We're talking about watch sales around here. Rolex apparently sells 650 million in watches each year. Susan says that wearing a watch these days is like jewelry for men, and that it's useless since everyone has a smart phone. We're thinking about Apple's watches. They'll have to compete with all the other watches. Supposedly they forecast it to use up 1/2 of all the gold production in the world. I wonder when Apple will stumble and launch a product that doesn't set the world on fire. Samsung wearable watches apparently didn't do that great. What do you think, and how will it affect the price of Apple. We just bought some on the news that they had to pay 600 million out of 150 billion in cash on a patent suit, which will probably be reduced to 10 or 30 million.

Stefan Martinek writes: 

I agree with the view that watches = jewelry, but then it is more about IWC Portuguese watches in platinum having an unassuming steel look and simple elegant design. Apple is not a competition here. Apple watch will need a phone for core applications + daily charging. Some people probably like to carry two devices when one is enough. Some people probably disagree with Diogenes "who wanted to be free of all earthly attachments — on seeing a boy drinking with his hands from a stream he threw away his drinking bowl, his last remaining possession".

Pitt T. Maner III writes: 

Given the popularity of the "Quantified Self" and Fitbit, why not a watch that monitors all your physiological parameters (via implanted sensors) and provides feedback on the optimal things to do next.

An early example might look something like this: "a new digital wellness and telemedicine platform which helps patients live a healthier lifestyle and connects healthcare providers to patients using telemedicine and wearable mobile technologies, today announced that its platform will be fully integrated with Apple Watch products. Or this: "Apple Watch wearers with diabetes will be able to use an app to monitor their glucose levels."

Carder Dimitroff writes: 

I believe the iWatch will be an ongoing success. Like they've done with the iPhone, Apple will convert the old watch into amazing and useful technologies. As such, the iWatch will likely become less of a watch and more of something else.
In my family, we seldom call each other. It's either an email, text or FaceTime. Phone calls are the last option. Our iPhones are not used much for phoning home.

Like the iPhone, each iWatch upgrade will pack in more technologies on less real estate. We will likely learn new tricks, become mindful of health issues and live a better life.

You can sign me,

Dick Tracy

anonymous writes: 

My son asked me why he has to go to school? "Why can't all this learning simply be uploaded into my brain?", he asks.

anonymous writes: 

The question becomes:

1. Will it ever have a cam?

2. Will it ever be independent of an iPhone?

3. What body sensors can be built into it?

4. Perhaps it will be the base for iHome?

Just some questions.

Duncan Coker writes: 

A watch is a perfect accoutrement for a man as it is rooted in a practical function. The form and design however vary greatly. They can be showy and expensive or simple, like the Timex my father had. Men like things that have a purpose. Watches are handed down from fathers to sons or daughters for generations. The Tank watch is one of my favorites though I don't own one. Fountain pens are in the same category as would be certain sporting gear like classic hunting rifles, bamboo fly rods, Hardy reels, or Swiss pocket knives that every man used to carry. For Apple I know design is very important along with function which is a good start for continuing this tradition.

Jim Sogi writes: 

A Swiss army pocket knife with can opener, screw driver, wine bottle opener and blade, a simple model, is the most handy camping tool. I love mine. I also have a pocket tool with pliers, knife, screwdriver with multiple tips. It's very handy for many things like sports, camping, and skiing. 

anonymous writes: 

I got a very nice waterproof sport watch used at the Salvation Army for $6. The guy at the jewelry store laughed when he saw the price tag and the battery was $15. You can get a real nice casio waterproof sport watch for $20 with alarms, date, stopwatch. I just don't understand some guys desire for expensive watches or computer watches. If the watch were small, had a phone and music and alarm, and GPS and the battery lasted… maybe.



 I know we've done a million studies showing the full moon doesn't predict squat about the market, but tonight's blood red moon full eclipse sure was accompanied by big moves in the market. Do you think a lot of people happened to be up watching the moon and figured, might as well do something crazy in the market? Hospitals and cops both say full moon is a busy time for them.

anonymous writes: 

But full/new moons do influence stock prices theres even a Fed Reserve paper on it.

Jordan Neuman writes: 

This full moon coincides with the Jewish harvest festival of Sukkot. I posted on the site two or three years ago that the period actually saw decent gains.  The saw about selling before Rosh Hashannah and buying before Yom Kippur had validity. It worked again this year.



 Finally Ag Commodities are getting a little break after months of straight down. Coffee up 7%. What was the explanation? Strong dollar dampens ags exports. Note that the yen and Euro are getting a little bounce today too after both being in downtrends for months. They are really driving the yen down.  

Jeff Watson writes:

But the question remains…Is Dec corn going to break 3 and are Nov beans going to break 9? Commercial hedging companies sell and deliver if necessary. The selling pressure from hedging companies is a real headwind in your face, even in a bull market. While one has enjoyed a respite from the continual decline in prices, one wonders….has the form changed, is this a bottom, or is this a selling opportunity? For the past year if you sold into strength in the grains and held for a couple of days, you made a very serious return. That's been the form and one wonders if it's changed. I recently got faked out in the grains around an important price point, and left 40% of the money on the table had I cashed in on Friday. Oh well, things could be worse…I'm a terrible poker player, and Ceres is very stingy. 



I am reading more and more about use of statistics to predict human behavior. We saw it in athletics, but we also know gugl and fcbk use it extensively. Target and most retailers rely on it and use it, and so do dating sites to glean users preferences, whether they know it or not. Credit companies use it. It's big business. But it's not very out in the open because most people find it incredibly creepy and invasive. Yet they continue to use FB, Gugl etc. Where is the line of privacy vs. prediction vs. voluntarily disclosed info and the use of it, the aggregation of the data, sales of data, use of data? It's a new world and there needs to be a discussion about it. There a some very talented statisticians on this site I know. Market data is used as a predictor of price action and people's preferences or habits. I am sure there is other correlated info out there that predicts price action. The question is how is that data, and what data is it that predicts price movement?



 I'm reading one of the best training books I've ever read for training for endurance sports, which they define as almost any sport lasting more than two minutes. Training for the New Alpinism: A Manual for the Climber as Athlete House, Steve, Johnston, Scott. They draw on many studies from high level Olympic athletic training and physiology.

Technical physiological detail supports their theory. In a nutshell to train for endurance sport, duration as opposed to intensity is key. Building up an aerobic base where you can exert yourself without hard breathing is key to to building mitochondrial mass, capillaries and appropriate ST muscle fiber which builds endurance. High intensity is not a short cut, and can lead to a decrease in endurance and performance. Cross fit is an example of high intensity.

