Apr

22

 We need to analyze this. She is unconventional, chatty, attractive. Does she throw the competitors off?

"Victoria Coren Mitchell makes poker history with San Remo victory"

Now Victoria Coren Mitchell has made history by becoming the first two-time winner of one of poker's most prestigious tournaments.

"I think I'm quite quirky in poker because there still aren't many women playing big tournaments," she said.

"I have another job and I sit at the table drinking wine and chatting. Poker's a strange game because it's face-to-face combat and we're trying to knock each other out and take each other's money but at the same time we're all friends."

Ross Jarvis, editor of PokerPlayer magazine, said Coren Mitchell's win came at a time when professional poker veterans are fighting it out with a new generation of online whizzkids, many of whom have won millions before they turn 20.

"You have players who are the best in the world who are well-known in poker, then there are so many young players who you won't have heard of until they burst on the scene. Within the hardcore, there are people as famous as Victoria but when it comes to the mainstream she's in a league of her own," Jarvis said.

Jeff Watson opines:

In my opinion, a good poker player that happens to be a woman will beat up most men. Women scare me at the table and I generally play around them. If they're semi hot, flirty, and charming, they have an significant edge provided they have solid poker chops. Their edge exists because they are in control just because of what and who they are and by virtue of this, can manipulate the opposite sex. It's a spectacle to see a solid woman poker player slice, dice, and chop up her victim. And many men believe that these women are just lucky since there's still that core belief out there that women aren't as good as men in poker. 

Ed Stewart writes: 

 A man's competitive instincts start to shut down around a beautiful woman. Competition goes against the natural order that furthers the species in a beneficial direction. Chivalrous notions emerge, good business sense quickly erodes. One can't fight that instinct for long, in my opinion. It is a lost cause.

In the old days when the workday was more segregated men were protected from this weakness. Now it is open season on us and the other side knows it. If a brokerage salesperson with a very sensual and attractive voice asks to make a face-to-face presentation, just say no, as difficult as it is to do, summon the will to do it and you will be thankful.

It could be that this is why men practiced some forms of workplace sexism. It kept us from becoming fools on a consistent basis. When our main work conflicts are with men we are energized. It feels natural. Not so much the other way. A women might read this and be extremely disturbed and think, "think with the big head" but it is easier said then done. Modern mores are constructs, conditioning, overwhelmed by the most simple flirtation, and every good looking professional woman knows this.

If we try to avoid the attractive woman we might be in violation of laws, so self-preservation is now illegal too. 

Mar

27

I cannot even count the number of trading lessons in this Bruce Lee video.

Mar

11

Let's assume the HFT does take a 1/2 tick out of the market per trade. But reflect back to the good old days when you would call in your orders to the floor. Then the locals would sit on the order for 1-2 minutes allowing plenty of time for front running, and other evil dong, then charge execution commissions of .50bp to 100bp. This was all before decimalization so instead of spread of .01 or .005 on stocks you had spreads of .06 or .25, higher by a factor of 5x. For a stocks or futures trader I will go with current electronic age even with those pesky HFT algos. If I was a floor broker, sure the old days were a lot better, but if you are sitting upstairs today beats by a mile.

Jeff Watson writes: 

But the trouble with the electronic market is that it's harder to know the size of the market (ie: how much wheat is really for sale in the pit). Plus, the electronic market eliminates the visual and auditory clues that one would get in the pit. The feel of the grains has changed significantly since electronic became the mainstay, but a bad fill is a bad fill, and your market order can get you a bad fill.

Gary Phillips writes: 

Floor brokers in the bond pit were under extreme pressure to provide institutional customers with good fills

Brokers were only as good as their last fill…

Good fills were taken for granted, but fills that were perceived as bad, were always acknowledged and then contested.

Adjustments for bad fills were de rigeur, if a broker wanted to retain his business.

But when a broker had an error, he had to eat it himself.

The risk /reward was definitely skewed against the floor broker.

Mar

3

Here's an interesting article for the layman regarding the use and misuse of P values.

Mar

3

 The grains (especially wheat) in the after hours are reacting to the Ukrainian situation. Big move to the upside that kicked in late last week when the commercials started buying. Grains tend to show sensitivity to events in the Ukraine.

Vince Fulco writes:

One wonders if the "seeds" for this were in the fertilizer firestorm a few months back? 

Feb

14

Failure, from Jim Sogi

February 14, 2014 | 5 Comments

 I've been thinking about failure. There are several kinds. One is inevitable: the failing of organs leading to death. Everyone fails in this regard. I suppose it is the manner of living, style, and health before that defines whether death is a failure or the end of a good life. Failure of health is bad. It's important to take care of health. It's the most important thing there is.

Another kind of failure is  failure of judgment. We've all had them. These are mistakes, failure to see the train coming at you. Looking back, they are usually pretty stupid in hindsight, but very hard to see in real time. If you learn from them and grow, and let them go, they won't ruin your life.

That brings up the next type of failure. Failures in a career, a marriage, a relationship, a friendship, an investment, or a business are serious and not easily overcome. More than one is very bad. Sure Ray Kroc overcame failure dozens of times, but most cannot. The odd thing is that some people don't see why they failed. They don't see what they did caused their failure. This is the bottom half that thinks they are better than most, the rationalizers.

I look back on my failures and see they are from personal defects. I can only try to work around the defects. I'm not sure its possible to correct personal defects even if you recognize them.

Jeff Watson writes: 

Personal defects are so ingrained, they need to be worked around…..I have not seen any credible evidence that they can be corrected. I trade around my demons every day.

Feb

7

 The latest contestant on the popular game show "Jeopardy" has found an unorthodox way to beat the game. Using game theory, Arthur Chu has managed to win 4 times in a row. His unorthodox methods have traditional Jeopardy fans upset as he follows the rules, but goes non traditional, and hits the big money first, then searches for the daily double. In fact, in one daily double, he found it in the category of sports (which he has little knowledge), and bet only $5. His style of play is to deny his opponents the big money, just like we try in the markets.

Anyways, Chu has upset the apple cart and won over $100K. Fans, along with the host Alex Trebec are visibly upset, but Chu is playing to win, not appease viewers or the host. This reminds me of speculators who get upset and blame HFT, flexions, the other side, etc. when they lose. They were mad at old man Rothschild when he had news of Wellington first and scooped the market. I'm sure that in the future, there will be many boogeymen to blame things on.

I applaud Mr. Chu for his out of the box thinking, and wonder why nobody has done this before, considering Jeopardy has had a 30+ year run. Mr Chu can teach us many valuable trading lessons.

Andrew Goodwin writes: 

This guy is a close friend of my gf. He has garnered much anger from the crowd. He has won four times in a row and is now being called the "Jeopardy Villain" by the press and fans of the show.

This is a take from the net describing his methods:

"What is Chu's game theory, exactly? While most players opt to stick with a single category and work through it from lowest to highest prize amounts, crossword-puzzle style, Chu begins with the most difficult clues in an effort to solve the Daily Doubles and doesn't hesitate to lay down the big bucks when he finds them in a topic he's familiar with. If the question belongs to one of his less-practiced knowledge categories, like sports, he'll only wager $5 and throw it away, knowing that it's off the board for his competitors. He also spat in the face of the $1-over wager tradition in Final Jeopardy, in which the extra dollar prevents a tie; instead, Chu intentionally bet to tie twice, though only once did he and his competitor (Carolyn Collins) both answer correctly and move on. This is not a humanitarian move, by the way, but it is a clever one (Keith Williams, former Jeopardy! winner and obvious math person, breaks it down for you in detail here.

Playing to tie increases your chances of advancing both because of game theory and mind-fu—- your opponent ("if your opponent knows you're going to wager for the tie, he might disregard a rational wager and go for broke in an attempt to tie you"). Chu is also quick to buzz in, which is perhaps the most useful Jeopardy! skill of all."

Chu has already won four games in a row and gets to compete again on Feb 24th. He is using game theory and statistics to beat the other opponents and has mastered them all so far using his unexpected system.

I suggest we watch to see if his play changes the behavior of the next opponents so that they match his tactics and alter the game show for good. This is the live popular culture version of the theory of ever changing cycles at work for all to see.

Far from a game of mere trivia knowledge, Jeopardy now is a game of greater complexity than thought previously due to the skilled tactics of Arthur Chu. Granted, I understand that Chu was considered a genius back in college, but he is not winning like Jennings in knowing all the trivia.

Adam Robinson would really enjoy this story.

Best regards, Andy

Feb

6

 Slater won the Pipe yesterday. Check out this minute and a half video of a perfect 10 on a wave he rode. Even a non-surfer would regard this as a perfectly ridden wave. What other moments in sports are comparable? What trades are comparable?

Jim Sogi writes: 

Perfection. It's rare, but when it happens, it's the best. Yesterday the surf here was perfect. Same size as the pipe pictures, west swell, perfect form, no wind, perfect size. It was like the cover of a Beach Boys album.

There were only about 8 people out, all of whom I knew. I caught many waves and didn't fall. Caught them right on the peak, in the pit, dropped in, the wave walled up and then kickout on the inside. Just a perfect day. Everyone was hooting and hollering and smiling. A pretty girl in a bikini paddles by and says the waves are so good she feels like she's on drugs. Just perfect.

The other great thing is the perfect day of powder snow, sun, no wind, new snow, no people, untracked lines.

Another great thing is the perfect trade. Great volatility, good entry in size, and good mental condition to ride the trade to a good exit with no pain.

All very rare, but just the greatest thing. You have to watch and wait and then be on it when it happens.

Feb

6

 Weather must play a factor in ag commodities. The weather has been pretty weird lately with weeks of rain in Alaska in January, snow in Hawaii (skiied 2 days last week), bad East Coast weather, drought in California. I am guessing this will affect the volatility of the ags and energy in the coming years. On a larger scale, weather can affect the economy of the entire world.

Jeff Watson writes: 

The big drought played havoc with the grains and we had a monumental rally. Weather also affects shipping of grains by barge, and sometimes the Mississippi River is unnavigable due to a variety of weather conditions. The basis for corn and beans can easily double in a matter of days at the Port of New Orleans when that happens. Since the system is all interconnected, other ports will see an increase in the basis.

Feb

3

Much ado has been made on this site regarding music and markets. Sometimes the markets are playing Brahms, sometimes Frank Zappa, or whatever. Today the equities are not playing music so much as making this sound.

Jan

29

Here is an excellent NYT video on the odds making in Vegas for the Superbowl. Great discussion of the difference between the insiders and the general public. Discusses the proposition bets at length. One quote, "The public wants to bet $10 to win $200, but the pro will bet $200 to win $10 if he sees value."

Jan

2

 We're off to a rollicking start for the grains in the new year. The form still hasn't changed and so far one can still sell strength with impunity. How long it will last is anyone's guess, since I'm loathe to pick tops or bottoms, or to even try to predict what these crazy markets are doing. This form has lasted for months, but I've seen it go this way for years back in the 80s-90s. Prediction and prognostication is way above my pay grade. I'm still at the observation stage, where I see what is happening and trade according to my rules. I've always been that way, trading within my rules, and that defines my comfort zone. It's also my downfall as I could probably be remembered as a great like Cutten and not a bivalve filtering up detritus in the brackish waters inland.

Nov

28

There are many trading and life lessons in this great article: "10 Reasons Surfing Improves Humanity"

Nov

18

 This is an old 2009 video that discusses the localism on the North Shore of Oahu. No matter how you slice it and dice it, there is some level of localism at every break, and there are always problems associated with localism. If you show up at someone else's break, respect and be humble towards the locals, especially towards the alpha who will be easily identified, and you might have some fun. Hubris does not serve visitors very well. Hubris doesn't help in the markets either.

Nov

14

 Some time ago Mr. Jovanovich posted an anecdote about old man Mellon to the effect that his kids never let him pay for a bill at a restaurant because the old man felt that prices should be the same as they were when he was a young man and that they were too high today. This is a common thing one runs into in certain people of age. They are accustomed to the old p/e, the average of the last 10 years, on those rare occasions in the 1930s when Ben Graham wasn't chasing the skirts, when you could buy companies at below their liquid cash, assuming incorrectly as he did that any shares were available and they weren't losing so much that the previous balance sheets were meaningless.

Galton had a way of dealing with such things, and he was the most revered man of his age, commanding universal respect, and heading all the leading scientific and geographic societies. "Let the bygones be bygones". Don't fret about bad things that happened, or look to take back the things that you could have done that would have made you so much better off. The woman you didn't marry. The stock you didn't pick. The limit order that wasn't filled.

I recently ran into this in a business meeting where I was trying to sell a company. When negotiations started the earnings of the company were half what they were when the negotiations resumed. The buyer was stuck on the old price and old earnings. The buyer consequently missed an opportunity to make a tremendous profit, of about 10 times his investment of millions in several years.

One often makes this mistake in the market. You try to catch a falling star and you miss it. And then it goes in the direction you had hoped. But you never come in again because you are trying to catch it at the bygone price. Anatoly once mentioned that he was trained in checkers by the KGB to learn to be an amnesiac so he wouldn't regret moves that he should have made on the board, and would look to the future.

In chess, the good players always say forget about the prices that have been taken and concentrate on the pieces that are on the board. I believe this is a common mistake in life and markets, and would be interested in the scientific and empirical and life and market lessons that you all have learned from similar ruminations.

Richard Owen adds: 

 Ted Turner believes a large component of his success is attributable to the fact he readily accommodated and cared not much about what had past. The Buddhist concept of acceptance and Kabbalahist idea of cause and effect are similar.

Compare Germany and Silicon Valley. In Silicon Valley ones past mistakes accrue as experience. In Germany there have been many internet start ups but also inevitably failures. Speaking to German friends, a failure there is carried like a deadweight around ones neck.

Society is destablising somewhat as the record of evidence of one's past peccadiloes becomes more extensive. Nobody can get into office or past congressional approval unless they lived a prude life of Cromwellian perfection. And its not clear one is best led by a Cromwellian prude.

Ralph Vince comments: 

There's two ways we learn things, the easy way, and the hard way.

If we learn things the hard way the FIRST time we climb up off of the pavement — that is the definition of a windfall.

Learning things the easy way is to accept facts like an obedient database. The only payoff to learning things the easy way happens when our perspective on the matter at hand altered such that we see it in its proper light and thus actually understand it, rather than merely as data.

To convey ideas to other human beings, we must amend their perspective, their point of reference on the matter, to see it anew from an entry point that they will understand it. To spare them the inevitable beatings of otherwise learning it the hard way is such a gift.

Stefan Jovanovich comments: 

In our misbegotten adventures in L.A. we had minor and almost all indirect dealings with the mouth of the South. Mr. Turner was so acutely aware of his father's defeat and death that even in casual dealings outsiders learned how determined he was to avenge/outpace/overcome his family legacy. He also was notorious, even in Hollywood, for accumulating personal grudges.

A great deal of individual success in Silicon Valley has come from the fact that the U.S. income tax code allows the tax-free pyramiding of gains through (1) buying and selling of principal residences and (2) exchanges of corporate interests. When you add the glories of carried interest, the result is a society of the well-connected in which there are very, very few failures who haven't held on to at least a respectable amount of the OPM. From the little I know of the German tax code, none of these opportunities to do a heads I win/tails you lose coin toss has ever existed in that country.

 Cromwell was many things, some of them awful; but he was never a prude. He and Elizabeth Bourchier had 9 children; and he and his wife were both, by religion, Independents. That meant they were those rarest of people who believed that Jews and (from the point of view of their Anglican, Presbyterian and Puritan contemporaries, even worse) Catholics were entitled to political and religious liberty.

What Richard may have meant is that Cromwell, as a military commander, was as piously single-minded as Joan of Arc. Like hers, his army never lost a battle once they had received proper inspiration; and each soldier literally believed in him and "the cause" for which they had a clear catechism. This was not ever going to be good news for anyone (Catholic Irish; Scots Presbyterian) who opposed him just as the Hussites (as dissidents from the true Catholic faith) would not have much mercy from St. Joan.

P.S. I find the history of Cromwell's catechism fascinating. If one were to ever come up for auction, the 1643 edition might be priced at a figure that even lovers of Bacon (the recently mentioned artist, not the writer) would respect.

For the American sequel to the story, check out The American Tract Society.

