber wheels supporting us — on a lake in Glacier National Park, and watched a terrible, terrific, astounding display of lightning. Stayed until the little woman got nervous. I understand a vehicle should have a strap hanging from car frame to ground, although I have not researched this necessity.

The most spectacular storms I've witnessed were out in the deep ocean where only lone sailors are blessed with these visions. To see these lightning strikes accompanied by thunderous blasts of sound in the sky and 100 foot waves crashing into your home on the sea, these are ultimate experiences.

Dylan Distasio responds:

I've always loved lightning storms myself also. I remember watching a spectacular one when I was out in Arizona crackle across the wide open horizon.

Another time, I was actually caught in one while camping with my brother on a peak along the Appalachian Trail in Massachusetts, which while breathtaking, was also terrifying.

By the way, you should be fine in a car hit by lightning without a strap (or rubber tires for that matter). A car basically behaves as a Faraday cage where the charge is spread along the outer surface. I remember learning that in a physics class at some point, although I wouldn't want to test it out myself.



AltmanIn the March 3 edition of Barron's there was an article by A. Bary entitled "Risky Bets". The author cites a number of stocks that are down 40% or more from their highs; he believes investing in these companies could be very profitable if the credit markets begin to normalize and the economy recovers.

There are a number of companies other than those he cites that are down 40-50% or more that may be two or three baggers when the stock market comes back. The question is, "Are they reliable companies or future bankrupts"? I've been using Value Line and Morningstar to determine the financial risk of some of these beaten down companies.

However, I'm also aware of a formula called Altman's Z-Score that predicts future bankrupts with 85% accuracy among stocks with a low Price to Book Value. A Google search yields a number of articles describing the approach and financial data to use.

The data to use are:

1) Earnings Before Interest and Taxes (EBIT)

2) Total Assets

3) Net Sales

4) Market Value of Equity

5) Total Liabilities

6) Current Assets

7) Current Liabilities

8) Retained Earnings

I have, with varying degrees of success found these data in the Yahoo, CNBC-MSNBC, and Morningstar Financial Pages. But the data are 6 or more months old or incomplete. Value Line was a big disappointment.

1) Is anyone aware of where more up-to-date and complete financial data may be found on the web?

2) Or is there a web page that lists companies along with their Z-Scores ?

Gordon Haave replies:

For those of you with Bloomberg (the system, not the mayor), there is a Z-Score function built in.

Larry Williams suggests:

For more up to data company financial data try: MSN Money or Kiplinger.

Allen Gillespie cautions:

Altman Z-Scores is designed to work for certain industries. You might have to use several different scoring methods to cover all industries.

Eric Falkenstein offers:

I just created a website with free default probabilities for public companies, US and worldwide. Better than anything else I've seen, and I've seen 'em all.



McDonaldsJust caught on the news that Mc Donalds will add a 'coffee bar' and make more dramatic changes to their drink menu than they have in the past 30 years. I enjoy their Bravo coffee and am sure I will enjoy the drink additions when they reach my area. Mc Donalds is apparently still setting the pace in many areas as it was also announced that Starbucks now plans to make changes.

Sam Marx adds:

Although Starbucks gets a different niche of customers, this not good news for Starbucks .

A coffee bar and wi-fi at McDonalds, then Starbucks really has a problem.

Adam Robinson reflects:

I've always believed that the ethos of a corporation pervades, DNA-like, throughout all manifestations of the corporation, however small the "cell." If you want to discover the values of a company, you can look anywhere, from its choice of stationery down to the cleanliness of its floors.

Back to Starbucks. It was telling for me regarding the company's values that, living as I do five blocks from the former World Trade Center, I was shocked that in the days following, when rescue workers, many of them volunteers, flooded the area to begin cleanup, the local Starbucks was selling bottles of water. I'm as much a capitalist as anyone, but the outrage this opportunism occasioned in the local community, and subsequent bad publicity — Starbucks quickly reversed its policy and began handing out bottles for free – rankles to this day. The positive publicity it could have garnered by donating the water to relief workers would have more than paid for the negligible profits "sacrificed."

Ray Kroc was fanatic about cleaning his stores, and making everything perfect. Moreover, McDonald's franchisees are a powerful force for innovation and market research. I doubt that Starbucks has any such credo. And were I a fundamental investor, I'd bet on McDonald's in the race with Starbucks.

Ryan Carlson adds:

A worthy read about McDonald's is Ray Kroc's Grinding It Out. My favorite passage:

The key element in these individual success stories and of McDonald's itself, is not knack or education, it's determination.  This is expressed very well in my favorite homily: 'Press On: Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent.'

Henry Gifford dissents:

Starbucks and McDonalds offer entirely different products in terms of the cultural experience they sell.

On Broadway in Manhattan, two blocks from me, there is usually a homeless person "working the door" at the McDonald's, opening the door for customers and asking for spare change. Once McDonald's put a guy with a bow tie there to open the door for free, but that didn't last long, and the homeless guy is there every day. Also, the workers in McDonalds don't hesitate to stand around and chat and ignore customers.

At Starbucks a block away I've never seen a homeless person "working the door," (nor at any of the other stores nearby), I don't see homeless people sitting there, and the workers have a spring in their step.

Jim Rogers counters:

As someone whose first career was in the hospitality industry, I can state that McDonald's moves markets in more ways than one.

The difference in demographics, however, is a present condition and certainly not a necessary condition. McDonald's has always put its eggs in two baskets: families (especially those with small children) and value. In the past, their offerings were weighted more heavily on the family side of the spectrum. Now, thanks to a number of cultural shifts (including those driven by Starbucks), McDonald's has realized that they can capitalize on the public's perception of additional value. Before, it was all about quantity (the Super-size phenomenon). Now, it's about quality (better coffee, more aesthetically pleasing decor, fresher menu items). In the past 24 months, the majority of McDonald's top line revenue growth has been driven by menu items at the top of the price scale, especially new salad offerings. There are a couple of interesting points that McDonald's has embraced: the masses (or at least a historically large percentage of the masses) will pay for quality, and design makes a difference. It made a difference in attracting the kids thirty years ago, and now it's making a difference as it re-attracts adults (with or without children) with Wi-Fi, coffee, and more pleasing decor.