There is no shortcut. It takes long hours building a base for endurance. The effect builds over years.

Larry Williams writes: 

I would add to this discussion that endurance does not win races. The winners are the fastest runners, skater's bikers, etc.

When the marathon running aspect of my life began I was doing 100 miles a week, ran 50 milers and all that but could never qualify for The Great Marathon; Boston, as I had to post a 3:25 at a sanctioned race to qualify. I was then running 4 hour marathons, and while I could run all day that was not enough.

Once we began doing speed work on the advice of a Kenyan runner who, while running with I asked, "What do I have to do", was given the simple answer, "run faster".

So off to the track we went for speed work and that on— top of endurance— got us to 4 Bostons, one with Ralph V.

There is a difference between completing a race, triathalon, etc and wining. Winners are fasters and work very hard to gain speed.

Seems like this applies to the markets in some fashion but I'm too slow to put that all together.

Anatoly Veltman writes: 

We're always taught that staying in the game is the key, because that's your prerequisite to catch the once-in-a-lifetime move. But then again, ascribed to palindrome: it's not whether you're right or wrong; it's how much you have on when you're really right! 

Larry Williams adds:

It's that delicate balance between spend and endurance– above average performance and staying in the game— in our game it seems. At times I have had speed in trading, competition, and like all in this list we have endured, but getting both at the same time still eludes me.

Buffet only has endurance.

Anatoly Veltman writes: 

I don't think Buffet only has endurance. He'd been given valuable chunks on silver platter.

Gary Rogan writes: 

 It seems like being given valuable chunks came after 1990, when he was already a billionaire. He made his first million in 1962, and a million was worth a little more back then. Perhaps someone has the goods, but it doesn't seem like he built up his fortune early on on anything but taking advantage of available opportunities. Early on the opportunities were not flexionic, but later on they got to be that way more and more. He will do or say anything to make a buck, but was he given or did he take what he saw?

As for only having endurance, it would appear based on his objective net worth that in acquiring wealth endurance matters more than speed, unlike marathons.

Rocky Humbert comments: 

Mr. Rogan makes a key point which should be underscored. The tortoise beats the hare in investing because of the law of compounding.

In a marathon, the objective incremental value of the runner's speed at mile #2 is the same as at mile #22. That is, the marathon result is a simple sum of the time used for each mile.

In a lifetime of investing, the incremental value is different at year #2 versus year #22 … because net worth is a geometric series due to compounding.

There are many subtle aspects to this — the effects of volatility on the compounding, and the effect of a bankruptcy in year #1 versus year #22, etc.

Lastly, to the extent that one believes that there is a random/luck/chance is a factor, the turtoise will do even better than the hare.

Ralph Vince writes: 

Good points Rocky (ever-prescient, except in matters matrimonial and matriarchal, in my humble opinion). In reading what you wrote though, the following question comes to mind (and I am unable to answer it, perhaps you or someone with a more sports-physiology knowledge can — my interest here in in the mathematical function pertaining to…).

There is not difference in benefit accruing to the marathoner by a given speed at mile 2 versus mile 22. However, is there a tradeoff a cost, involved between running wither of these faster that would indicate a particular strategy as being more preferable than another? I know individual marathoners may have a different take on this, I'm more concerned with the actual physiological function however.

anonymous writes:

Overall fitness requires strength, speed/agility, and flexibility.  The mental component is extremely important as it is the brain that gives the signals to the muscles to act.  If there is no deep reserve, or lack of strength, the brain senses this and pulls back autonomic functions.  Motivation however allows the brain to tap the reserves of strength and endurance in times of need.

Each individual has different training requirements.  Many a sport trainer or coach has found this out the hard way.  Each individual reacts to training in different ways at different times in the training regime. 

Training actual changes the body and brain functions.  Mitochondrial cellular mass actually increases, as does enzyme production and along with muscle mass and function. 

Recently I started logging my training efforts in a quantitative manner.  Very helpful.

Overtraining is a common problem.  A typical cure is to increase training, but it is counterproductive.  When you feel tired, cut back, or rest.  Your body is telling you something.



 Time is unidirectional and relentless. We can never go back. There are no Mulligans. Music performance is good training to understand time. Music has a beat or a framework and the notes have to fit in in time. Beginners have difficulty with tempo and keeping up with the framework. When they make a mistake they try to stop and go back and redo the part. It doesn't work. The show goes on.

A curious thing about real time is that it fluctuates in tempo. In markets opens, closes, night all have different tempos. When you're in a trade, time seems different. When you're relaxed time is different than when stressed. When you sleep, time disappears to you. Time, in reality according to theory, is relative to speed. Delay or lag in a correlated system is very difficult for people to make proper adjustments to achieve a steady state. This is the thermostat problem. This is the FED's Problem as well. This is a portfolio balancing issue too.

Jeff Watson adds: 

And time only has a circular definition.

anonymous adds: 

"Nature does not hurry, yet everything is accomplished." — Lao Tzu



 People generally cannot understand or have difficulty understanding or picturing exponential growth. There is a story about the inventor of chess when the King condescendingly asked him what he wanted for a reward, the inventor replied that he would like the number of grains of rice, which when starting with only one grain, doubled in amount for each square on the chess board. The King laughed and thought he got off so easy. This same inability to picture compounding growth interferes with a long compounding hold of financial assets.
The same lack of ability to see compounding growth applies to study of past growth. People understand linear growth more easily.

Vince Fulco writes: 

The inability to see compounding growth interferes with the study of nearly everything I might add. We tend to think that evolution is responsible for much if not all of the world that we see, a function of random mutations that have a selective advantage. Consider, after all, the universe is about 18 billion years old. In seconds, this is 60 x 60 x 24 x 365.2425 x 18 x 1,000,000,000 = 5.68e17.

"Random mutations with a selective advantage." Yes indeed. A thousand monkeys wailing away on typewriters will eventually happen upon Hamlet.

So let's examine that (it provides an insight into the astounding character of exponential growth James writes about here). Only considering the line "To be or not to be," which comprise 18 characters. We will consider the space a character, and make no distinction between upper case and lower case, require no punctuation, but rather a keyboard for the little apes having only 27 keys. The probability of any one monkey typing only this line is 27 ^ 18 = 5.81e25

To put the relative differences into perspective, if I could take a thousand monkeys, 18 billion years ago, and permit them 5,000 keystrokes per second, we would have about an even money bet that, without regard to case or punctuation they might, with a probability of about .5, come up with something like "to be or not to be" and much less all of Hamlet.