Victor Niederhoffer adds: 

One notes the Chinese proverb on a similar theme: "don't carry your hatreds into the new year" or the English variant, "you can't run a mill with water that's past". All languages seem to have a proverb similar to "let the bygones be bygones". The Jewish custom of asking forgiveness at the new year for all the harms that you have inflicted on other in the past year, and sharing a torte and tea is from a similar vein. 

Jeff Watson adds: 

One of my proverbs is to take the hit, forget about it, and move on. But then again I don't mind small losses as they are just part of my business, and I take many small losses of a couple of cents when I smell that the trade is going to be wrong. Just like surfing, where there will always be another good wave, in trading, there will always be another good trade.

Alan Millhone writes in: 

Dear Chair,

A grudge is a difficult thing to dismiss.

My Mother used to say, " I can forgive — perhaps not forget "

Sincerely,

Alan

Gyve Bones writes: 

Oliver Cromwell was an unmitigated bastard and I find no evidence he believed that Catholics were entitled to religious liberty. To the contrary, his raping and pillaging and wholesale theft of Ireland, which was clinging tenaciously to the Catholic faith, and the Penal Laws enacted for the suppression of the faith and Gaelic language starting then and continuing for a couple of hundred years was an attempt, largely successful at cultural and racial genocide.

His puritanism certainly enforced a prudery on England. Within 50 years of Shakespeare's death, his plays could not be performed. And prudery is not the same thing as having a fruitful but chaste (no roaming to other bedsteads) relationship with one's wife.

— G.B.

Show me a Puritan, and I'll show you a son-of-a-bitch. -H.L. Mencken

The President of the Old Speculator's Club writes: 

 Though Dailyspec seems to be a great repository of Mencken fans, there were a few voices which, although agreeing with him on many items, diverged on others. One such notable was G.K Chesterton. The two quotes which follow immediately demonstrate some common ground.

"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary." —H. L. Mencken

"We are perpetually being told that what is wanted is a strong man who will do things. What is really wanted is a strong man who will undo things; and that will be the real test of strength." —G.K. Chesterton

On the issues of science and religion, however, Chesterton suggested that Mencken was equally skeptical:

I have already noted that, if there is such a thing as religious mania, there is also such a thing as irreligious mania. Just recently, perhaps, it has been the commoner of the two. But a very interesting study of the matter comes from a country in which we may say, without injustice, that both are fairly common. I had occasion to remark recently, in this place, that an American paper had accused me of being an anti-American writer; and I commented on the curious irony that the American paper was itself an anti-American paper. But, though I may be permitted thus to parry a purely personal charge, and a highly preposterous one, I should not like anyone to suppose that I do not both enjoy and value the magazine in question.

I am quite well aware that Mr. Mencken, the editor of the American Mercury, is really doing his duty as an American citizen in being an anti-American critic. I myself have been regarded often enough as an Anti-English critic, when I regarded myself as a patriot. In short, there are immense internal evils for Mr. Mencken to attack, and he is perfectly right to attack them. All is well so long as the good citizen abuses his own city. The trouble begins when the foreigner abuses it—or, almost as often, when the foreigner admires it. But, anyhow, the chief efforts of the American Mercury have to be directed towards this howling wilderness of sectarian sensationalism.

The popular science, that rages in the American Press and local government, is simply a dance of lunacy more ghastly than a dance of death. And an exceedingly valuable and important protest against it can be found in the same number of the Mercury from which I have picked the examples of theological hysteria. The protest is all the better because it is not the sort of protest that I should write, or that any person of my beliefs would write. The critic is writing entirely in the interests of Science, and is perfectly indifferent to the interests of Religion. And he enters a virile and telling protest against that science, which is his only religion, being dragged through the mire as a degrading superstition.

From a great article: "Religion in American History: I
Hate Methodism; and G. K. Chesterton vs. H. L. Mencken: Battle of the
Monogrammed Dudes. Surprising or Otherwise Interesting Primary Sources,
Pt IV"

Richard Owen writes: 

This is fascinating stuff. The modern day argo in British English of referring to something as Cromwellian is along the lines Gibbons indicates, although at one step removed perhaps.

Cromwell instilled the Protestant Work Ethic in puritanical fashion. That still pervades much of British psyche today, and is captured in popular imagination, for example, in the writings of the Daily Mail and the books of Tom Bower, Britain's foremost hatchet biographer of businessmen (I say this with great respect; his books are well written and I suspect Mr. Bower would be glad to acknowledge his genre bias).

Thus the Protestant Ethic mentality is to be rich and industrious. But with the emphasis on the latter. As Martin Sosnoff said of his Dad, something like: *"he never thought he'd earn an easy dollar, and he never did".*

The one thing that really irritates the Cromwellian mentality is to find out, after slogging ones guts up to Vice President and exiting to early retirement with a Carriage Clock and blue chip pension, is to find out the reason for corporate downsizing was because a kid from the JFS, assorted Anglo Norman public school boys, or an Asian immigrant rustled up a grub stake into Forbes Four Hundredism. And possibly even had some good sex, bad drugs, and hella fun in the process.

Not to make light. These are complex neuroses and threaded reasonable sense given each parties bias.

Craig Mee writes: 

Victor, the point can also be made that although a potential lost opportunity arises and there are fewer pieces on the board, the situation is then more clear. Although you may not establish the solid position you initially hoped for, many more tighter risk reward opportunities now present themselves, sometimes allowing you a defiant win on the move all the same. However, this outcome may be related to your initial and ongoing foresight about what's unfolding.

Nov

11

This is a fascinating little essay by Wendy McElroy describing two types of child labor in England during the Industrial Revolution: "The Industrial Revolution You Haven't Met"

Oct

31

 This afternoon I was thinking of the events of my honeymoon back in 2009 and while in Hawaii we visited the Sogi residence which featured some good ol' jam band rock-n-roll action by Sogi and his team.

The decay in current music quality versus yesteryear production came long before the decay we have recently seen in the financial services industry. About 30 years or so is my estimate. What is interesting is that classic rock and roll will always have its place — like an old shoe or old pair of jeans. Financial services should be so lucky. What is scary while also quite ironic is that technology is largely the culprit for the decline in both fields.

Jeff Watson writes: 

 Rock and roll is not in decline at all, far from it. Revenues might be down, but not the musical quality. People of a certain age just get stuck in the 60s and 70s and won't let go. But one tends to only taste the cream and forgets that the 60s and 70s brought some absolutely horrible music to the table, stuff (I won't even call it music) performed by Boyce and Hart, Cyrcle, King Harvest, C.W.Mcall, and The Cuff Links. This is the worst song ever written.

My parents thought music died in 1955. My grandparents thought music died in 1920, and on and on. Every generation experiences the same nostalgia for the past, for the music of their youth and feels the new music of the day is declining in quality. Nostalgia is big business because people miss their youth. Bands like the Mowglis, Black Keys, Of Monsters and Men, Daft Punk, Outkast, et al are producing some amazing music which is just as good, or better, than the rock of 40+ years ago. Troubadours like Jack Johnson write and perform music which is just as relevant today as what Bob Dylan wrote two generations ago. An entire new group of people, our kids, are listening to the new rock, and a few old people like myself enjoy it immensely. Stop listening to Clear Channel and find some music……it's out there just waiting to be discovered.

Jim Sogi comments: 

 One day someone asked while I was playing, "Do you know any songs less than 10 years old?" I was kind of stumped, so I've tried to find new songs. It's harder to learn things when you are old and have to beat the new neural pathways harder.

A childhood friend of my son is Ryan Fontana, of Sex Panther. He has achieved big success as a DJ playing electronic dance music. There is some good music there and it's good for dancing. The girls really like it. EDM keeps people dancing and drinking. Some clubs according to WSJ can sell a million dollars of drinks in a night. Some of the music can feel repetitive but when they're dancing, they're not really listening to the music, but feeling it. With the big sound systems, the ground literally shakes. It's an experience and it's good business. I've got an open mind and even like some hip hop stuff, though it's taken a while.

Oct

30

 I'm a bit concerned about the last Apple quarter report—not because of what's going on right now but because the thing that i was hoping to hear was that the company wasn't concerned about margins so much as market share. That was the mistake of the 1980s—Apple focused on keeping margins up. Scully thinks that that was a mistake though not as much as firing Jobs. I think he has it backwards. Amazon is worth a fortune without having worried much about earnings. Apple would be the same—if it focused on market share first.

On the innovation front, Apple has always been about changing the relationship between man and his environment. That's what the iPod was, that's what the iPhone was, that's what the iWatch will be about, ditto for the iTV. What are the next two things in Apple's quiver? Try these two:

1. Apple purchases Nest, creates an iTune interface for all manner of modules to control a house. For instance, it reaches an agreement with Whirlpool to put those modules into Whirlpool's products. The modules cost all of $20-30, but they allow you to control everything in your house remotely. Everything.

2. Apple reaches an agreement with Ford to put an Apple iCar into each Ford auto. The iCar contains a description of what properties you want the car to be optimized for. Speed? Mileage? Handling soft ride? Handling firm ride? and so on. You could even build into the iCar a module, software programmable by an insurance company to monitor driving habits, a la Progressive. You could change the iCar with an iTunes like interface, and each driver in the family could have their own iCar. Junior wants the car? Dad puts the iCar into the car—using a secured compartment that Junior wouldn't have access to. Why? Because Dad's put a special limit on the iCar to keep Junior from going more than 70 for more than 15 seconds every 15 minutes. (Junior may need that momentary spurt to escape an accident.)

Ford would like the device because it could segment the market with it—the more expensive the car, the more capabilities in the iCar, and the iCars could be separated on the basis of the attached device, much as differentiates the iPhone 5 from the 4S.

There's lots Apple could do with such a device.

Strange that I have't heard anything about it—and that would sell quickly. You could even upgrade the iCars with each model year. Apple would have secured built in obsolescence. Upgrading the motor? Upgrade your iCar. Etc.

Now, if I can think of that, why hasn't Apple?

Jeff Watson comments: 

If you don't like what's going on, you can always short the stock.

Ed Stewart comments: 

Tying the aspirational Apple brand to something so lame as a mainstream car company seems like a terrible idea to me.

As for Nest, I think about my smoke alarm or other appliances in the home only once every 3 years or so, if that. It is a non-issue that does not solve any significant need. I can handle my smoke alarm without notes from my iphone. Why apple would want to tie in with such things once again seems a non-starter to me, degrading to the brand's appeal. If anything such features could be done through an app of little significance, a side feature among tens of thousands for those who want it, developed by a third party.

I could be dead wrong, of course. One person's strategic brilliance appears banal and foolish to another.

Good thing we can trade and sort things out.

Carder Dimitroff writes: 

I'm not an expert on Apple. I have no idea what they may be developing. However, I do think David may be offering an interesting idea.

Somebody will offer a simple home management system to manage energy consumption. It would take someone like Apple or Google to figure out a simple, easy to use system. It also could come out of somebody's garage.

Pressure is building for consumers to gain control of their energy consumption. Despite low wholesale prices, retail energy prices continue to increase. Regulators are promoting demand side management policies. Intermediaries are happily removing themselves between the consumer and the [volatile] power markets. Smart meters are being deployed across the nation to help consumers become responsive to market conditions.

The setup is nearly complete. A new day is arriving. Consumers will become fully exposed to the dynamics of the deregulated power markets, which operate 24/7 and change every three to five minutes.

The utility will always own the meter and outside wires. The consumer will own everything behind the meter. Creative developers will begin focusing behind the meter and help consumers manage their purchases of electric, natural gas and water.

Residential and commercial consumers will need programmable sensing and control devices. I have no idea what the technology will look like. However, it needs to be simple, buried and invisible to slow adoption consumers (like automobile computers). It also must manage energy consumption without altering lifestyles.

This is more than managing a thermostat. It is about controlling everything on the consumer side of the meter.

Apple and Google are very aware of energy issues. They are aggressively investing in large-scale alternative energy production facilities (solar, wind, fuel cells). Google invested in high voltage transmission lines.

Combining their energy knowledge with their consumer electronics experience suggests they are in a unique position to offer innovative demand-side management technologies. This would include the opportunity to manage massive amounts of data (Oracle is already trying to claim this space). If Apple or Google takes this path is another question.

Apple and Google have already demonstrated that change usually comes from the outside. One fact we know, consumers cannot expect their plain old utilities to develop innovative technologies. The question for me is whether Apple or Google can still deliver an out-of-the-ballpark product.

Oct

22

Here's an excellent video on how to split a 20,000 pound piece of granite in half. What you think about after watching the video is how musical it was. It's those who have perfect pitch in the markets who can hear the market like the splitter hears the rock.

Oct

15

This book Benson and Hedges presents: Recipes From Great American Inns honestly has the greatest chili recipe ever, plus a bunch of other recipes that have influenced my cooking over the past 30 years. 

Sep

27

 Here is a program that allows you to calculate the area of damage from any type of nuclear weapon, and will even drill down to your home town.

It gives you every scenario in the book, (air burst, ground burst, size etc) and has advanced settings so one can refine the map. The biggest weapon allowed was the Russian 100MT weapon was a beast, but I heard that it's power was dialed down to a more manageable 69MT.

The smallest was a 20KT weapon that would take out a kilometer and that's it.

Sep

25

 The earth is going to run out of natural resources starting in 2030 according to certain flexions. Hasn't that been the mantra for a many years? But the politicians are coming up with a plan (they are always coming up with a plan.) One suspects that whatever initiative they come up will involve more government control and less personal freedom. Free markets will have nothing to do with the solution.

Pete Earle writes: 

It's funny you mention that, as I'm currently reading The Bet by Paul Sabin, which chronicles the growth of the neo-Malthusian 'population apocalypse' movement in the late '60s under Paul Erhlich and the long, subsequent battle with the economist Julian Simon (who argued that innovation and markets would blunt the unrealistic projections of the doomsayers). I recommend it.

Sep

13

 An article in honor of Jeff : Amarillo Slim plays Bobby Riggs in Ping Pong with Coke Bottles.

"Amarillo Slim Hustles the Hustlers"

Jeff Watson writes: 

Some take aways from that most excellent article.

"Once again I proved that you can make a living beating a champion just by using your head instead of your ass. The easiest person in the world to hustle is a hustler."

" So I practiced and practiced until I could hit the ball over the net every time, and right then I knew that Coke bottle was going to make me a boatload of money. "

Sometimes, you need a stall. This one was perfect………………. "Let's get it on!" Lefty said. "No," I said, savoring the moment. "Let's post our money and play thirty days from now. I need to practice a little, now that I see you got yourself a real-life Ping-Pong champion."

" I am not interested in speculating, nor am I interested in making a small score. You see, friend, when I make a wager, the bet has already been won. And if I'm gonna win, I sure as hell want to break somebody doing it."

" I like to bet on anything—as long as the odds are in my favor."

"….I also learned that there are people who love action and others who love money. The first group is called suckers, and the second is called professional gamblers, and it was a cinch which one I wanted to be."

" If there is one fatal flaw, the Achilles' hell of every gamble, it is hubris. No gambler ever wants to lose face, and I have used that psychological edge to my advantage. All I have to do is play to a wealthy man's ego, and not only can I get him to gamble, but I can get him to gamble with me for life."

I can't even count how many market lessons are contained within that story. But then again how much money did my own hubris cost me over the years?

Sep

12

 This is an interesting article for the layman about the changing gravitational constant. One part that intrigues me is their hypothesis that maybe the nature of gravity (the form) is changing and that some other force might be changing it. Or maybe gravity is subject to oscillations? Any change could have interesting consequences.

Gyve Bones writes:

A rather weighty and grave subject for this site, eh? I reckon it falls under the category of ever-changing cycles, and perhaps, BBQ.

Gary Rogan writes: 

It's almost funny to see these scientists very concerned about the possibility that G is changing without much concern about what, in our universe (other than some supposed new field), really determines why it has any specific value vs. any other value or why it's at least somewhat constant through the Universe. Why shouldn't it change, if you have no idea how the value comes about in the first place?

Jeff Watson adds: 

But then again, if gravity can change form, can time and space be far behind? And I'm not talking Discovery Channel stuff.

Gary Rogan replies: 

ANYTHING where you don't understand the root cause (and even then if your understanding is wrong or incomplete) can change. All the fundamental physical laws are basically just observations that haven't been contradicted YET, and all the social science/market "laws" are just observations that at some point seemed correct to enough people. 

