Apr

14

Bloomberg news picked up this article. I am not endorsing the paper, its methodology nor its conclusions. But counters should heed the underlying message. Especially Kora. I find it surprising that he doesn't look at the multiple comparison issue nor cite Bonferroni etc, but rather prefers to ask the question, "what is chance that a backtest generates a great result by chance." He argues that if you use 10 backtests, you are very likely to find a strategy with a Sharpe Ratio of 1.6 which is over-fitting: "Pseudo-Mathematics and Financial Charlatinism: The Effects of Backtest Overfitting on out–of-sample Performance" by David H. Bailey, Jonathan M. Borwein y Marcos Lopez de Prado z Qiji Jim Zhux, April 1, 2014

What good is a hypothesis that cannot be disproven? A Cautionary Tale (In Memory of Ross Miller)

1. Kora observes: Y = Fn(X) with a significance of T.

2. Kora raises a small amount of investment capital based on the expectation of this stochastic function alone. She gives no consideration to dynamic or causal or other exogenous relationships or intellectual or information edge.

3. Kora produces excellent performance as Y= Fn(X) as predicted.

4. Kora raises a massive amount of investment preformance after establishing a track record.

5. After raising a large amount of capital and collecting substantial management and incentive fees, something happens and Y <> Fn(X), and the clients suffer horrendous drawdowns. The fund shuts down and the total net amount of loss dwarfs the net amount of gains.6. The SpecListers say, "The probability of this was extremely small. But it is an example of Bacon's Ever Changing Cycles." Rocky says, "This is a example of bad science because any utility of the observation Y = Fn(X) without a casual understanding is limited to and qualified by, the ability to anticipate the onset of a changing cycle. And if the scientist can correctly anticipate the onset of a changing cycle, then this meta-hypothesis is vastly more important than the functional hypothesis.

Unfortunately, this is a recursive paradox, because the ability to anticipate the onset of a changing requires the ability to anticipate the onset of a changing cycle of a changing cycle, and then the onset of a changing cycle of a changing cycle of a changing cycle … and this continues ad infinitum OR UNTIL spec partiers go home to bed — whichever comes first."

Jordan Neumann writes: 

I admit not to have fully read the paper — I searched for the word transaction cost but did not find it, yet it makes finding a profitable strategy much harder than it seems.

Isn't this a problem with statistics in general? How does this differ from using thousands of drug candidates to find a drug? We still don't know why Advil works, but I take it anyway based on the statistical evidence. When quants believe that earnings or margins or insider trading affect prices, I would say that the economic justification is far from random.

There is a recent series of news articles that disparage quantitative analysis, just as several quant funds suffer for a few bad years. I would think that everything moves in cycles, and this might be the bottom.

Hernan Avella writes:

Mr. Rocky offers some valid questions to the counting battalion. However, I'm afraid his argument suffers severely from the straw man problem. It assumes that one can't have an approach that incorporates: logic, an economic framework, money management rules and counting. Even more. As you move up in the frequency spectrum, the economic framework becomes optional (useless).

The real question is (for med/long term speculators). If you incorporate all the said components in your approach, can you quantify your success per component?

Ralph Vince writes: 

Kora,

Yes, in my humble opinion, more money is to be made on the assumption of EMH (the cost of being wrong in this regard is less).

Stefan Jovanovich writes:

The test of the reality of a market is whether or not there are prices for quantities exchanged in actual transactions; and the market itself is sufficiently profitable that dealers are willing to pay for the rent and other costs of keeping the lights on. Market failure happens all the time; a trade disappears because other markets have swallowed the action or the inter-mediation itself is no longer handled by bid-ask. Even now more than a century and more after they disappeared you can find the remnants of "corn exchange" buildings throughout Britain; dealing in grain continues but it is no longer handled by open outcry involving dealers and farmers within half a day's train travel of a regional hub.

Markets are efficient in the way that engines are efficient in that they work. They are inefficient in the sense that there is wasted energy, some or much of which can be the result of insider manipulation and general fraud. The debate is over numbers matter - the economics of the companies and the world of money as a whole, the prices themselves and their patterns, the numerical indices of sentiment; for that question there is no absolute answer, nor should there be. Larry Williams, the R-Man, the Watsurf, RPH and many, many others can all be right - and wrong. And, in that sense, markets are permanently inefficient because, even among people to whom Morgan would have assigned a perfect grade for their financial character, the only final word comes when the market itself disappears. 

Apr

8

1) First, some thoughts on the question "what would happen if everyone lived off capital?"

If people saved, rather than spent, every dollar they earned, it would initially slow down the velocity of money. Likewise if no one ever spent savings, it would initially slow down the velocity of money. Rather than maximizing immediate consumption, people would be savers first, then very frugal consumers.

However, in both these cases the slack would be picked up in either the business sector, or the government sector, since there is now have an over supply of savers looking to invest capital. This would, of course, lower the risk, as the companies would not have to jump too high a hurdle to make interest payments. When do you think government would likewise only spend capital?

The recent financial crisis could be thought of as the opposite case where everyone thought they could leverage and overspent. This increased the risk as savers willing to lend disappeared. The money given to the flexions' banks to save them, could be thought of as printed money put in a lock box called deleveraging. Hence an increase in the quantity but a slowing of velocity of money and a risk of deflation.

2) Now for some strategies for preserving capital. The idea is to be a saver first, a consumer second.

Lets assume we invested $1,000,000 in Vanguard's index fund in April 1987. And any week we ended up with more than $1,000,000.00 we withdrew the excess. Below I list the 52 week amounts withdrawn (assuming 364 day years, 364 = 7*52). While the average $138,000 seems generous, about top 5% of earners, it would still give you many years in a row of $0 withdrawn in the 2000's. But if you think these booms and bust are systematic, then a better strategy would be to only withdraw in any one year a set amount, and save the rest for those lean $0 years. The next 2 columns shows how much you would have withdrawn if that set amount was $125000 annually. The withdrawals come from from $1 million invested in stocks excess earned, first, and then, if needed, from the amount stuffed under the mattress (not literally, of course, but previously set aside as neither consumed nor invested in stocks) . The amount invested in stock is kept at $1 million, the excess not spent in any year is mattress padding for future years.

