Apr

9

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

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

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

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

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

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

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

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

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

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

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

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

Russ Sears writes:

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

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

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

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

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

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

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

Chris Tucker adds: 

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

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

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

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

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

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

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

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

Rocky Humbert writes: 

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

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

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

Ralph Vince writes: 

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

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

Apr

8

Hello everyone,

I note even more metal roofs being applied to residential roofs. I have kept a close eye on a few that are a few years old. I note them now dulling and one funeral home roof is faded and now beginning to peel.

I asked my banker how appraisers are looking at value and he indicated there is now some concern over valuations of metal roofs.

I feel the newer metal roofs, like some investing methods, are untested. I readily admit my strength is in residential construction and apartments.

For now I will take a 30 year dimensional shingle roof over metal until positive tested methods show me otherwise.

Regards,

Alan

Ralph Vince writes:

I was just in Punta Gorda, Fl., which was spit-shined, pristine and caught my eye. I notice all of the homes there have metal roofs and came to learn that it is the result of Hurricane Charlie a few years ago that came ashore there. Those roofs DO look a lot less wind-peelable than their shingle-based counterparts.

Apr

4

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

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

Larry Williams writes: 

In a random walk, half of all stops/targets get hit, so if that is not true in several trading systems, does it suggest the market is not random?

Anatoly Veltman writes: 

Electronic markets are far from random. Your broker's HFT frontruns your orders, and non-broker largest HFTs parallel run your orders. Thus your limit (profit-taking?) order is played against by unabling, and your stop-loss order is played against by triggering. Random? Not to your account.

Ralph Vince asks: 

But can non-random ticks, sampled on a bigger time frame, degenerate into randomness?

Anatoly Veltman replies: 

In the sense that all those orders, magnified by HFT mechanism, will carry markets somewhere - sure. The other question is: OK, so 70% of executed trades resulted in robbing the outsider spec - but the HFTs and the brokers have not fully benefited by your loss, because of their high overhead (the arms race, et al). So ok, the wall street salaries, the IT salaries get financed out of your pocket. Then the only way to keep you in the game is to inflate your remaining funds…So the mechanism will continue on…but to what end, if the economy is not picking up? So the result may well be non-random: all prices will go up.

Gary Rogan writes: 

Clearly the natural drift and/or inflation-driven accelerated drift will result in an upward bias that will make a random walk impossible. In addition, if there is an HFT-induced tendency to hit stops and not hit limit orders (by the way are there any objective statistics that prove that?) the question becomes: would an independent observer looking at the data tick by tick, but who is not himself placing limit/stop orders be able to tell that the statistical nature of the tick distribution has changed?

Jeff Rollert says: 

No, HFT is attacking your behavioral biases. Not the academic ones ones. Your bids show your hands.

These are modeled after high yield bond trading patterns.

How would you trade if the book was open and public? That is the point. Trading systems are rational, and your systems are easy prey…seriously, inject the random. To borrow a sports analogy, you can't bore a machine into an error.

Apr

3

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

Kim Zussman writes:

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

One-Sample T: next 5D

Test of mu = 0 vs not = 0

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

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

Date next 5D

02/11/13 -0.027

12/04/12 0.007

10/15/12 -0.005

06/28/12 0.018

05/08/12 -0.040

02/29/12 -0.004

11/21/11 0.021

09/22/11 -0.067

06/24/11 -0.009

01/07/11 -0.007

07/01/10 0.011

03/24/10 0.025

01/27/10 0.020

12/11/09 -0.003

06/22/09 0.017

03/10/09 0.022

01/12/09 0.047

10/16/08 -0.109

07/30/08 -0.032

03/20/08 0.022

08/16/07 0.010

05/10/07 -0.014

03/02/07 0.008

12/15/06 0.011

08/17/06 0.012

06/01/06 -0.026

02/13/06 0.026

12/20/05 0.050

10/20/05 0.026

08/30/05 0.031

07/06/05 0.002

03/22/05 -0.001 

Anatoly Veltman writes: 

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

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

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

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

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

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

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

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

Jason Ruspini adds:

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

CQG Order Types Supported by Exchange

Ralph Vince writes: 

Interesting points Jason. Timely too, I believe.

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

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

Mar

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

29

I would encourage every child of college age, and parent, to NOT do it.

I have niece at Miami of Ohio. She studies accounting to eventually take her CPA.

She can take all of her accounting classes from better institutions, online and for free. All the content — the very best of content — is available online and for free. Why not take the classes offered by Wharton?

Why not learn about differential equations from those teaching it at MIT?

The major colleges and universities are very disturbed by this trend, wondering when the dupes who keep paying to send their kids to their schools will wisen up — they KNOW they need a new business model, it's only the relentless nature of human momentum that keeps them going here. They are well-aware the only reason people are attending in person and paying is to get the diploma — the content is available for free. (The kids end up taking most of their classes online anyhow.)

It's the 21st century. I look at the nonsense at Florida Atlantic University, and other second tier colleges, and they appear to be an utter waste. I cannot speak for the Ivy league schools or other top academic institutions, though, as an outsider, they DO offer their content for free and online.

To bypass this I think is a sin, and that doesn't just pertain to college-aged young people, but to the rest of us as well.

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

I suffer from the affliction of loss aversion. I believe this is part of Prospect theory which say that one experiences more negative utility from losses than positive utility from gains which leads to non-optimal behavior in decision making. Maybe one could combat this simply (though not easily) by ignoring entry points, paper profits or losses, past booked gains or losses and focus entirely on the evidence and conviction one has at that moment in regard to the future expectation. It would be the Zen trading equivalent of living in the Now.

As an experiment for the last 4 years I have maintained a paper trading account along with my real money account. In the paper account I am largely ambivalent to losses or gains for obvious reason and just focus on what the research is saying at this moment in time going forward. I am embarrassed to confess the paper one has outperformed though with greater variation.

Ralph Vince comments: 

Non-optimal in what sense, maximizing profits?

It actually is optimal in the sense of acquiring beans, Not optimal in acquiring mountains of beans, but optimal in being able to acquire some beans — and it has deep, evolutionary roots.

There's nothing wrong with you or any of us in acting this way.

Mar

21

It takes a lack of intelligence to leap to higher intelligence. I've written about this and demonstrated it mathematically. The decisions early humans made were not well-founded by criterion we examine decision-making with today, although we make dozens of decisions, innately, every day along those same lines — it's how we are wired. Our poor decision-making has been our genius — the monkey who plays roulette and wins a banana.

Had it not been for this, we would still be cowering agoraphobically in the shadows of a primeval world.

Similarly, and this is not addressed in drakes equation, higher intelligence, at least the kind required to have formed on earth, requires, initially, a poor (or, when viewed in another light, brilliant) sense of decision making which is not evident in the conventional methods we employ in modern decision making.

Mar

18

Today, I stopped by the local Apple Store to buy an Apple TV–it allows my wife (who is hearing impaired) to see captions on streamed movies. When I walked into the store, it was difficult to notice how empty it was. This was on a Saturday afternoon, no rain, moderate temperature, and over half the store was empty (the last time I was there–a few months ago–you could barely get into the store). Over half of the sales folks in their blue shirts were standing around talking with one another. It wasn't as though there was anyone waiting to speak with them, or even anyone being asked if someone could help them–there were those sales folks going around the store, as well, and they were looking for things to do too–no one had questions for them or needed help. I was stunned. In the three years we have been using this Apple Store and this was the first time I've had this experience. I don't know that what I observed today isn't just an aberration. That said, are others on this site observing the same at their local stores?

Ralph Vince comments: 

Dave,

I think it's more than just Apple. I live by a popular vacation beach in FL. Access to the beach (free) is jammed, mobbed. Go out to a restaurant, they are empty. However, go to one that is running some kind of promotion and they are jammed. The roads are jammed, but people seem extremely price sensitive.

On the one hand, things have the feel of a boom, and on the other, of a bust. Very peculiar. I think Apple, however, from the looks of their stock, and evidently their stores, is certainly feeling the bust side disproportionately.

Thomas Miller writes: 

The Woodfield Mall in Schaumburg Illinois outside Chicago was extremely crowded today well into the evening. Temperature was mid 30's a little cold for this date. All the restaurants were very crowded particularly big chains like Cheesecake factory with huge waits.The Apple store in the mall was fairly crowded but less so than at other times I've been there particularly with the amount of people that were in the mall. I didn't see a lot of people buying anything while I was there. I also observed that very few people in the mall had shopping bags and the ones that did were fairly small. Also, I can't remember a time when I've heard so many different languages being spoken and seen so many kids there. The kids play area was absolutely packed and must've been teeming with bacteria and viruses. I started getting flashbacks of the mouse's house in Orlando. Felt like I was at some kind of United Nations mall. Maybe all the Aryans were out starting their St. Paddy's day libations early. Not very scientific, just unusual.

Ralph Vince adds: 

I notice a huge regional differences — though this has persisted throughout this protracted period, only now, become even more polarizing.

I think it's vulnerable, the only drivers of wealth here are those tied to very specific fields and/or government (and some workers in those sectors have been cut back severely, military in particular) and the stock market. Here's where the implications arise for us.

NO ONE has cashed out. Everyone crying about their investments and their pensions in 09, has their moment to find redemption now. Have they? Every major pension fund has a large allocation to equities now. Everyone feels safe. Teh fed will keep pumping — but they have such short memories, it was the very sound and fury of the igniting pump in Oct 87 that turned it around. If (when) this goes — when everyone tries to get out within the same span of two or three hours, who will save it and how?

Mar

7

These are still "nothing" days. Breakouts, new highs….nothing days. These are not outlier days. These kinds of days give shorts a chance to cover, longs a chance to add (or reverse) etc. They are not make-or-break days.

It's the kind of days that erase X days of action that are the make or break days. The higher X, the more the day makes or breaks. (The larger X days have historically been to the downside, those there are plenty of large upside days erasing X days of {downward} activity).

Interestingly, if you plot these days, you find that the probability of an X days retracement in a single day is Poisson-distributed (named after the statistician founder, Simeon Denis Poisson). In one of those great moments of serendipity in human discovery, the probability of catching a fish (un poisson!) is — you guessed it!

If you're short, the consolation is that a day which reverses X days of activity IS coming — the "when" part of that is distributed such. If you're long, you need to realize the same thing.

Mar

5

I found this video fascinating and mesmerizing…….especially the ending.

Ralph Vince writes: 

"The intricacies of designing a proper portfolio can often balance on the weight of a feather."

There's a LOT in that statement. The generally-practiced mean-variance style portfolio constructions miss this point however — that a single component can readily offset all other components in the portoflio over time — even if that single component is profitable!

 

Mar

4

One of the mantras of those who would convince us individual investors to buy and hold is "you can't time the market". The slogan seems to mean that you can't precisely time the exact bottom and exact top of any given market cycle. But that's a strawman: you don't need to buy on the very day that the market bottoms and sell on the very day that the market tops. Instead you only need to avoid buying when the market is overbought, overbullish, and overvalued, when cyclically adjusted P/E ratios are high, when the Q ratio is high, etc.; and similarly for selling.

Other than broker marketing materials, does anyone here have a good citation for the source of this old bit of market "wisdom"?

George Parkanyi writes: 

It's the mantra of the mutual fund industry (a) they want you to stay put so they can keep the fee stream going (they make money whether you win or lose), and (b) don't like you moving the money around from fund to fund because then they have the hassle of redemptions/re-balancing and/or parking your money in lower MER funds such as money-market for extended periods of time.

Ralph Vince writes: 

I've met people who can time the market.

And I would also say that it isn't necessary to do so.

There are many ways to be successful at this. It's a matter of finding what works for the individual, to find his groove. And it is precisely THAT which is the hard part.

Feb

22

Aside from the obvious answer which is to make money, what do dailyspecs think is the key to managing money? Is missing a big up move better/worse than missing a big down move? Meaning, if a long equity focused fund manager was flat in 2008 but underperformed in the recent move is that good or bad? It seems that if you play strong defense you often times don't catch the big moves. Similarly, if you are all offense your drawdowns are far greater. There are, of course, specifics to each style, but I am thinking more generally regardless of method or style.

Ralph Vince writes: 

George,

If I may….

"the obvious answer which is to make money"

Is a crazy, amateur answer. Anyone who claims THAT, is here just for entertainment (which does not mean they are playing just nickel dime either, but likely playing TOO heavy).

The number one rules is to answer what you ARE here to do. If you were running the LMNOP corp's pension…how would you define that?

If you were in a trading contest, you would have a different criteria. What would it be?

If you were managing money for granny, wouldn't that be different than a 22 year old kid with a little grubstake's criteria?

How can you have a plan, a map to get somewhere, when you don't know precisely what you are trying to accomplish, where you are trying to go. I know it may sound trivial, but that's step one. Otherwise, you just flounder.

By the way, when people say ".. to make money,: I have found that usually means they need to "make money," to cover their obligations, which is a LOT different than making money to increase their capital (i.e. their obligations are already covered). Those are tow different ballgames, and to me, to have to trade to cover your nut, is not the way to trade. Not for me anyhow, it;s a tough enough game without that on top of it!

A commenter writes: 

My first thought, FWIW, is discipline and hard work. It's like much else in life. There are naturals, to be sure, but for the rest of us, in any endeavor in which one seeks success, there's nothing like discipline and hard work.

Timothy Collins writes: 

If I HAD to choose, then capital preservation wins out. Fear and greed drive just about everyone, but I've found fear outweighs the greed. There isn't one right answer. It depends, but here is what I can tell you. If you start managing money during a time where we've had sideways action or a very slow climb or even very bullish action, folks are going to want you to outperform. If there hasn't been a recent correction or scare, then greed takes over. If you underperform, they will leave you. You can survive the first major downside move, usually, and keep most of the assets you manage. However, there will be a heighten expectation of communication, hand holding and reassurances that they next drop they won't lose as much, if anything.

If you start managing money during or shortly after a sharp decline, then most of those individuals are probably looking to make a change because they were hurt badly. They will want capital preservation, so underperformance in an up market is somewhat tolerated. Clearly doing 1% when the total market does 15% won't be acceptable, but if you deliver a decent up year during those times (say 6-8%) but avoid losses during 5-10% downswings and greatly minimize during big drops (15%+), they will be very loyal even if you underperform on the upside for several years in a row (3-4 even). People tend to remember and be loyal to protectors.

Just my view of course.

a commenter writes:

This is a superb question and one could fill an entire career answering it. It is the money management equivalent of "Does God Exist?" for a theologian. Belief in one sort of God on one sort of Continent will get you high praise, many parishioners, and a spanking nice Cassock. On another you'd be branded an Infidel and your kippah kicked in the sand. Although the asset management industry has a tendency more towards the Heaven’s Gate end of the spectrum than the Abrahamic.

another commenter writes: 

Capital preservation is very similar to when one is playing a strong defensive game and in top shape. Even a player with a weak offense, if he has a strong defense, that and fortitude can grind the opponent down.

Alex Castaldo writes: 

The business of money management requires two separate things: first the ability to attract (and retain) Other People's Money (OPM), and second the ability to successfully invest/trade. In my experience it is rare for one person to be good at both, so to have a successful firm you probably need some people who are good at one and some who are good at the other.

Raising money involves marketing skills and also good communication with the clients so you understand what the client wants and so you keep the client informed/reassured about what is going on (even when they should be worried instead!). Basically these are people skills.

For investing/trading on the other hand you need the ability to see things differently from others (so called "variant perception", seeing things that are true but that other people don't see). This skill is partly an intellectual skill and partly guts/courage to do things your own way rather than follow the consensus.
 

Feb

18

Does anyone know anything about housing values in Detroit? Of particular interest are empty lots.

Victor Niederhoffer writes: 

30 bucks will get you a good abandoned big home without the copper. Reason has a very good video on the bargains among the abandoned and its causes from excessive service rates and unionization. Chicago is the next Detroit I'm told.

David Lilienfeld writes:

I ask because a good friend of mine, a little older, is an ophthalmologist who bought four adjacent lots off of Woodward (?) near the center of town. The cost was practically nothing. Two of the lots are empty, the other two have abandoned homes (he compared them to Ridgely's Delight (in Baltimore) in the 1960s–that area of the city was in pretty poor shape at that time. The lots themselves are "big". Marty's thinking of when he can turn his practice over to his son and retire. (I can't picture Marty retired. The man runs on adrenaline and his great rapport with his patients. He would have gone into cardiology, but he thought ophthalmologists were paid more and didn't have to work as hard–leaving him time for his woodworking and a bunch of other hobbies.) He hopes to build a "large" house on the property sometime in the next 5-10 years as a summer home. I think he's crazy, but given his investing record, which is pretty good, I have to wonder if he's just really early, nuts, or onto something. Hence, my question.

GM and Ford do seem to be on the rebound, though. What's on the rebound in Chicago, except for gun sales?

Ralph Vince writes: 

I imagine it is much like Cleveland, where you can buy property for the back taxes owed. Young people not taking advantage of this are silly.

The mineral rights under most of these places, eventually, exceeds the cost

Feb

1

I am reading Ari Kiev's book The Psychology of Risk.

He argues that goal setting is most important in trading success. Instead of trading passively at what the market offers, one should first set his own goal, then develop a strategy based on the goal, commit enough risk, and trade with faith toward the goal.

Does anyone have any experience or thoughts in this approach?

Gary Rogan writes:

Leo, I just found it interesting that the language sounds like the industry-standard language of "financial planning", other than the faith part, in that that language involves "understanding the customer's goals", "finding their risk tolerance", "establishing a plan to achieve the customer's goals based on their risk tolerance".

Does he believe in some sort of "you dial the risk, you'll get the return if you believe hard enough" kind of thing? As he explains it, is the purpose of "faith" so that you don't chicken out when things get tough or as something else?

Ralph Vince writes: 

From the time I was 19 or 20 years old and a coffee-cranked margin clerk, until now, I have witnessed that the number one determinant of success or failure is a defined criteria (or lack of).

As Kerouac put it:

Two flies, You guys, What are you doing here?

So what are you doing here? If you're just here "To make a better return on your money," you may want to give your criteria a little better consideration.

What are you willing to accept as risk, how will you contain the risk to that? What's the time horizon? (the most overlooked aspect in investing, bar none. We live on a planet of delusion where people are using asymptotic, long-run values which often diverge greatly from the reality of finite time).

Pension funds are able to do this — articulate their criteria, as well as anyone. They need to keep to a specific liabilities schedule. Institutions tend to trump individuals in this regard.

You can tell the compulsive gamblers — the individuals without a specified criteria, disaster is imminent.

So…what are you doing here and when do you need to get it done by?

Gary Rogan replies:

But Ralph, and I'm not at all trying to be facetious, what if I have a hundred bucks, willing to lose fifty and want ten million in a year? Aren't your capabilities/means/methods at least as important as all the other factors put together?

Ralph Vince replies: 

Gary,

Ha! Maybe your plan is a deep OTM option….parleyed 6 times in a row, with half the $100 ?

Without a specific, detailed, articulated criteria, I cannot determine my exposure plan. I don;t have control over what the markets will do
– I DO have control over my exposure.

The whole thing gets you out onto that lumpy landscape I call leverage space, and without getting into the nittygrittynasties of that (and acknowledging you are IN leverage space whether you like it or not, and it is applicable to you whether you acknowledge it or not), let's say your criteria is exactly as you defined. Well that sounds like some sort of portoflio insurance, yes? Your strike price on that is $50. Now, given that there is a peak to leverage space, portfolio insurance runs from that peak (as a % exposure) to 0 (as a % exposure) as your equity decreases to $50 (where your exposure is 0).

So now, given that you have articulated a criteria, you can plot a path through leverage space. In other words, you can create a specific plan to achieve that criteria in terms of your desired exposure.

Leo Jia adds: 

Gary,

I am only a quarter into the book, so still can't comment on all your inquiries.

You are right, it does sound somewhat similar to the financial planning language. The difference perhaps is that the goal is meant for a daily goal or very short-term goal. It should be set at a level as high as one can stretch. One should clearly envision the realization of the goal to make sure that he WILL achieve it. Only by doing this, one can be ensured to devote all his power to achieve the goal.

The faith is to ensure that one does not get chickened out easily. It helps one to steer away from common beliefs one grow up with, such as staying safe.

Victor Niederhoffer writes: 

The power of prayer in markets and life for extending life and gains was well studied by Galton who noted that insurance companies did not reduce the rates for boats owned by divines nor was their life expectancy greater.Having faith in a market reaching a goal, will not alter the counts as to whether to hold for the end or the middle or the reverse. It will just cause unnecessary vig.

Leo Jia asks: 

What about the faith not in a religious sense? Shouldn't one have faith in oneself, in one's well-designed strategy, and in one's ability to reach the goal?

Ralph Vince writes: 

I return to this thread, which, despite it sounding like a hokey, self-help sort of thread, is, as I mentioned, the single-greatest determinant I have witnessed through the peephole of my own experience watching and participating in the trading world. It is what transforms those who are lured here for all the wrong reasons, into dull successes at this endeavor.

Especially as an individual trader, it's so easy to get sidetracked, derailed, spun around and disoriented by the markets. And if we agree that quantity is, over the course of N trades, at least as important as direction (the latter of which we don;t have much control over, and that a gentleman's bet and betting the house — the spectrum across there determines the weight of the specific risk on us), and that quantity is specified by a plan to achieve our criteria, then it is exactly the execution of that "plan," which becomes the vital exercise in trading. And without a goal, without specific, well-articulated criteria, you cannot craft the plan to execute — you are just waffling, flailing.

(And these goals the individual can craft should be more clear than that specified by the investment committee of an institution, because as individuals, you can set a higher bar than a committee of bureaucrat-types).

The exercise then becomes one of executing the plan, something quite boring and clerical, but, to me, something that has resulted in extreme trading success. I won't elaborate further, there are plenty, always, not experiencing success and my aim in this note is to point them in the right direction to achieve one pathway to that success (as I believe there are likely many, though I am only familiar with this one). Granted, I am very familiar with the linkage between achieving a criteria, specifying a path to achieve it, in terms of simple mathematics, but this is not something someone cannot learn and familiarize themselves with to a greater level than i have.

Since doing so, I have encountered success with this that I did not think was possible. The execution of the plan turns you into a trading apostate, relegating most market-related exercise, entry & exit, selection, etc., to their rightful place as secondary or tertiary concerns, contrary to what most believe.

No, I'm not going to detail my specific plan — it's unique to the criteria I am seeking to achieve, and the point of this note is to further highlight the critical importance of criteria and plan. Along these lines, what I later found echoed what I was discovering about my plan in a book called "Great By Choice," by Collins and Hansen, specifically the "20 Mile March" notion as it pertains to specifying such criteria-plan relationships as detailed here for trading and their execution.

I doubt most will bother with what I write here. Growing up in the raucous world of Italians and Jews and their gambling, the lure of a little self-created danger and excitement — the little rush of that, is what draws most to this arena and keeps them here, though they don't see it that way.

Gibbons Burke writes: 

Great post, Ralph. It brings to mind CompuTrac/Telerate's Teletrac software, which was originally named TradePlan. It was built to facilitate putting into practice the old Frenchman's wizened admonition "Plan your trades, and trade your plan." Unfortunately it was a bit weak in an area you championed, sizing your trades appropriately, but in many other respects its design remains one of the best for indicator and rule based analytics.

Ralph Vince writes: 

And, if the Chair will grant me a pardon just this one last time (regarding the French, a topic of seemingly poisonous exosmose to our regarded Chair) the number one rule I have learned of the markets and life: "Never face the Old Frenchman. Never. In anything."

Leo Jia comments: 

Hi Ralph,

Thanks very much for the inspiring posts on this thread.

Your point (if I understand correctly) is that the single purpose of a goal is to define the size of the trades. I understand size is very important but am not very clear on how exactly a goal works on that.

According to some literatures (yours as the most prominent), size is determined by how much one want to lose on each trade based on his strategy, and to win more, one has to increase the size, but there is an optimal size beyond which one's return will diminish. Isn't all that simply mathematics and how aggressive one want to be? How does a goal serve here?

On the other hand, how aggressive one want to be is very much influenced by his faith (or his illusion) on how successful his strategy will be. A key question I often have is how one can be so sure that his strategy will work as tested so that he can simply increase his size to the optimal level in order to maximize his return? And this doubt also applies to execution.

Would you kindly explain?

Ralph Vince responds: 

Leo,

You're asking me to explain an awful lot, too much for a simpled response I fear. Let's say there is a risk proposition, a potential trade or wager. If I am going to play it one time, what I stand to make as a function of what I risk is a straight line (from a gentleman's bet, i.e. risking nothing, where f, the fraction of our stake we risk, is zero, to risking the house, f=1.0, where the line goes from 1, that is, risking nothing we make a multiple of 1 on our stake after the proposition, to some value > 1 where we risk the entire house).

For a subsequent play, where what we have left to risk is a function of what ocurred the first play, a curve begins to form (and thus you can see how the notion of a "horizon," that is a finite number of plays is an important parameter in all of this). No longer is the peak at f=1 when we have more than 1 play. The peak begins to move from 1.0 in the direction towards some value > 0 .

And I can show mathematically (because this is NOT a story about may, but about graphic visualization) that, absent knowing where that peak will be in the future, that the long-term best guess for this peak is p/2, that is the percentage of winning periods divided by 2. If I expect 50% of my plays or periods I have a position to be winning, then the best guess for this peak is 50% / 2 = .25. I am not going into the mathematical reasoning behind that here.

There's more….a lot more now. A curve has formed. The curve has a shape, and the story is in the shape of the curve and all the geometrically important points therein (I have catalogued these and discussed them at length to a disinterested world). And you are neccesarily on this curve when you trade this instrument, whether like or not, acknowledge it or not, and likely moving about this curve — and you are paying the consequences and reaping the benefits of where you are on this curve.

And here's the thing — you have control over where you are on the curve, and where you are moving on it. You don;t have control over the trade. And the thing you have control over is the difference between a gentleman's bet (where nothing is at risk) and having your entire life at risk.

Now, you have a criteria. Someone asked earlier on this thread for a particular criteria, which sound like a sort of portfolio insurance, and thus, a path can be plotted on this curve to accomplish precisely that.

There's a lot more to the geometry of this, and the paths on the curve (or surface in N + 1 dimensions, where N is the number of components you are trading), but people prefer to be blind to this but they do so at their peril and cost.

Newton Linchen writes: 

Ralph,

When I finally understood Kahnemann's proposition, that people (including and - specially - me) are not "risk averse", but "loss averse", and later recognize that was this "loss aversion" that caused me to lose more than I needed to, (since I have always researched trading strategies), the next logical step was to dive into your work.

I'm now at the point of embracing your ideas about the leverage space "for good", because I finally realized that trading requires so much toil… that it's simply not worth it if you don't aim for the maximum goal.

In other words, trading is difficult regardless of anything else… So why not do it for the maximum available profit?

That of course, requires courage, since humans have a great deal of loss aversion - and it's only possible when one realizes that it's just not worth it if you don't aim at the zenith.

Ralph Vince writes: 

If you want to Newton, and you have the stomach for it. If that's your criteria — growth maximization and drawdown be damned, then yes, you want to be at what you expect the peak to be over the future horizon of holding periods you are going to engage over.

Me, I'm old and cowardly. I like to sit on park benches with a shawl on…

Leo,

These are already things everyone is already doing, i.e. they ARE moving around in this leverage space, like it or not, likely moving about it, paying the consequences and reaping the benefits of a location in a geometry which has extreme bearing on his fulfillment (or not) of his criteria. Your guy employing the mean variance approach has, as his criterion, maximizing expected (1 period!) gain with respect to variance (usually within some specified other constraints, like without using margin, without more than x% in any one group, no short sales, etc). He is still invariably in leverage space, moving about it. (Further, in assuming the main facet of his criteria, maximizing return vis-a-vis risk, wherein he specifies risk as variance in that return, is mathematically misguided as variance is a diminution in [consecutive] return, and not risk, i.e. it is already baked into the return portion, i.e. the altitude in leverage space, as one considers consecutive return [i.e. reinvestment]).

It's not a matter of maximizing return, alone or with respect to something — unless that is ones criteria. Regardless, we are in leverage space, moving around, and can craft our plan our path through or stationary location within this space to satisfy our criteria.

And, absent a criteria, a "goal," the virtue of which was questioned at the trailhead of this thread, there can be no plan as nothing is being sought (other than perhaps entertainment or some form of self gratification). And if one does have a goal, a plan can be crafted to try to achieve that goal.
 

Jan

31

Driving through the Owens Valley on a beautiful sunny clear day, the entire 150 mile stretch with 14000 peaks towering above showed the geological effects of immense glaciers that filled the entire valley during the past ice age. Ice could have been 3000 feet deep gouging up mountains. Even Mauna Kea in Hawaii has clear geological evidence of glaciers! The last ice age was as recent as 10-20,000 years ago and ice covered a large part of North America. Global warming is the end of the current ice age and has provided good weather and prosperity and the growth of civilization and the human race for 20,000 years. The reverse of global warming, namely cooling, is not an attractive alternative. Imagine if cooling began. It would mean summers with snow that did not melt lasting through destroying crops. 4 years of snow on the ground through summer would wipe out most of the world population. 4 years of 40 foot snow accumulation would erase most signs of civilization under a layer of ice. When Krakatoa went off in 1883 the ash plume circled the world and there was no summer in the US that year. Imagine the impact on gnp and the markets if cooling commenced. Its awful to imagine. So its a case of unintended consequences or be careful what you wish for should they figure out how to reverse global warming.

A commenter writes:

Cold weather crops like rye and barley would come back in vogue if we had an ice age which is not unthinkable. The zones for planting crops would change drastically. One would expect that researchers might do some genetic tinkering with corn, wheat, and soybeans, allowing them to flourish in a colder climate. Quite a number of scientists are predicting a Maunder Minimum at the end of this current solar cycle, which coincided with the "Little Ice Age.".

Steve Ellison writes: 

Quite a long time ago, I reviewed Evolutionary Catastrophes: The Science of Mass Extinction by Vincent Courtillot. Every one of the 7 mass extinction events identified by M. Courtillot was caused by global cooling. Therefore, I agree that global warming (which I see no reason to doubt) is the lesser evil.

David Lilienfeld writes: 

In the 1950s, 1960s, and 1970s, 1980s, and 1990s, the asbestos industry maintained that "there was reasonable disagreement" among scientists about asbestos as a cause of lung cancer; no asbestos-related regulations were needed. In the 1950s, 1960s, 1970s, and 1980s, the same was true of the tobacco industry for tobacco and lung cancer (and other sites, too). In the 1980s, 1990s, and last decade, many in the social conservative school of thought maintained that there was little evidence, or at least controversial evidence, about the role of human papilloma virus in the development of cervical cancer (I won't get into the matter of hand and neck cancer and HPV). In the 1960s, 1970s, and into the 1980s, the US salt industry insisted that the data linking consumed salt and hypertension were controversial and that no regulation of the salt content was needed. The argument against the consensus view holds only so long as additional data do not validate the view of that majority. With Copernicus, that was the case. It was the same with the role of bacteria in the development of peptic ulcers.

Absolute certainty and uniform conclusions by all members of the science community shouldn't be needed for policy formulation. If they were, then the Marlboro Man and Joe Camel would still be roaming the ranges and desserts of our television screens.

Ralph Vince comments: 

What a logical stretch David.

In the tobacco litigation, we found secret emails amongst the defendant employee's indicating a nefarious conspiracy to keep their methods and activities secret.

The East Anglia emails are similar in that regard.

I can tell you, from firsthand observation of the computer code that was in the email trove (because I have been writing code since the 70s, and I can tell you from examining someone's code what nationality they are, what mood they were in when they wrote it, and often what they had for breakfast). The code that was dumped was utterly damning to their cause. Not only does it show that the data does NOT sufficiently show that we are experiencing (anthropomorphic or not) temperature rises, but taints the issue because it raises the question of motive. We're left knowing that CO2 in the atmosphere has increased, a seeming understanding that this should have caused temperature rise, and the facts that do not comport to this, and as-yet no legitimate scientific reason (there are some theories, but that's all) to account for this.

Scott Brooks writes: 

I suggest that we look at the motives of the people involved in perpetuating what I believe is a giant con job.

Let's say the earth is warming. Is this a man made phenomena or is it just a normal cycle that the earth goes thru from time to time? Who stands to profit from these suggestions to stop global warming? Al Gore and his ilk?

Why do we trust these idiots in DC to make decisions that are common sense based and "special interest group" based?

If we start down this path that global warmists like yourself want us to go down, what happens when the earth keeps warming up (i.e. let's say it's really just a cycle the earth is going thru and not man made)…….what will happen then? Do you think the politicians will say, "Well, it's not mans fault. So let's roll back all the regulations", or do you think that they'll bloviate about how they need even more power to solve this horrible problem?

Why are you so willing to give more and more power to the government when they have a LONG history of abusing that power to their own selfish ends?

If you chose to go down that path, you will find people like me standing in your path actively trying to stop you.

Garrett Baldwin writes: 

I wasn't going to jump in on this, but I wanted to shadow something Scott said.