Jeff Watson writes: 

I suspect that F=MA would stand the rigors of any test in the macro realm. PV=nRT would probably stand up also, as well as V=1/2 AT^2. The fundamental Newtonian physical laws are pretty intact and have been proven in a variety of ways. Had the physical laws been incorrect, man would have not been on the moon, we wouldn't have landed a rover on Mars etc, Ohm's law(among other things) would not have be proven and I would not be able to communicate with you in this venue. And " the social science/market "laws" you make note of are more of an art than a science. I apply science to markets every day, but along with the science, I also use the art taught to me by my mentor to achieve a small degree of success….sometimes.

Sep

12

As long as I land a few miles up or down the coast from the target, I'm ok. Trying to hit the target exactly feels like when you have $9500 sitting on the blackjack table, and you won't quit until you have the winnings up to an even $10K. Made more than a couple of variations of that mistake over the years. If I'm making a transatlantic sailing voyage, and forced to rely on a sextant and chronometer and depart from Southhampton and I'm aiming for NY harbor, If I end up in Newport, I'm cool because I still got close.

Aug

26

 My 3 year old son recently transitioned from a glide bike to a real pedal bike. For those who are not familiar with glide bikes, they are basically small bikes with no pedals that kids ride by pushing with their feet and gliding on. Here is the type we got for my son (which I would highly recommend to anyone).

We got my son's glide bike after he turned 2 years old. It took him about 3 weeks to figure out, but not long after that he was gliding 20+ yards and could cruise at an adult's slow jogging pace, which looks pretty fast when done by a 2 year old.

So, when we recently got him a real pedal bike, I wondered how quickly he would be able to pick it up, given that I new he had good balance on a 2 wheeler. Yet, even I was shocked when on the third push, he took off riding and went about 50 yards with no aids. Basically, the glide bike made it possible to completely bypass the training wheel stage. Just this morning he rode all the way to the local park.

Anyways, it got me to wondering about the learning process in general. How often do learning aids end up hindering progress (or at best being tangential to progress)?

Common examples might include:

A music teacher that teaches a "cheat" method that ultimately thwarts progress for years.

You get interested in investing and trading, and an "expert" hands you a book on technical analysis, suggesting it is all you will need to profit

A coach who teaches a pet technique rather than proper form

Using calculators in a basic math class in a way that might harm the development of efficient mental techniques

I wonder what things I have unknowingly accepted and used over the years that have made me poorer, more ignorant, and less skilled than I might otherwise be. What are the best techniques to identify and avoid such pitfalls in the future.

Jeff Watson adds:

My son bypassed training wheels as well. When he was 3 and a half, I got rid of his trike and bought him a small bike without training wheels. The way I trained him to ride was to have him put on a safety helmet, then I made him get on the bike and I balanced him and started pushing, running next to him while he pedaled. I must have pushed him a good 400 yards until he started to get the hang of it. Once he discovered the gyroscopic effect of the wheels, he figured out how to balance, and was riding within an hour on his own. Not to say that he did not wipe out, which he did frequently, but he climbed back on the horse every time. Within a week he was an accomplished rider, and wanted to ride with the older kids.

He was an early learner though, swimming 3 different strokes by age 3, and diving and doing flips off the side of the pool by the age of 4 and a half, and surfing and doing skateboard tricks (ollies and kick flips) at age 5. I suspect that he was able to do these accomplishments because there was only positive encouragement and we told him that he could do anything he wanted, despite his young age.

Aug

19

 In this society, the notion of someone having any backbone is quaint. It is also wonderfully discordant with the realities of the society. Expediency has become our byword. Vision and courage are in short supply. Let's face it, few will take a risk unless it's with someone else's money.

And our government is the best at using OPM's to mitigate risk…..well, the risk of their political cronies.

Jeff Watson writes: 

The aforementioned men can be found on the few trading floors that are left, in back offices trading their own accounts. Ayn rand summarized it best when she said:

"The symbol of all relationships among [rational] men, the moral symbol of respect for human beings, is the trader. We, who live by values, not by loot, are traders, both in matter and in spirit. A trader is a man who earns what he gets and does not give or take the undeserved. A trader does not ask to be paid for his failures, nor does he ask to be loved for his flaws. A trader does not squander his body as fodder or his soul as alms. Just as he does not give his work except in trade for material values, so he does not give the values of his spirit—his love, his friendship, his esteem—except in payment and in trade for human virtues, in payment for his own selfish pleasure, which he receives from men he can respect. The mystic parasites who have, throughout the ages, reviled the traders and held them in contempt, while honoring the beggars and the looters, have known the secret motive of their sneers: a trader is the entity they dread—a man of justice."

Aug

15

 I'm just curious: why is the rice market small when the crop is so popular all over Asia and Asia has so much population? Is is because the Asian country make it a priority to be as self-sufficient as they can be even when it's not economical?

Leo Jia writes: 

As a picky rice eater, I think the large varieties of rices segment the rice market. All these rice are not the same at all though they may look very similar. The majority of rice produced in China is a hybrid rice developed by a contemporary Chinese scientist named YUAN Longping. Its mouthfeel is horrible, but it is much cheaper and contributed largely to feeding the large population in the country. Sogi-san commented that rice in Japan costs 4x or more than it does in the US. I am not sure if he referred to the same rice, but to my taste, some Japanese rice are much better than the American one.

There are two rice futures in China, but to my understanding they are both of some small varieties and therefore traded thinly.

Jeff Watson writes: 

Rice is a thin market because the insiders want to keep it that way, and the export market is small compared to other staple grains and grasses. Furthermore, rice tends to be consumed in the country of origin. We export around 3 million metric tonnes if memory serves me correctly, which is about half the US crop.

Aug

6

Bobby McFerrin demonstrates the power of the pentatonic scale in this video.

What market lessons can this offer?

Jul

24

 I heard something on NPR this morning (from the CEO of Mashable) which got me thinking about Apple. Consider: Back in the early 1980s, Apple was flying high–it occupied the high margin section of the emerging PC industry and it was making lots of money. Its CEO Steve Jobs was seen as a major entrepreneur. However, by the mid 1980s, Apple had lost its way, as it maintained its margins even as it lost market share. Jobs had been jettisoned in favor of someone with no computer industry marketing experience. Apple maintained many of Jobs' hires as Apple saw its market share shrivel. The high flyer then was a software company whose offerings ran on a host of hardware platforms–Microsoft. Everyone could use Windows and everyone could use Office. Now, fast forward a generation: Apple is again flying high, determined to hold its profit margin even as it loses market share. But there's a new kid on the block offering a mobile operating system used with different hardware platforms: Android. And Jobs is no longer running Apple. And Apple is again run by someone lacking computer industry (or consumer electronics) marketing experience.

Looking at this picture, I have to wonder if it isn't deja vu all over again. Now, I know that Apple has gazillions of cash that it can use to buy companies, but I'm looking at which of its acquisitions has been that helpful to its bottom line. Not much help that I can see. Kind of like Cisco during and soon after the dot-com boom and bust. Lots of money, not much to show for it. Its products are looking dated (and some products, like AppleTV, haven't appeared at all), several products have been introduced though they no longer elicit the oohs and ahs that characterized the products commanding the profit margins associated with Apple. Its execution on the software side has been little short of awful (the cloud in particular is something Apple doesn't get), and it no longer commands the attention of young engineers in the manner that it once did. And while it's PE is low, there's nothing to suggest that earnings will stay healthy, particularly if profit margins give way.

Is history repeating itself?

Gary Rogan writes: 

Apple is followed by zillions of super-smart people who track every available piece of information, many in real time. It also has a lot of moving parts and a lot of very smart people working for them. I doubt it's feasible to make money by out-thinking them all without some identifiable edge.

anonymous writes:

Didn't they say the same thing about Japan in the mid 80's?

Gary Rogan responds: 

Did Japan have a P/E of 10 and down almost 50% from its recent peak? There doesn't seem to be either irrational exuberance or irrational despair about AAPL but there is frenetic interest. It's latest numbers resulted in some pretty healthy volume after hours and a reasonable jump. Who knew how much it would jump and in which directions? Someone probably did, but it wasn't on the basis that Apple doesn't get the cloud. The point is, if there was ever an efficient market this is it. Not always, not for all time, but for here and now.

Jeff Watson writes: 

Isn't every stock that's not on the Pink Sheets followed by a bunch of super smart people who get tons of info in real time? Do you think the market makers have a pretty good estimate of the value of the stock? Don't insiders in their particular companies know if their stock is too cheap or too expensive? Just because AAPL is a cultist type of phenomena, please don't ascribe mystical powers to the stock. It's going to do what it's going to do, without any regard for the super smart people who follow and trade it. In fact, personal experience tells me that the super smart people are going to feel the most pain.

Gary Rogan retorts: 

I don't ascribe any mystical powers to it at all. It's a stock constantly in the spotlight. In my experience, there are "sleepy" stocks and there are highly followed stocks, in the sense of constant attention being paid to them everywhere. The market seems less efficient in the stocks that are not in the news all the time. If you have a long time horizon, and the highly followed stocks is showing signs of a mania, it may be a good short candidate, and the opposite if there is widespread despair, but it's hard to know. Of course it will do what it will do, I never claimed otherwise, but ruminating that their CEO, who at some point was in charge of worldwide sales, doesn't get marketing or the company doesn't get the cloud, or that Jobs is dead, or that there is this new kid on the block called Android would get you about as much as edge as me claiming that the world population is growing and needs more wheat and therefore going long wheat.

David Lillienfeld weighs in: 

Let's deal with these one at a time, and keep the emotion out of it.

First, Tim Cook was EVP for Sales and Operations, but insofar as he's never held a marketing position in his career (certainly not as long as he's been at Apple), this position seems as much organizational as anything else. His marketing value-add seems to be pretty small, if not nil. Fact. Cook's role has been manufacturing, and he executed pretty well. But that's quite a ways away from marketing, I think you'll agree. There isn't any report suggested that Cook has ever had any involvement in marketing other than this title, and one must note that at the time Cook was placed into the position, Jobs was handling marketing himself. Fact.

Right now, Android is doing to iOS exactly what Windows did to Mac OS in the 1980s. Fact. Apple kept a closed system and IBM/Microsoft an open one. Guess what. The open system won. When the Mac came out, one of the things seen in its favor at the time was that, much as happened with the Apple 2, there was software around to run on it. Same thing today–except it's now in the form of the App Store. Again, fact. We're now seeing the same thing happen in mobile. Google may not be able to monetize Android, but that's probably a matter that will be dealt with once someone figures out how to monetize mobile. (That's opinion, but one I think is supported by facts.) Do you deny that Android has taken market share from Apple, that it's more widely used than iOS, or that iOS doesn't seem to have much place in the low margin East Asia market? Moreover, Apple focused on maintaining margins rather than going after market share–both during the 1980s and also during the recent period. Fact. Earlier, that turned out not to be the way to success. Fact.

As for Apple being followed, that's irrelevant. Apple was heavily followed in the first half of the 1980s. I remember it well. By the latter half of the 1980s, it was no longer followed because it was in the process of becoming irrelevant in the face of Windows. By 1997, the company was on the verge of bankruptcy with 90 days of payroll in the bank. Fact. That's hardly the setting for a followed enterprise. Successful companies are followed. When success disappears, so does the following.

Lastly, if you think Apple gets the cloud, then I suggest you review how Apple's efforts in that space have fared compared with its competitors. I know of few who would opine in favor of Apple's efforts, even the cultists. Let's not forget that fantastic roll out of Apple Maps. Fact. Enough said.

I also noted that Apple has lots of money to work with, but then again, back in the early 1980s, it did too. (It's worth remembering Microsoft was similarly fortuitous–and well followed–and I don't know that it has a similar following today as it did in years past.)

That a generation has grown up since Apple's last appearance in similar circumstances of adulation also suggests that the younger minions may have forgotten that Apple's earlier escapade didn't result in hegemony–far from it. Fact.

As for Jobs, the reality is that since Jobs died, Apple hasn't functioned anything close to what it did when he was around–and he was active until about a month prior to his death. Fact. He may have picked the management team to succeed him, but much as happened back in the 1980s, without Jobs, that team didn't perform well. The contrast with, say, Alfred P. Sloan or Andrew Carnegie, or John D. Rockefeller, or David Hewitt or Adolph Ochs, or Robert Noyce or … I could go on, but the one thing that separates this group of CEOs is that when they stepped down as CEO, it took at least two generations of managers after before the company hit much of a bump. That's the mark of a great CEO–in addition to what happened to the company on the CEO's watch. Jobs didn't do so well with it in the 1980s, and it appears he didn't do so now.

If you don't like the facts, that's fine. Don't like them. But those are the facts. I'll leave the other elements of your comments for some other time.

But let's stick to the facts.

anonymous writes:

Let's cut to the chase. Tell me the long term growth rate of AAPL's earnings and I'll tell you (+/- 10-20%) what the stock is worth today. The bloomberg consensus growth rate is 19%, so the stock is worth about 1090/share.

If you cut it to 10%, the stock is worth 512/share.If you use a 5% long term growth rate, the stock is wroth 340/share.

The primary reason that 19% is wrong is that AAPL is simply too big to grow at that rate — or it would suck all of the oxygen out of room. At 442, it's priced for about a 8.25% growth rate. Not crazy, but 8% is still a lot of growth for such a big company. But their buyback can provide a lot of help in achieving EPS growth. BUT — the chart looks good! 

Jul

17

 Any thoughts on this futuristic contention in this short video "Why Did Einstein Say 'God Doesn't Play Dice'" that in the levels above the sub atomic level, given enough information, we can be always right in our prediction of events? Market implications?

Richard Owen writes:

Stephen Hawking wrote a good article on the evolution of dice thought since Einstein: "Does God Play Dice?"

In Einstein's non science writings he would talk about the comfort he took when things were going badly for him from the idea of a deterministic world.

Can you imagine how bad insider trading is going to get once a time machine is acquired.

Jul

5

I've been recently having success with this basic, very easy recipe

2 cups ketchup
1/2 cup mild-flavored (light) molasses
1/2 cup brown sugar
1/2 cup bourbon
1/4 cup Dijon mustard
3 tablespoons hot pepper sauce(Tabasco is fine)
3 tablespoons Worcestershire sauce
2 teaspoons paprika
1 teaspoon garlic powder
1 teaspoon onion powder
Salt and pepper to taste

Mix everything together, and bring to boil and let boil to a proper consistency. Works equally well on pork, beef, chicken, and shrimp etc.

Jun

30

 The Mrs and I are at Twickenham to see Rihanna with two no show tickets to sell.

What is the correct algorithm for touts (a.k.a scalpers in the US)?

First ask to buy then use that as a reference for an offer?

What is market standard discount an hour before start?

And what average vig does a tout make?

Here is my fast hand analysis of the market made by ticket touts.

Touts are generally criticised as parasitical, like many financial market participants. However, they provide a valuable service. Since concertgoers know there will be a market made, they are willing to show up for events without tickets. Last minute spare tickets that would otherwise be worthless to punters are therefore saleable.

For a £60 Rihanna ticket at Twickenham as the base of calculation we can note the following:

- Initial instinct in selling a ticket before the event to a tout might be to accept a discount to face value.

- The touts take advantage of this by using anchoring. Different touts rapidly quote heavily reduced prices of £5 or £10. This is accompanied by pained faces and "there's no punters around love" despite a stream of people walking by.

- Conversely, reverse anchoring is recommended: ask the tout "how much to buy a ticket?", then when they quote their price say, "ah, that's good, I have one to sell". And vice versa.

- In fact, the touts carry inventory, some of which they must have purchased before the event. This indicates that they expect to trade out their inventory for par or above, in order to avoid capital losses.

- Since the market is disorderly (although there may be unspoken 'exchange rules'), a punter could in theory join them and front run the next bid.

- All this suggests that tickets should never need to be sold for less than face value, despite this being the typical deal struck by punters looking to sell. This is especially true for ticket pairs.

- The tout's inventory drops to zero value at the time of the event. However, with Twickenham as our example, there are plenty of pubs and clubs nearby, one assumes that the last minute backup plan is to prowl the pubs offering the tickets to couples at knockdown prices. If offered a £60 ticket for £10, the price of a few drinks, one assumes it is easy to trade out of the inventory to locals at the last minute.

