I would love to buy a little car like the Tata Nano that costs two times as much as a samsung washing machine to get around town and run errands in. As it is I bet the federally mandated airbags in my car cost more than this entire car, heck, even the headlight assemblies, which have become exorbitantly complex, likely cost more.

The problem with the fiat and mini is that they are still very heavy for their size, and have huge blind spots due to the various air bags. I wonder how many uncounted people have been killed by the huge airbag created blind spots? Another uncounted number resulting from federal regs.

The only change I would make to the nano car is that I would take the doors off. Then it would be fun to drive. I would order mine in silver.



 One has been wrestling with the question of whether there have been excessive numbers of migrations in markets, and whether they are predictable, and what consequences they have for other markets. The book Great Migrations by the National Geographic Society, which I visited in Washington recently has been very helpful in generating ideas for me in this regard. What do you think is relevant and useful here, and what is the purpose? One of the purposes of migrations and markets is movement. Yes, there must be movement to generate the friction and losses and excessive trading that provides the wherewithal to pay for the massive infrastructure and costs of keeping the system going. But why back and forth, if it exists above randomness, as it is instinctual and so necessary for survival in so many species.

Anatoly Veltman writes: 

In the 80s-90s futures markets that I dabbled in, one peculiarity was a seeming pre-cursor of a big daily move in one commodity by another, oftentimes fundamentally non-correlated! The trading floor at 4 World Trade Center, depicted in D. Amiche's Orange Juice debacle "Trading Places", was shared by pits as varied as Coffee and Platinum. A number of prolific personages owned a Gold-colored Badge, allowing them to step into any and every pit and trade. It happened quite often that guided by noise-level alone, such local speculators would migrate to Sugar albeit for one day - while their decades-long specialty was Gold! That wasn't a surprising move by a trader; surprising was the next-day jump by that trader's own market! There was a lot of psychological, herd and greed factor involved; but also there was an interesting exchange-finance angle to this pattern, where even a collapse in one pit might provoke a melt-up in another. You see, all locals and their sponsoring firms were in a financial leverage melting pot. Thus, cross-margin liquidation might be a rule of one random big day. Winding down someone's Long stock-index position could also mean blowing him out of his Short Cotton position!

The reason I specified this took place in pre-electronic era is that exchange individual position limits were much looser then. Today such cross-margin liquidation would more likely ensue from over-the-counter derivative portfolio losses.

Ed Stewart writes: 

 1. Prior highs and lows and the edges or recent trading ranges are often feeding grounds.

2. Climate change is real (beyond simple cyclical patterns) so at times overshoots are required as the migrants must reset their bearings to balance their need for energy with what exists in the environment.

3. During a warming period the migrants must travel further north, during cooling period they find nourishment at a lower latitude.

4. Sometimes the migratory species gets confused and ends up at unusual locations, which can then become a ritual do to simple mimicry and the chance identification of a favorable stopping point.

5. Migratory movements are related to survival (feeding, reproducing, not freezing) not for their own sake as they are risky and require substantial resources.

Gary Rogan writes:

Some Northern European migratory warblers have dramatically adjusted their migration patterns from wintering in Africa to wintering in the UK (they breed in Germany and other Central European countries). This provides a great example of adjusting to every-changing cycles. It's interesting to consider the fate of many other warblers who tried to winter in various other places or too early in the UK vs. the tremendous benefit to the first pair that made it back from wintering in the UK alive. It's also interesting that once warblers started doing this 10-15 years ago, this has lead to what seems like a separate evolutionary path, where now the warblers that winter in Africa don't readily mix with their UK-wintering counterparts.



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.



 1. When you got out for lunch, the market will take a big move in your favor that you were too slow on the trigger to capture. Your wicked friends will stay glued to the screen during that time, knowing the big move in what would have been in your favor is about to happen.

2. When you switch your position size down after series of big losses, you will hit 5 winners in a row, which will not compensate you for just one of the big losses you took.

3. The bonds will rally big on a economic number like GNP, but stocks will go down sharply and the explanation will be concerns about interest rate increases.

4. The big basketball game will feature a comeback the previous evening that is exactly like what happens in your market, and your team won't make it to black nor will you.

5. Whenever you have a big loss, and it turns around and goes to break even and you get out with a hootenany of relief, the market will go at least as far in your favor if you held as your were under water before.

6. Whenever there is serious morbidity in your family, you will lose many days in a row.

7. After a tremendous decline, the market will percolate around near unchanged for a day or two until you give up hoping for a rise, and then it will have a huge rise in your favor.

8. After a series of lucky trades in your favor, you will increase your size and the market will give you a tremendous beating. The same thing happens with basketball teams when they hit a lucky % of threes in the first half. When they try the same thing in the second half, they will make only 10% of them, and will go on to an ignominious defeat.

9. The worst trader on your team will be the one that defends you after a big loss and says that everyone should rally behind the boss, he's been trading the longest. Imagine the ignominy of having Smith the worst player in the league, and the cause of all the Knicks woes, defending Woodson and saying all the team should rally behind him because he works so hard.

10. Your wife will come in and look at the roller coaster chart of your swings on the day, and suggest "why don't you get out of half". You won't listen to her and you'll double up, and you'll be so ashamed you'll quietly sleep in the dogs kennel that evening.

11. The more time that passes from your early days as a speculator, the better you were (in your own eyes).

12. When you're long the grains in the summer, and you spend a weekend in the Hamptons, the sun will shine brightly all day, and a light rain will fall at the end of the day.