With regard to motives, pay attention to the way that the hearings and the solutions to solving this problem are handled. Some of us want the market to solve the problem. For example, let's say that the biggest threat in the world were something that is hard to measure, like the earth is running out of fresh air.

I'd argue that if that were a serious problem, a man would come a long and invent a machine to solve it. We'd rely on human ingenuity. We'd beat back that threat…

But the people who stand to profit through centralized alchemy only want to do it one way — their way. And any solution that is market based, creates competition, and doesn't enrich allies or decision makers or centralize more power with the government is either demonized, destroyed or regulated from the conversation.

The reality is that central planners can't solve this problem. They claim that they invented the internet, but if the government were still operating the internet, it would just be two dudes from DoD playing pong back and forth between New York and Camp Pendleton. This entire hype has evidence of scam all over it. Naomi Klein has demanded that the U.S. distribute $2 trillion to third-world nations who are "victims" of the U.S. and our energy policy. Ironically, the nations that are demanding the money are also the ones that are near the bottom of the Heritage Economic Freedom Index. Countries that aren't developing because they keep they limit their own people's ingenuity and production are going to get $2 trillion and then do what with it? Usher in a green economy? Come on…

So, when I hear the idea that we have to "do something" and do it fast without exploring the data, without asking questions, and without being allowed to have a debate because doing so would cast the distrustful of government as people who don't care about the children or the future or humanity. Meanwhile, the alarmist will have a moving wardrobe of children follow him as he spouts off how important his intentions are and how we are monsters.

Beyond that, we also ignore one thing in this discussion.

What are the positive benefits of global warming? After all, Greenland had a booming farm trade 1,000 years ago. I'd like to get some beach front property in Greenland. I'd also think that trade through the Arctic Circle would be nice and reduce shipping to Asia in half. Why is global warming such a terrible thing? Is it because we refuse to embrace the challenge, and because there's profit to be made by saving us from ourselves?

So, I will say from my perspective this. I don't consider climate change a big deal, and it's not something that I worry about. Humanity will adapt after government spends trillions of dollars chasing this dragon..

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

It seems lately the TV is flooded with AARP and those reverse mortgages we discussed. A Colonial Penn salesman called me (wont give my actual number anymore) 9 times, then I finally answered. To me it seems the more the Market and our economy "improves" the more these charlatans proliferate.

What correlation do you experts see?

Regards,

Alan

Anonymous writes: 

When a niche expands, such as it did in this case with the Great Bust of 08, there is a rush into the new territory. The effort is to get there first, to beat the competition to the new territory. When the niche gets saturated or starts to shrink, then it will test the character of the marketplace. If it is a fair free market, the competitors will battle amongst themselves by giving some combination of lower pricing and better service to the customers. If however, some believe they have a government favor or regulatory advantage, rather than serve the customer, they will press that advantage. They will try to beat their competitors by oppressing the customer.The sales will become more deceptive and fraudulent. Everybody is happy when there is plenty of food. The wars start when food gets scarce.

The fraud becoming the norm rather than the exception in the mortgage markets started when home-ownership peaked.

Ralph Vince adds:

And when "food gets scarce," leaders (often little more than self-appointed) and media have seemed to exacerbate the divide, seeking to use the weight of one side are all, to their advantage by stoking the flames to points beyond unreasonable — whether A French writer of early 19th century, an Austrian convict in the 1930s, a South American or Latin American of (fill in the blank) or a ……

It isn't so much the leader, but rather the gullible that follow, convinced that their fellow man have been the problem.

Anonymous replies: 

For lawyers and media gullible public, fines, prisons (or lack there-of) and arms certainly can be how they think they can gain a governmental advantage. 

Jan

21

I can be forced to buy health care insurance. I can be forced to comply with all kinds of regulations I think impinge upon my freedoms and leave me feeling emasculated.

But I will NOT be forced to watch sports on television! I have pushed myself away from the lure of TV wrestling for the final time. I shall not be forced to watch 50 "foul shots," the exact same shot, in every game. I will not be forced to hear crowd noises, razorblade beer pickup commercials, or the post game "interview" with the sub-par IQ of some athlete named after some famous movie chimpanzee speak profundities of our existence.

I would rather be dead. Televised sports is where I draw the line.

Jan

21

I suspect that Lance Armstrong's confession on TV had to do with last Thursday's deadline for the US Federal Government to file a Qui-Tam (whistleblower lawsuit) action against him, based on information revealed by Floyd Landis (another doping Tour de France winner who denied doping for years after testing positive).

Qui-Tam lawsuits reportedly date back to the war between the North and South of the US, when the US Federal Government (North) offered a 10% share of money recovered from anyone who squealed on anyone defrauding the government. All the whistleblower has to do is talk, and the feds have a certain time to decide to pursue the case or drop it. If they pursue it, their likelihood of winning is very high, as they have infinite resources and many other advantages, such as the courtroom procedure where they plead their case, then the defendant rebuts, but then instead of the decision being made, the feds get another chance to rebut. This and other advantages, combined with the threat of criminal prosecution, lead many defendants to give up. In Lance's case, I suspect it could cost him more than all the money he has, or would likely be left with after the other people expected to get money from him get what is coming to them.

Press articles while he was still denying doping were in two categories - the ones that mentioned that he had tested positive for doping, and those that did not. He tested positive for steroids in I think his first Tour de France, and afterword produced a doctor's letter saying he had been taking a prescription saddle sore cream containing steroids. A doctor's note after a positive test is no defense, and the rules are clear on that - and printed on the back of every racer's license. But, he was let off the hook because he was a big shot by then, and it was not in the interest of anyone involved with the sport, including sponsors, to have him banned. Much later six of his blood samples tested positive for synthetic EPO.

EPO is a chemical produced naturally in the human body, which stimulates production of red blood cells. The fake stuff does the same thing, and was at one time the most commonly prescribed drug in the world. For an athlete, extra red blood cells mean increased Oxygen carrying capacity, which means riding a bicycle up a mountain without getting out of breath. And in training it means stressing the muscles all that much more than a person with normal aerobic capacity could do.

 There are a least four ways to increase red blood cell count, two of which are legal in bike racing, two of which are not. The two legal ones are training at a high altitude, and sleeping in a tent at night with reduced Oxygen levels, both of which champions have done. The two illegal ways are taking synthetic EPO and blood doping, which is removing a pint of blood a month before a race, refrigerating the blood, and then putting it back in the night before the race, leaving the body with extra red blood cells.

In the early 2000s there was no test for synthetic EPO, but a few years ago, when the test came out, samples of Lance Armstrong's blood which was taken in early tours and kept frozen over the years was tested, and all six samples came up positive. That makes 7 positive tests that were widely known to the public during his years of denial. The rest is history.

-Henry Gifford (Former NY State champion bike racer who has never taken any drugs or drank any alcohol).

Russ Sears writes: 

People could forgive the drugs and cheating, but they will not forgive the bullying and using LiveStrong as a front to further this bullying.

I have seen it more than once, when a rational guy starts taking steroids he starts having a g_d complex.

With the new sudden success, and the mangled brain, it leaves him thinking they are above justice, everyone else is blind. The changes seems so obvious to him that he is on juice. The accolades so addicting.

The justification that everyone else is doing it and getting away with it convinces him that fate has singled him out for greatness and he cannot be stopped. He is the only one capable of understanding the truth.

This was true from the kids on each stage level from the c level HS basketball team to the Olympians winning medals. It was sad and pathetic seeing the HS coach confront a juicer, it was an epic tragedy at the elite levels.

Ralph Vince adds: 

Reading Russell's post made me think "Does he mean Armstrong… or Obama?"

Drinking my morning coffee, listening to the what was Florida wilderness out back being churned and converted into housing. Local strip malls, parking space unavailable. I watched Reagan's tax cuts met with a rolling market by August of 82, then watched the largest tax hike in history, announced at the SOTU of 93, met the same interval of time later with another rolling market.

America is so big, it's economy so massive and with a mind of it's own, policy bounces off of the mammoth like the arrows of pathetic, little men. Rome rumbles on. It occurs to me that the president, in all his rockstardom and oprahglamour, is as relevant as Armstrong.

Jan

7

One of the interesting fallacies that one comes across in markets is the part whole fallacy. If you correlate the whole with a part of the whole + a random number, you come up with amazingly high numbers. For example, the first quarter change in a year or an earnings is correlated about 45% with the whole year change by randomness assuming each quarter has the same variation and there is no correlation between the first quarter and the last 3 quarters. An exact formula is given in Biometry (page 573 on google) by Robert Sokal (no relation to the man framed by his boss). In any case, the relation between Jan and the whole year is mainly a part whole correlation, although it has ceased working in the last 10 years and is in the graveyard except for the oldest seasonarians. However, if the correlation between the first month and the last 11 months is positive, then by a modification of the formula the correlation between the first week and the next 3 weeks must be negative.

Ralph Vince writes: 

Vic,

Doesn't this get to the heart of the matter, that being that good minds get sidetracked into boobey-traps all over the place in our endeavor here?

On a planet where camouflage is the dress code du jour, where predation and it's avoidance often depend on deception, we end up — as cognitive beings, reflexively and relentlessly seeking patterns and relationships — looking for things in prices that ultimately deceive us (or at best, work until they do not, a cruel form of deception, longer-term).

Markets, as man-made constructions, are particularly adept it this. I am again reminded of Nabokov's Lolita, one of the greatest pieces of English literature in this opinion of this amateur critic (second only to his Speak, Memory), as one that most will not consider because it alludes to sex with an adolescent — the common disdain for that, a perverse ruse in itself keeping many from ever enjoying the novel.

In similar fashion, I think one must must must must MUST assume randomness, however unpalatable the idea of trading randomly-generated data may be. In fact, as a strategy, rather, as concern or description of the underlying character of what we are working with, one must craft their strategy under the assumption that randomness belies the data flow, yet, should it go into periods where the data becomes non-random-like, to have that accrue further to our benefit.

It's more difficult to do than it seems at first glance, but, from a personal standpoint, it has been the most beneficial realization in my trading life.

Jan

4

Wow. here is every NFL play for the past 10 years in CSV format.

Dec

26

We're now into Year 3 of the Greek implosion. Lots of austerity measures in place in Greece, though it's not clear if anyone pays any income tax. Government employment rolls have been cut by more than 25%. At what point do Greek banks become buyable? Granted, there may be some social instability short-term, but given that the country has stomached the austerity measures thus far imposed, I'm not sure that my concern about the social fabric further unravelling is well-founded anymore.

Ralph Vince writes: 

A good point, but I think we should asses what is and has occurred in Greece, and elsewhere, as not just a function of duration but of time. I don't see the Greek situation improving an any substantial measure any time soon. Or Portugual of Spain or Italy or France or….

I fear europe — and the rest of the world (assuming the US follows suit on austerity) will be in a similar situation wherein the prisoner seems fine after 90 days of incarceration. But he has a 20 year sentence.

I think the real fear isn't so much "social fabric coming apart," lies in the realm of political reaction after sustained periods of hardship. This is where some pretty unsavory actors have made their mark — not in all cases, but it is the ground they have grown in, and no one has been into this long enough or suffered for enough of a prolonged period. We will know it is that time by the symptom of right-wing leadership and if it is sensible or extreme.

Dec

10

50/50, from Duncan Coker

December 10, 2012 | 2 Comments

Jeff's coin proposition bet illustrates a nice lesson for me when applied to trading. That is, even if probability is favorable, there can and will be streaks against. So, there needs sufficient N and staying power for probability to work in trading. So all the seasonal or studies that trade once or twice a year probably don't have a statistical edge.

The inverse lesson is that sometimes it is good not to trade when the probability is not in favorable, as in never take a proposition bet against a Florida surfer with a low handicap, (humor intended).

Jim Sogi writes: 

I read that in a sample of 10^10 binomial chances, there can be a run of a 1 million 1's.

The idea that in an infinite random time series every possibility will occur, such as the history of the earth, kind of worries me. There seem to be laws of nature, but are they? Will they change? Do they?

Ralph Vince writes:

James,

Yes, and it is man's innate ability to asses such probabilities (and hence, the fallacy of Huygens and Pascal — that risks should be assessed based on mathematical expectation) that is the most fascinating thing about the entire story of evolution (again, to me).

Why do you get on an airplane when it can crash? Why do you get in your car and go out to buy a quart of milk? We have evolved over eons to pursue often time-critical rewards on a risk-laden planet — it IS how we operate or we would be still cowering agoraphobically in the shadows of a primeval world. This notion fascinated me (and the reason I wrote a book on it in 2011), and the more I dove into it, the more I saw that the answer to it — i.e . the fundamental equations we posses innately for assessing risk, pertains to all other mathematical decision (game theory is rife with concepts that are tuned to the Huygens/Pascal model, not our innate model) and ought to be reassessed under the lens of our superior, realistic model (and yes, it is superior, or we would all be looking for termites to eat up in a tree some place.

Leo Jia writes: 

Ralph,

Your notion about man's innate ability to assess probabilities is fascinating to me. I hope to read your new book soon (I presume it is Risk-Opportunity Analysis.)

It is clearly phenomenal that the human species was able to advance over other species. It is not as clear though whether it was man's special innate ability that made man evolve or it was the evolution process that gave man the innate abilities. Regardless of whatever came first, I think many of man's innate abilities that exist today were largely fostered by the evolution process. While this was wonderful, it is perhaps also very discomforting to learn that many of our innate abilities were more meant for the environment of the wild, not really for the modern times as the modern couple hundred years is far too short in evolution terms. It begs the question of what of the very innate abilities are really useful and what are not. Whether we realize what abilities we have or not perhaps is not a big issue as we naturally use them in life. It does become more important for us to know what of our innate abilities are actually harmful to ourselves today.

Leo Jia adds: 

I did a test. It went like this:

1) toss a coin 10 times,
2) if there is 5 heads then add 1 to a record do the above 2 steps 1 million times.

The chance that in ten tosses one gets exactly 5 heads and 5 tails is 24.5539%. 

To be more comprehensive with the test results:

4 heads and 6 tails: 20.4194%

6 heads and 4 tails: 20.5125%

3 heads and 7 tails: 11.7019%

7 heads and 3 tails: 11.7010%

2 heads and 8 tails: 4.4018%

8 heads and 2 tails: 4.4145%

1 heads and 9 tails: 0.9783%

9 heads and 1 tails: 0.9830%

0 heads and 10 tails: 0.1004%

10 heads and 0 tails: 0.0968%

Easan Katir writes:

Thank you, gentlemen. This is good info to ponder and apply to trading. For my part, I found a shiny Lincoln-cent and spun it 10 times. Result: 7 heads.

Jeff Watson writes: 

But there is also another trick of spinning a coin very fast, get down to coin level on the table and observe carefully, and if you get a blurring image of tails, call tails…same thing if you see heads, call heads. Since the coin spins at a slight angle, the side that you can see the image will be what lands.

Ralph Vince adds: 

Gentlemen,

As far as coin tosses and trading — and this may be redundant information to many of you — to me, personally (in my sciatica and failing vision nowadays) I find the largest implication pertains to the nature of the equity curve and expectations, and the deceiving nature of randomness.

We know if we plot out the equity curve of consecutive coin tosses (with heads +1, and tails, -1, say) and we plot this out, we can then draw bands around the mean expected value (0 in this case) of standard deviations. Thus, we can draw a one standard deviation band above and below.

Such a band will be parabolic, like a parabola resting on its side, rightward-facing, opeining up as time or trades or plays go by. That is, the upper band will always be ever increasing albeit at an ever decreasing rate. Thus. to be ahead of the expectation by play number X to the tune of 1 standard deviation, is below being ahead of the expectation by play X+1 or X + N where N is any positive number.

Couple this now with the Second Arc Sine Law*, which pertains to such randomly-generated equity streams and tells us (the essence of The Second Arc Sine Law) that we would expect both the peak and nadir of equity stream to occur least likely towards the center (time-wise) and most likely near the start or finish of such a stream.

These two principles, take together, warn us that in a stream of randomly-generated outcomes (coin tosses, or trading if/when the outcomes occur with randomness) we should expect the rightmost endpoint to be at or near the very top (or bottom) of the entire equity run, deluding us into conclusions, "This works!" or "This fails," that have no basis in a causal existence, but are merely the artefacts of randomness.

*The First Arc Sine Law buttresses this further, this law being that we should expect the ratio of the cumulative equity line (comprised of X number of plays) least likely to be above the expectation X/2 number of times, and most likely to be above or below X or ) number of times — the same Arc Sine distribution as the Second Law. Thus, say, if I toss a coin ten times, it has an expectation of 0 (given the caveats mentioned in this thread!) and I would expect with highest probability that ten of those tosses see the cumulative equity line above (or below) the expectation line of 0 and with the least probability, see 50% of them above and below the expectation (0) line.

Nov

28

First consideration, have a customer who is willing to pay. If you have that, you have a business. Without that, you have an idea and not a business.

Second, be willing to amend your plan(s) in whatever fashion in order to accomodate what the customer is looking for.

Third, don't listen to anyone–naysayers, govt regulators or other douchebags– just go, do it.

Jeff Watson writes:

It might be advantageous to consider the possibility of finding a business near bankruptcy and doing a turn around. Failing businesses like pizza and bagel shops and others can often be bought turnkey for pennies on the dollar (the owner is selling equipment before the creditors can attach it), moved to a new location and turned around, or liquidated.

Plenty of people go into business without enough specific knowledge, capital, a business plan, proper help, quality product, or a realistic price list. They compound these mistakes by not watching their pennies, mismanaging inventory, having over optimistic, unrealistic expectations. They also might place too much trust in their employees and not notice what's going out the back door. Many don't realize that running a business is 24/7 and every small detail counts. I've seen small business owners who don't even know their raw material costs or how to figure a gross profit. I've also seen people go into business not knowing the size of the market which can be as deadly in a brick and mortar business as not knowing how much wheat is for sale at any given time.

A further note, speaking of gross profit, if I walk into a small business that is always disorganized, messy, poor sanitation, dirty windows, I would readily make a wager that the business also has a gross profit problem and probably much worse. I am always on the lookout for these types of opportunities, since being a silent partner in a properly managed turnaround situation can be very profitable. It's the ecology of the business world, just like in the markets…the strong eat the weak.

George Coyle asks:

Ralph,

Re: your 1st consideration, I assume you just mean end market demand for whatever it is you are selling. If entrepreneurs waited for the end market demand to cover costs I would imagine the majority of businesses that exist today wouldn't.

Ralph Vince writes: 

I mean before you go to sell or market something, find at least one person who tells you, "yes I will buy THAT at THAT price," and tell them you;ll be back with it tomorrow, or whenever. But make the sale, whether you are selling vats of mustard or something that has never been sold before. If you are going to consult — don't go into the consulting business, get a customer to pay you for something. Now you are a consultant. Do not go into business and wait for a sale
– that's doing it backwards.

Vince Fulco writes:

Ralph- the latest craze in the start up world of 20 year olds is developing a minimum viable product. MVP, which is the barest of bare bones app/site/product, gets customers to sign on and then one goes about building out the real infrastructure. Think of fake storefronts with no sides or back walls. Frankly, some of the truth stretching to get paying customers on board makes me conjure up carny barkers. Similar to the HF/FOF world, most experienced business people never, ever, ever want to be the 1st customer. How do you surmount that hurdle?

Vinh Tu writes:

Look at Kickstarter. there's no pretense, really: people are pretty upfront about the fact that they're at a stage where it's mostly a webpage, maybe a prototype or half-baked product. And in some cases people are still willing to kick in the cash. 

Vince Fulco adds: 

This is a good list for a quick and dirty website idea.

And throw in reveal.js for your funding/customer pitches.

 

Oct

22

I can't begin to express my disapproval of letting a son go round putting people in choke holds, and kidding them about their lives. I can't begin to think of a worse thing to do to people, and worse training for a kid. All fathers should put a violent stop to such activities at the first signs of it. I have had people put choke holds on me, and the feeling of helplessness and having death in the hands of a joker is one of the most terrible feelings that one can have. It can lead to all sorts of dire consequences and thank the good one that my friend who mentioned something about this to me is still healthy after their encounters and amusing contretemps in it.

Ralph Vince writes:

I agree that no one (of any age) should go around doing that, and a fortiori, young people must be taught to make sure not to let people come up behind them, to track them in their head, and to have a sense of the whereabouts in the plane surrounding them of all who are about. It's too easy to become preoccupied in thought (or conversation) and lose sense of where the pieces are on the chessboard.

That being said, I think having enemies expedites education. I can only speak for myself, but I live in the middle ages, and wouldn't think of leaving home without a cup and two discrete weapons. A gentle man should look like a gentleman, and above all, never, ever let anyone come up behind them for any reason. Similarly, one should be very careful when coming up behind someone else, to speak to them and them know. 

Kim Zussman writes:

Funny no one looked up the actual risks to "choking out".

However this fits with the ubiquitous meme on dailyspec, "we as parents who have lived longer (but aren't necessarily successful / self actualized / or understand fully what we are doing here) will instruct you".

Or, that you should study certain music, sports, chess, religion, etc, in order to have a better life (fit in, reproduce, instruct, etc).

This was apparent this afternoon observing various bird species. The local crows call to each other in a way they all accept. Most likely the calls are reassuring: "we are crows and we got it right!". Also there is a lot of Mexican sage growing here, which attracts legions of hummingbirds. They twit twit continuously, zipping about, arguing over this or that mate but at the same time saying "we are hummingbirds and WE got it right".

New to our neighborhood is the black-hooded parakeet - a non-native parrot released into the wild but living and reproducing happily here. They fly in a tight noisy cluster - from one neighbor's Mexican palm to another's pine. Somehow these two trees are go-to places for the parrots, as they squawk and argue about tabloidesque mating rights.

What does this have to do with Reese Witherspoon putting her Ojai house on the market ?

This:

"Libbey Ranch provides a serene setting to be with her family, and looms large in her approach to parenting. "It reminds me of growing up in Tennessee, where we spent all day outside," she says. "I wanted my children to have that experience, to get muddy and hang out with the animals."

Indeed, Witherspoon has turned Libbey Ranch into a menagerie. A Friesian horse and a chestnut pony share the paddock. There are donkeys, goats, pigs, chickens, and four whimsically named dogs: Hope, Nashville, Coco Chanel, and Hank Williams. Neff fashioned animal silhouettes that are perched on wooden fences around the property. "

An iconic actress teaching that the fond remembrances of her childhood should be impressed on her own children for their own good. But now married to a man who is not these children's father, and expecting his. Evidently the ranch has to go.

But Ojai is not just about Hollywood. In fact other mothers duked it out there Friday on one of my mountain biking trails:

"A 50-year-old woman was walking her three dogs Friday on a road just north of the Ojai city limits and adjacent to Los Padres National Forest when she apparently surprised a California black bear and a cub. The bear, described as cinnamon brown in color, was estimated to weigh 250 pounds and was with a cub that appeared to weigh about 50 pounds, the department said.


The bears ran across the road ahead of the woman, but then the larger one came back to her and scratched her wrist, leaving a 1- to 2-inch wound that was not life-threatening, officials said. The attacking bear began to leave, and the woman turned her back it. But the animal returned and charged the woman, knocking her down an embankment. In addition to the earlier wound, the woman received at least several 6-inch abrasions that appeared to be from a claw, the department said."

Sep

24

I'm a big science fiction fiend. Growing up, I went through the Asimov trilogies (and lots of his other works, some of which took on new meaning after getting drunk with him at a bar at a science fiction convention), the John Campbell stories, Niven's Ringworld series, Haldeman's Forever War series, and Dickson's Chylde series, with the latter as a particular favorite. Lots of things we now coming to reality were talked about in these novels and stories. As a group, these writers (excepting Haldeman and Heinlein) tended towards optimism about the future–the human condition would improve, albeit with changes in what was defined as work and how societies functioned in the process of that improvement. Then an interesting thing happened during the 1970s/1980s. While many of these authors continued to write, the new writers were hardly optimistic. When I was at the local Barnes and Noble this evening, I was struck by how dreary the worlds portrayed by current science fiction writers have become.

Is it that we as a society are lacking in optimism about the future–so much so that we are no longer able to imagine one with a positive image (I understand that there are those on this list who will suggest that this is merely my perception, to which I acknowledge it as so being)? Much of the talk about raising/lowering taxes represent incremental changes. I'm thinking about paradigmatic changes; those are the changes that might address some of the challenges of the moment, whether it's water, energy/natural resources, pollution, health and disease control. Perhaps it's the dreamer in me, but if we can't imagine a future in which the human condition is uplifted/bettered, how are we going to achieve it?

Ralph Vince writes: 

David,

I've been noticing much the same thing, particularly with the 20-somethings I am routinely around. The dark, negative future they all, pervasively envision is something I have never seen in such one-sided fashion before.

I've given this a lot of though in recent years and have come to a few conclusions you may or may not agree with — regardless, I'm interested in yours and others thoughts on the matter.

I think we DO progress — I think man's progress is ever-upwards in fits and starts, but, viewed through the lens of 3 or 4 generations, has persistently been higher. I think much of this is incremental, almost unnoticeable however.

Lately, I see changes in pop-culture themes that would make me think that the dark era of the past decade or so is coming to a close. I've mentioned walking into a high-end furniture stores, and the colorful, Dr. Suess-looking furniture invoking a sensation of almost giddiness. I see it in the extreme use of bold colors in television ads of the past 12 months or so, in women's fashion and the elaborate, loud footwear now, and hear it in the driving vocals, unwavering, non-tremulo female power voices replacing the warbling songbirds of the recent past.

The mass mood is changing, it's moving in a new direction already. You won't see young men in pinstripes, though you may, by next year, see the resurgence of seersucker (I've been trying, really, really hard on this last one!)

However, just as change occurs incrementally, it also comes in BOOMs. Jonas Salk, Louis Pasteur……Air conditioning, transistors…….the magna carta.

The Santa Maria.

I've alluded to the enormous undertaking of the interstate highway system (post 1950s) and the transcontinental railroad here as things that paid off many fold.

And we've just been stuck in a period of stasis which I think is bigger than politics and politicians, era's where things are just intractable, and the stasis, like large fields of ice, just take time til things become dynamic again.. To-wit, I present Barack Obama's administration. I truly think he/they IS/ARE committed liberals. I think there truly DID intend to close Gitmo, and many of the other things that didn't get done and are being pointed to (I'm not taking a political stand here, not making excuses for the administration, just pointing to evidence to support my "over arching stasis as a natural impediment to dynamism" idea. We've had periods in history where this HAS been the case. (the natural state of politics in a democracy IS stasis. I think had Obama NOT had a supermajority in his first year, a situation where he has to have every one of his party on board and, it would have been easier for him, and odd twist in our politics)

At some point, the stasis will give and dynamism return — I would venture a guess as a consequence of some unforseen invention again that elevates our existence in a quick burst once again.

I think the more "paradigmatic changes" as you say, are very rarely, historically, the result of political structure changes, of which there have been few throughout human history. Usually, it seems, these changes are a result of increasing the geographic perimeter of our existence. These things HAVE transformed cultures. Were the Romans not transformed by their excursions into Britain and particularly the Eastern Mediterranean? Wasn't the old world transformed by Columbus and the Iberian explorers of the 16th century? At some point (I will not be here) our perimeter will expand, and political structures will amend to the new reality — new problems will be solved.

In the immediate, when I see the one-sidedness of dark expectations among the young-n-naive (who will not all be right), and I see the mass mood of culture assume a new energy, I don;t think we will see an paradigmatic change any time soon (are these things even predictable?) but I do think we'll see a more optimistic era here in the coming years, regardless of who holds political office.

Russ Sears adds: 

Ralph,

While I admire and agree with both your optimism and lovely essay. I believe the turn to pessimism for science fiction has a much simpler explanation. The education system and elite culture has made it a crime to be a boy and has marginalized the importance of exercise, sports and competition for the intellectual boys. The results has been a rigidity of thinking, especially amongst those scientifically inclined. This ignoring of innate emotions causes internalization and depression It has been sad to see as my daughter is attracted to these intellectual young men, but is put-off by the cloud of doom many carry around.

There is an emotional side to all thinking, What the "rational" mind thinks must subconscious join with base instincts signals of the mind to be accepted thought. Rigidity in thinking, without a recognition of the emotions, is the opposite side of the "angry" trader. It causes one to miss the short term bringing out the canes, and the long term emotional side to central planning, fed policy and brinkmanship politics. In both cases, I believe can be shown, that these time periods are not independent random variables, within statistical significant.There also appears to be a symmetry that plays out between short vs long term non independent market movements and respectively stocks vs bond markets. Which I find quite beautiful. But I will leave both these as exercises for the reader.
 

Aug

24

"When you look at the distribution of annula S&P returns, 2008 is not an outlier, in fact it is not even the worst but the second worst return". Harry Markowitz

I watched this [interview with Harry Markowitz (caution: 74MB file)], and thought, you gotta be kidding!

It's the perfect manifestation of really smart guys who are just totally oblivious to the trenches, even though he (Markowitz) has been in the trenches for many years. When he speaks of the fact in this little 3 minute video that 2008 was only 2 1/2 standard deviations outlying, that we really haven't seen an annual outlier of 3 standard deviations in US market history, I'm left stupified.

I remember being on the phone in November of 2008, late at night with Mikey, who was consoling me, urging me to go meet the monster margin call I had to meet in about 9 hours time. In those days (since I was long equities out both a** and piehole) I was living with an airline barfbag by my cellphone.

"We've never seen 3 standard deviations in annual returns…."

Right……"Can I have till next year to meet that margin call? After all…."

Yeah, well, long story made short(er than Ted K's manifesto) I did manage to scrounge up the money, run around bittercoldBostonInABaseBallJacketInNovember, meet the call, and eventually get out of everything at a profit (thanks Mikey!). But annualized returns? What are we here, in the private placement world??? Weekly data is as far out as we can usually afford to go down here on the shop floor, usually, it's daily and hourly and minute-by-minute, though I try to look away as much as I can.

But that annualized returns thing just cracked me up, and I had to share, especially in the anecdote that 2008 has now faded off into.

Aug

6

The upside down man's objection: "If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year" is easily rebutted by Philip Carret's observation that common stock is like a leveraged investment. Bondholders are first in line to be paid, but their claims are fixed, so all upside of earnings beyond a fixed percentage belongs to stockholders (as does all downside if the company fails to perform). If the typical capital structure is 50% debt and 50% equity, the typical common stock is a 2:1 leveraged investment, so an expected return approaching 2x GDP growth would not be unreasonable.

Stefan Jovanovich writes: 

There is a complimentary explanation. GDP figures are a sub-set derived from the monetary Marxist notion that nominal expenditure by the government is just the same as voluntary private spending. (This is the same notion that the CIA and all the Galbraithians depended on to decide in the 1970s and 1980s that the Soviet Union had matched or even surpassed the US in economic output.) Er, no. Sherman Tanks may be useful and necessary but their "cost" is not the same measure as the spending to buy a combine harvester. The same applies to civil service pay versus private payrolls; the one measures a Keynesian cost, the other measures an expenditure in search of profit. It should hardly be surprising that, in order to support the dead weight of wars and "public" investments that no private market demands, the equity residual has to grow at twice the rate of the overall "economy" measured in nominal Marxist terms.

Ralph Vince writes: 

Stefan,

Yes, this was the case I made on this or a related list about 4-8 weeks ago and had my economic naivete was assailed. In fact, I would posit that not only should government expenditures NOT be included in the positive column of GDP, but rather might best be place in the negative column. A good portion of government spending is in the form of capital outflows, interest payments to foreign entities, outright gifts to foreign entities (when we give the UN a billion dollars, is that really a billion dollars added to out GDP? 10 billion to Israel, does not increase our GDP by 10 billion), nation building (building schools in Afghanistan does not increase GDP). Outflows such as exports, count on the negative side of the GDP ledger — so too should government spending, or at best, it should be a wash.

If GDP growth is anemic now, remove the YoY increase in government spending from GDP and it's a pretty bleak picture in recent years (and no, I'm not being political about the Oreo presidency of the past 11 1/2 years. Same guy, same party, same people, different faces and names).

Jul

18

Here's the brewing problem that I think about every day: "The Real Class Warfare is Baby Boomers vs. Younger Americans".

I'd claim it drives me to drink, but do I really need excuses?

While my parents worry about my future… I worry about the solvency of the programs that their generation built… and how 14 percent of my freelance revenues might as well be lit on fire because (let's be honest) my social security and medicare taxes are not coming back with the same purchasing power or benefits guarantees (The healthcare system in 2053 will be tremendous, I'm sure).

These programs obviously need some means testing, as Pelosi's generation and anyone with 20-30 years of business experience will likely be much better off in the U.S. at their age then my generation will at 50 through 70, given resources, expanded competition from abroad and so on.

I personally feel sorry for anyone under the age of 27.

I graduated in 2004 (in a bad job market) and was still just able to sneak out and get 4-5 years of solid experience before the bottom fell out in 2009. Then I was able to go onto grad schools…I think I barely escaped. But it appears that fewer and fewer in 2008-2011 undergraduate classes are able to get the practical experience before they hit 30.

