May

15

Henrik Cronqvist, Stephan Siegel, and Frank Yu:
Value versus Growth Investing: Why Do Different Investors Have Different Styles?  [39 page PDF ]

Abstract:

We find that several factors explain an individual investor's style, i.e., the value versus growth orientation of the investor's stock portfolio. First, we find that an investor's style has a biological basis and is partially ingrained in an investor from birth. Second, we show that an investor's hedging demands as well as behavioral biases explain investment style. Finally, an investor's style is explained by life course theory in that experiences, both earlier and later in life, are related to investment style. Investors with adverse macroeconomic experiences (e.g., growing up during the Great Depression or entering the labor market during an economic recession) or who grow up in a lower socioeconomic status rearing environment have a stronger value orientation several decades later. Our research contributes a new perspective to the long-standing value and growth debate in finance.

Victor Niederhoffer writes:

This is why we count and do prospective studies versus retrospective ones, and why we eschew paying attention to work form Yale professors who average earnings over 10 years , many of which were not reported until 6months after the earnings were or were not reported, with retrospectively selected stocks.

Rocky Humbert writes: 

Vic, by your own admission and work, if the stock market declines massively this year, it increases the probability of a greater-than-average return in the future. And by extension, if the stock market rises massively this year, it increases the probability of a lower-than-average return in the future. Why don't you extend this logic (which is both fundamental and technical) to relative valuation (i.e. growth v value) ; perhaps because your data set is lacking one of the largest multi-year examples (1997-1999) in history?

Also please explain how dismissing Shiller (or anyone else's argument) strengthens your argument– which I interpret as being a blanket belief that "fast growing company stocks outperform inexpensive slow-growing stocks." I can provide you with many strong academic studies that have documented this phenomenon in the past; as well as good studies that demonstrate momentum, small cap and other factors have historically outperformed. I would also like to better understand how you define a prospective study — since I find your use of the term confusing in this context.

As others have noted, this list has increasingly veered from its mission and why I joined; because the direction and rigor comes from the top, this exchange provides an excellent opportunity to reorient — unless you'd rather demur and focus on longevity.

Since when is this kind of thing true for future returns in a random walk? 

Russ Sears writes: 

The stock market declines massively this year, it increases the probability of a greater-than-average return in the future. And by extension, if the stock market rises massively this year, it increases the probability of a lower-than-average return in the future. There is a subtlety in this statement that I think should be pointed out, it is time. A quick hard drop increases the chance of a quick high return next year. However it is not symmetric with time. A large risk may lower expected return over a much longer period of time. Knowledge and therefore increases in wealth stays with us longer than destruction.

Victor Niederhoffer writes: 

Since when is this kind of thing true for future returns in  a random walk? 

May

11

 For me the most important gain was realizing that the game was in the final stages, which creates a kind of freedom. You don't have the energy, drive, T, etc, to take on big risks, and in any case you shouldn't because it would be hard or impossible to start over after losing.

(Some will argue 50 is too young for these kind of thoughts, but as mom noted I am an old soul)

I once read an article by a retired journalist about his high school reunions. His best one was the 60th, because by then the ones left were done bragging about their big plans.

anonymous writes: 

A bit off-topic but the good Dr and the post-50 risk aversion he alludes to I am finding is quite pervasive. Nearly everyone I speak to wants to "just do this until I retire," or "I just want to work this job until I hit 62 and can begin getting SS, and live on the cheap from there."

And this is a very large swath of the population. In fact the big boomer bubble– who is either retired or mid-fifties now, is, by virtue of their age, nearly entirely risk-averse. The younger generation, perhaps even more so having never witnessed anything like an 80s or 90s style economy.

Just food for thought folks, being that I am not in the prognostications of anything business.

anonymous writes: 

I turned 60 last July. Although 3X/year sports injuries keep taking their toll on my old body, I keep chugging along. Yoga and open water swimming has been a lifesaver, probably cutting my recovery time in half. We're thinking of getting a house in Nicaragua, where the uncrowded waves have a siren song of their own. I have a bucket list in mind, and it is entirely surfing related. Before I die, hopefully I will get to surf Tavarua Fiji again, big Sunset Beach HI again, Todos Santos MX, Puerto Escondido Mx(Mexican Pipeline), Bali again, the Mentawais, Hossegor France, J-Bay, Bells Beach, and Durban. Plans and reservations are already in place for Tavarua next fall. Incidentally, Tavarua is the third best wave on the planet IMHO, and is the place that brought me closest to meet Charon. Bounced off a reef and picked up a staph infection that put me in intensive care for 10 days with my organs shutting down. Was it worth it? Hell yes. One thing that gives me thanks….my wife has bought into my bucket list and both of our lists easily mesh.

Stefanie Harvey writes: 

I am 48 so not quite there. This is the happiest I have been in my life:

- respected in my career
- happy in home life
- tolerance for bad behavior/drama has gone to zero
- integrating life experiences to solidify my values and philosophical base
- comfortable in my own skin

The one change– the body changes. Loss of estrogen means cardio vascular risk increases but it's easier to put on muscle. For men it can be loss of testosterone. My father got supplementary shots beginning in his late 60s until his death at 85. Exercise and healthy eating is a must for energy.

Make diet and exercise a priority. Create a system to eliminate distraction and decision fatigue. 

May

6

 At our little vineyard here in CA (not little when age adjusted), we planted some bird nesting boxes to tip the local ecology toward insect depletion. The Western Bluebird–an obligate insectivore–is a cavity nester:

OK it says they also eat berries, but I've not seen them feed on grapes. (If so the plan will change)

This year one of two nest boxes have been occupied by a nesting couple. The eggs hatched, and mom and (mostly) dad feed the babies insects and grubs all day. Parents and kids are now accustomed to me, as with this year's heavy rains there is much work in the vineyard.

But this morning I noticed a trail of ants–illegals– actually invasive Argintine ants–crawling up the post to the nest box. I worried that some or all of the babies died. But on opening the box I was greeted by 2 of the 3 fat babies.

Mom and (mostly) dad fly food in every few minutes, which explains these obese chicks. They compete for incoming food by chirping as loud as they can, and holding their mouths open so as to create the easiest target for their tired parents (one was going to reference nubiles surreptitiously flashing but…).

I had some Borax granulated detergent (thanks to 20 mule team and Ronald Reagan) which I poured around the base of the post supporting the nest box. It contains sodium tetraborate, which is good (in trace amounts) for grapevines, but deadly for ants. It may take a few days but the ant trails and nest will be dead soon.

As a conservative, I took responsibility for the nest box I installed. Even though the birds may not be 100% beneficial, in some ways I own them…even though these children have traits of socialists. But…libertarian too, right? If you don't chirp, don't expect to be fed?

I resolve this with my commitment to do all I can to help the chicks successfully fledge from my nest box. But during harvest season when birds can strip the vines clean, watch out. I net the vines and will shoot any birds preying on my grapes while perched on the net.

Apr

4

 Europe and emerging markets are the favorite topic of all in the coming months. Osmotic pressure?

Ralph Vince writes: 

But Stef, why screw around with those markets when the US is in a monster bull market — bigger than anything seen in over 50 years, or maybe in modern times? The US and the earth may have de-linked, and the US is, at least, a sure thing. We are in SUCH a raging bull market it's silly. This may be MORE than 1982, and the reason I am certain of it is because EVERYONE is SO RISK AVERSE. A planet of absolute weenies now.

I had some stooge tell me the other night, as I went to our myself a glass of tap water from the faucet of a friends condo here, "I only drink distilled water." Are you f***ing kidding me?

A bike helmet society. Since 9/11 and the crash, everyone is insanely risk averse. "The Presidents first priority is to keep Americans safe!" has been a common theme. That appears NOWHERE in the US Constitution btw, and I'm certain its framers - who were individually certified badasses, would laugh at such a statement. If you step outside of the day, if you transcend the era we are in and look at the bigger picture, it;s clear that never have so many people, been so motivated by fear in my lifetime. Maybe in 1938/9 people in Europe were, maybe in the Spring of 387 they were, Do you think this is not manifesting in the markets? Does anyone think that fear has dispersed yet?

Youth is steeped in it, and now, must be conditioned, only trough painful, firsthand experience to NOT be so risk-averse. The markets have never accommodated everyone, why would it be different this time around? Yes, there will be fits and starts and sputters, but the next 20 years are up and up and up and it doesn't matter what happens politically–this is bigger than politics, but is the market's reaction to one-sided human emotion.

J.T Holley writes: 

I completely agree with you Ralph. Having been a Father of three, Athletic Coach, and Boy Scout Leader I can tell you that there are two generations of folks that would rather be risk averse and maintain a lower standard deviation with their lives than take even the surest of bet!

The only other generation that might have had more fear would be that of the 1950's after WWII. That generation or slice of generation were the ones who did bombshelter drills, got under desks at school, and were spoon fed propaganda. They feared total nuclear annihilation. That eventually faded.

Ralph Vince writes: 

We're finally seeing what we "feared" for a long time, that all this inflating would result in a giant asset-bubble. This is now manifesting, but nowhere near to the degree it would to be commensurate with the size of the inflating that occurred.

If people are risk averse, the late-boomers, people my age, mid 50s to early 60s. simply want to be able to hobble into "retirement." They are not taking any risks. The younger set has been programmed NOT to seek risks. People of wealth are and have been hunkered down for a long time. Bank prop desks are dissolved…so very few are taking serious risks in the equity of assets–an endeavor the vast majority of people think is about finished for a variety of weak, small minded reasons.

Kim Zussman writes: 

Ralph I admire your optimistic enthusiasm. So much, in fact, I would like to adopt you as my brother (along with a select group of spec listers)!

I somewhat get the point about pervasive fear. But as a devil's advocate (and I'm not particularly bearish):

1. There could be even more fear, including the acute variety, just thinking about risks involving N Korea, Iran, Russia, ad nauseum
2. Dems will do everything they can to stop the president from executing his pro-growth agenda, though he has and will continue to get some of it via executive order
3. Related to #2 (and to some extent with the same motives), the Fed is in tightening mode
4. Protectionism and withdrawal from international trade might not be good for many company's earnings
5. To the extent one cares about valuation, stocks aren't particularly cheap here
6. VIX has been quite low and spikes are smashed apace. Long time since 10-20% "correction"
7. Boomers are retiring and they can't eat their stocks. Many might be inclined to lock in asset values, but who will buy them?

You may point out these and other fears are bullish, and I agree. But we don't have anything like the fear of 08-09 that resulted in over a 3X - 9 year gain (and probably won't again in my lifetime).

Would you suggest all-in, or scale-in on dips?

Ralph Vince responds: 

Kim, my response to your points is below: 

1. There could be even more fear, including the acute variety, just thinking about risks involving N Korea, Iran, Russia, ad nauseum

This is already baked into the market.

2. Dems will do everything they can to stop the president from executing his pro-growth agenda, though he has and will continue to get some of it via executive order

Very likely they will do all they can to obturate things. But as I said, this saturnine, fearful sentiment is what drives markets, and it;s the same mechanism we saw, for the same reasons as in 09. Except the fear - at a deep and cultural level, has remained as an ocean of cash has been pumped into the system — still out there. The ascent of Trump merely gasoline on this deep, prolonged, over-arching cultural shpilkes.

3. Related to #2 (and to some extent with the same motives), the Fed is in tightening mode

At the short end. Mr market is telling us a differetn story at hte long end, where the free market for credit occurs. I'm looking for a 1 big handle on the thirty within a year.

4. Protectionism and withdrawal from international trade might not be good for many company's earnings

You're talking a zero sum game by definition. It may not be good for some, but people will still buy light bulbs.

5. To the extent one cares about valuation, stocks aren't particularly cheap here.

They aren't expensive either, the relationship being (earnings ^2 ) / ln(long rates). By this (linear) measure they ARE quite failry priced indeed, and at the 1 big handle on the denominator, well….

6. VIX has been quite low and spikes are smashed apace. Long time since 10-20% "correction"

And where SHOULD Vix be? Is the pre-November historical level……..is that same level where it should be? Everyone for months has been looking for Vix to spike. It will, of course, at SOME point,as stocks too will correct beyond a few percentage points, at SOME point.

As an aside — perhaps looking at outright vix levels is deceiving us, just as looking at absolute interest rate levels deceives us. Perhaps vix, like interest rates, should be looked at for the character of its term structure, rather than absolute levels? (and further, vix exhibits the character, ie.e the manner in which it moves, which is very similar to monthly unemployment — not that they move together, they do not, but they move with similar personality)

7. Boomers are retiring and they can't eat their stocks. Many might be inclined to lock in asset values, but who will buy them? We haven't seen Dr. Greed enter the picture yet. How many guys do you know well past retirement who love to take a spec on things? Boomers aren't going to leave this game en masse — where will they get a return?


You may point out these and other fears are bullish, and I agree. But we don't have anything like the fear of 08-09 that resulted in over a 3X - 9 year gain (and probably won't again in my lifetime).

We have similar fear today, and, just like 08-9, it is deep and culturally ingrained, far beyond the mere fear of capital market corrections. The difference is we've been further steeped in it, and the markets have continued higher, stoking hte fear further. By every metric, gun sales, political banter (on all sides, favoring "safety!") etc., we are a culture in a sort of tenebrous, deep fear, which has persisted well beyond a decade and a half now — I contend it is so deep and so ingrained that we aren;t even aware of it.

Would you suggest all-in, or scale-in on dips?

Timing dips is for dips who think they can. Why piddle when things are just going to keep making new all-time highs? Just buy and buy and keep buying. Come up with more money and buy some more. Add and add and ultimately cause yourself to have a bigger stake in it which has naturally averaged in. If you want you can protect it very cheaply for about 1-2% /year.

Mar

30

One sees that everything is topsy turvy with the service reform that repubs are now pointing to. Apparently the agrarian reformers have put a framework in place where a new plan must be revenue neutral or else it has to subject to whatever non-reconciliation is. To the layman that means it's a lot easier to get a revenue neutral plan in. Washington loves that because gov spending won't be decreased. But the fly in the ointment is that any proposal to reduce service rates will generate enormous increased revenues through growth and compliance and proper business activities rather than those designed to reduce payments to the service. Supposedly the "non partisan" budget office made the congress agree that there can't be dynamic scoring. So the Lafferian correlation between reductions in service rates and growth can't be taken into consideration. Thus, the whole thing has an improper foundation, a twisted acorn that must grow into a twisted oak. I've found that all things built on improper foundations eventually crumble.

Rocky Humbert writes: 

Since taking office, I count that to-date, Trump has eliminated over 90 government regulations; some of which are very significant and positive from an economic growth perspective (if one is inclined to view the cost/benefit ratio of such regulations as high).

Rocky wonders whether Vic has any hot water in his Connecticut manse. Why? Because he always seems to have a bucket of cold water at the ready.

Ralph Vince adds: 

And further to Rocky's point comma it is estimated that these regulations costing economy about to trillion dollars a year. That's one eighth of our economy. Cut that in half reduce half of these regulations and you see an immediate 6% bump in GDP. In my case I have spent over 150 hours in the last month simply wrestling with the regulations caused by Dodd-Frank. Those who oppose the president on the political scale to sew an ideological grounds but in the nuts and bolts world of trying to get anything done and America the regulations are stultifying.

That 6% bump in GDP is before any kind of multiplier is put on it. Can again go back and look at any of the great social programs have been started and worked successfully in America from Social Security to Medicare to Medicaid they all coincide with double-digit GDP growth, something I personally and looking for between now and January of 2019. Taking a machete to the Jungle of regulations anyone trying to start or run a business or even so much as take out a mortgage has to contend with, as the numbers illustrate goes a long way towards getting his towards that double-digit growth, and possibly then some type of healthcare plan in America. People have been flying to this putting the cart before the horse.

Kim Zussman shares the article: 

"How to Engineer a Trump Boom"

Cut taxes, deregulate, build roads, bridges and airports—and don't start a 1930-style trade war.