You can see that during the bounteous years of the 1990s, you could have set aside over $1 million without compounding to cushion those upcoming lean years.

(Note: fiscal years ending in April)

Rocky Humbert writes: 

Mr. Sears' approach towards capital withdrawals is nominal, not real. So in an environment of 10% inflation and a risk free rate of 10%, he would be shrinking the real value of his corpus as he withdrew 10% on average. Conversely, in a deflationary environment, with rates at zero, he would not be consuming at all even though the corpus of his portfolio would be growing in real terms. The reality is that inflation has been averaging between 2 and 3% for the last decades and that destroys the corpus over a lifetime.

This wealth illusion associated with inflation/money printing is prevalent among both retirees and working folks. It is an insidious behavioral bias and I believe affects both consumption and economic activity. The bias is one reason that deflation is a drag on medium term growth.

Ralph Vince adds: 

I believe inevitably governments, a century or several hence, will live off of their own capital, part of a social-evolutionary process.

A structured dismantling of future liabilities (undoing the mega-Ponzi Social Security in the US, for example, in an orderly manner through generational taper with newcomers to the job market putting 100% in self-directed, those leaving the job market, 0% self-directed) and would other future liabilities to a sustainable level, and some time later, to a level of easy sustainability would allow an ultimate sinking fund of future government liabilities, eventually reaching a level of self-sustainability.

At which point, one would HOPE taxes would end, unless the Catholic Church model is employed.

Stefan Jovanovich writes: 

Everyone does live off of investment (I think this is what Russ means by "capital"). The one correlation that seems dismally robust is that, in spite of all efforts to "distribute" (sic) wealth, only the ratio of private investment to people working determines how high someone's pay can go. If there is low "capital" investment, people make very little; if there is high "capital" investment, they make much more. People instinctively know this; it is the reason we all have our eyes drawn to to displays of physical grandeur and, in the days of the gold standard, bank lobbies always had marble. But, since we live in the age of alchemy (the nominal wealth illusion the R-Man notes), "income" becomes more important than savings.

Ed Stewart writes: 

Stefan doesn't it matter how savings are deployed. Savings productively deployed in a way that increases output of goods and services increases total wealth (and if such capital is up per head, wages) but not all savings are equal in this regards. Savings deployed to fund a make-work project via government debt represents consumption. I question if in general, savings used to help another party pull forward consumption on net represents consumption and not savings, just redistributing wealth from shortsighted to farsighted — if that makes sense (??).

Russ Sears writes: 

Once again my e-mail's brevity and my poor writing causes some confusion. The "mattress" strategy was meant to be humorous, not literal. Implying you have many options as to how you use the "savings" to hedge inflation. This strategy was meant to illustrate how to take equity risk while still withdrawing a decent amount for consumption. $125000 is a decent amount in today's dollars to live off, but in 1988's dollars that was very high living, perhaps near top 1%. In the example, the amount withdrawn could easily be slowly increased for inflation, with interest earned on the savings or less savings. The bigger problem I have with my own example is what do you do if you retire/need money at the start of long term $0 return to $1,000,000 capital amount. But let us go over some inflation options:

1. Put savings back into equities…I believe, (only my opinion), this may be a good option if money keeps being put into the system due to low or negative inflation and hence likely low interest rates as we currently see. But, this also leaves you more open to risk of inflation killing the equity markets or long term bear markets in general. However, looking back long term equities returns should beat inflation if next 100 years is like last 100 years.

2. Put saved money into a long term bond fund. This could handle mild inflation, as long as it stays mild.

3. Put money initially into short term fund then as inflation gets "high" switch over to long term bond fund as inflation kicks up. But this leads to when is inflation "high" (10% seems to be Rocky's boggy). Perhaps the answer is when it starts killing equities returns because the market is worried about it. Then if you think this is the case start putting "more" of the savings into long term funds. You'll have to decide what "more" speed is and if inflation is "the cause" for poor equity returns.

4. A combination strategy.

How to invest for inflation is a tough subject which such a simple "living off capital" strategy was not meant to answer. I hope the above shows sufficiently that a disciple approach to withdrawals. even if adjust for some inflation is better than simply going with the wealth effect and spending as earned from equities. But in the end you are going to have to decide for yourself, what you think inflation will do and when it will do it. And then execute it. But at least a disciplined approach to withdrawals give you much more flexibility and with it a chance to meet this challenge.

Finally the reason "capital" was chosen instead of "investment" was to signify an investment that is somewhat dependent on a stable "monetary" base for entry and exit. As opposed to a more direct investment in human capital or even property which may out last a government and may more likely be inverse related to inflation.
 

Mar

20

 I follow the sports news and commentary and find it much more erudite
and analytic than the financial commentary. Try reading the NY Times
analyses of games The Knicks play, and you'll learn more about the
market and human nature than you will from Bloomberg. 

Ken Drees writes: 

I once worked on technology to automate sports reporting using "canned" or routine language. It came to nothing at the time but it amazed me how simple it would be to automate sentence and paragraph structure of a simple sport score/ game report. You would have selected templates and fill in bursts of stats to make it seem true. Anyone who listens to an athlete's interview these days hears the same old same old.

"We battled, and that's what we are about–never give up, keep focused on the game at hand." "No, I am not looking ahead towards the next series, I am focused on the day to day–what it takes to win today is what I am about".

Seriously all these athletes talk program. All the same crap every time—I can hear it before they say it!

Anton Johnson writes: 

This is the best ever basketball interview.

Ralph Vince writes: 

It is a most peculiar sport, and the great Meadowlark Lemon worth study; that someone can be so good, so adroit at what they do, which is not comedic, that they can transform it into comedy, not take oneself so seriously, and perform to perfection. Mastery occurs when someone can do something to such perfection that they can laugh about it and about themselves as their virtuosity expresses itself, carried on a wave of euphoria of their own creation.