13. When you go out for dinner, the person next to you will be talking about his youngest daughter bought Netflix and Tesla and made millions on them.

14. After getting out of positions successfully on a swing during the day, you will try it the next day, and by the close if you had held your position you would be a rich man.

15. When you're long the market over the weekend, war will break out, or John Kerry will be reported to be visiting the Mideast or Russia to put out a fire.

Please add to the list.

David Lillienfeld writes: 

Vic, if it makes you feel any better about it, I often wind up having to sleep in the kennel, and that's without a trading loss. And we don't even have a kennel.

Gary Rogan writes: 

David's tale of woe reminded me of the old definition of Metaphysics: it's like being in a dark room and looking for a black cat that isn't there. Either that or the waterbed joke: you know it's going to be a bad day when your waterbed has sprung a leak and then you realize you don't even have a waterbed.

But for me what's guaranteed to happen is this: if I buy a little of some stock, I will have a nice gain, if I buy a lot, I will have a big loss.

Ed Stewart writes:

 The malevolent invisible hand guides ones trades when the in-laws visit. Suddenly your position size is 3X the norm, getting bigger, and at just the wrong time.

George Parkanyi writes: 

16. When you sell or short a stock - a takeover announcement will happen the next day (that happened to me twice - sold Robert Simpson; shorted General Instrument).

17. When you go from theory to practice, your well-researched and tested system will immediately bleed money, and will only start making money (without you) when you stop using it.

18. The positioning of your stop-loss order is irrelevant - you WILL be stopped out within a few cents of the low/high, and the market WILL go roaring the other way. (This is the only sure thing in trading.)

19. You will apply logic, reason and critical thinking to the market. You might as well have thrown a dart.

20. In exasperation you will eventually just throw a dart. Your position will go against you.

21. You will continue trading anyway, because your DNA has failed, permanently locked in the "I can do this" switch position.

Craig Mee writes: 

As soon as you mention a position to
anyone (some more so than others–for example, Vic's Hoodoos) the
heavens will open and you can kiss it goodbye.

Ed Stewart adds: 

Another guaranteed to happen item. Far more often than should occur by chance an invisible hand keeps you in the loss by a few ticks. At this point if you get out with a planned time based exit, most often prices move quickly in what would have been your favor. If you stay in, it does the opposite. And a related item, if you get out with a day-trade profit, it keeps going in your favor for days. If you swing trade it, the reversal was just a blip in the previous trend and you are soon dunked underwater again. My thought, and I could be wrong, is that much of this is real, not imagined, and is a more distant effect of the adverse selection problem with limit orders.



 The market today is like a pretty girl. It is very attractive from the long side in many markets, but it gives you no opportunities to buy on the cheap. Where is Anatoly with his bargains outside of Hawaii and Disney today?

Larry Williams writes: 

One of our members has not had a losing trade in many years now; not a one in, I'm not sure, maybe 10 years. Ironically one of his clients, a large bank, closed out a few years back thinking something was wrong because of the excellent performance. Such is the life of a trader.

Alston Mabry writes: 

"The Holy Grail Of Trading Has Been Found: HFT Firm Reveals 1 Losing Trading Day In 1238 Days Of Trading"

You could argue that you don't need a transaction tax when it has already been levied by HFT firms.

Ed Stewart writes: 

Virtu's dividend paying history seems very aggressive to me relative to what looks like its operating earnings and net assets. Last year $250m of the $430m dividend payment was financed. $250 being very close to the firms book value equity while earnings were 180m.

2011 and 2012 had earnings near 90M and dividend payments of 120M and 130M. Around 1.5B total paid since 2006.

Is this the magic of steady returns + finance + limited liability?



 One thing that is striking to me is that many of the online businesses that appear to be bubbles would be incredibly great small/medium sized businesses if the founders and people involved were not dead set on hitting a grand slam home run via market capitalization.

On one hand, the massive valuations stimulate investment in new technology, which is good.

On the other hand, selling stock to investors with a grand scheme to dominate the world could make hundreds or billions while running some of these sites as "small businesses" might still pull in high 7 or 8 figures of real economic profit from customers, without the public scrutiny or "cashing out".

The bubble pops when all the spending to make the "world beater" can't help a niche become something it never really could become. So the company becomes a vehicle to satiate speculative desires, which founders and advisers can take advantage of.

I wonder if on net that home run mentality helps or hurts. I'm inclined to think it adds a pyramid scheme element to enterprise that is not necessary. On the other hand, it does fund research and allow little ideas and little companies to compete with the bigs.

Chris Cooper writes: 

In my experience, it is not just money that motivates founders to swing for the fences. It turns out that there are a whole new set of challenges and things to learn with each order-of-magnitude increase in revenues/size. If one happens to find oneself in a high-growth, high-potential situation, one quickly realizes that it may be a once-in-a-lifetime occurrence. It can become one's chance to gain new experience and knowledge, to learn how to manage an organization as it grows, and many other things that most people never have a chance to attempt. It sometimes leads to failure, but that's part of the experience, too.

Knowing that probably doesn't change very much the way it looks on the outside, but to attribute "a grand scheme to dominate the world" to purely monetary motivations is not an accurate picture of what is really in the heads of many founders.



 Hypothesis: inflation is rampant but hidden by federal subsidies. Prove me wrong or prove me right. If I am right I will go into politics.