Natural selection, whereas I do not contest its existence, does not explain a whole lot as clearly not enough time has elapsed since the big bang.

I'm wrestling constantly these days with allocation structures based on similar matters, where a copula of discrete outcomes (say, the copula of rolling a pair of dice) posses 21 possible, distinct outcomes such that the branch out across elapsed consecutive trials gets unfathomably large quite rapidly. Even with parallel processing (more monkeys, more typewriters) the problem reduces, but the scale remains too enormous still as a result of astounding nature exponential growth.

Henry Gifford writes: 

The relatively new field of epigenetics has some very interesting answers to the astute observation that random mutation alone would have taken too long.

Stefan Jovanovich writes:

So, one starts with a "known" fact that is not a fact at all — monkeys sitting at a typewriter writing Hamlet. Then, one proves mathematically that the fact is not probable; and that, in turn, raises a question about the validity of the current best hypothesis for explaining the organic world around us — namely, that through natural competition fortunate mutations win.

It seems to me that we are all saddled with two very stupid terms and our minds wear them like blinders - Marx's word for the results of enterprise ("capitalism") and the Darwin's unfortunate choice of the word "selection" for his title. "Evolution", especially in the eyes of its admirers who try to turn its theory into a fact, somehow takes on the certainty of religious moral authority; it "explains" everything just as Marxism does. No, it doesn't; but Darwin's theory does withstand the Shakespeare test. For one thing, there is no evidence that any monkey of sense would go near a typewriter.

If Marx fudged the data wherever possible to make history say what did not, in fact, happen, Darwin did the very opposite. He thought there could never be enough data to "prove" his hypothesis; but he did take heart that there was, at least not yet, no data that proved it wrong. He does seem to have realized that he had been proven wrong in his choice for the title for his first edition. But he deserves a pass for that.

In choosing On the Origin of Species by Means of Natural Selection, or the Preservation of Favoured Races in the Struggle for Life, he was not endorsing the Southern way of life or Dickens, Carlisle, Kingsley and Ruskin's defense of Governor Eyre. Hardly. Darwin was one of the very few people who had the courage to speak up, along with Huxley, John Bright, and John Stuart Mill. In using the words "race" and "species" Darwin was using the biologist's definition - could male and females produce offspring. In the rare times when he was asked about human "races" Darwin was genuinely bewildered by the question; there was, in his view, demonstrably only one human species/race.

That leaves the point HG notes. Useful mutations may have had their randomness accelerated.

"Timescales of Genetic and Epigenetic Inheritance":

"According to classical evolutionary theory, phenotypic variation originates from random mutations that are independent of selective pressure. However, recent findings suggest that organisms have evolved mechanisms to influence the timing or genomic location of heritable variability. Hypervariable contingency loci and epigenetic switches increase the variability of specific phenotypes; error-prone DNA replicases produce bursts of variability in times of stress. Interestingly, these mechanisms seem to tune the variability of a given phenotype to match the variability of the acting selective pressure. Although these observations do not undermine Darwin's theory, they suggest that selection and variability are less independent than once thought." 

Jeff Watson writes: 

We should revisit the Second Law of Thermodynamics, and how some scientists speculate that it enables the formation of life itself. There is some very good peer reviewed literature regarding the second law and life.

Anyways, there are some very interesting challenges to Stanley Miller's glass jar filled with water, methane, ammonia, and hydrogen.(I believe he got his PhD from the same place as the Chair). In Miller's experiment, he blasted it with an electric arc for a long time, and out of this primordial soup arose half the amino acids required for life.

Fifty years later and biochemists and physicists today are on the verge of creating an artificial organism that meets all the criteria of life.

Mr. Krisrock asks:

In evolution it's the survival of the fittest, so how come so many species still exist?

Gary Rogan writes:

There are multiple niches in the environment, so species specialize.  The famous Darwin finches were shown to adapt their overall size and beak size to different sub-environment both geographically and on the same island.  It's the same reason why Toyota doesn't operate supermarkets or Procter and Gamble doesn't own any airlines.  It's easier with conglomerates: at least they can get specialized departments, but imagine a lion competing with heat-loving microorganisms in under-water vulcanoes.

Now the jumps: just because not all species that died out left any identifiable remains, doesn't mean they didn't exist.  The absence of evidence is not evidence of absence.

Bruno Ombreux writes:

Why is it hard to believe that matter will organize itself into a more
complex form when a very high temperature source of energy is in the

Matter will organize itself when it is in an open system subjected to an energy gradient. See Prigogine's principle.



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

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

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

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

Jeff Watson writes: 

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



 The citrus market is a sleeping giant. Brazil is the big boy on the block.

"Citrus: World Markets and Trade"



 Here are the three most important things I've learned from you and the DailySpec.

1. Count. Then count some more. If you see something you think is promising, capture it in a statistical test and see–first hand–how correlated it is with what you already know and how much variance in prospective price change it truly accounts for. There is no better antidote for overconfidence bias (and no better stimulus for humility, objectivity, and perspective) than to rigorously test one's ideas.

2. Explore. What you observe in nature, human events, music, and so many other facets of life can teach you a great deal about people and markets. Some of the best market inspirations come from being away from markets and absorbing wisdom from insightful people, good books, and the arts and sciences.

3. Achieve. Half of life's battle is staying young-hearted and benevolent in spirit. There is no better barometer of a person's sense of life than seeing his or her emotional response to great achievement. Being young hearted means staying inspired and always pursuing new vistas. It means reveling in the best of others and thereby fueling the best within us.

Victor Niederhoffer writes: 

I believe that most of us including me, consider Brett one of the most sagacious personages we've ever had contact with. He says explore exploring "what you observe in nature, human events, music, and so many other facets of life can teach you a great deal about people and markets. Some of the best market inspirations come from being away from markets and absorbing wisdom from insightful people, good books, and the arts and sciences."

I thought it might be useful to explore if there are some things we learn from sports that might be useful in markets. I have some ideas along these lines like offense wins the game more than defense. The home team always wins. The first blow is half the battle. Wins by a few points are not indicative of future success. The lucky shots and lucky wins tend to reverse. The end of the game tells the form. Slow and steady wins the game. The horses change at the beginning of new season. Start young if you wish to achieve mastery. Don't play your opponent's best game. You can't run with the hounds and play with the foxes. I haven't quantified many of these ideas, but some I have. But Brett seems to imply that big ideas even when not quantified (perhaps the counting can come later ) can be useful. I'd like to hear if any of you have ideas from sports helpful for markets, (other than that Smith and Antoni are the curses from the Bad One).