By ROBERT J. BARRO

Stefan Jovanovich writes: 

Mr. Barro is looking through the large end of the historical telescope. Trade wars only occur when countries are already having shooting wars; they begin and end when one country loses all its money. The 20th century's "trade war" began in 1914 and only ended in 1945.

What "explains" the 1920s is that the one country in the world that had any money - the United States - decided that it could afford to accept other countries' central banks' valuations of their domestic currencies. What explains the 1930s is that Herbert Hoover and Franklin Roosevelt both agreed that the way to solve the collapse of the Wall Street credit bubble was for the U.S. to join the rest of the civilized world and undertake its own default on its domestic currency.

When economists now say that countries can inflate their way out of their debts, they are referring to the magic of the defaults of nearly all the international loans issued after the Great War. No one got paid back because the valuations accepted for the initial loans (mostly from the U.S.) were as fictional as the current Venezuelan exchange rate; and the Americans decided that having the U.S. Treasury own all its citizens' money was the ideal way to revive American credit exchanges.

Academically trained economists insist on treating political economy as a science, yet they believe, without evidence, that international trade was "free" after World War I. They see a world without quotas, currency controls and imperial preferences after 1918 as a kind of mystic vision that is true regardless of any actual facts. They believe this version of history with even more fervor than LDS believe in the story of Joseph Smith and the golden plates. The Mormons, God Bless Them, consider their gospel a matter of faith; Professor Barro and his colleagues must pretend that it is all somehow Reed Smoot's fault.

Mar

13

 "Reflections on the revolution in Middlebury"

by Charles Murray

A few months ago, AEI's student group at Middlebury College invited me to speak on the themes in Coming Apart and how they relate to the recent presidential election. Professor Allison Stanger of the Political Science Department agreed to serve as moderator of the Q&A and to ask the first three questions herself.

About a week before the event, plans for protests began to emerge, encouraged by several faculty members. Their logic was that since I am a racist, a white supremacist, a white nationalist, a pseudoscientist whose work has been discredited, a sexist, a eugenicist, and (this is a new one) anti-gay, I did not deserve a platform for my hate speech, and hence it was appropriate to keep me from speaking.

Middlebury College. Last Wednesday, the day before the lecture was to occur, I got an email from Bill Burger, Vice President for Communications at Middlebury. The size and potential ferocity of the planned protests had escalated. We agreed to meet at the Middlebury Inn an hour before the lecture so that we could go over a contingency plan: In the event that the protesters in the lecture hall did not cease and desist after a reasonable period, Professor Stanger and I would repair to a room near the lecture hall where a video studio had been set up that would enable us to live-stream the lecture and take questions via Twitter.

Here's how it played out.

Mar

10

 After 20 years, my trusty Ford Explorer bit the dust. The Mrs had been on my case for years to get rid of this beater, but I loved it. It was very reliable, and great for hauling stuff as well as scaring patients at the office.

At first I was going to replace it with a used SUV because of the 20% loss you incur driving a new car off the lot. But searching the web I actually found better deals for new SUVs than low mile used.

I wound up with a new 2017 Chevy Tahoe LS. It is about 15% bigger than my departed Explorer, and much more. It is a computer wrapped in a vehicle. Even though it is the low-option model, the Tahoe is loaded with technology. Better safety features include backup video with virtual car position, too close sensor, and braking assist when a too-slow vehicle is detected ahead. The stereo fidelity is excellent, and there are many communication features. Fuel economy is not much worse than the Explorer (the V8 goes V4 with lower load demand, and the big lug gets 23 mpg highway).

The Tahoe has OnStar, with satellite internet and a WiFi hub. This links to your smart phone to allow voice-recognition hands-free calling, navigation, and emergency services. In lieu of OnStar (free period ends in 3mo), I use the "Android Auto" app. The phone links to the console via USB or Bluetooth, and Google maps (with traffic, directions, etc) are projected to the video console. (With both systems you converse with a female robot. Mrs OnStar sounds older and kinder than Ms Google, who seems a bit shrill and abrupt. Right away I could tell spot the liberal)

In 1997 I paid $32,664 including tax and license fees for the Explorer. I plugged this into BLS CPI calculator, and with inflation this becomes $49,420 in 2017.

Remarkably the bigger/better/more advanced Tahoe was $48,088 out the door.

Besides being a beater, the other advantage of the Explorer was that the government (CIA, NSA, KGB, Google, etc) never knew where I was. Initially I took comfort knowing I never do anything that should upset the government, until recalling this was the same though Jews in Zimbabwe had before Mugabe.

Mar

4

I have what is probably a naive question related to volatility products. Is there any direct effect on equities markets caused by so many people piling into volatility? I'm not talking about the fact it reflects an underlying fear.

I was wondering if the buying of volatility ETFs (and behind the scenes transactions to maintain them) would either somehow dampen actual volatility or help compress the spring further and accentuate any moves when the dam finally does break.

Just something I've been wondering about.

Kim Zussman writes:

A related question is whether correlation of implied volatility with underlying security price varies, and if so what this means. I noticed VIX was not making short-term lows when SP500 made all time highs on Wednesday.

A related related question is whether there is predictive value in the variation of correlation between implied and realized volatility.

Russ Sears writes:

Clearly I am not smart money, but I am naive. And perhaps the following statements will prove how naive I am and that I mistake the complexity of the question, but trading in general is honorable because it brings price discovery to all. Hence in general it decreases volatility. However, Hull from his book on options states that volume of trade increases volatility. I would suggest that trading makes volatility clear. For an counter argument of extreme- real estate is not liquid and therefore on accountant books it nice and stable, but that illiquidity has a big volatile price if one is forced to liquidate. 

Feb

23

"For the first time ever, astronomers have discovered seven Earth-size planets orbiting a nearby star — and these new worlds could hold life."

This cluster of planets is less than 40 light-years away in the constellation Aquarius, according to NASA and the Belgian-led research team who announced the discovery Wednesday.

The planets circle tightly around a dim dwarf star called Trappist-1, barely the size of Jupiter. Three are in the so-called habitable zone, where liquid water and, possibly life, might exist. The others are right on the doorstep.

Scientists said they need to study the atmospheres before determining whether these rocky, terrestrial planets could support some sort of life. But it already shows just how many Earth-size planets could be out there — especially in a star's sweet spot, ripe for extraterrestrial life.

The takeaway from all this is, "we've made a crucial step toward finding if there is life out there," said the University of Cambridge's Amaury Triaud, one of the researchers. The potential for more Earth-size planets in our Milky Way galaxy is mind-boggling.

"There are 200 billion stars in our galaxy," said co-author Emmanuel Jehin of the University of Liege. So do an account. You multiply this by 10, and you have the number of Earth-size planets in the galaxy — which is a lot."

Jan

17

Since Jan 1st 2000 to Dec 31st 2015

Total $SPY returns for all days 92.71 points

returns on 1dom + fed day (most important days) are 89.02 pts (about 97% returns captured by doing hard work on 322/4025 days (8%))

The year gone by 2016 is a different story.

Total $SPY returns are 23.95 pts and on most important days the returns are a mere 0.71 pts (20 of them out of 252 days)

So where did the returns shift to?

answer -> 11-15th trading day

2016 $SPY returns 23.95 pts

Returns on 11,12,13,14,15th trading days combined are 24.14 pts (60/252 = ~24 % days)

Conclusion, work load increased in 2016 from 8% to 24%, a 200 % rise in work hours. A 2017 wish is reduce in the lower working hours!

Kim Zussman writes: 

I also checked whether the past 16 years were trendy for stocks.

If today's close was above 100D moving average, return from today's close to tomorrow's close. ">100DMA" (mean)

If today's close was below 100D moving average, return from today's close to tomorrow's close. "<100DMA" (mean):

Two-sample T for >100DMA vs <100DMA

                   N     Mean    StDev  SE Mean
>100DMA  2766  0.00025  0.00824  0.00016 T=-0.06
<100DMA  1394   0.0003   0.0179  0.00048

>>almost the same.  However, as expected daily returns were less volatile when the market was going up:
 
Test for Equal Variances: >100DMA, <100DMA

95% Bonferroni confidence intervals for standard deviations

                   N       Lower      StDev      Upper
>100DMA  2766  0.0079943  0.0082355  0.0084912
<100DMA  1394  0.0171828  0.0179134  0.0187065

F-Test (normal distribution)
Test statistic = 0.21, p-value = 0.000

Levene's Test (any continuous distribution)
Test statistic = 540.84, p-value = 0.000

Dec

11

What are the factors that make so many useful idiots and alluring shibboleths so prevalent and harmful in our field. The desire for publicity and renown must be one of them. So many personages who don't or can't trade achieve prominence and self esteem by becoming pundits or propagandits on the media. Many of them are second handers who can't make a profit on their own, but can only prospect by forming a fan club that carries their positions along once they front run the positions on both the long and the short side. Others achieve prominence by coming up with a very unpopular call that will turn out to be right once in 10 occasions and gives them long lasting fame. Others have recently been fired from their jobs, and join the media as a way of achieving psychic or economic remuneration.

The question arises as to whether a useful idiot has always been a useful idiot or becomes one after he rises to prominence. The same with shibboleths. Have they always been wrongful and harmful or do they become such only after they are bruited to the public. In considering this subject it might be helpful to start with an enumeration of current useful idiots and shibboleths. Certainly those who are consistently bearish on stocks and risk assets like the man of multiple court cases and yoga, or the recently passed Barrons' columnist, or the world stater who always calls for more agrarianism and is always bearish on enterprise must be near the top of the list. But what are the general factors that determine our following a useful idiot or harmful shibboleth? How can this phenomenon be usefully unraveled?

Kim Zussman writes: 

Why would successful traders/ money managers dissipate their advantage by publicizing their methods or thinking? Most or all would want to keep their insights secret. If trying to market to investors, returns sell better than talk.

Depleting the persistently successful from the pool of talkers means more talk from the less skilled, and few meaningful revelations.

anonymous responds: 

There are some strategies that benefit immensely from increasing participation.

Russ Sears writes: 

Of course idiots are useful to those that know they are idiots and take the other side. It's the old dot com hucksters and short sellers secret that promoting a position you already have, once you're holding full position, you want someone to unload it, you need someone left holding the bag. How else could the markets cause maximum losses for the most people.

Might I add that it is easy to find fault and sound profound, but it is difficult to pin-point why someone or some company will succeed and even more difficult to find an audience for ones wisdom. Further, most can't comprehend that volatility is not linear but clearly see the risk tomorrow. Few comprehend the risk premium outweighs the volatility over time, and few are willing to wait, but many want to do something. The law of showbiz meets the internet age: If there is an audience, someone will play for it.

Ed Stewart writes: 

The useful idiots or shibboleths that rise to celebrity circulate and gain steam because they serve an unmentioned interest–they have an unseen fan club. Some times it is increasing the brokerage commission, sometimes it is simply giving the public the "red meat" it needs to get clicks/eyeballs for add revenue, sometimes it is literally as servant to "the idea". At times it seems all three at once. Hat trick. The only known defense is the cane.. to hobble down and buy at puke points, but also to raise over head and smash the media channel that pipes the idiots to restore a more sound state of mind.  I did it 7 years ago. So far, so good.  

Aug

5

The main benefit of brushing your teeth is partial removal and disruption of developing bacterial plaque between the teeth. As plaque grows the layer becomes organized*, with deeper layers developing anaerobic bugs which are more pathogenic.

Long ago researcher Harald Loe had his students refrain from oral hygiene and observed the development of gingivitis, which went away when hygiene resumed.

*like America

Jul

6

"The emotional arcs of stories are dominated by six basic shapes"

Kurt Vonnegut on the Shapes of Stories

Victor Niederhoffer writes:

And what would a comparable study of market stories show, and can we learn anything from literature.

Bo Keely comments: 

If you can ascertain the personality of the market then you will know its emotions and therefore its shapes. Start with the personality of the market if that isn't too far a stretch of anthropomorphism. Likewise every story has a shape. I prefer the inverted pyramid from newspaper reporting, but my mentor Art shay taught the arc of the home run to shape a story. 

May

28

A. 20 day low / no 10 day high
B. Valuation model says 3-6%PA expected return so always buy dips
C. Mr. Market said "risk on"
D. Grandma says tight is right
E. #Whitestocksmatter to Cattle traders
F.  Pocahontas

Mar

13

Time to check on wait times between bear markets:

SP500 weekly closes 1955-present to look for instances when this week's close was more than 20% down from the highest close of the prior 250 weeks (~5 years). Then I checked how many weeks had elapsed since the prior first -20% week.

As of last week's close it has been 222 weeks since the last -20% week, which occurred in Dec 2011.

35 bear markets were identified this way, and the great bull market of the 90s ranks longest between bear markets. Our current wait of 222 ranks 4/35, which could help explain the complaints about helicopter Ben and his mom.

Date          weeks btw bears
03/05/01 644
10/12/87    282
06/04/62    234
02/22/82    211
09/26/66    210
02/28/05    191
12/03/73    191
09/12/77    182
01/19/70    173
06/30/08    159
07/25/11    149
03/14/88    22
11/07/11     15
06/13/05     15
07/11/88     14
06/04/01     13
10/31/88     13
01/03/78     13
05/17/82     12
04/06/70     11
08/25/08     8
03/18/74      8
09/17/62      7
07/09/62      5
12/05/11      4
12/31/73      4
09/15/08      3
06/25/01      3
08/01/88      3
04/04/88      3
02/06/78      3
10/03/77      3
01/21/74      3
07/30/62      3
01/16/78      2
 

Mar

7

 Showing at the Ahmanson theater in Los Angeles is 90 minutes of mind-bending leftist revision channeled through flagrant disrespect for religion.

God, it turns out, is a sarcastic narcissist who is mildly troubled by his own capriciousness and lack of compassion. These character flaws he launders by noting that we are made in his image…and given our similar flaws who are we to judge. (Bill? Hill?)

We also learn the reason for a large number of same-sex couples in audience. The bible is not to be taken literally and all openings are fair game. The first humans were actually Adam and Steve - with a lisping pet snake - and Steve was a dumb hunk with a good bottom. We also suspect that many of these couples standing at ovation had religious childhoods.

God also tells us he picks on America because we deserve it, that he hates Sarah Palin, expresses shock that Donald Trump could rule the world, disses the book of Mormon, and emphasizes that the bible does not entitle us to own guns. Evidently only governments, criminals, and gods must wield power.

Even to the non-religious it was offensive to witness the disrespect for people who are. I was proud but lonely as the only Angelino sitting quietly at the end. One might expect a play like this in a small theater but now the movement is front and center.

This act of god was a timely tour of the current entertainment/government axis, and put to rest any doubts that one should support the traditions of our shameful past or eccentric conservative candidates.

Feb

17

 The search for happiness has a Heisenbergian aspect: the more certain you are about what you want, the less happy you will be attaining it. It seems to happen unexpectedly, and often only in hindsight.

There is also an "aspergian" aspect: like Viktor Frankl's "The doors of happiness open outward". I take this to mean searching and engaging with the world (rather than perpetual introspection), but it could also be the joy in helping others (as risky as it may be).

In markets it is very hard to find happiness, and it is probably foolish to look there. A good source of unhappiness, however, is limit orders. You place them with great hope and the market runs away and leaves you behind. Or you get filled and then it takes you way down. Or you're overjoyed to finally get out with a modest profit, only to find you sold too soon and missed the big one*.

*Holding losers long and selling winners short: the hardest thing not to do.

Sushil Kedia adds:

Happiness is life. It has a unique property. The conditional probability of happiness is a certainty if you have a happy nature else it is zero for every other variable.

Anything contingent on an outcome (event) or a property (belongings) is not happiness. Happiness is unconditional. Happiness is an absolute.

Happiness is neither a milestone nor the journey of life. Happiness is the fuel of life. By this assumption or understanding one can see pain is not the opposite of happiness. Pain is only a signal asking us to change something.

On a lighter note, obviously no one normally seeks happiness from a mistress. In Markets, you come for taking what you have come to take and not search happiness, since happiness is within. 