Marion Dreyfus opines:

Whatever the relative merits or demerits of the individual loci, the Starbucks habituee will not 'descend' to the perceived downmarket of McD's, which is a brand-association drummed into our consciousness by millions of ad messages over decades. The food may be better, the prices definitively so, at McD's, but the smart set will not cotton to the overbright, plastic-dominated perceived lower-ranking environment of kid-friendly McD's.

The escalation of prices for a simple beverage to unheard-of stratospheres is one thing that has, to date, ensured the rarefied perception of Starbuck's as being compatible with the upward-striving status-jumper.

So unless McD's radically alters its branding, the trendoids will find it distasteful to step lively in those swinging doors, even if their coffee tastes more acidic and sets them back more by a factor of twice or thrice the McD's coffee.

Ken Smith comments:

Ronald McDonald is five blocks east of me in Seattle, a short walk downhill a ways. Property they have is also just a short walk uphill to Childrens' Hospital. Parents can stay at Ronald's place while visiting kids, many with cancer. Ronald's facility is commendable for its architecture. One can have nothing but praise for Mr. Ronald, whose plastic body is standing out front of the facility, smiling with welcome. Kids love him.

Vitaliy N. Katsenelson analyzes:

SBUX stock is transitioning from 'growth' to 'value' investors. However, it is not cheap enough for value guys. At least not yet. Also, with current news cycle it will likely see the other extreme of its valuation. In the not so distant future it will probably have to rationalize its store base, close some underperforming stores and slow its growth expansion.

Jim Rogers notes:

Fast-food restaurants, due to their staffing policies, are much more likely to employ legal immigrants than you might think. The biggest offenders in the food world for using illegal labor: high-end restaurants, because they lack the institutional oversight and back-office support to adequately check a lot of prep cook and porter staff applications (and some are simply dishonest). If you're looking for a trade opportunity in the event of some strict anti-immigration policy, short higher ticket restaurant groups.

Scott Brooks writes:

McDonalds will have to work hard to overcome their persona. They have cultivated that image for a long time. I have often joked (with an air seriousness to it) that one of the greatest inventions/innovations of the 20th century was the McDonalds Playland!
I absolutely hate the food at McDonalds and will move heaven and earth to not eat there. But my kids like it. So when the wife needs a break and the kids want to go play, I'll take them to McDonalds, buy a few Happy Meals and let the kids play and eat.
Actually, they don't so much eat as graze. They play, come back and grab a few fries and bite or two of their burger/McNuggets and go back to playing.
As much as I don't like the food at McDonalds, they are an incredibly innovative company that I respect immensely. And with their distribution chain and the demographics of America changing, don't underestimate what McDonalds is capable of.
That clown may look stupid, but underneath there is a shrewd businessman!

Nigel Davies ponders:

I'm just wondering what the real appeal of McDonalds is and what really gets people in the doors.

I often eat at McDonalds during tournaments because there's usually one around, probably they won't poison me and if they do (and I live) I can sue them.

On the other hand my five year old son much prefers the relatively civilised atmosphere of Pizza Hut, so much so that I can use the 'Would you like to go to McDonalds for lunch?' gambit as a threat. Now it turns out he quite likes pubs that do food, but the big thing here was getting him in the door and outside his comfort zone. Now he does miss the balloons but there again he's taken a liking to turkey.

So it seems to me that a lot of this is down to parental choice, the main driver here being cost. Of course most parents are going to be struck by severe pangs of guilt should there be even a whiff of a rumour that the food served up is unhealthy. So with BSE (Mad Cow Disease)/cholesterol etc appearing on the horizon, it was inevitable that McDonalds would take a hit until it overhauled its menus and image.

In this respect I see the coffee/WiFi as being a really clever means of making them look like Starbucks and feeding off the modern, trendy and healthy image of the coffee house chains. But are they a 'competitor'? I really don't see it, and I don't see a Starbucks denizen suddenly switching to McDonalds because of the cost. To me it looks more like an image thing to get the old customers back in the doors.

Julian Rowberry submits:

Starbucks never really caught on here in Australia. Its brand name and attempt at exporting US culture is a tad brash for the local market. Plus there's already a vibrant cafe scene. The Maccas Cafe has been here for years. It's aiming at the fast and convenient 'healthy eating' market that companies such as Subway feed on. Not branded wanker latte drinkers.

Alston Mabry recounts:

Burger KingAt Burger King the other day (I'm not a big fan of fast food, but I am a Coke addict, and my dogs love the burgers on the dollar menu), I hit the drive-thru, and when I pulled up to the window, the Latina there said they needed to cook the burgers and would I mind pulling into the parking lot in front for about three minutes (they know their cooking times). No problem. I don't mind waiting in the car because I always have a good book to listen to, this time Adventure Capitalist. I'm listening away, and the pooches are quiet in the back, when I notice it's been almost ten minutes. So I go back through the drive-thru, and there is a young guy at the window this time. I start to explain, and he thinks I'm placing an order. His English is good, but he is obviously from Mexico or Central America. I show him my drink and the ticket and he gets it and starts rattling away in Spanish with the staff. I realize he is the shift manager. He comes back, apologizing profusely, and explains that they accidentally gave my food to somebody else who was also waiting, that they will cook fresh burgers for me and that he will bring them out to me personally. I think he was worried that I would be angry, but I wasn't at all. We park again, and a few minutes later he appears with the food and apologized otra vez.

The point of the story is this young guy. He was a good-looking kid, maybe twenty. He was running the show, working hard on his English, taking reponsibility for the results, apologizing for mistakes and personally delivering the goods. And here was Burger King providing the structure for him to be successful. Not a dead-end job at all, not for this guy. I was very impressed.

Scott Brooks adds:

I had an funny thing happen in fast food to me in about 1985. I was a manager of a Taco Bell, putting myself through college. We had hired a new girl who had previously worked at Burger King. It was her first day and I had her working the drive-thru.
The drive thru "dings" with her very first customer. She says into the microphone: "Welcome to Burger King, can I help you." I thought it was pretty funny, she thought it was pretty funny, but the guy in the drive-thru began laughing hilariously.
But he placed his order and pulled to the window. The reason he was laughing so hard? It turns out he was the guy who owned the Burger King where she used to work.