Jim Sogi writes:

This seems to be what Gross at Pimco is saying as well. Credit growth fuels asset price. Credit deflation may result in asset deflation. Seems to be what is affecting stocks.

The alternative theory is to follow the Fed's explicit explanation that the Fed is preventing deflation, and that removal of the stimulus will allow prices to deflate. This as they say is the greater risk.

Ed Stewart writes:

That makes sense to me. Credit growth or fed asset purchases have created asset price inflation relative to the rest of the economy, which is known as "the rich getting richer".

Deflation of assets is harmful as it impacts the money supply that leverages off of asset prices via credit. Kind of a different dynamic than what most people think of when discussing inflation based in consumer prices. One thing Mises said that I like is that money creation is never neutral across the price structure. It enters in specific ways and impacts specific prices relative to others. I used to think someone must understand how these things work, I now wonder if it is that things change enough such that understanding is not possible.

Gary Rogan writes:

Presumably asset inflation is related not just to the growth of the money supply (a large portion of which sits as excess reserves right back at it's point of origination and isn't contributing to anything other than bank earnings) but also to the intent of the Fed. Otherwise why would relatively tame tapering result in some deflation even while a huge amount of money is still being printed?



 As diligent dailyspecs know, I recommended a long in natural gas a few weeks ago. The front contract has now risen about 40% and is currently making a new high (up about 15% over the past two days).

As a veteran of this market, I can say with wizened knowledge that Natural Gas is a market that V-tops. So if you followed my recommendation and bought some UNG or whatever, don't expect a graceful exit. I am NOT calling a top. There is some probability of further upside. Possibly massive. Rather, I am saying that you shouldn't expect me to announce my exit in the way that I did in gold.

Note to Dr. Z and the counters: There is always a bull market somewhere.

Ed Stewart writes: 

Amazing string of winning ideas. It seems that with the benefit of Rocky's calls doing one's own research is counterproductive.

Jim Sogi writes: 

In '05 and '08 natgas went over 15 and 10. What caused those run ups?



Mini crashes might serve to stabilize things in the larger picture if they clean out accumulations of stop orders and discourage their use and the use of over-leveraging. I am not sure why nanex thinks every event like this is news - is there really evidence that they are more common, or is it just that they happen over a compressed time frame? Back when some of the electronic contacts were fairly new, one of the first strategies I used was to set scale limit orders below swing points since little stop runs were often not fully followed by the big contract and tended to reverse quickly.

Craig Mee writes: 

It reminds me of arm wrestling. If there is a stale mate on even ground, you can feign weakness quickly in order to hit the opponent with even greater force when he is not expecting it.



 When you look at markets that have natural long/short hedge interests (such as physical commodities) I think that there is an interesting point that occurs when movement in the market puts one side's (long or short hedgers) primary business at risk. In either late 2010 or early 2011 (I think around then), I looked up the quarterly reports of coffee processors/roasters and tried to get an understanding of how their hedge program was structured, and how they were dealing/had dealt with the price spike.

I remember one of the companies (A CA based roaster if I remember) talked about expanding their hedge program — they reached the "uncle" point where they needed to hedge out more risk "in case it gets worse" and motivated by that fear, started a program that was ultimately very costly — as costly as it was necessary.

And I know that for a period after that, once the bull trend faded, a very steep contango developed that was/has been quite persistent.

I read the Starbucks CEO's biography years ago. I remember him describing a horrible bull market in coffee, and how they ended up expanding the hedge program huge at just the wrong time in a way that (with hindsight) hurt profitability for years. They, in other words, hit the uncle point — and the continuing need to buy coffee meant they put that hedge premium into the market for years.

The above was not very articulate, but my point is that I think there is a sweet spot in speculation. When the other side feels forced to act, substantial premiums can set up on the other side that become persistent, and this can be partly seen and is reflected in things like the forward curve. Kind of basic stuff, but I think very useful when looking for large profit opportunities.



 I recently had the opportunity to review the portfolio of a near centenarian who had part of her portfolio held at a large "wire house" broker, and part literally held as stock certificates held in a bank vault. GARP stocks in a vault for 30 years… well, they make you very very wealthy over a 30+ year holding period with zero friction… a thing of beauty. No "proper" broker would have ever allowed a 12K investment to bloom into multi-millions, etc with more than a few positions, plus the amazing stalwart Exxon, etc. The idea that " you have to diversify, etc" made the "wire house" account just a fraction of "the vault".

Alex Castaldo adds:

This reminds me of the famous anecdote told by Robert Kirby in his article "The Coffee Can Portfolio" (JPM, 1984). Mr. Kirby had been advising a well off female client for several decades, supplying a steady stream of buy and sell recommendations.  One day he discovered that her husband, unbeknownst to him, had copied some of his early buy recommendations in his own separate account; he had then lost interest and stopped trading that account; the dormant account had grown more than the wife's more active account and included some remarkable gains in a few now famous stocks.

Victor Niederhoffer writes: 

Very fantastic and resonant for all ages. 

David Lillienfeld writes: 

But that was during a period of economic growth starting from when the US produced ¼ of global GDP. Would the same thing have happened if she had started in 2000?

Victor Niederhoffer adds: 

England did not do very well during this period. A few world wars. Lost its seat as financial capital. Went socialist. Their returns about as good as those of the US. David, you can take the boy away from the agrarian farm, but you can't take the ( ) farm away from the farm. You would enjoy Dimon who suffers from the English disease, and despite his results is always trying to forecast 2 or 3 % a year less for the next 100 years because of his malady.