Contrary to what I would have expected, basketball seems to have players who are more articulate and analytical. Among the worst are those who are involved in the individual sports like golf, tennis, as well as most NFL locker rooms. For whatever reason, NBA players seem to do far better in front of the microphone.

Stefan Jovanovich writes: 

Players are not any better than actors at coming up with original lines on their own; it is the coaches (who like the writers are usually not on camera) who have the interesting stuff to say.

Mar

12

 Have you read Rashard Mendenhall's retirement letter. For those that haven't read it, it is worthy of your time.

Ralph Vince writes:

He got out near the top of his game.

Gramps, just before he died, a man who forgot more about the game than almost all will ever know, made a comment to me shortly before he passed away, about a running back for San Diego names Natrone Means: "A running back in the NFL these days has a lifespan of about two years, maybe three."

I found it very surprising when he said that, but have watched it occur over and over since. Mendenhall was a great running back, and his is a wise move.

Feb

28

 Does the hot hand exist or is it consistent with randomness?

"The Hot Hand Might be Real After All"

The authors contend there's something to it.

Ralph Vince writes: 

Fascinating article, I think he might have pursued some avenues of thought there just a little further.

Basketball shooting is not the same, say, nor the streaks one might feel in doing it, as the streaks one might sense at a craps table, the difference being the participating aspect of one's skill (unless you attribute throwing dice to a "skill," and many of us, no-doubt, have had uncles who held that view!).

So the feedback mechanism of the previous play impacts upon the next play where skill is actually involved. Where they speak of players feeling hot, and taking greater chances as a result, the player enters a different distribution of outcomes (or, at the very least, different parameters to the distribution of outcomes) than when he didn't feel hot. This is likely true in most of life's endeavors that we must perform something.

And what a lesson there, professional athletes inadvertently might be providing.

One "sport" I find pure torture is golf. Go miss a three foot putt, and the next one looks like it's thirty feet. Go get rattled and try to hit the next shot like you did X holes ago. Clearly, there are different outcomes based on how you react to immediate previous outcomes, pro and con.

Yet, professional athletes seem to be able to compose themselves such that the negative side of the coin they are able to disregard altogether. This may be the greatest facet of their skill in fact, I certainly wouldn't be the one to judge that, but I do marvel at how they can re-compose themselves and relax in difficult situations, even when things aren't going too well for them. 

Jan

28

 In a poisson distribution the number of events, e.g big declines in a time period occurs with a specific average rate, regardless of the time that has elapsed. For example, the average number of big declines per month is two. How likely is it to have 2 declines in the month, 3 declines. The time between such events, follows an exponential distribution. What is the distribution of time that elapses between such events? The time between events has a mean of 1 / the average rate, e.g. 1/2 a month in the above example. The variance is also 1/2.

Mr. Vince proposes that the rate and average elapsed time changes conditional on what has happened in the most recent period, a very good proposal, which can be modeled most practically by the use of survival statistics that all here are familiar with, i.e. what is the average duration between declines based on what the most recent event has been. Vince proposes that one look at the likely variations in that time, which may be skewed to the near term or long term.

Rocky Humbert writes: 

My stats are rusty but I believe poison specifies an average time between events (lambda) as a parameter and further specifies that's the actual time between events is random. Others please correct me, but I believe volatility in stocks experience clustering and so the independence assumption of poison is violated.

Ralph Vince writes: 

I'm talking about modelling the times between declines of x% with the fishy distribution, determining lambda. Then testing various past time windows vs futures ones to find a window length such that lambda settles and converges.

Gary Rogan writes: 

Why would it be a reasonable theory that a process where actual sentient being react to a previous decline in some way resemble a process where every event has no informational connection to not only the prior event but any other?

Ralph Vince replies: 

Why not? Has dependency been proven here?

Jan

28

 The beauty of a Martingale strategy is that we have price distributions that are bound at zero.

We are in a casino, where red can only come up on the little wheel X times in a row.

And no one in this business can get past their pre-conceived notions to capitalize on that.

No one.

Instead, the entire industry wants to focus on price direction, the immediate direction of price, which has nothing to do with what's going on after the next play. Nothing at all.

anonymous writes:

Mr. Vince, would you mind expounding on this concept of for the dunderheads like me. I get that a price of a stock is bound at zero (I'm hoping I at least understood that comment correctly), and that red can only come up a finite number of times in a row as a result. How does this help with a Martingale strategy in the real world with a limited bankroll and uncertainty over how many times in a row the wheel actually does come up red?I am obviously not looking for a grail with these comments and realize they got beyond a simple Martingale, but would like to explore your concept further if you're gracious enough to share more food for thought.

R. Vince responds: 

It gets messy quickly now, so I will try to keep it at 38,000 ft. Beyond the next, immediate play, or trade, or holding period, where <<what one has to risk is a function of what has happened to what they have to risk up to that point>>, you are somewhere on a curved line (for 1 proposition. For N propositions, you are in an N + 1 dimensional manifold. So, for 1 proposition, you are in a 2D manifold - a plane. I bound the manifolds at 0 and 1 for all axes except altitude - which is the cumulative expected return. So you are on a surface in an N+1 dimensional manifold.

Everyone is in this manifold, on this surface when the caveat (inside <<…>> above) holds, which includes those practicing portfolio insurance, any type of portfolio re-balancing, replacing components in an index, any type of short or levered ETFs, any managed programs, etc.

And I contend, ultimately, the only thing that really matters in trading (over consecutive trades or holding periods) is where you are on this surface, and possibly, how you are moving about it. Again, the most sophisticated, thorough and ultimately practical (some might argue otherwise) would be the most recent paper with Lopez de Prado and Zhu.

The point is, where we are on that surface, and how we are moving about it, we are either oblivious to or are using to satisfy certain criteria. For example, one who wishes to maximize their MAR ratio would want to be at those points on the surface that are in the sub-manifold of what we all "zeta-points" on it. Another — If one wants to begin to maximize time at or near equity highs, they traverse a path between some loci on the surface and 0,0…0 going downwards with sinning periods, upwards with losing.