VNThe importance of practice in music can't be overstated. There are hardly any musicians of great competence who took up their study after the teens, and most have been practicing intensively since the age of seven. The problem is that most people hate practice, stop at an early stage, and waste their time when they do this. Michelle Siteman in her magnificent book, "The Pleasure and Perils of Raising Young Musicians " has a chapter "Practice Makes Perfect " in which she gives 10 techniques for improving the quality and quantity of such practice.I have received completely positive feedback from musicians who have read this book that the techniques she suggests are ingenious and useful. I believe the have universal value, and I will try to apply the lessons from Ms. Siteman's chapter to improve the practice of trading with a few of my own practice techniques from racket sports thrown in. This is a subject that has received much too little attention as practice makes more perfect in every field including our own, And this would apply to any trader despite his natural proclivities and abilities. It is common to think that a quality for greatness in a field is to love to practice it. But Vladimir Horowitz, Glen Gould and many other musicians, including Beethoven, hated practice when they were young, but they were able to conquer their aversion, usually with the aid of a firm parent who applied some of these techniques. Presumably the head of a trading team should insist on practice regardless of the qualms or machismo of some of those whose recent track record is good, or believe they were to the manor born. Emulate Pablo Casals and Yehudi Menuhin, who practiced eight hours a day, every day of their lives.

It's not enough to say: practice trading. Most people don't know how to do it. And most are bored while practicing so there has to be something that makes it interesting. Musicians handle this by mixing in some easy beautiful pieces with the scales, finger exercises and and arpeggios.

1. Group activity. One universal technique for making practice more interesting is to make it part of a group activity. Somehow those who play instruments in orchestras stick with their instruments to a much greater extent than piano, and this is why many impartial observers suggest that orchestral instruments are better for a child to play than piano, because they stick with it. Practice sessions for traders should be in groups.

2. Money rewards. And what follows from this is that monetary rewards are a great motivator for musicians to practice. Some parents make their kids pay part of their lessons with their allowance money. This has a very salubrious impact on the efficacy of practice. Group trading practice should have monetary rewards. It's amazing how many of us will stoop down to pick up a $5 bill.

3. Record keeping. Record keeping is an important part of a good practice session. A systematic account of what has been learned and what the goals are is always helpful as a foundation. It's also helpful to be able to review the mistakes and winning forays that went into a successful trade.

4. Parental presence. All musicians find it boring to practice alone. Having a parent around to observe reduces boredom. If it's important enough for the parent to insist the child do it, then it's also important enough for a parent to take an interest. The same would apply to a trading manager, who all too often leaves the trading practice to the subordinates without taking an interest in it.

5. Proper logistics. Practice should be at a certain time, and a certain place and there should be good lighting. That way there's no chance that a session can be missed because of a conflict in schedule that arose because the child or trader didnt know that it was scheduled for that day and time. A proper environment without sibling or other traders squawking that they are hungry also improves results.

6. Consistency. Practice every day is essential. The markets are always changing, and after a day or two all the skills begin to detiorate. I once practiced squash every day, 365 days a year, for 10 years. A trader should practice trading each day, or if a hiatus ensues, should practice steadily for a number of days before entering into the fray.

7. Read books about the techniques that other great musicians used to improve their techniques. What worked for them probably would put you on a path that has at least been tested. Eschew the techniques of traders that were not successful, for example the boy trader.

I would be interested in ideas readers have on improving the training and practice of traders.

Larry Williams adds:

Larry WilliamsI have always thought mastery is a largely the function of repetition.

Obviously you have to repeat the right things. Today's great home run hitters all have instant access in the dugout to videos of their last time at bat to review and repeat the right techniques and stop the wrong. Many scoff at paper trading — sure, it is not as emotional, but still provides valuable lessons.

Chris Ledoux won the world bareback riding championship with very few rides in actual rodeos. He was so banged up he practised on a bucking machine (also wrote a good song about it) to prevent further injury and shocked all the bettors who had never heard of him as he accomplished his gold belt-buckle dreams.

Jim Sogi suggests:

Jim SogiMy Karate teacher said, "What is the best practice and training for fighting? Fighting. You can run all day, you can do 1000 sit ups, 1000 push ups, 1000 sprints, and 1000 punches. But the best practice is fighting with an opponent. "My father once said, " The only difference between a small case and a large case is the number of zeros behind the 1."

You can read 1000 books about trading, study data for hours, but the best practice for trading is trading. Even if you do small size, which is best for practice, it keeps your wits sharp and emotions tough and keeps you in the game.

Keep a place set aside for only trading, always ready to go, 24 hours a day without having to clean up, scoot others away. Same with music practice. Have a set aside place or room for music with all the instruments just ready to walk in and pick up and play, even for 10 minutes before dinner. Pretty soon it becomes a habit.

Allen Gillespie takes it further:

Scales and etudes and pieces played with different bowings, speed, rhythm, etc. Breaking down a passage into shorter component parts. For example, if there is a long passage of quickly played 16th notes, first practice with separate bows for each note, then two on a bow, then three, etc. then change the rhythms from just 16ths notes, then just play the key notes from the scale so the ear hears where the passage is headed as many of the notes are fillers, understand and anticipate the pattern. Learn to play by ear. Finally, Always Play/Practice Musically (i.e. even when practicing the notes do not forget to include the crescendos, etc.)

For the trader,

1) Imagine as many scenarios as possible.

2) The distance between lows or highs or between lows and highs might give an indication as to the key

3) Some notes/days are more important than others

4) Trade smaller during times of practice

5) Test different combinations of variables - first separately then two, etc.

6) Despite all the practice, sometimes the best performances are not straight from the page

7) Finally, trading is an emotional game, so play with passion and remember there is always a low note and a high note and many notes in between.

Sam Marx reminisces:

Practice is important and in my sport in high school I practiced quite a bit but always felt that I had a limit because of physical limitations. I was 6 ft. tall but my hands were below average for my size. I couldn't get a good grip on a football or palm a basketball.