John Floyd writes: 

Focus on developing a good base of fundamentals(trading principles/methodology) and follow them, gimmicks and tricks will only go so far at higher levels.

Play to your strengths, don't trade others ideas or positions.

Longevity and being able to stay in the game is key, you can't win if you are ejected from the game.

Maintain balance, overreaching and thinking you can master many markets often spreads one too thin.

Cross market feedback mechanisms(how does a slowdown in China impact Brazil, etc.), skills in one sport are often complementary to others.

Discipline and routine, when this change it is all too easy get off track.

Jim Sogi writes: 

1. Big waves come in sets, and rarely is the first the biggest. Never take the first wave.

2. Trust your board. Stay on it as long as you can. Riding until the end of the wave is the safest exit.



 Risk is when things might go wrong or get worse. News often focuses on the possibility that things might get worse. People ask, aren't you afraid of getting killed? But things might get better.

A few days ago there were big waves in the 15 foot range. Upon arriving at the beach it was windy, cold and bumpy and rainy. I really had to drag myself into the water. When I got out into the line up conditions were terrible. Just me and my neighbor Alistair were out in the water. But then all of a sudden the wind died down, the rain stopped, and the waves started lining up real nice. There we were, just two of out in these really nice big waves. I love when that happens.

I watch the weather and wave reports and know when a good swell is about to hit. It's really a good feeling to go out when no one is out, and just as you get there the big swell hits.

It's a similar feeling when the market is tanking, things look might grim and you jump in, and lo and behold, things turn around. It's great to be in early.

In the big picture, old people say they regret the things they didn't do the most. It's important to jump in. Life is fragile. Drink deep while you can.



Russell is doing the Wyckoffian shuffle around the 1000 yard line.

Craig Mee writes:

100 in Dollar Yen on approach… it doesn't get much bigger or fat cat than that. You can almost feel the price, like a train track, buckling and stressing under the midday sun as it approaches. It may take NFP to decide that one.



 I'm learning a new song by the Beatles called Dear Prudence off the White Album. Its an extremely difficult song to play with interesting changes in time signatures and drum beats over the same meter. Some of John and Paul's harmonies are very difficult to hear on the record so I have to resort to deciphering the chart which is in musical notation form and play the notes for the back up singers to sing in harmony. I'm sure Laurel could sight read it, and like reading a book she can "hear" the melody, notes and harmony just from sight. I haven't read music since 7th grade and deciphering the notes is a laborious process in which I've made a "key" of the notes with the names written out up and down the staff so I can translate them to the guitar. Its similar to counting with fingers. Yes, its very primitive. However, its unlocked some problems in figuring out the song and allowed a break through of sorts. You know how when you read a book you don't struggle with letters and sounding out words, you just fly through it and see and hear the characters in living color, not seeing the black and white. Some people can read music like that on sight, and hear the melodies and harmonies. Remember the movie, Amadeus, and the scene where Salieri is reading Mozart's score and "hears" the sublime music in his head.

Chair wrote and filmed about the similarities between music, notation, and price history charts. Music has discontinuities, jumps that give dynamism, chords. Price charts also have gaps, jumps, air drops. Music has rhythm changes and meter and time signatures. Do multiple markets, such as bonds and equities have chords for their various relationships? Financial markets appear to have rhythm changes. I wonder if they could be classified as to meter and time signatures. The exchanges designate fast markets which operate under different rules. There could be others such as the meter of the open, the slowness in midday, the jumpiness of the close. An interesting thing about notation is that is does not capture rhythm or feel. That is left to notes and interpretation. For example beats such as the shuffle, straight beats, appear the same in notation. I believe also that one cannot copyright rhythm. That's interesting that European notation does not capture one of the main elements of the music. There are similar rhythmical things that price charts also fail to record. The information in time and sales does not appear in regular interval time price charts. Price charts capture price change, but not the rhythm at a single price.



 At the Shanghai parks, thousands of Asian women sit with posters behind them advertising their college educated girls' availability for marriage. The girls seem to be in a minority in the population because of the one boy syndrome so they have a competitive edge but they are too busy with the exams and too shy to meet to have a good chance of marriage. The prices in China for American goods seem a bit higher than they are in the US for the comparable goods.

Prices in China seems slightly lower than in the US. The McDonalds Big Mac costs 4 $ or so. And the meal comes to $ 8. To the extent that China has benefited from low prices and low wages in the past, and this has been their model to grow, aside from spinning off the state owned businesses to members of the party, they would seem to have a damper on the growth.

The Chinese 30 and unders like to wear the kinds of clothes that 12 and under wear here with frills and ribbons and lace and sequins. The % of women wearing high heels is about 5 times higher than in the US. Of course, the skyline in Shanghai and the number of skyscrapers on the Bund and the number of good restaurants there easily dwarfs by 3 or 4 fold the comparables in NY.

All the restaurants are twice as busy in China as New York as the space is cramped at home, and it is traditional to have the family and friends dinners at restaurants.

All this talk about the smoking and pollution in China is terribly exaggerated. There are numerous parks in Shanghai and the air there is just as good as anywhere in New York. The % of smokers in Shanghai would seem to have been well below 10%. The prices of sushi in Japan seem to be about 1/50 at the fish market and the fish stores in the fishing villages as what one would pay in New York. And of course there is no freezing and the taste is much better. Had more abalone there in a week than in the US in the last 50 years, and much better.

 The competitive economy in Japan seems to be riddled by duopoly, oligopolies, unneeded distribution, and layers of the old boy network. My very entrepreneurial brother in law has been there 30 years and had dozens of entrepreneurial ventures, and each is blocked at the end by an old boy network or extra level of distribution that has to be overcome. Of course, in his defense, he has a great entertainment business based in Kobe, and that was knocked off the block by the earthquake.

The plight of women in Japan is somewhat saddening as they have to be overly subservient, and they do not seem to have much opportunity for advancement to the upper levels of success.

A haircut in Japan is a major adventure as you need 5 or 6 hair cutters to cut your eyebrows and hair, and the good one forbid the facial and neck hairs. That is typical of everything else in this stratified society. But everything works much better in Japan than in the US. There is nothing that would not fix their economy and make it thrive a thousand times better than the US that open immigration would not cure. While I was there, they seemed to be adopting a much more open view towards letting skilled immigrants in than the US policy of closing down the businesses with illegals making the minimum wage.