Without violating the proprietary ideas of other colleagues, we can look at randomness, and at this hypothetical bounded roulette game in terms of this surface and our criteria.

What to me, at this point in my life, is most interesting about this now is not so much the trading implications, but the more broader applications of this. As a trader, we seek growth, but there are many more functions in life that comport to this same growth dynamic where we seek to diminish growth, and I find applications for it everywhere I look.
 

Jan

27

Do we have any predictions of the path of S&P in the next 5 days… based on the past 16 years, looking at the most similar moves over the last two days, I see Monday up. But perhaps a terrible decline along the road.

Alan Millhone writes: 

Dear Chair,

Is the failure of Obama care and concerns on its bailout making folks jittery ?

Sincerely,

Alan

Ralph Vince writes: 

I don't know if it is something that conscious, Alan, but surely, whether one alludes to it as success or failure, there IS some economic impact to higher premiums, to the socialization of anything. In this instance, the bigger question, is given that there must be some diminishment in economic activity as a result of this "law," (and if that were not the case, it would be fully implemented at present rather than piecemeal) my concern is what kind of a multiplier effect is there on this across other sectors of the economy.

This, coupled with 10 billion/month less in pumping, and there is a drag out there that was not there 120 days ago. The extent of that drag remains to be seen.

Alan Millhone writes: 

I feel the drag will turn into a good dragging.

The 10B was a poor band aid to cover a deepening economic wound.

I see a big increase of street people walking thru my town. I see increased numbers of people using the Cash lands in my town. I see more U hauls on the road

My local banker CEO says last year he had more charge offs since he has been there. He also says delinquent payments are up considerably.

A local bank is closings its three local locations and basically all employees lost their jobs. Huntington Bank bought the bank.

I have rental property and renters overall having a rough time.

My gut tells me bad times ahead.

Ralph Vince writes:

My GDP models have me expecting the next leg down to be considerably worse than 2008. This is very disturbing to me.I won't delve into obamacare yet.

Anatoly Veltman writes: 

Funny you should say that, Ralph. I haven't taken a position in many years; but it's crazy how charting can work within some minds. When she started coming off the 2009 bottom, I had a conversation with a friend in front of a live but very long-term chart. Looking at it, I explained that penetrating the 2002 bottom by substantial amount, the SP chart has sustained significant damage. At the time, I could confidently state that the 666 low will one day brake. Alas, I added, the chart is imminently Bullish — so I will not be assuming a Short any time soon. Next question was: "How Bullish is it?" And I had to shake my head: "Possibly, new record first…" Well (I was deservingly told), you're no help Anatoly.

For full disclosure: I have since changed my mind about breaking the 666. The sole reason for my change of heart is my belief that by the time that were to come around, the measuring unit (the USD) will not have nearly the purchasing power of 2009. So in real terms, I'm holding to my speculation; but not in nominal terms. To complicate things, the lower we may go right now, the less Bearish I will become. I really prefer to be Bearish at records - and it's harder for me to believe the top is in place when the move down is already in progress. Kinda opposite to Chair's weekend topic…But when Rocky was forced and announced his market call earlier in January — I was forced into seconding him instantly. Partly because we all knew that profit takers will not act out before January, for tax reasons.

David Lillienfeld writes:

I came across some notes I made last year about an interview with Leon Cooperman. Cooperman was commenting about having taken a large position either in student loan bonds. When he was asked about the increase in student debt, the problems graduates are having finding jobs, the lack of much increase in wages, and so on, all of which suggest a coming default, Cooperman just smiled and commented that the bonds were likely to paid off at par by the US government should they default and that he looked at them as being low risk at worst. Last time I looked, student debt was north of 1 trillion, and I think it may be up at 1.3 trillion by now. I don't hear many talking about student debt as the underbelly of the economy these days, but it seems to me that there's a storm brewing there. How long would it take for a default on the first tranche or two of those loans to spook investors?

Jan

26

 Tennis talk is a common theme on this site, one the chair himself often engages in, and we often do so with an eye towards market parallels.

Yesterday, at the Australian open Nadal beat Federer (commonly thought of these days as the greatest player of all time, but who is now 32 years old, extremely old for a professional tennis player at that level) in straight sets 7-6, 6-3, 6-3 I believe.

At one time, this was a great rivalry, but it was quite evident yesterday that Federer may not quite be what he was a few years ago.

Craig's reference was to the notion that perhaps Federer should have hung it up rather than embarrassing himself. My reference was to Nadal, who, with a dozen or so major victories to his credit, out to be conscious of an exit date for himself, rather than the pathetic decline we see with so many athletes, who so often seem to be the last to see it in themselves.

Perhaps Mr. Manning (who, in my mind is the greatest quarterback I've ever seen) should certainly make net Sunday be his last pro game, win or lose.

That's another of my two cents now I am broke like the Ex Governor of Virginia.

Craig Mee writes: 

The fed deserved the very best after his career and being the absolute gentlemen he is, he took the risk of playing on and having his name tarnished by a defeat like he saw Friday. He was comprehensively outplayed and was at a loss for words really in the post match interview. It is unfortunate some will view this as oranges and oranges. I give credit to him for pushing his limits, but now the tougher question arises of whether to hang up his racquet now or play on for potential further pain. Ralph is quite correct. As for market parallels, it makes me think about when to give a strategy away after it being successful for years.

Jan

26

 One always likes to see the delphic predictions. After a market has fallen 5 % or so, a market writer will say "temporary top is in". The latest one is DeWayne Reeves an award winner. Yes, of course by random numbers it will take about 100 days. Has to be true.

Anatoly Veltman writes:

These things are different for people who must have a short or long position every day, or people who must only invest for great many years and only selectively divest at times.