Once I was seated at a dinner table next to Bart Starr, former Green Bay QB. That man had huge hands. I have no doubt that enabled him to better control the football and made him a star. Another time I was in close proximity to Gil Hodges and I noticed that he also had huge hands. I believe he was a first baseman. I could just picture him with an oversize glove catching balls or scooping up grounders that would be missed by the average infielder.

A friend of mine was an excellent boxer. His arms were extremely long, also, his head was smaller than it should be for his size. He could just move around his opponent and jab him silly while keeping his head tucked behind his shoulders. Standing up with his arms dangling on his side I thought he looked like a chimpanzee. He had no desire to become a professional boxer but I've seen professionals in the ring with those characteristics. Kid Gavilan comes to mind.

On the options trading floor I noticed that some traders could hear trades from across the pit. Their hearing was acute.

Practice is important, but don't dismiss physical and mental ability, especially abilities in the 3 plus sigma range.

Don't tell your kid that he can accomplish anything if he practices enough. Offer this advice only when justified. Tell him he can greatly improve with practice but don't offer false hope of attaining the impossible. It can be frustrating if you're not in the 3 plus sigma range in the field you're practicing in.

Nigel Davies recalls:

David Bronstein once advised me to prepare for tournaments by studying chess at the exact times the games were scheduled. And I understand that Vladimir Kramnik took this concept one stage further by solving endgame studies (particularly demanding work) during the last hour of such studies. The last hour of a playing session is known to be the most critical, with most games being won or lost at this time. And it does seem that he got the better of Veselin Topalov at this point in the games.

Easan Katir mentions:

I spent one recent Saturday evening at the Hat and Hare Pub in the basement of the Magic Castle, with two accomplished card men, Aaron Fisher and Tony Picasso, discussing their art. Aaron instructed, "to improve, perform at any opportunity, for anyone." The club was full. He said, "C'mon, let's find you some people." So he rounded up a spontaneous audience comprised of three giggly young things, and gave this amateur the opportunity to perform modestly baffling illusions.

Live performing, live trading. No solo practice or paper trading like it. Mind sharp. Managing audience expectations, unexpected reactions and distractions. The joy of good execution. The thrill of conquest. The glow of accomplishment.

Much theoretical study, counting and practicing correctly precedes such moments. For trading I suppose the advice "perform at any opportunity" could be ambiguous enough to become a way to diminish one's capital, unless one adheres to tested guidelines for what constitutes an 'opportunity'. It works for me to transfer these skills to trading.

Evan McKeown writes:

John McEnroePractice is such an important topic. I have always believed that if you do what you love, and love what you do, then success will eventually come your way. Success itself means different things to different people.

I am a 5.0 tennis player, and love playing tennis. No matter how much I played, or practiced, I never was able to reach a level much higher. Notwithstanding my dedication or love for the game, I have enjoyed other success by meeting wonderful people that share my enthusiasm and we enjoy our weekly matches. John McEnroe once said he hated to practice, so, instead, he played in doubles tournaments. John had one of the best net games in tennis which is unusual today thanks to his devotion to being a doubles player as a substitute for practice.

I am a trader. Once again, I love what I do. Trading is not a job, it is a way of life, my passion. I trade every day, and practice every day. Practice for me, comes in many different forms. Just as in tennis, there is on the court, and off the court practice time. Off the court (or ticker screen) I stimulate my mind with financial literature. The best book I ever read, and the only book I ever read for a second time, is "The Education of a Speculator." This work of art should be required reading for any college finance class. Long before this book made me any money, it first saved me thousands. Years ago, when a perfect storm of events had collapsed my portfolio and nearly had me on the verge of ruin, I sent an email to Vic and Laurel for some word of encouragement after the market had crashed through a 200 day moving average, financial condition in the market that is not unlike the one we see today.

To my amazement, Vic and Laurel wrote me back with a few simple words that inspired confidence. Not so much advice, as it was knowledge on how to handle adversity. I not only made back the 50% that my portfolio had declined, I ended the year with a 27% gain. That email changed my life forever. Instead of placing a sell order and taking a loss of half my assets, I took the pearls of wisdom and made the most of the opportunity.

Thank you Vic and Laurel, for sharing your knowledge and experience of the markets, for being an inspiration for common everyday traders such as myself, and for taking a few moments and write such an inspiring email that changed my life forever!

Pitt Maner III says:

Many years ago I went for 3 days of tennis lessons at Nick Bollettieri's in Brandenton, Florida. An evaluation was done of each player's ability and then we were separated into groups and sent out to practice for about 5 hours each day (with a lunch break at mid-day to watch films of Agassi playing). Thank God it was not in the dead of summer, but at 80 or so degrees it was still quite brutal for moderately trained weekend warriors.

One of my teachers was a former Rhodesian paratrooper named Ian who picked up very quickly on my poor footwork (even for a 3.5 or 4.0 player) and tendency to "float" or not properly set my right foot when hitting a backhand. The school also emphasized the need to follow through on strokes and to keep hitting the ball deep and allowing for sufficient height of trajectory over the net. In other words give yourself a margin of error and don't try to hit winners all the time from the baseline–play it a bit safe and wear your opponent down.

The tendency of beginning tennis players love to hit winners even at the expense of hitting several poor shots and losing games was discussed. Players were taught to recognize the importance of swing points (ie. 40-30 or deuce or 30 all) and to be more aggressive at 40-0 or 40-15. At the pro level students were shown film of Agassi running Lendl and not finishing off points right away if Andre could get Lendl to "lunge" one more time and thus exert more energy. Tennis warfare by attrition.

Tennis at the highest levels was indeed a different game then what I imagined or had gathered from watching Borg and Conners on TV or reading about in Tennis magazine.

On the adjacent court one could watch the 10 year old Anna Kournikova practice with her coaches under the vigilant eyes of her Russian mother. The tennis school had a quite rigorous schedule for the kids–lots of running in the morning, tutoring–school, weightlifting, and hours and hours of hitting tennis balls. At the time Anna said she loved to play tennis and did not mind the practice. We watched as she played practice games in the afternoon against boys her age or slightly older.