Ken Drees writes: 

"You never see the stock called Happiness quoted on the exchange."

"It is better to desire the things we have than have the things we desire".

-Henry Van Dyke

Feb

1

SPY (2000-present) was checked for instances when the last day of the month was up more than 1%, while the 20 day return to the end of the month was down (including the up last day). Then, what was the return for the next day (first day of new month), and the next 5 days (first 5 days of the new month).

Here are the results:

One-Sample T: last DOM+, prior 20 day ret-, 1OM, 5OM

Test of mu = 0 vs not = 0

Variable              N       Mean     StDev   SE Mean             95% CI
last DOM+         14   0.016441  0.008813  0.002355  ( 0.011353,  0.021530)
prior 20 day ret   14  -0.043020  0.032422  0.008665  (-0.061740, -0.024300)
1OM                  14  -0.007521  0.025683  0.006864  (-0.022350,  0.007308)
5OM                  14  -0.019825  0.041358  0.011053  (-0.043704,  0.004055)

Variable              T      P
last DOM+          6.98  0.000
prior 20 day ret   -4.96  0.000
1OM                  -1.10  0.293
5OM                   -1.79  0.096

There were 14 down months with big up last days. The mean last day of month return was +1.6%, and the mean down month return was -4.3%. The next day and 5 day periods were negative, with the 5 day about -2% (both NS)

Feb

1

 "Still Mine" is a decent flick that could never make it near modern Oscars (not even best janitor):

An old but stubbornly competent white guy dogged by epicrats* while trying to help his infirm white wife who was the love of his life.

No people of color. No disease. No apologies. Therefore to see it you will need to search and find it.

*epidemic bureaucrats

Jan

25

The correlation between daily changes in SPY and USO were checked every non-overlapping 10 day period, from present back to 2006. The attached chart shows the result.


Current correlation between stocks and oil is high but consistent with the entire period, though recently somewhat higher than the past two years.

Russ Sears writes:

Here is a scatter of the Absolute value of 21 day correlation of USO/SPY at the start of each calendar month. To the next 21 trading days log normal returns. I used the Absolute value because it appeared high R^2 increase volatility even if the correlation positive or negative. But R^ 2 curves this relationship. Not predictive but clearly implies increased volatility with higher R^2

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I would suggest that there is however much more to this suggested change in regimes on a daily or day trader holding period basis and those interested should study it further .

Jan

18

 Around the time Bernie Madoff became famous I quit my subscription to the Wall St. Journal. The paper had lost its allure as an erudite alternative to leftist treyf in California, for personal reasons.

As a young man I subscribed to the LA Times. Dutifully every morning skimming the headlines and articles over coffee before work because one should stay abreast of current events. However over time one became too sad and too angry at the start of every day, and upon analysis the Times was dumped. Overselling tragedy and engineered remediation, I concluded, and my bid faded away.

The new Wall St Journal subscription paid for itself almost immediately. A local politician / financial planner had been pitching his version of 401K for my business, along with his generous commissions and yearly management fees. Luckily I spotted a Schwab ad for a SARSEP IRA plan - which (then) could provide 401-like benefits for zero fees or commissions. The plan was adopted, later grandfathered, and to this day continues (cost free).

So I owed her big time. And truly appreciated the more balanced views and high school level writing. But as trading evolved I was found to be too weak to view hourly or even daily market updates. It was better to study the moves and avoid the noise because, even emanating from a quasi-non-hystrionic viewpoint, all noise was ultimately detrimental to discipline. (Applies to these lists as well) So the Journal was quit.

Recently Ben and Jerry Leftkowitz of ice cream fame thought to fund a new flavor in honor of socialist fart Bernie Sanders:

"I have fantasized about a Bernie Sanders ice cream, and it would be called 'Bernie's Yearning,'" Cohen said in a recent CNN interview. "It would be a giant chocolate chip on top of the ice cream that covers the entire top. . . . The rest of it is all mint. The giant chip on the top represents all the wealth that has gone to the top 1 percent of the population over the past 10 years," he added, nodding to the Vermont senator's decades-long attack on inequality in America."

For one thing it should be a marshmallow on a mound of chocolate chip. For another………a call to action. Like the clarions of an archaic generation - if not now, when? It was time to re-enlist.

Bernie made me re-subscribe to the Wall St Journal….print edition to be delivered again next week.

Jan

12

The first five days in January were down more than 5% for for SPY. From 1994-2015, here are the returns for the 1st 5d, and the subsequent 5d, 10d, and 30d periods (starting from end of 5th trading day for each year, T test vs zero). First set is subsequent returns for all years–both up and down first %d:

One-Sample T: 1st 5d, nxt 5d, nxt 10d, nxt 30d

Test of mu = 0 vs not = 0

Variable   N       Mean     StDev   SE Mean               95% CI                    T
1st 5d     22   0.007451  0.020490  0.004368  (-0.001634, 0.016536)   1.71
nxt 5d     22  -0.001853  0.022606  0.004820  (-0.011876, 0.008170)  -0.38
nxt 10d   22  -0.005438  0.032450  0.006918  (-0.019826, 0.008949)  -0.79
nxt 30d   22  -0.001758  0.060676  0.012936  (-0.028660, 0.025145)  -0.14

>>slightly down, NS

Next are the subsequent returns when the first 5d of the year were up:

 
One-Sample T: 1st 5d+, nxt 5d+, nxt 10d+, nxt 30d+

Test of mu = 0 vs not = 0

Variable   N       Mean     StDev   SE Mean                95% CI                    T
1st 5d+    15   0.018284  0.011132  0.002874  ( 0.012119, 0.024449)   6.36
nxt 5d+    15  -0.005035  0.026227  0.006772  (-0.019560, 0.009489)  -0.74
nxt 10d+  15  -0.006290  0.034643  0.008945  (-0.025475, 0.012895)  -0.70
nxt 30d+  15  -0.001706  0.065904  0.017016  (-0.038202, 0.034791)  -0.10

>>also down, NS

Subsequent returns when 1st 5d were down:

 
One-Sample T: 1st 5d-, nxt 5d-, nxt 10d-, nxt 30d-

Test of mu = 0 vs not = 0

Variable  N       Mean     StDev   SE Mean               95% CI                    T
1st 5d-    7  -0.015763  0.016067  0.006073  (-0.030623, -0.000904)  -2.60
nxt 5d-    7   0.004965  0.010197  0.003854  (-0.004465,  0.014396)   1.29
nxt 10d-  7  -0.003613  0.029654  0.011208  (-0.031038,  0.023812)  -0.32
nxt 30d-  7  -0.001870  0.052451  0.019825  (-0.050379,  0.046640)  -0.09

>>Mixed, with next 5d averaging +0.5% (albeit NS) and 10 and 30d down

Sep

22

 "Nobel winner Fama: Active management 'never' good":

Eugene Fama, the University of Chicago investing researcher who won the Nobel Prize in economics last year, once again warned investors against the lure of active management.

"The question is when is active management good? The answer is never," Fama said to laughs Thursday at the Morningstar ETF Conference in Chicago .

"If active managers win, it has to be at the expense of other active managers. And when you add them all up, the returns of active managers have to be literally zero, before costs. Then after costs, it's a big negative sign," Fama added.

He's known as the father of the efficient-markets theory, which says that asset prices reflect all available information; investment managers can never truly get an edge.

Fama dismissed the idea that it was possible to pick the best managers.

"The good ones might be good or they might be lucky. The bad ones might be bad or they might be unlucky. We can't really tell the difference," he said. "I don't know if it would ever make sense, even if the fees were zero, I don't think you'd be better off because you'd be investing in an undiversified way."

Read More Economy weak because of 'stupid' policies: JPMorgan pro

Asked about Warren Buffett's long-term record of picking good companies, Fama said the Berkshire Hathaway (BRK-A) chief actually agreed with his index-based thesis. Buffett said recently he actually has directed much of his fortune to be placed in passive index funds after he dies.

"He's, like, my hero," Fama said. "What he says is, 'I can pick a company every couple years, but if you have to form a portfolio, you're better off going passive.'"

"All the behavioral people say the same thing," Fama added. "In the end, they realize that the game of doing something active is fraught with problems."

Fama was also asked about hedging against big crashes, like what happened to the markets in 2008. Attempting to protect against them, he said, was the unwinnable game of market-timing.

"If you sold when the market crashed, you made a big mistake, and if you saw it coming you're a genius," Fama said.

Gary Rogan writes:

Everything that The Sage deems right and proper will happen after he dies, the charities, index investing, who knows what else. I guess it's no longer politically correct to say "Après nous, le déluge".

The statement "If active managers win, it has to be at the expense of other active managers. And when you add them all up, the returns of active managers have to be literally zero, before costs." is probably mostly correct but given that some active managers are also activist managers it's not completely correct. Also imagine that every single person in the world was an index investor, that would be an absurd situation where nothing in particular but the inflow of new money would determine the price of all stocks. And still, if the average of all managers, aren't some managers better than indexing? At the very least Fama could say that no person is capable of either being or choosing a better-than-average active manager, but he isn't actually saying this.

Bill Rafter writes: 

That's a poor logical argument by the good professor. While Dr. Fama may be right that before costs the average return of all active managers must be zero, clearly it is possible (if not likely) that there will be serial winners and losers. Speaking only of the latter, several years ago we were asked to propose solutions to a shop that had managed to underperform the S&P for every one of the prior 15 years. They did not like our proposals and also rejected proposals from other research providers, continuing with their own methods. They are now 0-18 versus the S&P. Since it is possible for some to get this investment "thing" totally wrong, it is perfectly logical to assume that some others have better than average performance with consistency.

anonymous writes: 

In the case of Buffett you might ask: cui bono? His non Berkshire index assets could fill an Omaha thimble. Is it not the same press release as Betfair put out about their fixed odds versus exchange book on the Scots referendum?

Sep

21

 All government, in its essence, is a conspiracy against the superior man: its one permanent object is to oppress him and cripple him. If it be aristocratic in organization, then it seeks to protect the man who is superior only in law against the man who is superior in fact; if it be democratic, then it seeks to protect the man who is inferior in every way against both. One of its primary functions is to regiment men by force, to make them as much alike as possible and as dependent upon one another as possible, to search out and combat originality among them. All it can see in an original idea is potential change, and hence an invasion of its prerogatives. The most dangerous man to any government is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos. Almost inevitably he comes to the conclusion that the government he lives under is dishonest, insane and intolerable, and so, if he is romantic, he tries to change it. And even if he is not romantic personally he is very apt to spread discontent among those who are.

-H.L Mencken, The Smart Set (December 1919)

Stefan Jovanovich comments: 

That voters once turned out in much greater numbers than they do now is true. But those better days were times when the franchise was limited so voting was like balloting in takeover battles for corporate control; the voters for both sides had direct stakes in the outcome. That direct stake on the outcome continued after the franchise was expanded; with that Jacksonian revolution patronage also expanded. The stakes for voters remained very real. Those same rules still apply but now they are limited to the significant campaign contributors; for their interests who gets elected still matters. But for the millions or hundreds of thousands of voters who show up for elections there is no individual interest that is furthered by their ballot. For them voting is a completely ritual activity. Many people know this and choose not to bother. The fact that so many continue to vote is what is truly noteworthy. One can take the turnout either as proof of people's faith in democracy or as confirmation that politics has nothing to do with logic. Mencken would say "both".

Jun

10

Daily all time highs in SP 500 (natural log) vs date.

 For example latest record close for S&P was 1951.27, ln(1951.27)= 7.576

 At times a new ATH follows closely after another ATH, but at other times there is a considerable gap or "bullopause".

 The last Major Bullopause lasted 1375 trading days, from October 10, 2007 when the S&P failed to exceed its prior close of 1565.15 until March 28, 2013 when it set a new record close at 1569.19. From then until now the pauses have been quite short, none exceeding 34 trading days and usually much shorter.

May

1

Speaking of trends how does the May-Oct (April 30-Oct 31) period perform as a function of the YTD performance as of April 30?

SP500 (1951-2013) Dec 31-Apr30 returns were sorted:

"-" is down more than 2%. 
"+-" was flattish, return between -2% and +2% (2014*). 
"+" was up more than 2%.

Sorted this way, the returns for the 6 months following YTD-Apr 30 appear to continue the trend:

One-Sample T: May-Oct-, May-Oct+-, May-Oct+

Test of mu = 0 vs not = 0

Variable      N     Mean     StDev   SE Mean       95% CI             T
May-Oct-   17  -0.0408  0.12458 0.0302  (-0.1048, 0.0232)  -1.35
May-Oct+-  11   0.0059  0.0897  0.0270  (-0.0543, 0.0662)   0.22
May-Oct+   35   0.0389  0.0680  0.0115  ( 0.0155, 0.0623)   3.39

* YTD as of 4/30/14 is 1.93%

Apr

5

 Ukraine buys almost all its energy (natural gas) from Russia. Revenues from natural gas sales are a primary source of income for Russia.

Because of the recent disagreement between Ukraine and Russia, Russia is raising the price of natural gas it sells to Ukraine.

Ukraine is almost broke and can't afford the increase in the natural gas price because it would be forced into bankruptcy.

Obama(the USA) just announced the United States is giving Ukraine $1 billion to assist in paying for the higher priced natural gas it buys from Russia.

So, the United States is actually giving Russia $1 billion because the money is just passing through Ukraine.

The first question: Has Putin figured out a way to raise the price of his natural gas sales and make the U.S. pay for the increase?

Next question: Was he really in the KGB or was he a commodities trader?

If this analysis is accurate, Putin just got Obama(the USA) to pay him $1 billion by holding a press conference and trucking some troops across town from the Russian Navy base in Ukraine.

Who is the smartest guy in the room now?

Anatoly Veltman writes: 

You are absolutely correct, Kim. I thought Obama was actually scoring a PR point on this one, not Putin.

Kinda like a chess gambit, where Obama sacrificed a bishop (1bn) to buy time and check-mate (16bn) Putin.

Mar

30

 2014 Payscale College ROI Report

Rocky Humbert writes: 

One cannot help but note the irony of Dr. Z posting this "data". I dare say, based on his seemingly unremitted skepticism towards the markets, he would not invest the tuition in equities, but would instead hold cash ensuring with certainty a negative after-tax, real return (comparable to the eponymous Goshen College). If one lacks confidence in stocks 20 years hence (despite history), why would one believe that these numbers have any predictive value over the same period? More substantially, the study is based on a static view of the world. Geologists and petroleum engineers are currently in short supply. But the market will surely respond to that with a glut in five to ten years. Picking a college based on this data is like buying Blackberry when it was "da bomb." Similarly, it seems that the study gives no account to GPA, major, or post graduate study. In the best case, these numbers will be ignored. In the worst case, this sort of thing will turn into the next-gen US News rankings. Either way, they do not reflect the many intangibles associated with higher education nor with any real forecast of individual results. Lastly and most importantly, I am extremely dubious about the accuracy of the numbers. I have never been asked by my Alma Mater about my income. And if I were, I would err on the low side to reduce my attraction to the every vigilant alumni fundraisers.

Kim Zussman writes: 

I cannot vouch for the calculator's accuracy, but if you look further it allows screening by major, as well as adjusting for financial aid. It was shared in part because it seems ironic to rank an educations ROI; not just because it resembles predicting markets long-term, but especially the implication that education is primarily to earn money.

It remains that universal skepticism is the hallmark of good science anywhere outside New Haven, CT.

Feb

19

I believe there are 4 cases, conventionally called:

h(t) > h(t-1) and l(t) > l(t-1) an uptrend day

h(t) < h(t-1) and l(t) > l(t-1) an inside day

h(t) > h(t-1) and l(t) < l(t-1) an outside day

h(t) < h(t-1) and l(t) < l(t-1) a downtrend day

Victor Niederhoffer writes: 

Excuse me? 

Alex Castaldo replies: 

OK, OK, let's call then upshift day and downshift day then.