Of course things are so much more harmonious in Japan than the US with no honking of horns, no dirt on the street, no garbage cans because people are so neat, and everyone trying to do a good job. Throughout the Chinese economy one sees pockets of amazing activity e.g Hagen Daaz in every corner, but it turns out that these have to a large extent been delivered and granted and licensed to high ranking members of the party.

Much of the woes and obstacles to a dynamic society in Japan and China come from the examination system where a very small number of students get into the best schools and everyone has to study 120 hours a week for the exams until they are 12 or 15 and has no time for anything like innovation.

There is about 1% as much physical activity like jogging in Japan as in the US but in China all the parks have thousands exercising in the morning whereas in Japan there is hardly any.

Mr. Leo Jia performed admirably in facilitating all aspects of the trip for Aubrey, Laurel, Susan, me, and Victoria and Artie, and Mr. David Cole was totally beneficent in Japan. 

 Worth the time and price of a trip to Japan in and of itself is a meal at Hayashiya in Hyago port in Kobe city on Awaji Island. Magnificent shell fish and tuna and yellow tail and sea urchin and white fish fresh off the boats for a meal that would cost perhaps $ 12,000 at Nobu or Masa but for $ 300. And of course nothing frozen or delayed 10 days.

The monkeys in Kobe are behaved just as well as the Japanese. I gave them a few tests on using tools and they lived up to their names (they were the first to discover how to wash bananas and pass it on) when they used a broom to sweep the apples I placed away from them down an inclined plane to get their food.

The one untoward incident I had was when I was chased away by a guard with a cudgel waving after me after I mistakenly walked a few steps into the Eastern part of the Imperial Garden. It is amazing to see the wealth of the shoguns in Kobe and the castles and parks that they maintained.

The Japanese respect for their elders is somewhat harmful to their economy as they can't be thrown out until they are 80 and this reduced the flexible turnover and new blood necessary to compete in a competitive economy.

The traditional Keirutso dining in Kyoto has much to do with tradition and face. We ate in the highest restaurant on a mountain with the water down to all the other restaurants about 30 in a row. Like Ishmael who liked to get the first draft of wind, the best restaurants like to have their water flow down to the others, and this applies to the way they hang their laundry also, with the senior patriarchs hanging their clothes out above the others.

John and Rosanna Floyd are can do harmonious travel companions that made the whole trip even more harmonious than would have been possible to imagine and Susan and I and my family thank them. Amazingly, the last things said to each other was "where are we going next year?" after 10 days of togetherness and encumbrance by me.

Jim Sogi comments:

The observation that women are subservient is an illusion. They only appear to be subservient in public face. The reality is that women control the home and most of the men in Japan and are tigers, dragon women. Don't be fooled.



 Some guys blend, I juice.

Just got a new Jack Lalanne Juicer and have been juicing apples, beets, carrots, pineapples, grapes, green beans, chard, celery, grapefruit, oranges, strawberries.

It seems very healthy to drink the live uncooked juice.

The V8 vegetable juice with some tabasco and worcestershire is good.

The fruit juices with a little ginger kicks it up a notch. Juicing adds more variety than just smoothies.

The juicer is pretty easy to clean and was inexpensive.



 In old England, disputes were solved by trial by combat with the winner winning the dispute. Modern trial and interrogation techniques put the subject under stress to ferret out weaknesses in the story line. Markets put their participants under stress to determine what is the proper price at the close. A trader who has an opinion will put on a position, and if he thinks its correct will hold that even when put under stress. He holds a belief that the price will be bettered. If his belief is not strong, individually and in aggregate, the price level will not hold, as the belief in the value of the asset at the price level is not strong enough either rationally or emotionally to withstand the stress. Also, if the bet exceed the trader's ability to hold margin, the price will not hold, as the belief is not support by adequate fundamental financial ability. As the market moves, this dynamic works to determine the proper price for the day.



 Complicated things of high quality don't just break down in a big cataclysm. Take a modern car. They are well built. The engine will last for half a million miles if properly maintained. However it is the little things that start breaking: the plastic ashtray falls out, the rubber seals wear, the bearing start getting loose, the fabric tears. These little things can get more serious. If the seal leaks, and the oil is low, the engine can wear prematurely. The shocks wear, and the ball joints go. The steering gets loose. Small things can lead to bigger problems. Take a modern city, like New York in the 70s. First it's some graffitti, then some broken windows, soon vagrants move in, garbage piles up and the city head to bankruptcy. It's the small things first. Take a huge economy like the US. The GDP isn't going to fall apart. Employment probably won't go off a cliff. It's going to be small things first. Take a corporation. The earning won't collapse right off. It will be receivables up, inventory up, sales down, or even smaller things. Maintenance up, or down. Take a market like the Nasdaq.

Leo Jia writes: 

These are very insightful. Our bodies are about the same. And while the destruction process happens this way, it is interesting to note the creation process is also quite like this. First, small trivial things get created, then the large more significant things. All things seem to move like this in circles. Bubbles start small, grow big, then shrink a little, then burst.

Jim Lackey adds: 

Hold on ther' hoss. The first thing we do, it wash, feed and stable the horses before the cowboys. This car post caught my eye. If the simplest part breaks, a mass air flow sensor, the engine runs rich and bad things happen. Yet we have a dummy light! Even back in the day we had dummy lights for high temp, or low oil pressure. These little 25-200 dollar parts break on brand new machines. Take the worn out 100k 7 year old car. Yes what you say is true. 35 years ago the 100k car may be dead in the crusher for scrap. Today what people thing of the heart of the car is the engine. With CNC , CAD and CAM all short for, computers do not have UAW contract for, tired nor sick nor go out of whack and slap together the last V-8 at the end of bowling night. Therefore the engines are designed and build and installed to Engineer spec. They do last for 250k. Most but not all of them do 250k except for the short cut copy cat Far East red flag waiving commies BYD my 6.

The little things that are build to spec yet cant possibly last for 7-12 years as you say rubber O rings, Balls joints, tie rod end,s brake rotors struts all must be changed or maintained. The most complex and weakest link of the chain on new cars is automatic transmissions. I made one the of the worst mistakes trading this week. I was taught about racing cars bikes and anything with an engine, failures. In a way we kept track of the max min wait time on a failure of a part. We change them at or before the median failure time. I forgot all about that for our trading. Didn't lose, it was much worse than that to a racer not winning is as painful as being on fire.

One spec posted a customer service report on cars and diamonds weeks ago. The gist was one man said change all parts. The other man said wait 5,000 miles. The implication was the second man said wait, and was best. What wasn't taken into account was two things. The performance of the car and his safety and time of a second trip to the shop. Other was the parts probably were not in stock at dealer B. There fore the guy simply told what most want to hear, no money today rather than we will have to keep your car over night as the parts are coming off the ship from Japan.