I spend a lot of time researching the impact of the recession on MBA education, and I'm seeing the ages go up, and applicants 22-27 being shown the door before they even get a chance to say hello. How we're going to sustain and educate our next crop will be a new gap. I am interested to see if there will be a significant pay gap between individuals 30-40 today, and individuals 30-40 in ten years.

Every day, Australia looks better and better to me for a 2014-2015 move. Too bad the IRS will meet me at the docks once I get off that slow boat.

Ralph Vince writes: 

Garrett,

Thanks for your posting. Your post deserves comments from the more geezerly here. Permit me to be the voice of those despised boomers.

I agree with you on inter-generational warfare notion. I hear it incessantly from the younger (<35) crowd, and not that it is without merit, I find it's rather one-sided. I am left wondering, despite the miserable economy and resultant job market of recent years, why the animosity? I, for one, twice your age, having been paying into the Ponzi schemes at over 18% per year for over 4 decades of my working life. Most in my circle seek to dismantle these Ponzi social programs, and agree the place to begin is clearly through means testing. I too don't expect to see a dime from these systems (not that I would qualify under means testing, but I would prefer we stop the Ponzi nonsense and consolidate it all under Welfare. Actually, I would prefer they do away with it entirely for that matter!)

Don't forget, roughly half of us boomers have been relentlessly voting against any of this nonsense our entire lives, and have sought to have it dismantled, but we have been outnumbered by the handout crowd — I believe your generation fear the boomers now becoming the handout crowd, an understandable concern given the demographic imbalances. Here is what they evidently don't teach in grad school (and I don't say this with condescension, rather because I find a conformity in perspective among the < 35 crowd). Straight-line forecasts into the future never work. The image presented to those your age — the straight line, cause and effect, demographically created scenario — that demographic doomsday isn't going to happen. Things always, invariably, descend from outside the system, rendering the straight-line forecast of the masses substantially wrong.

I don't know precisely WHAT those outside influences will be, but I'm pretty certain they will be severely pro- economic growth. This will have profound and far-reaching economic effects on the generation of workers now < 35. I'm not talking in the distant future either, but rather this decade. Don't be surprised to see home values surge, 200 to 300 percent over an 18 month stretch — when people least expect it. Don't be surprised if we need to bring in a few million qualified tradesman, or real competition among medical services in the US, wrought from outside the US. Don;t be surprised with plentiful, inexpensive oil and electricity. There are a myriad of factors now conspiring to create an enormous economic boom. Don't buy the "We are going the route of Japan" scenario. We are not Japan. Don't be surprised by double-digit GDP growth at some point this decade. The ground is shaking right now, and the < 35 crowd is unwittingly standing atop a mountain of opportunity for those who can shed the yoke of perspective that has been sold to them.

Lastly, Australia? Forget about it. Throughout my entire adult life, I have been of the mind that the US is really NOT the place to be if one wants opportunity and economic growth. I believe that is now flipped, and the states very likely presents the prospect for great growth and opportunity in the coming decade. This is a time to sit tight, take chances, and if things soften more, risk more, buy into it.

That's my two cent take, I wish I was young enough to capitalize on it the way a young man could, but I'll stake my future entitlements on it.

Jul

15

I have always wondered to what extent a random walk with normally distributed steps would differ from a Pareto distribution with comparable means and third moments. I have never believed that stock prices are fractals or infinitely variance, or any way different from a shifting normal distribution or a mixture of same. The hazard rates of fall off for both distributions could be compared, and one would hypothesize that there would not be a observable difference.

Ralph Vince writes: 

Vic,

I have always agreed with precisely what you are saying. The "Pereto Explanation," does NOT explain market conditions changing; it is stationary. Clearly, those who posited that were naive when such might be better modelled by moving distributions (maybe even Cauchy distributions, where variance issues still persist).

However, when we speak of variance in returns, we must consider that the ntion of "infinite variance" is equally naive(!) as follows: What is varying is returns, specifically, today's price divided by some price in the past (e.g. yesterday for daily returns). Everyone seems to (conveniently) discount that these cannot go below zero. Thus, if returns were equivalently bound on the upside (at 200%) we could be certain that variance in returns was NOT infinite. Sine we cannot makes this assumption, we can only assume that variance can be infinite ONLY by upside moves of ever increasing maximum magnitude as we increase the window of time into the future.

We should be so lucky!

p.s. my own take on it is that we are dealing with moving distributions, likely Normal or at least where the variance is measurable and finite. The shape of the distribution, it;s moments, however, can move rapidly and without any warning whatsoever. price change, is just the single data point selected at that moment from such chrono-dynamic distributions, the real question pertaining to price change — and challenge — is to discern what that distributions is at the moment. THAT is the real price change, the solitary point witnessed, just a random manifestation of it.

Steve Stigler writes: 

On stock models: Some aspects of these models are driven by a wish for internal consistency, that the step distribution is the same (rescaled) for steps in minutes or hours, etc. And the steps are independent. These imply that the steps are "stable distributed", a class that includes normal and some heavy tail distributions. The reason is the central limit theorem (clt) - if the step for a minute was pareto with finite variance then the step for an hour would be the sum of 60 such and by the CLT approximately normal. If the step for a second is pareto, even more like a normal for an hour. So if you don't want a very complicated analysis the only choice with finite variance in normal, and if you take any other step dist for small steps the dist for large steps will be approx normal.

Jun

29

These people (including Roberts) are Corporatist Globalists completely. Before yesterday I would have wagered that they would strike EVERYTHING in the bill except the mandate! The corporatist, globalist party is what unites these freaks, Kagan, Sotomayor, Roberts (just look at all of these people, that's all you really need to know anyhow if you've been walking around on this planet for at least a few decades with your eyes open. Really, look at the picture of these freaks together, then the class picture of the jox riding in The Derby. Who would you want deciding these matters? Does it matter?.

Be it Kelo, Arizona Immigratino, Affordable Care Act or any other Orwellian-monickered bill before them, the ONE thing the court invariable rules in favor of is the entities, the globalist, corporatist entities and never the individual.

I'll reiterate my case: The 21st century is not one of class struggle, but one of the struggle of the individual versus the globalist, corporatist interests. We are being ruled by our enemies.

Jun

27

I am at a loss why seemingly great athletes — those you would expect to have the keenest kinesthetic awareness — seemingly struggle on the dancefloor (I am not referring to ballroom-type dancing here…..not just shaking around on some club floor). I used to think that they were merely overly-self conscious, and this was causing their seeming stiffness. Yet, these very athletes excel precisely because they do NOT stiffen up and understand perfectly well the necessity of avoiding that, as well as preventing adrenalin surge, or coping with it in beneficial ways.

Peculiarly, the only atheletes-turned-dancers I have seen who can perform the dancing aspect gracefully are those who are boxers or very good standup fighters.

And the more I have watch this, the more evident it has become to me why (this is my hypothesis, which I am seeking feedback on here). A great ballroom dancer, like a great boxer or stand up fighter, has to have his feet under him such that if he were wearing a belt buckle, it would be slightly pointed upwards. In all other sports, be it playing shortstop, returning a tennis serve, a hockey player…..there is a certain, crouched position where the belt buckle is pointed downwards.

Yes, the best boxers, the best standup fighters almost invariably have tremendous footwork, where even their punches come from the balls of their feet (watch a slow right cross from Ali, how the ball of his right foot pivots, the heel up and turning outward, allowing that complete extension through his target). Many of these guys are often even built much like Fred Astaire, light not just in bodyweight, but seemingly light on their feet as well (though, not to the extent of Astaire, who must have been filled half with helium, the man was truly superhuman). Yet, footwork aside, it seems the angle of the belt buckle, in a range of, say, ten degrees, is a hugely discriminating factor in what permits an athlete to go from his game to the dance floor.

Russ Sears adds: 

In my opinion, there are at least 2 reasons "great athletes" are not dancers both stemming from your definiton of "great". Most of the highest paid athletes need 2 things extra-ordinary size and extremely high levels of fast twitch mucles.

The size comes at a considerable price to "grace". Extra ordinary increase in growth during teen years happen with increase muscular strength often very awkward years for even more normal sized men. It takes much more to control a large body to make delicate movements. Those needing the speed spend considerable time training for raw speed, to go with that size, not necessarily intricate steps and bends. Those needing delicate touch, likewise spend considerable time to get the hand/arms to move just so.
But perhaps more important is the fast twitch need in most of the highest paying sports leaving the "great" athlete with little endurance. Endurance comes with a more balanced slow twitch combination. A cardio taxing dance last several minutes long.

Dancers have considerable cardiovascular fitness, as do boxers. The middle distance runners I have known often are great dancers and often make great boxers and vice a versa. In the olympics note the events that last 2-5 minutes at a hard pace with no rest and you probably have some great dancers. The longer events suffer the opposite, slow twitchers can't jump but have great endurance but lack the explosive movements ability.

Anecdotally, didn't Apolo Ohno win "Dancing With The Stars" one season? 

Duncan Coker writes: 

I used to take lessons and compete in some pro/ams back in the 90s in New York, and also got to know a lot of the professionals at that time, mostly British and Russian. Ralph is right about the position of the man's belt buckle as it is quite important. The center helps create a floating style important in ballroom. Also interesting, the term swing as it applies to ballroom dance is not really about 1940s swing dancing. Rather it means to mimic the swing of a pendulum in fox trot and waltz. As the dancers are moving laterally across the floor they are also gliding up and down. Another position technique that was taught was contra body movement (CBM). It means to move the feet and legs in one direction while maintaining contact with a partner in another direction. Most professional couples start dancing in childhood, so the steps and physical attributes are ingrained early. I can see how many of these techniques would be hard to learn by even accomplished athletes in other sports later in life.

Ballroom is a strange and wonderful world. It still amazes me the tv shows are so popular, but I think it is great.

Ralph Vince writes: 

Russ,

Once, in working with a biochemist-turned-programmer, and talking about my pathetically slow running, the Chinaman, the biochemist (who was no runner, not the slightest athletic propensity whatsoever) told me that age, weight, and cellular mitochondria were the limiting factors. The only one I could really change was my weight, in order to get faster.

Now, I don't believe that entirely, because that would mean that whatever training I did only benefited by whatever weight I took off, and clearly there are 02 factors that you can train for, etc. But he did point out that I am not going to cut my average mile time in half — a valid point. He then mentioned that in all creatures, speed is a function of how much mitochondria is in one's cells, with, say, a cheetah having a great deal of it, human beings, in differing degrees, of course, possessing far less.

Now, this has nothing to do with Fred Astaire's ability to beat the living daylight's out of most thugs (I am convinced a man with his feet and coordination could have done that handily, and I say that based on the little thugs I knew in my youth who were physically disposed in similar though far less amazing ways) but I would like to know your take on that given your background in the world of running.

Russ Sears replies: 

Despite the popular assertion to the contrary you can not "be anything you want to be." relative to others. No amount of training will get a sprinter to turn into a distance runner and vice versa. I believe it was Flo Jo that after retiring from sprinting tried to become a distance runner. She was very dedicated, hired smart coaches and believed she was going to be great… but never ran a 5k faster than about 21 minutes. Now this is a decent time for the general population. Competitively this would only get her onto most high school girls cross country teams. In most teams even small schools this time would not be the best on the team. In evaluating kids to guide them into the right event to try out for in track in field I have tested for the following.

Sprinters- Fast twitch explosiveness- standing and running vertical jump relative to size. Muscle size relative to strength is important, lean muscles verses bigger more explosive. Bone size is also important.

Stalky - bigger muscles large bones, built for sprinting and short middle distance.

Lanky - Small bones, lean muscles for distance and longer middle distance. Middle distance - repeat 200 meter and 400's times. Distance VO2, max heart rate, and recovery time - Push-up and pull-up counts coordination for most field events - timed box steps up and down in patterns. Weight /Size and arm and leg strength with fairly good fast twitch relative to size for throwing. Small bones but explosive for high jumpers. Pole vaulters - coordination, explosive, stalky, fearlessness- look for trampoline and diving craziness.

You can be good at an event simply by loving it, training for it, have some core athlete talent and being in shape, but to be great you have to have several genetic factors in your favor.

Some of these factors can be changed by type of training, eating and lifestyle while young etc. But you can not completely reverse them by nurture. Most people that run regularly will see their times drop for many years. It takes about 10 years of hard cardio training to fully develop your cardio system. But your body will break down due to training before it could develop someone without the core body type and muscle types into a distance runner.

Peter Saint-Andre writes: 

Lessons for traders and investors here? Probably some folks are built for short term trading, others for long-term investing, others for building companies directly, etc…

Jun

12

Anatoly shared this interesting article with me: "Jack Schwager explains why trading is more difficult now".

My thoughts:

So Uncle Ben's innovative efforts and the endless bailout/disappoint cycles, currently centered in Europe, have nothing to do with making the situation more unpredictable by a non-flexionic observer?

Anatoly Veltman writes: 

Hmmm, was trading actually "easier" a few decades ago? I don't think so. I think returns may have been, on average, a few hundred basis points higher. I think that is what he (Schwager) is referring to).

So too were rates a few hundred basis points higher though. In short, I think the difference is, (ceteris paribus) attributable to differences in rates, not that trading on things that move are moving in ways that elude us any more than they always have.

Reasonable size orders are played against by HFT algorithms. That's exactly how they take billions in profits out of the zero-sum every quarter

Ralph Vince adds:

If I have an order in for BA to sell, say, at 70.10 limit, what do I care if it's done by one big tuna or a school of piranha? I'm not following you I think on the last point.
 

Anatoly Veltman responds: 

All depends on the size you're trying to execute. If small, your fill will be random. But a reasonable size limit order at 70.10 will only get filled, if algos figured out that there will be no chance to sell at 70.10 immediately thereafter — according to what they automatically sniff in order books. Thus you are only allowed to buy a loser. If your 70.10 is currently a good buy — you'll never execute, which is the highest level of slippage.

Ralph Vince writes:

Anatoly, doesn't that argument though say that there are no other sellers around at 7010? Would there be the same number of sellers at 7010 as if there were no HFT? (I'm not trying to taunt you here, I'm trying to see if this really MAY be a problem to me that I am oblivious to.)

Anatoly Veltman writes: 

You're implying "fair" market as you used to get via direct execution. But there is no direct execution now, as HFT's are co-located. Thus the execution of your limit order (that seems fast to your eye) is in fact a slow-mo replay of the actual market that experienced multiple biases in the meantime. I'm not sure why you should be "oblivious to the problem", if a handful of HFT entities report consistent billions of profits every single quarter. These ARE modern commissions. 

Paolo Pezzutti comments: 

Trading is as difficult as it was I guess. Each time has its challenges though. In the past you had less access to real time data, software, information, but higher commissions. Today you have more sophisticated players and technology (hft), which can provide an expensive edge to some. There always be an edge and niche for everyone in some market, some product, some time frame. And it is everchanging. So if you are fast and adaptive you can find new ways to make money and abandon old and exhausted patterns. This is the beauty.

Jun

11

Meat goes into the sausage factory….

Meat comes out of the sausage factory.

So, by the conventional measure of GDP (which counts government spending as a positive, the only negative being imports) counts government spending twice. That positive has already been accounted for (and perhaps it should be a negative, as it must be made up by taxation, past, present or future).

The government could borrow 5 trillion, spend 5 trillion, and GDP would increase by 5 trillion.

If we look at my version of GDP, we haven't had positive growth in years in the US.

Feb

15

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

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

Jeff Watson writes: 

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

John Netto comments: 

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

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

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

Sam Marx writes:

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

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

Ralph Vince writes: 

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

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

Enjoy the etouffee,

Ralph Vince

Stefan Jovanovich adds: 

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

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

 

Oct

25

In the quest for the truth and the elimination of ballyhoo, one must get through all the BS to find the kernel of truth. Here is a very important glossary of mathematical mistakes that are commonly seen in the popular culture and often repeated as the absolute truth.

http://members.cox.net/mathmistakes/glossary1.htm

It would be an interesting exercise to see what we can add to the list, either in the popular culture arena, or market lore.

 Ralph Vince comments:

 How about (cultural ballyhoo) "After all, we're a very litigious society!" (this is usually accompanied by the reminder of some anonymous woman scalded by coffee at McDonalds being awarded an amount so ghastly that poor McDonalds will have to make up that amount against the rest of us somehow!)

I would posit we are not litigious enough. One need only sit in any municipal court or state appellate court for a couple of hours and see the litany of individuals being hauled before the altars of justice by the financial institutions or the paint manufacturers whose lead was ubiquitous, or any other host of entity vs the individual going on. Truly, I almost NEVER see an individual as plaintiff in one of these unless they are going after another individual. The vast majority of what goes on in the courts WE PAY FOR are actions brought by those who do not pay for these courts, against our neighbors.

Yet, our class action rights are eroded under our noses repeatedly and recently. The only ones in favor of so-called "Tort Reform," are the insurance companies. The medical professionals who think they will financially benefit by this are delusional. The delusion is further propagated to the hoi polloi under the even falser notion that the medical community will share these newfon legislated riches amongst us.

 Rocky Humbert writes:

 After reading this, it's unclear to me whether Ralph is in favor of, or opposed to, tort reform.And, arguably, he's guilty of a bit of cultural ballyhoo here. He writes, "The only ones in favor of so-called "Tort Reform," are the insurance companies."At a macro level, it's not obvious why insurance companies should necessarily support tort reform (or even care about it.) Insurance companies raise premiums to offset the costs of litigation. Their profits (the combined ratio) are the "spread" between premiums earned and the settlements paid.

If the costs of litigation decline, so will premiums — and if there were serious tort reform, it might actually damage insurance companies, since their products would no longer be required!!If there were no tort litigation, insurance companies might go out of business en masse!!! The visible and direct costs of litigation (to which Ralph alludes) are minuscule compared to the invisible costs. The invisible costs include the innovation and investment which are forgone because of the FEAR of litigation; the incalculable dead weight loss; the practice of defensive medicine which wastes resources (and which applies to other industries as well).

"Loser pays litigation costs" combined with allowing third parties to finance and benefit from winning litigation — would be a fine first step towards balancing the scales between plaintiffs and defendants. But to suggest that insurance companies actually want tort reform ignores their raisson d'etre.

 Stefan Jovanovich comments: 

 Ralph omits the largest part of the litigiousness of our society, which I pray will be largely eliminated some day - the criminal justice system. Since misdemeanors rarely go to trial, they will be absent from the municipal court dockets; and state appellate courts are usually not the best venue for criminal appeals (the Feds are usually better) so Ralph may not have had a chance to see how much of the "justice" system is about law and order.

A visit to any Superior Court or Federal District Court would probably change his view; at present, the largest single obstacle to an individual seeking civil damages is that their right to a speedy trial is non-existent.As one defendant put it, "The United States of America versus Alphonse Capone! What kind of odds are those?"

 Ralph Vince responds: 

Rocky,

I'm not an attorney — and I AM a little over-impassioned about the subject, so don't be surprised by my phreneticism here on this subject, ok? I am utterly opposed to this (altogether speciously misnomered) "Tort Reform," idea!

Where you say ". If the costs of litigation decline, so will premiums," I could NOT disagree more. When the Bankruptcy Act of 2005 was passed (presumably, among other things, so that the costs financial institutions were having to suffer as a consequence of personal bankruptcies not be passed along to the rest of the peons like me) did we see credit card interest rates reduce as as result? Did we see banking fees come down? No, the margin gained by such legislation accrued to the banks.

Profits ONLY flow upwards. Those paying down here do not participate in profits. If we did, those $150 running shoes made in Jingalia would only cost us about ten bucks.

The notion of a frivolous lawsuit is something cast in sand, and something the courts can deal with already via sanctions, etc. Just try to get an attorney to take a patently frivolous lawsuit to court — or see what happens if a non-attorney attempts one pro-se. They will be clobbered by the courts.

In fact, I say to the average Joe F. Blow out there, just try to take his NON-frivolous lawsuit to court. Go see how easy that is. Go see what the typical attorney will require of you up front. He is already, effectively blocked from the system, Bleak-Housed out from the very courts his tax dollars pay for. And again, if you take from people their venue for settling disputes in a civil manner, they are then likely to settle them in an uncivil manner. What is wrong with allowing people the venue of settling their disputes?

Our courts are NOT clogged incidentally. These are not a natural resource of finite size. If we need more courts — set em up. More insane judges. No problem. Homer Simpson is a little sick of sitting at that control panel at the nuclear facility, he can sit on on the bench for us.

Finally, when I speak of profits only flowing upwards, I don't mean it with respect to tort reform alone. The notion is integral to the specious arguments we are subject to every day to try to stifle our abilities of thinking critically for ourselves (I am not referring to you personally here, you seem to do so quite well except when it comes to your interactions with women). We hear repeatedly how free trade brings the cost of goods down (taking away US jobs) or how if we don;t have illegals picking our produce that tomato will cost 5 bucks.

Nonsense. Perhaps there is a scenario, but I cannot think of one wherein Joe F. Blow benefits because the cost to producers is reduced legislatively. To do so but taking Joe's right to settle his disputes — against individuals AND entities — away from him, is the real crime.

 Stefan Jovanovich responds:

 Neither Ralph nor I is an attorney, but I am guilty of having been one in California for nearly 4 decades. I stopped being one when the State Bar of California decided that it has absolute jurisdiction over any commercial transaction of my companies simply because I was an officer of the court. What that meant in practical terms was that any business partner or even customer could claim I owed them a fiduciary duty as a lawyer even if our dealings were purely commercial. As W.S. Gilbert put it, "here's a pretty mess". Eddy's Mom and I decided that resignation was the better form of valor. It took us nearly 2 years from the Supreme Court's clerks to decide we really meant it; the last letter we have from them is one suggesting that we might want to reconsider because we would be losing all the member benefits - i.e. access to State Bar of California credit cards and life insurance.

The greatest obstacle to "the average Joe F. Blow" is the current system of pleading; it is archaic to a degree that would astonish Lincoln or any other railroad lawyer of the 19th century. David Dudley Field would not be amused, especially since his reforms were adopted in Britain with much greater success than they have been in the United States.

 http://en.wikipedia.org/wiki/David_Dudley_Field_II

http://en.wikisource.org/wiki/The_Mikado/Here 's_a_how-de-do

 Ralph Vince writes:

Stefan, we evidently live in different universes. I routinely get called to jury duty in Cuyahoga County, Ohio, losing a week every two years. This is a court for monkeys.I have been through that system on the wrong side. Ex-parte rulings, convicted judges, FBI swarming, lower court transcripts LOST going to the appellate courts, corrupt clerk of courts, corrupt sherrif's dept., (all have plead guilty), routine over-charging of defendatns hoping for the routine, gullible jury, etc.

I will tell you what I tell the prosecutor in voie dire. "There's no way in hell you will get me to convict my fellow man of anything. Bring in the DNA evidence, the video, of this child-molesting cop killer. I wont convict anyone here in monkey court."Then….the resultant litany of threats levied upon me. I do my week and I go home. At least where I am here, in this universe, there is NOTHING WHATSOEVER about "Justice."

Oct

5

Did Bank of America upset every woman in the world with their 5$ a month fee? The wifee just came in with new account info from a local bank. It turns out these little banks are offering lagniappes to new customers. She has been asking me for years should we move here or there for a simple checking account. I was informed I had ignored her requests but enough is enough for her. I look at the stock quote and thought.. why didn't she come with that idea yesterday.. It may have saved us more than a five a month. I didn't see the news till now about how the politicals told all to close their BAC accounts!

Ralph Vince comments:

Yeah, this is a very interesting phenomenon, and it is interesting in a twofold manner:

1. Women seem extremely steamed at this, even more so than men, and ARE acting with their shoes here.

2. Raising prices, on anything in this economic period, is akin to suicide, regardless of your industry. Just ask NetFlix or look at cable-tv providers, look at price-sensitivity on airline tickets or look how well the Chevy Volt has sold.

I think this move from Bank Of America is going to make them do a full-scale retreat on it — should be interesting. (Incidentally, just what IS their product?) 

Anton Johnson comments:

If debit card fees don’t stick, banks will have a revenue reduction, retailers will have lower costs, and consumers will be unaffected or benefit slightly because it is highly probable retailers won't lower prices commensurate with the purported 22 cents savings per debit card transaction attributable to the Durbin Amendment’s swipe fee caps.

Sep

29

One posits that dependency on the past is sacrosanct to all trading/ investing, and when past relationships break down there is always the question whether the current instance is a temporary state or regime change. (2008-09 contained many such, as well as a few more recent examples).

This reduces further to how well success in markets (life, etc) tightly correlate with intelligence, learning from study and experience, and discipline, and what happens to successful trend followers (which all living creatures are) when the trend dies and nature deals out an extinction. The quaint notion that fear is conserved in the genome for a reason.

Ralph Vince writes: 

As the Old Frenchman would have put it, stamping out his Gitane on the dashboard itself, "Adaptation…..The first rule of survival."

anonymous writes: 

Clearly, it would be best to know in advance if things that worked in the past stop working. But aside from a very very few circumstances (true arb is the only one that comes to mind, and even that relies on technology working), do traders ever have this knowledge? Instead, isn't money management of some sort used?

With respect, for example, enter a tiny amount, if it works, put on more, if it doesn't work, but the idea remains the same, take off some and wait for a truly outrageous spread to try again, if it never works, exit and take it off the screen or something etc.

Ralph Vince talks about not needing to predict movement to make money and I keep thinking about this.

Sep

25

I flew out of Logan Airport in Boston yesterday — for the very last time. I had an Air Tran flight out of there — the very last time with that too.

Arriving early at Gate C 40, I watch in disbelief at what I think is a mouse attempting to get into an elderly woman's bag on the floor. Shoo-ing it away, thinking it an anomaly, I watch a man seated a few feet away from me stomping his foot to frighten away yet another mouse. And then I realize — the place is swarming with them.

I get up to move, and as I do, I notice food — pizza and popcorn, soda pop and half-eaten sandwiches, littering the entire place. Two Africans (who either could not or feigned being unable to speak English) sitting facing me as I start to throw all this crap out (it is EVERYWHERE in these gates — the carpet, sticky, filth mess, having long ago passed the point of being salvageable through cleaning). I ask my spectators, since they work there, if they could assist me. Of course, they are too busy watching TV. Now a large, redheaded one approaches, looking as though he may be looking for a fight (he has come to the right place).

I'm looking for Air Tran people — not the workfare idiots of Boston who exist on the backs of the working men and women and the travelling public. I find a couple of Air Tran guys, checking someone onto a flight at gate 42, who are literally begging me "Please call the health department!" The entire airport is rodent-infested.

More Downs-syndrome adults approach me from TSA — not that they are there to help, they think I'm causing a raucous. I hope to, but my fellow Americans are too deflated and defeated to fight back anymore, sitting in their rodent-infestation.

Finally, an Air Tran suprevisor, along with the Africans, and TSA — 8-10 people in all, circle around me. I'm livid,

"Food is being sold in the hall here — but the place is rodent infested — your own employees admit to this. There are restaurants here, why have they not been shut down?"

"We can't do anything about it, it's Mass Tran that has to do something."

"You can't put rat poison out? If I had this problem in my home it would be over before I went to bed tonight."

"Yes, but it has to be Mass Tran that fixes it."

I call Mass Tran and tell them. They say they will "make a note of it."

I've been in third world shithole airports all over the planet. Logan is the worst I have ever seen. If there are mice in the numbers I saw them, there are mice on the Air Tran planes as well — has to be.

You may feel that mice aren't a problem — but if you ran a restaurant and had them (and there are those at the airport, and Mass Tran and the health department there turns the other way) you wouldn't be open. Rodent infestations have killed 1/2-2/3 of the European population in 2 years, and having Cystic Fibrosis, and realizing the genetic advantage to rodent-born plague that carriers of CF posses, it isn't lost on me that this avaoidable pestilence bears disease, and I look upon those who tolerate it as I would my fellow man who doesn't bathe.

You people may be willing to tolerate Boston Logan. If I come back there, it's to turn the place to ashes. Air Tran, you fail. I will not fly on your mice-infested planes.You tolerate Boston Logan — you are and have been aware of the problem, yet you do nothing.

Sep

12

I suspect that this video is a preview of something that will be the next great bull market, a bull market that will dwarf the dot com market, a bull market that will be representative of a society changing technology right out of a science fiction novel. This new technology will redefine, reinvigorate, and recreate the industrial revolution.

Ralph Vince writes:

This technology has been around a long time for prototying componentry. There is a particular file format (comprised of a tringualr mesh of 3 d vertices) which many CAD formats readily convert to OR can be converted into.

I think where the rubber meets the road on this is the ability, ultimately, to do away with the machining of parts, particularly out-of-service parts. Try getting parts to very old cars for instance. With a CAD drawing of such a part, the physical part — or, the physical components to the assembly of the part, could readily be recreated. I did a ton of work with this kind of stuff — what the video doesn't go into is that the drawing itself can have engineering rules embedded within it. It;s more fantastic really than the video shows!

Dylan Distasio writes:

I agree that this one will eventually be a game changer. Although what I'm about to link to is more of a hobbyist unit, it is still impressive in its abilities, especially for the price. I've seen demos of these firsthand, and they're pretty cool for a home user:

Shapeways is also doing some pretty cool stuff with this in the commercial space, and offers a lot of different materials.

Sep

9

The scientific method has two parts. There is theory, which requires knowledge and intuition to posit a cause and effect, and there is testing, collecting data to determine whether the observations refute the theory. If I understand your point correctly, empiricism is necessary but not sufficient. There should be a theory that is not entirely based on the observed data. As an imaginary example, “The S&P 500 is likely to decline on Friday afternoon because day traders are biased to the long side and want to be out of the market before the weekend” is better than “The S&P 500 was down on 19 of the past 30 Friday afternoons”.

Ralph Vince responds: 

Steve, yes, but the premise, the cause, needs to be proven. “The S&P 500 is likely to decline on Friday afternoon because day traders are biased to the long side and want to be out of the market before the weekend” needs to be proven as causal, not merely posited as a possible cause.

Frankie Chui writes:

Yes, I always end up asking myself “why does it not work anymore after it has worked for so long?” when the moment I trade it the system stops working. It has also happened to me quite often where I backtest a strategy, everything seems ok, trade it for 2-3weeks and that’s the end of that system. Therefore, I am now experimenting with optimizing parameters in systems more frequently, perhaps once every two weeks on a rolling basis. Optimize two weeks of data, trade it for a week, optimize the past 2 weeks again, trade it for another week. Of course the 2 week/1 week time frame may not be the best (I just randomly chose it), but has anyone ever done anything with this kind if approach? I’m curious to see if this will work for day trading. I am new in mechanical trading, but I’m very curious to know if optimizing data fast enough will allow a trading system to work better and longer (for day trading).

Jeff Watson writes: 

Frankie, you’re running up against Bacon’s ever changing cycles, which tend to render systems obsolete.

Phil McDonnell adds: 

There is an insidious danger when you use optimization. The optimizer will fit the system to the data too well. It will never perform as well out of sample as in sample. It becomes especially important to use tests of statistical significance when you do optimizations.

The optimizer can actually create a multiple comparison problem in some cases. For example if you tested, looking for seasonality and wanted to find which month was the best to buy it would create a multiple comparison bias and any test for significance would have to have a much higher threshold than if you just tested September.

One way to judge a system and evaluate whether it will continue to work is to plot out the equity curve. If your testing assumes an equal sized investment each time then the system can be plotted on an ordinary arithmetic scale. If you compound it should be plotted on a log scale. Either way the most desirable system would be a system that looks like a smooth line going monotonically up to the right as time passes. If it starts to roll over then it may be a system about to fail.

Paolo Pezzutti writes: 

The system should be quite robust. It should work pretty well with a sufficiently wide range of values of parameters. There should also be few parameters avoiding curve fitting.

 

Sep

2

Before you have a system for something, I believe you really need two crucial pieces that most of us never really contemplate because they are hard to think about and the answers are often mushy, but they are the necessary foundation to a system (in anything)

1. A criterion you seek to satisfy (what is it, specifically, you are trying to achieve — it may be more than one thing, or, often, it may be something that you have no business doing given the potential risks)

2. A paradigm or "template," a "model" of how things work from which to craft rules (a system) to satisfy #1.

Lastly, a quick golf story: 

In the 1973 PGA Championship, as an adolescent, I got a job retrieving balls that were hit over the fence at he far end of the driving range, onto the 14th fairway. Two guys were teeing it up and hitting it over the fence routinely, out of the entire field. A guy name Tom Weiskopf, and an old geezer named Sam Snead. I remember being amazed at how Snead, 300 yards away, as taking this seemingly effortless swing, and just firing missiles seemingly right at me, when all these other fellows, younger and stronger than him, weren't even coming close.

Incidentally, Jack Nicklaus won that tournament, and the $32,000 first place price. About an hour after receiving the trophy, I was (on the wrong end) of a 3 on 1 fight in the bagroom when I saw my assailants fleeing, looked up and saw a now-well-showered Nicklaus, tell me in that high-pitched voice of his how much I appreciated the work, and he duked me a hundred bucks. Quite the generous guy.

Craig Mee writes: 

Thanks, Ralph.