Rocky Humbert writes: 

There is a bit of chicanery going on in this thread. The tax effects are not being considered. Let me illustrate: Let's assume that a portfolio of stocks compounds at 8% and there are NO dividends. And let's assume that a portfolio of bonds compound at 8% (and the coupons are reinvested each year.) So it's a horse race between the two long duration asset classes. After 30 years, the stock portfolio will have grown from $1 to $9.31.

HOWEVER, there are capital gains taxes owed as the old lady moves into a nursing home and needs the cash. Let's arbitrarily say that the combined local, state and federal capital gains tax rate is 40%. Then the $9.31 is actually $5.58 after paying the tax bill … and the compounded rate of return is 5.9%In contrast, the investor pays taxes every year on the bond portfolio and reinvests the remaining amount after taxes. After 30 years, the bond portfolio will have grown from 1$ to $3.89 or about 4.5%. So, even though the return on both asset classes were the same, the effect of compounding on the deferred taxes in the stock portfolio is what accounts for the lion's share of the difference. I used a high capital gains tax rate. The actual results may be better. And if the old lady dies, there are no capital gains taxes. Only estate taxes (if any).

Buffett understands this phenomenon extremely well. And there are several excellent academic studies that document even better results if one harvests the tax losses each year and never sells the winners…. BOTTOM LINE: The permabears on this list are ignoring the single most important factor to achieving outstanding returns: Unrealized tax liabilities are an interest free loan from the government on which one can compound over time.

Jim Sogi writes: 

There is another very important often unanswered question: how much is enough? I know all of you want to make as much money as possible, but how much is enough. My best friend is rich, and made his money in real estate. Yet he has gained weight and is having health problems. I tell him, take time off, spend some money, have fun, exercise, spend time with your family. He doesn't need to work, still he is busy with another big project. Why? The money will not be good for his kids. I've seen the destructive power of money often. It can ruin a child's incentive and motivation easily. Is money worth losing your health?

Ed Stewart responds: 


You are making inferences that are unwarranted given the story that I told. She was an extraordinarily generous woman to friends and charity, who lived very well - very adventurous in spirit and a world traveler. She continued to oversee private companies well into old age - Companies that employed many and created value for customers in competitive industries.

In the weeks before her death she was contacted by a young man who is an attorney at a leading law firm in the region where she lives. He met her for dinner with his wife with gratitude in his heart. Years ago, this old woman had paid for both his private university and his law school. And her only connection to this young man was that his father was her gardener and household helper for many hears. And this was not an anomaly or a one off. She helped to open up the American dream in this way, for many, many people - never publicly or speaking credit, but content and satisfied to be a partial catalyst for the self betterment of others and the achievement of what she felt was the American dream.

So, while in a general sense I understand your sentiments, in this case they are ill applied. Happy thanksgiving folks.

a commenter writes: 

I had often wondered why someone with great wealth will continue not only to sometimes still work so hard but to risk all in ventures in the quest for even more rather than keep in safer investments that will be enough to give them a great luxurious life. I later realized that there are different objectives that are the focus of people's lives that seem innate or driven by personality types that are. One of the most common are find are the "game players." To prove to themselves that their lives matter they prefer competitive activities in which the goal is to come out on top. The money might matter to some extent for what it buys, particularly for buying power, but part of it is just a way of keeping competitive score. People are not necessarily confined to one trait; they can be more complex than that - but one may dominate. Those who favor high taxes on the rich sometimes point to good growth in the economy like in the 1950's when those marginal tax rates were outrageously high. Of course, loopholes allowed the wealthy to often pay less than those rates, but that can hardly be the entire answer. Rather, I suspect that some will be competitive irrespective of the haircuts because even with the disincentives they still want to be the ones who come out on top. Hence, the destructive effects need not be quite as great as one might expect. But if the disincentives are too great they may just start playing other competitive games, such as who will be on the political top under a communist society, and stop playing the economic game in which wealth is the measure of success.

Ed Stewart adds:


Your sentiments are a big part of what struck me after reviewing this track record.

Let me add to the story though, what perhaps I should have initially. This old woman was never a miser. In fact very wealthy all along do to her husband's success in business and investing acumen. She had no need for the stock portfolios for any reason, be it income, old folks, care, etc, be it current income or charity, etc. And she was very generous, lived comfortably, and by no means a miser. The amazing part of the investment angle of the story is the way the "vault" stocks over time surpassed her other holdings in value, investing in many of the "dull" names that today are famous for having created enormous returns over the long term.

A commenter advises: 

 How would buy and hold work for those not initially wealthy?

Though you can't afford them, buy stocks when you are young so they can compound.

Never look at them, or the market, as you will be tempted to sell.

Pay off your student loans from your after tax income.

Don't read about investment managers who beat the market because you might try your hand.

When you need money to start or buy a business, borrow but don't sell.

When the little lady wants a nice car, house, vacation, or life, just say no.

When you need money for your kids growing up, skimp but but don't sell.

Save for kid's college from your salary and make them take student loans for public schools.

Have boys so your daughter-in-law's parents pay for weddings.

Retire late to prolong compounding and delay taxes.

Now that you can finally spend, enjoy retirement with your many close friends and relatives.