;-)

Kim Zussman adds: 

What about outie and innie?

Using SPY (2000-present), checked for outside days (today's high > yesterday's high, today's low < yesterday's low). Then checked the return for the next day.

Days after outies were also checked if the market was up-trending (20DMA > 100DMA), and, in addition to up-trending, if the intra-day return was up (C>O). Here are the c-c returns after (vs zero), for all days (c-c ret), all days after outside days outie+1), days after outside days and up-trending (and 20>100), days after outside days and up-trending, and the outside day was up intra-day (and C>O):

One-Sample T: c-c ret, outie+1, and 20>100, and C>O

Test of mu = 0 vs not = 0

Variable        N       Mean     StDev   SE Mean       95% CI             T
c-c ret         3550   0.00022  0.0131  0.0002  (-0.0002, 0.0006)   1.01
outie+1         353   0.00049  0.0118  0.0006  (-0.0007, 0.0017)   0.77
and 20>100  234   0.00061  0.0090  0.0005  (-0.0005, 0.0017)   1.03
and C>O       89    -0.00047  0.0090  0.0009  (-0.0023, 0.0014)  -0.49

Zeroish, with none significant, and days after outside days and up-trending winning the race at 0.06% per day avg.

Feb

6

 In the short term trading world is it better to diversify and trade many things or specialize and trade just a few. I am in the later camp, as it takes all my usable mind capacity to manage just one or two positions concurrently.

Others prefer to trade many instruments saying it increases opportunity and reduces risk by diversifying. However in futures trading, and short-term in particular, there is no Markowitz "free lunch" that comes from diversification which applies only to stocks. By trading more instruments it does perhaps give you something to do when other markets are slow. This however could also be viewed as a negative, and maybe it is better to not be in the markets at times. It makes sense to me to trade based on opportunity. Yet, in practical trading-life these opportunities are so difficult to find, it takes being a specialist to uncover them.

In angling, I am a bit of a hybrid. I specialize in flyfishing, but I will go after anything with gills and scales and recently added the beloved carp to my list. In economics, comparative value tell us to specialize and has been the source behind much advancement. Ben Green traded just horses and the occasional mule. Bacon just bet on the ponies. Specializing served them both well.

Anatoly Veltman writes: 

The main advantage of algo trading is the ability of your portfolio to simultaneously participate in all futures you've pre-programmed. Certainly that's an impossible task for a manual trader

Kim Zussman comments: 

Duncan isn't trading index futures lunching with Markowitz? (Albeit less so than before the period of widespread indexification).

Feb

3

Using SPY (93-2013), here is comparison of return for 1st day of month (close last day of prior month to close first day of new month) vs. all days in the period:

Two-sample T for 1DOM ret vs all dat ret

                      N    Mean    StDev  SE Mean
1DOM ret      250  0.0029  0.0136  0.00086  T=2.8
all dat ret     5270  0.0004  0.0122  0.00017

For 1DOMs following a down month as we just had, checked 1DOM returns when the prior 20 trading day return was down more than 2%.  Here again compared to return of all days in the period:

Two-sample T for 1DOM <-2% vs all dat ret

                           N    Mean   StDev  SE Mean
1DOM <-2%      60   0.0012  0.0200   0.0026  T=0.32
all dat ret        5270  0.0004  0.0122  0.00017

>>not as good

As to whether 1DOM has become DUM, attached is a chart of mean 1DOM return by year.  Recent years 2008 and 2011 have undermined the pattern (the last year on the chart is 2014, which represents one data point = 1st day of January)

Gary Rogan writes: 

A steep multi-year rise making equity values fairly expensive, buying on the dips always having worked in recent past, and then a reduction in liquidity. Three was no other specific catalyst for the equity markets to unravel, but it was an end of an era: the enthusiastic dotcom era, and this is the beginning of the end of the era of "the market goes up because the Fed will always save the day, so any bad news is good news".

Steve Ellison writes: 

 Three years ago, I posted on a variation of this idea that was published by Norman Fosback in 1976 and added stats from 2005 to 2010: http://www.dailyspeculations.com/wordpress/?p=5867 . When an idea has been known this long, it would be surprising if it worked at all. There was even an ETF a few years back that was only going to be invested on the 1st of the month. I don't know if it has survived.

I found that, over a very long period of time, this idea could still lead to good returns, but there were periods lasting a year or more when it did not work. As Steve Irwin found, the crocodiles hate you and might be waiting for you at the same spot you jumped in last time.

Jan

26

SPY lost 2.5% last week. It has been 23 weeks since it dropped more than 2%. From 1993-present, checked for weeks down more than 2%, and the wait time (in weeks) between such drops. Then checked return of the following weeks.

First here are mean return weeks after 2+% drops regardless of wait times:

One-Sample T: nxt wk

Test of mu = 0 vs not = 0

Variable    N      Mean     StDev   SE Mean          95% CI            T

nxt wk    151  0.0020   0.0400  0.0032  (-0.0044, 0.0084)          0.62

Mean up 0.2% with SD of 4%

Here are mean returns of weeks after 2+% drops, for waits between such
drops longer than 20 weeks:

One-Sample T: nxt>20

Test of mu = 0 vs not = 0

Variable   N       Mean     StDev   SE Mean          95% CI             T
nxt>20    12  -0.0021  0.0192  0.0055  (-0.0143, 0.0101)       -0.38

>>Down -0.2% with about half the volatility: SD = 1.9%

(volatility clusters).

This is consistent with the sign of slope coefficient for regression of
next week's return vs wait time (though NS):

Regression Analysis: nxt versus wait_1

The regression equation is
nxt = 0.00240 - 0.000071 wait_1

Predictor        Coef    SE Coef      T      P
Constant     0.002405   0.004269   0.56  0.574
wait_1     -0.0000706  0.0003814  -0.19  0.853

S = 0.0403364   R-Sq = 0.0%   R-Sq(adj) = 0.0%

>> rather than waste time on analysis it is easier to just wait for Rocky's calls.

Jan

24

SPY 20 day range (defined as 20 day intra high - 20 day intra low ) / (Avg(20 day intra high, 20 day intra low) printing a value of 1.97% = (184.94-181.34)*100/(184.94+181.34)/2

Not many instances since 1993.

Paolo Pezzutti asked:

Kora, what are the implications from a practical perspective?

Kora Reddy replied:

12/13 times SPY (for interleaving trade samples) closed higher 20 days later, but the sample size is too low to make a bullish bet.

3/4 times for the non-interleaving samples, SPY closed higher …

12/13 times SPY closed higher than the current close in the next five days at some point of time ( i.e first profitable exit, otherwise exit at fifth day at close.)

Kim Zussman expands:

Dividing SPY into non-overlapping 20 day periods (counting back from 1/22/14 to 1993), I checked for Kora's low range periods.

Range = 20D HI / 20D Low
 
The most recent range appears to be the lowest in the series, 1.0198 (1.98%)
 
There were 11 other instances of 20D range <3%; and the next 20D appears to be very bullish:
 
One-Sample T: nxt 20d ret
 
Test of mu = 0 vs not = 0
 
Variable N Mean StDev SE Mean 95% CI T nxt 20d ret 11 0.0146 0.0161 0.0048 (0.0038, 0.0255) 3.02
 
Here are the instances:
 
Date H/L nxt 20d ret
04/07/06 1.023 0.022
12/16/93 1.023 0.023
04/08/13 1.024 0.036
08/18/05 1.024 0.015
07/27/93 1.024 0.028
01/14/94 1.026 -0.005
06/22/05 1.026 0.009
12/20/13 1.026 0.015
01/25/07 1.027 0.021
10/12/95 1.029 0.019
04/01/93 1.029 -0.022
 
avg 1.025 0.015

Jan

13

At least in terms of small cap, the recent ratio of growth to value is subdued compared to 2000-02. Attached is ratio of small cap growth ETF to small cap value ETF (IWO/IWN).

Jan

7

The first 3 trading days of 2014 have been declines in the S&P 500. Going back to 1960, there have been only 6 other years starting with 3 consecutive down days. Here are the returns of the following 3-day intervals:

Date DDD   nxt3

1/3/2005     0.005

1/2/1991     -0.030

1/2/1985     0.009

1/3/1978     -0.028

1/3/1977     0.004

1/2/1968     0.012

avg -0.004

Jan

2

One notes the SP500 (SPY) has gained 5.6% for the two month period November-December, since the statistical study below was posted:

"The Jan-October return of the SP500 index for the period just ended was +23%. This 10 month return is 4th highest since 1971 (4th out of 42 years).


Over this period, for Jan-Oct returns over +10%, the following two month returns were up (2-month return of the next Nov+Dec), an average of 4.9% with 16/18 positive:

Date       Jan-Oct   nxt Nov-Dec

10/1/1975 0.299 0.013
10/2/1995 0.266 0.059
10/1/1997 0.235 0.061
10/2/1989 0.226 0.038
10/1/2003 0.194 0.058
10/1/1991 0.188 0.063
10/1/1980 0.181 0.065
10/3/1983 0.163 0.008
10/1/1986 0.155 -0.007
10/1/2009 0.147 0.076
10/1/1996 0.145 0.050
10/1/1976 0.141 0.044
10/1/1985 0.135 0.113
10/1/1998 0.132 0.119
10/3/1988 0.129 -0.004
10/1/2012 0.123 0.010
10/1/1999 0.109 0.078
10/2/2006 0.104 0.029

Dec

15

How can the US diet be so horrible when over the past 100 years US life expectancy has increased about 60 % ?

(Graph is average male/female life expectancy 1900-98 from a Berkeley source )

Hopefully the government will continue to protect us from capitalist farmers.

Longevity has also increased as a result of the absurd US medical system. This too is now finally being rectified.

Note the drop ca 1918 from the flu epidemic. How will vaccine manufacturers of the future can find ways around bureaucratic limits on profit in the liability minefield?

Dec

9

The attached chart plots weekly closes of DJIA (DIA ETF) per the corresponding long-bond price close for that week (TLT).

The irregular line follows the relationship over time, from 7/02-present.

As the line moves from lower left to upper right, stocks and bonds are both rising (higher slope means rate of increase stocks>bonds, and vice versa).

From 7/02-10/07, stocks rose faster than bonds but both increased.

From 10/07-3/09, stocks declined while bonds increased.

From 3/09-7/12, stocks and bonds increased - with greater variation than the 7/02-10/07 period.

From 7/12-present, bonds have generally declined while stocks continued to increase.

The recent move went from upper-right to lower-left (bonds and stocks both declined), a pattern that appears rarely in the chart.

Benian motion instead of Brownian?

Dec

1

For the last 30 years (1/84-present), at the end of each month Mike bought $1000 worth of SP500 index.

Akira (who lived in the US) also bought $1000 every month of his country's stock index — the Nikkei 225.

Both dollar-cost-averagers invested a total of $358,000.

Attached are the equity curves of Mike and Akira (not accounting for dividends, transaction costs, currency slippage, etc).

Mike's SP500 investment is now worth $1,200,054. Akira's Nikkei investment is now valued at $386,106.

[DCA = Dollar Cost Averaging].

Nov

25

Some preliminary thoughts on the running median 2, 3, 4, 1, 7, 8, 9, 3.

A moving median of the first 5 is 3, of the next 5 is 4, of the next 5 is 7, of the next 5 is 8– it's a good indicator of trend. First recommended to me 53 years ago by Fred Mosteller, Chairman of Harvard's first statistics dept.

It is more stable than the moving average as outliers are removed from sample. It is easy to compute fast with computers for small running numbers like 5 or 100 by repeated sorts. For higher numbers, you can form two groups, those below the median and those above. As a new number comes up you place it in one of the two groups if higher or lower and take away the oldest number. Then adjust to make the two groups equal again. It is not used as much as the moving average so it shouldn't be hurt by front running or spikes when cross over occur. It has a defined distribution when the underlying distribution has inordinate extreme values as frequently occurs with Cauchy or similar distributions with infinite variance.

It's probably a good thing to use when using nearest neighbors as predictors, i.e using the median and running median to compute your predictors. It deserves testing in real life markets for real life applications.

Ralph Vince writes:

It is the indicator of "expectation," as evidenced by human behavior itself, and not the probability-weighted mean.

Bill Rafter adds: 

Moving medians have some distinct advantages.

They represent real values that occur. For example, taking the average of 1, 2 and 5 gives you 4, which never occurred, whereas the median 2 did occur. Continuing with the same series, should subsequent values in the series be less than 5, the value of 5 will not occur as a moving median. Hence, the moving median eliminates outliers.

One of my appliances has three thermometers to measure temperature. The value displayed is the median (and hence a series of moving medians). Should one of the thermometers be broken, or distorted by being in a particularly hot or cold spot, the median will still give me the best estimate. This elimination of outliers is very useful.

Should you have data whose importance relies upon only crediting occurring values and need to eliminate outliers, then you should test moving medians. We ourselves had experimented with them regarding price series and written extensively about them, but do not use them in our current work. Our reason is that we consider the outliers in a price series to be particularly important.

Kim Zussman adds:

The following is a plot ratio of SP500 (10 week moving average) / (10 week moving median) for the recent 5 years (SP500 weekly close data).

Nov

19

Examine the enclosed chart and answer the questions below:

1. What does the historical record of the Japanese stock market imply about the existence of bubbles?

2. (honors) What does it say about assumptions regarding long-term return of claims on earnings streams?

3. (law students) What effect has Japanese government had on their stock market long-term? Would the result be different were the default world currency were the Yen?

Nov

4

 I have a hypothesis that older people with money to invest put too much value on youth in their investments, i.e, that they think that young people and things that young people buy are better than other things. I wonder if this is because of their desire for immortality or just a rejection of their loss of virility. I looked for articles that were relevant to this hypothesis but not having the scope or sweep of Pitt, or Mr. E, I have not yet struck pay dirt.

Vince Fulco writes: 

Add to the mix of hypotheses, worry about not keeping up or relevant on world developments, IT, or scientific advancements. It is exhausting for some generations given they were raised with sliderules.

Scott Brooks writes: 

Isn't it fair to say that the growth companies of yesterday are the value companies of today?

Older people probably want, at least, some growth in the portfolio, so they invest some of their money with the younger generation who generally more innovative and/or more attuned to "newest" innovations and idea's that come out.

This makes me think of the thread that we had on the open list last week about music. The older we get, the less we are attuned to modern (innovative?) music. We become entrenched in what we know and what impacted our lives growing up.

My theory is that the growth stage of our lives occurs during our teens, 20's and 30's. In our 40's we begin to transition into entrenched value stages and by our 50's (and one), we are value driven.

I think this applies to music and investing.

However, if we are smart (and I'd like to think we are…..at least some of the time), we inherently understand that "youth innovates and invents" and we want to be a part of that.

And since by the time we are in our 40's (and up) we have the money, we are the ones that the "youthful innovators and inventors" come to for cash to fund their ventures. And if we missed the Angel/VC and even IPO stage, we'll still invest a portion of our portfolio's with them to harness their vision……and recapture some of our own lost youthful vigor and insight.

Kim Zussman adds: 

Perhaps this wasn't the case before Microsoft (Apple, Google, Facebook, etc) showed that young computer mavens could hit it big, and that nerds will rule the world. People who came of age in the PC era.

Weren't the big success stories pre-1980's stodgier companies?

Scott Brooks writes: 

Wouldn't it be fair to say that GM, Ford, IBM, were the growth and innovative companies of the Henry Ford and Bob Hope Generations?

IMHO, every generation has their MSFT or AAPL, or GOOG……it's just that by the time we know about them (we being the next generation), they've become value companies.

The car companies and airline companies of our parents generation were the equivalent to the computer companies of our generation.

Pitt T. Maner III adds: 

 One would think that the influence of youth is increasing due to the higher use of the internet by the over 50 crowd (which includes me).

1. "Baby Boomers Driving Technology Wave":

'What explains the rapid pick-up of tech tools among the older crowd? "The younger investor is usually an influencer towards their parents in terms of technology," says Ryan by email.