I think the real question is by what percentage has the market risen (or at what rate) within the current up cycle vs. the current economic forecast vs. after-tax attraction of alternative investments. If that rate has been too fast (which I speculate), then the market may not gain in 100 or even 1500 days from here. The other matter is foreseeable drawdown, which might simply relieve one of any stake. Who can estimate the coming drag? I think the world has been subjected to more than it's regular doze of mismanagement for just enough time to teeter on the brink of critical mass, debt-wise and moral hazard-wise. So I can't exclude that we're in uncharted territory. I continue to hold opinion that so many years of ZIRP will effect the inflation/deflation perceptions in ways that were never experienced by policy makers before. Thus, I'm afraid that years and decades of markets stats have been poisoned for market application directly ahead. But of course everyone will bet in accordance to their agenda - and not every participant is in it to make money. For example, gold bugs are in it for what they believe is a strive for own freedom. There is a lot of currency uncertainty around the world; I speculate that USD will prevail, but many speculate that technology outpaced the regulators - and that alternative currencies will proliferate. Again, unprecedented.

Ralph Vince writes:

Anatoly raises an interesting point, one I have been thinking about as well: Zirp has changed our models, not just the models we are using to gauge today's market, but models in the foreseeable future will be created on data that has been zirp-perverted (and pump-perverted as well).

For example, if 90 day rates were, say, 4%, and the 3 which is currently around 3.62x%, that inversion would certainly be ominous. But we don;t get to see it. For many years, many equities models were driven in large part by rates (because, if modeled, one would have seen back then the very driving force of rates) one of the more famous and widely-followed "in the day" was that of Abby Joseph Cohen.

Zirp-n-pump has perverted these things, and the effect leaches into many other indicators I suspect (breadth, momentum, etc). I find these days we are relying far more on measures of sentiment (which is mercurial in quantification at best) and trend persistence than in the past (who, in their right mind, would have relied on trend following on equities indexes in the past? That was simply a very bad way to go, "back in the day").

Jan

22

 "(BSP) Novak Djokovic Upset by Wawrinka in Australian Open Quarter final"

Many market things in this one. But I like best that the last time Warinka played Djokovich he lost by a gnat's eyelash, and that was ephemeral. So this time the odds were 50-50 he would win. But even better than that, I like that Djokovic seems to be developing some character and sportsmanship as he ages.

Ralph Vince writes: 

I was watching it sans volume at the gym, and the IBM stats box kept popping up that ND had an 83% chance to win this match (not unlike many market "fights"). This 83% had me grinding, wondering, "How do they calculate that," etc. as any good systems guy or technician might.

But Jimmy Connors refers to tennis as "a fight where you are 90 feet away," and today's match comports to the notion I am constantly reminded of in life, that "In any fight, ANYthing can happen."
 

Nov

25

 One thing I notice in unsophisticated investor-traders such as myself is that the positions one takes are usually supported by an unspoken prediction: "I will know when it is a good time to sell this and I will be able to do so."

Gary Rogan writes: 

The beauty of really long-term investing is that you don't have to have this unspoken prediction.

Victor Niederhoffer writes: 

And to add to Mr. Rogan's "beauty", you take full advantage of the most marvelous aspect of arithmetic, the power of compounding. And furthermore, you reduce to a minimum the vig from flexionic and top feeder activity.

Anatoly Veltman writes: 

Can't dispute all of the beauty. The problem is that only a narrow group is willing to commit: those who set aside slow money. Most suffer from the "hot money" bug: how to make money work its hardest. Willing for the money to die trying.

Gary Rogan writes: 

Very poetically put. It also illustrates the following point: in any kind of investing or trading the problems and solutions come in two flavors, namely those of competence and those of psychology. Even in long-term investing you still have to decide what to buy and when to buy it, so it's not immune from either category.

S. Humbert writes: 

Buy and Hold (for the medium term) is not, in my view, enough to earn a living from. Please let me explain before you fry my IP address.

In the past 30 odd years alone, even the unleveraged long only holder of US stocks has had many barren years (and multi year) periods when he lost or didn't make.

In my usual, inelegant fashion, what I am saying is that if you trade for a living — for yourself (i.e. at the sharp end of the game) then buy and hold alone doesn't cut it. (Unless you start in 1982 or 2009 or some other retrospectively chosen low). This does not dilute the effectiveness of the strategy, I'm just saying an individual's perspective and starting point dictate what weight one should give to the passive, low vigorish strategies.

Frankly, a low single digit return with a very poor Sharpe Ratio over the lady two decades LESS retail friction, well… I certainly couldn't have lived off that taking into account my extremely modest circumstances when I started my speculative business in 1990. Anyway — it's at all time highs now right!

Ralph Vince writes: 

Worse–you're still going to touch that money. You're going to take a morsel, or add a morsel, you can't sit there and forget about it.

Now you're on the curve.

Now, if you are 100% invested, you are completely doomed, and it isn't a matter of if.

Nov

25

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

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

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

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

Ralph Vince writes:

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

Bill Rafter adds: 

Moving medians have some distinct advantages.

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

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

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

Kim Zussman adds:

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

Nov

14

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

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

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

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

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

Richard Owen adds: 

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

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

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

Ralph Vince comments: 

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

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

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

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

Stefan Jovanovich comments: 

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

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

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

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

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

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

Victor Niederhoffer adds: 

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

Jeff Watson adds: 

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

Alan Millhone writes in: 

Dear Chair,

A grudge is a difficult thing to dismiss.

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

Sincerely,

Alan

Gyve Bones writes: 

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

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

— G.B.

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

The President of the Old Speculator's Club writes: 

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

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

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

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

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

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

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

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

Richard Owen writes: 

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

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

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

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

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

Craig Mee writes: 

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

Nov

11

 I found this article very interesting. Yet few of the investment greats have PhDs or CFAs. QED? Albeit that PhDs are overweighted vs, their population weight.

"What a Difference a PhD Makes: More Than 3 Little Letters"

Abstract:

Several hundred individuals who hold a Ph.D. in economics, finance, or others fields work for institutional money management companies. The gross performance of domestic equity investment products managed by individuals with a Ph.D. (Ph.D. products) is superior to the performance of non-Ph.D. products matched by objective, size, and past performance for one-year returns, Sharpe Ratios, alphas, information ratios, and the manipulation-proof measure MPPM. Fees for Ph.D. products are lower than those for non-Ph.D. products. Investment flows to Ph.D. products substantially exceed the flows to the matched non-Ph.D. products. Ph.D.s' publications in leading economics and finance journals further enhance the performance gap.