- As a finger in the air, one feels a buyer looking for a ticket before the event would pay ~£150 (and this is without factoring in any 'hotness' of the tickets in the weeks before the event thanks to EBay, etc.).

- Thus, for sake of calculation, if you assume (wrongly) for each tout a 50% chance of having to sell each ticket held in a forced sale just before the event at £10 and a 50% chance of getting it bid at £150, it suggests an average liquidation value of £80.

- If tickets are on average bought at ~£20 and sold/liquidated on average for £80, for a £60 ticket that's £60 or 100% roundtrip vig. For pre-purchased inventory, that's £20 roundtrip profit or 33% vig.

- So if 80% of inventory is pre-purchased and 20% bought in the market, that's an average vig of £28 or ~50%.

- For a ~50k seater concert, £3m of ticket inventory exists. So for every basis point traded (5 tickets) that's £300 face value.

- So for each basis point traded (5 tickets) that's £140 profit to the touts.

- It's hard to guess the actual number of basis points traded without empirical data. If you guessed 25bps, that would be £3500 profit to the touts.

- Since taxi drivers double up as the stereotypical tout, and they typically make ~£12/hr, for three hours work (£36), that would suggest an equivalent hourly income for ~100 taxis drivers (ignoring a fee for "return on risk capital").

- The above suggests either (i) very thin trading <<25bps of face value, (ii) my vig estimate is way off, or (iii) this is a way to make supernormal profits by taxi drivers. I eyeballed about 5 touts in total at our gate, so generously say 25 total.

Jeff Watson writes: 

 My dad used to scalp tickets when he was a kid. He financed me to scalp the Rolling Stones 1971 concerts, and I had to pay kids to sit in line to get the tics. Typical of my dad, I did all the work and he got his 60%. Still, it was a good learning experience, I made a couple grand (which was a lot of money in 1971), and that money was the seed money for my first excursion into soybeans and commodities in general. Had I never scalped the Stones concert, I would probably be a drone in a lab somewhere with a much different career path. Funny how the most minor things in life can affect the biggest changes. Heck, the most minor things in the market can do the same thing.

Richard Owen responds: 

That reminds me of a story told to me by a friend acquainted with one of London's most successful touts. He is known at "Gary One-Point-Eight". Why? Because he bought a house in Chigwell worth £1.8m with the proceeds.

Jun

20

On the website for Mega-Millions Lottery, to encourage action, they are giving "statistics" for their players, much like the statistics one sees in a keno room or at a roulette table. Very interesting. After all, balls with numbers on them have memories…..just like coin tosses, ha.

Jun

12

An edge can last a long time, but when a paper is published outlining a system with an edge, sagacious people note the edge and start trading that system and natural market forces move that edge to zero. We all know people who have shared their systems and their edge. Regrettably, I've given away a few myself. Once they're shared, in my personal experience, they tend to disappear quickly and may not reappear for a very long time. That's why I would no more give details of my methods than I would give perfect strangers a glimpse into the most private areas of my life. The only consistent edge is to pay the price to have exchange privileges, able to buy at the bid and sell at offers on the inside market. You won't get rich but probably won't get killed either. But then again, I should be talking…….Ceres decided to give me an auto da fe today, with musical accompaniment, and she used a cat of nine tails in 7/8 time.

Jordan Neuman writes: 

Hi Jeff,

Interesting note. I have found that edges go away even when I don't give them away — if I am paranoid, I would think I am in a Truman show. Others start talking about what I discovered eventually, and I also wonder if I discovered it because of what others have talked about previously. Thus, I am not sure if edges go away faster if you discuss them versus the null of not doing anything. I think it also depends on what the edge is…some like the January effect will last a long time because of tax arbitrage while others might fade to equity-like risk/reward and then lack the "natural market forces" to fade further.

Regards,

Jordan

Jun

11

 A quote from an interesting article follows below that refutes the conventional images of drowning. Closest I have come to drowning as a kid was at the Y when a smaller child, playing around, jumped on my back and put me in a choke hold while I was swimming underwater. It was quite a tussle to get him off and make it back to the surface–the nearby lifeguard didn't see it.

The Instinctive Drowning Response – so named by Francesco A. Pia, Ph.D., is what people do to avoid actual or perceived suffocation in the water. And it does not look like most people expect. There is very little splashing, no waving, and no yelling or calls for help of any kind. To get an idea of just how quiet and undramatic from the surface drowning can be, consider this: It is the number two cause of accidental death in children, age 15 and under (just behind vehicle accidents) – of the approximately 750 children who will drown next year, about 375 of them will do so within 25 yards of a parent or other adult. In ten percent of those drownings, the adult will actually watch them do it, having no idea it is happening (source: CDC). Drowning does not look like drowning…

Full article here, "Drowning Doesn't Look Like Drowning"

Jeff Watson adds:

As a surfer, I have saved more than a few people from drowning. Every instance was with them getting caught in the rip and trying to get out by swimming against the current and becoming exhausted. I would paddle over to them and insist that I tow them in to shore. Often, people would refuse my assistance, not realizing their danger. I sat on my board nearby, waiting for them until they changed their mind, or started to swallow water or go under. My Senior Lifesaving teacher once told me that one needs to get control of the victim before you can make the rescue. My own technique is jabbing my thumb as hard as I can into the side of their rib cage (between the ribs) which makes them submit. And you're right, drowning does not look like drowning. Fellow dailyspec-er, George Parkanyi should recount his heroic life saving experience. 

Jun

4

Gerry Lopez, might not be the best surfer ever, but his style approaches sublime. No other surfer, ever, had the natural style of Lopez. I wonder whose style in the world of speculation is similar to his. 

It's his flow, the way he glides along the face, always on the best part of the wave, gets tubed, and casually stands up fully erect, shakes some water out of his hair, little smile on his face, then kicks out of the wave and starts over again. He is totally relaxed, zen-like, despite the conditions being really hairy.

What you never see with Lopez is the horrible wipeouts that he took as the cost of doing business. He was brutalized by the reefs under the waves, yet he always kept riding. Lopez's style is something a trader would want to emulate but on a different plane.

Richard Owen writes:

 An equivalent investor would be Crispin Odey.

The only man in town with enough style, accrued wealth, and know how to swing a book that actually looks like a hedge fund of old.

Able to turn gracefully on a wave before it engulfs him. Who pulls out the longboard, the quad, etc. dependent upon conditions. And who is likely as fascinating off the water as on.

Jun

4

 Blackjack tables seem to be the major profit centers in Vegas, and I don't see them going away anytime soon. The house has the edge when you're playing a "perfect game." Make one or two mistakes or deviations from the perfect game and the house vig goes to ~18%.

At the Riviera, if they suspect you are counting, that shoe gets reshuffled every other hand. On those non-regulated offshore gambling boats, they either put in a mechanic or a gaffed shoe to bury you. Blackjack, roulette, slots, lotto, keno, etc are way too tough for me.

Steve Ellison writes:

I had three fraternity brothers on the team referenced in the below article. The most obvious parallel with trading is that casinos won't tolerate any player who consistently wins. Casinos have rules against card counting, but the principle applies in other games, too. My wife knows a guy who has won big at video poker and is banned from several casinos.

"Aces Return to Vegas for Gaming Panel"


"Blackjack is the 'minor leagues,' said John Chang '85, one of three alums from the notorious MIT blackjack team who returned to Caesar's Palace in Las Vegas May 28 for a panel discussion at the 15th International Conference on Gambling and Risk Taking.


The Las Vegas Sun reported on the panel, at which Chang joined Houh '89, SM '91, PhD '98 and Andrew Bloch '91 for a frank discussion of the years-long streak that MIT students enjoyed, putting their math skills to practice.

Chang had to join the panel remotely, answering questions in a prerecorded session, since his ban from Caesar's (among other casinos) is still in effect. …"

Jun

3

 When I was a 9 year old kid, my parents told me that a diamond was the hardest thing on the planet, virtually indestructible. A friend came over, and we were talking about Superman and indestructibility and I told him that Superman was fiction, but a diamond was impossible to be damaged, since it was the hardest thing in the world. He said, prove it, and I said OK, and even made a huge bet of all my baseball cards on the outcome. I sneaked into my mother's jewelery box and filched a 1.5-2 ct loose diamond she had. Brought it downstairs into the basement where my dad had a small anvil. I put the diamond on the flat surface of the anvil, grabbed a 5 lb hammer, took a swing, and came down really hard on the diamond. I thought it would just bounce off, but imagine my surprise when all I found that the diamond had turned to dust. Later on that afternoon, my sister ratted me out, and I got that "Go up to your room and wait until your father comes home" speech. My dad came home, went upstairs to my room and wanted to know why I would destroy a very expensive diamond. I told him that both he and my mother told me that diamonds were the hardest thing on earth, virtually indestructible, and I was just proving what they told me to a disbeliever. After all, my own parents wouldn't lie to me or give me unscientific facts.

I thought that my explanation would suffice, reason would prevail, and I'd be in the clear, but I was still grounded for a week, had to do all the dishes, polish all the silver, wash floors, plus I lost a my entire baseball card collection when I paid off the bet.

This was the first experience I had as a kid that taught me that adults were just as full of crap as kids and to not take their word as gospel. That lesson alone, when applied to markets and gambling, gave me more than a few million % return over the years. It took me the rest of the summer to win all my cards back as I had mastered the trick of flipping for cards. Learning the mastery of flipping cards was another story in itself and was the result of losing all my cards the year before to a big kid in the neighborhood. It takes hours and hours of practice, practice, practice to learn how to flip cards to give you an edge.

May

31

 For the most part on this site, we discuss the big picture and large important markets. We discuss their stats, their trends and their probabilities.

By focusing only on these large markets (usually indexes and their derivatives) we can lose sight of the smaller markets and often we forget those markets even exist.

By focusing only the large, we not only miss out on "alternative" opportunities, we miss out excitement and ready made profits.

Therefore, I would like to point out to the list some alternative markets in baseball.

As I'm sure everyone on this knows, there are really only 3 teams in baseball. The Yankees, Red Sox and Orioles which trade in the AL East market. The Trinity of Baseball, if you will.

Now, most people who follow these team know that there are also at least two other teams in called the Devil Rays and Blue Jays. This is known because every once in a while, either the Yankees, Red Sox or Orioles has to play one of these teams. Of course, there are "lesser markets out there that occasionally pop up and as a result the only three teams that really exist have to go trade (errrr….I mean…..play) in those markets as well.

Many of the anointed traders (fans) might be confused by these other markets, and not only not know anything about them, but may not even be sure they really exist. Because, they are in what Dr. Zaius refers to as "The Forbidden Zone", or as some of our anointed betters refer to it: Fly over country.

These alternative markets are commonly referred to as the AL West and the AL Central.

Now, I need you all to buckle up because I'm gonna tell you all something that will rock you at the core of your belief system. I'm gonna challenge your belief in the existence of the Trinity. For even beyond the rumors you hear of the AL Central and the AL West and the almost credible reports of citings you hear about teams existing in "The Forbidden Zone", I am going to tell you that even more than you can imagine is in the Forbidden Zone…..

You see, a little know alternative market actually does exist. It is called "The National League"….I know, I know, stay with me here. I hear your gasp and your cries of "HERESY, HERESY". But if you will stay with me, I will lead you closer to the truth.

You see, there is market out there right now that you can trade in that will bring you much pleasure. It is market based on teams that are built on fundamentals, coaching and training in the minors.

You see, not all teams are bought on the free agent market. Some teams have only a fraction of the budgets that the Trinity of Baseball has.

And these teams are doing quite well right now.

For instance, if you were to google "MLB NL Central", you would find that there are three teams that dominating. And the third best of those teams, as of yesterday, would be in FIRST PLACE in every other division in MLB.

One of those teams, a mid-market team, has a long storied history of success. A history of growing their talent internally on the farm, and making wise free agent acquisitions to lead the nucleus of home grown talent. They are so good at this, that they have won the second most championships in the history of the game, second only to the head of the Trinity, the Yankees.

And if one were to compare the money spent in reference to winning championships, the Yankees aren't even a close second to this team.

What team am I talking about?

Well, the St. Louis Cardinals, of course.

Now, I know that many of your may not know about this market, let alone have ever even bothered trading in it (or following it).

But this is a market that is worth following as there are many life and trading lessons associated with how this market works, how the team works and how they consistently build championships teams and teams that contend year after year after year.

Throw away your belief system realize that great teams are not spontaneously bought and magically appear over a few days. The late George Steinbrenner may put together championship teams in 7 Days, but there are a lot of teams out there, like the St. Louis Cardinals, that grow their teams over time….teams that evolve into Champions.

And that is your snarky lesson for the day.

One of those teams, a mid-market team, has a long storied history of success. A history of growing their talent internally on the farm, and making wise free agent acquisitions to lead the nucleus of home grown talent. They are so good at this, that they have won the second most championships in the history of the game, second only to the head of the Trinity, the Yankees.

And if one were to compare the money spent in reference to winning championships, the Yankess aren't even a close second to this team.

What team am I talking about?

Well, the St. Louis Cardinals, of course.

Now, I know that many of your may not know about this market, let alone have ever even bothered trading in it (or following it).

But this is a market that is worth following as there are many life and trading lessons associated with how this market works, how the team works and how they consistently build championships teams and teams that contend year after year after year.

Throw away your belief system realize that great teams are not spontaneosly bought and magically appear over a few days. The late George Steinbrenner may put together championship teams in 7 Days, but there are a lot of teams out there, like the St. Louis Cardinals, that grow their teams over time….teams that evolve into Champions.

And that is your snarky lesson for the day.

Jeff Watson adds:

Gibson, 1968, greatest season of pitching in baseball? What about 1968 when Denny McClain won 30 games? Who's done that since?

May

28

Aversion to losses or aversion to risk? Which of the two is addressed by willingness and ability to close out losing trades?

Well, without invoking mathematics where it is not necessary, it is common and logical to place on the table that when a losing trade is closed one has the willingness and aversion to the risk of the persistence of loss becoming into a bigger one and one does not have aversion to the present level of loss in being accepted.

Now on the other hand, unwillingness to stop out a losing trade is indeed loss aversion.

The computations that show that having utilized some sort of mechanical rules for stopping out adverse incursions actually increased the probability of meeting with adverse incursions is totally flawed abuse of statistics.

Several arguments:

1) Historical data analysis does not undertake the "uncertainty at a given moment to decide upon" into account and is definitely incorporating hindsight 20:20 vision mind-set.

2) Any measurements of uncertainty and thus risk are never definite, since measurement of uncertainty too will be having an uncertainty of its own. So a trader in the middle of a losing trade has to decide that the level of uncertainty in his method, mind or cognition regarding the calculation of the "value of uncertainty" in his trade has become too high for him to handle. That's where humility, the currency that prevents others from profiting more from your mistake, can come into play and allow the willingness to hit the stop.

3) However, when either with or without the illusions of statistical computations of stop losses increasing the probability of meeting with more losing trades, one fails to control the human weakness of loss aversion, to somehow and anyhow turn that loss into a profit, one is becoming totally risk-insensitive. From skill, the turf changes to the power of prayer. The game begins to change from action to hope. Inconsistency of thoughts thus turns one into a trader who is continuing to hold on to risk without a mental apparatus to assess it or react to it. As the loss continues to grow not only the lack of willingness to take it hurts, the ability to accept the increasingly bigger loss also dwindles rapidly.

I am ready to be thrown before any firing squads of mathematical minds and ideas on this list if they can with or without numbers help me learn how come this list celebrates and cherishes a human value of humility and yet indulges in an idea that staying on in a trade that has incurred a level of loss greater than anticipated when the trade was opened are mutually consistent.

I would close my submission for now with one thought:

When loss aversion creeps in it makes a decision system (mind) risk-insensitive and with no respect for risk, returns are impossible. Yet, if a mind continues to be risk-averse it does not have loss-insensitivity and in humility such a mind closes out risk that has turned out to be less than comprehensible.

Phil McDonnell responds: 

Since I am the well known culprit I shall give Mr. Kedia a reply. If the probability of a decline art the end of a period of time equal to your stop is p then the probability of losing the stop amount with a stop loss strategy is 2 * p. It is simply a derived relationship. It is what it is.