The numbers dovetail findings by the Pew Research Center's Internet & American Life Project that more than half of adults 65 and older are online today. They're flocking to YouTube, social networks and shopping sites—while also growing more comfortable using banking and other financial services online. They form a surprisingly active demographic for Facebook, where 57% of those 50 to 64 are on the social network, according to Pew.'

So you might look at who are the main internet influencers with respect to individual stocks and the stock market and older internet users. For instance Cramer appears to have a fair amount of online "clout" with respect to stock selection as might several others on CNBC.

2. There are many companies trying to figure out and somewhat quantify who the influencers are– such as Klout.

3. This is a recent paper on the influence of the collective mood state on Twitter with respect to the market.

Behavioral economics tells us that emotions can profoundly affect individual behavior and decision-making. Does this also apply to societies at large, i.e., can societies experience mood states that affect their collective decision making? By extension is the public mood correlated or even predictive of economic indicators? Here we investigate whether measurements of collective mood states derived from large-scale Twitter feeds are correlated to the value of the Dow Jones Industrial Average (DJIA) over time. We analyze the text content of daily Twitter feeds by two mood tracking tools, namely OpinionFinder that measures positive vs. negative mood and Google-Profile of Mood States (GPOMS) that measures mood in terms of 6 dimensions (Calm, Alert, Sure, Vital, Kind, and Happy). We cross-validate the resulting mood time series by comparing their ability to detect the public's response to the presidential election and Thanksgiving day in 2008. A Granger causality analysis and a Self-Organizing Fuzzy Neural Network are then used to investigate the hypothesis that public mood states, as measured by the OpinionFinder and GPOMS mood time series, are predictive of changes in DJIA closing values. Our results indicate that the accuracy of DJIA predictions can be significantly improved by the inclusion of specific public mood dimensions but not others. We find an accuracy of 87.6% in predicting the daily up and down changes in the closing values of the DJIA and a reduction of the Mean Average Percentage Error by more than 6%.

4. That reminds me of these websites

tickertweets

Marketpsych

avoiding the herd

5. This influence effect on the older investor might have to be considered with respect to the depressing findings asserted by this research:

"Examining the economic costs of aging, we find that older investors earn about 3-5% lower annual return on a risk-adjusted basis. Collectively, our evidence indicates that older investors' portfolio choices reflect greater knowledge about investing but their investment skill deteriorates with age due to the adverse effects of cognitive aging."

David Lillienfeld writes: 

And the problem is that it's unclear that there's any company to take over the place of MSFT, AAPL or GOOG besides AMZN, which can't seem to earn any money (real profit, not just revenues). I had hoped that my now, there would be some suggestion of which companies those may be, but I'm not seeing them.

Scott Brooks writes: 

You could have said almost the same thing about railroads…..then came big steel.

You could have said almost the same thing about big steel….and then came GM.

You could have said almost the same thing about GM…..and then came IBM.

You could have said almost the same thing about IBM…..and then came MSFT.

You could have said almost the same thing about MSFT…..and then came GOOG.

You could have said almost about GOOG…..and then came……?

You have successful well run companies that create cash flow and then use that cash flow and credit to buy up smaller (other) companies….and become dominate.

Isn't that just the way the eternal business cycle works?

Isn't that really just the way of mankind and government?

Nov

4

The Jan-October return of the SP500 index for the period just ended was +23%. This 10 month return is 4th highest since 1971 (4th out of 42 years).

Over this period, for Jan-Oct returns over +10%, the following two month returns were up (2-month return of the next Nov+Dec), an average of 4.9% with 16/18 positive:

Date Jan-Oct nxt Nov-Dec
10/1/1975 0.299 0.013
10/2/1995 0.266 0.059
10/1/1997 0.235 0.061
10/2/1989 0.226 0.038
10/1/2003 0.194 0.058
10/1/1991 0.188 0.063
10/1/1980 0.181 0.065
10/3/1983 0.163 0.008
10/1/1986 0.155 -0.007
10/1/2009 0.147 0.076
10/1/1996 0.145 0.050
10/1/1976 0.141 0.044
10/1/1985 0.135 0.113
10/1/1998 0.132 0.119
10/3/1988 0.129 -0.004
10/1/2012 0.123 0.010
10/1/1999 0.109 0.078
10/2/2006 0.104 0.029

Richard Owen writes:

Great work! If you dial it back a day or two and bolt on 87, I wonder what it looks like as an average.

Oct

29

Using Robert Shiller's monthly data* (1900-2013 ), I constructed SP500 earnings yield:

E/P = (monthly earnings) / (SP500 price)

(Note this is conventional earnings yield, rather than his P/E adjusted with earnings smoothed over 10 years)

Shiller's data also contains contemporaneous "long interest rate"; GS10, which is 10 year Treasury Constant Maturity Interest Rate.

Used E/P and long interest rate to construct a "FED model": (E/P) - (long interest)

E/P - long interest is plotted monthly from 1910 - 2013 as the blue line.

For each month, mean monthly stock returns were calculated for the future 36 months (3 year mo avg return), plotted contemporaneously in red.

The FED model generated with this data is a great deal less stable than corresponding future stock market returns. This is in contrast to one of Shiller's main observations that stocks are too volatile compared to expected dividends (earnings, etc). It is an article of faith that investors and scientists are forced into stocks when bond yields are small compared to earnings yields. If this were true one would expect a more stable relationship than observed here.

Instead it appears the FED model changed around 1980; with E/P getting smaller than long interest rates - making the curve go negative. Recently it has trended back up as bond yields dropped and earnings stabilized. Perhaps we are headed back to an older religion.

anonymous writes: 

Please elaborate on your statement: "It is an article of faith that investors and scientists are forced into stocks when bond yields are small compared to earnings yields. If this were true one would expect a more stable relationship than observed here."

I don't understand your logic. Which are the independent variables? In the arbitrage-free model, isn't everything explained by the equity risk premium — which is yet another independent variable? And isn't the Fed model essentially a Cauchy (ratio) Distribution? I believe your comment therefore is to be expected. Please direct me to any academic papers (not popular press) where Shiller cites the Fed model. I thought his point is that stock prices move around a lot more than the underlying earnings/dividends. Is that incorrect? 

Oct

21

 It begins with a new uncertainty, we're going to attack Syria, we're going to default on our debt, a Middle East fight, in conjunction a 1 1/2 % decline or more in stocks or bonds then fighting between the conservatives and the liberals a call by Buffett and Krugman for government intervention and more service revenues. A resolution with a big stock market rise to new 20 day highs an end with blame being put on those who wish lower service revenues and reduced intervention and unanimous agreement that we should never strive for reduced intervention again, and tea party types must go back to caves. How would you improve this or possibly profit from it?

Anatoly Veltman writes: 

But of course crisis starts on the way up. It's been said that no market has ever topped because someone sold massively short at the high. Any decline from the high is merely profit taking, not new shorting. So the beginning of crisis is such overvaluation that's liable to cause aggressive profit taking.

Gary Rogan writes: 

The way to predict the quick resolution of the next crisis is to figure out who is in control of the mechanics. While there was some ambiguity in this one, John Boehner played a truly masterful role in its handling and supposedly (although not by all accounts) received a standing ovation and no blame in the end by most of his tea party opponents, a deliberately induced case of the Stockholm syndrome. Next time he initiates a crisis (and there will be two opportunities early in the new year) bet on a timely resolution, and this time probably a couple of days before the deadline, as in this last one he was almost by his own admission compelled to give his tea party "friends"/antagonists as much rope as was needed to supposedly hang themselves and this will likely not be the case in the future.

Kim Zussman writes: 

Doesn't seem that ambiguous.

When the Organizer and his operatives said to worry the market worried. When the conscientious objectors gave up it went up.

We were re-elected and you will go quietly.

Oct

15

From Anatoly Veltman:

I just saw this Weekly SP chart, and it's honestly… Ugly (link).

I can't imagine how we're supposed to be Bullish on such chart. Mock me all you want, I am no buyer here, sorry. I'll probably miss another tremendous growth opportunity.

Victor Niederhoffer comments:

Needless to say my silence about the chart interpretations should not be taken as acceptance. And aside from the ecology of markets, deception, avoidance of fear, relation to music and barbeque and sport, longevity, board games, etc, the whole genesis of this site from its founder was to avoid such mumbo jumbo.

Gary Phillips writes a poem: 

beware of greeks bearing gifts
and single data points
they support a myopic view
and play into the hands of the deceivers

at any given point in time
an equally compelling case
can be forged in either direction
depending on one's bias

the thing about charts
is that they fail to let one see
the markets for what they are,
but instead, for what they appear to be

Kim Zussman writes: 

Charts! Charts!
Like musical Tarts
The more you looks
The more it smarts

So look away
From Siren curves
Or you will get
What you deserves

anonymous writes: 

I refer everyone to Bruce Kovner's quote regarding the utility of charts below. If you have a better track record than he does, then you are entitled to mock his wisdom. I will gladly wager that no one who is reading this comes anywhere close to his long-term, continuous, audited track record.

There is a great deal of hype attached to technical analysis by some technicians who claim that it predicts the future. Technical analysis tracks the past; it does not predict the future. You have to use your own intelligence to draw conclusions about what the past activity of some traders may say about the future activity of other traders.

For me, technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he's not going to take a patient's temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is – whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge. Technical analysis reflects the vote of the entire marketplace and, therefore, does pick up unusual behavior. By definition, anything that creates anew chart pattern is something unusual. It is very important for me to study the details of price action to see if I can observe something about how everybody is voting. Studying the charts is absolutely crucial and alerts me to existing disequilibria and potential changes.

Gary Phillips writes: 

Indeed, I look at 22 charts on 4 screens myself. But, what I should have said while in my rush for cynicism, is no one single chart stands out and provides me with a competitive advantage or a forward-looking view of the market; at least not in the time honored edwards and magee kind-of-way. But when charts are related to a broader network of market events, themes, and correlated markets, etc., and provide (to borrow from the chairman) a consilience, then one can assess the departures from value that govern trading opportunities. which is what, I may say, you do so well.

Victor Niederhoffer adds: 

Please forgive my not using the term "armchair speculatons" or "furshlugginer" with reference to all those untested hypotheses and impressionist descriptives but not predictive things about chart movements and also ideas about secular bearish markets when we are within 1% of all time high, and a Dimson 1 buck in 1899 would have risen to 60,000 at present.

Scott Brooks writes: 

I say this respectfully. Vic and I have jousted on this front several times (and I believe the back forth has always been good natured). But my overarching point on secular bear/bull markets is valid to the average investor.

The extreme highs and lows we've experienced since 2000 is all well and good for the speculator who can take advantage of the market ups and downs.

But to the average 401k investor, 2000 - 2013 has been the lost decade (plus 3+ years).

Yeah, they've continued making deposits and benefited from DCA'ing. But for far too many of working class Joe's, there is very little gain outside of deposits.

The trader can benefit from the market movements. Johnny Lunchbucket has no idea what to do except to move his money around chasing last years returns, and after a few years of that, he is just flat out frustrated. Johnny Lunch Bucket and Working Class Joe do not care that the market is near all time highs. What they intuitively know (maybe even only on a subconscious level) is that even though the market is near all time highs, they've lost something far more important–13+ years of time for that their money should have been, but wasn't, compounding.

I'm not trying to be contentious with the Chair….I'm just trying to present a different POV that many on this list never experience….the plight of the average investor.

Gary Rogan comments: 

Scott, the average investor is handicapped by having the urge to sell low. If you sold during the 2008/2009 lows and waited to get in you are certainly left with a very negative impression of the market that feels like a bear market. The only feasible way for an average investor to think about the market is to look at their 45 or so year workspan as the period to evaluate market performance. 13+ years should mean nothing in that frame of reference. Now, if you start investing when you are 55, it means a lot, but you are doing the wrong thing so getting the wrong impression comes with that.

It is true, in my opinion, that the market today is expensive by such measures as total capitalization to GDP ratios. This is somewhat likely to limit returns in the next 15 years although it means very little for the next say 7 years, but within any 45 year period starting from 45 years ago to 45 years into the future market returns are likely to remain close to their historical average (barring a major calamity). The average investor who knows next to nothing should learn this very simple behavior: put a certain percentage of your income into stocks every year, and stop complaining.

Scott Brooks responds: 

The best thing that the middle class working man who who is NOT eligible to invest with top tier money managers (due to accredited investor rules) and is stuck with 15 expensive mutual funds in his 401k or his cousins fraternity brother as a broker or some State Farm guy as his insurance agent, is TIME.

Over time he can make handle the ups and downs. But the fact that the S&P peaked at around 1550 in '00, and is now in 2013 getting ready to hit 1700 means he wasted 13+ years with less than a 1% average annual growth rate. Sure, he picked up a point or two in dividends and maybe benefited from DCA'ing….assuming he wasn't one of the many that stopped putting in money into their 401k's for whatever reason (got scared, saw his pay cut or his job outsourced or his spouse got laid off….or whatever)…..but when you subtract out management fees and 401k fees, he almost certainly netted 1% and maybe less.

That my friends is a secular bear market…..and that's the world that 90% of America has lived in for the last 13+ years.

We gotta remember that people on this list are not like the rest of the country, and it's easy to lose sight of that.

I hope it is clear to everyone that I don't pretend to be something that I'm not. I don't pretend to be a counter or even a trader. I'm a simple man who was raised in a lower middle class world and 90% of my family still lives in that world. I'm not trying to raise anyone's ire with these posts. I'm just trying to shed some light on a subject that is very real…..

And maybe somewhere in my words there is a way to create even more profit for those of us that are blessed with:

1. a brain that works better than 95% of the population and
2. have a burning desire to use that brain to it's fullest.

Oct

3

 "Business Insider: The Stock Market Looks Like 1967 All Over Again"

A chart overlay showing similarities between the S&P in 1993 and this year appears below in this article. I have seen other overlays by the bespoke group showing almost exactitude with this market and I believe 1926 or some such. Harry Roberts, where are you, with your proof that random charts look just like stock market charts. What are the chances that such idempotent overlays would occur by chance if you could pick out the closes match over the last 93 years or so.

Rocky Humbert adds: 

And 1954 too. From that link:

U.S. stocks are trading virtually in lockstep with 1954, the best year for American equity and the time when shares finally recovered all their losses from the Great Depression.

The Standard & Poor's 500 Index's returns in 2013 are tracking day-to-day price moves in 1954 almost identically, according to data compiled by Bespoke Investment Group and Bloomberg.

In no other year are the trading patterns more similar to 2013 since data on the index began 86 years ago. The correlation coefficient between this year and 1954, when the benchmark gauge rose 45 percent, is 0.95 out of a maximum of 1.

Kim Zussman writes in: 

Using SP500 weekly returns for 2013 (Jan - Sept), checked correlation of these 39 weekly returns with weekly returns of prior 39 week periods back to 1950.

Here are the 10 most correlated:

Date          Correl     Month

09/30/13     1.000     9

01/05/70    0.506      1

04/11/55    0.506      4

02/19/80    0.482      2

07/26/65    0.479      7

11/12/12    0.476      11

07/21/97    0.450      7

06/21/04    0.448      6

09/21/64    0.436      9

04/08/85    0.431      4

The current 39 week period correlates perfectly with the current 39 week period.

Next closest correlation was the period ending January 1970.

The most correlated Jan-Sept period ended Sept 1964, which along with $7.95 will buy a cup of coffee.

Sep

19

Is there a better way to map time-series data to reflect the (presumably) non-linear perception and memory of market events?

Log transformation of the price axis seems a reasonable approximation for reaction to price. But what about transformation of timescale as well? How long do significant market events influence current judgement, how are they weighted, and at what rate does this influence fade in comparison with recent events?