At the end of 3 days my toenails were breaking off from my swollen feet (note to file–never come to a tennis camp with new tennis shoes!) I had experienced my first and only time with tachycardia after running side to side "suicides" on the court. My game had been broken down and I was now playing like a sorry 3.0 player and not able to incorporate or integrate all the intensive things that had been taught. There was a German banker who said he worked 60-70 hours a week at home and came to the camp for "relaxation"–masochism at its finest!

But the lessons were learned and not forgotten and months later my tennis game improved and my appreciation for the game greatly expanded.

Steve Scoles makes another point:

An important requirement of successful practice is getting proper feedback in a timely manner — touching a hot stove teaches you pretty quickly not to do it again. Markets, because of their probabilistic nature, are really horrible at given this kind of feedback. In investing and risk management, the short-term outcomes are often  unrelated to the quality of your decisions and it may even take years to be proven "right" or "wrong". I don't think this is a new idea to the world of trading, but I have always found playing poker to be a good way of practicing dealing with the probabilistic nature of markets.

Poker has several similarities with investing with some key ones being:
- imperfect information
- probabilistic outcomes
- emotional involvement is in play as money is on the line and your failures and successes can be monitored & commented on by the other players.

The advantage of poker over the markets is that the decision-outcome relationship is usually more analytically simple to learn from and thus the feedback loop is a lot better than what you get from the markets.

Three things that I have found poker helps you develop that can be carried over to the markets are:

1) to learn and internalize how gains and losses are really probabilistic outcomes rather than successes or failures;

2) to improve your ability to evaluate decisions on a basis other than the outcome;

3) to improve your ability to maintain emotional stability through the various ups and downs.

Jim Sogi makes his second remark:

In Japan the Sumo wrestlers live a strict regimen of diet and training. They avoid emotional upset that might affect their appetite. This is like trading. It has to be approached as a competitive sport. Physical training, proper sleep, good food, avoiding drugs and alcohol are necessary during the trading week to be in top shape when in the fray. If something upsets me or I fall out of training, the trading can be affected.

Alan Millhone follows up:

I will speculate that the Sumo's do not watch much TV nor hear any negative news while in training ? Mental discipline in Sumo, trading, board games,etc. is critical. When I attend any Checker tournament I get my rest, eat properly, no TV when on the road. Mr. Sogi is correct that being upset is a big deterrent to functioning properly in any endeavor. Staying focused is Job # 1 and critical to proper performance. The avoidance of drugs and alcohol holds true in any event we pursue. 



Two years ago, I just about jumped out of my skin when I walked into a convenience store and saw a large sign saying "October 19, 1987." A closer examination revealed the purpose of the sign: "You must have been born on or before this date to purchase cigarettes."

Marion Dreyfus recalls:

On October 19, 1987, a friend sent me a two-pound box of Leonidas to commemorate the flight I was on wherein he met me. He went on to Paris, I to London. When I arrived, I was told the market had fallen 500 points. I was in shock, thought my informant was joshing cruelly. But these layers of deliciousness are almost a suitable make-up for the huge loss suffered.

Sam Marx writes:

I remember that weekend of October 1987 well. The Dow was around 3,000 and Friday had a 100 point selloff.

That evening on Rukeyser's Wall Street Week, Martin Zweig predicted a crash for Monday, which did occur. That prediction truly cemented his reputation. If anyone hears or reads of a Zweig prediction this weekend, please tell me!

But to compare that weekend to now without taking into account the underlying technical structure (market P/E, option implied vol, etc.) is misleading. For example, implied vol then was very low, today it is moderate.



I'm trying to collect the following daily data from around 1998 to the present: share price, volume, option prices, volumes and implicit volatilities. I would be prepared to pay if need be and the source is "official." I need these data for stocks traded on Wall Street, though I'm not yet sure which.

Sam Marx replies:

I recommend that you start with the CBOE itself and if you need more, they may be able to assist. Check with the CBOE website as a start.



 The fixing scandal involving NBA referee Tim Donaghy raises many questions for markets. Who would have known that one of the key insights that he gave other gamblers was information on who was going to ref the game, which affected the outcomes of games because of how they were going to call offensive and defensive fouls?

Also, he was able to ply his trade without any of his fellow refs or even the players knowing he had an ax to grind. Particularly creative in this regard was his adding an extra 1.2 seconds on the clock following a missed Portland shot in the Dec 1, 2006, Orlando-Portland game, won by Orlando 91 to 89, with Orlando favored by 4 points. The game would have gone into overtime without it. It appears Donaghy also used technical fouls and mismatched fouls.

In racket sports, I always could tell when a player was fixing the game. Often my own partner in handball was fixing the game against me and I had to kick him off the court if I couldn't beat him up. In tennis you can always tell if the other side is trying to lose by their muscle moves and gait, and apparently a sister game was once found out this way.

If basketball games can be fixed this way, how much easier is it to disguise stock market fixes?

Vance Humbert replies:

A couple of examples I view as fixing the game-

1) In the hedge fund world, there are many managers labeled "talented" and "consistent performer" by external analysts, but who are in fact blessed with a few Street relationships that provide most of the generated alpha. I think back to certain convertible arb funds in the early 2000s with stellar returns which were a function of taking every new deal that came down the pipe as a matter of facilitating the issuance process. It was common knowledge that, within a matter of hours to days, they could flip the bad deals back to the underwriter for a .20-.50% loss but the good deals they would hold for 1-3% gain. Where is the portfolio management skill when you have to take every deal?

2) Referring back to perceived stellar high frequency managers, how about the one who takes down a bunch of stock and then strongly suggests the sell-side analyst change his rating for the better? Of course, this is all in the name of improving fundamentals. But it doesn't hurt that the fund does a lot of transaction volume with the firm. Once the rating change is announced, the hedge fund's minions make sure to call all the other research desks on the Street to ensure they are aware of a "good call" by another house. While the stock ramps, they unload their inventory.

Steve Ellison comments:

 One evening last summer while playing blackjack, I began to suspect the dealer was cheating. Four times, the dealer's face-up card was a five. The best playing strategy in this case is generally to stand on any hand of twelve or more. In no circumstance should the player risk busting because the dealer is at high risk of busting.

In all four cases on this evening, the dealer managed to draw a third card with a value less than ten that brought the dealer's total to 20 or 21. Of course, it could have occurred by chance, but Edward Thorp documented in Beat the Dealer various sleights of hand dealers can use to view cards still in the shoe and deal the second card rather than the top card.