It is not a misuse of statistics but rather a description of how a stop loss exit strategy will change the distribution of returns. Larry Connors studied over 200,000 trades from a winning system and compared the results with and without stops. He found the use of stops increased the probability of loss and reduced the expected gain.

In my opinion the best way to trade is to reduce position size so that no one loss hurts your account too badly. That means many small positions to me.
 

Larry Williams adds:

Ahhh here I go off on a rant; please excuse a tired old mans bitterness at system vendors who claim stops hurt performance.

Yes, they are correct in that the statistics of your system will look better if one) you don't use a stop and two) your use a market with a perpetual upward bias like the stock indexes have been, usually.

They are absolutely totally incorrect in terms of living the life of a trader. So what if I am long in a position that eventually shows a profit but because I did not have a stop loss that one trade moved against be 20,000 or $30,000 and it took a year or so to get out of? Yeah, the numbers look good (high accuracy) with no stops but it's one hell of a lifestyle.

High accuracy is a false God.

Consistency and never being in a place where you can get killed is more critical. Perhaps Mr. Connors has never sat through the reality of a large loss, especially in a large position. I have; I would rather battle the devil at midnight on a new moon with both hands tied behind my back.

It's one thing to have a system with "good numbers" it is quite another thing to be a trader and have to deal with reality.

It only takes one bullet in the chamber to kill you when playing Russian roulette. As near as I can tell trading without any stops, in any way whatsoever, is just the American version of this form of spinning the wheel.

Play the game as you wish but please heed the warnings of an old man.

Leo Jia adds: 

I have been studying the use of stops. Due to loss aversion I guess, I would like to use narrow stops. But among the various strategies I have yet found one working well with narrow stops. Good stops have to be relatively wide in my cases, but having no stops or stops that are too wide clearly hurts results (my trades are time limited). So a good choice for me is to size the position according to the stop size.

Sushil Kedia writes: 

If you reduce position size can it be argued that a position of Size N reduces to N-n implies that you took a stop loss on n lots out of N you held. Then too, it validates the fact that you do take stops.

Anatoly Veltman writes: 

Larry covered main bases (different markets, different position sizes, different lifestyles) pretty well. I just want to be sure that reader doesn't end up with wrong impression. I think the best conclusion is "it depends".

And because my act follows Larry's (who is certainly biased in favor of stops), let me try this. If you enter based on value (which is certainly against trend), then there is no justification available for a stop. Unless you argue that this stop proves you were an idiot on the entry. But if you are an idiot on value entries, then why play value…

Anton Johnson writes: 

 The problem with using Conners' simulation as evidence that placing a trade stop-loss reduces returns is that he tested a winning system that likely had never experienced any 5-sigma negative excursions prior to the test date. And of course there are no guarantees that his strategy, or any unbounded trading strategy, will perpetually avoid massive drawdowns.

When implementing a strategic trade, a good compromise between profit maximization and loss mitigation can be achieved by balancing trade size along with a stop-loss, which when placed at a level that only an extreme event will trigger, will likely contain losses to a predetermined range, and also prevent getting stopped-out of a potential winner. If one is disciplined, maintaining a mental stop-loss level is preferable to an order pre-placed in the book, and available for all the bots to scan.

Larry Williams adds: 

But speaking of stops, I go back to my litany, my preaching the essential reason for never putting stops on an exchange server, or even your brokers server. Putting stops on servers means that your stop becomes part of the market. And not in a positive sort of way either. Pick a price, hit the button, and take the hit. Discipline is key here.

Ed Stewart writes: 

A trader needs a decision process for managing the expectation or expected value of the trade as well as the equity position. The problems occur when these two things are in conflict.

The thing with stops is that at times it makes no sense to get out of a trade when the expected value is still good. What is the difference between exiting at a small stop-loss point 4X in a row vs. one loss of that same size? Well, if at each "stop out" point the expected value was favorable, it makes no sense, one is just locking in losses. At times the best "next trade" is simply staying in the current trade.

However, I see Larry's point and it is a good one. Yet, the example of letting a loss get huge or holding an underwater position for a year is to me something of a false alternative. No exit strategy but hoping for a profit at some point is not a reasonable alternative.

What maters, I think, is the expected value of the trade at each moment, and balancing that against equity and a margin or error to ensure, "staying in the game".

Given this I always trade with mental stops, if not on individual positions, on total account equity. Having that "self-preservation" discipline is useful.

Jeff Watson writes: 

I learned very early on in the pit on how to go for the stops, and that weaned me off of stops completely (except in my head).

May

21

Here is a deeply flawed article in Texas Monthly about BBQ, but the article contains an interesting (but somewhat inaccurate) map of BBQ across the South. The flaw is the essential conceit that Texans have by thinking their BBQ is the best in the world and every other BBQ is inferior. I've had some inedible BBQ in Texas and I have had some awesome BBQ in the North when Mr. Humbert was gracious enough to take me to a BBQ place in CT. That place was better than any Texas BBQ I ever had.

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

7

 My wife wrote:

Does this count as an Economics lesson? I pay 1 cent per dandelion picked from our yard (organic control). Two children secretly agreed to leave a breeding stock. (A third child ratted them out, but I did nothing as there were more children not party to the agreement than party.) One of the children who made the agreement secretly picked all the dandelions that had been set aside as breeding stock and turned them for cash. The other wigged out.

Jeff Watson writes: 

Very smart kids who deserve a reward. But I advise you to gently punish the one who queered the deal. Nobody ever liked or respected a tattletale.

May

6

How often does the market offer hidden messages, specifically tailored for a particular segment of the market (victim of the Mistress)? Here is a great example of a hidden message in real life: "This Ad Has a Secret Anti-Abuse Message That Only Kids Can See"

What are the market parallels, if any?

May

5

Has anyone noticed the rally in the 10 year Bund? I thought that it perhaps had finished, but that's not the case. The yields just keep dropping.

Anatoly Veltman writes: 

David, if you missed that story: major Central Banks vouched they'll never raise rates again. So you can't be short any core sovereign bond today.

My take, however, is that following 32-year-long advance in US bond prices — it's just as important to be ready for the reversal day. Once you think we are getting a reversal day, just imagine how many years you'll be following this position down!

Jeff Watson writes: 

What if bonds don't reverse for a long time? That could happen you know….Logic does not always work. How long are you willing to wait, 10 years? The Fed has stacked the deck and the new deck is a 6 deck blackjack shoe, marked cards. and the deck is very rich, a counter's delight, and there is a run of AK,A10,AQ, all paying the new, reduced odds of 6:5 for blackjack that many games are offering. Unfortunately, when they reshuffle, we get the 2's and 6's while the dealer shows an ace, and the key element to keep the sagacious away is the dealer gets to go last after we all bust out. How do you beat that game? People tend to over think things, and assume that because A=B and B=C, then A=C. We know that the best trading opportunities sometimes lie when A does not equal C for whatever reason. Sometimes I tell people that intellectualize too much to take a page from Charles Bukowski, who in an alcohol fueled rant said "Don't try," but I changed that to "Don't think." I'd like to know how much money has been lost by "Thinking."

Anatoly Veltman adds: 

First there is a Long trade, but I'll let someone else formulate it. I'm really no good in playing the momentum of a 32y old trend. Then, there will be a short trade.

One way to formulate the future Short trade: what's better a. to enter Short at some relatively high point OR b. to enter when the future down-trend "is" in earnest.

I'm reminded of Gold nearing $1900 in 2011, with Rocky (who's been Long since probably $1000 lower) proclaiming: what's the use out-thinking the trend just because she may be "overbought". There are no signs of a bubble, just stay the course. When the top is finally confirmed and the down-trend develops, you'll have years of riding a Short…

So in case of Gold, Rocky finally declared in 2012 that "something has changed in Gold" as it was rapidly correcting toward $1525 for the second time - and he didn't want to be Long of it any more. In 2013, Rocky was anticipating the break of $1600, and announced his now Short bias.

Back to Bonds: there are way more signs of a bubble!! So lets see if Rocky will pick a., b. or a future way of Shorting I haven't thought of.

a commenter adds: 

There are those self promoters who picked the real estate bubble (Shiller et al), the guys who predicted 2008 etc. What you don't hear is their predictions that went south as that would diminish the brand of the promoters. Even a broken clock is right twice a day. And really, how does one really know, and how does one predict with certainty there is a bubble? And if it really is a bubble, who cares as long as you can sell at a high price on the way down. Isn't commentary regarding the morals of whatever kind government action a waste of time? The government does whatever, you go with the flow and relax. Fighting headwinds, fighting the Fed, wasting time on worrying about why things happen, making decisions on emotion and false logic…..these little things are what make the account balance bleed, and drive one insane.

May

2

 Novices can be the scariest opponents a solid poker player can face, especially in a one on one situation. Novices make bad bets all the time, bets no rational player would ever make. Bets like drawing to an inside straight, which gives him a miserable 4 outs, but happens. Since you are playing an irrational player, someone who might have more "gamble," and less knowledge, you need to change your game. If he is really loose, a good player will play tight and vice versa.

In poker, not all weak players are novices. Some are lifetime degenerates that are like ATM machines. I think novices can be extra dangerous because of the belief that beginners can do very well (some would call it luck). I drew a pat queen high straight flush on my very first commodity trade (soybeans) almost 40 years ago as a 16 year old kid, and things like this happen. Most of the poker games I used to play in were full of very tough players, opposing forces, so to speak. I've traded against some pretty solid players in the pit. In both poker and trading, one needs to play around, and not against the tough player, and go after the weak (which is not necessarily the novice). Does the least irrational player come out ahead in the long run? In poker or trading, that is worthy of further study. Then again, I have found on many occasions, the most rational thing to do is act irrational, or at least make your opponents think you are acting irrationally. In any case, the key lesson is to play a very strong defense at all times and keep one's guard up.

David Lillienfeld writes: 

The same thing is true in chess. When something moves out of a rational context, it is challenging indeed. When I played tournament chess (a lifetime USCF member) a while back, I used to go for the upset prize–it meant winning one game instead of the best of 5, and the prize was not quite that for the tournament overall, but it also involved less work. My opponent usually had a much higher rating than I did, and often didn't pay much attention to the board because, obviously, I wasn't close to his measure and he could focus on other things during our match. Sometimes, in the early middle game, I used to start using inane sequences of moves that would absorb lots of my opponent's time (we played on a clock) as he tried to figure out what I was doing. This would absorb a lot of his time. I would then sacrifice a piece or two, which made no sense, but it again absorbed time on his end figuring out what the madman he was playing against had in mind. About half the time, his clock would expire and I would win what was basically a lost position. It's not the best strategy for trying to win a tournament, but for the upset prize, it worked a lot of the time.

Anatoly Veltman comments: 

You may laugh, but at the level of Soviet and International grandmasters, directly the opposite was sometimes practiced by a few leading players who were best of the best in lightning chess (blitz). If they didn't like what they had on the board, they would purposely allow their clock to run down to only like 50 seconds remaining. What they gambled on was that the opponent, who already had a very good game on the board, might instead focus on their clock…

Apr

29

 BUT WAIT! Get a Second One FREE, just pay…

We've all heard the late-night spiels for some lightweight crinkle hose, or a new miracle chopper, carpet-tack holder or cat feeder floor- shield. Or domestic mail ricin detector.*

The ad engagingly shows you how fabulously easy it is to use the doohickey, how much time or energy or weight it saves you ("Why should you expect a cane to support you, if it can't support itself?!" Sophistry aside). Then comes the money shot, as it were. You can buy this life-changing device or product or varmint destroyer for just $whatever. Whatever or so. O, oh joy. Then the kicker: Wait! We'll "give you" another one, totally free! "Just pay postage and handling, extra."

So if P&H are, say, $9.99 for the first item, and it can easily accommodate a second item neatly spooned in a slightly larger cardboard box shipped to your front porch, why do you have to pay a whole extra $9.99 for the "free" second item you don't really need?

Because the manufacturer/retailer makes all their profit on that near-subliminal catchphrase: "Just pay extra postage and handling." Wow, what a deal. If you weren't so logy from sleep deprivation when you hear these infomercials, you'd pick up on the dicey proposition to separate you from your wallet with a feint to the word FREE! and the sub-audible addendum about the P&H extra cost.

Who knows? Maybe these incontrovertible must-haves are foreign, and they fall into the "overseas contingency operations" beloved of a certain gunmetal-haired appointee of the current Administration that do merit extra postage, taxes, handling, to get through Taiwan border sentries…? Last giggle: If you try to purchase the device or product without the add-on, they won't sell it to you. Discretionary purchases that wend their way into mandatory.

What brings this to mind is the bait and switch we experience with the late-night chief executive, who feeds us one message about "saving babies" in the Newtown, CT, massacre of kindergartners, a tragedy, versus his "celebration" of the long-lived, mostly government- underwritten abortion palace of Planned Parenthood, whose sole purpose is to crown our efforts with yet another aborted fetus or seventeen million.

The issue is laden with land-mines, yes, we know. For a period of time, most advocates of limiting abortion were, for perhaps one or two decades, advocates of "women's right to choose." A neat runaround for the notion that, au fond , we are speaking of the slaughter of little humans.

The worshipers of the faux notion of climate change, a theory that is maximally disputed by many, especially scientists without a Democrat agenda or debts, don't apparently believe the indisputable fact that it is human life developing from the time of the dividing zygote. They'll swallow climate change on the falsified info of dubious charlatans and wannabe's, but won't accept fertilization: Call them Cirque du the sun-addled.

Because we are never to be inconvenienced, we women must be permitted our hard-fought right to erase our 'mistake' (the current president's locution when once asked about the possibility of one of his daughters' becoming pregnant—she should not be "punished" with the results of her "mistake"). We are busy. We are important. We have other things on our minds. A baby would interfere.

Mind, we are not addressing the issue of pregnancy from rape or incest, or a threat to the health or life of the mother-to-be, all of which have legal, moral, ethical perspectives and dimensions apart from female or marital convenience. But in view of the ongoing but strangely muted coverage of the Kermit Gosnell trial for his decades-long grisly handling of babies born live after his maladroit abortive efforts, and his consummate population reduction of gestational mothers who pass his way, it is mystifying the larger public is not gummed to their recliners at the gory spectacle of "snipped" infant spines and shelved, bottled baby parts ( no pimiento included, sorry, folks )–scenes that have kept the tabloids in chocolates and Crystal for eons. Why the reticence?

It has all the ingredients of a bloody disaster ("tragedy" being the White House resident's fave locution, after not tragedies but deliberate acts of heinous sabotage and slaughter) so beloved of the famed "Never let a disaster go to waste," or waste disposal, crowd.

Hey, Janet Incompetano: Here's a REAL "man-caused disaster. " Yet Ms. Janet is…mum…on this issue that upholds and justifies her tortured and otherwise bizarre linguistic pretzels.

Doesn't Dr. Kermit warrant a wee wrist-slap by the nannygrams of the regulation-happy Ubama Reich? Don't hundreds of killed infants near to term, a Dr. Caligari-level chamber of umbilical fetal "preserves," and a handful of regrettably slain moms-to-be, rise to the level of public outcry and revulsion by the ever-outraged #1 Peevish POTUS and his ever-feckless companion Incompetano? Et al? (Actually, no one in the past fervid five years under BHU has stooped that far. No one et Al. Yet.)

But wait! You get two monsters in one—kills live-born babies and their 'inadvertently' murdered moms—just handling & postage, extra. Ye Presidential nostrils do not descend to the aroma of this particular olfactory stimulus.

Is there a way to package the Gosnell's gossamer tale of grue with the darned inconvenient Tsarnaevs of Boston Bombing infame–which colorful duo (and screeching family) "have no known connection to any known terrorist sect or group," right, Ms. Janet? And did this all wholly unaided by foreign monies or assistance; correct, again?—so that we get them both, FREE, just adding correct postage & handling, so we can drop-ship them anywhere out of the orisons of the lovely folk who brought you UbamaCare, otherwise dubbed the Affordable Care Act, whose very vocal proponents are now scrambling to exempt themselves from its regulation-barnacled, writhing, exorbitantly unmanageable and debt-ivied tentacles?

Call it Don't ask; won't sell.