Let's assume that traders are not influenced by events more than 1600 trading days ago. SP500 daily return 1960-present was log transformed:

lnRET = ln (today's close / yesterday's close)

These traders care more about recent events than past events. Partly because memory is not conserved, and partly because many processes in the biological world are more logarithmic than linear (eg visual and auditory dynamic range). "Countback days" are simply the count of days from the present to the past, from 1 to 1600. Weighting consisted of scaling each day's lnRET by it's respective ln(countback day)

Current "return perception" of SP500 is the sum of 1600 prior lnRET values, each weighted by ln(countback day):

Current return perception = sum (1-1600) {lnRET/lncountback day}

This process was repeated back in time, starting from March 2013 to Jan 1960 (attached)

current transformed perceived return = sum (lnprice/lncountback days)

The chart of current return perception shows an all-time peak in year 2000. There were large amplitude variations in the 1970's-1980's, then in the early 90's return perception took off. In terms of 1600 day perception, the 2001 bear market never fully recovered, and the 2008-09 decline appears similar to the bear market ca early 1970's.

Sep

13

 Voyager 1, launched back in 1977, has become the first man-made object to pass into the unknown vastness of interstellar space. News Report.

I have a serious challenge for you. Name a single man-made device that has worked continuously for 40+ years without any human physical intervention. The winner will receive Rocky's usual prize: A unique gift of dubious monetary value.

Chris Cooper has a go at it: 

There must be any number of vintage self-winding watches that still work. If it must be wound, does that still match the spirit of your inquiry? Of course, there are many watches and clocks which must be wound by hand that are still operating. You can find some self-winding watches for sale on eBay.

Kim Zussman replies:

I am man-made and have worked continuously for well over 40 years (though currently half time for the government).

Bill Rafter adds:

Without doing any looking, there are lots of low-tech human creations that have survived the test of time. Many dams have performed their functions for decades and even centuries. I'm not speaking of hydroelectric dams, but simple river control devices. The Marib dam in Yemen is still there (after two millennia) and would be working if there was enough rainfall. Many artificial harbors also have exceptional longevity. Some Roman harbor constructions are still operational; the Romans having been expert in concrete manufacture. And don't forget Roman roads.

In more recent times, I am certain there is some electrical cable that is still functioning from half a century ago, if only to ground lightning rods.
 

Sep

2

Evidently the "red line" was the one crossed from below by the market in the last minutes Friday.

Aug

23

 "A Penny Saved is a Partner Earned: The Romantic Appeal of Savers"

Abstract:

The desire to attract a romantic partner often stimulates conspicuous consumption, but we find that people who chronically save are more romantically attractive than people who chronically spend. Saving up to make a particular purchase also enhances one's romantic appeal, as long as the planned purchase is not materialistic. Savers are viewed as possessing greater general self-control than spenders, and this perception mediates the relationship between spending habits and attractiveness. Because general self-control also encourages healthy behaviors that promote physical attractiveness, savers are viewed as more physically attractive as well. However, general self-control is not always coveted in potential mates: dispositional and situational factors that increase the need for stimulation reduce the preference for savers. Nevertheless, capitalizing on the general preference for savers over spenders, people are more likely to deceptively describe themselves as savers when completing a dating profile than when completing a private questionnaire. Our work sheds light on how a fundamental consumption behavior (spending and saving decisions) influences the formation of romantic relationships.

Aug

22

 The fact that the Dax was up 3 ratio points against the US markets shows that the largesse of the flexions on our numbers is not withheld from those who make recipes for the bernaise and bechamel sauces in Brussels .

Alan Millhone writes: 

Dear Chair,

Am afraid the bernaisacky sauce might upset my stomach.

Note Dow was below 15. That is upsetting enough to many without adding any sauces.

Sincerely,

Alan

Kim Zussman writes:

It was dyspepsia from absence of Bernanke sauce.

Peter St. Andre writes: 

I really need to write a little poem that starts with "Ben Bernanke makes me cranky"…

Gary Rogan contributes: 

There once was a man named Bernanke

Engaged in some bad hanky panky 

But he went AWOL

and skipped Jackson Hole 

And now the markets are cranky.

Craig Mee adds: 

Bernanke the captain of Fed
Resembles Titanic's, Smith Ed
Evades all bergs, engines full out
Bond infinity, no damnable doubt
"Untapered, untwisted, now screwed", he said.

Aug

19

 Many years ago one followed the Wall St. Journal stock-picking / dart throwing contest. The Journal claimed that the expert stock pickers were well ahead of the darts over many iterations. Holdings in those days were all mutual funds or indices. So for a first foray into individual stock ownership, I bought shares of "TCBY treats" - a frozen yogurt franchise - which was touted by the analyst in WSJ dart contest.

His analysis was, "The balance sheet looks good". I checked his background and he seemed well educated and reputable (remember this was pre-enlightenment vis. shibboleths of Ivy degrees and name shops).

I never checked the balance sheet because it was unlikely my novice reading would provide more insight than the market, and in any case the analyst was trained, experienced, and (in essence) endorsed by WSJ.

Some time later the analyst could point to brief intervals when TCBY was higher. However as you might guess the stock went into a long/slow slide into oblivion.

Following recommendations without understanding their basis and the motives of the recommender is risky business.

Rocky Humbert writes: 

Dr. Zussman is absolutely correct. One should never ever listen to any recommendations or thoughts that I espouse as my motives are suspect; my analytics are flawed; and my thought processes are clouded by insomnia and senile dementia. (I view these albatrosses as my secret edge in the markets.)

Furthermore, I myself follow Dr. Zussman's advice religiously and assiduously avoid reading newspapers or books, avoid conversations with intelligent people and spent 23 hours per days in a saline-filled sensory deprivation tank (from which I emerge to occasionally pen SpecList posts.)

Gary Rogan writes:

I have been told by many people, on multiple occasions, and for a variety of reason to avoid stock tips, mainly because you can never know exactly why the person likes them and also because they are unlikely to fit into your "trading system" (and I would guess investment system). I find this advice hard to evaluate. I suppose if one knows some stats of the person's previous picks this makes it easier. If you can deduce that the person isn't simply talking their book, that's probably better as well. But fundamentally, a stock can't know that someone has recommended it to you. If you have a system, you should at least know whether the person intends for the pick to be a short-term trade or a long-term investment and judge accordingly. Rocky doesn't give a lot of stock tips, so what should one think of one when it suddenly appears? Hard to know. On the other hand, I think I have a pretty good idea who Rocky really is and he is an upstanding member of the community with a good track record, and can't possibly be thinking of moving AAPL significantly by talking about it here, so is it really wrong to follow his recommendations?

Aug

9

A question for Kim or Victor: Since IWM has more stocks than SPY, does it follow that daily returns on IWM are closer to the Normal Distribution than SPY? - A Reader

Victor Niederhoffer replies:

It does, as a consequence of the Central Limit Theorem .

Kim Zussman replies:

Let's look at it empirically. Here is the "Anderson - Darling" test for normality of daily SPY returns, 2000-present (SP500).

Next is the same test for IWM (Russell 2000 ETF), 2000-present.

Rocky Humbert writes: 

Vic, I'm not sure that the central limit theorem is the right paradigm. An unknown is whether the covariance within the two groups is sufficiently different to offset the CLT. I have never tested this. And testing is tricky because you need to use compounded total returns with dividends reinvested. The index and stock prices produce misleading results because dividends are greater for big caps.

Intuitively, I believe that most of the perceived differences can be explained by 2 things:

1) the dividends…which is really just a duration effect and 2) the reality that companies leave the R2k only when they are incredibly successful or when they die. Stocks only leave the SP500 when they die. They never leave the SP500 and go to the R2k when they are successful. So over time, the perceived differences are a micro sampling of a survivor bias between the 2 indices. Not sure how to test this theory…

What we do know is the implied volatility of r2k is almost always higher than the implied volatility of the SPX. I think this could be an analogue to the fact that out of the money puts are more expensive than out of the money calls. Put another way, if you are long SPX and short r2k in equal dollar amounts, you will usually make money during violent and persistent market downdrafts. I think this is proof that the distributions are different.

Victor Niederhoffer writes: 

Those are good points you make about areas that I should have considered in estimating the departures and distributions of comparative performances. It is also amazing to me that the statistical tests, especially the Kolmogorov Smirnov, show such departures. I am a great believer that the risk premium on untried and small stocks is much bigger and that they should perform better and that buying two handfuls of them will have a limiting distribution that converges to a return a percentage or two above the 8 % you get from the average NYSE stock. I must go back and check my premises. It reminds me of how I told the people in my family to buy the riskiest vanguard over the counter fund, and they tell me that they are always getting notes in the mail that the funds I recommended are being sued by their holders as the worst performing funds in history due to all sorts of wrongs of a practical and theoretical nature. I mean this response in a humble and appreciative way although it is sometimes hard to communicate that by email in the face of all the errors that are elicited.

Ralph Vince writes: 

Like everything else in this realm, it depends on the unit of time used in analysis. If you use annual data, things play much more nicely to Normal. The shorter the time unit used, the less so.

Jul

8

Interesting article by Vivek Wadhwa in Technology Review "Silicon Valley can't be copied".

(Regrettably omitting the role of resourceful governance).

By 1960, Silicon Valley had already captured the attention of the world as a teeming technology center. […] French president Charles de Gaulle paid a visit and marveled at its sprawling research parks set amid farms and orchards south of San Francisco.

Soon enough, other regions were trying to copy the magic. The first serious attempt to re-create Silicon Valley was conceived by a consortium of high-tech companies in New Jersey in the mid-1960s. [The plan] could not get off the ground, largely because industry would not collaborate.

In 1990, Harvard Business School professor Michael Porter proposed a new method of creating regional innovation centers. […] Sadly, the magic never happened—anywhere. Hundreds of regions all over the world collectively spent tens of billions of dollars trying to build their versions of Silicon Valley.

The reasons [for Silicon Valley's unique success] were, at their root, cultural.

Californian Stefan Jovanovich adds:

There is an element that is not mentioned. California, for better or worse, has always been the place people went to strike it rich. People came to Silicon Valley for the same reason they went up into the Sierras or stayed in San Francisco and sold shovels in the 1850s - they intended to make their fortune, not just get a "good job" (pun intended). What literally disgusts those of us who loved the place is that the same greed exists today but the enterprise is almost entirely directed to fleecing the government in the name of (pick one) "curing cancer, saving the environment, some other socially responsible activity that just happens to attract a good deal of non-profit and government cash". As one of our friends, who left for Idaho a decade ago, said, "Sleaze is always a part of the hustle that comes with "making it new"; but now the whole state is the music business without any new music - everything is just sampling what has already been done and filing a claim to protect what was not even invented in the first place."

Carder Dimitrioff speculates:

Actually, it could be argued that Silicon Valley is a replication of Boston. Up until the Nixon Administration, the greater Boston area was the nation's technology highway. Fed by Lincoln Labs, MIT, Harvard, Northeastern University, Boston University, Boston College, University of Massachusetts, Worcester Polytechnic Institute, Clark, Rensselaer and other great technology centers, companies like MITRE, DEC, Polaroid, WANG, and dozens others popped up all over Boston's Route 128.

Then, Massachusetts became the "one and only" state not to vote for Nixon in 1972. Nixon was from California. Silicon Valley is in California. Maybe there is a connection?

Peter Saint-Andre writes:

I forwarded this article to Jim Bennett (co-author of "America 3.0") and he noted:

"One of the under-appreciated factors was Stanford's rule that allowed professors to work part-time for companies and take stock options in pay. Most universities forbid that as being vulgar, as gentlemen are not supposed to engage in trade."

Carder Dimitroff replies:

In my experience, most technology professors in the Boston area were part-time academics. Most wanted to start their companies based on their areas of interest. Most Boston area universities allowed such.

EG&G is an early example. The letters represent the names of three MIT professors. My dad was one of their first ten employees. He worked under Doc Edgerton - not in MIT or Lincoln Labs, but in EG&G, Inc. This was decades ago.

One of my beefs with MIT is their lack of dedicated faculty. Even professors in their Sloan School spend most of their time in consulting firms. A lot of their faculty seem like they are adjunct professors.

Jun

16

 I have recently had a lot of pain related to a problematic tooth. It is a tooth that has been giving me trouble on and off for years and I have no idea why. Dentists have suggested it suffered some type of trauma when I was younger, but if that was It I don't remember the event.

Went to the emergency room last January (weekend, regular doctor closed) because I was in massive pain over the holiday weekend.

It turns out that it had become infected and was putting pressure on the nerve in the Jaw. Since that time I have had a root canal on the tooth, but that did not solve the problem. I have had two other procedures, the last one this morning because the prior one did not heal properly and got infected again. Really aggravating experience, no need to go in to details. Today I am holed up recovering, jaw aching on a beautiful day.

The thing is, back in January, I had a gut reaction that the best thing to do would be to just forget all the treatments and have the problematic tooth yanked out. Based on the trouble it had caused me to that point, it just seemed to be the solution that made sense — likely to be final and just "end" the problem.

Yet, I was told that was too extreme and "the tooth could be saved" etc. No professional I spoke with thought it was a good idea, in fact they seemed astonished that I suggested it. And today, after treatments and quite a bit of discomfort, things not going right, etc, I am inclined to think my initial hunch was correct. Forget treatment. Just get rid of the problem.

I wonder how often this happens.

A clear cut solution to a problem exists, but a bunch of complex alternatives are presented and the resolve to do what is likely required to the end the problem with certainty is dampened. Not to push the analogy to far, but does this not also happen in trades, businesses, and relationships that are going wrong. Rather than end a problem trade, it is easy to tinker with it, look for hedges, "scalp" around the position, etc. but instead of a resolution only more pain is created. Or a relationship that has stopped working — "keep fixing it" but only more delays for the inevitable split which is more painful than a clean break.

It is hard to tell what is hindsight quarterbacking, and what is a life lesson. In this case I am still not sure which it is. I wonder if there are any general rules or ideas that can be applied to these situations to give better outcomes.

anonymous writes:

Absolutely, the best case is to always treat (your tooth or a losing trade), like it was bad meat and spit it out. Deal with it immediately, no messing around, just take the hit and get over it. Bad trades, like bad relationships, have a way of metastasizing into something worse, and the old cliche comes to mind, "Your first loss is the least."

Personally I remember once having a relationship with a nice gal that went south (but as a guy I was totally oblivious to the whole thing and didn't see the obvious signs). I was out with the lady in question in public at a restaurant and she gave me "the blow-off speech." I was so confused that I didn't even see it coming (One could make a case that infatuation is insanity). In retrospect, I should have gotten up, picked up the check, paid her carfare, bid her adieu, and walked out, never to see or communicate with her again…..like one exits a bad trade. Instead I lingered for months in an emotional limbo, like a sick puppy, suffering great humiliation and many bad feelings. In retrospect, like a bad trade, that relationship wasn't worth it and there was no bargaining, hedging, covering it with options that was going to save it. It had to be pitched immediately, and I broke my cardinal rule by not pitching it (emotions again).

Bad trades, like bad relationships can teach one many lessons in life and trading if one listens to what the situation (market) is telling you. If only, when dealing with that person, I had used my trading persona instead of my emotional side, I would have not lingered in emotional limbo for months.

This supports a great case for dispassion, and a big part of the Masonic obligation is to "learn to subdue your passions." But like the ying and yang, good things happened out of that debacle and I ended up seeing a very cultured, erudite, successful, powerful, and beautiful woman that I married a few months ago. I'm happy for the first time in five years, and that's what's important. Bad teeth, bad trades, bad relationships…..get rid of them, they are just nuisances that get in the way of life.

A commenter adds: 

But that thinking of could have, would have, should have is very deadly in the markets. Although hindsight is always 20/20, my eyesight of 20/100 does not allow such indulgences and my defensive game does not allow for such risk. I'm trying to make money, not keep my finger in the dike like the little Dutch boy. The Dutch boy was wasting his time. 