What you say in point #2 is very true. People are looking to trade systems for "something", without understanding the price action or what market price represents. Instead they just focus on the next contract.

Point #1 sounds to me like it goes back to your criteria of time horizon…and if you haven't thought the whole procedure through, and if you keep chopping and changing and being undisciplined and inconsistent, you are going to be forever with your back to the wall.

That's only my interpretation of this, please correct me if I'm wrong. 

Ralph Vince replies:

Craig,

Pretty much. I think the "Criterion" aspect is troubling to many. People want to "make money" but with respect to what? If someone is truly looking to simply maximize profits, f = p/2 gets the job done but I don't know too many willing to endure that — or, as I have said, everyone wants to wrestle the gorilla till the door opens.

Many, I find, when you boil it down, are NOT in it to really satisfy any criteria other than "entertainment," a very dangerous proposition.

And yes, that criterion/criteria is nearly always a function of horizon, something which needs to be defined in defining horizon. Some people do all of this reflexively, and, in my observations, tend to be the most successful. 

Sep

2

I have been watching this happen under my nose here. All kinds of manufacturing is coming back on, especially here in the great lakes region. It's amazing how cheaply I can lease an entire factory, under really ANY terms I want — and how I can, in the 2011 world, steal the machine drawings of really anyone (because so much is manufactured with machine drawings that are required to manufacture components to a certain spec) and be producing anything in about 30 days at such a minimal investment.

Aug

24

I read a very entertaining article in Scientific American yesterday: "Can Math Beat Financial Markets ".

Stefan Jovanovich writes: 

Check out the author's home page.

Gary Rogan writes: 

Looking at the page brings up the age-old question: can the same techniques that are used in natural science to study the universe that doesn't change from being studied and where the fundamental rules don't change at all be applied to a system where nothing prevents most rules (other than that old "human nature") from being changed at any time? He cut his teeth on never-changing, but how will it play with ever-changing? Somehow fractal coastlines are just not the same as fractal security price charts. Fat tails and non-gaussian distributions are great, but then what? We can evidently estimate the risk of something happening he says. But can we???

Ralph Vince adds: 

Yes, when he speaks of their raison d'etre "To quantify risk" I think, "Huh? How? VAR? Just HOW DO they 'Quantify Risk.'

If alluding to using it ("algorithmic trading," in the context of some sort of proce prediction a la quant, I assume he means modelling prices using models based on SDEs. Again, "Huh? How? Does this guy know what he is talking about?")

Quant-dom, traces it's roots to pricing of various securities — warrants, options, spread on futures/forwards, backwardations, and the pricing of the plethora of derivative creatures who climbed out of the ooze of ercent decades. This is NOT predicting markets, or "Quantifying Risk," (the latter, clearly, has utterly failed using their conventional models).

The entire article smacks to me of something dumbed down to the point of being useless and silly

Aug

23

It's my experience that if you need to sell a portion, even if that portion is 100%, via a stop order, you're in too heavy to begin with. Being in too heavy is to be too dependent on luck.

Dylan Distasio writes: 

Ralph,

Can you expand on your definition of "need"? Let's use the case of HPQ as an example. x had an investment hypothesis that no longer necessarily holds true after the potential value destruction of recent company decisions. As a result, he decides to liquidate half. Maybe someone else gets in a few weeks ago after the discussion on HP here, as they agree it looks like a value play, but they have a rule to always attempt to minimize losses on new positions to a flat 10% to protect capital and to always use stops because they need them for discipline. So they get a ~20% haircut after getting stopped out on the gap down.

I'm not sure either situation of a 50 or 100% liquidation was based on what I would call need, but rather some kind of capital preservation or very basic risk management rules.

In all serious, how would you define need as I think it is worth looking into this further? Potential loss of all capital? Forced margin liquidation? I agree that being in with too much leverage or too large a position opens you up to getting taken out by noise, but what is need versus risk management?

Chris Cooper writes: 

I took a big loss on Monday of the week before last. I then cut my trade size in half, and manage to end up flat at the end of the week. The week actually would have been very profitable had I been willing to stay with my original sizing. But Ralph is correct, and I decided that if I am getting scared by a big daily loss, I'm trading too heavy, so I have left the trade size at that halfway point.

On the other hand, one might choose a rule that pares back the trade size when volatility increases. These were intraday forex trades, and clearly that week was exceptional in terms of volatility. The problem is that the volatility spikes that kill me do not appear to be predictable. Therefore I have to trade most of the time at a level that seems relatively placid in order to avoid being frightened into damaging behavior occasionally.

Gary Rogan writes:

I think this illustrates the point I was trying to make originally about the lack of logical underpinnings in the "sell half" decision: it's an emotional decision because you (a) get scared by the suddenness and violence of the move an its effect on your net worth (b) belatedly realized that you were in too much. Now the second part is sort-of logical, but it really points to the lack of imagination about what a position can do when you get into it: you imagine a slow gradual move and the thing suddenly loses a big chunk of its value without much warning. This is not theoretical for me, because for the first time ever I have faced the following: two days after buying a stock it suddenly loses 25% of it's value in a day. This happened TWICE in a row on top of that, and only underscored to me that you never know enough to say with confidence that you will not lose all, and quickly. Therefore you should assume that that's the case from the very beginning. 

Ralph Vince replies:

Dylan,

I'm really referring to liquidity concerns; Rocky's decision to liquidate half, I assume, is a risk-management procedure here, as opposed to a strategic one based on changed fundamentals (I may be, and, in retrospect, likely am wrong about this!).

Any risk-management concern where someone "needs" to get out, shy of that investment being entirely wiped out, will, in time, be entirely wiped out, or damn near whether by an Enron, or those gilt-edged AAA GM bonds at one time.

Dylan Distasio responds: 

Gary,

Although I don't typically trade that way, I don't think the sell half is necessarily an illogical or emotional decision depending on the scenario. We have no way of knowing what the reason behind selling half is for a given individual. Reducing a losing position size is, in my mind, a way to mitigate risk of additional loss while still having some skin in the game. Keeping some powder dry is (I would imagine as an amateur) one of the more important survival skills in this game. The person selling half doesn't have to be in too deep to their overall capital pool to want to protect half of what remains of that position based on changing circumstances. Losses do add up over time.

Alston Mabry writes: 

I have found that trading breaks down into (1) analysis, and (2) execution. With "analysis" being a period of calm, quiet reflection (maybe with a cold beer) over a crowded spreadsheet; and "execution" being whatever I have to do to manage my lizard brain once there is real money at stake. They can be such radically different modes of being that sometimes it's very difficult to establish a link.

If I make "analysis" and "execution" the axes of a graph, I can place each of my trades on the graph in the appropriate quadrant: {analysis(good), execution(good)} = exhilaration, {analysis(good), execution(bad)} = regret, {analysis(bad), execution(good)} = relief, {analysis(bad), execution(bad)} = self-loathing.

The challenge of trading is that there is only one quadrant you *want* to be in.

Chris Cooper adds: 

Rocky wrote:

"I challenge anyone to demonstrate a single person who blew up while sticking to the rule: "Only add to a winning position.""

I can't meet your challenge, but I did have a week where I lost 50% of my equity. Your observation does not apply to those trading with leverage. I am now learning to scale back the leverage, make adjustments in trade size more frequently than weekly (should be real-time), and to write models which account for higher correlations during times of stress.
 

Aug

14

For the Kelly investors among us, I found this interview with Edward Thorp very interesting. 

Ralph Vince writes: 

Thank you, Stefan.

Thorp seems to be quite the interesting guy, though I have never met or corresponded with him.

The Kelly Criterion itself was not what Kelly or Shannon thought it was - a fraction (it only appears like a fraction, and equals what is the expected asymptotic growth optimal fraction under certain conditions, ubiquitious in gambling). In trading, this fact is damning.

So even if someone IS attempting to be expected growth optimal, if they are employing the Kelly Criterion, they are NOT employing what they think they are. The solution returned by the Kelly Criterion does NOT equal the expected growth optimal fraction — it is NOT bounded at 1 on the right-hand side (and because it is often < 1, it is often mistaken as a fraction to the great peril of those employing it).

Worse-still is that the formula you can determine the expected growth optimal fraction with gives us the the entire landscape for all values of the fraction (0…1) for all axes. As I pointed out to Duncan on this list a few days ago, this allows one to craft a positioning strategy to satisfy criteria aside from the medieval "expected growth optimal."

In short, in trading, I find there is NEVER any good reason to employ the Kelly Criterion, even when one is seeking to be expected growth optimal.

Jul

4

Don't know what else to say about this movie, except that it is the best movie I have seen — the most compelling, poignant thing I have seen, since Babel.

I know everyone wont like it. I would say 30% of the audience walked out in the first 20 minutes — though I was riveted from the opening scene throughout.

I must say, I don't know if anyone else will even like it — but I was quite in awe of it.

Jun

28

As specs we snicker at the lottery player, he is a sucker. We smile when we hear how the crowd is routing for the hometown favorite when we know odds favor the other side. We hopefully carry out the canes when the crowd is tossing down the tickets in disgust, we sniff for value when there is no value there–so says the financial press.

But what is our own attachment to this concept–catching a falling knife, holding a loser, getting involved in some fiasco stock since the market is beginning to bore, riding a coattail that turns into a skid, throwing in "just this once"? Why do we fail to follow our own good sense from time to time?

There must be a thrill or an ego impulse underneath this temptation to turn from the path and into the wind of long odds–"cause we can handle it".

Victor Niederhoffer writes:

Our own attachment should be based on quasi scientific study., not riding a coattail. 

Ken Drees writes: 

True, but do we fasten our own rickety reasons from study based on the past which has no real reason to work in the future other than past frequency, tendency and relationship, and thus delude ourselves into thinking that our proof more than compensates for the new speculation? And if finding tendency and causality can be negated by the speculative theme of ever-changing cycles, and also trumped by the unknowns –how do we believe this and thus risk capitol?

I think that the chair has outlined many great themes in speculation, almost like laws:

1. Methods must be tested in order to find relationships of validation.
2. The laws of ever changing cycles are present in the market at critical-mass moments.
3. There is a high degree of relationship between markets and natural systems. What can be said of the "unknown"? What is this speculative doomer, the whispy apparition above the pond at days end? What law can be attributed to this unknown force that seemingly has uncanny timing?

Ralph Vince writes: 

Ken,

I think it's simpler than that.
-The past gives us a proxy for the distribution of what can happen.
-We can amend that distribution of what can happen based on how we foresee the future diverging from the past
-That very distribution can now be used to determine how aggressive we might want to be withing a given risk (drawdown) constraint.
-If we don't exceed that drawdown constraint, and our distribution is reasonable of the future, the profits accrue.

Gibbons Burke writes: 

 I wrote this in a previous thread about the difference between speculators and gamblers, and I think it holds true: "Gamblers are willing losers who occasionally win; speculators are willing winners who occasionally lose."

At bottom, and at one time or another, most of us are gamblers. It takes a very disciplined, brilliant, and perhaps unrealistic person to only play games where the odds are in our favor. The reasons many engage in knowingly losing propositions are greater than the stars in the night sky in rural flyover territories. Entertainment and division rank high among them, sociability, peer pressure, guilt about the money they are risking (unconsciously disposing of it), fear of success, self-disgust, compulsive addiction to the stimulus-response loop, adrenalin junkie.

But all these are all proxies for the thing everyone is really seeking, usually unconsciously: a desire to be in union with the godhead, the creator, the divine purpose. As St. Augustine wrote in the opening lines of his autobiographical "Confessions": "You made us for thee, Lord, and our hearts will be restless until we rest in thee."

Phil McDonnell writes: 

When I ask people why they do not invest in a guaranteed savings account or short term t-bills they usually respond that they are too boring. And they are, or at least used be because they could not lose. Most traders unconsciously seek to lose because it represents action and excitement. While I think the usual arguments that it takes assumption of risk to increase return have validity, at the sub-conscious level the desire is really no more complex than risk seeking for excitement.

Ralph Vince writes: 

I agree — this is what frightens me about individuals who are out investing their own money — no kid needs to relive the station wagon as home for awhile as a consequence of Dad's gambling proclivities.

I'm beginning to think institutions are just the individual lambs in the wolves clothing of trading with other's money.And the reason I say this is because, again, not only can they not articulate their criteria for being involved in this, most criteria involve the ultimate metric of "what is the probability of getting smacked x% in the coming y period(s)."

And I don't see ANY of them operating that way. Rather, their risk metrics are ones that don't really tell them anything, analgesic salves that do not stave off the infection. 

Russ Sears writes:

Personally, my record shows that I am more often guilty of trying to catch the falling knife on an individual stock and on an option trade, than I am on an allocation strateging or long term market timing basis. I believe this is because of two reasons, One reason is I am just to gullible for a single stock, and buy the story the more it goes down the more I am convinced it will pop, often averaging down. I believe most businesses as a whole are running honorable businesses, that is they are trying to do what is best for the long term. However, the exceptions happen and there are frauds/crooks and businesses that have agency problems (businesses run for the executives or employees short term interest) The second is that I am often guilty of believing that the studies timing is much more stable than it actually is. It may be that the market is over sold and will bounce back, this results is the crux of my "edge, but the time period is often part of the ever changing cycle.

I have helped this some by giving myself some boundaries or a do not buy or sell if held rules of:
1. If the market believes the board or leadership is not acting in the stockholders interest, based on key decisions they have made.

2. If there are union grievances making the press.

3. If there are rumors of fraud or accounting problems.On options buying time or gamma seems to work better. And in general I have learned to not do as many option trades as I am not as good at them as I think I am.

These rules are simply my adjustments for my own shortcomings.

Jim Sogi writes: 

The heuristic at work here is risk aversion where one would rather face a known small risk with bad odds of a big win, rather than a 51% favored odds with a risk of a large loss. It's very hard to overcome the natural tendencies.

Jun

24

Anyone have any advice on passive investing– there is no timing the market, so one therefore invests with an eye to neither highs nor lows of a particular day or time or season?

Ralph Vince writes: 

Correct, but there are now two "flavors" to such, as you will, as an advent of "active" indexes. Typically, one would mimic, say, the S&P 500, and the returns would be those of the S&P 500 (there is a problem with reinvestment of returns here often, and of additions and withdrawals, but in theory, you would track the index).

"Active" indexes typically seek the same underlying components, but the weightings into the components tend to be dynamic, so the returns tend to be those of the underlying index with an upward bias.

Rocky Humbert writes: 

Ralph raises a brilliant point. Over the last 20 years, the Russell 2000 (small stock) index and the S&P500 (large cap) stock index have both returned about 8% per year.But from 1993 to 1999, the S&P returned 24% per year while the Russell returned 12% per year. A 200% outperformance for the big cap index…Next, from 2000 to 2011, the Russell returned about 7% per year while the S&P has returned 2% per year. A 350% outperformance for the small cap index…Today, the Russell is trading at 35x trailing p/e … while the S&P is trading at a 14.6x trailing p/e. In order to justify this record valuation difference, small caps must grow their earnings twice as fast as big cap companies. While small companies often grow faster than big companies (due to the math of compounding), arguably Mr. Market's pendulum has swung too far — and it's improbable that the Russell 2000 will outpeform the S&P500 over the next 5-10 years FROM THE CURRENT RELATIVE VALUATIONS.

Note: Dr. Zussman, I (and many others) have studied this phenomenon, and we've not found any consistent explanation for these swings other than investor preference…. and these cycles/trends last years and go further than "sensible" people expect. However, if I were starting a passive investment strategy today, I certainly wouldn't pick the IWM (Russell 2000) as my investment vehicle with a 5-10 year time horizon.
 

Jun

12

Gentleman!

The speed of light is infinitely fast! Your calculations are an illusion, one caused by the acceleration in the expansion of all matter in the universe — a uniform, accelerating expansion so you don't notice it (akin to being a piece of dust, which too is accelerating and expanding, on a balloon being filled with accelerating force, such that you seemed to stick to it, and you mistake it for matter attracting).

This causes the speed of light to appear constant, and accounts for the fact that there is no "graviton," no particle associated with gravity, and, also in maverick fashion to the other 3 fundamental forces, moves in only one direction with respect to time.

Now, everyone back to their stations please!

May

30

One has to wonder why this whole "college is a waste of time" meme has suddenly become so prevalent. Is it because so many people have trouble with college loans? Too many writers who have nothing more to say about O's birth certificate?

Thinking one can predict the future based on what one does in the present is a persistent human foible. For sure a lot of kids go to college who don't need to. But is this truly something new? Would anyone sensible make a decision based on what they read about this subject? Unfortunately some probably will.

It remains to be seen how employers of the future will react to resumes that state "I am really smart but I didn't go to college because I read online that it was BS; but I really am smart."

One of my kids is 1/2 way through college and the other is just entering this fall– and I don't spend any time at all thinking it's a waste of time or money; it's been a path to prosperity in my family where none of the previous generation had any education past high-school (if indeed they finished that at all).

On the other hand my wife and I went to CUNY at a time where the cost was $35/semester. That's not a typo.

But I still wonder what's behind the impetus to discredit higher education?

Ken Drees writes:

I get the vibe that the intent is more of a cost justification issue. You don't send a kid to college who gets middle of the road grades and majors in marketing anymore. The job market out of college is poor and will continue to be poor. College now will set you back serious money as a percentage of household income and there will be serious debt burdens on the student and parents upon graduation. You can't put the college payments on the credit card or the home equity loan anymore.

I believe that a college bound child needs serious career planning up front, which is tough to do since kids sometimes do not know what they want to do prior to going off to the higher education arena. Like the union bubble which is feeling the backlash from the debt riddled state pockets empty reality, colleges need to step back, cut back, stop the pay raises–else enrollment is going to crater and the pie shrinks.

Victor Niederhoffer comments:

A college education will always serve as a signaling device to employers and partners and parents that one is capable of being admitted under highly competitive circumstances and then has the fortitude to stick with the program, and finish the requirements, and the moral fiber not to have been kicked out. The signaling will always be of value and the rate of return from college should stay relatively constant.

Russ Sears comments:

Very similar qualifications could be said about homeownerships, commitment to paying a mortgage and good citizenship of being a good neighbor. When a persons limit to leverage has no bearing to what they could reasonably expect… many with nothing to loss will gamble with somebody else's money. This of course creates a bubble in some areas where there will be large oversupply of X degrees. For instance everybody will think in 2022, "what were they thinking taking forensic science and $100 grand of loans?"

The problem is when you use the argument that is it "should" be worth it to argue that everybody has a "right" to upgrade there lives. Further when you grant this "right" to any 18 year old capable of getting a high school degree you are bound to get many that should not have been given this privilege without working a few years and tasting responsibility. I still believe orginially there was a segment of responsible people that were granted sub-prime loans. These people however, proved to be the exception to the rule when everybody was given this right.The difference may be that those youth that are the sharpest will see the "bubble" within these areas and avoid them.

Could we be looking at the class of 2011? on a resume and subconsciously think what a deadbeat?

James Goldcamp writes: 

I agree with chair's analysis of the signaling value of education, but one also wonders at what cost. I would find it hard to believe the return on invested capital has not gone down with both greater real costs and general degree (volume) inflation over time. It occurs to me that a rigorous self study program with standardized tests against which one could be compared might provide some lesser but nonetheless valuable signaling vehicle at 1/20th the cost of the current college education. Interestingly, one hire we had years ago was more known for his perfect SAT than his multiple Ivy degrees.

Thomas Miller writes:

This anti college education and anti home ownership "debate", seem to reflect a negative attitude that is growing in this country. The theme seems to be "dont even bother to go to college or strive to own your own home. it's not "worth it." just give up and settle for less." Of course college education or home ownership is not for everyone, but those that propagate these defeatist platitudes, (especially the ones that do it on internet blogs read by a large audience), are doing a great disservice to young people. "just settle for less" is not the attitude that made this country great. A generation ago, many that chose not to pursue college could get a decent job with benefits and be fairly sure of being able to retire from that job. There are very few of those jobs available now. The gap between those with a college degree and those without will continue to widen.

Russ Sears comments:

I believe those that are "anti" college are saying take more risks start a business instead.

And for those that it will not turn out for the better, it's not good government to guarantee the loan. More responsible decisions will be made if they have to compete for access to loans like anyone else.

Ralph Vince replies:

I cannot speak for others, but I am not advocating a "give up," or defeatist attitude here. I speak with those who have children of college age frequently, as well those who ARE of college age frequently too. One of these day, I'm going to stop speaking to people who don;t take my advice (most people are incapable of taking advice, we simply have to learn things the hard way, and usually more than once)

I hear an awful lot of talk from all of these people that a college education is necessary to enter the American job market, as though it were a ticket to the dance, a means to an end as it were.

(I should point out in full disclosure I do not have a college education. I am self taught. When I decided I should learn math, I started with algebra, geometry, trig, analytic geometry, calculus, topology…..eventually stochastic differential equations, which is used (with near exclusivity) to model prices with (a nice target for a math track for someone interested in the markets, but I find these methods model prices with a degree of reality akin to Oz modeling Kansas). When I wanted to learn literature, I started with Homer, then Virgil….through to the 1950s. Of course one cannot study everything and anything, you have to make selective, intelligent decisions (which is where talking with others comes in) and someone must WANT to dispal their ignorance (and this is the key attribute, the acknowledgement of our ignorance and a desire to overcome that — whether formally educated or not).

The last time anyone ever asked me about my educational background was probably when Reagan was running against Carter.

So when I look at what people are learning, and WHY they are learning it, I DO come away in MOST cases with a "Why bother with that?" attitude.

So once we acknowledge that there are two reasons for edication:
1. To dispel our ignorance, and ultimately, to study material we are passionate about, should have such good fortune, and
2. To make ourselves, personally, a marketable product (i.e. posses a marketable "trade," be it electrician, brain surgeon, or truck driving certificate)

people can make better decisions. Unless they are fortunate enough to be a trust fund kid, they need #2. A mere college degree does NOT provide that — this is a wives tale that floats about America wherein a lot of money is being wasted in its pursuit.

#1 is a luxury — one must have the good fortune of finding what fires their jets at a young age, aside from pornography, and find a way to pursue it. If they have the resources and time, college is the way to go. If not, anyone with a spark and a modicum of resourcefulness will find a way to pursue it.

I've spoken of this before. The number of persons from the 2000 census to the 2010 census is up 20%, the number of households, nowhere near that amount. Clearly, in the not-so-distant future, either much housing must be created or much work must be done to convert the "cul-de-sac development" McMansions into 2 and three household homes. What young person is a yeoman plumber out there, or plasterer? Not many, certainly not many over the past 10 years — but it is the fastest track to acquiring #2, above, for most.

And most need #2. Not everyone needs #1, and if they have that luxury, nothing will stop them from pursuing it. But the notion of borrowing a lot of money for a ticket to a dance based on some parent's misguided model of reality (Oz!) is something the educational institutions feed on, benefit by and play to.

Jim Lackey writes:

College is the time to meet your mate, your equal. For the fortunate men, it's  the better half you spend life with.

In your college years, there is only so far you will go…. Either to fake it, to fit in/get ahead or rebel against, to get off easy and/or explore the adventures of danger. The gist is how you act when no one you know is looking. Sin may resurface later in life. For certain people, the hypocrisy of life will rear its ugly head. If a married couple knew each other during these years of growth and uncertainty it's near impossible to argue later the lack of full disclosure prior to marriage.

A grievance can always be resolved. A slight, an imaginary hurt, the lack of full disclosure–the "I thought I knew that person". That person will hate you til the day they die.

My guess that is how/why bitter divorces ruin families… vs the much higher than average success rate of current marriages from my anecdotal evidence of family, friends and cohorts that married some one they knew from school.

Jeff Sasmor writes:

Good article on "What's a Degree Worth" :

What Are You Going to Do With That?

For the first time, researchers analyze earnings based on 171 college majors

By Beckie Supiano

Tuition is rising, the job market is weak, and everyone seems to be debating the value of a college degree. But Anthony P. Carnevale thinks these arguments are missing an important point. Mr. Carnevale, director of the Georgetown University Center on Education and the Workforce, has argued that talking about the bachelor's degree in general doesn't make a whole lot of sense, because its financial payoff is heavily affected by what that degree is in and which college it is from.

Now, new data from the U.S. Census Bureau sheds light on one big piece of Mr. Carnevale's assertion: the importance of the undergraduate major. In 2009, the American Community Survey, the tool the bureau uses to collect annual estimates of population characteristics, included a new question asking respondents with a bachelor's degree to give their undergraduate major.

After combing through the data, Mr. Carnevale says, it's clear: "It does matter what you major in."

Laurence Glazier writes:

After the signalling provided by college qualifications, the deliberate undertaking of full-time employment may signal the willingness to allow creative fruit to wither on the vine. A shibboleth of perspective. So many wait for retirement (which may not come) to allow vent to such aspirations, but the law of the farm dictates regular irrigiation throughout a lifetime.

To this end there would be much benefit to all if full-time work became less the norm. The end of government subsidy of unsound housing loans would reduce the pressure on people to suppress their finest qualities.

The Harry Potter books emerged not in spite of the writer's modest circumstances, but aided by them.

David Hillman writes:

Very astute observations.

A laborer can be trained to dig a ditch to a certain depth. A monkey can be trained to dance to the organ grinder's tune. Even a plant can be 'trained' to grow in the desired fashion. But few of the former are, nor neither of the latter can be, trained to *think* and creatively problem solve.

One might speculate that emphasizing skills, specialization and technology in educational curricula and employment qualifications may be the culprits.

While a college education being increasingly available only to the affluent because of financial considerations is, indeed, an issue, perhaps another of our chief concerns should be that we are creating a nation of people who are trained, rather than educated.

Kim Zussman writes:

The "education ruins thinking" argument has value, but simply looking at dollars a college degree pays more than just HS diploma. BLS stats below shows increasing income with formal education: about $400/week more for college grads - which of course does not include harder to value assets like volume of learning, tutored critical thinking, facility of life-long learning, status, access to better mates, good memories, signalling, etc.

One would need about 10 years of the additional (median) college grad salary to pay for 4-year private degree (ignoring taxes). Would the degree be worth it if it took 20 years to pay off?

Unemployment rate     Education attained        Median weekly earnings
in 2010 (Percent)                     in 2010 (Dollars)

1.9%            Doctoral degree            $1,550
2.4            Professional degree         1,610
4.0            Master's degree             1,272
5.4            Bachelor's degree         1,038
7.0            Associate degree           767
9.2            Some college, no degree           712
10.3            High-school graduate           626
14.9            Less than a high school diploma       444

8.2                     All Workers                        782

Note: Data are 2010 annual averages for persons age 25 and over.

Earnings are for full-time wage and salary workers.

Source: Bureau of Labor Statistics, Current Population Survey

Rudolf Hauser writes:

The question of a rate of return on a college education is not that easy to measure. For one, it will vary greatly on the college attended both by cost and quality of education. It would also vary greatly by the course of study and how much a person actually learned as opposed to just getting by and having fun. Even taking account of these variables, it is not an easy question to answer. The math is a simple discounted present value calculation, but the inputs are something else. For one, the attributes of those attending college and those not attending will differ. Those with an interest in learning and working hard, more personal discipline and more ambitious are more likely to be attending college than those who are not. Those people are more likely to earn more than the group that does not go to college even if they had not gone to college. So while the value of the education is the difference in what they earn in the future compared to what they could have earned had they not gone to college, one cannot just assume the latter is what those without a college education currently earn. In addition what is actually earned will not be a single average or medium figure but will have a wide distribution around it based on good or bad fortune, who you know, and countless factors beyond one's control. Costs while being educated in addition to direct costs of tuition ,books include difference in living costs relative to what they would be had one not gone to college and opportunity costs of lost potential earnings from working rather than going to school. Then there is the question of how much of the difference is due to signaling as opposed to the value of what was learned and contacts made during school. That is real but could change if the marketplace found alternatives to such signaling. If lower education had more strict criteria for graduation and grades the signaling value of a college education might lessen as employers had more confidence in that and prior work experience. The cost of loans may also vary, so that how the education is financed will matter a great deal.

In addition to monetary economic measurement, there are other benefits that might be gained. Meeting a spouse has been mentioned by list members as one such benefit. Learning about many areas and learning how to learn, may enrich one's life as a person, contributing to the value one has to society and family and to one's personal richness of life and happiness. But if prospects do not turn out as one hoped, it can also lead to unhappiness. The question then is how much one wishes to pay for these other potential benefits or negatives (i.e., the probability of disappointment). Some areas of study such as general liberal arts, might be expected to have a higher risk of low or negative economic returns than more specialized fields, but specialization runs risks if those skills become of less use to society.

 
On a personal level, I do not believe it make sense to send a kid to college unless they are actually going to work hard to learn. If not, it might be best for them to work for a time and see how difficult life can be without a college education. Often they may then go to college and actually make the most of it rather than going at a younger age and goofing off.

I might also add that education need not be in the classroom. The time spent learning on one's own is also education. One need not attend college to learn. It might not have much signaling value but it certainly helps in many areas. The cost is the value of the time spent either in terms of the value of one's leisure or economic opportunity cost.
The ability to learn might be enhanced by a formal education. One of the things I would advise a person attending college to learn is how different disciplines think. The way a lawyer thinks about problems, the way a scientist does, the way a creative writer thinks , the way an economist thinks differ and are specialized in some ways that takes a time to learn. The first course in microeconomics is difficult for many students, for example. The more ways of thinking one understands, the broader ones ways of understanding the world, understanding other people and in solving problems. Some of the great innovations come from taking of advantages in knowing something about other areas of learning that provide insights into the problems in your area of interest.

David Hillman writes:

Ok, then, I meant the focus to be on the point of training versus education. If it requires more updated or timeless references than those to the 20th Century, so be it, and I beg pardon.

(1) Backhoe operators are *trained* to operate them, but there are many instances of heavy equipment being stuck because the operator failed to *think* about the application.

(2) Musicians can be *trained* to play an instrument, but without a proper foundation, i.e., *education* in music theory, history, etc., while the music may be technically correct, it is often dry and mechanical, uninspired and with an 'off-the-shelf' feel.

(3) An air traffic controller can be *trained* to direct aircraft, but when an emergency arises, he/she must *think* of how to resolve it, not unlike,

(4) A 9-1-1 operator being *trained* to follow protocol, but when that protocol does not apply, hopefully, that individual may be capable of *thinking* of a way to prevent loss of life.

And, what of entrepreneurs like you and me? How can one be *trained* to brainstorm an idea out of thin air, then take it from the drawing board to reality? But, one can certainly be educated broadly enough to think creatively, make connections, take calculated risks and solve problems. Even in strategic planning, one can follow a plan, but the successful execution of it requires feedback from the real world and adjustment, which requires the ability to think, not just the ability to follow an SOP manual.

Clearly, a liberal arts education is not for everyone and the rise of tech schools and alternative forms of education and training should be applauded. For those who require training, the more well-trained they are, the better off will be all of us who depend upon their services. But, one should not necessarily depend upon them to do anything other than the job for which they've been trained, nor to be able to *think* creatively when faced with a situation or event for which they have not been trained. Trained mechanics may depend upon a diagnostic computer and trained line cooks upon a recipe, whereas a great mechanic might 'feel' a rough idle and a great chef might improvise a dish. The latter two have the ability to think and create, some of which is natural, but a good deal of which may also come from an education.

Nor is a college education always the right thing for someone at any given time. There are plenty of examples of individuals who failed to perform well in college as a recent high school grad, but did stellar work 'going back to school', my own being one of them.

Some eschew those who are 'too educated' as being 'troublesome' precisely because they can think. However, if I knew nothing of one's natural intelligence, and had to choose, I'd probably go with the educated over the trained.

That said, neither education nor training has much to do with 'smarts.' For that, you either are, or you are not. Some of the dumbest guys I've known have had PhD's, but so have some of the smartest. Likewise, some of the least educated have been the smartest and most capable, but there have been many that are dumb as a box of rocks.

As someone once told me, "it's better to healthy and rich, than to be sick and poor." I'm kinda thinking it might also be better in the long run to be smart and educated, than to be dumb and trained.

Stefan Jovanovich writes:

David is right. If there is any fault to his argument, it would lie in his optimism about the capacities of higher education. But, then, my cynicism about schooling comes from having literally grown up in the business and from being a 2nd generation academic bum. (There are not many fathers and sons who share the distinction of having gone to graduate school in English literature solely because they had no better idea of what to do and the GI Bill would pay for it.) School, like most things, is what you make of it. My difficulty is that "education" is now what "national defense" was in the 50s and beyond; an open-ended appeal for more money that is always justified in the name of some higher good that is incapable of being questioned.

Jeff Rollert writes:

I concur with Ralph, and if you believe in the concept of singularity, then a repetitive answer method is most likely to be replaced by a machine.

For me, I believe that standard problems will have standard solutions already applied to them before I'm even aware of the problem. So if one were to find employees who where good at sensing/finding the "unknown-unknowns" then they would have to have a non-standardized approach - in other words a non-academic approach.

Lastly, in a logic sense, how can something be a "value" but still be "expensive"? Aren't these mutually exclusive?