Over the past year all of my worst trades have all been long term positions that I sold at a nice profit. Yet I only realize this after tallying up realized losses and the mind wanders to "what happened to the ones I sold at a gain" and I tally it up to see that the missed gains dwarf the realized losses. Certainly a function of the bull trend, yet still… It seems to be a psychological phenomenon where the market plays tricks on my perceptions — or perhaps I trick myself.

Craig Mee writes: 

Ed, that's a good example of why when your cycle is in and you're making money in the market, you have to keep things tighter than ever, as if you have to start shooting from the hip because your saddle bags are full. It will end up with your cutting good trades to pay for the new losses, the market's own little stoppy to make sure you don't get to much of the action.



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

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

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

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

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

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

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

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

Jeff Watson comments: 

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

Ed Stewart comments: 

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

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

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

Good thing we can trade and sort things out.

Carder Dimitroff writes: 

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

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

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

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

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

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

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

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

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

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



 The FOMC announcement for the policy meeting is expected to leave rates unchanged. As Bloomberg reports "market focus will be on the FOMC's characterization of the economy-especially the labor market-and on any hints on timing of the start of reducing quantitative easing".

It seems markets are anticipating the release of the minutes expecting another hurrah: let's print some more money….! Markets have been printing new record highs day after day, and I completely missed this move losing instead my hard earned money trying to counter the impressive ongoing uptrend.

I have always wondered if my being contrarian has something to do solely with counting. I continue to see every day bearish patterns that miss their expectations, although I am aware that euphoria may invalidate typical mean reversion behaviors. I think there is something about being a contrarian by nature, like someone who is not willing to be part of a herd. Or to conform to stereotypes.

Extending the concept to its limits, being a contrarian could be also related to the inability (or unwillingness) to fully integrate oneself in the established common set of values of social contexts. As herd behaviors take a long time to exhaust their thrust, often times it would be better anyway to be less dogmatic.

Ed Stewart adds: 

A few thoughts about your post with an admission of little expertise.

Sometimes I truly feel that in spite of all the intelligence applied to it, trading is not much more complicated that other types of commerce where consumer tastes are fickle. As someone else said, it is the art of "what works now" or "what can I buy now to resell at a higher price".

To me, the best of counting is in studying, "what is our market is doing now" and "can i find a profit in it". I find when I get to far away from this basic notion my counting (limited as my abilities are) stops working.

In terms of contrarianism, I don't see it as a technical strategy or a need to always be fading price, so much as a mindset that recognizes that the great loss from the public shows up in money weighted returns, not just transaction costs. If you do what the public does you lose more than you rightfully should, as Vic has said many times.

I see much of trading as playing the forward curve of expectations. The easiest trade to me is shorter term fear against longer term drift or an expected value — and not to "dig in ones heals" but to stay nimble and play for a blip, at least in futures. And not massive fear but just the many little fears that show up regularly and give the other side a chance to exit or initiate at a poor price - and if it turns out out wrong adjust and move on quickly. Make the money back somewhere else.

The worst thing about shorting stocks to me is that it gets you thinking about covering when a more profitable thought at that moment might be to get long - So often on a short trade one squeezes out with a small profit right before the market blasts off again. And when you evaluate it you see that it was indeed a good time to get long, but you were oriented the wrong way and lose out.

One analogy that I liked a great deal in Practical Speculations is that energy dissipates through an ordered flow. That idea and its relation to studying price behavior and economic things like the impact of QE has been very useful to me. QE and similar is potential energy, the markets turn it into kinetic energy. Subsidized cost of capital lead to share buybacks, shrinking float. Shorts crushed. The entire market thermodynamics chapter is highly useful and one of my favorites.



 I wish I hadn't written the chapter on poker in edspec. I hadn't played for 30 years when I wrote it, and all I did was read some books from the gamblers book club, and then write about it as a layman, poseur, armchair geezer. I wasted 5 pages of everyone's time on it. And anyone who knows the game would have seen I was out of my league. I try not to be as ignorant of my ignorance as I once was.

The current issue of Outside is all about the secrets of survival. What it takes to stay alive. I am ignorant on this subject. The only thing I know about it, is from books, that when you're the captain, you're supposed to be the last man out, until you say "every man for himself" as Aubrey did. Also, what I read in L'Amour about always being aggressive at the beginning when threatened with a life saving situation. But people on this site are infinitely more knowledgeable than I on this subject as are all my kids and partner, who all had to spend a few days alone in the Vermont wilderness as part of the Mountain School they went to.

So please, give us your survival things, and comment on what Outside said, so that we can survive better in speculation, a consummation devoutly to be wished, and which the all seeing eye would like to do so many things in this life over again related thereto.

Jim Sogi writes: 

 Many cases of death in the wilderness are as a result of a series of small stupid mistakes that compound and make what is not a deadly situation, into a deadly one. First is lack of preparation. The classic case is the two hour hike without proper basics such as jackets, maps, water, shoes, compass and the weather gets bad. The party hurries, mistake 2. One in the party gets injured: mistake 3. The parties separate to get help: mistake
4. Both parties become disoriented and lost and panic, running about. mistake 5. Their bodies are found days later a few feet off the path. All stupid mistakes, compounding a nice situation and tipping into irretrievable disaster. It is the same as Chair talks about: a good base of operation. Basic needs of the operation in the wild are adequate shoes, protection from weather, warmth and hydration, and basic navigation.