Gary Rogan writes: 

Bad women and bad teeth rarely get better by themselves, although some teeth that seem to need a root canal sometimes do. Equities do it a lot more frequently, so to this day I don't know how to reliably tell when a bad equity trade needs to be spit out. "Your first loss is the least" obviously applies to some situations, but for instance I still own a stock that lost me 20% two days after I bought it, 50% three months after I bought it, but now two years later it's up 70%, having been up 120%. Rocky talked a lot about his thoughtful decision to exit HPQ back when it was relentlessly moving south, but it's back. What used to be RIMM is still in the dump, but someone who bought it in September doubled their money. If you could always make a wise decision by just getting out of a (currently) losing trade, everyone would be a lot richer than they are.

Rocky Humbert responds: 

Mr. Rogan,

Indeed HPQ has been inexorably working its way back and may keep climbing. Who knows? What we do know is what  the S&P index has done subsequent to my exiting HPQ. And we also know what  other alternative investments (gold, real estate, etc) have done over the same period of time. Taking the hit and putting the (remaining) capital into the alternatives would have been better than suffering. Hence in these matters, one must consider not only the ongoing pain, but also the opportunity cost. To the extent that one is monogamous, the analogy holds for personal relationships.

Is there an opportunity cost for teeth? Not sure.

Gary Rogan replies: 

Sure, there is always the opportunity cost. The question is, how well do we know it in advance? My point was that if say you bet all your money leveraged 10 to 1 on wheat, and your position is down 10% you may want to exit, but if you own 100 stocks and one is down 10% or 50% or even 90% what to do at that point outside of any tax considerations and without any additional information isn't exactly clear. Given my preference for 52 week lows in the absence of any other information it may make sense to buy more or do nothing. If the sudden move lower really attracted your attention, and upon further study you conclude that this is only the beginning, of course you may want to sell. But then a sudden move up or a long period of flatlining or something you happen to read or hear may attract your attention as well.

A commenter writes: 

The key phrase that piqued my interest was when you said, "you bet all your money leveraged 10 to 1 on wheat." Why would you "bet" all your money? Wouldn't you want to just "bet" a small part of it, and keep the rest of your powder dry? Anyways, betting signifies gambling, and gambling is wrong.

Gibbons Burke writes: 

Anonymous, I am like you—I don't see any value in pissing my money away in a known negative expectation game, so I sympathize with your view. I have never found enjoyment in gambling, personally. But I can't extrapolate from my subjective view and experience onto the world because everyone's utility and entertainment functions are different.

Gambling in the United States has several positive social functions… State lotteries support education of children… Gambling on Native American reservations is a voluntary form of reparations to that people… and, it gets money out of mattresses and back into economic circulation, transferring capital from those who are not prudent in their stewardship of that capital (otherwise they wouldn't be gambling, would they) and putting it into hands where it will be more efficiently employed.

Part of the freedoms cherished in this Constitutional Democratic Republic is the freedom to act the fool, on occasion, as long as you don't infringe upon the rights of others, or forsake the duties to yourself or those in your charge. 

Kim Zussman adds: 

You would not have regretted your decision to accept professional opinion / treatment had everything gone well.

The mistake is assuming you could have made a better decision - to extract the tooth - simply because in hindsight the treatments have not worked.

For any decision there is a range of outcomes. Perhaps your treatment had 80% chance of success (defined as rapid pain reduction, elimination of infection, and saving the tooth). But so far you are in the 20%, and for you the failure feels like 100%. "If only I'd extracted"

Do you expect portfolio managers or sound strategies to never lose, or abandon them only when they do? (Buy high / sell low)

Dentist and physician success rates are mostly unknowable but patients use cues to evaluate them. Cues such as trusted referral, reputation, diplomas, demeanor, looks, office decor, exhibited technology, etc.

Your treating dentists are simultaneously incentivized to obtain good results (reputation, future referrals) as well as make money (perform treatment). Those with consistently poor results have trouble competing with those with good results, and you are less likely to wind up there. 

Jun

3

Inspired by the concept of burnout from the medical world, it might it be useful for traders to review every once in a while as a tool for when to take a break.

Or conversely take out the cane.

May

14

 I first saw the 'dead eyes' look of a poker player/loser when I was 13 or so. Still gives me restless nights and I know I cannot become that way.

My dad took me into the "stockman's bar" in Billings, Montana to impress upon me what degenerate, greedy people turn into.

Probably another sleepless tonight tormented by that devil.

Gary Rogan asks: 

What is the real difference between gambling and speculation (if you take drinking out of the equation)? Is it having a theory about the odds being better than even and avoiding ruin along the way?

Tim Melvin writes: 

I will leave the math side of that answer to those better qualified than I, but one real variable is the lifestyle and people with whom one associates. A speculator can choose his associates. If you have ever been a guest of the Chair you know he surrounds himself with intelligent cultured people from whom he can learn and whom he can teach. There is good music, old books, chess and fresh fruit. The same holds true for many specs I have been fortunate to know.

Contrast that to the casinos and racetracks where your companions out of necessity are drunks, desperates, pimps, thieves, shylocks, charlatans and tourists from the suburbs. Even if you found a way to beat the big, the world of a professional gambler just is not a pleasant place.

Gibbons Burke writes: 

 Here is something I posted here before on this distinction…

Being called a gambler shouldn't bother a speculator one iota. He is not a gambler; being so called merely establishes the ignorance of the caller. A gambler is one who willingly places his capital at risk in a game where the odds are ineluctably, mathematically or mechanically, set against the player by his counter-party, known as the 'house'. The house sets the odds to its own advantage, and, if, by some wrinkle of skill or fate the gambler wins consistently, the house will summarily eject him from the game as a cheat.

The payoff for gamblers is not necessarily the win, because they inevitably lose, but the play - the rush of the occasional win, the diversion, the community of like minded others. For some, it is a desire to dispose of money in a socially acceptable way without incurring the obligations and responsibilities incurred by giving the money away to others. For some, having some "skin in the game" increases their enjoyment of the event. Sadly, for many, the variable reward on a variable schedule is a form of operant conditioning which reinforces a compulsive addiction to the game.

That said, there are many 'gamblers' who are really speculators, because they participate in games where they develop real edges based on skill, or inside knowledge, and they are not booted for winning. I would include in this number blackjack counters who get away with it, or poker games, where the pot is returned to the players in full, minus a fee to the house for its hospitality*.

Speculators risk their capital in bets with other speculators in a marketplace. The odds are not foreordained by formula or design—for the most part the speculator is in full control of his own destiny, and takes full responsibility for the inevitable losses and misfortunes which he may incur. Speculators pay a 'vig' to the market; real work always involves friction. Someone must pay the light bill. However the market, unlike the casino, does not, often, kick him out of the game for winning, though others may attempt to adapt to or adopt his winning strategies, and the game may change over time requiring the speculator to suss out new rules and regimes.

That said, there are many who are engaged in the pursuit of speculative profits who, by their own lack of skill are really gambling; they are knowingly trading without an identifiable edge. Like gamblers, their utility function is not necessarily to based on growth of their capital. They willingly lose their capital for many reasons, among them: they enjoy the diversion of trading, or the society of other traders, or perhaps they have a psychological need to get rid of lucre obtained by disreputable means.

Reduced to the bare elements: Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose.

There is no shame in being called a gambler, either, unless one has succumbed to the play as a compulsion which becomes a destructive vice. Gambling serves a worthwhile function in society: it provides an efficient means to separate valuable capital from those who have no desire to steward it into the hands of those who do, and it often provides the player excellent entertainment and fun in exchange. It's a fair and voluntary trade.

Kim Zussman writes:

One gambles that Ralph and/or Rocky will comment.

Leo Jia adds: 

From the perspective of entering trades, I wonder if one should think in this way:

speculators are willing losers who often win; gamblers are willing winners who often lose.

David Hillman adds: 

It is rare to find a successful drug lord who is also a junkie. 

Craig Mee writes: 

One possible definition might be "a gambler chases fast fixed returns based on luck, while a speculator has time on his side to let the market decide how much his edge is worth."

Bill Rafter comments: 

Perhaps the true Speculator — one who is on the front lines day after day — knows that to win big for his backers, he HAS to gamble. His only advantage is that he can choose when to play. 

 Anton Johnson writes: 

A speculator strives to be professional, honorable, intellectual, serious, analytical, calm, selective and focused.

Whereas the gambler is corrupt, distracted, moody, impulsive, excitable, desperate and superstitious.

Jeff Watson writes: 

I know quite a few gamblers who took their losses like men, gambled in a controlled (but net losing manner), paid their gambling debts before anything else, were first rate sports, family guys, and all around good characters. They just had a monkey on their back. One cannot paint with a broad brush because I have run into some sleazy speculators who make the degenerates that frequent the Jai-Alai Frontons, Dog Tracks, OTB's, etc look like choir boys. 

anonymous writes: 

Guys — this is serious, not platitudinous, and I can say it from having suffered the tragic outcomes of compulsive gambling of another — the difference between gambling and speculating is not the game, the company kept, the location, the desperation or the amounts. The only difference is that a gambler, when asked of his criterion, when asked why he is doing this, will respond with "To make money."

That's how a compulsive gambler responds.

Proper money management, at its foundation, requires the question of criteria be answered appropriately, and in doing so, a plan, a road map to achieving that criteria can be approached.

Anton Johnson writes: 

It's not the market that defines whether a participant is a Gambler or a Speculator, it's his behavior.

Gibbons Burke writes: 

That's the essence of my distinction:

"gamblers are willing losers who occasionally win"

That is, gamblers risk their capital on propositions where the odds are either:

- unknown to them
- cannot be known

- which actual experience has shown to have negative expectation
- or which they know with mathematical precision to be negative

They are rewarded for doing so on a random schedule and a random reward size, which is a pattern of stimulus-response which behavioral scientists have established as one which induces the subject to engage in the behavior the longest without a reward, and creates superstitious as well as compulsive behavior patterns. Because they have traded reason for emotion, they tend not to follow reasonable and disciplined approach to sizing their bets, and often over bet, leading to ruin.

"speculators are willing winners who occasionally lose." That is, speculators risk their capital on propositions where the odds are:

- known to have positive expectation, from (in increasing order of significance) theory, empirical testing, or actual trading experience

They occasionally get unlucky, and have losing streaks, but these players incorporate that risk into the determination of the expectation. Because their approach is reason-based rather than driven by emotion, they usually have disciplined programs for sizing their bets to get the maximum geometric growth of their capital given the characteristics of the return stream, their tolerance for drawdown.

If a player has positive expected value on a bet, then it is not a gamble at all. The house does not gamble. It builds positive expectation into its games. It is a willing winner, although it occasionally loses.

There are positive aspects of gambling, which I have pointed out earlier in the thread and won't belabor. To say that "all gambling is bad" is to take the narrowest view. Gamblers who are willing losers (by my definition all are) provide the opportunities for willing winners (i.e., speculators) to relieve gamblers of the burden of capital they clearly have no desire to hold onto, or are willing to trade in a fair exchange for the excitement of the play, to enable their alcoholic habit, to pass the time, to relieve their boredom, to indulge delusions of grandeur at the hoped-for big win, after which they will quit playing, or combinations of all of the above.

Duncan Coker writes: 

I found Trading & Exchanges by Larry Harris a good book on this topic and he defines all the participants in the exchanges and both gambler and speculators have a role to play. Here is something taken from page 6 that make sense to me: "Gamblers trade to entertain". Speculators to "trade to profit from information they have about future prices."

He divides speculators into those that are well informed versus those that are not. One profits at the expense of the other. Investors "use the markets to move money from the present into the future". Borrowers do the opposite.

May

8

This chart plots compounded return for SPY day and night (open-close, close-open) for the prior bull market of 3/03-10/07. Most of the period's gain occurred overnight, though day returns were strong in the initial rally. The overnight returns were consistently good over the period.

This is a similar chart of compounded SPY day and night returns for the recent bull market 3/09-present. Unlike the prior one, the current bull market was up both day and night with advantage going to daytime returns.

One possible explanation would be the visible hand of Ben and Co: heavily pulling levers during market hours to maximize return (of voters).

Apr

30

In 2013, stock market return for January - April is about 12% (SPY: Dec 31 - end of april). Going back to 1994, regressed subsequent May- October returns against return of prior Jan-Aprils shows a positive correlation:

Regression Analysis: May-Oct versus Jan-Apr

The regression equation is
May-Oct = - 0.0107 + 0.753 Jan-Apr

Predictor      Coef  SE Coef      T      P
Constant   -0.01071  0.03092  -0.35  0.733
Jan-Apr      0.7530   0.4125   1.83  0.086

S = 0.115422   R-Sq = 16.4%   R-Sq(adj) = 11.5%

Though not quite significant, in the absence of a miraculous recovery in economic activity (and unlikely FED tightening), the regression equation suggests another +7% through October. 

Apr

23

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

Kim Zussman adds: 

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

But I see your point vis traded price path:

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

Victor Niederhoffer writes: 

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

Kim Zussman replies: 

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

Victor Niederhoffer responds: 

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

Apr

12

 Today was a day that I lathered the face at 7:00, and checked on the prices and the shaving cream is still there. Gold down a nice 35 bucks and bonds up a point and stocks down 8. The Dax down 150 and crude down 2 bucks. A take away from the trading. When the pain is too great to withstand adding to the position, and you utter an "oh , no!", that's when you should be standing solid as a stone wall and adding to the fortress, I think.

Vince Fulco writes: 

I've been looking at some historical chart of the softs and other extreme situations recently and per the Chair's comments it is remarkable how quick and painful the washout can be before the trend changes direction violently and puts on multiples of the initial move.

How many times if we just walked away from the desk for a couple of hours to read, jog, or do anything, would we return back to clover? If only one had the fortitude to stand firm at all times.

Kim Zussman writes: 

A possible key is a human inability to shift attention time-scales, i.e, if one is used to thinking (stressing) ticks (minutes, hours, points), it's hard to switch to weeks or months, then back again — in order to be profitable under different states of the market.

It may also help explain early buying and selling.

Apr

8

Chart is labor force participation rate 1972-present. RED arrow indicates infection point.

Apr

3

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

Kim Zussman writes:

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

One-Sample T: next 5D

Test of mu = 0 vs not = 0

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

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

Date next 5D

02/11/13 -0.027

12/04/12 0.007

10/15/12 -0.005

06/28/12 0.018

05/08/12 -0.040

02/29/12 -0.004

11/21/11 0.021

09/22/11 -0.067

06/24/11 -0.009

01/07/11 -0.007

07/01/10 0.011

03/24/10 0.025

01/27/10 0.020

12/11/09 -0.003

06/22/09 0.017

03/10/09 0.022

01/12/09 0.047

10/16/08 -0.109

07/30/08 -0.032

03/20/08 0.022

08/16/07 0.010

05/10/07 -0.014

03/02/07 0.008

12/15/06 0.011

08/17/06 0.012

06/01/06 -0.026

02/13/06 0.026

12/20/05 0.050

10/20/05 0.026

08/30/05 0.031

07/06/05 0.002

03/22/05 -0.001 

Anatoly Veltman writes: 

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

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

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

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

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

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

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

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

Jason Ruspini adds:

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

CQG Order Types Supported by Exchange

Ralph Vince writes: 

Interesting points Jason. Timely too, I believe.

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

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

Mar

10

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

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

Kim Zussman writes: 

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

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

Paving Wall St for Hillary (sorry Ross).

Richard Owen adds: 

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

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

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

Mar

6

Yesterday (3/5/2013) the DJIA passed its all-time high (not adjusted for inflation); the SP500 has only a couple % to do the same.