Tim Melvin writes: 

We have dealt with both sides of the college issue here in the past few years. My daughter on her quest to be the world only libertarian teacher had no choice. To teach you must have three degrees and credentials. She has on semester left and has pulled a 4.0 throughout. She may have learned some basic teaching techniques she did not know but the general education element was lost on one who reads like her. When I look at the top 10 majors in US colleges I have a hard time seeing what we are producing except middle managers. Teaching and nursing are the only to that offer a truce vocational choice. I would love to have had four years to study literature, but I question the employment value of the degree itself. The top tier schools may be different but is seems to me that our universities are teaching fixed values and information, not how to think. How to think has to be either installed by your parents or learned on your own. I cannot see where this can possibly be worth the cost today. Perhaps Colonel Depew can add a though on this but I think teaching the young to read the Great Books Curriculum would go farther than the current middle management factory that are most schools today.

I never went to college. Truth be told I dropped out of high school at the enthusiastic recommendation of the local authorities. What education I have I obtained from between two covers in the style of Louis L'Amour– I suggest that book as a manual on learning to think by the way. I read constantly when I was a kid. My mother was wise enough to let us read anything we wanted regardless of content. If there was something we didn't understand she made us find the source material to explain it..and this was back in the day when Encyclopedia Britannica was still the source of knowledge not the internet. I have continued to read ravenously all my life. I read anything and everything. I have found that even fiction often contains lessons for life and can be a source of knowledge. As an example, I read two or three of Robert Parker's excellent Spenser series. Great detective books, but read a few and you will learn two or three good quick dinner recipes, several literary quotes worthy of further research and how to win a fight. Many of us on the list have followed the chair's lead and studied the great lessons of Monte Walsh, Don Quixote and Patrick O' Brian. Randy Wayne Whites Doc Ford novels often contain insights into the biology of floridian waterways and the everglades. Knowledge is everywhere if you know how to think. I fear today's world of standardized testing and assembly line universities may not be teaching that valuable skill.

Think about this. The two greatest innovators and business men of the past thirty years both dropped out of college. Some schools may be worth the price tag. I suspect most are not.

My son on the other eschewed school in favor of making a few bucks. He discovered he had a real talent for and love of business. Within six months or so of going to work at Boater's Worlds he was managing one of the top producing stores in the company…at the age of 20. We talked about school and he told me flat out "I can't see the value of spending the money. I have two MBAs working for me now because they can't find jobs that pay enough, and my part time staff includes a phd in English." He moved on when the Ritz family folded the chain. His former district manager brought him over to his new company and he is moving up the rank there. He just undersands the art of working hard and making money. He may need a few accounting classes some day but four years at some state university would have been a waste of time and money.

We need more thinkers who have a passion for knowledge and more curious explorers and fewer managers and chair holders. That's on us as parents as much as the schoools. If our children go onto college make sure they know how to think and the univerisity allows them to do so.

Stefan Jovanovich writes:

Dropping out can be useful even for scholars. Peter Green (the #1 biographer of Alexander the Great) did it.

So did Eddy's favorite professor who didn't teach art history.

Eddy's most treasured legacy from 4 years at Cal was giving Professor Jacobson the recording of her version of the Super Mario tune. He had heard her play it on the UC Carillon and wanted it for the ring tone on his phone.

Dan Grossman writes: 

Found this interesting blog post by Steve Sailer proving the value of higher education:

 A column on a new Gallup Poll asking "Just your best guess, what percentage of Americans today are gay or lesbian?"

"The mean guess was a ridiculous 24.6%. Only 4% said less than 5%, which is probably the best guess.

Polling companies seldom ask questions on which people can make obvious fools of themselves, since those can raise questions about the value of opinion polls.

Looking at the demographic crosstabs, it's evident that low intelligence people were most likely to wildly overestimate the percentage of homosexuals: 53% of people making under $30,000 annually said that at least 25% of the population was gay, and 47% of those with no more than a high school education. 43% of Democrats versus 24% of Republicans got the question wildly wrong.

In general, people are terrible at estimating or remembering demographic statistics. A 2001 Gallup survey, right after the release of 2000 Census results, found that the average American estimated that 33% of the population was black and 29% were Hispanic. That adds up to 62%, but who's counting? Not most people.

In that 2001 survey, nonwhites estimated that 40% of the population was black and 35% was Hispanic (adding up to 75%). In contrast, people claiming postgraduate degrees estimated that 25% were black and 24% Hispanic (only about double the Census numbers), which proves the value of advanced education."

May

10

Why was there a Negro League in baseball, yet Pro Football never made such a distinction. They were a part of professional football from the early formative years of the league.

Anyone know the reason or can offer an explanation?

Stefan Jovanovich corrects: 

Not true. Black-skinned people were not allowed to play in professional football until after WW II. The pre-War heroes of professional football - Red Grange, Bronco Nagurski, Don Hutson, Sammy Baugh– were all "white" (sic). Jim Thorpe was given a pass only because of the odd status given Indians. The irony of all this is that the first professional sport - baseball– began as an "integrated" (sic) one; the "color barrier" was erected legislatively, first at the state level in the South and then nationally as part of Wilsonian "progress". As late as the 1880s black players were part of professional teams in the North. The ultimate proof of how much "racism" (sic) is a product of the higher mind that brought us universal education is that hockey in Canada remained without a color barrier until nearly 1890s. It was only with the rise of the Cecil Rhodes approach to trade that the descendants of the runaway slaves in the Maritimes were banned from being on the same ice with properly pale players.

Ralph Vince replies: 

Stefan,

My Grandad (who played against Thorpe) played with a number of Negro players in the early 1920s– I had lengthy discussions with him and his recollection was not only firsthand– there is a Negro player who was on his team who is in the Pro Football hall of Fame.

Apr

24

I just did a quick read of Fisher's Crashes, Crises, and Calamities: How We Can Use Science To Read the Early-Warning Sign s. Although I found it to be light on applied theory, I thought some of the general ideas put forth in it were worth some additional investigation.

He discusses the impact of negative and positive feedback on systems. In really simple terms, negative feedback is generally a stabilizing influence on a system but it needs to be applied quickly as a series of rapid small changes versus a larger more gradual one, and positive feedback near a transition point can cause a system to suddenly change states.

One of the more interesting phenomenon he talks about is the Allee effect in which a population can grow if it is above a certain level, but will enter freefall if it is below that cutoff density. He talks about a problem with flamingos breeding at a certain zoo due to this effect which was alleviated through the use of mirrors to give them the illusion of a higher density.

One of the other areas of interest is the idea of resilience in systems, and the fact that it is the loss of it that leads to rapid state changes in systems as they are more easily pushed through a tipping point. Loss of resilience leads to a system that is slow to recover from an initial assault, and less able to maintain equilibrium after a subsequent one.

He argues that there are 5 key early warning signs indicating a loss of resilience:

1) Increasing occurrences of extreme states

Fluctuations near a critical point can drive huge jumps between alternative states.

2) Fluctuations between different states

3) Critical slowing down

A progressively slower ability to recover from small perturbations as a crisis approaches. Under this section, he mentions Parkinson and his concept of injelititis as a disease that brings down companies. Parkinson's Law and injelititis are a subject worth an entire discussion on in their own right:

4) Changes in spatial patterns

5) Increasing skewness in the distribution of states

He also spends some time on Toynbee and his idea of the life cycle of societies corresponding to a musical rhythm of three and a half beats to the bar. This plays out as a period of initial growth followed by some event that marks an end to growth, and then a three and a half beat pattern of collapse…recovery…collapse…recovery…collapse…recovery…final collapse.

Overall, I found some interesting food for thought here.

Ralph Vince adds: 

Interesting post Dylan, thanks. I would add to this, though, a very simple amendment note– crashes in commodity prices are most often preceded by a contraction in open interest. 

If, in the midst of a price run-up (typically, what we would call a "parabolic-style" run-up, and OI begins to roll over (because a run-up is typically seen with expanding OI), as OI decreases and the price continues its rise, it's about over, and likely to come down symmetrically with how it ran up. I am speaking only of hard commodities here, not financial ones.

Henry Gifford writes:

This is similar to my old trick of watching the thickness of the multiple listings book to gauge interest in real estate, now there are gauges such as average time between listing and sale of property, etc. Proxy for OI.
 

Apr

20

"The Poor" have very little to surrender. Direct payments to people who are broke - cash, housing and food stamps - are about 1% of the unified local, state and Federal budgets. The debate is about "jobs" - i.e. working for the government and doing work that only government regulations require to be done. The argument over Medicaid - the largest single expenditure for "the poor" - is about the medical paperwork and other make-work that program supports far more than it is about the medical care actually being provided to the poor.

As a friend of mine once said about the Peace Corps (he had himself been a volunteer), "if they had taken all the money they spent on me, my plane ticket and the support and divided it up among those people I was "helping" (sic), they could have bought enough decent farmland to become rich in their own country." When I wrote to him recently to ask if he had changed his mind, he wrote back with this:

"Hell, no. If anything, I was being soft-headed; I still thought that people really intended to help the poor, but they just didn't understand how to go about it. That was a childish illusion. Changing the world" by official decree and government action is and always has been first and foremost about having conferences and meetings and policy discussions and their own pensions. That is why everyone who rants for social justice is so quick to accuse others of selfishness; they are worried sick that somebody else might get their hands on the public purse."

Tyler McClellan comments: 

I have never met a person who I felt truly understood social security. Let me point the way forward in all humility. The money could never have done anything but be spent immediately upon receipt. The goal of social security was two fold, a transference of net wealth to the old in the first generations as an inducement for other things and more importantly, the creation of an indefinite means of savings. Savings that would be repaid based upon whatever happened in the future with no need for action in the present to make any reference to that specific future which would square the circle: a perpetual and confident solvency with only the extent of the future burden left to calculation.

It was a great leap to realize that all savings is contingent, and that which is most contingent is that which is most valuable. No trust fund ever existed, nor ever will, but by this great leap we have been able as a society to save without any commitment to the form our means of saving must take. If we spent the money poorly, no matter, so long as some in the future acquired income wisely that we might tax.

Of course the program has worked brilliantly because it is the only one to deal honestly with a contingent world (aided no doubt by the twist of phrase that we all earned it by paying in, an infantile but successful appeal to merit).

Certain people have never liked social security but that is related to the fanatical obsession with Say's law that is a great undergirding shibboleth to a whole caste of mind. The caste of false rectitude.

If all Americans gave 90 percent of their income to the poor in Africa and Africans bought nothing from Americans, 90 percent of the income in America would cease to exist and our per capita income would become African.

I'll leave it as an exercise to the reader to prove that it is impossible to transfer cash from one group to another in any large sense if they don't bank or trade with each other.

I didn't want to embarrass my friend by allowing Vic to publish this, but he said OK– anything for the one guy I have ever known you, Stefan, to voluntarily address as the Chair. So, publish away. 

Victor Niederhoffer responds: 

You are much more of a chair than I. The chair has a connotation of derision in it which I like which my former employees gave to me because I was somewhat immobile in my positions when they went against me, and in my seat unless I was playing tennis because of my old hip problems. They used to call me vicious vic when I played squash but I changed that to relentless vic or some such which my opponents were quick to adopt because they were afraid that if they didn't, I wouldn't let them maneuver to get on the other side of the draw from me so they woudn't have to meet me until the finals. I do not have that mojo with my trading as of yet, but I am hopeful that instead of being known as the blow up artist that some day they will call me the Phoenix or some such.

Stefan Jovanovich replies: 

No question. My friend's suggestion presumed that the owners of the better farm land already traded with America since they were the very politicians who cut the ribbons in the photo ops with the visiting Peace Corps' senior officials. If the poor farmers had the U.S. legal tender with which to buy the land, the politicians would be willing to sell because they couldn't put the soil in their foreign bank accounts. It would be another form of graft (less complicated than the grand tradition of stealing and selling the U.S. food aid), but this form of graft would actually benefit the poor. My friend says it would have been another form of "honest graft" - just like the old days when your cousin (my friend's name uses its y's for vowels) got a job working in the sewers and actually worked in the sewers. The only net losers would be the Peace Corps' officials who, given their respectable backgrounds, could surely find other work.

Ralph Vince writes:

What certainly won't happen in our lifetime (and, sadly, our forefathers had big balls and small brains, and never had the vision to bite this bullet) is to create a pension to sink ALL future government liabilities. The scourge of taxation should have been eliminated by now, and we have yet to even start down that necessary path.

Look, if we could pay down the national debt, even to a small degree, then, feasibly, the entire thing could be retired. And, if that were the case, then a cache of 50 trillion to the positive, at thirty year domestic rates, produces the (quite obscene) 4.5 trillion budget.

But we never got to that point — and we never will until we see that it can be done, must be done, resolve to it, and then start down that long road. It will take generations — and although a pity no previous generations had the vision or will to do this, doesn't excuse ours.

Apr

20

1. "There is no such thing as easy money"

2. Events that you think are affected by cardinal announcements like the employment numbers at 8:30 am on Friday are often known to many participants before the announcement

[An example supplied on April 18 by Mr. Rogan: "The Reason For Geithner's Weekend Media Whirlwind Tour: White House Learned About S&P Downgrade On Friday" (zerohedge )]

3. It's bad to try to make money the same way several days in a row

4. Markets that have little liquidity are almost impossible to profit from.

5. When the stock market is way down, policy makers take notice and do what they can to remedy the situation.

6. The market puts infinitely more emphasis on ephemeral announcements that it should.

7. It is good to go against the trend followers after they have become committed.

8. The one constant, is that the less you pay in commissions, and bid asked spread, the more money you'll end up with at end of day. Too often, a trader makes a fortune on the prices showing when he makes a trade, and ends up losing everything in the rake and grind above.

9. It is good to take out the canes and hobble down to wall street at the close of days when there is a panic.

10. A meme about the relation between today's events and those of x years ago is totally random but it is best not to stand in the way of it until it is realized by the majorit of susceptibles

11. All higher forms of math and statistics are useless in uncovering regularities.

Mark Schuetz comments: 

A point about # 2: This one might be fun to try to rigorously measure and test, looking at price movements in the time leading up to and including certain announcements (knowing this type of thing has been shown by list members before, but usually it's more descriptive instead of measured). Is it possible to show which types of announcements are more often known by participants beforehand as opposed to other types? Also, if certain participants are informed ahead of time, how far ahead of time do they know and in which way will they "front-run" the announcement (there can sometimes be many different ways to make a position on one economic statistic) ?

Victor Niederhoffer replies:

Certain participants know it and they react to it, and you can figure out which announcements are go with and go against——-but but but. The pre and the post regularities are always changing vis a vis the flexions and cronies and their nephews.

Ralph Vince writes:

What a great post. Thanks Vic. I certainly must second points 1 and 11, the bookends….and they have me thinking…

1. There is no such thing as easy money

This is so true, in the markets, in everything. Those who happen upon money where it DID come to them easily, it seems, as a witness, have had it very fleetingly. In my own case, although I am supremely confident in the profitabliity of what I am doing, in practically any market, in virtually any "regime," doesn't mean it's easy. It works like clockwork and is incredibly painful and distressing. It would be so much easier to simply sell buckets of blood."

11. All higher forms of math and statistics are useless in uncovering regularities.

Certainly in a post-'08 world, quants are out of favor, and for good reason. Most anyone I know who DOES make money in the markets, does so with very simple, robust techniques. Having considered going to quant school, and studied a good deal of it, I finally came to the conclusion that they are simply working with "models." Models of how the world behaves. unlike hard sciences like Physics and such where you can perform a test, come back a year from now, perform it again and get the same results, you don't have this in financial modeling. And I think this is where the quants have fallen short. Models are NOT reality, and they never got down to the bedrock, the reality of what his game is about. Of course it had to fail, and in a large way, at some point. A good rule of thumb is that if I need a computer, if it isn't simple enough to do in my head on the fly in the foxhole after I have been awake for over 100 hours, I can't use it. 

Jim Lackey writes: 

About point # 10: It takes no time at all for the information to spread. Yet how many times have we acted, lost a bit, recovered, then seemingly too much market time expires, and we close out a position. We say "awe everyone knows that it's priced in." The meme is then repeated for the 57th time and on a low pressure day, month, or year and then, kaboom!

Of course, I can think of the few times where we missed a huge score, being short YHOO in 2000 or selling some short in 2008. Yet there are hundreds of low magnitude fantastic long only ideas that we forget about. I look back 6 months later and say wow look at that beautiful rise, what happened? It went up very small, day after day, and only buy and hold would have worked.

Alston Mabry adds:

12. One should not make one's analysis more precise than one's actual trading could ever possibly be.

13. If the rational mind has not determined the parameters of a trade, then upon execution, the lizard brain will decide.

14. Never go on vacation with open trading positions.

Or, zooming in:
<click> home

<click><click> to lunch

<click><click><click> to the bathroom 

Paolo Pezzutti writes:

One could test how the stock market reacts to good (very good, wonderful) or bad (very bad, terrible)(a sort of matrix) news when the news is released and after some time. It might help build a strength indicator. Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Alston Mabry comments:

Amazing how the earthquake in Japan and the unrest in Middle East, admittedly extremely bad news, were absorbed by the strong trending markets without any problem (so far). In other times, stock markets might have crashed confronting with the same news.

Chris Tucker adds: 

Stick to your guns, but realize when you are wrong. Easier said than done. Good ideas can lead to conviction, but only experience can strengthen ones resolve. Forget the last trade, look to the next. Try, try, try to learn from your mistakes, but also from your wins.

Anton Johnson writes:

15. When correlations among many typically disparate markets become high, one should reassess leverage and seek novel opportunity.

Jeff Rollert writes:

17. Sell side liquidity is an inverse function of cell signal strength and micros0ft patch frequency, especially at lunch time.

Rocky Humbert writes:

The First Law of Rocky – In every "macro market" (indices, bonds, commodities), all prices WILL be seen at least twice. The only unknowns are: (1) how long it takes and (2) how far prices go, before the price is re-visited. This Law is true 99.999999999% of the time.

The Second Law of Rocky – Rocky always keeps his calculator precision set to two decimal places. Any trade that requires more precision than the hundreth decimal place, is a trade that Rocky leaves for smarter participants

Jeff Sasmor writes:

About Jeff R's # 16:

16a. Never go to the doctor when you have a profitable position as it will reach its maximum profit and reverse exactly at the time that you enter the doctor's office.

Happened to me yesterday…

Ralph Vince comments:

With regards to the First Law of Rocky…."Unless it is a new high, that price has already been seen before."

Victor Niederhoffer adds:

Beware of using hard stops as it's bad enough that the floor can always know your physical hard stops.

Jay Pasch comments:

No wonder over-leveraged daytraders always lose as they are required to deposit a hard stop with their leverage, along with their hard earned money…

Ralph Vince adds: 

Despite numerous posts on this thread, it has not been opened up beyond Vic's original 11…

T.K Marks writes:

Aristotle felt the same way about drama, posited that it could be comprehensively reduced to 6 elements. And any additional analysis would by definition be but variations on those original half-dozen themes:

"…tragedy consists of six component parts, which are listed here in order from most important to least important: plot, character, thought, diction, melody, and spectacle…"

Jim Sogi writes:

Always be aware of and consider current market conditions and how they might affect or even negate your prior analysis.

Even the the weather forecast says sunny, if the clouds look dark and the wind is blowing, stay home or dress warm.

James Goldcamp writes:

One good anecdotal rule I've found that works for investing is that the market that causes you the most psychological pain, revulsion, and visceral response from prior bad investments, or overall perception, is probably currently the best opportunity since others may also have a similar overly pessimistic view (or over assign risk premium). This seems to be especially true for post calamity emerging markets, high yield bonds, and fallen growth stocks (tech). If for no other reason, this is why I think stocks like Citi and the West Virginian's company are good buys now (and perhaps government motors and Russian stocks).

Ralph Vince comments: 

Thinking on this a great deal the past 24 hours, I think I would add one more, which is to me the most important of them all perhaps, or at least tied with #1 and #11. And that is that most people have no business being here. They don't know why they are here, and, if pressed, can only give a sloppy, struggling answer. "I'm here to make money." "I'm here to improve my risk-adjust return," or some other nonsense.

They are here for action– whether they know it or not, whether they acknowledge it or not. The market is a magnet for gamblers, a magnet for those who compulsively seek out the very action she puts out. People are here because they want to feel they have one-up on the masses, the system, or that they are not as inadequate as they suspect. The very proof of that is their utter inability to instantly articulate their criteria in specific terms. Absent that– they're in a bad place.

They're looking for girls in the wrong dark alley.

It makes no difference how well-capitalized the individual is. The world is full of guys with $10,000 accounts who will lose it all and then some, and full of guys with very fat checkbooks who will lose all of it equally as quickly, in similar fashion.

They still think it is about what you buy, when you buy it and when you get out, facets that have nothing to do with what is going on here (which is specifically why mathematics, simple or higher-order, fails in this endeavor; people are applying to aspects they mistakenly think this thing is about.)

If you examine institutions, they may be equally as clueless as to what this thing is about, but they have one big up on the individuals– they have a specific, well-defined criteria in most cases about what they are in this for, what they are willing to do to achieve something very specific.

Most individuals– of all gradations of wealth– can't, and that's the red flag that they here for all the wrong reasons.

Jeff Rollert adds: 

Amen. If it doesn't hurt a little, you're wrong.

Mar

15

Markets Aren't 100% Efficient But You Still Can't Beat Em:

Nearly 40 years after the first edition of "A Random Walk Down Wall Street" the legendary Princeton Professor Burton Malkiel has released the latest version of the text: "The Time-tested Strategy for Successful Investing".

If one were to judge a book by its title, they might think Malkiel was making the case that there is no order to the stock market and that stock prices move randomly. But, that's not exactly the case. "It is not that stock prices are capricious in any sense, it is quite the contrary," says Malkiel. "[Prices are] essentially unpredictable, not capricious, but unpredictable because true news is unpredictable." He argues that all news is not equal.

Many headlines are efficiently already baked into stock prices before the events actually happen. Take for example the much talked about QE2 in the second half of 2010. There was so much speculation that the Federal Reserve would move again to buy up Treasuries that the market had largely adjusted for the decision before it actually happened. But, "true news" is very random, he says. For example, no one would have expected North Korea to unleash deadly artillery fire on the South, as occurred last month.

To his point, the event sent markets reeling, at least temporarily, evidence for why it's impossible to predict the short-term ups and downs of the market. You Can't Beat the Market Malkiel's book is essentially a brief on the Efficient Market Hypothesis, which states that stock prices efficiently incorporate all information available at any given time and trade at fair value. There are no profits sitting around, waiting to be picked up by investors. In the accompanying clip, Dan notes the "efficient market" theory has recently taking a beating; not just with the spectacular housing bubble and burst, but also due to the work of behavioral economists that have been studying irrational behavior.

But, Malkiel thinks the theory still holds up. "The efficient market hypothesis does not mean that prices are always right," he says. "We don't know at any one time whether [they are] too high or too low."

Read the full article here. 

Ralph Vince comments: 

This notion is silliness, grandiose academia at its worse.

There seems to be great oscillations in the collective thinking of men. We go from feeling we know everything there is to know, that we can, essentially, control everything, to that we know nothing, and all is beyond our control.

The EMH is akin to the 19th century notion that everything has been discovered and there is nothing new to discover. It does not account for those of us who regularly make profits other than to proclaim then as just lucky.

I don't need a bull market to make money and I can do it with any stock on the long side, without even having the choice of when to get in. I had to learn how to do it.

Simply because you cannot learn it in a university program doesn't mean it is any less of a learned skill.

Ralph Vince writes: 

I'm wondering though if maybe I don;t understand what Malkiel is saying, or what he IS saying is commensurate with the argument you guys are making.. He asserts most managers list money, others make money, but that seems to rotate around.

Ok, let's assume his empirical evidence in that regard is correct (I have no reason to doubt that). I think the larger question is "Is there a subgroup, within that revolving group of profitable managers, however small, that does NOT revolve, that DOES consistently make money. "…diamonds in the rough, for us clowns in the buff!"

Mar

11

This article is something I don't understand. I can understand that rewards should reflect the risk that people are willing to take. What risks do financial advisors personally take to justify the rewards they reap? It seems to me that if you take a much bigger reward than the risk you personally take, then that reward is undeserved and a pure expression of greed vs. what you're truly entitled to. Am I missing something?

Gary Rogan writes:

Clearly the flexionic millionaires don't deserve their rewards, especially after their companies should be long bankrupt if left to the vagaries of the free market. Is the remuneration of a financial adviser, who without any governmental or otherwise illegal/unethical tricks, derives good income from seemingly simple work, "justified"? I suggest that this is another "angels on the head of a pin" questions that cannot be answered, because it's "ill posed". In a free market, anything you get from a voluntary exchange is "justified" by it's existence. If you want what he's got, try it on your own and see if you can do as well or better. I personally don't believe in the services of a "financial advisor" so I've never been to one. I have the same attitude towards them as I do toward well-paid athlete in a sport I don't care about: if somebody is willing to voluntarily pay them their salary, it's not my problem or concern.

The article, in a true populist fashion, confuses ill-gotten gains with the rewards of the free market. This "trick" is a favorite of revolutionaries, who use the existence of scoundrels to destroy any semblance of order and replace it with a dictatorship led by even worse scoundrels.

Mark Goulston replies:

Thank you Gary. It is aimed at the true "flexionic millionaires," and I am in favor of the free market and oof people who are willing to put themselves and finances at risk to reap the rewards when they pay off. I'm just not sure I agree with "flexionic" people reaping the rewards as a result of their risking other people's money.

Gary, Hit me with your best shot about: The Obsfuscation Conspiracy.

Gary Rogan responds:

Mark, I think that most of the "flexionic millionaires" are probably CEOs of large, mostly (but not exclusively) financial companies and to a lesser extent, some hedge and other fund managers. It seems from the context that you were referring to the latter group rather than some down-home financial advisors who take on a few clients personally. To the extent that they derive their gains from their flexionic connection they are just thieves. The problem is it's often hard to separate what percentage of their gains comes from their honest skills and what percentage comes from exploiting the illegal/unethical schemes.

The real truth is that in complex societies those who learn to exploit complicated "angles", legally or illegally do well. We should try to clamp down on the illegality because otherwise everything else becomes corrupt, as corruption cannot be contained to one sector. The quest however to link compensation to the social value of one's work by anything other than enforcing anti-corruption laws and encouraging such attitudes is likely to become a fight with windmills or worse, a populist revolutionary crusade with disastrous consequences. Freedom trumps unfairness, but unfairness due to corruption should fought by good people.

Fast Anonymous writes:

While the flexonic millionaire are an issue. The cause of this issue is those millionaires that made their money by skimming a small sliver of risks and put it on the unsuspecting. No body has gone to jail, for this willful blindness. Not only have they not gone to jail those very workers are the new untouchable, too big too fail, in with the government: flexons. Of course they can put together a new system built on trust (wink, wink, nod, nod). We have all heard of perhaps the urban legend "penny skimming" millionaire. The con where you simply take a few pennies from every account, and 99.9% never notice but simply adjusted their books each month it happens . Those that did notice, did not take the time to complain. those that complained never sued etc.

Many in Wall Street simply skimmed the risks, added more and more risks, to those that thought they were buying safety, got sold garbage. The truth got stretched further an further out. One in 1 in million soon became 1/1000, then 1/100 then 1/10 and thereafter bound to happen sooner or latter. Allstate has done a statistical study that proves without a reasonable doubt many of these mortgage pools were outright frauds. The audacity of the lies were staggering to me. AIG sold over $500 billion of insurance on such securitized products, that they could not cover. They eagerly took the premium thinking they were the ones selling worthless promises.

Craig Mee writes:

Give people an inch and they take a mile. How long is a piece of string… if you do something, your kids will follow. At times no doubt its to do with re-educating people. For example, when countries move to a greater minority group within their populace, initially sometimes, those then deem to capitalise on looseness within the system. The locals then realise they're paying higher premiums because of this and get in on the act. And then the snowball begins. (A mate recently in court with a bad neck from car crash…usd7000 was the going rate. Turns out 8 people were sitting beside him with their hand out, all from the same family two car accident, usd 56000, a nice down payment on small business.)

As banks have been shown to "take liberty" so has the public. On a recent problem with a bank in Australia, atm's started punching out cash regardless of balance… from an official : "we have some people innocently trying to get sums of money out and being given more, through to people pushing security guards out of the way to go and get to it."*

We breed it and deliver 4 year political terms for those to give our cash away at will to secure votes in a socialist environment, and pay the consequences.what the answer. Work Harder!

The old laborer had to stand together, from such risks skimmers, to make a safe work place.

Wall Street must stand up to these skimmers of risks also.

Mr. Krisrock writes:

I appreciate that you posted this because it exposes that you are a supporter of Obama's strategy to VILIFY 500,000 people working in financial services and millions more who work in service industries that support them and the capitalist methods of allocating capital.

VERY VERY VERY few of these people were responsible for the financial crisis and in fact, some of us saw the fact that these same people never chose to attack the PUBLIC PRIVATE SYNDICATE called Fannie Mae.

Craig Mee writes:

Mr Krisrock, you may want to set your scope on a more deserving recipient. How my idea that "banks have taken liberty" has anything to do with a slam dunk and vilification of 500,000 financial service workers I don't quite understand.

I am a supporter of less taxes, that's what I'm a supporter of, and a fair go, for those who are having a crack.

Kim Zussman comments:

The meme gains momentum.

Ralph Vince writes: 

It's ALL about money. Nothing else. In ALL walks of life, medicine, teachers, cops, politicians, waitresses, hookers, traders and traitors. Pretending to be "Above it all," is alway, bankably, a phoney act. All the little people's greed is always at the fore of their consciousness (excepting in young men, where that greed is surrogated by something else).

And who says the compensation should be consistent with the risks one takes? Or the good one does? Or their intellect?

I love that expression "…what you are entitled to." It rather rings of the other one those kind of thinkers lob out there, "…fair share."

It's enough to make you think we don't really live in a jungle. My experience, is that these are expressions of the largest predators among us, their weaponry consisting of the very specious argument that we are not in a jungle.

Let's not believe that for one second.

Gary Rogan writes:

The way the world really works is that if you unleash the government to take from those who have to cure sick patients and to house homeless children, you will have more patients unable to pay and more homeless children. Not immediately though. The liberal argument is always about here and now: "If we take the money today, we can spend more of it on worthy causes immediately. How can you not see that those in pain deserve it more than the rich who have more than enough?". Michael Moore who inserted himself into the Wisconsin crisis the other day went further. His claim was that we don't have ANY financial crisis and no government is broke because there is this untapped resource which really belongs to "the people", the wealth of the rich, that is simply not being tapped.

The real argument in Wisconsin is actually more about power than money. In this case the money, more specifically the forcefully extracted union dues of the public employee union members, is what has kept the Democrats in power in a self-sustaining feedback loop: we give you more secure and better paying jobs, you keep getting us elected with your contributions. The left is having the proverbial cow that the election process has somehow gone so wrong as to break this loop. Their reaction is bewilderment and blind rage.

Mar

1

I see free reserves are, yet again, at a new high (of all time, and by an enormous margin). Consider that at the height of the financial crisis, free reserves were about 25 TIMES higher than the previous all-time high.

That's one big pizza.

Now in fact, about 20% higher than that. There's some sort of "membrane" holding back this unimaginably large tidal wave of liquidity, and I don't know what/when/how that gets pierced and things get flowing again (flow as in we'd be ants on the beaches of Phuket in Dec 04).

I am referring to Free Reserves" as posted in Barrons each weekend. If you go to my site ralphvince.com you will see I keep a spreadsheet with these numbers on it.

Gary Rogan writes: 

The membrane is the inability of the banks to find regular profitable opportunities to lend in the economy thus making the puny rate they are getting in their FRB accounts the default "investment" choice. So you get high inflation if the economy is in the toilet and hyperinflation at any sign of life. That's the situation the Keynesian/Bernanke cabal has created. Uncle Ben can claim all he wants he can raise the FRB rates any time he feels like it, the reality is (since the Fed refunds all govt bond "income" net of costs back to the treasury) that he can't because this will immediately worsen the deficit.

Stefan Jovanovich writes:

Gary has described the truly ironic result of the triumph of Keynes' notion that, through central banking and fiat currency, "stones can be turned into bread" at no cost. We are still using a 19th century vocabulary to described as 21st century world. The term "Reserves" had meaning in the world of Jackson and Polk and Grant and Cleveland and even Teddy Roosevelt because it described specie - the Constitutional Coin that had to be there to assure people that the bank's notes were backed by something other than the market price of its outstanding loans. Our Bush II/Obama I system has solved that problem by both evaporating the market for mortgage loans and eliminating the necessity that banks mark those assets to a market price. The banks now have a choice between 2 kinds of bad paper: (1) reserves, which are "good" in terms of price risk but offer lousy interest returns and (2) long-dated loans (mortgages, tax-frees, even Treasuries) that offer a wonderful spread on funding costs but are perceived - rightly or wrongly - to have real risks of default and value destruction through inflation. This is still an improvement over the bank's former situation - when they had enough truly bad paper to bankrupt them all. In that sense the central bank and the Treasury did save the banking system; but to do it they had to turn public and most of private finance into bouncing the rubble. If they had used the Treasury's then good credit to simply guarantee deposits and left the markets and the bankruptcy courts to offer their cruel but effective remedies, the cost to the country and the world would have been far, far less; but the guys at the Treasury and the Fed would have lost all their lunch buddies, and Paul Krugman would have said even nastier things than he does now. That would have been - for those making the decisions - far too high a price to pay.