Andrea Ravano adds:

The first and most important principle here is of human nature. What is it that motivates Americans, Chinese, Italians and everyone else? Greed, passion, hatred? There are many desires that make up the complexities of human nature, but the afore mentioned are among the strongest in determining our actions.

Thus, corruption in all its parts, belongs to our nature regardless of our culture. Weak people will always seek a short cut to obtain what has been built by endeavoring , trying, suffering and sweating. Racists will tell you that a certain culture, brings about corruption and weak thoughts, as if a political system or a social group could stand up and offer the perfect model for us to admire.

Einstein said "it is easier to break the atom than prejudice" and the same goes for the markets. Prejudice is your worst enemy. The lack of clarity when analyzing data, or your inability to understand the nature of the ever changing cycles, will lead you directly on to the wrong side of the trade.

My grandfather considered the stock exchange a place for depravates who didn't want to work and sweat, and he taught his children to keep investing their assets in "real" economy. His ideas were largely influenced by the fact that one of his brothers (out of a family of fourteen brothers and sisters!) had lost a considerable amount of his fortune in the 1929 Stock market crash. Thus he taught his children to stay away from the corruption of the faster moving parts of the financial world and to keep investing their money in a sound way.

When the time came, after his death, to sell assets and increase financial holdings, none of his sons thought of doing so as the great early 80's bear market in shipping wreaked havoc among ship owners (which they were) and brought to its final conclusion the danger of believing in an idea without testing it: prejudice had taken its toll. 

Steve Leslie extends:

Poker is a game that lends itself quite nicely to fixing because there can be up to 10 people at a table during the course of a game, and the players are constantly touching the cards. Poker can be manipulated in a variety of ways.

The obvious ways to cheat in poker:

1. Mark cards

2. Manipulate the deal

3. Bring extra cards in and out of a deck such as the occasional ace to fill out a hand

4. Post incorrect bets

5. Pull back a bet when it is obvious that you are beat

6. Deal from the bottom of the deck and "deal seconds"

7. Conspire with the dealer to steal an occasional pot

Less obvious ways to cheat include:

1. Play teams at the table, splitting the winnings with an accomplice

2. When handing out chips or changing out a player, giving an incorrect amount

3. In tournament play, having an accomplice dump his stack to you by going all-in with a vastly inferior hand in heads-up play

4. Having an accomplice consistently raise the pot while you hold the best hand, drawing attention away from you

5. "String betting"

More subtle ways include:

1. Having the more experienced players go after or attack the weak and unprepared "fishes" or "pigeons" at the table

2. Having the large stacks go after the small stacks

3. Having dealers rake more money than they should

As they always say, if after 20 minutes you can't figure out who the pigeon is at the table, it's you. Always ask yourself why you were invited to the game in the first place.

John Lamberg replies: 

Casinos do not have to cheat to be profitable. The only time I suspected a blackjack dealer of cheating was at a small casino where the dealer, who was hand-dealing, correctly announced the next two cards by suit — an ominous warning to run to the exit.

While basic strategy does call to stand on 12 or more against an up five, hitting a 12 against a five would be an appropriate play if the count supported it. In a situation where the dealer repeatedly makes a hand on a "weak five or six" (or repeatedly beats my hand by one), my strategy is to find another table or sit the rest of the shoe and evaluate the next one. Red flags, whistles, and bells now sound when a player announces in frustration or anger that the cards can't be that bad and have to turn soon.

On occasion, I will watch a player fight the cards and wait until he either blows out or gives up in frustration, take his spot, and enjoy the blackjack he just missed. Nice parlor trick when it works, but certainly nothing to bet the farm on.

Sam Marx comments: 

I think the term "fixing the game" as applied to the market should be made more clear. What is included in "fixing the game"? For example, I believe you would include "trading on inside information." 



 Oil is again trading at over $70 per barrel. However, as I understand it we (the US) have more oil in four states than there is in Saudi Arabia, locked in shale, and it can be extracted profitably at less than $35 per barrel.

Meanwhile the U.S. is pursuing and subsidizing ethanol from corn, driving up corn and meat prices. I think that a policy of extracting oil from shale should be our primary policy. What am I missing?

Of course, more than 30 Senators are from farm states and a policy of oil from shale, tar sands (under $30/barrel), or coal ($40/barrel) would drive down oil prices.

Jaime Klein writes:

Exploiting shale requires immense investments as well as a change in environmental regulations. Historically, oil markets suffer from cycles of overproduction followed by tight supply (like recent years). Investment in oil production has a long maturation period and is very risky. Any number of events, such as an outbreak of stability in Iraq, opening up Iran to foreign investments in oil, Hugo Chavez retired by a military coup, strengthening of demand destruction (in many developed countries oil demand is falling), could cause crude prices to collapse and then settle at its historical level (maybe half of its current price). I am shorting oil.

Sam Marx replies: 

If oil goes below $50, Saudi Arabia will cut production as it has in the past.

Alan Millhone comments:

Yes, then a 'created' scarcity. Alternative fuels, hybrid cars, etc. have been 'beat around' for years, but little done. In Vegas they have built an elevated monorail from MGM to the Sahara and talk is to extend it all the way to the airport. Taxi drivers are against this, but something has to be done to ease traffic congestion and fuel consumption in one isolated area of the US. America has always had a love affair with the automobile.

In Europe you can get a passenger train to about any location and buses and subways are readily available. I drove in Paris once and quickly realized I would not want to have a car there. Problem is not many of us are willing to 'cut back' on our driving. 

Sam Marx writes:

I believe that the only "alternative" fuel that will work is oil produced in this country. That means drilling in Alaska, offshore, and very deep drilling on land. Aside from that are oil produced from shale, coal, and tar sands (Canada). Money and necessity should be the solution to environmental problems.

I believe that by hybrid cars you mean they also use ethanol. For many reasons I don't believe that ethanol is the solution. As for smaller cars, it is my understanding that since 1972, an additional 50,000 people have died in auto accidents in the U.S. because they were in a small car, but would've survived if protected by being in a larger car.