S. James writes: 

I struggle to find anything less important than the letters after one's name when assessing investment managers.

Ralph Vince writes: 

I would certainly argue that more education is preferable to less, in any field, provided such education doesn't impede someone's ability to reason things through for themselves.

Whether it facilitates thinking this way or not is not something I (nor one who does posses those credentials) can determine from our own experience.
 

Sep

19

 Can anyone explain to me why counting matters anymore?

I asking seriously and without disrespect.

How can one "count" for what happened today? Is there some sort of "the market is up 37 out of the last 42 full moons" question/equation that would lend one to believe that the the 2 pm rocketing of the market was going to occur?

Maybe there's some other form of analysis that we can do to have an edge?

What about fundamental analysis?

What about technical analysis?

What about astrology?

Palm reading?

Maybe I should convert Scientology and see if the Thetans give me any insights?

I firmly believe that the government (and let's be not pretend that the Fed is not the government) and politics are driving 98% of what happens in the markets now.

This is a BS market.

Ralph Vince writes: 

It's a GREAT market.

At the risk of being a blasphemer, my interest in market analysis is an academic one. My implementation, devoid of my personal academic failings. That is……buy low, sell high, and at the same time, sell high something else, to buy it back lower.

You should never have a move like this go by without taking a profit on something.

Yeah, I take a lot of disparagement over my bullish stance on the markets here, as I do thinking the Miami Dolphins will be Super Bowl Champs this year. I have no skins in either game you see.

Gary Rogan writes: 

If you invest long-term in good companies you don't have to be hurt and/or left out of the steady progress of the market regardless of any of this.

If you enjoy this n-dimensional game of chess than you should be like the Palindrome: smart, totally cynical and totally connected.

Ralph Vince responds: 

Gary,

But the premise of buy and stay long HAS worked only because we have been in a bull market since forever. Every high of the past couple hundred years has been exceeded — long term bull market (for whatever reason).

That is a bet on that continuing.

Gary Rogan replies: 

Ralph, but didn't Victor publish some whole-world stock data from Dimson, I believe it was, that showed steady progress? Isn't it the expectation for the previous highs to be eventually exceeded simply from the nature of the beast and not being a a "hundred year long bull market"?

There are really only three risks for a diversified stock portfolio:

-Geographical concentration risk (including where the owner lives so that he can actually access his money if it hits the fan)
-Unprecedented worldwide collapse
-The future being TOTALLY different from the past in this area

Otherwise it's steady progress all the way to infinity.

The three risks are unquantifiable, but seem better than being able to outwit the flexions day-to-day.

You pays your money and you takes your chances.

Ralph Vince adds: 

The thing is, this isn't a big move up.

When the rain comes, it washes everything away in a hurry. Weeks worth of advance vanishes in minutes.

I don't recall, in my lifetime, a setup for liquidity disasters like we have under us here, and when this goes, it will vindicate any shorts you can hang onto.

Gary Rogan writes: 

Ralph, why would all this extra liquidity resolve itself by the stock market collapsing in a spectacular fashion as opposed to say (1) Sudden high inflation perhaps followed by hyperinflation of the economy improves, and the stock market losing value in inflation adjusted, but not absolute terms (2) Or a multi-year stagflation period with the economy not doing well in some middling fashion and with the stock market slowly drifting down or simply not rising (3) Given that we will have this extra liquidity for quite some time now, evidently, based on the recent Fed personnel developments and Ben's short term and new-found caution, a liquidity withdrawal quite a few years from now, making any shorts in the meantime unfeasible, even if there is an eventual collapse?

I really have no idea what will happen if there is a bond vigilante battle royale against the Fed and it's printing press, and clearly bonds cannot be a GREAT investment at this point, but how can you be even reasonably certain that there will be a stock market collapse unless there is an overall economic collapse (which is reasonably likely, but will make profiting from the shorts a moot point)?

Mr. Kris Rock comments: 

Counting is a discipline…like belonging to the mormon church is a discipline…

Ralph Vince writes: 

I think people look for "causes" (du jour) to explain market moves. Right now, the story is QE, and it sounds plausible, but the story always sounds plausible, but it is always a very, very specious causation there.

We're talking about equities. Puffs of smoke that only have value because people day they do, right now, that the value is X. And that is only because they don;t have something shiny elsewhere to put their money. Equities are an easy place to park money.

But they have the same value as puffs of smoke, and when we forget that, the market has a cruel way of reminding us.

Gary Rogan adds: 

The future is fundamentally unpredictable: no amount of past experimentation or data can preclude some fundamental parameter of the system changing and invalidating all the statistical evidence. We don't seem to have a choice in having to rely on the past to the extent that we understand it and extrapolating in the future. But what if a parameter like the unprecedented rise of the national debt in peacetime or the rise of socialism or the changing demographics flips the long term growth rates in profits? Or the reduction in de facto property rights or the rise of flexionism make it impossible to realize gains? I don't think there is an answer other than overall we have evolved to take the past as a consideration for the future, so we might as well stick with it for the lack of a better alternative watching out for the changes in the parameters where we do understand the causal relationships as well as (and particularly so) for contradictions.

Sep

2

The dreaded September effect reminded me of "Sell in August and Go Away?" but certainly bears rechecking.

Ralph Vince writes: 

I think Dr Z's study focuses on 2000-2013.

Curious and needing to do some counting, however simple, I looked at SPY monthly moves 1993-present, and got these stats.

Aug

23

 I have been emailing my 8-year-old grandson a daily quotation or one-line advice (about sports, learning or life in general), which he seems to enjoy.

But I am running out of quotations and pithy advice relevant to a young person. Does anyone have either a good source of these, or some particular favorite quotes or advice?