See this wikipedia article on Mancur Olson.

Bud Conrad writes:

Thank you very much for providing the Barrons spreadsheet in zip form on your web site. I plotted the reserves column and it is the same data I pointed to in my post. It was just slightly higher in the middle of the crisis than now, but that is unimportant.

I see you have a couple of additions, including a model for stocks and for bonds.

The discussion here is the more important point since the actual reserves measured are really the result of the Fed completely running wild to bailout banks in the 2008 crisis, and they are firing up the after burners again in the QE 2. They create these reserves in the name of the banks they buy paper from. The monetary base is at new record and is easier to understand as it adds the currency to the reserves. The point is valid that there is a whole trillion of money that banks have access to for making loans such that the original structure of the Fed as having some way to limit the expansion of loans and thus money is far from having any effect. The reserve requirement is also so small at $60 B to be completely irrelevant as it has been for decades. The membrane analogy makes sense. I agree that the risk of inflation is high.

Feb

23

What is the one thing everyone needs but cannot afford, hence the single string to control a person, family's & society's lives? Health insurance. If overpriced, it cuts out the middle class– the rich afford, the middle class teeters in ill health, and the poor get it free with enough time to wait in hospital lines and pick up bugs. The ramifications of unaffordable insurance are sundry: one frets about getting ill, and so becomes. Aspiring youth are forced out of entrepreneurship into gov't, military & corporate jobs w/ benefits. I saw it daily while teaching– inability to go to the hospital for a spider bite, etc, and the students geared study away from books to cultivating relationships to get jobs w/ benefits. My SED class (severely emotionally disturbed) had many cases of the brightest kids & parents who invested their children in the class to get instant, free health insurance, and to build a future family breadwinner in the welfare system. Further, is it stupid to earn less salary to fall into a low income bracket for free health care, like many do? Long ago, I quit contributing to escalating monthly insurance premiums, and used cheap, comprehensive traveler's insurance while globetrotting, and now travel w/out it exclusively in third world countries where medical/dental/hospital fees are about 1/50th USA. e.g. I get a physical & medical workup on arriving and leaving S. America for $50; a tooth crown reground and re-pegged on the spot in Mexico for $5; and the local Sumatra healer/doctor here just treated a stomach ache with a broad leaf massage for $3. I like to say, don't point out a fault w/out a solution, but i don't have it for American health insurance.

Ralph Vince writes: 

I use Medix when abroad, having researches the various travelers insurance plans some years ago, it seemed the best to me. What I find interesting, is that it is less than half what I pay for insurance in my own country of the US.

Feb

23

I thought this blog post called "3 Things To Do as you Watch Manufacturing Die in America" was very good.

Stefan Jovanovich replies:

I think this solution will be far, far worse than the supposed problem. What Mr. Elkus and others are advocating is the same kind of imperial preference/discriminatory tariff legislation that pushed Britain and eventually the U.S. into 2 world wars after half a century of material progress that our current age only comes close to matching. Affirmative action for industries will be as thoroughly corrupting for the country's economy as it has been for schooling, and it will produce the same result– public wealth destroyed for only the temporary private advantage of those best able to define themselves as victims of "unfairness". It really is time that the United States accept economics' greatest single practical discovery– the paradox of competitive advantage– and abandon the idiocies of mercantilism once and for all. Keynes was not wrong for wanting to see societies solve the problem of chronic underemployment through make-work; it remains the only solution– as Goodwill Industries proves every day. Almost everyone can do some work, but not all work can be profitably done. Keynes was right to urge us to provide charitable employment so that people could earn incomes, but he was as wrong as Gary is now in suggesting that governmental power could create profitable employment for all.

It is the same fallacy of all monopolies– the one that labor unions offer even now: let us have the monopoly authority of the law to set our own prices. Whether you jigger the terms of trade directly through an industrial policy or a collective bargaining monopoly or indirectly through conjuring tricks with the currency, the result is the same: a con that does nothing for the poor but provides a great deal of wealth for the people put in charge of shuffling the cards. Charitable employment has to be paid for out of profits, personal incomes and personal and business savings.

Keynes's solution, the labor movement and Gary's proposal are all attempts to do the job on the cheap– either by finding the money for it in a monopoly printing press that allows currency to be nothing but credit or by legislating higher wages/profits for favored aka "essential" works and industries. The deficit spending in these methods ends up being paid for by the "ordinary" (sic) citizen, by inflation and by increasing the cost of living beyond what it would be if the foolish citizens were allowed to buy goods priced by competition alone.

Now, regarding the fact: Mr. Elkus' story about the VCR is pure hip-hop-hooey. The American producers of tape recorders– AMPEX, for example– didn't lose out to the Japanese in the production of VCRs because of MITI; Matsushita and SONY had already won that race on their own. In broadcast production equipment RCA lost because Mr. Sarnoff decided that his company should invest its capital in trying to compete with IBM in the computer business instead of reinvesting its profits into its core broadcasting business.

Gary Rogan writes:

Stefan, I would not subsidize any specific industries at all. I would impose the kind of tariff you like. In addition, for "'habitual violators" of common norms of ethical behavior, like those who don't respect intellectual property or require technology transfers as a condition for join ventures, etc. I would impose additional tariffs that would be reduced to zero as soon as a specific set of demands was met. Deal with countries, not industries. It's unfortunate that the government, with all of its inherent corruptibility, would have to be involved, but I don't see any alternative as I don't believe it's reasonable for individual companies to fight foreign governments. My main point in posting this article was not to provide a solution though, but to document one more time that whatever has been going on has not lead to a good outcome. It's a judgment call, I believe that a serious country has to have a competitive bag of technological tricks to remain stable in the long term. I don't have any specific preferences for the areas other than weapon technologies where those tricks need to be located (like the famous "green" technologies of the future or chip-making machines mentioned in the article), but once again one can make a judgment call that the deterioration has gone too far to right itself without extreme measures.

Would having sane fiscal and monetary policies and getting rid of excessive regulation do the trick? Perhaps, but the change would have to be pretty quick and pretty extreme, and how likely is that? At some point you have to ask yourself: was South Korea completely stupid for shielding itself from foreign competition as it developed from a wasteland similar to the worst South American examples into a global technological powerhouse? Is EVERY non-competitive (call it mercantilistic if you'd like) behavior that China is undertaking bad for IT economically? And would a country like say Egypt or Ghana develop any appreciable standard of living any time soon if it somehow managed to establish a completely "fair" bilateral or multi-lateral trade regime with a number of advanced industrialized countries?

Stefan Jovanovich responds:

Thanks for agreeing about the ad valorem tariff, Gary, but if you also allow punitive tariffs for "habitual violators" the excise will quickly become as corrupt as the criminal code and the income tax law. Yours is precisely the argument in favor of economic virtue and against economic sin that Roosevelt (Teddy), Wilson and Chamberlain (Joseph) made in the support of imperial> preference and discriminatory tariffs; and there is little question that their greatest "success" was convert Germany's "threat" of making better> aniline dyes and offering better, cheaper passage across the North Atlantic into the first of the 20th century's several holocausts. If we are going to learn any "lessons" from history, surely we ought to learn that one: countries should never, ever make ultimatums to one another. I can't accept your historical assertions about South Korea and South America. The ROK's comparative success came from its competitive advantage in skilled wage rates, the same competitive advantage that Germany and Japan had after they too had been reduced to rubble by catastrophic war. The relative failures> of Argentina and other South American countries in the 20th century were attributable to their adopting the very type of "protective" legislation> that you are recommending; the result was, as we both know, pure disaster. Yes I do think Egypt and Ghana would quickly develop an appreciably greater standard of living if those countries adopted an ad valorem tariff, free capital flows and a banking/monetary system based on specie reserves and currency convertibility. That is precisely the path that Singapore took when it adopted 19th century trade laws and made its currency freely convertible into the U.S. $ which was then as good as gold. Enterprise> produces wealth; rules against "sin" and for abstractly defined "virtue" whether in trade or in life only reward lawyers and the other official> definers of what is good for the public.

"Prisons are built with stones of law, brothels with stones of religion" (William Blake).

Gary Rogan continues: 

Stefan, perhaps you should read "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism" by Ha-Joon Chang who, as it happens, hails from ROK. He is a friend of Ian Fletcher who wrote the article I posted. You may change your opinion> about what caused their current highly advanced position in the world economy and how poor they were when they started. I think he under-emphasizes the role of culture, but it's instructive to go through his view of how ROK and many other countries developed their economies. 

Steve Krisrock writes:

With 40% first dollar taxes in the USA, I don't buy any argument that small companies can compete against companies overseas who don't have the social security, unemployment, workers comp, insurance, and hoards of state and local taxes plus the democrats grab bag of taxes BEFORE they make something…go east to Asia that where wall street has found a new home to rebuild…and leave the scumbags from Chicago romi manual with those that want to destroy American power like Soros.

Tell me about property rights when the EPA seizes drilling areas, shuts down plants at both the state and locality… How about the Homeland Security not enforcing the rights of American landowners on the borders, or the fish and wildlife putting fishermen out of work for things like global warming? I'd rather be in China and borrow their money and take the risks of seizure than with the American wackos who create these ideas at places like Rutgers…how about the debasement of American citizenship by allowing hispanics in at a 100% rate bringing with them all the corruption and vote buying that comes from their cultures and stealing our healthcare…we have far too many laws and far too little protections. A man shooting an eagle can spend more time in jail than a rapist in San Antonio…such property protection…

Don Boudreaux writes:

As burdensome, annoying, etc., as U.S. taxes and regulations are, the benefits of operating in this market remain huge– so large that they outswamp the benefits, for many firms, of moving to places with lower taxes and fewer regulations.

Property rights in the U.S. RELATIVE to most other places are secure; corruption here is relatively mild; our internal market is enormous and untariffed.

And the facts speak: inward foreign direct investment in the U.S. continues to lead the world.

By the way, here is a good review by Ed Glaeser of Ha-Joon Chang's book, Bad Samaritans.

Ralph Vince writes:

Gary,

I beg to differ that we get products cheap. On the contrary, I find profits always flow upwards, profit margins are not shared with the consumer unless forced to by competition. The ONLY benefit I see of imports is that it forces competition *.

But if profits created by cheaper labor flowed down to the consumer, that head of lettuce would cost me a dime, those big Nike shoes of Justin Beaver's would cost 5 bucks instead of 150.

-Ralph Vince

* consider the dumping that occurs in the US historically has only lowered prices temporarily– the long run effect, a hypothetical. Consider tires from China which now are prohibitively tariffed. The benefit of tire dumping in the US was, ultimately, short-lived to the consumer. Rather than domestic manufacturers becoming competitive at home with the dumpers here, they merely got lawmakers to collude against the consumer and removed competition by tariff.

Gary Rogan writes:

Ralph,

Certainly the Nike business model is to make for pennies and sell based on the image. That is NOT the WalMart model though. I'm not prepared to argue based on solid data but it is my impression that at least until very recently WalMart has passed a lot of the savings to the consumers regardless of where they sourced, but of course sourcing from China wound up being their favorite model. I would also suspect this to be true in other low-end clothing and home decor retailers. Like everywhere else, branded products are quasi-monopolies and will sell differently than commodity (in the sense of easily substituted) products. If everybody can import socks from China it's unlikely that the competition will not force some retailers to sell them at cost plus a small margin. If there are ten or more domestic sock manufacturers and no imports the situation will be the same except the higher costs will be reflected in the higher price. Obviously imports lower the cost, but I don't see the dynamic being all that different than if we only had a totally free domestic market surrounded by a mote.

Any argument that sooner or later there will be only a small number of domestic monopolistic suppliers would apply to the international market as well.As I mentioned, I'm not for product-targeted tariffs, at least not at the present stage. Perhaps something called "raw materials" could be exempted but that's about it. I'm also under no illusion that domestic manufacturers will not typically raise prices as high as the market will bear if imports are restricted in any way. I do think that Stefan's favorite tariff is a better source of fully funding the government than income taxes, but I also believe that if we chose to enforce intellectual property rights domestically, we should enforce them internationally, and through higher tariffs.

The same should apply to other thuggish behavior as in "if you want to sell here you get a local 51% partner and you transfer all technology to him, and MAYBE we will let you sell for some undetermined number of years". And if a country chooses to impose a tariff higher than our tariff on ANY product category we should impose at least an equal tariff on ALL products from that country. No discussions, no negotiations, just automatic action. If we determine that there are some monkey business-type restrictions on selling ANY product category in a particular country, we immediately impose a tariff ON THE ENTIRE COUNTRY to compensate for the inconvenience. I do realize that there is a lot of opportunity in the latter category for corruption, but those are the breaks.

Believe me, I understand the beauty of totally free markets. I just don't understand the logic of pretending that having a population of a billion people trading with us via some crazy rules controlled by a handful of people and us just taking what they are shipping here totally on their terms constitutes a free market.

Stefan Jovanovich adds:

Open Trade and Food Prices

Percentage Share of Household Spending on Food, 2008

United States                                         6.9
Ireland                                                  7.2
Singapore                                            8.0
United Arab Emirates                            8.7
United Kingdom                                    8.8
Canada                                                 9.1
Switzerland                                         10.2
Australia                                              10.5
Austria                                                  11.1
Germany                                             11.4
Sweden                                               11.5
Denmark                                             11.5
Netherlands                                         11.5
Finland                                                 11.9
New Zealand                                        12.1
Hong Kong, China                                 12.2
Qatar                                                     12.7
Norway                                                12.9
Belgium                                                13.0
Spain                                                     13.2
France                                                  13.5
Greece                                                 14.0
Malaysia                                              14.0
Japan                                                    14.2
Italy                                                       14.2
Kuwait                                                  14.5
Bahrain                                                 14.5
Estonia                                                 14.6
Slovenia                                               15.0
South Korea                                         15.1
Portugal                                               15.6
Czech Republic                                     15.6
Hungary                                               16.3
Slovakia                                                16.6
Israel                                                     17.7
Bulgaria                                                18.2
Uruguay                                               18.5
Ecuador                                                19.0
Latvia                                                    19.0
South Africa                                          19.8
Argentina                                              20.3
Poland                                                  20.3
Lithuania                                              21.8
Chile                                                      23.3
Saudi Arabia                                         23.7
Mexico                                                 24.0
Taiwan                                                  24.0
Turkey                                                  24.4
Brazil                                                     24.7
Thailand                                               24.8
Costa Rica                                            25.7
Croatia                                                  25.8
Iran                                                        25.9
Turkmenistan                                        27.1
Colombia                                              27.6
Russia                                                   28.0
Bolivia                                                   28.2
Peru                                                      29.0
Venezuela                                             29.1
Dominican Republic                              29.2
Bosnia-Herzegovina                              31.1
Macedonia                                           31.5
China                                                     32.9
Romania                                              34.3
Kazakhstan                                         34.9
Uzbekistan                                         35.1
India                                                      35.4
Guatemala                                          35.5
Tunisia                                                  35.7
Philippines                                          36.7
Vietnam                                               38.1
Egypt                                                     38.1
Cameroon                                             38.4
Nigeria                                                  39.9
Morocco                                                40.4
Jordan                                                  40.7
Georgia                                                40.7
Ukraine                                                42.1
Indonesia                                             43.0
Belarus                                                 43.2
Algeria                                                  43.8
Kenya                                                   44.9
Pakistan                                               45.5
Azerbaijan                                            46.9

Source: USDA

I think we are now in the realm of horses and water and drinking. The not-so-subtle point here was that Singapore and the Emirates - those agricultural powerhouses - had among the lowest food costs in the world because they had open trade laws. I am going to end my contributions to this discussion on a (warning: aural pun coming) sour note. The rush for imperial preference that led to World War I began with the German Empire agreeing that foreign grain and milled flour would be subject to prohibitive tariffs. This was done so that the value of the Prussian nobility's estates would be preserved and braten would only be served with rye bread (the only grain that could be grown in the lands on the shore of the Baltic). There is no proof for this speculation, but I have always thought that a great deal of the appeal of Hitler's plan of Lebensraum to the German public was its implicit promise of good, plentiful, inexpensive pastry flour. That seems far more probable than the idea that a promise of free land would by itself appeal to a population that had long ago left the farms for the towns and cities and had no desire to return to them, even if agriculture was an "essential" industry. Having now made a really bad joke and played the Hitler card, I surrender.

Feb

17

I just finished browsing the 2012 Federal Budget Proposal. If you believe the Economic Assumptions, Dow 36,000 is a no-brainer. But see my comments at the bottom.

Here's the link. see Table 2-1

Here's the meat:
2012 Real GDP = 4.0%
2013 Real GDP = 4.5%
2014 Real GDP = 4.2
2015 Real GDP = 3.6%

2012 CPI = 1.8%
2013 CPI = 1.9%
2014 CPI = 2.0%

Wages & Salaries:
2012 Growth rate YOY= 5.8%
2013 Growth rate YOY= 6.5%
2014 Growth rate YOY = 6.5%
2015 Growth rate YOY= 6.2%

Average Tbill rate:
2012= 1.0%
2013= 2.6%
2014= 3.7%
2015 = 4.0%

Average 10 year rate:
2012 = 3.6%
2013 = 4.2%
2014 = 4.6%
2015 = 5.0%

I don't have a crystal ball. And it's certainly possible to have nominal GDP growth of 6-ish percent. However, the historical anamoly would then be in the interest rate forecasts. Since the 1950's, and except for two very brief recessionary periods, the 10 year Treasury yield has ALWAYS exceeded the year-over-year change in real GDP — with the average (eliminating the 1975-85 inflation) — being about 200 basis points. So, if you accept their real GDP forecast, the interest rate forecast is implausible. And if you accept their interest rate forecast, their GDP forecast is implausible.

BUT IF YOU ACCEPT THEIR ENTIRE FORECAST, YOU SHOULD BUY STOCKS NOW!

Ralph Vince writes:

Out of curiosity, maybe George Z can chime in, are these GDP assumptions typically unrealistically rosy?

George Zachar obliges: 

Well, since you asked…

2013 Real GDP = 4.5%
2013 CPI = 1.9%

That gives us NOMINAL GDP of 6.4%, which happens to be the high end of the range going back two full decades.

Not bloody likely given the current configuration of economic, demographic and political forces.

Wages & Salaries:

2013 Growth rate YOY= 6.5%

With existing slack/low participation rates? No way.

I think these figures were calculated by guesstimating what they could publish without folks bursting out laughing…and then multiplying by 1.2.

Rocky Humbert comments:

 Might I suggest that the interesting reactions to my post regarding the 2012 Budget/Economic Projections should cause some introspection.

As I noted, the projections seem historically improbable and incredibly optimistic — but just like that Goldman Sachs economist who projected the outlier of 6% or 7% growth this year — they are NOT impossible. And if they turn out to be even close to correct, the upside in the stock market could be mind-boggling. That was my point. And for the umpteenth day in a row, Mr. Market is again voting for the improbably bullish outcome even though GZ's helpful comments have much better odds!!. See this old post.

I cannot overlook that Mr. Rogan in his replies, yet again, mistakes ZeroTruth (excuse me, Zero Hedge) to be a source of wisdom. It's particularly ironic when Mr. Rogan writes "to be an intelligent liberal today is to actively promote lies" when in fact, actively promoting lies is the essence of Zero Truth's business model. A question for Mr. Rogan: Why is the propaganda on the White House Website more troubling to you than the propaganda on Zero Truth website? Perhaps you only object to "lies" when they are from someone who doesn't share your idealogy?

One of these days the stock market will decline. And cotton will go down. And we'll have another recession. I only wish that I was smarter so I could know when that will happen. I don't know. And that's why I always hedge my bets. And that's not just bearish hedging. It's bullish hedging too. And I'm glad I'm hedged bullishly right now!!

Feb

10

Chess, like the game of bridge (just look at those guys at the bridge tournaments), I have noticed, is an addiction. In fact, the older I get the more evident it is to me that all of human behavior is under the gravitational influence of people's panoply of addictions (and, virtually everything is an addiction– not just drugs, alcohol, etc. Look at that "CraigsList" congressman who resigned yesterday, or the guys who has just discovered the leverage available– bridging the gap to his dreams– of long options, or young people who just get their driving license– all of human activity is an addiction of varying degree).

And I think the pursuit of satisfying these addictions permeates all of human behavior– and is in large measure a reason why people often act very illogically (Kahneman and Tversky were right– it's just that oftentimes I think the illogic of human beings does NOT have a hidden economic benefit.

Sometimes……our plumbing doesn't make it all the way to our fixtures.

Good stuff to keep in mind down on the shop floor).

Jan

24

Firstly, 700,000 people are dying every year in China as a result of the extreme pollution, according to the World Bank. They can’t be compensated at some later date with a wind farm. Secondly, and even more crucially, the West “cleaned up” largely by exporting its pollution to poor countries like China. As Watts puts it: “This model relied on those at cleanup stage being able to sweep the accumulated dirt of development under a new and bigger rug. When this process reached China, it had already been expanding for two centuries. Now “the waste [is] getting too big and the rug too small.” Where is China going to export it to? For how long?

http://www.independent.co.uk/opinion/commentators/johann-hari/the-choking-of-china–and-the-world-2192372.html

A "plastic soup" of waste floating in the Pacific Ocean is growing at an alarming rate and now covers an area twice the size of the continental United States, scientists have said.

The vast expanse of debris – in effect the world's largest rubbish dump – is held in place by swirling underwater currents. This drifting "soup" stretches from about 500 nautical miles off the Californian coast, across the northern Pacific, past Hawaii and almost as far as Japan.

Ralph Vince Comments:

Nonsense. It wasn't "The West" that swept our pollution to China. It was the multinational entities that TOOK it to China because we (specifically, the United States) passed (and enforced) regulations to clean up.

I'm old enough to remember the stench of sulfer in my fair city, and to remember my father pointing out that the orange-rust-colored ribbon 48 stories below was a river.

The rest of "The West" followed in part. Everywhere else was always a pig sty, even absent the heavy industry which would be fleeing The West. Latin America is a pig sty, as is the middle east and, Eastern Europe, and, with the exception of Japan and Singapore, so is Asia. The subcontinent isn't even worth mentioning.

The academic explanation that the collective "West" swept it under a bigger rug is a lie. The United States would have loved to have kept those manufacturing jobs but the decision was made to move it to where they could pollute with impunity by the polluting entities themselves. Later, trade treaties with these places would be opposed by voters in America, but like the misnomered "Health Care" bill of 2010, would be crammed down the voters throats.

Jan

24

It's pathetic, stifling here in fact. We are governed by those who have no clue (regardless of party affiliation, or this thing would have been appropriately dismantled when either party held power in recent decades rather than only getting worse and worse).

I have to put on another two people — but I cannot do it here, I simply cannot. SS, payroll tax, the insanity of workman's comp., etc. You simply cannot hire someone and pay them — the obtrusive ass of government here, the absolute dead weight of that, is ever present, ever in the way.

It's pathetic and self-defeating; I take my little high school education (incidentally, NOT payed for by government, rather because I got accepted into a Catholic hellhole that was self-endowed, selective, and thought I would be more "cooperative" than I was), I never was assisted by the government in any manner, only impeded at every turn, I do things that create jobs, and have to do it outside the US.

And I'm not even doing it to save costs (as, I surmise, the major players in the outsourcing world are) but rather because the bureaucracy is overwhelming to me — I'm doing things and I don't have time for that crap. 

Jan

13

I haven't read the book, her WSJ article, or followed this at all. But are the Asian-American children's academic and music results a fair statistical test of their mothers' methods? How many Asian-American youngsters are there in the NFL or the NBA? That is, maybe their success in academics and music relates to some other than their maternal environment.

Jim Sogi writes:

Yao Ming

Ralph Vince writes:

If I were to believe the argument, then I would have to believe that black mothers raise their kids to be great defensive corners, and miserable placekickers (The socio-economic argument, that sports like football draw the poorer kids and hence the duskier kids by some reasoning, just knocked out of the ballpark).

Football is a sport where you see the minor physical differences under great magnification. That's not to say someone cannot be of primarily Asian descent and not be a great defensive corner (or placekicker). But the empirical data certainly seems to speak to an awful lot.

I refuse to disregard empirical data. (Just as I may believe in the notion of fiscal conservativism, but can clearly see empirical correlation between GDP growth and government deficit spending– even that clown Krugman [no defensive corner he], like a broken watch, right on occasion).

Dan Grossman responds: 

But genes play a big role in whether you can demand that your child get an A in advanced calculus or make first seat in the violin section of the orchestra. With that in mind, let's contemplate the genes being fed into those Chua children who are doing so well.

Maternal grandfather: EE and computer sciences professor at Berkeley, known as the father of nonlinear circuit theory and cellular neural networks.

Mother: able to get into Harvard (a much better indicator of her IQ than the magna cum laude in economics that she got there); Executive Editor of the Law Review at Harvard Law School.

Father: Summa cum laude from Princeton and magna cum laude from Harvard Law School, now a chaired professor at Yale Law School.

Guess what. Amy Chua has really smart kids. They would be really smart if she had put them up for adoption at birth with the squishiest postmodern parents. They would not have turned out exactly the same under their softer tutelage, but they would probably be getting into Harvard and Princeton as well. Similarly, if Amy Chua had adopted two children at birth who turned out to have measured childhood IQs at the 20th percentile, she would have struggled to get them through high school, no matter how fiercely she battled for them.

Accepting both truths—parenting does matter, but genes constrain possibilities—seems peculiarly hard for some parents and almost every policy maker to accept.

Dec

31

UPDATE 1/31/2011:

Contestants Summary:

- 31 Spec-listers contributed to the 2011 Investment Contest with "specific" recommendations.

- Average 4 recommendations per person (mean of 4.2, median and mode of 4) came in.

- 6 contestants gave only 1 recommendation, 3 gave only 2 and thus 9 out of the total 31 have NOT given the minimum 3 recommendations needed as per the Rules clarified by Ken Drees.

- The Hall of Fame entry for the largest number of ideas (did someone say diversification?) is from Tim Melvin, close on whose heels are J. T. Holley with 11 and Ken Drees with 10.

- The most creatively expressed entry of course has come from Rocky Humbert.

- At this moment 17 out of 31 contestants are in positive performance territory, 14 are in negative performance territory.

- Barring a major outlier of a 112.90% loss on the Option Strategy of Phil McDonnell (not accounting for the margin required for short options, but just taking the ratio of initial cash inflow to outflow):

- Average of all Individual contestant returns is -2.54% and the Standard Deviation of returns achieved by all contestants is 5.39.

- Biggest Gainer at this point is Jared Albert (with his all in single stock bet on REFR) with a 22.87% gain. The only contestant a Z score greater than 2 ( His is actually 4.72 !!)

- Biggest Loser at this point (barring the Giga-leveraged position of Mr. McDonnell) is Ken Drees at -10.36% with a Z Score that is at -1.45.

- Wildcards have not been accounted for as at this point, with wide
deviations of recommendations from the rules specified by most. While 9
participants have less than 3 recommendations, those with more than 4
include several who have not chosen to specify which 3 are their primary recommends. Without clarity on a universal measurability wildcard accounting is on hold. Those making more than 1 recommendations would find that their aggregate average return is derived by taking a sum of returns of individual positions divided by the number of recommends. Unless specified by any person that positions are taken in a specific ratio its equal sums invested approach.

Contracts Summary:

- A total of 109 contracts are utilized by the contestants across bonds, equity indices (Nikkei, Kenyan Stocks included too!), commodities, currencies and individual stock positions.

- The ratio of Shorts to Longs across all recommendations, irrespective of the type of contract (call, put, bearish ETF etc.) is 4 SELL orders Vs 9 Buy Orders. Not inferring that this list is more used to pressing the Buy Button. Just an occurence on this instance.

- The Average Return, so far, on the 109 contracts utilized is -1.26% with a Standard Deviation of 12.42%. Median Return is 0.39% and the mode of Returns of all contracts used is 0.

- The Highest Return is on MICRON TECH at 28.09, if one does not account for the July 2011 Put 25 strike on SLV utilized by Phil McDonnell.

- The Lowest Return is on IPTV at -50%, if one does not account for the Jan 2012 Call 40 Strike on SLV utilized by Phil McDonnell.

- Only Two contracts are having a greater than 2 z score and only 3 contracts are having a less than -2 Z score.

Victor Niederhoffer wrote:

One is constantly amazed at the sagacity in their fields of our fellow specs. My goodness, there's hardly a field that one of us doesn't know about from my own hard ball squash rackets to the space advertising or our President, from surfing to astronomy. We certainly have a wide range.

May I suggest without violating our mandate that we consider our best sagacities as to the best ways to make a profit in the next year of 2011.

My best trades always start with assuming that whatever didn't work the most last year will work the best this year, and whatever worked the best last year will work the worst this year. I'd be bullish on bonds and bearish on stocks, bullish on Japan and bearish on US stocks.

I'd bet against the banks because Ron Paul is going to be watching them and the cronies in the institutions will not be able to transfer as much resources as they've given them in the past 2 years which has to be much greater in value than their total market value.

I keep wondering what investments I should make based on the hobo's visit and I guess it has to be generic drugs and foods.

What ideas do you have for 2011 that might be profitable? To make it interesting I'll give a prize of 2500 to the best forecast, based on results as of the end of 2011.

David Hillman writes: 

"I do know that a sagging Market keeps my units from being full."

One would suggest it is a sagging 'economy' contributing to vacancy, not a sagging 'market'. There is a difference. 

Ken Drees, appointed moderator of the contest, clearly states the new rules of the game:

1. Submissions for contest entries must be made on the last two days of 2010, December 30th or 31st.
2. Entries need to be labeled in subject line as "2011 contest investment prediction picks" or something very close so that we know this is your official entry.
3. Entries need 3 predictions and 1 wildcard trade prediction (anything goes on the wildcard).

4. Extra predictions may be submitted and will be judged as extra credit. This will not detract from the main predictions and may or may not be judged at all.

5. Extra predictions will be looked on as bravado– if you've got it then flaunt it. It may pay off or you may give the judge a sour palate.

The desire to have entries coming in at years end is to ensure that you have the best data as to year end 2010 and that you don't ignite someone else to your wisdom.

Market direction picks are wanted:

Examples: 30 year treasury yield will fall to 3% in 2011, S&P 500 will hit "x" by June, and then by "y" by December 2011.

The more exact your prediction is, the more weight will be given. The more exact your prediction, the more weight you will receive if right and thus the more weight you will receive if wrong. If you predict that copper will hit 5.00 dollars in 2011 and it does you will be given a great score, if you say that copper will hit 5.00 dollars in march and then it will decline to4.35 and so forth you will be judged all along that prediction and will receive extra weight good or bad. You decide on how detailed your submission is structured.

Will you try to be precise (maybe foolhardy) and go for the glory? Or will you play it safe and not stand out from the crowd? It is a doubled edged sword so its best to be the one handed market prognosticator and make your best predictions. Pretend these predictions are some pearls that you would give to a close friend or relative. You may actually help a speclister to make some money by giving up a pearl, if that speclister so desires to act upon a contest–G-d help him or her.

Markets can be currency, stocks, bonds, commodities, etc. Single stock picks can be given for the one wildcard trade prediction. If you give multiple stock picks for the wildcard then they will all be judged and in the spirit of giving a friend a pearl–lets make it "the best of the best, not one of six".

All judgments are the Chair's. The Chair will make final determination of the winner. Entries received with less than 3 market predictions will not be considered. Entries received without a wildcard will be considered.The spirit of the contest is "Give us something we can use".

Bill Rafter adds: 

Suggestion for contest:

"Static" entry: A collection of up to 10 assets which will be entered on the initial date (say 12/31/2010) and will be unaltered until the end data (i.e. 12/31/2011). The assets could be a compilation of longs and shorts, or could have the 10 slots entirely filled with one asset (e.g. gold). The assets could also be a yield and a fixed rate; that is one could go long the 10-year yield and short a fixed yield such as 3 percent. This latter item will accommodate those who want to enter a prediction but are unsure which asset to enter as many are unfamiliar with the various bond coupons.

"Rebalanced" entry: A collection of up to 10 assets which will be rebalanced on the last trading day of each month. Although the assets will remain unchanged, their percentage of the portfolio will change. This is to accommodate those risk-averse entrants employing a mean-reversion strategy.

Both Static and Rebalanced entries will be judged on a reward-to-risk basis. That is, the return achieved at the end of the year, divided by the maximum drawdown (percentage) one had to endure to achieve that return.

Not sure how to handle other prognostications such as "Famous female singer revealed to be man." But I doubt such entries have financial benefits.

I'm willing to be an arbiter who would do the rebalancing if necessary. I am not willing to prove or disprove the alleged cross-dressers.