The second main survival issues are the basic needs of human survival: water and warmth. One can go for days, and almost weeks without food, but without water, hours can bring on death. If the body goes just a few degrees below or above its normal temperature, body and mental functions shut down and the person goes into a stupor. It can happen in 70-80 temperatures surprisingly.

Often, the simple cure to avoiding the above is just to stop. People have a real need to be doing something, and often it is not helpful and leads to disaster. How many parallels there are to trading!

I have a simple survival first aid package. Loss of blood is one of main causes of battlefield death. Unless bleeding is stopped, death will quickly follow often in minutes. Cetox granules go in the wound and staunch the bleeding by forming clots. Pressure and bandaging or sealing with stitches or tape will stabilize until further help. Also in the kit are pain killers. Sprains and breaks are common, and pain killer will allow the party to limp or carry to further help. The commercial first aid kits are often a waste. Water treatment is top of the survival bag list to kill giardia and cryptosporidium that will cause runs and dehydration. A small tarp or space blanket and jacket will provide enough shelter to avoid hypothermia by blocking wind and rain. Tape such as dermoplast or even duct tape can be used to staunch bleeding, make splints and stabilize breaks and sprains. A good flint and steel and tinder and water proof matches will help build a fire to keep warm. That's about all in my kit. All the crap in the commercial kits tend to be useless weight. Most survival situations only last 3 days. By then 95 percent are rescued or dead. Just stay warm, drink water, and keep your blood inside you.


98.6 The Art of Keeping Your Ass Alive
Cody Lundin
Backcountry Skiing Skills Wheeler, Margaret
First Aid: A Pocket Guide Van Tilburg
Glacier Travel and Crevasse Rescue ,
Selters, Andrew

Deep Survival, Gonzales, Lawrence

Phil McDonnell writes: 

About the only thing I can add to Mr. Sogi's excellent summary of survival techniques is to recommend the choice of tinder for the flint and steel technique. I have considerable experience from Boy Scout days with flint and steel. The best tinder by far is steel wool. I believe the reason is that hitting the steel against the flint throws off molten steel sparks which somehow are attracted to the steel wool fibers. In competitions I used to be able to boil a #10 tin can of water in 3-4 minutes.

Pitt T. Maner III writes: 

 I occasionally watch the Les Stroud Survivorman show and he has some good ideas on the subject. Similar to Mr. Sogi.

For urban disaster he emphasizes having a basic kit stored in a plastic container.

In Stroud's view it is ideal to keep:
1) a week's supply of water and 2) a nice first aid kit (probably doesn't hurt for everyone in the family to take the Red Cross First Aid/CPR course or from another qualified provider. He advises having a 3) crank-up radio to keep in touch with outside world and 4) a shake, non-battery flashlight. 5) Water proof matches, 6) Rope, 7) a Multi-Tool.

During the hurricane season a trip to Costco to prepare for a possible storm is important. Easy to pick up canned goods, water and other items needed. A little wine to share with your fellow condo survivors doesn't hurt either when the power and water go off for a week and you are sweltering without the A/C. I like a big lantern-type flashlight with fresh batteries so you can read a bit at night.

At any rate, Stroud emphasizes staying dry to avoid hypothermia in the wilderness. Exposure is a big risk in the wilds.

Ed Stewart writes: 

 James has an excellent summary of important points.  I will add (or expand on) a few.

First, be very cautious when venturing into new territory.  If one is experienced at hiking a certain path or mountain or area, Don't assume "it is all the same" when you go to a new place.   Don't assume, "I know how to find my way".   I grew up in rural New England and spent a great deal of time in the woods (back country type skiing, hiking, fishing, etc) from a young age.   My families home was near a govt owned wilderness area, and over time I got to know the terrain extremely well in terms of having a mental map and orientation, but also things like natural formations that could be useful as shelter, etc. Knowing a wilderness territory is like knowing where the "utilities" are that you can access from any position.

It is very dangerous to generalize such specific knowledge into thinking "I am good at finding my way", a mistake I experienced and learned from.

Wear the right clothes initially, not just in a backup capacity. What is comfortable in ideal conditions (light cotton long sleeve T-shirt, etc) can be a disaster when conditions change. Material that is waterproof and/or maintains insulating ability when wet is always good.

Extreme danger emerges out of "usual" situations and seemingly small challenges. It is hard to see danger without experience. For example a recreational hiker thinks, "that small rock formation would be fun to climb".   The problem is, how it looks at the bottom (easy!) is a distortion relative to what one sees close up (unstable rocks, dirt, etc) from a now dangerous height. "From a distance" assessments are not an accurate judge of things for most people.

Focus on external factors that reveal themselves through the five senses. Take the time to observe. Stop and listen. Look at shadows, type of earth you are on, gradient, sounds, smells. Getting into that observation mode, not talking, not focusing on your own thoughts but on what is "out there." Bringing the senses alive to the slightest changes in the environment is a significant survival skill.

Experience coping with blood and guts, both literally and metaphorically, prepares one for survival. Many people are very deceived about survival situations because most of modern life is very safe, sanitized, and compartmentalized. Meat comes in a plastic package. "Someone else" does the dirty work. "Someone else" fixes an injured person. "Someone else" makes things safe and secure. People are squeamish about crossing boundaries, and when confronted with them can panic or become ill. An easy way to develop a natural survival mentality in any circumstance is to look for ways to cross boundaries before one is forced to do so.