Many thanks,

Dan

Ralph Vince writes: 

Here's some for you Dan. You may want to edit them for a younger mind, plus, you may not agree with all of them, but these are some that come to mind as I sit here and thing about it:

1. Don't try making sense out of it. You're in an insane asylum – things are not going to make sense, people will do things that don't make sense, that they cannot adequately explain. People don't know what makes them tick, only that they tick.

2. Happiness, of course…is all in your head. If you don't know that, if you haven't come to that realization, you will never be happy.

3. The Bull Market Syndrome. People, when they are met with success, take personal credit for it (bull markets breed geniuses), and when they are met with failure, blame luck.

4. Actually, luck is responsible for both! If you can only die by being struck by lightning, eventually, you will die by being struck by lightning! Conversely, if a man were to live forever, and bought a lottery ticket every week, eventually, he will win the lottery, with a probability that approaches certainty. Just stay the course, keep doing today what you must do today. As Woody Allen says, "Fifty percent of success is just showing up."

Luck Trumps Brains. To get luck, keep showing up each day with your shoes on.

5. Creativity trumps money every time.

6. Fortunately in life, you don't have to succeed at everything you do, only a few things. One success often justifies all prior attempts.

7. You can buy great a education – you can not buy brains.

8. The Oswald Principle: Usually, the best course of action in life, is to take no action (and usually, the best thing to say is nothing!). The guys in jail or there not because they didn't do anything. Usually, you should just sleep in! If nothing really bad happens today, as my friend Oswald said to me in eighth grade, it's been a good day!

9. You don't have the problems you think you do. Actually, the only real problems are health and criminal problems. Everything else is just a frivolous, meaningless nuisance.

10. Never say never. Everyone, however righteous they may claim to be, however upstanding they say they are, will, under the right circumstances commit the crime. A cold morning, wet, hungry, tired, angry….they'll do things they never dreamed they would!

11. Everything is going to be OK. It always is.

12. You never know what's going on in someone else's life. Before you do or say something nasty to them, realize this. Perhaps they have just gotten some awful news of some sort. You never know what is going on in someone else's life.

13. Don't pressure yourself. Just take care of today's things today, and relax…we got all the time in the world. The proper attitude in performance of anything, be it athletic, mental, etc., is a kind of relaxed, aware, confident attitude. You see it manifest in sport all the time (Ali, Ramirez…..or hitting a gold ball).

14. Don't complain and don't explain.

15. Don't react or engage emotionally with others. There is great power in stoicisim, in a cold, blank, stare back when others are trying to engage you in a fight.

16. Similarly, if it is someone you love or must live with, trying to engage you in an argument, practice avoidance. Just try not to be around them, to avoid them. Go out for a walk.

17. Live "in the tunnel," but think outside of it. In other words, deal with the mundane, immediate issues at hand, think as out-of-the-box as you can.

18. You can always "lift" more than you think you can.

19. Women will be as bad as they are allowed to be.

20. You should pray for your enemies — you need them. You need to have some enemies to keep life interesting.

21. Treat those you love as though they were going to die at midnight.

22. Your body is a record of how you have cumulatively cared for it.

23. The easiest way to learn things in life, is through observation. Sit back, watch all the ways everyone around you will figure out to how to screw up.

24. There are two ways to learn something. The easy way and the hard way. With the easy way, someone tells you something and you learn it. The hard way is the way we usually learn things, and we usually don't learn it the first time through. So the easy way, you see, is the equivalent of a windfall. (note to teachers – you can cause the easy way in others if you can convey a different perspective on a problem, a manner wherein the person learning thinks, "Ah, I see it now."). The moral here is that there is no point lending money, time or advice to help people out if they aren't going to listen to you, if they are going to insist on remaining on their own vector, unchanged by your advice, wherein they are going to learn their lesson the hard way with or without your giving them time, money or advice. So don't give it unless they are going to incorporate it.

25. Do not succumb to the suffocating culture of comfort. If you are comfortable, you are in trouble, you just don;t see it heading towards you.

26. Remember – your best trades are ahead of you.

A commenter writes: 

The time to abandon is when you have to step UP into the lifeboat (or raft). Any other time is premature. 

Vincent Andres writes: 

Hello,

A creative man is motivated by the desire to achieve, not by the desire to beat others.

All philosophical con games count on your using words as vague approximations.

A refusal to vote represents a definite expression of political opinion, a rejection of the candidates & the programs offered.

Credit is not…a magic piece of paper that reverses cause and effect, and transforms consumption into a source of production

if men want to oppose war, it is statism that they must oppose.

Man is not a lone wolf and he is not a social animal. he is a contractual animal.

and many more from A. Rand here.

The highest laws of the land (America) are not only the constitution and constitutional laws, but also contracts - H Arendt

The most radical revolutionary will become a conservative the day after the revolution. - H Arendt

Concentrated power is not rendered harmless by the good intentions of those who create it. - M Friedman

"Governments never learn. only people learn." - M Friedman

"Humility is the distinguishing virtue of the believer in freedom; arrogance, of the paternalist."

It takes a special sort of man to understand and enjoy liberty - and he is usually an outlaw in democratic societies.

The average man doesn't want to be free. he wants to be safe.

Sorry if not all quotes are appropriate for a 8 years old.

There are many specialized twitter accounts who deliver 1 or several quotes per day. There is one for Ayn Rand.

Anonymous writes: 

Try to always practice good manners; be particularly polite, deferential and prepared at bars, gas stations, convenience stores and parking lots for these places are fraught with others over-valuing matters and ready to imprudently defend their claim.

There will be fights, unavoidable fights, they will find their way to you, you don't need to look for them.

Paolo Pezzutti writes: 

It's not how to achieve your dreams.  It's about how to live your life. -Randy Pausch

Throughout the centuries there were men who took first steps down new roads armed with nothing but their own vision.  -Ayn Rand 

Jun

24

Isn't it likely that anything like the current level of prices will cause a slowdown in the economy and soon we will be hearing that the tapering is not imminent?

Anatoly Veltman writes: 

I assume energy prices are meant. Maybe food, too? Any other, "input" prices?