The discussion also goes to medical. too much of medicine is based on illness. When talking to my Docs and their ranges for normal I burst out and said, your kidding right? How do basic stats escape Medical training? How much better can we all feel if we did X and Y do the the people all wait until a breakdown and see the Doc for solution which prescribed as X. I know why. I did the same thing last week on my trading. I didn't consider wellness. I was waiting for the market to become sick then do trade X. My trading doc even warned me and kept me from having a bad loss. He was focused on wellness ( is best I can describe) I was looking for the illness. (Okay so the markets went 1530 to 1490 and I said why not wait for 1475 to come in? I pull my racing pits cap over my head and tell the wife, at least I didn't lose short)

How much better will a car perform with New tires brakes and rotors vs a car with 5,000 miles of anecdotal testimony to wait. I can give you the stats on new vs 20k or 40k miles and after one race on a real car. Racers change brakes and tires after each and every weekend. We rebuild engines most every weekend depending on class. In some pro classes we rebuilt engines after every single 1/4 mile run, new pistons, rods and bearings, Valve sprints and retainers, all seals and gaskets.

What the anecdote above states is the engine will run for 250,000 so then to should the car. Yet the car will not move with a broken ball joint. The engine will die with a broken timing belt and over heat with a bad water pump, that now last to 110,000 miles. So the engine system is still only good to run for 110,000 miles. The trans and rear end gears all die at 125-150 and the fuel pumps and all do the same. The catalytic converters die way before this. Most cars have a 5 year 100,000 mile warranty on the drive train. Its only 3/36 or 5/50k on bumper to bumper.. The emission control systems or parts are now only good for 80,000 miles.

So in theory your car is now worse than a 1969 model. It will break down and be non drive able 20,000 miles before the 1969 model died and went to the crusher. Yet your correct, at 80k miles your car will be fixed for 1,000 bucks and in 69 you needed a new engine trans and every hose belt and switch was dead.

This entire deal of failures was burned into my trading memory banks for life. I used it in some ad hoc way since MR Vic showed me in 2004. Yet the advances in his technology on how to quickly repair the trading engine and have it on the road to profitability was lacking by lackey.

The story I wrote about my teenager failing to appreciate the need for trans fluid made me dump the BMX van for 25% above scrap rates to a new friend. I am now shopping for a good used van. There is also a meme on pricing of used vs new cars. We try not use never always when it comes to life. Yet the financial advice out there has man a never and always do.

Too many men are all over the past 10 year return of stock at or about nil. The we are in a range trader calls have been falsified many times this decade. The SPU made a high in 07 the Russel or what ever made a high this year. Yet its true and maybe always is tr that not all stocks make a new high as the joke is many stocks fail to exist, survivor ship bias. Its all mumbo as they use all or this or that index.

Then to say all new cars have engines that run to 250k miles and do not fall apart all at once.. is also false. A brand new car has the ability to shit down or go into safe mode. Its broken according to our ladies who drive. It can only be idled at 35mph to your local shop. With palladium and platinum are such high prices the emission control systems are too expensive. The cars heart is not the engine, it never was the brain. It used to be the driver and the mechanic. Now its a computer. We have fire trucks that will not start if the diesel engines emission system is on soot burn mode.

Now we have computers in control of making markets for the global stock and futures markets. All economic reality seems to be lost in the short term. If political hack from Berlin says A and EU hack said confirm A and US is about to have a press conference you can forget about the next four hours prices being predictive. The markets computers go into safe mode. They will move and shut down quickly and we must, as traders idle at 35 MPH to our local dealer of data to find out what happens next after that part failure.

For what ever reasons I have gained my passion for markets back. Of course we know where we lost it. What makes men take risk? What makes risk takers skip a generation? Is that true? I had a friend as me this week about becoming a spec. I asked him to answer this one question. Would you rather trade your money and take risk per 500k account to eeke out a living or use another mans money and take 20% of profits yet no fees? I have asked this Q so many times and it reveals much about a mans capacity to take risk, yet most important to take pain. Ya see racers, we do not care about losing crashing or getting hurt. Its part of the game. We do not like losing, yet not winning that is so painful, like I said we wear fire suits and not winning is as bad as completely destroying your car on driver error and being on fire.

The gist of the answer is if your rather trad OPM you do not belong in the hours 1/2 day markets, ever. Do not do it..It has to be the hardest way to make a living. The easiest way if you have any capacity to sell or raise money is ride the tides and collect a fee. I am sure you can find a way to make a firm stand on the middle ground. Some fine research and pick some fine stocks and short some over plus commodities after the bubble has been busted and hold that roll that for years. Now you have the ability to take down a small fee and a profit incentive.

What has changed my attitude is being certain about one thing. These markets change direction and patterns change so quickly its fast, like racing and Fun! Where in the hades have I been the past few years not to look at all of this as a positive thing for, me. I love to go fast. lack

My motivational quotes for this week attached.

August 1908 issue of a periodical for bicyclists called "Bassett's Scrap Book". A short item contrasted the modern age to ancient times and presented a variation of the epigraph:

"Naram Sin, 5000 B.C. We have fallen upon evil times, the world has waxed old and wicked. Politics are very corrupt. Children are no longer respectful to their elders. Each man wants to make himself conspicuous and write a book."Johnson's often-quoted definition of genius, "the infinite capacity for taking pains."

"genius is inspiration, talent and perspiration." Kate Sanborn

The President of the Old Speculator's Club, Jack Tierney, writes: 

I seem to recall the name

Carnegie's "Gospel of Wealth" idea took his peers by storm at the very moment the great school transformation began—the idea that the wealthy owed society a duty to take over everything in the public interest, was an uncanny echo of Carnegie's experience as a boy watching the elite establishment of Britain and the teachings of its state religion…Since Aristotle, thinkers have understood that work is the vital theater of self-knowledge. Schooling in concert with a controlled workplace is the most effective way to foreclose the development of imagination ever devised. But where did these radical doctrines of true belief come from? Who spread them? We get at least part of the answer from the tantalizing clue Walt Whitman left when he said "only Hegel is fit for America." Hegel was the protean Prussian philosopher capable of shaping Karl Marx on one hand and J.P. Morgan on the other; the man who taught a generation of prominent Americans that history itself could be controlled by the deliberate provoking of crises. Carnegie used his own considerable influence to keep this expatriate New England Hegelian the U.S. Commissioner of Education for sixteen years, long enough to set the stage for an era of "scientific management" (or "Fordism" as the Soviets called it) in American schooling. Long enough to bring about the rise of the multilayered school bureaucracy. But it would be a huge mistake to regard Harris and other true believers as merely tools of business interests; what they were about was the creation of a modern living faith to replace the Christian one which had died for them. It was their good fortune to live at precisely the moment when the dreamers of the empire of business (to use emperor Carnegie's label) for an Anglo-American world state were beginning to consider worldwide schooling as the most direct route to that destination.