During WW II , Germany had to resort to oil from coal. After everything is considered and there is rational leadership in this country, willing to stand up to big oil, I believe we will have to resort to oil from shale, tar sand, or coal also.

I don't believe that there is a conspiracy by big oil to drive up prices, but I do believe that they don't want prices to come down and oil from shale, tar sands, or coal would do that. 

Henry Gifford writes:

A man named Peter Judd did a study of the amount of fuel used to make heat and hot water for each of thousands of apartments in New York City in the 1980s. He divided the buildings into five categories: old law tenements (pre 1901), new law tenements, pre WW2, post war, and post 1974 oil embargo. The average use for each category was about the same, except for some improvement in the post 74 buildings, which when credit for more bulk and therefore a lower surface area/floor area ratio is considered, means there has been approximately zero progress in 100 years.

The most interesting thing he discovered was the spread between the best and the worst buildings - about 700% when the unusually high and low consumption buildings were tossed out of the mix. The spread persisted in all categories.

The main exception were the buildings gut renovated in the 1980s, which had new double pane windows, insulation for the first time, and new boilers and controls. They used 50% more fuel than the average of the existing housing stock. Since they were renovated by the government, and Peter was a government employee, he was moved to a do-nothing job, and soon left. His counting skills are now put to use in producing off-off-Broadway theatre.

The lesson I took from this is that some buildings use 1/7 of what others use, while providing better comfort. Meanwhile, this is all done unintentionally, as it wasn't until the mid 1990s that anyone even claimed to be making energy efficient houses in NYC. The extra cost of course was zero. I think this argues that there is a lot of potential gain from conservation.

It turns out there is a field called "Building Science" which is a study of the factors which effect comfort and building durability and energy use, which is widely ignored by the industry. But the science to explain this exists, as does the counting to show what is possible. Knowledge of these things has led me to believe that buildings could be built that use 10% or 20% of the energy that existing, average buildings use, and be built this way for no extra cost. I have done this, and am one of the only people in the field who shows fuel bills to back up claims. Of course, zero extra cost has its own problems, not the least of which is that there are approximately four people in the US who work on energy efficiency in buildings and are not paid by the government. This causes many conversations to start with "money is available for…" instead of "energy can be saved by…", which of course is an impediment to innovation.

I cannot predict how widespread sound building practices will become, but have no doubt that from a technical perspective, all the necessary technology has existed for decades, and is currently for sale in Home Depot. It's just that the industry that knows how to design and build such buildings mostly does not exist.

As for oil from coal, it is true the Germans did it, but at a high cost, and only in the face of severe shortages. The rumor that fuel was so scarce in Germany that the first jet planes in history were towed to the runway with horses is simply not true. They used cows, because the army was using all the horses. I think fuel will get more scarce before oil shale is economically viable.

One of the costs is the energy used in the process. The Canadians say that it will take the energy from two barrels of oil shale to produce a third barrel. Perhaps in our milder climate the numbers will be a bit better, but probably not by much. At best, it will be a costly and difficult process. 



I thought readers might share my interest in the work of Professor Jan Vecer, of Columbia University Statistics Department. Vecer has developed and published a mathematical approach to predicting the winner of professional tennis matches. He has also been working on "Maximum Drawdown," which he defines as the drop from an asset’s high to its low price within a given time frame.



NEW YORK (AP) — Stocks wilted Wednesday as comments from former Federal Reserve Chairman Alan Greenspan and worries about upcoming economic data deflated a rally fed by takeover activity.

Those who have been around as long as I have seen these ephemeral events played out many times before after comments were attributed to the hot hand with an esteemed reputation.

There was a time when Dr. Doom Henry Kaufman was known to dramatically impact the markets, especially the bond market, with his interest rate predictions. This was while he was with Salomon Brothers in the 70s and 80s.

There have been others who had limited success with predictions and moving the markets, such as Elaine Garzarelli of Shearson, Abby Joseph Cohen of Goldman, Bob Farrel of Merrill Lynch, Bob Prechter of Elliott Wave, Bill Gross of Pimco, and Joe Granville in the 70s. Even Alan Abelson could comment on a stock in his weekly column for Barron's and have a big effect on its opening on Monday. A comment on a stock in the Heard on the Street column could also be worth a point or two. There have been others over the years.

From John Tierney: 

Here are some examples of Greenspan's forcasting history. 

From Stefan Jovanovich:

I believe Mr. Leslie was referring to the total increase in market valuations, not the percentage gains alone. By that standard the late 90s were qualitatively and quantitatively different from the other periods Professor Pennington noted.

The recovery in the ticker from 1932 was hardly viewed by the public as a "rise"; Americans remained hostile or, at best, indifferent to securities investing for another generation. It would be equally hard to see the post-Spanish-American war boomlet as comparable since the U.S. was not yet considered a financial center equal to Berlin, let alone London.

While the 1926-28 Wall Street boom may have outperformed the late 90s by a slight margin, the level of public participation was not comparable. As a percentage of the total adult population, fewer Americans had checking accounts in the 1920s than had securities holdings in the 1990s.

Charles Pennington adds: 

3-year moves following:
12/31/1932: 139%
12/31/1925: 92%
12/31/1903: 92%
12/31/1994: 106% *
12/31/1995: 79% *

(*Partially overlaps the 3-year period after 12/31/1996)

It is true that the market went up a lot after December 1996, but I don't see any basis for saying that post-December 1996 was the "greatest rise in the history of the United States."

Why make such sweeping statements without checking them first? It is like saying, "Nobody hit more homeruns than Willie Mays."

Sam Marx adds: 

Back in the early 50s or maybe the late 40s, Walter Winchell would end his heavily listened to Sunday program with a stock tip that would create a buying binge for that stock on Monday morning. The Stock's Specialist would open the stock substantially higher and buy back at lower prices as the institutions would come in selling their holdings.

When someone asked Winchell where he kept his money, he quipped, "In rubber bands".

From Sam Marx:

 Michael Milkin should be given a pardon.

He created the junk bond market, was influential in financing many of today's largest businesses including CNN, and building the modern Las Vegas. Now he is using his funds for prostate cancer research.

I believe that with all his capital and important character witnesses he could've stalled and defeated the charges against him which were mainly "stock parking" charges. He pleaded guilty to save his brother from going to jail.