And my second question: ok, suppose "we will be hearing that the tapering is not imminent". Will it necessarily sustain record equity prices? What about cyclical fluctuations? What about economic realities? Will stocks always necessarily go up (from ANY level) due to Fed "hopes" alone? What about fiscal issues around the world? What about geo-political strains? What about currency wars? What about old fashion profit-taking, correction…

Again, the chart looks eerily like 1987 - when a drop of historic proportions proved to be a mere correction

I think the most dangerous for the market situation will arise precisely as described by the Chair: that participants will be given more Fed "hopium"; and we'll get a lot more of them in for the wrong reason and at the wrong levels.

Ralph Vince writes: 

Vic,

Don't you think that depends on the pace of events though here, doesn't it?

Conceivably, things can fall off very, very rapidly given the political backdrop right now and the history of anemic real GDP growth leading as a reliable prelude to recession (and the fact that YoY real GDP has seen successively lower troughs since 1980, the stage is certainly set for a rapid descent). And if the jawboning (which is likely priced in already) doesn't provide the support it is thought to?

A commenter adds: 

A Fed official has already bandied this idea in the media. On Friday Bullard said that the pace and duration of QE will respond to market conditions.

Gary Rogan writes: 

The costs of the rising rates are already hitting the mortgage refinancing market severely and may soon derail the housing recovery. The cost to the Treasury of higher interest payments and the lack of the profit rebates from the Fed would be enormous, while simultaneously increasing outlays for unemployment and food stamps if the Fed causes a recession. The recovery is tepid and not self-sustaining. Also getting to 6.5% unemployment is a long way off.

It seems likely that the Fed saw a stock bubble building and decided to puncture it. When the first downtrend after the initial attempt started to reverse itself, Ben jawboned some more. He probably has a target level in mind, but he can't afford to to let the rates rise too much so it's a balancing act. What may be best from his perspective is a stock market crash followed by a quick rhetoric reversal from him and perhaps even more QE to lower the rates. He needs to have stocks and bonds to move in the opposite direction by any means necessary.

Scott Brooks writes: 

IMHO, there is no amount of stimulus that ward off the coming demographic shift that is occurring in America as well as most of the rest of the developed world.

In America, the final wave (the 3rd wave) of the baby boomers have exceeded their peak spending years and are refocusing their money. Generation X is not yet ready (nor do they have the numbers) to replace the spending of the baby boomers.

Spending is one of the biggest (if not the biggest) driver of our economy. Spending peaks at about age 47/48.

If one were to look at an immigration adjusted birth index, one would clearly see that the baby boom peaked in 1961 then leveled out (with an ever so slight increase increase) thru early 1964 and then off precipitously after that. Add 48 to 1964 and you get 2012.

Spending will decrease for the boomers. The big index companies that sell to the boomers will see their profits further erode. The secular bear that started in 2000 will continue on for several more years.

It will be a traders market with several bear market rallies and opportunities to make money on the short side. I predict higher than normal volatility.

Old "buy and hold" dinosaurs like myself will have to adjust our portfolios and be more nimble. It will be a great opportunity for the day traders and option/future traders of this list to make profits (that is if you profit off volatility). Smaller more diversified positions, low leverage (you don't want to get burned by big moves in volatility), and hedging will be the hallmarks of the day. The long only crowd may experience more pain they are accustomed too, unless the volatility increases the premiums enough on OTM puts that it makes them worthwhile to sell without getting burned on the downside.

Although the potential exists, I don't see big moves down (like 1987)….I see more of a slow bleed like we saw in 00/01/02.

The combination of statist entitlements based on unrealistic assumptions are going to put excessive pressure on governments to deliver on their promises. The same pressure is going to be put on private pensions, many of which are currently underfunded.

This won't last forever, though. Things will get better. Watch demographic tables for those countries which see their demographic start to move positively and buy there when demographics make their positive move. Don't look at typical "index stock" type companies though. When demographic changes take place and the younger generation starts to move into power, they will innovate. Look at smaller companies for profits.

Of course, I've been wrong many times before so it may be best disregard everything I've said.

Ed Stewart asks: 

Scott, where do productivity increases fit into this type pf analysis? After all, isn't this what boosts living standards over the long run? Rather than think in money terms, what about the creation of real goods and services that improve lives.

If it is just "spending" that is needed, they could just poof cash into everyone's bank account in the same way that today they "poof" cash into the QE programs.

Scott Brooks replies:

Ed, it's more than just spending that drives any economy. Innovations that improve productivity do play a role.

As to real goods and services and improving lives…..I am very excited about that. Difficult times are often the fertilizer needed to cause innovation. As one generation (the baby boomers) moves off into the sunset of their lives, the next generation (GenX) moves into power and gets to apply their new ideas and innovations.

Each generation builds on the work of the last….and even comes up with brand new ideas along the way.

We saw it happen from 1968 - 82, 1929 - 48 (with a hiccup due to the war), and I could go back even further. Generation shifts occur and we are in one now.

Carder Dimitroff writes:

Your argument makes sense. Unfortunately, this is not how the system has been working. Worse, those advocating for the good 'ol days do not realize they are asking for more government guarantees, a la Solyndra.

Utilities love these guarantees. Given the choice of free markets or government controls, utilities pick government controls every time.

Look at the southeastern states. They had several opportunities to create a free market, called "Grid South." They rejected that idea, preferring instead to remain centrally planned by comrades in state utility commissions.

Almost two decades ago, liberal states began implementing free-market systems for New England to Virginia and all points in between. Soon after, California jumped in. Late to the game was the Midwest. Even later was Texas. Of course, utilities operating in these states were not pleased when their generating assets exit the state's rate base.

It gets better. For decades, gas and electric utilities operated a "cost-plus" enterprise. From time to time, utilities would visit their regulators, present their [prudently acquired] costs, seek an adjusted rate to recover those costs and then asked for a modest margin.

It's like milking your neighbor's cow.

Jun

16

Is there ANY reason on earth why bank free reserves would be up over 25 percent since the beginning of the year?

The last time we saw such acceleration was to stem meltdown.

What in the world is this about now?

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.
 

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