Mr. Krisrock writes: 

This happens when there is a world price for labor…that American foundations arranged for 100 years.

Jack Tierney responds:

I'll go along with the parts played by American foundations, but not the 100 years. In a recent book by David Horowitz, "The New Leviathan," he points out that many of the great foundations we still hear so much about have wandered substantially from the goals envisioned by their founders.

Among them are the Ford and Rockefeller foundations, as well as those of Pew and John MacArthur. Each accumulated substantial fortunes in very capitalistic endeavors…and expected their trusts to continue to promote efforts in that direction.

At first this worked as the initial appointed trustees were chosen by the benefactor. Over the years, however, (and this relates to my initial post) subsequent trustees went off in their own, very contrary direction. inevitably, they labeled these modifications as "progressive," a catchall phrase that seems to excuse almost any perversion of original intent.

Most of these changes in direction have occurred over the last 50 years as the original trustees passed away or retired. Only Olin was prescient enough to "sunset" his trust to forestall this drift.



Lefevre in Reminisces, and Clews in Fifty Years recount manipulators buying up a market and then selling it at the top, toppling the market. Yesterday's market (2/28) felt like that– a quick, too quick, buy up, and then a big fall at the end, dashing some hopes surely. I wonder if such a thing is still possible in today's markets. A 10B line swings some weight. 



 I'm in Valdez Alaska. It snowed 2 feet the day before I got, here, and 3 feet the day I got here, and 2 feet today, and it's still snowing. When backcountry skiing, avoiding avalanches is a constant concern and a matter of life and death. I've talked to a few real experts on the subject here, Dean Cummings, former World Extreme Ski 2nd place champion and owner of H2O Heli ski, and Matt Kinney.

One of the basic ways to understand the snowpack and the potential danger of avalanches is to dig a pit in the snow and examine the layers of snow over the season and test its structural properties. Snow, when viewed cut away in a pit, shows the layers of snow over the season like the rings of a tree, exposing the various attributes of the snow. One of the things to look for is a weak layer in the snow, such as a layer of ice formed by rain or sun melt, or powdery sugar snow called hoar frost. The other thing to look for is slab formation caused by wind blown snow. The danger is when a slab slides on a layer of ice, or sugarlike snow and forms an avalanche.

The pit exposes the layers and the skiier examines each layer by touching it to feel its consistency. The skiier then isolates a 1 or two foot wide column of snow which can be 240 cm tall where that is the depth of the snow. After tapping the top and counting the number of taps, if the column of snow collapses at the icy or sugary layer, it is a sign of weakness in the snow, a potential place where an avalanche might trigger at the weak layer in the snow structure. Avalanche experts use microscopes and examine the snow crystals and see how they have metamorphed over time with temperature. A pit is only a snap shot of the snow in one area of the mountain and the snow cannot be assumed to be the same elsewhere, but it gives information about the relationship of the layers.

I could not help to think of the similarities in the historical evidence of snow to the order book. I wish one could look to see the structure of the entire order book up and down the prices. Especially nowadays with computer traders, the order book rapidly and constantly changes, but there would be information in the changes in the order book. There would be weak layers, or strong layers in the book. There may be structures in the order book near or around round numbers, and in time around announcements, closings. Even better would be to see whose orders there were. I've read that CME full members can see the tags identifying the order makers' identites. I'm sure the complete order book is available to someone somewhere, perhaps the market makers see this. Without the information it feels like flying blind sometimes. It certainly would be an advantage.



 Have you guys heard about this guy

"Hawaiian big-wave surfer Garrett McNamara will go to any lengths to chase a massive swell. On Monday that pursuit took him back to Praia do Norte, a tiny coastal village about 60 miles north of Lisbon, Portugal, where he got pulled into a massive wave that has the entire surfing world in awe. "

youtube video of him at Nazare, Portugal

Could the surfing aficionados please explain to me how these people do not die?

Jim Sogi responds: 

Scott, First they train and train and train so they are prepared. They have a system with the sled driver so they can get rescued if they fall. The maximum hold down would be 20 seconds for one wave, and possibly 40 seconds for a two wave hold down. With training one can hold their breath that long fairly easily. A three wave hold down for 60 seconds gets dicey and black out is possible. Thirdly, they are wearing life preservers that float them to the surface. Shane Dorian has also developed an air bag that inflates to bring the surfer to the surface. The statistics of surfing demonstrate it is rather safe overall.



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

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

Jeff Watson comments:

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

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

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

Craig Mee writes:

Sounds great Jim, good job indeed.

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



 Recent conversations with a close friend have had me thinking about "The Basics". How, and to what extent, does an understanding and focus on the basics of a particular subject contribute to the building of a strong foundation from which to expand outward in a stable and progressive manner? While they may never be mastered, an understanding of what the basics are seems to apply to a myriad areas of life. The foundation in the basics in various areas of life's pursuits would seem to provide the base from which to advance. Conversely, lacking such a core likely limits movement forward relative to one might be able to go.

In sport we might learn the basics on the very first day of study. In traditional Japanese karate the student often begins with the making of a fist and the punch. The simple mechanics are improved upon and practiced in every training session from white belt to 10th dan black belt. In fencing experts say that basic footwork is 65% of the game. In mountaineering one is told of the importance of keeping one foot moving after the other and not stopping too often to rest.

In nature the basics of survival and expansion can be seen in both plants and animals. Sequoia Giganteum, the giant sequoia, manages to live several thousand year through thick bark that protects against fires and pests amongst other factors.

In relationships the basics of simple greetings and compliments by name and eye contact seem to go far.

In games like chess the building of a solid foundation and harmony amongst pieces goes a lot further than memorizing openings.

In civilizations there are often core values that act as a bulwark against more nefarious forces. The founding fathers of the United States had some ideas on this topic. What might be learned about current events and political forces globally and those of say Rome and the British Empire?

In the daily routine the art of breathing properly, stretching, posture, exercise, hygiene, and diet.

In trading the basics might include first the art of survival. Important on the list would also be the daily routine, the size and number of winners versus losers, the ability to evolve with markets yet maintain core principles without style drift amongst many others.