He was a threat to some of the moribund corporate boards because he was able to raise the capital, through junk bonds, to enable the takeover artists (Ivan Boesky was not a takeover artist, he was an arbitrager) to gain control of these companies and remove those moribund boards and revitalize those companies. I've heard that the word came from the highest office in the government to get Milken because he was a threat to the entrenched country club set.

Ironically, although he is credited with it, the idea of using junk bonds to take over companies was not Milken's idea. A superior at his firm suggested it to him.

Some such as Ben Stein consider Milken a charlatan. I do not know the exact details of Stein's reasons but I do know that Milken used a Harvard study that showed that a portfolio of high yield bonds would over a period of time outperform higher quality bonds. This may have been valid at first when he was selling existing high yield bonds as a bond salesman but the type of bonds that Milken later created did not fit the properties of the high-yield bonds in the Harvard study.

Before he moved to California, Milken worked in Philadelphia and then N.Y.C. and lived in Cherry Hill N.J., two blocks from my house. When he was commuting to N.Y.C. he would take the bus very early in the morning wearing a coal miner's helmet to read company reports in a dark bus.



This price movement of June bond futures on the morning of Apr. 23 taught me a lesson.

From 7:52 AM to 8:55 AM (slightly over an hour) the market went from 111-10 to 111-01. During this period it traded 19,459 contracts. There were no announcements during this time frame.

Then from 8:56 AM to 9:57 AM the market completely reversed its direction and went from 111-10 to 111-01, exactly where it began two hours previously. The additional contracts traded in that time frame: 20,469. Almost the exact amount as on the way down.

Why would market participants all of a sudden change sentiment, when there were no announcements? What makes participant bias change so abruptly without news?

Robert Ray replies:

A nine tick Lobagola? Take that same move from the perspective of someone that wasn't watching every tick and it would appear that not much at all went on as the price was the same two hours later. There is a meal here in how one perceives things.

Edward Talisse remarks:

This behavior happens all the time, not only in US but in Bunds and JGBs. It's the hedging of new issue deal flow. As corporate bonds are priced, dealers (read: swap desks) trade the order flow but usually end up flat. It has nothing to do with availability of new information.

George Zachar adds:

Deal flow is information, and gaming the hedges and their lifting is a major part of the debt market's micro-process.

Phil McDonnell explains:

A price quote is for a completed transaction. It is always between a buyer and a seller. So the number of buyers always equals the number of sellers — no exceptions. Only the price adjusts. So logically the number of long contracts equals the number of shorts always, all futures markets — no exceptions.

You can infer something about the initiator of the trade. He is often a market order coming from off floor. The market order will cross on the floor (or in a computer) with the current bid or ask. So a down tick usually means an off floor trade crossed with the bid. An uptick often indicates an off floor market order crossed with the current best ask. This is only the commonest case and must be tempered with the realization that limit orders will appear as bid/ask quotes as well and may be confused with market maker activity. Also you cannot know if open interest is increased or decreased by a single trade, but you can track it on a net basis over longer time periods.

Victor told the tale of the elephants always returning by the same path in his book EdSpec. It was a story originally told by Lobagola. The story holds true for markets as well. Markets tend to retrace the same ground — often many times.

Is there statistical evidence for this? One need look no farther than Doc Castaldo's recent post on the Pythagorean scale and markets. His data showed that markets exhibit small changes far too often for it to be chance. This is the salient feature of speculative markets. It happens all the time. Huge amounts of money are made and lost on the very numerous small change days.

Consider the idealized model of a market with a single market maker. He quotes 100 to 101. Someone sells to him at 100. So he drops his quote to 99 to 100. The very act of dropping the quote inspires more selling. He drops his bids to 98, 97, 96 then 95 in succession as more sales come in. His average cost is about 97.50. Now at 95 a funny thing happens. He hits somebody's threshold of pain, whose stop is executed at 95, and our market maker winds up too long. Now he holds the price firm or even raises it.

On the perception of firming or even rising prices speculators start to nibble. Our market maker now slowly raises prices back up to where they were before. Only this time he is supplying at the ask price. So he makes his spread which he tries to maintain at one point. By the end of the day the quote returns to where it was before. Our market maker has sold his inventory at an average of 98.50. The market has done a Lobagola down then up. The news reports the market was unchanged today and everyone yawns. But our intrepid market maker made his spread going down and then back up. He can afford to eat at Delmonico's yet another night.

Sam Marx adds:

As a former market maker on the floor, I can say that this description is a good approximation of what happens. That's why the distribution of prices is higher at the middle than the normal distribution. The market maker is more confident within the existing range.

Also, when there is an large influx of sell orders, the market maker steps aside, buying smaller quantities, a minimum number of lots at each lower price to perform his function, and lets the price really drop. When buy orders start coming in, or when the sell orders stop, he starts buying. That's why the price distribution is lower than the theoretical normal distribution a short distance from the middle of the curve. A leptokurtic distribution.

J.T. Holley extends:

I'm looking at long bonds today. The UK 50 year yields 4.1% and the French Euro 50 year around 4.0% Does this mean that the US long bond is going to 4%? Has anyone with a scientific bent studied/counted the ratios/differences of these instruments' yields?

Faisal Essa responds:

The UK and EUR long bonds are said to trade at those levels because of the local pension and insurance company law changes that have forced pension funds to match their long duration liabilities with long duration, high quality bonds. This has led to reduction in allocation to equities and a shortage of long bond supply relative to demand. To make matters worse, restrictions on currency exposure and derivatives overlays force the funds to stay in their own market rather than buying other countries' long bonds. This legal framework is quite unfortunate for Dimsonian pensioners.

This situation (along with changes in US pension fund law) does have some influence on US long bonds and long TIPS.

Charles Sorkin suggests:

If the media decide to exploit the notion that the American homeowner needs to be bailed out, bonds could fly. An interesting hedge (although extremely difficult to model and get the ratio correct) would be a short bond position hedged with long support-class POs. Difficult for the small investor to find, but some pieces have been floating around lately in the upper $30s to upper $40s on long paper. Such securities could return your principal within two years on a bond rally of 100-200 bps. 


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