Ralph Vince writes:

A very low volume bar on the weekly (likely, the first of two consecutive) after a respectable run-up, the backdrop of rates having risen in recent weeks, breadth having topped out and receding - and a lunar eclipse on the very night of the Winter Solstice.

If I were a Roman General I would take that as a sign to sit for next few months and do nothing.

I'm going to sit and do nothing.

Sounds like an interim top in an otherwise bullish, long-term backdrop.

Gordon Haave writes: 

My three predictions:

Gold/ silver ratio falls below 25 Kenyan stock market outperforms US by more than 10%

Dollar ends 10% stronger compared to euro

All are actionable predictions.

Steve Ellison writes:

I did many regressions looking for factors that might predict a year-ahead return for the S&P 500. A few factors are at extreme values at the end of 2010.

The US 10-year Treasury bond yield at 3.37% is the second-lowest end-of year yield in the last 50 years. The S&P 500 contract is in backwardation with the front contract at a 0.4% premium to the next contract back, the second highest year-end premium in the 29 years of the futures.

Unfortunately, neither of those factors has much correlation with the price change in the S&P 500 the following year. Here are a few that do.

The yield curve (10-year yield minus 3-month yield) is in the top 10% of its last 50 year-end values. In the last 30 years, the yield curve has been positively correlated with year-ahead changes in the S&P 500, with a t score of 2.17 and an R squared of 0.143.

The US unemployment rate at 9.8% is the third highest in the past 60 years. In the last 30 years, the unemployment rate has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.90 and an R squared of 0.028.

In a variation of the technique used by the Yale permabear, I calculated the S&P 500 earnings/price ratio using 5-year trailing earnings. I get an annualized earnings yield of 4.6%. In the last 18 years, this ratio has been positively correlated with year-ahead changes in the S&P 500, with a t score of 0.92 and an R squared of
0.050.

Finally, there is a negative correlation between the 30-year S&P 500 change and the year-ahead change, with a t score of -2.28 and an R squared of 0.094. The S&P 500 index price is 9.27 times its price of 30 years ago. The median year-end price in the last 52 years was 6.65 times the price 30 years earlier.

Using the predicted values from each of the regressions, and weighting the predictions by the R squared values, I get an overall prediction for an 11.8% increase in the S&P 500 in 2011. With an 11.8% increase, SPY would close 2011 at 140.52.

Factor                  Prediction      t       N    R sq
US Treasury yield curve      1.162    2.17      30   0.143
30-year change               1.052   -2.28      52   0.094
Trailing 5-year E/P          1.104    0.92      18   0.050
US unemployment rate         1.153    0.90      30   0.028

Weighted total               1.118
SPY 12/30/10               125.72
Predicted SPY 12/30/11     140.52

Jan-Petter Janssen writes: 

PREDICTION I - The Inconvenient Truth The poorest one or two billion on this planet have had enough of increasing food prices. Riots and civil unrest force governments to ban exports, and they start importing at any cost. World trade collapses. Manufacturers of farm equipment will do extremely well. Buy the most undervalued producer you can find. My bet is
* Kverneland (Yahoo: KVE.OL). NOK 6.50 per share today. At least NOK 30 on Dec 31th 2011.

PREDICTION II - The Ultimate Bubble The US and many EU nations hold enormous gold reserves. E.g. both Italy and France hold the equivalent of the annual world production. The gold meme changes from an inflation hedge / return to the gold standard to (a potential) over-supply from the selling of indebted nations. I don't see the bubble bursting quite yet, but
* Short gold if it hits $2,000 per ounce and buy back at $400.

PREDICTION III - The Status Quo Asia's ace is cheap labor. The US' recent winning card is cheap energy through natural gas. This will not change in 2011. Henry Hub Feb 2011 currently trades at $4.34 per MMBtu. Feb 2012 is at $5.14. I would
* Short the Feb 2012 contract and buy back on the last trading day of 2011.

Vince Fulco predicts:

This is strictly an old school, fundamental equity call as my crystal ball for the indices 12 months out is necessarily foggy. My recommendation is BP equity primarily for the reasons I gave earlier in the year on June 5th (stock closed Friday, June 4th @ $37.16, currently $43.53). It faced a hellish downdraft post my mention for consideration, primarily due to the intensification of news flow and legal unknowns (Rocky articulated these well). Also although the capital structure arb boys savaged the equity (to 28ish!), it is up nicely to year's end if one held on and averaged in with wide scales given the heightened vol.

Additional points/guesstimates are:

1) If 2010 was annus horribilis, 2011 with be annus recuperato. A chastened mgmt who have articulated they'll run things more conservatively will have a lot to prove to stakeholders.

2) Dividend to be re-instated to some level probably by the end of the second quarter. I am guessing $1.00 annualized per ADS as a start (or
2.29%), this should bring in the index hugging funds with mandates for only holding dividend payers. There is a small chance for a 1x special dividend later in the year.

3) Crude continues to be in a state of significant profitability for the majors in the short term. It would appear finding costs are creeping however.

4) The lawsuits and additional recoveries to be extracted from the settlement fund and company directly have very long tails, on the order of 10 years.

5) The company seems fully committed to sloughing off tertiary assets to build up its liquid balance sheet. Debt to total capital remains relatively low and manageable.

6) The stock remains at a significant discount to its better-of breed peers (EV/normalized EBITDA, Cash Flow, etc) and rightly so but I am betting the discount should narrow back to near historical levels.

Potential negatives:

1) The company and govt have been vastly understating the remaining fuel amounts and effects. Release of independent data intensifies demands for a much larger payout by the company closer to the highest end estimates of $50-80B.

2) It experiences another similar event of smaller magnitude which continues to sully the company's weakened reputation.

3) China admits to and begins to fear rampant inflation, puts the kabosh to the (global) economy and crude has a meaningful decline the likes of which we haven't seen in a few years.

4) Congress freaks at a >$100-120 price for crude and actually institutes an "excess profits" tax. Less likely with the GOP coming in.

A buy at this level would be for an unleveraged, diversified, longer term acct which I have it in. However, I am willing to hold the full year or +30% total return (including special dividend) from the closing price of $43.53 @ 12/30/10, whichever comes first. Like a good sellside recommendation, I believe the stock has downside of around 20% (don't they all when recommended!?!) where I would consider another long entry depending on circumstances (not pertinent to the contest).

Mr. Albert enters: 

Single pick stock ticker is REFR

The only way this gold chain wearing day trader has a chance against all the right tail brain power on the list is with one high risk/high reward put it all on red kind of micro cap.

Basic story is this company owns all the patents to what will become the standard for switchable glazings (SPD smart glass). It's taken roughly 50 years of development to get a commercialized product, and next year Mercedes will almost without doubt use SPD in the 2012 SLK (press launch 1/29/11 public launch at the Geneva auto show in march 2011).

Once MB validate the tech, mass adoption and revenues will follow etc and this 'show me' stock will rocket to the moon.

Dan Grossman writes:

Trying to comply with and adapt the complex contest rules (which most others don't seem to be following in any event) to my areas of stock market interest:

1. The S&P will be down in the 1st qtr, and at some point in the qtr will fall at least

2. For takeover investors: GENZ will (finally) make a deal to be acquired in the 1st qtr for a value of at least $80; and AMRN after completion of its ANCHOR trial will make a deal to be acquired for a price of at least $8.

3. For conservative investors: Low multiple small caps HELE and DFG will be up a combined average of 20% by the end of the year.

For my single stock pick, I am something of a johnny-one-note: MNTA will be up lots during the year — if I have to pick a specific amount, I'd say at least 70%. (My prior legal predictions on this stock have proved correct but the stock price has not appropriately reflected same.)

Finally, if I win the contest (which I think is fairly likely), I will donate the prize to a free market or libertarian charity. I don't see why Victor should have to subsidize this distinguished group that could all well afford an contest entrance fee to more equitably finance the prize.

Best to all for the New Year,

Dan 

Gary Rogan writes:

1. S&P 500 will rise 3% by April and then fall 12% from the peak by the end of the year.
2. 30 year treasury yields will rise to 5% by March and 6% by year end.
3. Gold will hit 1450 by April, will fall to 1100 by September and rise to 1550 by year end.

Wildcard: Short Netflix.

Jack Tierney, President of the Old Speculator's Club, writes: 

Equal Amounts in:

TBT (short long bonds)
YCS (short Yen)
GRU (Long Grains - heavy on wheat)
CHK (Long NG - takeover)

(Wild Card)
BONXF.PK or BTR.V (Long junior gold)

12/30 closing prices (in order):
37.84
15.83
7.20
25.97

.451

Bill Rafter writes:

Two entries:

Buy: FXP and IRWD

Hold for the entire year.

William Weaver writes:

For Returns: Long XIV January 21st through year end

For Return/Risk: Long XIV*.30 and Long VXZ*.70 from close today

I hope everyone has enjoyed a very merry holiday season, and to all I wish a wonderful New Year.

Warmest,

William

Ken Drees writes:

Yes, they have been going up, but I am going contrary contrary here and going with the trends.

1. Silver: buy day 1 of trading at any price via the following vehicles: paas, slw, exk, hl –25% each for 100% When silver hits 39/ounce, sell 10% of holdings, when silver hits 44/ounce sell 30% of holdings, when silver hits 49 sell 60%–hold rest (divide into 4 parts) and sell each tranche every 5 dollars up till gone–54/oz, 59, 64, 69.

2. Buy GDXJ day 1 (junior gold miner etf)—rotation down from majors to juniors with a positive gold backdrop. HOLD ALL YEAR.

3. USO. Buy day 1 then do—sell 25% at 119/bbl oil, sell 80% at 148/bbl, sell whats left at 179/bbl or 139/bbl (whichever comes first after 148)

wildcard: AMEX URANUIM STOCKS. UEC, URRE, URZ, DNN. 25% EACH, buy day 1 then do SELL 70% OF EVERYTHING AT 96$LB u http://www.uxc.com/ FOR PRICING, AND HOLD REST FOR YEAR END.

Happy New Year!

Ken Drees———keepin it real.

Sam Eisenstadt forecasts:

My forecast for the S&P 500 for the year ending Dec 31, 2011;

S&P 500       1410

Anton Johnson writes: 

Equal amounts allocated to:

EDZ Short moc 1-21-2011, buy to cover at 50% gain, or moc 12/30/2011

VXX Short moc 1-21-2011, buy to cover moc 12/30/2011

UBT Short moo 1-3-2011, buy to cover moc 12/30/2011

Scott Brooks picks: 

 RTP
TSO
SLV
LVS

Evenly between the 4 (25% each)

Sushil Kedia predicts:

 Short:

1) Gold
2) Copper
3) Japanese Yen

30% moves approximately in each, within 2011.

Rocky Humbert writes:

(There was no mention nor requirement that my 2011 prediction had to be in English. Here is my submission.) … Happy New Year, Rocky

Sa aking mahal na kaibigan: Sa haba ng 2010, ako na ibinigay ng ilang mga ideya trading na nagtrabaho sa labas magnificently, at ng ilang mga ideya na hindi na kaya malaki. May ay wala nakapagtataka tungkol sa isang hula taon dulo, at kung ikaw ay maaaring isalin ito talata, ikaw ay malamang na gawin ang mas mahusay na paggawa ng iyong sariling pananaliksik kaysa sa pakikinig sa mga kalokohan na ako at ang iba pa ay magbigay. Ang susi sa tagumpay sa 2011 ay ang parehong bilang ito ay palaging (tulad ng ipinaliwanag sa pamamagitan ng G. Ed Seykota), sa makatuwid: 1) Trade sa mga kalakaran. 2) Ride winners at losers hiwa. 3) Pamahalaan ang panganib. 4) Panatilihin ang isip at diwa malinaw. Upang kung saan gusto ko idagdag, fundamentals talaga bagay, at kung ito ay hindi magkaroon ng kahulugan, ito ay hindi magkaroon ng kahulugan, at diyan ay wala lalo na pinakinabangang tungkol sa pagiging isang contrarian bilang ang pinagkasunduan ay karaniwang karapatan maliban sa paggawa sa mga puntos. (Tandaan na ito ay pinagkasunduan na ang araw ay babangon na bukas, na quote Seth Klarman!) Pagbati para sa isang malusog na masaya at pinakinabangang 2011, at siguraduhin na basahin www.rockyhumbert.com kung saan ako magsulat sa Ingles ngunit ang aking mga saloobin ay walang malinaw kaysa talata na ito, ngunit inaasahan namin na ito ay mas kapaki-pakinabang.

Dylan Distasio comments: 

Gawin mo magsalita tagalog?

Gary Rogan writes:

After a worthy challenge, Mr. Rogan is now also a master of Google Translate, and a discoverer of an exciting fact that Google Translate calls Tagalog "Filipino". This was a difficult obstacle for Mr. Rogan to overcome, but he persevered and here's Rocky's prediction in English (sort of):

My dear friend: Over the course of 2010, I provided some trading ideas worked out magnificently, and some ideas that are not so great. There is nothing magical about a forecast year end, and if you can translate this paragraph, you will probably do better doing your own research rather than listening to the nonsense that I and others will give. The key to success in 2011 is the same as it always has (as explained by Mr. Ed Seykota), namely: 1) Trade with the trend.

2) Ride cut winners and losers. 3) Manage risk. 4) Keep the mind and spirit clear. To which I would add, fundamentals really matter, and if it does not make sense, it does not make sense, and there is nothing particularly profitable about being a contrarian as the consensus is usually right but turning points. (Note that it is agreed that the sun will rise tomorrow, to quote Seth Klarman) Best wishes for a happy healthy and profitable 2011, and be sure to read www.rockyhumbert.com which I write in English but my attitude is nothing clearer than this paragraph, but hopefully it is more useful.

Tim Melvin writes:

Ah the years end prediction exercise. It is of course a mostly useless exercise since not a one of us can predict what shocks, positive or negative, the world and the markets could see in 2011. I find it crack up laugh out loud funny that some pundits come out and offer up earnings estimates, GDP growth assumptions and interest rate guesses to give a precise level for the year end S&P 500 price. You might as well numbers out of a bag and rearrange them by lottery to come up with a year end number. In a world where we are fighting two wars, a hostile government holds the majority of our debt and several sovereign nations continually teeter on the edge of oblivion it's pretty much ridiculous to assume what could happen in the year ahead. Having said that, as my son's favorite WWE wrestler when he was a little guy used to say "It's time to play the game!"

Ill start with bonds. I have owned puts on the long term treasury market for two years now. I gave some back in 2010 after a huge gain in 2009 but am still slightly ahead. Ill roll the position forward and buy January 2012 puts and stay short. When I look at bods I hear some folks talking about rising basic commodity prices and worrying about inflation. They are of course correct. This is happening. I hear some other really smart folks talking of weak real estate, high jobless rates and the potential for falling back into recession. Naturally, they are also exactly correct. So I will predict the one thing no one else is. We are on the verge of good old fashioned 1970s style stagflation. Commodity and basic needs prices will accelerate as QE2 has at least stimulated demand form emerging markets by allowing these wonderful credits to borrow money cheaper than a school teacher with a 750 FICO score. Binds go lower as rates spike. Our economy and balance sheet are a mess and we have governments run by men in tin hats lecturing us on fiscal responsibility. How low will they go Tim? How the hell do I know? I just think they go lower by enough for me to profit.

Nor can I tell you where the stock market will go this year. I suspect we have had it too good for too long for no reason so I think we get at least one spectacular gut wrenching, vomit inducing sell off during the year. Much as lower than expected profits exposed the silly valuations of the new paradigm stocks I think that the darling group, retail , will spark a sell-off in the stock market this year. Sales will be up a little bit but except for Tiffany's (TIF) and that ilk margins are horrific. Discounting started early this holiday and grew from there. They will get steeper now that that Santa Claus has given back my credit card and returned to the great white north. The earnings season will see a lot of missed estimates and lowered forecasts and that could well pop the bubble. Once it starts the HFT boys and girls should make sure it goes lower than anyone expects.

Here's the thing about my prediction. It is no better than anyone else's. In other words I am talking my book and predicting what I hope will happen. Having learned this lesson over the years I have learned that when it comes to market timing and market direction I am probably the dumbest guy in the room. Because of that I have trained myself to always buy the stuff that's too cheap not to own and hold it regardless. After the rally since September truly cheap stuff is a little scarce on the ground but I have found enough to be about 40% long going into the year. I have a watch list as long as a taller persons right arm but most of it hover above truly cheap.

Here is what I own going into the year and think is still cheap enough to buy. I like Winn Dixie (WINN). The grocery business sucks right now. Wal mart has crushed margins industry wide. That aside WINN trades at 60% of tangible book value and at some point their 514 stores in the Southeast will attract attention from investors. A takeover here would be less than shocking. I will add Presidential Life (PLFE) to the list. This stock is also at 60% of tangible book and I expect to see a lot of M&A activity in the insurance sector this year and this should raise valuations across the board. I like Miller Petroleum (MILL) with their drilling presence in Alaska and the shale field soft Tennessee. This one trades at 70% of tangible book. Ill add Imperial Sugar (IPSU), Syms (SYMS) and Micron tech (MU) and Avatar Holdings (AVTR) to my list of cheapies and move on for now.

I am going to start building my small bank portfolio this year. Eventually this group becomes the F-you walk away money trade of the decade. As real estate losses work through the balance sheet and some measure of stability returns to the financial system, perhaps toward the end of the year the small baileys savings and loan type banks should start to recover. We will also see a mind blowing M&A wave as larger banks look to gain not just market share but healthy assets to put on the books. Right now these names trade at a fraction of tangible book value. They will reach a multiple of that in a recovery or takeover scenario. Right now I own shares of Shore Bancshares (SHBI), a local bank trading at 80% of book value and a reasonably healthy loan portfolio. I have some other mini microcap banks as well that shall remain my little secret and not used to figure how my predictions work out. I mention them because if you have a mini micro bank in your community you should go meet then bankers, review the books and consider investing if it trades below the magical tangible book value and has excess capital. Flagstar Bancorp(FBC) is my super long shot undated call option n the economy and real estate markets.

I will also play the thrift conversion game heavily this year. With the elimination of the Office of Thrift Services under the new financial regulation many of the benefits of being a private or mutual thrift are going away. There are a ton of mutual savings banks that will now convert to publicly traded banks. A lot of these deals will be priced below the pro forma book value that is created by adding all that lovely IPO cash to the balance sheet without a corresponding increase in the shares outstanding. Right now I have Fox Chase Bancorp (FXCB) and Capital Federal Financial(CFFN). There will be more. Deals are happening every day right now and again I would keep an eye out for local deals that you can take advantage of in the next few months.

I also think that 2011 will be the year of the activist investor. These folks took a beating since 2007 but this should be their year. There is a ton of cash on corporate balance sheets but lots of underperformance in the current economic environment. We will see activist drive takeovers, restructures, and special dividends this year in my opinion. Recent filings of interest include strong activist positions in Surmodics(SRDX), SeaChange International (SEAC), and Energy Solutions. Tracking activist portfolios and 13D filings should be a very profitable activity in 2011.

I have been looking at some interesting new stuff with options as well I am not going to give most of it away just yet but I ll give you one stimulated by a recent list discussion. H and R Black is highly likely to go into a private equity portfolio next year. Management has made every mistake you can make and the loss of RALs is a big problem for the company. However the brand has real value. I do not want town the stock just yet but I like the idea of selling the January 2012 at $.70 to $.75. If you cash secure the put it's a 10% or so return if the stock stays above the strike. If it falls below I' ll be happy to own the stock with a 6 handle net. Back in 2008 everyone anticipated a huge default wave to hit the high yield market. Thanks to federal stimulus money pumping programs it did not happen. However in the spirit of sell the dog food the dog will eat a given moment the hedge fund world raised an enormous amount od distressed debt money. Thanks to this high yield spreads are far too low. CCC paper in particular is priced at absurd levels. These things trade like money good paper and much of it is not. Extend and pretend has helped but if the economy stays weak and interest rates rise rolling over the tsunami f paper due over the next few years becomes nigh onto impossible. I am going take small position in puts on the various high yield ETFs. If I am right they will explode when that market implodes. Continuing to talk my book I hope this happens. Among my nightly prayers is "Please God just one more two year period of asset rich companies with current payments having bonds trade below recovery value and I promise not to piss the money away this time. Amen.

PS. If you add in risk arbitrage spreads of 30% annualized returns along with this I would not object. Love, Tim.

I can't tell you what the markets will do. I do know that I want to own some safe and cheap stocks, some well capitalized small banks trading below book and participate in activist situation. I will be under invested in equities going into the year hoping my watch list becomes my buy list in market stumble. I will have put positions on long T-Bonds and high yield hoping for a large asymmetrical payoff.

Other than that I am clueless.

Kim Zussman comments: 

Does anyone else think this year is harder than usual to forecast? Is it better now to forecast based on market fundamentals or mass psychology? We are at a two year high in stocks, after a huge rally off the '09 bottom that followed through this year. One can make compelling arguments for next year to decline (best case scenarios already discounted, prior big declines followed by others, volatility low, house prices still too high, FED out of tools, gov debt/gdp, Roubini says so, benefits to wall st not main st, persistent high unemployment, Year-to-year there is no significant relationship, but there is a weak down tendency after two consecutive up years. ). And compelling arguments for up as well (crash-fears cooling, short MA's > long MA's, retail investors and much cash still on sidelines, tax-cut extended, employee social security lowered, earnings increasing, GDP increasing, Tepper and Goldman say so, FED herding into risk assets, benefits to wall st not main st, employment starting to increase).

Is the level of government market-intervention effective, sustainable, or really that unusual? The FED looks to be avoiding Japan-style deflation at all costs, and has a better tool in the dollar. A bond yields decline would help growth and reduce deflation risk. Increasing yields would be expected with increasing inflation; bad for growth but welcomed by retiring boomers looking for fixed income. Will Obamacare be challenged or defanged by states or in the supreme court? Will 2011 be the year of the muni-bubble pop?

A ball of confusion!

4 picks in equal proportion:

long XLV (health care etf; underperformed last year)

long CMF (Cali muni bond fund; fears over-wrought, investors still need tax-free yield)

short GLD (looks like a bubble and who needs gold anyway)

short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than vigilantism)

Alan Millhone writes:

Hello everyone,

I note discussion over the rules etc. Then you have a fellow like myself who has never bought or sold through the Market a single share.

For myself I will stick with what I know a little something. No, not Checkers —

Rental property. I have some empty units and beginning to rent one or two of late to increase my bottom line.

I will not venture into areas I know little or nothing and will stay the course in 2011 with what I am comfortable.

Happy New Year and good health,

Regards,

Alan

Jay Pasch predicts: 

2010 will close below SP futures 1255.

Buy-and-holders will be sorely disappointed as 2011 presents itself as a whip-saw year.

99% of the bullish prognosticators will eat crow except for the few lonely that called for a tempered intra-year high of ~ SPX 1300.

SPX will test 1130 by April 15 with a new recovery high as high as 1300 by the end of July.

SPX 1300 will fail with new 2011 low of 1050 before ending the year right about where it started.

The Midwest will continue to supply the country with good-natured humble stock, relatively speaking.

Chris Tucker enters: 

Buy and Hold

POT
MS
CME

Wildcard:  Buy and Hold AVAV

Gibbons Burke comments: 

Mr. Ed Seykota once outlined for me the four essential rules of trading:

1) The trend is your friend (till it bends when it ends.)

2) Ride your winners.

3) Cut your losses short.

4) Keep the size of your bet small.

Then there are the "special" rules:

5) Follow all the rules.

and for masters of the game:

6) Know when to break rule #5

A prosperous and joy-filled New Year to everyone.

Cheers,

Gibbons

John Floyd writes:

In no particular order with target prices to be reached at some point in 2011:

1) Short the Australian Dollar:current 1.0220, target price .8000

2) Short the Euro: current 1.3375, target price 1.00

3) Short European Bank Stocks, can use BEBANKS index: current 107.40, target 70

A Mr. Krisrock predicts: 

1…housing will continue to lag…no matter what can be done…and with it unemployment will remain

2…bonds will outperform as republicans will make cutting spending the first attack they make…QE 2 will be replaced by QE3

3…with every economist in the world bullish, stocks will underperform…

4…commodities are peaking ….

Laurel Kenner predicts: 

After having made monkeys of those luminaries who shorted Treasuries last year, the market in 2011 has had its laugh and will finally carry out the long-anticipated plunge in bond prices.

Short the 30-year bond futures and cover at 80.

Pete Earle writes:

All picks are for 'all year' (open first trading day/close last trading day).

1. Long EUR/USD
2. Short gold (GLD)

Short:
MMR (McMoran Exploration Corp)
HDIX (Home Diagnostics Inc)
TUES (Tuesday Morning Corp)

Long:
PBP (Powershares S&P500 Buy-Write ETF)
NIB (iPath DJ-UBS Cocoa ETF)
KG (King Pharmaceuticals)

Happy New Year to all,

Pete Earle

Paolo Pezzutti enters: 

If I may humbly add my 2 cents:

- bearish on S&P: 900 in dec
- crisis in Europe will bring EURUSD down to 1.15
- gold will remain a safe have haven: up to 1500
- big winner: natural gas to 8

J.T Holley contributes: 

Financials:

The Market Mistress so eloquently must come first and foremost. Just as daily historical stats point to betting on the "unchanged" so is my S&P 500 trade for calendar year 2011. Straddle the Mistress Day 1. My choice for own reasons with whatever leverage is suitable for pain thresholds is a quasi straddle. 100% Long and 50% Short in whatever instrument you choose. If instrument allows more leverage, first take away 50% of the 50% Short at suitable time and add to the depreciated/hopefully still less than 100% Long. Feel free to add to the Long at this discretionary point if it suits you. At the next occasion that is discretionary take away remaining Short side of Quasi Straddle, buckle up, and go Long whatever % Long that your instrument or brokerage allows till the end of 2011. Take note and use the historical annual standard deviation of the S&P 500 as a rudder or North Star, and throw in the quarterly standard deviation for testing. I think the ambiguity of the current situation will make the next 200-300 trading days of data collection highly important, more so than prior, but will probably yield results that produce just the same results whatever the Power Magnification of the Microscope.

Long the U.S. Dollar. Don't bother with the rest of the world and concern yourself with which of the few other Socialist-minded Country currencies to short. Just Long the U.S. Dollar on Day 1 of 2011. Keep it simple and specialize in only the Long of the U.S. Dollar. Cataclysmic Economic Nuclear Winter ain't gonna happen. When the Pastor preaches only on the Armageddon and passes the plate while at the pulpit there is only one thing that happens eventually - the Parish dwindles and the plate stops getting filled. The Dollar will bend as has, but won't break or at least I ain't bettin' on such.

Ala Mr. Melvin, Short any investment vehicle you like that contains the words or numerals "perpetual maturity", "zero coupon" and "20-30yr maturity" in their respective regulated descriptions, that were issued in times of yore. Unfortunately it doesn't work like a light switch with the timing, remember it's more like air going into a balloon or a slow motion see-saw. We always want profits initially and now and it just doesn't work that way it seems in speculation. Also, a side hedge is to start initially looking at any financial institution that begins, dabbles, originates and gains high margin fees from 50-100 year home loans or Zero-Coupon Home Loans if such start to make their way Stateside. The Gummit is done with this infusion and cheer leading. They are in protection mode, their profit was made. Now the savy financial engineers that are left or upcoming will continue to find ways to get the masses to think they "Own" homes while actually renting them. Think Car Industry '90-'06 with. Japan did it with their Notes and I'm sure some like-minded MBA's are baiting/pushing the envelopes now in board rooms across the U.S. with their profitability and ROI models, probably have ditched the Projector and have all around the cherry table with IPads watching their presentation. This will ultimately I feel humbly be the end of the Mortgage Interest Deduction as it will be dwindled down to a moot point and won't any longer be the leading tax deduction that it was created to so-called help.

Metals:

Short Gold, Short it, Short it more. Take all of your emotions and historical supply and demand factors out of the equation, just look at the historical standard deviation and how far right it is and think of Buzz Lightyear in Toy Story and when he thought he was actually flying and the look on his face at apex realization. That plus continue doing a study on Google Searches and the number of hits on "stolen gold", "stolen jewelery", and Google Google side Ads for "We buy Gold". I don't own gold jewelery, and have surrendered the only gold piece that I ever wore, but if I was still wearing it I'd be mighty weary of those that would be willing to chop a finger off to obtain. That ain't my fear, that's more their greed.

Long lithium related or raw if such. Technology demands such going forward.

Energy:

Long Natural Gas. Trading Day 1 till last trading day of the year. The historic "cheap" price in the minds of wannabe's will cause it to be leveraged long and oft with increasing volume regardless of the supply. Demand will follow, Pickens sowed the seeds and paid the price workin' the mule while plowin'. De-regulation on the supply side of commercial business statements is still in its infancy and will continue, politics will not beat out free markets going into the future.

Long Crude and look to see the round 150 broken in years to come while China invents, perfects, and sees the utility in the Nuclear fueled tanker.

Long LED, solar, and wind generation related with tiny % positions. Green makes since, its here to stay and become high margined profitable businesses.

Agriculture:

Short Sugar. Sorry Mr. Bow Tie. Monsanto has you Beet! That being stated, the substitute has arrived and genetically altered "Roundup Ready" is here to stay no matter what the Legislative Luddite Agrarians try, deny, or attempt. With that said, Long MON. It is way more than a seed company. It is more a pharmaceutical engineer and will bring down the obesity ridden words Corn Syrup eventually as well. Russia and Ireland will make sure of this with their attitudes of profit legally or illegally.

Prepare to long in late 2011 the commercialized marijuana and its manufacturing, distribution companies that need to expand profitability from its declining tobacco. Altria can't wait, neither can Monsanto. It isn't a moral issue any longer, it's a financial profit one. We get the joke, or choke? If the Gummit doesn't see what substitutes that K2 are doing and the legal hassles of such and what is going on in Lisbon then they need to have an economic lesson or two. It will be a compromise between the Commercial Adjective Definition Agrarians and Gummit for tax purposes with the Green theme continuing and lobbying.

Short Coffee, but just the 1st Qtr of 2011. Sorry Seattle. I will also state that there will exist a higher profit margin substitute for the gas combustible engine than a substitute for caffeine laden coffee.

Sex and Speculation:

Look to see www.fyretv.com go public in 2011 with whatever investment bank that does such trying their best to be anonymous. Are their any investment banks around? This Boxxx will make Red Box blush and Apple TV's box envious. IPTV and all related should be a category that should be Longed in 2011 it is here to stay and is in it's infancy. Way too many puns could be developed from this statement. Yes, I know fellas the fyre boxxx is 6"'s X 7"'s.

Music:

This is one category to always go Long. I have vastly improved my guitar playin' in '10 and will do so in '11. AAPL still has the edge and few rivals are even gaining market share and its still a buy on dips, sell on highs empirically counted. They finally realized that .99 cents wasn't cutting it and .69 cents was more appropriate for those that have bought Led Zeppelin IV songs on LP, 8-track, cassette, and CD over the course of their lives. Also, I believe technology has a better shot at profitably bringing music back into public schools than the Federal or State Gummits ever will.

Other:

Long - Your mind. Double down on this Day 1 of 2011. It's the most capable, profitable thing you have going for you. I just learned this after the last 36 months.

Long - Counting, you need it now more than ever. It's as important as capitalism.

Long - Being humble, it's intangible but if quantified has a STD of 4 if not higher.

Long - Common Sense.

Long - Our Children. The media is starting to question if their education is priceless, when it is, but not in their context or jam.

Short - Politics. It isn't a spectator sport and it has been made to be such.

Short - Fear, it is way way been played out. Test anything out there if you like. I have. It is prevalent still and disbelief is rampant.

Long - Greed, but don't be greedy just profitable. Wall Street: Money Never Sleeps was the pilot fish.

I had to end on a Long note.

Happy New Year's Specs. Thanks to all for support over the last four years. I finally realized that it ain't about being right or wrong, just profitable in all endeavors. Too many losses led to this, pain felt after lookin' within, and countin' ones character results with pen/paper.

Russ Sears writes:

For my entry to the contest, I will stick with the stocks ETF, and the index markets and avoid individual stocks, and the bonds and interest rates. This entry was thrown together rather quickly, not at all an acceptable level if it was real money. This entry is meant to show my personal biases and familiarity, rather than my investment regiment. I am largely talking my personal book.

Therefore, in the spirit of the contest , as well as the rules I will expose my line of thinking but only put numbers on actual entry predictions. Finally, if my caveats are not warning enough, I will comment on how a prediction or contest entry differs from any real investment. I would make or have made.

The USA number one new product export will continue to be the exportation of inflation. The printing of dollars will continue to have unintended consequences than its intended effect on the national economy but have an effect on the global economy.. Such monetary policy will hit areas with the most potential for growth: the emerging markets of China and India. In these economies, that spends over half their income on food, food will continue to rise. This appears to be a position opposite the Chairs starting point prediction of reversal of last year's trends.