*restrictions & conditions apply

Jeff Watson writes:

That get one free for additional S&H is exactly the same thing they busted McDonalds for when they offered super-sizing. I've often wondered that when one is at the airport and the bar at the airport offers a drink for one price, then offers a double for a little more, how much their profit margin goes up? Hey, with a short pour, a little at the top for taste, their profit margin might double. I know about up-selling, as that retail 101, and will make a mediocre business a profitable business. I wonder how many times a day the Mistress of the Market tries to up-sell the players? Probably on every trade…

Apr

29

 I really enjoyed this article "The History of Creating Value". It has a great timeline showing how people made money through the ages.

Stefan Jovanovich writes: 

Warrior — "We can plunder grower's food for the King". Actually, not. Food is grown and taxed under the King's authority so that the King can afford a standing army that picks fights with other standing armies.

Craftsman — "If we make things and found cities, warriors won't get us." Kings need palaces and priests need temples and they are sure as hell not going to be stuck out in the boonies.

Skipping forward…

Oil Driller — "since industrialists need to feed cars, oil" . Oil was used first for illumination, then for furnaces (both for direct heat and for steam), and only then for gasoline, which begins its history because the Russian oil production has created a kerosene glut.

Corporate Executive — "cars made large factories into corporations" - So this is why the East India Company and the Pennsylvania Railroad are really outliers.

Ms. Vital is the new winner of the Historicity Prize and is entitled to a full case of scuppernog.

Gibbons Burke writes: 

The underlying thrust of this timeline is to argue that being a startup founder is the route to wealth and value creation today. Which is a great idea, and in line with Distributist economic organization, which holds that the main problem with capitalism is not when you have too many capitalists, but too few. The more owners there are in the society, the better.

But while the idea is a good one, the reality is that the road to wealth proposed by these startup evangelists is not to found and create a company which will provide a way to generate value for the owner over his lifetime, but to come up with a novel idea, develop it to the point where it has a proprietary advantage, and sell it to some corporate behemoth who has decided it it easier and much less risky to outsource its research and development to masses of proles living the startup dream. When one emerges with a good idea, simply snap it up and bring it into the corporate umbrella, and either monetize it and develop it further, or kill it because of the disruptive threat it poses to the existing herd of corporate cash cows.

Apr

17

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

Steve Ellison writes: 

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

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

Jeff Watson writes: 

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

Alston Mabry writes:

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

Steve Ellison writes: 

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

Sushil Kedia writes: 

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

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

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

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

Rocky Humbert writes: 

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

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

Gary Rogan writes: 

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

Apr

17

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

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

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

Jeff Watson writes: 

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

David Hillman writes:

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

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

Peter St. Andre writes: 

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

David Hillman writes: 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Apr

8

 I am pleased to find that Garet Garrett's novel Satan's Bushel is finally available on pdf. Written in 1924, but taking place a decade earlier, it completely captures the gestalt of the wheat market, the players, the speculators, the pit. This book is to wheat speculation as Bacon's book is to the turf speculator. I've always suggested this book to aspiring grain traders. No spoiler, but this book has the best definition I've ever seen of what a speculator is and does. Satan's Bushel is a value adding read. If this pdf is too hard to read, Kindle has it for $2.99.

Apr

8

To put the size of the bitcoin market in perspective, the total value of the bitcoin market is about the same as the US 2012 commercial tobacco market which was $1.55 billion dollars.

Funny thing about markets and human behavior. When bitcoins were 10 cents each (not that long ago), nobody, not even professionals wanted them. Now, at $160, everybody wants them. There is an obvious market lesson in that.

Apr

2

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

Jeff Watson writes: 

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

Apr

2

 Pain is a subject with which traders are probably familiar. There is psychic pain and physical pain. The amount or intensity of both kinds of pain is not commensurate with the amount of the loss in all cases. There is not a direct correlation between the increasing amount of loss and the increase in the amount of pain. For example, the pain of losing 100,000 is not a hundred times the pain of losing $1000, and the pain does not increase in a linear fashion. The pain of losing a loved one is not 1000 times more painful than losing say $100,000. (multiply amounts for wealthy readers). The pain of a small burn can be as painful as a major illness.

The other curious thing about pain is that it ends and its hard to remember after its gone. Experiments have shown that in time people tend to revert to their mean disposition even after horrific personal losses. Some people can handle pain better than others or recover at different speeds. When one is tired, small things can feel more painful. Pain and sadness are closely related to anger. There are mental techniques to handle psychic pain and effective drugs to deaden physical pain. I suppose one could write a book on the subject.

Sushil Kedia adds: 

Pain is a signal to consciousness or to the mind to search for changing the situation. Those traders who are not experiencing pain up to a level of loss are "willing" to lose that much and will thus have lost that much.

Like all of our perceptions, pain too is relative and there is no absolute measure feasible such as the measurement of temperature. Varying wealth levels or varying risk perceptions will, for one example for traders, bring varying intensity, length or sensitivity to pain.

For another example, in a simple surge-protector the fuse is expected to blow up before "paining" the computer to a point that the computer blows up. Some traders believe their stop loss strategies akin to this surge protector. Others believe their computers can withstand any power-surge, by placing some probabilistic calculations that having a surge protector will increase the probability of a power surge. Different hourses, different courses.

Jeff Watson adds:

The real sad thing is that you can be 100% right and the mistress of the market won't stop flogging you. Need to have my head examined. 

Mar

29

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

Anatoly Veltman writes: 

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

Ralph Vince queries: 

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

Jeff Watson writes: 

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

Anatoly Veltman writes: 

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

Jeff Watson adds: 

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

Anatoly Veltman writes: 

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

Richard Owen adds: 

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

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

Rocky Humbert writes: 

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

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

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

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

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

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

Mar

28

 Before work I drink two double espressos. I wouldn't have the courage to leave the house otherwise and go to work. I just rely on jitters to move me uncontrollably and eventually I bounce out the door. An espresso around my house/work costs approximately $3.00. That's $6.00 a day. I drink these on weekends as well, so, that would be around $42 a week and there are two of us in the house. $84 a week. We go through around $10 beans per week. We also need to factor in cleaner for the machine, but I bought industrial bulk cleaner for $20…it'll last a year or two even with weekly double cleans. We also give others a coffee when they come around. I'll ignore that, however.

I bought the coffee machine for around $800 on special and it makes a very tasty cup. We've had it since late 2007. So, we've been drinking $4,368 per year for four years, so $17,472 for the life of the machine. Only $2,080 for the beans over four years. All up, I think we're ahead. There are power costs and so on, but, they're minor. We've probably saved, conservatively, around $13,000 in the last four years.

Here is a good article reviewing the best home coffee machines.

Jeff Watson writes:

I drink a lot of Cuban Coffee, which is espresso, and is very sweet. My pot cost $12 at Target and I've had mine for at least 15 years.

I buy Cafe Pilon which is priced at 4 bricks for $22 and that's a 2 month supply, figuring 4 cups a day.

It takes less than 5 minutes to knock out the coffee.

Dylan Distasio writes: 

My company recently eliminated the free Green Mountain brewed coffee as part of a bean counter initiative and switched over to Flavia packets which is a very poor substitute. I have been going downstairs to buy a large cup of coffee a day for $2.67 but am looking for a cheaper alternative.

I am about to order one of these aeropresses based on the reviews I've read of the device and the coffee it makes. It is essentially a gentle one cup espresso maker which can then be turned in a cup of Americano if desired simply by adding additional hot water.

Update:

 So I got my Aeropress and wanted to report back my coffee findings to the group. I am a huge fan of this device and believes it consistently brews a delicious cup of coffee quickly and easily. The only downside I see is that it can only brew one cup at a time. For me, this is a non-issue though since I am using it at work and not for a group. Even if I used it at home (I am considering getting a 2nd one for that purpose), my wife does not drink coffee. I have a Keurig I had bought for convenience at home in case I wanted a quick cup of joe on the weekends. There is no comparison between the two not surprisingly; the Aeropress blows the Keurig with its k-cups out of the water.

Just a little additional background on my coffee habits…I drink my coffee black with a few exceptions…I generally don't like SBUX brew. I am with the folks who call them Charbucks. I prefer McDonald's or Dunkin Donuts coffee, but will drink the SBUX Blonde or an Americano (espresso plus hot water) there under duress. I am not a coffee snob (at least not yet) so you will not be hearing me talk about brewing beans picked out of civet droppings or $1000 burr grinders.

I picked up a bag of whole bean Jamaican Blue Mountain coffee from Costco for my first brews with the Aeropress. I am using a burr grinder versus a bladed one but it is a relatively inexpensive Mr Coffee one I bought years ago when I was experimenting with a Braun Espresso maker. I am grinding relatively fine somewhere between espresso and french press.

Once the coffee is ground, it is a very quick, simple process to brew a tremendous cup of coffee. The Aeropress comes with a measuring scoop which I use to scoop around 2 - 3 scoopfuls into the device after placing a fresh filter disc at the bottom. I then pour relatively hot water obtained from the dreaded Flavia machine onto the grounds and stir with an included stirrer for approximately 30 seconds (they recommend 10 seconds). I then insert the plunger piece into the waiting grounds and with some elbow grease slowly press the coffee down through the filter leaving the grounds behind. After that, I add additional hot water to my coffee mug to craft an Americano. I have tasted it undiluted and it is also delicious. I'm not really sure it would replace an expensive espresso machine since it is not applying the same pressure, but for me, it is a nice cup of what the Aeropress folks call espresso.

Clean up is simple. You just unlock the piece that holds the filter in place, and plunge the grounds into the trash. After that, it's a breeze to rinse off.

One of these would also be great for travel and camping/backpacking. It is pretty small and easy to carry.

In case you didn't notice, I am sold on the Aeropress. I'd highly recommend checking it out if it sounds like a good fit for your purposes. I'm looking forward to experimenting with the grind settings and some different coffee beans in it.

Just to continue this discussion, does anyone have any whole bean coffee recommendations to try?

For those of you interested in debating how many angels can dance on a java bean, check out coffeegeek.com also. The minutiae available for coffee lovers there may blow your mind.

Mar

27

Look at this site and this article "are you a compulsive gambler" and substitute the word "speculating" every time you see the word "gambling." What do you think?

Ralph Vince writes: 

Sure! Here's how it differs:

1. We have more complicated math….
2. We use OPM a lot more….
3. We tend to dress better than those greezers at the tracks…
4. We have better, more sophisticated software…
5. Kids don't have to live in their father's station wagon in a church parking lot because he blew the house…

I can go on and on….. as you can see, this domain has NOTHING in common with that one!

Mar

25

 My son sent this to me and I enjoyed some of the life lessons. For some reason I could imagine this coming out of Ben Green's mouth.

Take a little good advice from an old Montana farmer:

Your fences need to be horse-high, pig-tight and bull-strong.

Keep skunks and bankers at a distance.

Life is simpler when you plow around the stump.

A bumble bee is considerably faster than a John Deere tractor.

Words that soak into your ears are whispered… not yelled.

Meanness don't jes' happen overnight.

Forgive your enemies; it messes up their heads.

Do not corner something that you know is meaner than you.

It don't take a very big person to carry a grudge.

You cannot unsay a cruel word.

Every path has a few puddles.

When you wallow with pigs, expect to get dirty.

The best sermons are lived, not preached.

Most of the stuff people worry about ain't never gonna happen anyway.

Don't judge folks by their relatives.

Remember that silence is sometimes the best answer.

Live a good, honorable life… Then when you get older and think back, you'll enjoy it a second time.

Don 't interfere with somethin' that ain't bothering you none.

Timing has a lot to do with the outcome of a Rain dance.

If you find yourself in a hole, the first thing to do is stop diggin'.

Sometimes you get, and sometimes you get got.

The biggest troublemaker you'll probably ever have to deal with, watches you from the mirror every mornin'.

Always drink upstream from the herd.

Good judgment comes from experience, and a lotta that comes from bad judgment.

Lettin' the cat outta the bag is a whole lot easier than puttin' it back in.

If you get to thinkin' you're a person of some influence, try orderin' somebody else's dog around..

Live simply. Love generously. Care deeply. Speak kindly. Leave the rest to God.

Don't pick a fight with an old man. If he is too old to fight, he'll just kill you.

Mar

7

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

Jeff Watson adds: 

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

Richard Owen writes:

I found this article very applicable. 


PLOS Medicine: Why Most Published Research Findings Are False 

Mar

7

This is a story of a downfall, fortunes lost, amateurs, amateur mistakes, and tons of hubris.

"The Rise and Fall of Andy Zaky".

Feb

11

 This is an amazing clip of a magician performing the card trick "Sam the Bellhop", which is "without a doubt one of the best card tricks you’ll ever see." (from Big Geek Daddy).

The other week I was at a social event where they brought in a "corporate" magician. I've always wanted to see someone cut aces from a deck in person — and sure enough, the guy said it was easy.

So we went off to the side — I inspected the deck and shuffled it myself. He cut the 4 aces in 10 seconds…unreal!

Jeff Watson writes: 

Notice the very subtle technique he used to get the guy cut the cards exactly where he wanted it cut. Notice the crimp? Notice the Mechanic's Deal? The rest was false cuts, false riffles, false shuffles and very nice subtle pass throughs. He had the deck set up beforehand, and not a single card was moved despite all outward appearances. This guy is pretty good, but you can't listen to him, just watch the hands, and only the hands. His patter reminds me of the noise that the mistress uses to deceive us and relieve us of our cash. One could probably improve their speculation game if they just concentrate on the movement of the hands and ignore the noise. 

Feb

8

It is interesting to contemplate the ecology of the grind, the vig, the infrastructure, as the market mistress each day is content with a 12 or 15 point range and 1. 78 million contracts of volume. Apparently this is enough to feed the eagles, hyenas, worms, and detritovores.

Jeff Watson writes: 

Better add slippage, market friction, and outright mistakes to the kettle.

Feb

4

 My parents always send a box of honeybell oranges while they snowbird in Florida to escape the midwest winters.

While fresh squeezed OJ is always an enjoyable indulgence, honeybells take it to a whole other level. I highly recommend partaking should one ever get the chance.

Jeff Watson writes: 

I have a honeybell tree, and OD on them during season. while the honeybell OJ is the best in the world, it also makes the best screwdrivers and orange ice cream. 

Jan

31

 There was a time when all big hedge fund managers were bearish. And at the close of a month, they sold in mass, with that ululation that only communality and unlimited funds can match. Where have they gone? Not until the last bear has given up, to say the opposite of what the world's worst forecaster Alan Abelson would say, can we expect those glorious days to come again. One must take sustenance until then with Churchill's guidance: "Twenty to 25. (route 95). Those are the years. Don't be content with things as they are. Don't take no for an answer. Never submit to failure. Do not be fobbed off with mere personal success or acceptance. You will make all kinds of mistakes (the next day especially). But as long as you are generous (to those who need) and true, you cannot hurt the world or even seriously distress her. She was made to be wooed and won by youth. She has lived and thrived only by repeated subjugations". (the drift has subjugated them?).

Jeff Watson writes:

And that's a perfect segue to the idea that has the world in it's grip.

Pitt T. Maner III writes: 

A sentence from a recent column by a surprisingly ebullient forecaster:

"But there's the buoyant stock market, which we've typically found to be in good times and bad a better investment guide than the run-of-the-Street strategist or portfolio pro, and regret not having paid it more heed back in the dark, wintry days of 2009, when it began its long slog back from the depths of the Great Recession."

—Alan Abelson, Saturday, January 26, 2013

 

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

I was skiing in Vermont recently and as is usual for skiing in the northeast, the slopes weren't as deeply covered with snow as one would wish. When one attacks a steep run in these conditions, it is guaranteed that the center of the trail will be bereft of snow — thin cover is the term we use euphemistically to indicate ice and rocks — mostly ice though. When this happens, there can usually be found some snow piled on the edges of the trail, it having been pushed there by previous skiers who made all their turns in the center, their scraping edges clearing it away off of the underlying hardpack and pushing it to the sidelines.