The sound of a heavy metal bell can carry a great distance.  As I said, I grew up in a very rural area and our home was on a large number of acres. When I was out late fishing, etc, my mom had a very heavy metal bell that she would ring– a sound which would carry for miles and alert me to come home — and immediately, automatically set my orientation.   There are plenty of ways that a low cost item like this can be used.

Vince Fulco writes: 

 Besides some of the other great pubs listed here, the US Special Forces Medical Handbook (a bit dated) can be found on amazon and similar for $10. There is plenty of food for thought for the non-medical professional for when the stuff hits the fan in a bigger way.

Vincent Andres writes: 

I remember well one of Reinhold Messner's simple tips.

When in danger, you are yourself the very first level of protection (and also one of the best, since your reaction can be very immediate). So work well on this very first level, and don't count on somebody else doing the job for you.

This is also a very libertarian and Randian tip.




 There's lots of chatter about the decline in oil resulting from perceived risks of war in the Middle East. That's strange, since the risks haven't been higher in a while. Consider: Turkey did a pretty good job of betraying the Mossad by revealing 10 agents in Iran. How many of those agents were involved in monitoring Iran's nuclear weapons program I do not know, but I doubt that their absence provides the Israelis with any sense that Iran is far away from being able to build a nuclear weapon.

As a result of the above event, the US responded by canceling drone shipment to Turkey. Since Turkey was trying to reposition itself as a ME power and away from the EU (which it assessed as a losing proposition a few years back), it's not clear what the impact of this action may be, though it certainly doesn't increase US influence.

The US cut off aid to the Egyptian military, losing leverage. The Israelis are concerned because they saw that aid as the guarantee on the peace treaty with Egypt. Israel is also concerned about the return of the Muslim Brotherhood to the Egyptian government, with its connections with Hamas and complicity in support of the Gazan tunnels into Egypt. Of equal concern is the re-emergence of Russia in Egyptian affairs, with Putin moving to sell arms and provide financial relief to Cairo.

Saudi Arabia just turned down election to the Security Council as a protest against inaction in Syria and against IranThe Iranian PR offensive continues with absolutely no suggestion of any real behavior change by the regime.

Bibi is again talking about Israel's right to defend itself and that Israel will not tolerate anything short of the shutdown of the Iranian nuclear weapons program, including Iran's ability to enrich uranium (which Iran has declared to be off the table). I've seen no suggestion that concern among the Israeli electorate about Iran's intentions has lessened.

Syria has attempted on three different occasions in the past month to move chemical weapons to Hezbollah in Lebanon, even as the Lebanese re-evaluate their tolerance of the group in Lebanon.

Syria continues to decay, the Iranians continue to prop up the Syrian economy (or what's left of it), and refugees continue to enter Turkey and Jordan. Russian influence in Syria has increased in the wake of the negotiated quasi-destruction of some portion of Syria's chemical weapons store (the part that's visible and easily monitored). Iraq deteriorates as political support for the government continues to drop.

US credibility in the area is greatly diminished as a result of multiple international and domestic missteps. None of these occurrences should be a surprise. But in light of them, why is the "war premium" going down? If anything, instability in the Middle East, especially in the Gulf, has increased.

Ed Stewart writes:

You said: "None of these occurrences should be a surprise. But in light of them, why is the "war premium" going down? If anything, instability in the Middle East, especially in the Gulf, has increased."

It might be the difference between kinetic vs. potential energy. A specific crisis (kinetic) creates focal point for risk premiums. Some of the regional potential energy has been talked about for so long (business as usual) it is less relevant until movement occurs which signifies it is activated and being released.

As to if the "chatter" is correct or not, I have not, I have no clue.



 One thing that I've learned about trading is that sometimes working harder does not help. Sometimes it's best to go surfing or take a vacation and forget about it for a while.

Ed Stewart writes:

I agree.

I think what confuses things is that a lot of modern 'work' is busyness without much productivity, yet people consider all of their time in the office to be work. Real productivity (other than manual labor), particularly creative work, seems to have a natural cycle, or rhythm, and the amplitude of different people's seems to be different.

For example, I have found that I work best in long stretches. After a focused stretch I need to rest and tune out. Time in nature is the best for this. If I try to fight the cycle my real productivity plummets and non-productive busyness sets in (including bad trades, impatience, cluttered, non-creative thinking, irritable, etc). 



 One thing I have been considering lately from an investor's perspective is the power of consumer brands.

What is the value of a well known brand? My inquiry is motivated by a few different angles, but I think what has most stimulated the question is my study of a a "prestigious" company that has been growing by purchasing OTC medicine-type brands from the major consumer goods and drug companies.

At face value it seems like a great strategy. The shorter term economics look favorable. Yet, when I look in my families medicine cabinet, I notice my wife buys almost exclusively store brands when it comes to things like cold medicine, etc. It only takes choosing the low cost option one time to realize that the store brands (Costco, Walgreens, Roundy's etc) work just as well as the higher cost name brands.

Will the familiarity of an old brand have staying power that can allow for an above average roe over time, or are they wasting assets? How long can reputation last when the underlying reality is not particularly distinguished?

A family relation of mine owns a fashion design/women's retail business. One discovery this person made in the manufacturing process (working with contract manufacturers) is that the big names in mainstream "luxury" goods often have completely average quality or only slightly above average quality in terms of material and construction. The desirability factor is almost 100% psychological - what other people will think, a giffin good type effect. This might seem reasonable with regards to items people use to create their public persona or to establish a sense of status. But what about consumer staples? It seems like a much tougher sell. I know that when I go to Costco, I instinctively grab the store brand and am very rarely disappointed. When presented with two very similar, low risk options, even a 50 cent difference can feel significant at the moment when one must reach for an item off the shelf (or maybe I am particularly cheap?)