Likewise, the demand for precious metals such as gold and silver will not wane as these are the poor man's hedge against food cost. It may be overkill for the advanced economies to horde the necessities and load up on precious metals Yet, unlike the 70's the US/ European economy no longer controls gold and silver a paradigm shift in thinking that perhaps the simple statistician that uses weighted averages and the geocentric economist have missed. So I believe those entries shorting gold or silver will be largely disappointed. However in a nod to the chair's wisdom, I will not pick metals directly as an entry. Last year's surprise is seldom this year's media darling. However, the trend can continue and gold could have a good year. The exception to the reversal rule seems to be with bubbles which gain a momentum of their own, apart from the fundamentals. The media has a natural sympathy in suggesting a return to the drama of he 70's, the stagflation dilemma, ,and propelling an indicator of doom. With the media's and the Fed's befuddled backing perhaps the "exception" is to be expected. But I certainly don't see metal's impending collapse nor its continued performance.

The stability or even elevated food prices will have some big effects on the heartland.

1. For my trend is your friend pick: Rather than buy directly into a agriculture commodity based index like DBA, I am suggesting you buy an equity agriculture based ETF like CRBA year end price at 77.50. I am suggesting that this ETF do not need to have commodities produce a stellar year, but simply need more confirmation that commodity price have established a higher long term floor. Individually I own several of these stocks and my wife family are farmers and landowners (for full disclosure purposes not to suggest I know anything about the agriculture business) Price of farmland is raising, due to low rates, GSE available credit, high grain prices due to high demand from China/India, ethanol substitution of oil A more direct investment in agriculture stability would be farmland. Farmers are buying tractors, best seeds and fertilizers of course, but will this accelerate. Being wrong on my core theme of stable to rising food/commodity price will ruin this trade. Therefore any real trade would do due diligence on individual stocks, and put a trailing floor. And be sensitive to higher volatility in commodities as well as a appropriate entry and exit level.

2. For the long term negative alpha, short term strength trade: I am going with airlines and FAA at 49.42 at year end. There seems to be finally some ability to pass cost through to the consumer, will it hold?

3. For the comeback of the year trade XHB: (the homebuilders ETF), bounces back with 25% return. While the overbuilding and vacancy rates in many high population density areas will continue to drag the home makes down, the new demand from the heartland for high end houses will rise that is this is I am suggesting that the homebuilders index is a good play for housing regionally decoupling from the national index. And much of what was said about the trading of agriculture ETF, also apply to this ETF. However, while I consider this a "surprise", the surprise is that this ETF does not have a negative alpha or slightly positive. This is in-line with my S&P 500 prediction below. Therefore unless you want volatility, simply buying the S&P Vanguard fund would probably be wiser. Or simply hold these inline to the index.

4. For the S&P Index itself I would go with the Vanguard 500 Fund as my vehicle VFINXF, and predict it will end 2011 at $145.03, this is 25% + the dividend. This is largely due to how I believe the economy will react this year. 

5. For my wild card regional banks EFT, greater than IAT > 37.50 by end 2011…

Yanki Onen writes:

I would like to thank all for sharing their insights and wisdom. As we all know and reminded time to time, how unforgiven could the market Mistress be. We also know how nurturing and giving it could be. Time to time i had my share of falls and rises. Everytime I fall, I pick your book turn couple of pages to get my fix then scroll through articles in DSpecs seeking wisdom and a flash of light. It never fails, before you know, back to the races. I have all of you to thank for that.

Now the ideas;

-This year's lagger next year's winner CSCO

Go long Jan 2012 20 Puts @ 2.63 Go long CSCO @ 19.55 Being long the put gives you the leverage and protection for a whole year, to give the stock time to make a move.

You could own 100,000 shares for $263K with portfolio margin ! Sooner the stock moves the more you make (time decay)

-Sell contango Buy backwardation

You could never go wrong if you accept the truth, Index funds always roll and specs dont take physical delivery. This cant be more true in Cotton.

Right before Index roll dates (it is widely published) sell front month buy back month especially when it is giving you almost -30 to do so Sell March CT Buy July CT pyramid this trade untill the roll date (sometime at the end of Jan or begining of Feb) when they are almost done rolling(watch the shift in open interest) close out and Buy May CT sell July CT wait patiently for it to play it out again untill the next roll.

- Leveraged ETFs suckers play!

Two ways to play this one out if you could borrow and sell short, short both FAZ and FAS equal $ amounts since the trade is neutral, execute this trade almost free of margin. One thing is for sure to stay even long after we are gone is volatility and triple leveraged products melt under volatility!

If you cant borrow the shares execute the trade using Jan 12 options to open synthetic short positions. This trade works with time and patience!

Vic, thanks again for providing a platform to listen and to be heard.

Sincerely,

Yanki Onen

Phil McDonnell writes: 

When investing one should consider a diversified portfolio. But in a contest the best strategy is just to go for it. After all you have to be number one.

With that thought in mind I am going to bet it all on Silver using derivatives on the ETF SLV.

SLV closed at 30.18 on Friday.

Buy Jan 2013 40 call for 3.45.
Sell Jan 2012 40 call at 1.80.
Sell Jul 25 put at 1.15.

Net debit is .50.

Exit strategy: close out entire position if SLV ETF reaches a price of 40 or better. If 40 is not reached then exit on 2/31/2011 at the close.

George Parkanyi entered:

For what it's worth, the Great White North weighs in ….
3 Markets equally weighted - 3 stages each (if rules allow) - all trades front months
3 JAN 2011
BUY NAT GAS at open

BUY SILVER at open

BUY CORN at open
28 FEB 2011 (Reverse Positions)
SELL and then SHORT NAT GAS at open

SELL and then SHORT SILVER at open

SELL and then SHORT CORN at open
1 AUG 2011 (Reverse Positions)
COVER and then BUY NAT GAS at open

COVER and then BUY SILVER at open

COVER and then BUY CORN at open
Hold all positions to the end of the year

WILD CARD
3 JAN BUY PLATINUM and hold to end of year.

RATIONALE:

. Markets to unexpectedly carry through in New Year despite correction fears.

. Spain/Ireland debt roll issues - Europe/Euro in general- will be in the news in Q1/Q2

- markets will correct sharply in late Q1 through Q2 (interest rates will be rising)

. Markets will kick in again in Q3 & Q4 with strong finish on more/earlier QE in both Europe and US - hard assets will remain in favour; corn & platinum shortages; cooling trend & economic recovery to favour nat gas

. Also assuming seasonals will perform more or less according to stats

If rules do not allow directional changes; then go long NAT GAS, SILVER, and CORN on 1 AUG 2011 (cash until then); wild card trade the same.

Gratuitous/pointless prediction: At least two European countries will drop out of Euro in 2011 (at least announce it) and go back to their own currency. 

Marlowe Cassetti enters:

Buy:
FXE - Currency Shares Euro Trust

XLE - Energy Select

BAL - iPath Dow Jones-AIG Cotton Total Return Sub-Index

GDXJ - Market Vectors Junior Gold Miners

AMJ - JPMorgan Alerian MLP Index ETN

Wild Card:

Buy:

VNM - Market Vectors Vietnam ETF

Kim Zussman entered: 

long XLV (health care etf; underperformed last year)
long CMF (Cali muni bond fund; fears over-wrought, investors still
need tax-free yield)
short GLD (looks like a bubble and who needs gold anyway)
short IEF (7-10Y treasuries; near multi-year high/QE2 is weaker than
vigilantism)

Dec

30

The Chair offers a meal in the ideas of forgetting and trying to start fresh in trading every day, week, month. In my case I tend to remember and overweight the large losses and not the average gains. This leads to trading too infrequently and then being subject to adverse selection. Sometimes forgetting is a good thing. This past year it would be hard to forget the intra hour move of 10% in May, or intra month move of 25% in Oct 2008. Though they deserve some consideration, their likelihood of occurring again is probably overweighted for me. I am reading a book called Waves where it documents a 1700 foot wave that hit Lituya Bay Alaska in 1958. How many fishermen would ever venture out if they dwelled on the past too much? I have found in tennis, I often play better after a period of not playing, as I forget my bad habits. For some reason I manage to remember the core fundamentals. This affect unfortunately wears off when the dreaded reversion to the mean takes hold.

Ralph Vince comments: 

Interesting observation Duncan. I am of a similar mindset, have been working with the idea the past 12 months and have drawn the conclusion therefrom that "expectation," the probability-weighted sum of possible outcomes, aka "Mathematical Expectation," of what might happen, is not only NOT how human beings asses risk-opportunities, and rightly so. If we did, the analogy I like to use is, we would never board a flight.

But we DO board a flight, knowing there is an incredibly small probability of never arriving at our destination. Why? Because we "expect" to arrive at our destination.

In fact, the notion of Mathematical expectation is really a mere proxy (and a poor one at that) for assessing risk-opportunities compared to what we should use.

Thinking about writing a book on this. The problem is it ties into everything else I have ever worked on, and a lot of it would be redundant.

George Coyle writes:

I too suffer from this problem. This is obviously tough for those trading with casino logic which requires the "house" to play all games (subject to size limits). There is a concept in psychology known as systematic desensitization (http://en.wikipedia.org/wiki/Systematic_desensitization) which attempts to stop responses to fear and anxiety. It might be useful for trading, but presumably one would have to incur many losses to get the benefit. Also, if we check the opposite end of the spectrum (the bank traders who take large risk because they can just jump ship and move to the firm across the street if they lose) it would appear having nothing to lose personally, and thus an asymmetric risk profile, would also result in eventual disaster. So there must be some optimal level of fear/greed/caring/indifference, the efficient frontier of trading emotions. It is difficult to think of how it might be measured and then used.

Craig Mee comments:

This seems to be a catch twenty two here, how individuals receive risk, and how the market does.. As everyone is boarding different flights at different times, surely fear and greed , or lack of …fifo's each other out. 

Ralph Vince adds: 

Put another way, what the casino "expects," and what you, the solitary individual "expects," are not mirror images of each other.

George Coyle adds:

The casino expects a slight positive expected return over the course of time (by virtue of the odds of the games). The only real exception is blackjack in which a player has an edge provided s/he can split aces and double down on split aces. The speculator using a casino approach would expect the same. Basically the central limit theorem says that over a large enough sample the distribution of outcomes will be approximately normal. In this instance both speculators and casinos using this logic assume a slightly positive mean (expectation) to the distribution. So they do expect the same, a profit over time by virtue of the laws above. The amount of said profit varies as markets are not governed by the statistical laws of casino games. So they aren't mirrored, but they have the same trajectory. Both experience runs against the expectation, the goal is to manage emotions such that a big loss does not prevent a speculator from playing the next game which may cause the positive average to be realized. The casino does have the benefit of odds remaining in their favor over infinite time.

Dec

29

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

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

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

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

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

Abstract

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

and

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

Sam Marx writes:

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

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

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

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

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

Ralph Vince writes:

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

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

T.K Marks writes:

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

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

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

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

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

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

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

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

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

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

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

He smiled.

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

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

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

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

One would hope.
 

Dec

29

I'd like to make a couple of points on education.

1. I don't think that the US is capable of making a decision as a nation to pursue proper education. The concept itself is highly collectivist, so it's unlikely to work in anything but a dictatorship, and even then it's hard to implement. Individual people have to make a decision to value education, and however flawed the present system is, the children of many Asian immigrants, for example, have no trouble getting educated extremely well. Culture determines educational achievement to a much greater degree than the available infrastructure, unless it's extremely poor.

2. The country is still capable of attracting the best minds in the world if the conditions are otherwise suitable for entrepreneurship. Any shortages of highly educated workers can be fairly easily solved. There are not millions of engineering and programming jobs that are unfilled because of the lack of suitable candidates. There certainly are some, and the unemployment rate is much lower among the educated, but being a good place to do business will do wonders. That and not having "free trade" with centrally planned economies.

Ralph Vince writes:

That argument assumes my dog can learn calculus. It assumes that dopes can be meliorated to be not dopes."Education," only goes so far. You cannot take your average bozo and make him into a brilliant mathematician any more than I can train hard enough to run a mile in under 6 minutes.

Isn't going to happen– and the fallacy perpetrated by the NEA is that other countries are "Investing in education," and getting results like they are trying to have us believe we can achieve here in the states.

The rest of the planet is bunch of dopes too– only, oddly, more naive than what you find in this ever-so-sophisticated society of America.

Further — jobs aren't being hemorrhaged because the rest of the world outside the states is so smart. They're finding their way to the bottom, to slaver labor present in places elsewhere, and in the case of commodities (like steel) to places with the softer currencies. I propose that education– teaching dogs how to integrate functions– isn't moving jobs around the planet.(Incidentally, the notion that torts cost society I take issue with. Torts cut into insurance company profits, and profits never, ever EVER flow downward. If they did, those pimpy running shoes that cost $150 bucks would be available for $10).

Dec

20

Keynes was interested in markets, and did pretty well. What about Hayek?:

"Keynes was another Kelly-type bettor. His record running Kings College Cambridges Chest Fund is shown in Figure 2 versus the British market index for 1927 to 1945, data from Chua and Woodward (1983). Notice how much Keynes lost the first few years; obviously his academic brilliance and the recognition that he was facing a rather tough market kept him in this job. In total his geometric mean return beat the index by 10.01 per cent. Keynes was an aggressive investor with a beta of 1.78 versus the bench- mark United Kingdom market return, a Sharpe ratio of 0.385, geometric mean returns of 9.12 per cent per year versus Ð0.89 per cent for the benchmark. Keynes had a yearly standard deviation of 29.28 per cent versus 12.55 per cent for the benchmark. These returns do not include Keynes (or the benchmarks) dividends and interest, which he used to pay the college expenses. These were 3 per cent per year. Kelly cowboys have their great returns and losses and embarrassments. Not covering a grain contract in time led to Keynes taking delivery and filling up the famous chapel. Fortunately it was big enough to fit in the grain and store it safely until it could be sold. Keynes emphasized three principles of successful investments in his 1933 report:

1. A careful selection of a few investments (or a few types of investment) having regard to their cheapness in relation to their probable actual and potential intrinsic value over a period of years ahead and in relation to alternative investments at the time; 2. A steadfast holding of these in fairly large units through thick and thin, perhaps for several years until either they have fulfilled their promise or it is evident that they were purchased on a mistake; and 3. A balanced investment position, i.e., a variety of risks in spite of individual holdings being large, and if possible, opposed risks.

Jeff Watson writes:

I could not find much about Hayek's investment performance and speculate that his work in getting a Nobel Prize and publishing seminal works probably attenuated any desire to actively play in the market. Granted, Keynes was a genius……completely wrong about everything, but a genius nonetheless. I notice no comment from his fans on the left about his legendary Anti-semitism, his frequent use of the N-word when describing American Blacks, and his dismissive attitude towards Russians, and other Eastern Europeans who he thought to be the unwashed masses and very ignorant. Still, in his complete wrongness, he provided a very bright beacon for those of us who wish to pursue the correct course. Keynes is our own perfect fade factor, a Douglas "Wrong Way" Corrigan of economics.

Larry Williams writes: 

What an article on this that does not mention Ralph Vince. Oh, I get it…much of his comments are lifted from Ralph, so why let people know he exists? Trade kelly and you are doomed to die.

Ralph Vince responds:

Thank YOU Larry. A couple of things on this.

1. Whenever people start talking "half Kelly," or other ad-hoc locations on a dynamic curve (with respect to the number of plays) I realize they don;t know what they are talking about. It doesn't mean they aren't good mathematicians, they just don;t understand their material well enough. Ziemba has been doing that for years.

How can a man look at the curve and not begin to discern the nature of it beyond that???

2. The "Kelly" Criterion answer is NOT what any of these guys thought it was. It is NOT the optimal fraction to invest. It is a leverage factor — a number not bound between 0 and 1 but 0 and + infinity. Thus, if you treat it as a fraction, you will inadvertently be using a fraction that is way beyond optimal in trading.

3. Once you discern what the real optimal fraction is to invest (and you won't get there with the Kelly Criterion) then you can make intelligent decisions on what value to use as a prediction of where the optimal fraction will be in the forthcoming periods.

All of that if you want to be growth optimal. Go ahead, have at it slugger. The REAL benefit to understanding the nature of the curve of the optimal fraction (not to be confused with Kelly's misguided criterion) is that you can use it to satisfy OTHER objectives aside from the incredibly aggressive growth optimal one.

I don't claim to be the mathematician any of these guys are. But I know I understand this material better than all of them combined.

And I have the real-time track record to prove it.
 

Dec

16

Last night, we lost another baseball great, Bob Feller.

Ralph Vince comments:

He was here all the time, in this little town of Chagrin Falls, (along with a few other old-time MLB pitchers, none in stature to Feller). I don't know if he lived here, or just hung around here. This is the kind of place people come to just to hang. (God alone knows why. This is a bit of a pre-lapsarian place. At the local hardware store, if you need anything metric, you won't find it in this town. Need film? At the drugstore you can get Kodak, but not Fuji or Konika.)

He was not very well liked, not regarded as a pleasant guy at all.

Stefan Jovanovich writes in: 

And, why, pray tell, should it matter a tinker's damn whether the man was "well-liked" or considered "pleasant"? The man had the unfortunate habit of always telling the truth– about baseball and about this country. He and Wahoo Sam Crawford were two of a kind. 

Jack Tierney writes: 

This reminds me of my home town's only claim to major league fame, Jay Hook. Jay was the local hero who made it to the "bigs" but never made a big splash.

He wound up with the Mets and Stengel in the expansion draft and had the honor of pitching the first Mets' win ever. He was a graduate of Northwestern (thermodynamics) so could tie his shoes without help.

Jay's most notable accomplishment, though, (and maybe even the one that lead Stengel to ask "Can anyone here play this game?") occurred as he and another pitcher sat making calculations in the dugout during a game.

Stengel wanted to know what the hell they were doing.

Displaying a sheet containing a host of complex maths calculation Jay told Casey that they were assuming Gibson could throw a curve ball at 90 mph. The problem: Given that speed and distance between home plate and where Gibson released the ball, how many revolutions did the ball make?

I never discovered if they determined the answer as Casey snatched the paper and dumped it.

I don't know if this story ever made the papers but it was related to me by his father, Cecil (proprietor of Cec's Drugstore), over a traditional Sunday morning after-Mass vanilla malt.
 

Nov

20

I love the contrast of this. Living, as we do, essentially day-by-day (and I know some of you trading jocks live it second-by second) with the nearly imerceptible changes in long-term sentiment, the following contrast I find fascinating:

First, the PBS Frontline Series of 1997 and the article today.

And that's perhaps the largest part of why I cannot help but be bullish, especially when my long-term system of rates and breadth is long. Couple that with the fact that we've had a downer decade, a bottom in March of 09 with all kinds of socioeconomic flags (and technical ones as well) consistent with a bottom, the 7 year cycle which bottomed in 09, and I cannot help but think we are at the beginning of a bull market whose magnitude I wouldn;t venture a guess at– it may be feeble, it may not be, I just can't tell.

I know there are many who (quite convincingly) argue that we are in a very long term down period. But suppose they're right. Even in the smash of 08 people MADE money. I even made (a little) money in that period trading stocks from the long side only! There were some who made a lot of money on the short side. So when I hear the woman as in the article today proclaim that the market "Has just gotten weird," I say "So?" Get weird, stay weird. I'm staying long, buying more with limit orders under this market.

Nov

7

As far as I have ever been able to ascertain, Larry Williams was the first to attempt to apply the Kelly Criterion to outright position trading, and the first to openly discuss it. His pursuit in this regard not only was my initial immersion to the ideas, but he funded those attempts. Whatever I've uncovered along the way is a product of that — Larry's unquenchable curiosity, fearlessness regarding risk, and willingness to fund pursuits others would never touch.

A couple of points further in the post worth mentioning here because I think the other interested members deserve to have light shed on some misconceptions, some of which are a little dangerous to ascribe to, but are widely held.

"One "plays" forever, or practically forever."

But no one does and no one can, and it is this very notion of there being a finite "horizon," that changes not only the calculation of a growth optimal fraction, but every other metric related to it, giving rise to an entirely new discipline in and of itself.

"If one is somewhat risk averse, one can establish a half Kelly criterion, essentially betting half one's full Kelly bet. This results in a lower probability of one's bankroll halving."

But why "half?" Why this arbitrary number? (Or any other arbitrary dilution for that matter?) Remember, we're dealing with a function that has an optimal point, implying a curve, and it is the nature of this curve that is important to us. Being at different points on the curve has vastly different implications to us. Further, the various and important watershed points almost all are a function of that "horizon" mentioned earlier, i.e. the points migrate about this curve as a function of that horizon. Advocates of a "Half Kelly," or other arbitrary point along this chronomorphic curve (with respect to the horizon and events transpired) are seemingly unaware of the implications of their arbitrarily-chosen points.

"The criterion is to maximize the expected value of the logarithm of one's bankroll."

Yes, that is the Kelly Criterion which, in trading, does NOT result in the growth optimal fraction but a far more aggressive (and dangerous, without growth-commensurate benefit) number. No one seems to understand this.. The number returned in determining the value that satisfies the Kelly Criterion can be converted into a growth optimal number (which I call the optimal fraction. or optimal f) but in and of itself, the value that satisfies the Kelly Criterion is NOT the growth optimal fraction in trading. Incidentally, the so-called Kelly Formulas (put forth by Thorp I believe, and market applications attempted by Larry Williams in the mid-1980s) do NOT satisfy the Kelly Criterion in trading applications, but DO in gambling ones (that is, in trading applications they will not yield the same results as the value which satisfies the Kelly Criterion. The Kelly Formulas do, for dual-outcome situations, return the growth optimal fraction). For more on this I can only refer those interested to the most recent Journal of the International Federation of Technical Analysts 11 (available at admin at ifta dot org) or the 2-day course on Risk-Opportunity Analysis I am having in Tampa Nov 13 & 14 see http://ralphvince.com)

"The biggest issue of application is that one makes many assumptions about statistical distributions, correlations, returns, etc. that are all wrong."

I agree. In a strange, ironic twist to my modest participation to this story, it was (again, but some decades later) Larry Williams (rather recent) insistence of a way to apply what I know of growth maximization in a robust way. As a result of the pollenization of these ideas by Larry, I can state unequivocally that there are clear, simple, mathematical solutions to these impediments — in short, if someone wishes to apply a growth optimal approach to their future trading, these impediments ARE readily surmountable. But be certain your criterion is growth optimality, and be sure you really want to get into the cage and fight the gorilla. Most just want to sit and watch Dancing with the Stars.

Nick White comments:

Dancing with the stars….brilliant and well said.

We're all fortunate beneficiaries of Mr. Vince's investigations into the intricacies of these issues.

Phil McDonnell writes:

Kelly originally wrote his paper based on race track examples with binary outcome. You won or lost with assumed probabilities and you knew the wager size and payoff. So strictly speaking his formula only applies to wagers with two outcomes. Even a blackjack hand has at least five possible outcomes (win, lose, blackjack, double down, split) and not just two so strictly speaking Kelly's formula does not apply. Some people have erroneously tried to modify the binary Kelly formula by using average win size and average loss size to compute. All such formulas are dead wrong. The reason is that, in general, the average log does not equal the log of the average.

As Larry Williams pointed out most people do not feel comfortable using the optimum log approach even if the math is done correctly. I believe there is a simple reason for this. Most people do not have a simple logarithmic utility function. Rather they seek to maximize ln( ln w), where w is wealth. This is an iterated log function and results in a much more conservative ride. I talk about this distinction toward the end of my book. Ralph Vince also has written extensively on this subject using his term optimal f.

There is another issue with simply maximizing returns and that is it may not really take into account risk in a proper manner. It is true that the log function weights the largest loss the most in a non-linear manner and reduces the weights of gains so that the largest gains are weighted sub-linearly. But that may still not be enough to satisfy one's real risk aversion. That is part of my argument for the iterated log form but it may be that an explicit metric such as standard deviation is still needed.

Larry Williams writes:

Optimal or Maximum Wealth (possible gain) only comes with Maximum Risk; therein lies the problem. Not loosing…risk…is more important than gain in the art of speculation business.

Chris Cooper writes:

More important, as far as my practical experience goes, is that one's estimate of the edge is always subject to uncertainty. The reasons have been discussed on this list before, but certainly include changing regimes, limited history for the models, curve fitting, flexionic machinations, scaling nonlinearity, etc. I relied on the Kelly formula extensively in the mid-'70s when gambling, and uncertainty in your edge was no less important then. The problem arises because overestimating your edge is so destructive to your terminal wealth.

It might be interesting academically to consider an approach, such as Bayesian, where your estimate of the edge is not stationary, but in fact must decrease when you hit a losing streak.

James Arveson writes:

I am a newbie on this site, but I can assure y'all that any finite amounts of outcomes can easily be handled by maximizing the expected value of the logarithm of one's fortune. I have also executed these theoretical outcomes for many years in AC and LV in BJ, and yes, in Bethlehem, PA in Texas Hold 'Em. See Mathematics of Poker for a better exposition of these issues than I could ever present.

Remember that each bet is a single bet, and one can bet forever. Leo Breiman has actually proved that (in the most general cases) that this approach DOMINATES all other strategies.

Now, IMHO, this approach is irrelevant to the market. NO ONE can get all the statistical assumptions correct-statistical distribution, EV, correlation, return, s.d., etc.

Have fun until we get to the next level. Same goes for Markowitz. Check out www.styleadvisor.com. I have no piece of their puzzle but wish I did (I might be able to get a write-off ski trip to Lake Tahoe where they are located).

Actualizing all of this crap may be the next Nobel Prize in Econ, but it will probably not help schlepers make money in the markets.

Ralph Vince replies:

James,

Pursuing awards is for schlepers like Krugman or other academic dweebs –it's an award voted upon by dweebs for dweebs, and its pursuit bridles and constrains the mind (as *any* political pursuit will. Usually, the truth lies with things that - people off). To-wit, the lack of challenge to the notion that Kelly presents on p925 in the conclusion of his now-famous paper wherein he asserts that geometric growth is maximized by the gambler betting a fraction such that "at every bet he maximizes the the expected value of the logarithm of his capital."

This is accepted by the gambling community, and, by extension (falsely, mistakenly) accepted by the trading community. HOWEVER, a critical analysis of this notion reveals that it does NOT result in the growth optimal fraction, but rather in a multiplier of one's account to risk (the two are different indeed, the latter being less than or equal to the former, resulting often in over-wagering). In fact, the multiplier on one's stake equals the optimal fraction to risk only in certain, specific instances which manifest in gambling, but are rare still in trading (e.g. only on long positions, etc.). I would gladly go into this in depth put I cannot publicly do so as the paper on this has been publish in a current issue of a journal, and I have agreed to refer those interested to the article instead. The upshot is, that the Kelly Criterion, as specified above, is not what Kelly and others thought it was except in the special case I just mentioned — it is NOT the growth-optimal fraction, but something different, equal to the growth-optimal fraction only in the special case — a case that manifests in gambling with ubiquity, and oddly, in trading very rarely.

Again, the gambling community has accepted it for reasons mentioned –because it does give you the same answer for the optimal fraction to bet as the formulations for the optimal fraction in the gambling situations. But just because it gives you he same answer as the optimal fraction in special situations does not mean it is the formulation for the optimal fraction –it isn't.

Secondly, even the "optimal fraction"it is never optimal. Suppose you are playing a game with a 50% probability and odds of 2 to 1. Your optimal fraction is .25 (if you were to play forever). However, after the first pay, the phone rings, it;s your wife, and she informs you of an emergency and you have to bolt the game (with your winnings from the one play, make you a popular guy). If you knoew beforehand you were going to only play for 1 play, you should have bet 100% of your stake to maximize your gain. If the call came after two plays in this game, you should have bet .5.

Tomorrow, you come back to this game — and you bet .25, reconciling yourself that yesterday you bet .25. (so….the game possesses memory?)

Wait, it gets worse in trading, where we see that each individual bet is, in fact, NOT a bet. Let's say you trade only XYZ stock, and you put on 300 shares. Let's say you have a stop below your buy price but it;s a different level for each of 100 shares, so you have three stops below the proce for 100 shares each at different levels. Now, let's say onyl the closest stop, for 100 shares, gets hit, resulting in a loss on 100 of the three hundred shares. Weeks later, you sell out 100 shares at a profit, and, a few weeks after that, another 100 shares at a price higher than that.

But these are NOT three separate trades. This is ONE trade, one wager for the purposes of growth-optimal calculations. And the reason is because you are ONLY trading XYZ — there has been NO recalculation of positions to put on until the entire thing has been closed out. IF, on the other hand, you were having other trades throughout the course of your aggregate position in XYZ, then you WOULD consider each of these a separate trade.

Trading is not the same as gambling. There are similarities, but don't make the assumption that because you risk something and gain something that it is the same. There are things which are proxies for truth, that asymptotically appear to be truth, but they are only proxies (such as the Kelly Criterion) as well as the widely-held (in the gambling community, and hence the trading one as well) but incorrect notion that a wager should be assessed based on it's asymptotic mathematical expectation. This too is a mere proxy and an incorrect one that can, in extreme cases, lead one to accept bad wagers and reject favorable ones.

Again, critical thinking has been absent and trumped by the acceptance of industry catechism.

Finally, you speak of SD's and EV (mean-variance is dead incidentally, as dead as dead can be everywhere BUT academia) correlations, and Chris mentions the (valid) problems of assessing the edge in the future and the problem of non-stiationarity.

The solution to growth optimality in the markets, lies in NOT accepting the Kelly Criterion, but instead accepting what IS the growth optimal fraction– because that then reveals (in the simplest of ways!) how to address the problem of non-stationarity in the future and it doesn't require any of these parameters, or even a computer, it's really THAT simple if you want to attempt growth optimality in the future.

Phil McDonnell comments:

Ralph raises a lot of interesting philosophical questions. On some points I disagree, so let me elaborate. For the purposes of this piece I will assume one is entirely risk averse and seeks only to maximize expected wealth on a compounded growth basis.

First he raises the point that there is no guarantee that a game or investment opportunity will continue. Certainly a true statement. However it is also true that there will be a succession of such opportunities available in one's lifetime. Thus some rational basis for choosing bet size each time should include consideration of expected logs of the outcomes.

Philosophically I disagree with Ralph's analysis of bet it all on the last bet. His math is correct, in that it will maximize the expected dollar outcome. But there will always be other bets, so one's lifetime objective should still be to maximize the expected log not simply the arithmetic expected value. I believe Kahneman and Tversky made the same error in their Nobel winning papers.

I have an alternate take on Ralph's argument that it is hard to define a trade because you can put on 300 shares and exit 3 times at different prices, unknowable in advance. Rather than look on each trade as the basic metric one should look on the portfolio as the metric and a basic unit of time as the portfolio re balancing decision point. For example if you invested .25 of your wealth in a trade that doubled you know have .50 of your 1.25 wealth in the trade. That is too much if you want to maintain the .25 ratio so you need to sell .1875 to get back to your optimal ratio. But the simplest way to look at it is to look at the investment portfolio in each time period, be it a day, week or whatever.

One of the reasons the mean covariance model is in disfavor is that it seems to fail when everything hits the fan. In fact the model is incomplete in the sense that EV and COV are stochastic variables and vary over time. (I am implicitly including VAR here.) You need to explicitly include the correlations somehow in order to take into account how an entire portfolio will vary together. Using the formulas for optimal bet size on a trade level will always lead to serious over trading if there are multiple trades put on at the same time except in the case of a negative correlation between the trades. So it is misleading to calculate an optimal trade size for one system or one trade without consideration of any others that might be on at the same time. At best it is a dangerous upper bound for any single trade size. But it will almost always be an estimate too high. Optimization of expected log of wealth can only be done at the portfolio level.

Ralph Vince responds:

Philip,

I am not raising ANY "philosophical questions." Just because people may have to think about them doesn't make them philosophical questions as opposed to facts:

1. The value that satisfies the Kelly Criterion is NOT the (growth) optimal fraction of ones stake to risk (although, in special circumstances which we find ubiquitously in gambling and not in trading, it is an equivalent value to the value that IS the optimal fraction). And the pervasive mistake by those attempting growth maximization in the marketplace of using the Kelly Criterion result puts then OVER exposed, to their unwitting peril. They are NOT growth optimal. In fact, the value that satisfies the Kelly Criterion NEVER returns the growth optimal fraction. This was a mistake on the part of Kelly and Shannon. The very fact that it is still accepted by others is testimony to the absence of critical thinking in this matter.

2. Further, what IS the growth optimal fraction is a function of the horizon of the game — and all games have a horizon, including the game of evolution on earth. Further, all metrics, including the analysis of drawdowns (including VAR where a horizon of 1 is implicit), even the analysis of whether a wager should be accepted or not, are a function of horizon. Disregarding the horizon leads us to incorrect conclusions at every turn in risk-opportunity analysis. In fact, it is the necessary introduction of "horizon" that gives rise to this entire burgeoning discipline.

3. Once we accept points 1 and 2 above, the obvious solution to solving for the non-stationarity of the distribution of outcomes we are dealing with becomes obvious. Growth-maximization, unlike attempts at it in the past, now CAN be performed with informed assessments of what the best growth optimal fraction value to use in the future will be.
 

— keep looking »

Archives

Resources & Links

Search