Skiing in such conditions can be done, but not without incurring greater than normal risk. And it is usually not as satisfying as skiing using the entire available path whose deeper, more sweeping turns are somehow more satisfying and which provide greater control. But under these conditions, staying in the center is deadly so advanced skiers will stick to the edges of the trail, making all of their turns in rapid succession on what is in effect a trail only two or three feet wide. This means that turns must be small in degree and therefore must happen very quickly so as not to allow the tips to remain pointed straight down the hill and therefore incurring excessive speed. This kind of skiing requires conditioning, linking extremely rapid turns is exhausting and one must not attempt this when fatigued as the resulting inability to really push hard and dig can be catastrophic. It also requires some nerve, for one, keeping near the edge puts one in dangerous proximity to the treeline (or the edge of the abyss -as the case may be) and one slip at high speed and it's all over. And it means high speed, even while carving one edge after another in succession, the lack of available surface on which to gain traction means keeping the tips pointed perilously close to straight down the fall line. Mistakes at these speeds tend to have greater than normal undesirable consequences.

As I enjoy the speed, I will make one or two runs in these conditions just for the thrill of it, but this kind of tight skiing in a narrow and steep path requires tremendous concentration and loses it's appeal rather quickly. I will spend the majority of my time on tamer runs with more snow, even though they may be more crowded, so I can make the more gratifying, longer, carving turns that I prefer.

Jeff Watons writes:

That's just like surfing big waves vs small waves.I am not comfortable in the brutal conditions Mr Sogi San surfs on an every day basis. In those conditions, I will look for the rip current to get outside, paddle and make a bottom turn, and ride it in. Like typical Sunset. I don't stay out very long as I did when I was younger when it is big. But if the waves are 2-3' overhead, I'm good all day long. I'll still find the rip to make paddling out easier, but I'll attack the wave harder. But some of the very best days are those waist-chest high waves where you cruise on a long board, and catch the glide. However, during calm conditions I have suffered the greatest traumas while surfing. Broken vertebra, herniated discs, tendon and ligament damage, broken nose, etc. Somehow, being relaxed while it's calm is more dangerous then when it's big. Or maybe I'm more careless when the waves are small, and a bit reckless thrown in for good measure. Carelessness happens in the markets also. You start taking your profits for granted. It's humming along nicely with all your positions in the green, then wham, the Mistress gets a little PMS(no sexism intended) and throws the whole system off balance or upsets the cart, and your account suddenly needs a tourniquet. The lesson here is to keep your guard up at all times.

Jim Sogi writes:

 Just back from backcountry skiing in the Eastern Sierras. The conditions were snow that was about a week old, with very cold temperatures, and no wind. The sun made a crust where solar energy hit, so the powder stashes were hidden on north facing aspects where there were old growth trees. The cold had dried out the snow making it sparkle and soft and creamy sugar which was excellent for skiing.. Though it had not snowed for over a week, in the shade, on the north facing slopes shaded by old growth pine where the sun did not affect the snow there was beautiful sugary soft powder. It took some doing finding these niches and some hiking to get there and fighting some pesky brush at lower elevations. No one else seems to have discovered these hidden stashes of nice powder. This reminds me so much of the markets, when even in less than optimal conditions, there are hidden stashes of unridden goods. It takes understanding of the underlying processes that create and destroy snow, the equipment and will to get there, and the ability to ride those conditions. Its surprising in such a huge mountain range that only in such limited conditions would there exist such fine skiing. The last day, new wet snow came and turned everything into the famous Sierra cement.

Laurel Kenner writes:

I took Aubrey to our favorite ski place, Telluride, a couple of weeks ago. A drought was on and the mountain was brown, but the resort's snow-making machines had been at work since November and most runs were open. A few patches of grass were visible in some popular places — enough to send a skier head over heels in the old days. The new equipment was somehow able to ride it out, although caution was still warranted. That strikes me as like the market; if you're well-equipped enough with margin and numbers to ride out the rough patches, you can still do well in adverse conditions.

Steve Ellison writes: 

I ski 10-15 times per year and encounter a wide variety of conditions. Light is an important factor. An overcast sky causes what skiers call "flat light". I slow down in flat light because the lack of shadows makes it hard to spot irregularities on the surface until one is nearly upon them. Dense fog is even worse. I have been in fogs in which I could not see the trees on either side and momentarily lost track of which way was down.

I like fresh snow, but there can be too much of a good thing. One day right after a 2-foot snowstorm, I started down my first run and fell on the very first turn when my outer ski caught some snow. I pushed off my hand to get up, but my arm sank into the snow all the way to my shoulder. It took a few minutes of wiggling and maneuvering to get back on my feet.

Wind is another factor. The Sierras sometimes have very high winds, which blow loose snow off exposed areas. The result is alternating ice and soft powder (in the spots in which blown snow settles). Going too fast at the transition point can result in a fall. On one traverse I often ski, I use moderate wind to my advantage by letting the wind slow me down as I ski into it with no effort on my part.

Duncan Coker writes: 

When backcountry skiing which Mr. Sogi describes another key element is the approach. There are no lifts, so you hike uphill for every turn you will make downhill. It can be exhausting, but also very rewarding and you get to know the terrain including snow pack, the location of rocks, couloirs, tree wells, cliffs and the grade. After enjoying the view at the top you can descend focusing mainly on execution, making some nice turns. Skiing the steeper, untouched terrain has more dangers but is more rewarding.

I love the surfing analogy of "never taking the first wave" alluding to the dangers of being tempted by the first big wave in a set, after a lull. In skiing there are times when it is better to take pass on a run as well. Condition may appear good, but dangers are still there. Ultimately though we all have to "drop in" at some point for whatever activity we are pursuing, and taking some risk is certainly worth it.

Jan

28

Here is a great article mentioning the disturbing act of betting money on a WWE match. How much vig are you really paying? Seriously, this one is truly over the top and is indicative of the degeneracy of the masses. If the financials are to be believed, there are a lot of people out there hooked on professional wrestling, and are big fans. While it uses athletic moves, requires conditioning and coordination….plus a high tolerance for pain, professional wrestling is still just Greek theater. I'm not going to ever bet on a WWE event any more than I will bet the South will win the time my wife makes me watch "Gone With the Wind" on Netflix. The vig is just too high.

Jan

25

We used to sing variants of this song at different times on the floor
depending on the conditions of the market and/or our level of boredom:

(To the tune of Camptown Races)

Puts and calls will break your balls, doo dah, doo dah
Puts and calls will bust your balls oh doo dah dey
Sell a naked call,
Sell a naked put,
Ground up balls is what you'll get, oh doo dah dey.

Puts and calls are highly rigged, doo dah, doo dah
Puts and calls have a lot of vig, oh doo dah dey
Time decay aside, straddles all the way,
Options will really rip your balls, oh doo dah dey.

Strangles and straddles will choke you dead, doo dah, doo dah
and strangles and straddles will smash your head, oh doo dah dey,'
Sell a put today, die another day
the only one who does OK, is the guy saying you made a good trade today.

Black Scholes was the holy grail, doo dah, doo da
Black Scholes is is the sucker's game, oh doo dah dey
Sell a call at night.
Buy a put at day,
Whatever you do, it will sure be wrong, so oh doo dah dey.

Options are a suckers game doo dah, doo dah,
Options take your money away, oh doo dah dey,
But your balls at night,
Bust your balls at day,
The premiums you pay, make someone;s day, oh doo dah dey.

Now today you will fail big time, doo dah, doo dah
Listen to the touts, they will lead you astray. Oh doo dah dey
But since it's only money, and you;ll soon be so broke
just sing this song and get along as you and the money will soon part ways.

Jan

24

 If cheapskating is going to increase, we might consider whether individual stocks that cater to cheap skates might have inordinate returns. This is the kind of things that my kids might make money with in terms of the category of stock, rather than its financial characteristics. Perhaps. On another front, I believe it is important to be especially cheap after having a good year. I think of Rimm every day with grave loathsomeness.

Art Cooper writes:

It's been a market theme for quite some time to buy stocks like Family Dollar Stores, Dollar General, etc. instead of retail stocks which cater to the middle class. The high-end retail market is a different market, as it responds to different forces. 

Jeff Watson writes:

I'm always accused of being a cheap person and try to not be penny wise and pound foolish. I never pay retail for anything and try to buy only stuff that will hold value. Herb Cohen is a person I look up to. He might look a little seedy, but he makes great sense and teaches sound methods of bargaining. His first $19.95 book I ever bought was probably the best investment I ever made, saving at least a million bucks, by bargaining with some of his techniques over a 30 year period. That's a hell of a return and his techniques work…

Pitt T. Maner III writes: 

 Cheapskating is likely to be an increasingly popular topic as hidden inflation and taxes go up. Perhaps there is an opportunity for a "Global Skinflint"!

"Jeff Yeager, dubbed "The Ultimate Cheapskate" by Matt Lauer on NBC's Today show, is a very cheap guy. He re-cants, as opposed to decants, the wine he proudly serves his dinner guests, funneling cheap box wine into premium-label bottles. He believes you should never spend more than USD 1 per pound on food items. And to save time and energy costs, he soft-boils his morning eggs along with the dirty dishes in the dishwasher."

And then there is the TLC show :

"Be aware of what you're using. Victoria Hunt, who retired from her accounting career at 48 has been tracking her expenses and her income on a spreadsheet since 1989. "Every minute of every day has something to do with how I can make a better decisions financially," she points out."

Rocky Humbert writes: 

Mr. Yeager is either wasting money on his super-heated dishwasher or he's stretching the truth about his eggs. Dishwashers (generally) do not heat the water about 140 degrees. See this article on naturalhandyman. To get the egg white solid, it requires about 180 degrees. Even my Miele doesn't get the water to 180 degrees! This does not compute! (That is, he's making his money selling books. Not cooking eggs.) I would suggest that he should instead put his Pop Tarts and morning sausage on his car engine's manifold. By the time he gets to work, he'll have a well-cooked breakfast. (And he can similarly roast hot dogs on his drive home.)

Dr. Johnson writes: 

Ballyhoo? Like any good Spec, one must test, and test I did, the claim that an egg can be cooked in a dishwasher during a normal wash/dry cycle.

Equipment- Miele G5775.

Note: Perhaps not the ideal brand for testing a cheapskate's assertion.

Eggs= Phil's Fresh Farms Free Range Large 42F wrapped in plastic film.

Max Water Temperature Wash5F Max Air Temperature Dry= 185F

Time to complete cycles= 54 min wash & rinse, Dry 22 min.

Results: Egg removed immediately at end of the cycles= Yolk 134F thick and slightly flowing, settles to 1/4 height, white 151F at shell boundary with firm consistency.

Egg removed after 10 Min.= Yolk 141F thick and settles to 1/2 height, white 141F at shell boundary with firm consistency.

Conclusion: Not Ballyhoo! One important consideration for those cheapskates who want to try this method is that egg shells are semipermeable, therefore unless the taste of detergent combined with a menagerie of old food waste is to your liking, sealing the egg in plastic wrap is advisable (also which at +140 F will transmit unwanted substances).

David Hillman writes: 

Yes, let us commend Dr. Johnson both on his testing and on his using Phil's Farm Fresh Free Range eggs, the chicken egg of preference at Casa DGH…..cage-free, no chemicals, natural whole grain feed, laid in nests, and certified humane!

That said, even though my Bosch heats water to 160F and air dries at what seems to be 1200K if one opens the door during the 'sanitize' cycle and is met by a blast of superheated air, this whole business of cooking eggs in a dishwasher seems a bit impractical.

One, it seems like using a sledgehammer to place a pushpin in a cork board. Two, while the dishwasher here is run every 2-3 days, typically in the evening, eggs are a daily breakfast staple. What to do on 'accumulation' days? Three, counting time to heat water or a pan, it takes about 10 minutes to fry, poach, baste, scramble or soft boil eggs on the range. Why wait 76 minutes? Four, dishwasher cooking uses a heck of a lot of water and electricity v. range top cooking, multitasking notwithstanding.

For those who feel the need to multitask in the kitchen, there are what seem to be more practical alternatives to cooking one's breakfast eggs in the dishwasher, though at $90, this might not be thought of as 'cheapskating' …..

Pitt T. Maner III adds:

 A few older links, but possibly of interest to those seeking to find ways to ride the money-saving trend and as a possible example of a company that finds quickly (identifying trends) and uses new inventions from private inventors. Khubani the CEO started with ad in National Enquirer.:

1) From 2010: 'A.J. Khubani, the man behind many “As Seen on TV” gadgets such as the PedEgg foot scraper, is making cheapskate gimmicks a priority at his company Telebrands, one of the nation’s top direct-response TV marketing companies.

More than half of Telebrands’ gadgets, sold online and at 90,000 stores, are now focused on helping shoppers be cheap. Khubani, who has been traveling around the country to meet inventors, is speeding up the number of new products he’s launching to every 30 days from every 60 days. “The mood of the country has changed,” said Khubani. “We’ve had tremendous opportunity with this recession.”'

Since 2007, Telebrands’ revenue has doubled to several hundred million dollars, he said.

Read more.

2) The current lineup of brands.

3) From 2012: "For the first time in our company's 29 year history, TeleBrands had 15 products ranked in a single year including our most recent hits like, Slice-O-Matic, Plaque Blast, Slim Away, OrGreenic and Bake Pops," said TeleBrands' CEO/Founder, AJ Khubani. "Each year, we continue to solidify our spot as the largest and most successful marketer of DRTV products aimed at solving everyday problems and reaching mass audiences at affordable prices. In 2011 alone, we rolled-out 12 products — the most in a single year in our company's history."

Read more.

4) On Khubani from 2011:

"The son of Indian immigrants, Khubani started out at 23, spending a few thousand dollars on an ad inNational Enquirer — a move that led to his first big hit. Since then, he's sold hundreds of millions of "As Seen on TV" products, including AmberVision sunglasses, the PedEgg and Doggy Steps. He has bolstered the careers of ubiquitous TV pitchmen, including the late Billy Mays, who enthusiastically hawked products now found on the shelves of more than 100,000 retailers. Today, Khubani is the leader in the $20 billion direct consumer marketing industry, turning out more "low-tech" products than ever before."

read more.

5) Not all have been appreciative of Khubani's methods:

"But will anyone care about dust mites? Khubani wasn’t achieving much traction among his Telebrands staff with his bed-spray idea, when along came a proposal for an anti-dust-mite pillow, from a colleague Khubani mysteriously describes only as “a business associate.” It’s hardly a new concept—there are several such pillows already marketed to allergy sufferers and asthmatics. But so far, nobody has had the brilliance to incite a national panic around flesh-eating creatures that feast on human remains—and lurk in the pillow of every man, woman, and child. “The hum you sometimes hear at night?” Khubani asks eerily. “That’s the sound of 2 million dust mites eating your dead skin.” Or perhaps it’s the sound of one man in Fairfield, New Jersey, homing in on your next anxiety. "

Read more. 

Victor Niederhoffer adds: 

 Of course the main virtue about cheapskating is that it prepares you for such activities in your business. As the oil magnate said, "I am not smart enough to act one way in my personal life and another in my business. My margin is 8%, and if I gave away 8% on everything my 200,000 employees would be out of a job. So I make them pay for their telephone calls." Regrettably, the oil magnate was victimized by old man's disease (the same disease as the sage), and he was locked up in England for 20 years, with his retinue preventing him from going back to us for fear that he might change his will, and he was soporifisized by many nubile girls and other attractive women he would meet at museums. 

Funny. More important even then the fine posts with examples and tests of cheapskating is the query I have received from many of the younger hearted on the list. "Where are those museums that the oil magnate frequented?".

Gary Rogan suggests:

I suspect the Getty museum is a good place to start.

Stefan Jovanovich writes:

I hope Gary means the original one in Malibu, the villa whose design Getty himself supervised but never saw. The monstrosity built on top of the landfill by the 405 is absolutely the worst place in LA for the amusements Getty had in mind. If he were alive today and living in SoCal, he would be going to OCMA to appraise the latest generation of lovelies.

Jim Sogi adds:

Eggs can be cooked sous vide at 144 -155 for 20 plus minutes for a wonderfully cooked smooth soft boiled egg with a consistent texture throughout.

Food grade hydrogen peroxide diluted to a 3% solution is an excellent way to sanitize kitchen and utensils and not toxic like chlorine. 

Jan

21

 I've watched a fair bit of the Aussie tennis open in week one, and it is amazing to watch the amount of drop shots that are getting played, with the net effect of approximately 30 played and 3 winning points against player 27 in the matches I've watched. Not good odds, some may say.