Going back to 1950, daily SP500 closing prices were identified which were both an all-time high (starting at 1950), AND the first such occurrence in 100 trading days. There were 19 such instances. For these 19 new all time highs, checked the return for the next 1 day, 5d, 10d, and 20d - here comparing the means to zero:

One-Sample T: 1d, 5d, 10d, 20d

Test of mu = 0 vs not = 0

Variable N  Mean   StDev   SE Mean        95% CI            T      P
1d        19  0.0010  0.0059  0.0013  (-0.0018, 0.0038)  0.77  0.451
5d        19  0.0047  0.0117  0.0026  (-0.0008, 0.0104)  1.78  0.092
10d      19  0.0040  0.0185  0.0042  (-0.0048, 0.0129)  0.95  0.354
20d      19  0.0061  0.0257  0.0059  (-0.0062, 0.0185)  1.05  0.309

>>not much; the most promising being the 5 days after new all time highs.  Below are the dates:

Date
5/30/2007
2/14/1995
8/19/1993
7/29/1992
2/13/1991
5/29/1990
7/26/1989
1/21/1985
11/3/1982
7/17/1980
3/6/1972
4/29/1968
5/4/1967
9/3/1963
11/1/1961
1/27/1961
9/24/1958
3/11/1954
6/25/1952

Feb

27

SPY daily data was used to calculate a measure of intra-day volatility normalized to current price:

(H-L) / ((H+L)/2)

SPY data was also used to calculate daily intra-day return: (C/O)-1

These ratios were used to calculate the ratio: return / (intra-day volatility) (return per unit realized volatility, intraday)

The plot of return/volatility over time (1993-present) is here.

The plot looks sufficiently random but for a number of "roundish" points in the 93-94 period. Notice that for most of the series (excepting 93-94), there were no instances of "1" or "-1" (either an up day with intraday return = intraday volatility, or a down day with intraday return = -(intraday volatility) ). But there were several instances of 1, -1 in the earliest period. Also in the same 93-94 period there were a number of "0"s for the ratio - corresponding to zero return.

Hypotheses include problems with the data (Yahoo), and problems with the ETF itself.

Feb

5

Feb

5

 An expert has great comparative advantage in their area of expertise.

They say it takes 10,000 hours of study and mindful practice to become an expert — not to mention the natural talent, and the practice time it takes to maintain expertise.

Since a work lifespan is ~50 years — along with time needed for play, sleep, food, and social interaction — it would be unusual to become expert at many things. Which suggests that the economic fuel of comparative advantage is not likely to go away.

How is expertise possible in ever-changing markets?

Jeff Rollert writes:

I recommend the book Mindfulness, which contains the research work of Harvard psychologist Ellen Langer on observing and problem solving.

I practice some of her ideas when I walk to work…

Jan

30

There is a zero sum part to trading where what one flexion makes, another high frequency or day trader or poor gambler ruined or lack of margined or viged player uses. The win win aspect is that if you hold for a reas period as almost everyone in market is forced to do, you get the drift of 10000 fold a century, except if you lived in the Iron and played a game with kings moving backwards.

Anatoly Veltman writes:

Ok, I'll say it. Drift prevails over a century. And I had no problem with drift as recently as 4 years ago, when the only true drifter I know, a prince of certain oil, was adding to his C holdings by bidding pennies.

I'm having a problem with over-relying on drift now; because now, four years later, you can only bid pennies for C if you add $42 in front of it. All the while the real economic indicators, as Chair pointed out just today, have not and will not improve much any time soon. Now tell me: why assume that there will be much of a drift effect in the near five, or maybe the near ten years? Do you expect policy improvements, or pray for a budget spiral miracle, or Europe culture unity miracle, or what other miracle?

Jeff Watson writes:

Back in 1932, the DJIA made a new all time low that wiped out 36 years of gain. Likewise, the market didn't totally recover from 1969's highs until 1982, and the market has done a 15 bagger since then. I'll stick with the drift, which is a steady wind. 

Rocky Humbert writes:

There seem to be two sorts of smart-sounding stock market pundits: (1) those who get bearish because prices have risen. (2) those who get bearish because prices have fallen. I am neither smart nor a pundit but my views of the 3-5 year upside from here (small) and current positions (long inexpensive s&p calls) are known to all.

In the face of the current seemingly relentless rise (which has used up a year's drift in 3 weeks)… I confess that I am looking at my new, over 50% combined tax rate, and positing that higher marginal rates disincentive not only my risk-taking, but also my selling (as the taxes discourage my speculative urge to sell now and buy stuff back at hopefully lower prices.)

With this in mind, an academic study might consider whether changes in capital gains tax rates result in more serial correlation (i.e. trending — as I look around three times) SHORTLY AFTER the higher taxes are imposed. And the effect diminishes over time as people become accustomed to the new regime. Obviously I would guess the answer is yes.

Kim Zussman writes:

 Increasing tax regime could be bullish:

1. additional vig against frequent trading (as if there weren't enough already) > 1a. "drift" of holding period toward longer timeframe
2. disincentive to sell = incentive to hold and/or buy (including insiders)
3. restructuring away from dividends toward stock buy-backs

Rocky Humbert writes:

Dr Z may be onto something. Does this mean if Obama raises capital gains taxes to 99%, the stock market will triple over night? 

Anatoly Veltman writes: 

1. I have no problem with counting to include the last few years
2. I have a problem with counting to include anything pre-2007, let alone pre-2001, and even more so pre-1987.

The reason I have a problem with it: historical price analysis, no matter which way analysis is performed, relies on the notion that participants have not largely changed, and that "their" psychology has not changed. This is not the case - if one goes too far back - because financial market mechanism and participant make-up has changed ever increasingly over the past decade.

One of the victims of methamorphosis was "trend-following". I believe that most previosly successful trend-following rules have died in application to regulated electronically executed markets, because most clients are now automatically prevented from over-leveraging. Thus, "surprise follows trend" rule, for example, lost potency. Nowadays, you get preponderance of surprise "against trend". That's a very significant switcharoo, which has put most of famed trendfollowers of yester-year out of biz.

Also, Palindrome was not much off, predicting the other day hedge fund outflows due to old as age "2&20 fee structure". This structure just can't survive the years of ZER environment. Huge chunk of very cerebral participation has been replaced by bank punk punters, gambling public's money for bonuses.

Gary Rogan writes:

The drift seems to be a long-range phenomenon that has existed in different stock markets for a very long time. It is therefore difficult to make predictions of its demise based on any specific factors. One thing is clear: calamities like revolutions end the existence of the market and obviously the drift. Benito Mussolini was very good for the Italian stock market for a long time, and even way into the war it kept up with inflation, but eventually it succumbed to the realities of war (in real, not nominal terms). Granted, Mussolini initially had much better economic policies than Obama, but who would really expect that faschism could coexist with a great stock market? The question still remains: will there be a total wipeout? Short of that the drift is likely to continue.

Il Duce wasn't chosen completely at random, and the question was (just a little bit) tongue-in-cheek.

I could easily make the contention, and a great case, that fascism co-exists with a great stock market right here in the USA.

Ralph Vince writes:

I think we make a huge mistake when we assume that policy affects long term stock prices. Sure, you might have seen events, like a lot of stocks seeing big ex-dates last year, before big tax theft years — but the long term upward drift is a function of evolution. Like our progress has always been — starts and fits.

Sometimes the fits have lasted 950 years! But it always comes around. I like to get up in the morning, put my shoes on, by a few shares of some random something or other. If it goes against me, buy a little more. When it comes around to satisfy my Pythagorean criterion, out she goes.

As I've gotten older, I like to do it with wasting assets, long options.

It makes it more sporting.

Stefan Jovanovich writes:

I wish that we all could agree that prices only count if you can use the money . Zimbabwe's stock market does not have prices for anyone who wants use the money except in Zimbadwe. The Italian stock market was not quite that bad but close enough to make its "performance" entirely fictional from the point of view of anyone wanting to do what people now take for granted - use their dollars to buy/sell "foreign" stocks, close the trades and then take home their winnings - in dollars. That was not possible in Italy after 1922 or in Germany after 1932, for that matter.

As for Mussolini's economic policies, they were far more destructive than the President and Congress' inability to stop writing checks that the Treasury has not collected the money for. In his Battle for the Lira (1926), Mussolini decided that the currency would be fixed at 90 to the pound, even though the price in the foreign exchange market was 55% of that figure. The result was to create an instant bankruptcy for all exporters and those few remaining financial institutions that dealt in international trade. As a result Italy got a head start on the rest of the world; its Depression began in the fall of 1926. But Quota 90 did create a windfall for the Italian industrialists who were Mussolini's supporters; their costs on their imported raw materials were immediately halved. Like the German industrialists after Hitler took power, they saw their order books boom with all the government spending for guns and butter. And look how well that all turned out.

Baldi writes:

Ralph, you write: "As I've gotten older, I like to do it with wasting assets, long options."

Older? You wrote about doing just that in 1992:

"Finally, you must consider this next axiom. If you play a game with unlimited liability, you will go broke with a probability that approaches certainty as the length of the game approaches infinity. Not a very pleasant prospect. The situation can be better understood by saying that if you can only die by being struck by lightning, eventually you will die by being struck by lightning. Simple. If you trade a vehicle with unlimited liability (such as futures), you will eventually experience a loss of such magnitude as to lose everything you have. […]

"There are three possible courses of action you can take. One is to trade only vehicles where the liability is limited (such as long options.) The second is not to trade for an infinitely long period of time. Most traders will die before they see the cataclysmic loss manifest itself (or before they get hit by lightning.) The probability of an enormous winning trade exists, too, and one of the nice things about winning in trading is that you don't have to have the gigantic winning trade. Many smaller wins will suffice. Therefore, if you aren't going to trade in limited liability vehicles and you aren't going to die, make up your mind that you are going to quit trading unlimited liability vehicles altogether if and when your account equity reaches some pre-specified goal. If and when you achieve that goal, get out and don't' ever come back."

Jan

28

 One of the pleasures of visiting the declining city of Chicago (perhaps the next Detroit), is to visit the Seminary Bookstore in their new location, 5727 S. University Avenue, They have a great collection of quasi academic books, i.e. the kind that professors write for popular consumption, and the current text books can be bought a few blocks west at the University Bookstore.

Compared to the old store, it has much more room, much more light and glass windows, and plenty of places to sit and read. And unlike the old store, it's possible to find your way out without being buried by a ton of musty books if you don't get lost in the basement. I am one of those unfortunates who was not educated enough in my college days to have a good grounding in all the disciplines that make up the world of knowledge so I like to update myself periodically in areas that I am weak in or should know much more about, especially for market actualization or knowledge to share with my kids.

Perhaps the list of books I bought might be of interest to some scholars or would be market people. Microeconomics by Besanko and Braeutigan

Industrial Organization by Luis Cabral

Investments Bodie, Kane, Marcus (ninth edition)

Stochastic Modeling Barry Nelson

Scorecasting Moskowitz and Wertheim

The Evolution of Plants Wills and McElwain

Survival by Minelli and Mannuci

Thieves, Deceivers and Killers, Agosta

The Birth of the Modern World 1780-1914

The Lions of Tsavo, Patterson

Modeling Binary Data by David Collett (second edition)

Historical Perspectives on the American Economy, Whaples

Viruses, Plagues, and History, Olstone

Plastic (a toxic love story), Feinkel (for the collab for her new business)

The Power of Plagues, Sherman

Quantitative Ecological Theory, Rose

Think Python, O'Reilly (for my kids who want a job in the future).

Beautiful Evidence by Edward Tufte

All of Nonparametric Statistics by Larry Wasserman

Number Shape and Symmetry by Diane Hermann and Paul Sally

Nonparametri Statistics with Applications to Science and Engineering, Paul Kvam and Brani Vidakovic

Discrete Multivariate Analysis by Yvonne Bishop et al

Modeling with dta by Ben Klemens

Python Essential Reference by David Beaszley

The Origin of Wealth by Eric Beinhocker

America, Empire of Liberty by David Reynolds

The Entrepreneur (classic texts by Joseph Schumpeter) Marcus Becker

A History of Everyday Things: the birth of consumption in France, Daniel Roche

Civilization by Niall Ferguson (the west and the rest)

The Americans (the Colonial Experience) by Daniel Boorstin

Triumph of the City (how our greatest invention makes us richer, smarter, greener, healthier and happier) by Edward Glaeser

The Big Red Book by Coleman Barks (bought by Susan)

The Founders and Finance, Thomas McCraw

A Nation of Deadbeats (an uncommon history of America's financial disasters) by Scott Reynolds Nelson. (this one I have to read immediately)

Rome by Robert Hughes

The American Game: capitalism, decolonization, world domination and baseball by John Kelley ( 173 5 by 8 pages only)

Exploring the city (inquiries toward an urban anthropology ) by Ulf Hannerz

Brokerage and Closure (an intro to social capital), Ronald Burt

All the Fun's in How You Say a Thing (an explanation of meter and versification) by Timothy Steele

The American Songbook by Carl Sandburg (for Aubrey)

The Measure of Civilization (how social development decides the fate of nations) by Ian Morris

Freaks of Fortune ( the emerging world of capitalism and risk in America by Jonathan Levy

The Invention of Enterprise (entrepreneurship, from ancient mesopotamia to Modern times) by David Landes et al
 

I feel like Louis L'amour who gave lists of books he likes to read in The Wandering Man without telling what he got out of them, but I do not have enough erudition to tell based on skimming them how valuable or interesting they are. Any suggestions or augmentations on that front would be appreciated and perhaps helpful to others.

Kim Zussman writes: 

University of Chicago is now ranked #4 by US News — the highest ever. This is a big jump from the era of the low tax predecessor to the former con law professor, and will hopefully have a favorable impact on South side murder rates.

Dan Grossman writes: 

Unintended Consequences by Edward Conard is the best book I have seen on the subprime crisis and current government tax and economic policy.

Jan

28

 I have been doing auto trading of Palm Oil futures for some time using a self-developed system. The system works on the continuous data of the contracts and trades on the most liquid contract.

One morning last week after I started the software before the market open, to my surprise, I discovered the prior day's data was of the wrong contract month. It was not the same as that during the prior day's trading session. Seeing an anomaly of the data, I disabled auto trading prior to the market open.

When the market opened, I saw the system gave a short signal that I believe was due largely to the influence of the wrong data of the prior day. But gradually, it turned out to be a good signal. By the close of trading when the system signaled to closeout the trade, it was a 10% profit. Although I understand that it should not be my expected profit, I was feeling a little upset for not taking the trade.

Then the next day when I started the software, the data was corrected. With the corrected data, the system showed a trade on the past day of actually a 4% loss. I felt a little relieved.

Kim Zussman writes:

This is where the mistress speaks to us. In between the rationally testable segments; where the discretion of experience, discipline, and morality are challenged every day.

Jan

23

Charm, from Kim Zussman

January 23, 2013 | 1 Comment

 "Charm" (decay of option sensitivity to underlying over time) seems an apt model for the decline in male sex drive with age, and the attendant increased attention to youth. Further calculations are required to examine the effects of being in the money, and time-related sensitivity to volatility.

Charm or delta decay, measures the instantaneous rate of change of delta over the passage of time. Charm has also been called DdeltaDtime. Charm can be an important Greek to measure/monitor when delta-hedging a position over a weekend. Charm is a second-order derivative of the option value, once to price and once to the passage of time. It is also then the derivative of theta with respect to the underlying's price.

Jan

11

 An astronomer was profiled in the media, ca ~2000. Not for his science, but for the fact that he held onto a position in MSFT stock for ~10X (100X, etc).

He didn't sell after 20% gain. Or 50%. Or 100%. He just irrationally (per nascent behavioral finance) held. Intuition, like in Carl Sagan's "Contact", rather than explicit knowledge of the company's business prospects, valuation, or moving average. Dumb stubborn luck.

MSFT hasn't done much since then, so whether he's still holding or sold out, no matter (because it wasn't AMD).

The astronomer is a standard-bearer for those in the empirical vacuum tempted to sell after a double, or down on their luck and doubling down.

Jan

2

Looking at SPY reversal patterns (2007-present): If two consecutive trading days were each up >1%, and they were preceded by a drop of at least 1%, the next 2-day return was negative (NS):

One-Sample T: DUUXX

Test of mu = 0 vs not = 0

Variable   N   Mean     StDev   SE Mean  95% CI             T
DUUXX   18  -0.0097    0.025  0.0058  (-0.022, 0.002)  -1.64

Variable      P
DUUXX   0.119

keep looking »

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