So the question is, how to evaluate brands in a competitive, relatively uniform (in terms of quality) market. When are they worth investing in over time (in terms of long-term roe?) I see two big things:

1. Need for reliability/high trust in product (condoms vs. hand soap)

2. Items that signify status (LV logo vs. generic)

To bring things to a specific context, I am presently evaluating if the company Prestige brand's (PBH) strategy of buying "known" but relatively mundane brands will have staying power over time (say next 15-20 years). The short term economics look good, but what about staying power in these competitive markets where stores have an incentive to sell their proprietary brands?

Any thoughts are welcome.

Russ Herrold writes:

 Historically Sears also historically perfected the 'Good, Better, Best' model of offering several lines at varying price points.

That brand has huge value, at least out here in Flyover Country.

Jim Wildman adds: 

Good, Better, Best has been adopted by John Deere as to their lawn equipment as well. 1xx series are cheapos, designed to compete at the low end with the Craftsmen and MTD's. 2xx are better, but still not what one thinks of with a Deere. For those you need the 3xx series, which are what I grew up with as a kid.

Easy to tell the difference once you know where to look as well (pressed metal vs cast pieces, bolted vs welded, etc, etc)



 Employment is not what it used to be. Technology already does a large percent of the real productive work. In the future this will even more true. I no longer believe that a large or growing work force is needed to, "pay for the old folks" and similar. Taxation has a claim on resources because of productivity. It does not matter if this productivity is produced by workers, or by increasing technology — including cyborg-like devices.

There is no need for the government to print money, pay increasingly superfluous workers, then supposedly fund things by taking a portion of the funds back again. Just print the money and be done with it. So long as productivity and real wealth continue to grow, it will not matter. The era of needing population growth to "grow" is past, but the system has not caught up to this reality.



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

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

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

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

Common examples might include:

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

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

A coach who teaches a pet technique rather than proper form

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

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

Jeff Watson adds:

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

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



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: 


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.



 Who is this ubiquitous "public" of which we all speak?

You must know who I mean. The one that Bacon thinks the form always shifts against at the race track. The one that allegedly always loses in physical stock markets. The famed 'Mrs. Watanabe' in the JPY Carry Trade. The 'Belgian Dentist' (what the ???) in Fixed income Securities. Well, I think, in the modern world, the concept of a "Public", as commonly classified, is absolutely redundant.

1. Holdings of Physical Stocks by the 'Public' is now circa. ~ 20% (Excluding Mutual Fund Holdings)

2. Therefore, the public to which we refer (in stock markets) is actually an MBA from a Big Ten business school in the United States or Oxbridge/Insead in UK/Europe. These guys are the ones buying and selling.

Now I am not saying that these are better or worse investors than the "public" we all allegedly copper. It's just that their behaviour is different — more institutional.

The ecology of the market has changed substantially, even in the past 25 years since I have been involved. I read somewhere recently that BlackRock owned or controlled ~ 20% or 1 in 5 stocks… Now figuring out how they move volume and why might be better than focusing on the public.

I find it hard to even dignify the 'Mrs. Watanabe' classification. The allegation that investors and speculators in Japan are in some way more trend following in nature or more likely to "buy the high" than any other classification of investors/speculators is laughable.

In all fairness, there are one off anecdotes about large purchases at the highs of trophy items by Japanese investors but that has more to do with who has the money and when. The last five years have seen the G.C.C. countries & China buy everything way through the highs for trophy assets…They too shall sell the low in times to come…

Ed Stewart writes: 

I disagree.

You are only considering it from the viewpoint of time-weighted returns. The problem is that time weighted returns are make-believe from a actual IRR perspective. Money weighted returns are where the public's poor outcomes become most apparent. Investors underperform their own mutual funds by something like 2% a year or more, if I recall correctly. Significant under-performance even occurs in index funds. People also time their 401k contributions, etc. I would love to see data on how much contributions dipped or were canceled in late 2008 early 2009, only to be turned on 2 or 3 years later after the tremendous rally re-instilled confidence. There were undoubtedly a tremendous, outrageous losses during this period relative to the time weighted returns, which seem to suggest that "everyone has been made whole" which is far from accurate.



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

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

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

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

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

I wonder how often this happens.

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

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

anonymous writes:

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

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

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

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

A commenter adds: 

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

Gary Rogan writes: 

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

Rocky Humbert responds: 

Mr. Rogan,

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

Is there an opportunity cost for teeth? Not sure.

Gary Rogan replies: 

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

A commenter writes: 

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

Gibbons Burke writes: 

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

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

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

Kim Zussman adds: 

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

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

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

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

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

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



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

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

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

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

Several arguments:

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

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

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

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

I would close my submission for now with one thought:

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

Phil McDonnell responds: 

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

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

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

Larry Williams adds:

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

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

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

High accuracy is a false God.

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

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

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

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

Leo Jia adds: 

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

Sushil Kedia writes: 

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

Anatoly Veltman writes: 

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

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

Anton Johnson writes: 

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

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

Larry Williams adds: 

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

Ed Stewart writes: 

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

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

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

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

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

Jeff Watson writes: 

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

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