Is it that players are tired? And going for the easy out, or some 3 dimensional hiccup in the brain, which makes them think that it's a percentage play, with the opponent right down the far end of the court, even if it is rebound ace. Do they just want to mix up their game, knowing they will lose this point but provide unsurety in their opponent for the following points? Or is the RIO trade alive and well, i.e they just can't help themselves to go for the "get out of jail free" shot.

I'm not sure… I wish I knew the answer.

It seems unforced errors is possibly the most major stat to take interest in, along with 1st serve percentage. Winning, doesn't mean a great deal, if one has the same unforced errors, and in this day and age one needs a 70%+ 1st serve in, to give them some space.

If one doesn't following their trading plan suitably and manage risk appropriately, then winning a slam becomes a distant thought.

Victor Niederhoffer writes: 

The same thing about the drop shot being non-percentage could be said about the lob. Both become even more non-percentage as the game wears on. It's almost as bad as trying to take a few ticks out of them near the close of a market. The mouse with one hole is quickly taken. The one thing that could be said is that the weak players don't have coaches who count. And the hard surface makes drop shots even less effective than usual. But of course, it does tire the opponent out, and set him up for when you need a point. And of course it is like the penguins jumping into the whale first in social learning, as the one shot that you hit with non-percentage makes the vast majority of your " colleagues" , the subsequent shots, that much more effective.

Jim Lackey writes: 

 One that knows nothing about racquets, sees something similar in dirt bikes. We take the extreme inside line in a tight corner vs. the outside berm rim shot, it's much faster. It's about the line or exit of the corner. If you dive bomb on the inside you can cut off the exit of your opponent. This forces him to either take an inside line or a tighter line on the outside, thus slowing him down.

The wear out your opponent is a funny thing. Everyone that does count knows every single move and limit of the other riders… If towards the end of a race I know a guy gets "arm pump", which is literally your forearms swell up and it's hard to hand on the bikes, we use or force those boys to inside. One needs to stand on the brakes very hard to take the inside line. When you have arm pump it's very difficult to let go of throttle and put a couple fingers on the front brake to slam on. I'll put it another way… like tennis looks, it seems much easier to stand back in one box and hit it as hard as you can when you're exhausted vs. running around and using your touch. Same with MX. It's so much easier to stand on the gas and take the outside and go as fast as you can vs modulate.

I am doing BMX now here, it's a short 400 meter spring and to pedal. It's similar but a different training sport, but the counting goes on. I made a comment off the cuff to a 14 year old expert about changing a gear ratio 0.1-T or we use decimal gearing since it's single speed bikes. IT pinch ratio you can have the same gear ratio in a chart book. IE 41-18 X 24" circumference tire. At the big races towards end of day I would lose power. So I'd go down to a 40.9-t custom gear. It's still a 41T sprocket but the circumference of the gear is small, so it's a lower ration shorter roll out IE I crank revolution 2.277 vs. a 2.72222. t changes it just a tick and its enough to help.

Our friend, an MIT grad and racer, picked up on our questions to why the same gears felt a tick different on other bikes and he'd always say, "it's not same ratio," it's tire diameter or pinch in gear brands. So he invented a new business. Guys ask me if it works and I burst out laughing. I been doing that for 30 years. (Yet dad didn't have CNC machine so we have to mess with combinations IE got from 41-18 to 36-16 but we measured and charted ever, single combination on every race every track every time.)

Bottom line for MX, BMX, or any other sport. I never ran a 4.5 40' and can't run under a 22 minute 5k so I was always stuck in the middle and never a great athlete. The only reason I ever won a national event racing was counting, everything. Yet in baseball or the A pro level of all racing… "everyone does that".

Anatoly Veltman writes: 

Drop shots are akin to those who try to "provide liquidity" against an Elliott Wave impulse (offering against the third wave, or early on against the fifth).

Jeff Watson writes: 

 Just exactly what is an Elliott wave???? Has anyone ever seen one, or do they only exist in hindsight?
 

Jan

20

 Eccentricity/degree of crazy is class based. If you are rich and like to chase dogs down the street while naked, you're considered to be eccentric, but if you are poor and do the same thing, you're crazy.

Gary Rogan writes: 

Eccentricity at the top is also somewhat cyclical as people often want the opposite characteristics to the last package that didn't work or simply became boring. You could argue that Hollande is far less eccentric than Sarkozy, that Putin, Yeltzin, and Gorbachev were/are significantly more eccentric than anyone between Khrushchev and them, and that the highly non-eccentric Bush Sr. led to a string of Presidents that were each differently eccentric, to coin a concept, with the last one being more non-orthodox in a number of parameters than eccentric.

That same principle works on Wall St. It's seems highly predictable (in retrospect, of course) that the dot com crash would result in a reversion to the mean in the investment bankers' wardrobes. Animal spirits that clearly go back and forth between extremes work the same way, as revulsion with past failures is probably one of the strongest forces in investment trends. The Depression and the subdued consumer spending in the US lead to the consumerist paradise which itself reversed to a kind of malaise, with a few more minor cycles that followed.

Eccentricity is in many ways like the periods of fast mutation in evolution, which themselves tend to revert to the mean. And speaking of Churchill the reversal he suffered after being thrown out of office after the war had a profound influence on him, and likely his health and was used as an example of being extremely powerful and then suddenly not, and the effects of such changes, in the book I'm currently reading. Nothing is forever, and I'm sure eccentricity will return to the British political scene in due time.

Richard Owen writes: 

Winston Churchill would sit starkers in his bathtub and dispense to his secretary notes and instructions for the Great Offices of State. Soak complete, he would towel off, don a Chinese floral silk dressing gown with matching fez hat and take bedside visits from his Cabinet. Part of the game was to leave the odd setting and peculiar garb unmentioned. Out for duty, he would don a custom made Siren Suit - a glorified boiler suit - and set forth to whichever geopolitical circus he had budgeted his day to. Sartorial fruitiness featured throughout.

What does one look for in a great leader, thinker or doer? An ability to act independently? Think differently? To consider the facts of the matter and take provocative, even painful action?

Siegmund Warburg - perhaps the only individual in the modern era to create a full service European investment bank from scratch and entirely within his own lifetime - upon his death bequeathed a large library of fine literature and other books. Within sat a unique folio of pornography, surgically extracted, before handing over to St. Paul's School for Girls for posterity. Some of Siegmund's business rules included: good manners; consideration of others, particularly juniors; ignore the fashionable; non-conformism as a right, not a duty. This does not feel familiar in today's Wall Street.

To be branded an eccentric these days can be terminal. Particularly in the American paradigm. Instead of independence, determination, or contrary thinking, it is a signal of unreliability and cause for suspicion Some of the driving factors are positive: the British eccentric has class-based roots. The public schoolboy, assured his place in the firmament, could afford to transport his playground hijinks into the world of work. Just as investment bankers re-donned their suits after the dotcom crash, so did the pressures of openness and assessment mute some of the rakish public school excess. But a paradigm can swing too far.

Who do we have leading the Labour left in the UK? Mr. Edward Miliband, an impressive man whipped into a strait jacket of conformity. He arrived by Faustian deal with the trade unions; everything he utters is calculated for short term gain. Even the passion moments - the big conference set-piece speeches - feel badly scripted with an insipid instinct for popular policy.

The batty leaked clip of Miliband repeating the exact same soundbite answer to every question thrown his way at a media scrum - whether it made an iota of sense or not - gave the impression of a malfunctioning replicant whose circuitry had badly fused. The semi-autistic response mechanism was a guerrilla tactic to cope with today's minefield 24-hour news loop.

The irony is that Miliband's constituency - the unions - have backed a man who's supposed state educated, humble upbringing, disguises a militant intellectual father, likely private tuition, and all the other bells and whistles of hidden cultural advantage. The socialistic Labour left's distaste for the British grammar school has hamstrung a generation of intelligent working class and closed off their main vein of progress to the upper-echelons. Eccentric this is not.

And the Conservative coalition? Headed by David Cameron, every inch the PR man. A better looking, more charming and affable version of Miliband? Perhaps. But we need not repeat the basic assessment - they are both ultra-Blairs. But without the Blairite flair within.

Blair himself was most definitely an eccentric. He was willing to throw his whole reputation onto the pyre for a self-styled humanitarian war in Iraq. You can assess the merits, but at least it showed spine. Blair was so effective that he construed the ensuing hate into three back-to-back election victories.

Blair, however, left a messy intellectual endowment: the idea that, today, politics doesn't matter and one just acts as intelligent administrator. And just at the very turning point where hard choices, real budgeting, became essential.

What isn't obvious from the public record is that underneath the "call me Tony" demeanour was a burning intellect. A man who insisted on rising early to pen his own speeches. An intentionality. His followers have adopted the outer shell, but are missing the flavoursome crab meat inside.

When discussing interesting investment outcomes on Wall Street, we refer to eccentric or non-systematic returns. Bespectacled, absent minded Leon Levy could thread profitable eccentricity back-to-back. Just don't ask him which subway stop he meant to get off at, next year's EPS to one decimal, or the date of his anniversary.

Wall Street now wants conformism pretending to be eccentricity. Actuaries demand excess return without deviating from the crowd. And yet we're surprised at the aggressive behaviour created.

Ace Greenberg, penning Chairman's memos to his staff would channel the advice of Haimchinkel Malintz Anaynikal, an imaginary and often hilarious business philosopher; a figment of Ace's minds eye. If Jamie Dimon tried that today, he would be carted off the premises and branded a loon. Perhaps private partnership allowed better for private eccentricities. But something deeper, more cultural, is at work.

 To quote British banker John Studzinski: "after the dotcom crash, investment bankers were put through the meat grinder and came out robots." Warburg was so listened to by clients because he actually had something useful to say. His eclectic, eccentric outlook gave him a differentiated, potent opinion. Instead today's bankers collect endless, vapid powerpoint slides rather than bequeathable collections of fine literature. And they have opinions to match. Produce views and analysis like clockwork. But Warburg knew that producing was for the farmyard and generated opinions like manure. Quoth Siegmund: "One general reservation which I feel about some of the US investment banking houses is that they put too much emphasis on measuring, almost from month to month, what a specific partner produces. I don't even like the way they pronounce the word - not produce, but 'prodooce'. All this emphasis on producing - that is all right for a cow, but not for a human being."

Keynes, the great economist, trader, bon vivant, and political adviser was as likely to be found of an evening cottaging with the local bishop as penning a treatise on the National Product. Disraeli, a spectacular Prime Minister, was also a former bankrupt, mining entrepreneur and spiv. Try shoehorning such vitae into a political career today.

What do we have instead in British national life? Andrew Mitchell and the Plebgate inquiry, staffed by thirty full-time police offers, all straining to determine whether a politician muttered the word "pleb" to himself when heading past some cops at Westminster's gates. It's not so much fiddling whilst Rome burns as actively brainstorming more and better fuel supply lines.

Thatcher, every bit the eccentric, would have known what to do. Colleagues stung in the press by petty scandal would be grabbed by the arm and marched through Westminster's lobby. A show of support from the top; a smothering of the flame before it became entrenched in the press.

Straight-laced individuals, politicians, businessmen, forget their independence, their room for originality. Horrific, black swan events demand attention; perhaps a gun review is sensible post Sandy Hook. But don't forget the didactic nature of the Oval; exactly how FDR sucked billions of deposits back into the banks, or a gamely Reagan re-invigorated a whole nation. The lowest cost, highest impact fix would surely be a fireside chat on the benefits of sitting down for dinner daily with the family; taking an interest in your children.

On complex issues, one can't clear one's throat. The free-thinking intellect and the prejudiced have an intersection: the former will at least try on the latter's opinion to see how it fits. But don't dare be caught by the media as such.

Even the thesaurus is gripped by the modern will - it serves up for eccentric: aberrant, abnormal, flaky, crazy. Perhaps all those things. But also: essential.
 

Jan

15

 New Years eve brought the biggest best waves of the year to Kona. In the morning it was triple over head, clear blue sky, perfect shape, completely glass on the water without a breath of wind, and only a handful of friends out. It doesn't get any better. That afternoon the waves got even bigger. Just before I went out a huge wave cleaned out the entire line up and washed people on to the rocks. They got out with white faces and minor injuries. I had a perfect day where I did not fall once, did not get caught inside and caught each wave perfectly and rode it to the end. All in all a very rare day, one to remember for a lifetime.

Lack recently wrote about not making any errors. My son used to play Mortal Kombat video game as a kid and when he beat the opponent without suffering a single injury it was a perfect fight. It's the kind of day when you enter perfectly at the bottom tick and your bid is taken in size, and it immediately starts up, you ride it all the way and exit right at the top. For some reason it's not the kind of thing you can do at will, nor does it happen all the time. I had been training so felt strong, and there had been waves for the prior two weeks. Mentally I felt good. I wish I knew the secret to achieving such good results with more consistency.

Jeff Watson comments:

The key sentences, "I had been training, so felt strong, and there had been waves for the prior two weeks. Mentally I felt good. I wish I knew the secret to achieving such good results with more consistency."

Well played Sogi San. And you answered your own question.

Meanwhile our waves have been thigh to waist high and the SUP has been getting the workout, not my 9'6" or fish or any other board in between. It's really a drag living on the pond of the Gulf of Mexico.

Craig Mee writes:

Sounds great Jim, good job indeed.

Having a consistent plan before you paddled out, and it seems conditions were relatively steady, probably allowed for a strong take off with commitment each time. Finally, as you felt comfortable, you were probably more likely to squeeze each wave for everything it was worth. Your day, your market, your result– excellent.

Jan

8

 On the corporate morality thread, I can offer some experience of the company I first worked for, a large manufacturing business. The number one priority ahead of profits, customer service, quality or value was safety for the employees. We will not injure our employees, and there was zero tolerance on this issue. The quickest way for a manager to lose his job was lax safety practices. And in fact some of the work around machinery was dangerous. Every meeting started and ended with reports and progress on safety. It is the morally right thing and does not conflict with good business. Safety at work or anywhere else is fundamental. Secondly, this focus attracted a culture of employees who cared not just about safety but about the other things that make a business successful, productivity, investment in new ideas, costumers and creating value. I would predict that companies with good safety records internally have equally good performance externally for customers and shareholders, and the opposite.

Jeff Watson writes:

My grandfather had another indicator of the condition of a company. Drive by the place and look at the parking lot. If it's full of older cars, junky cars, it's probably not a good place to work for and probably is a poor credit risk. On the other hand, if a parking lot is full of shiny new cars, it's probably a better place to work and probably has better financials and business.

David Lilienfeld writes:

I don't doubt the morality in corporate behavior. In the pharmaceutical industry there is lots of concern about patient safety. There are two schools of thought about why: The first is that the companies are enlightened and accept George Merck's "Do well by the patient, and you will do well by the society." The second is "A dead patient doesn't buy drugs."

My observation is that while the industry has a sincere interest in patient safety, it can also deceivingly discounts that safety in preference to efficacy, which is perceived to be the reason drugs gets approved. I don't think this is a conscious effort at deceit. That doesn't make it any less real. Many of the leading pharma houses have come to accept that and have tried to design in fail safe safety mechanisms into the approval process. It will take another 4-5 years to see if they are having their intended effects.

Jan

7

 The miserable performance of the text book company in all areas including the nook, and sales of books, and stock price, would seem to raise the question of whether a company that has declining sales might be worse situated to provide customer satisfaction than the companies with increasing sales and profits. Thus a positive feedback loop of sales, profits, and customer satisfaction develops. It would be interesting to look at customer satisfaction as an indicator of future stock performance.

Jeff Watson writes: 

In Florida, there are two main grocers, Publix and Wal-Mart. (Winn Dixie, Whole Foods, and Sweetbay are minor players). Publix charges higher prices, but offers better quality, good variety, better service, quick checkout, better trained employees, an enforced dress code, employees that smile, and bright, cleaner stores. Wal-Mart offers rock bottom pricing, surly employees, poor quality, and long waits at the register.

Here is a chart of Publix's 5 year performance (private yet employee owned).

Here is Wal-Mart's 5 year performance.

Maybe customer satisfaction in the grocery industry isn't reflected in the stock prices, but these are just two samples and Wal-Mart does a lot more than groceries.. My friends at Publix tell me it is an excellent place to work and they regularly receive bonuses every quarter while at Wal-Mart, the full timers are lucky because they might get 32 hours a week. 

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