In Japan there is a saying " Ichi Nichi Issho" or "One Day One Lifetime". At the core one might view this as a starting point in the basic building blocks and unfolding of one's life.

Many books could be written about all this topic and this is meant to be only a short list and some thoughts. What other areas and basics might be considered in various endeavors? Who can we look to as examples of success built upon the mastery of the basics? What books or learning tools might be applied and studied?

Anatoly Veltman writes:

There will be a lot covered in this topic, but I'll touch on Technical Analysis. Specifically, on what's commonly referred to as "a basing pattern". In 2012, this pattern played out to its best in USD/JPY. The cross has languished in 76-78 yen area just long enough to lull everyone. The technical foundation for a blistering rally thus had been built. Technical Analysts refer to this set-up as "things that stay horizontal the longest — go vertical the fastest"

Jim Sogi comments:

The myth is the "basics" are easy. The 10th Dan karate master still studies the basic punch because there is so much depth to it, the timing, the placement, the purpose. Musashi Miyamoto after a lifetime of study of the sword still pondered the basic sword cut and the purpose of it. Basic diet sounds simple, but eating and cooking properly with nice taste and presentation everyday is very very hard. Breathing sounds easy and everyone does it, but to breath with the right mindset can be the key to nirvana. Talking sounds easy and everyone does it, but to say the right things…well you get my point. Real mastery of the basics, especially at the highest levels, is difficult.



 Premium Rush is a great movie about fixie bicycle delivery riders in NYC delivering a ticket with a bad cop trying to steal it. The greatest part is the "what if" scenarios in choosing his bike route through traffic. Very fun movie, good riding, fast paced, not much violence, exciting, ok plot (mostly a chase).



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

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

Jim Sogi writes: 

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

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

Ralph Vince writes:


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

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

Leo Jia writes: 


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

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

Leo Jia adds: 

I did a test. It went like this:

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

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

To be more comprehensive with the test results:

4 heads and 6 tails: 20.4194%

6 heads and 4 tails: 20.5125%

3 heads and 7 tails: 11.7019%

7 heads and 3 tails: 11.7010%

2 heads and 8 tails: 4.4018%

8 heads and 2 tails: 4.4145%

1 heads and 9 tails: 0.9783%

9 heads and 1 tails: 0.9830%

0 heads and 10 tails: 0.1004%

10 heads and 0 tails: 0.0968%

Easan Katir writes:

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

Jeff Watson writes: 

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

Ralph Vince adds: 


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

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

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

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

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

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



As with many news events, the market's reaction is not always what one expects. The reason is that the predictor's assumptions may be wrong, or the wrong premise is being held. In the current election, it appears it is not the substantive political positions that matter, rather it's the certainty or uncertainty of the outcome.



Perfectionists have a compulsion to do things perfectly. When things do get done, they are done well, but there is a dark side. They can't get things done because they are never perfect. They seem afraid to take risks because they are afraid of not being perfect. They have many requirements, so many that needed projects do not even get started.

Trading is one of those non perfect endeavors which when done well has a high, say, 40%, failure rate. This is tough on perfectionists.

A friend is a great singer, but as a perfectionist refuses to sing because it's not perfect. Singing is like trading, you never hit the exact note. In fact that is the beauty of the human voice, it's not perfect. It's the wavering and straining that makes it emotional and beautiful. But that is another topic, similar to the penumbral idea.



In Swahili, mzungu (wazungu-pl) is the name for white people and literally translated is one who wanders around aimlessly. It is a good description of the the today's market — wandering around aimlessly. It is at a border crossing, 1400, so there may be some rhyme to the reason.



 I recently read the wiki page about The Endowment Effect.

Basically, it says the one values his possession much more than others value it.

Thaler conducted the following experiment. He randomly gave some participants a mug, which sells for $6 in a store. He then asked the ones now owning the mug to give a minimum price below which they would not sell the mug, and asked the ones not having the mug to give a maximum price above which they would not buy the mug. It turns out that the owners valued it for $5.25, while the bidders valued it at $2.75. He concluded that the very fact that the persons owned the mug made them give it a higher value.

Very interesting research. But I wonder if the conclusion is as that simple.

First, I wonder what would happen if the owners were asked to buy another mug. How would they now value it? Since it is not a critical item to have and they already own one, it is reasonable to believe that they would bid an even lower price than the bids from those who didn't own it, isn't it?

Second, what about selling short is allowed in the experiment? If the people who didn't own the mug were asked to price it if they would sell it short. I bet their price would be even higher than what the owners offered, and very likely be higher than the $6 store price.

Any input on this, please?

Gary Rogan writes:

Leo, I'm not sure it's productive to attempt to extend these "effects", and there are many of them, beyond their original definition without doing actual experiments. This particular effect seems to be as simple as "defend what's yours harder than you would attempt to get the same thing from someone else", one of the ancient evolutionary developments. Primitive (as well as advanced) animals demonstrate the same effect when fighting for territory, that's why the challenger loses most of the times. Of course someone who has a relatively useless (from their original standpoint) mug to begin with doesn't want another one. Personally I find it more interesting to think about the practical value of the original effect. In the behaviorist books it's supposed to manifest itself by "holding on to losers too long". Every time I read this I always think about whether the logical conclusion is that a rational person should always sell "losers". Sometimes they bring up the tax loss effect, and that's fair but it doesn't get to the heart of the matter. Considering this question, and all the robotic trading that goes on, how would one take advantage of this effect? 

Pitt T. Maner III writes: 

The self-storage business might be an area where this effect is felt most strongly. There is a lot of rent money being paid (by baby boomers and those who have left houses) and property used to store old things instead of buying new.

Rocky Humbert writes:

This is a fascinating subject for exploration. Being only slightly tongue-in-cheek, I wonder what effect negative real interest rates have on the willingness of people to hold onto "junk" ? To the extent that "the cost of carry" (i.e. monthly rental fees) are small, hoarding is a rational behavior. Also, there was an article in the WSJ last week discussing the effects of "clutter" on marriages and home life. Lastly, there may be a "depression-era" and "aging demographic" effect occurring here. In the situations where I've (sadly) had to empty out elderly relative's apartments, I've discovered that depression-era people hoard useless things like return envelopes from bills, archaic car and doorkeys, memorabilia from bygone days, etc. I think that there are many interesting factors at work in this trend — and there is market-related utility in thinking about them.

Jim Sogi writes:

It's really hard getting rid of one's "junk". There is a weird attachment to the stuff. Its almost painful to throw stuff away. Then there's the issue of getting rid of the junk, and then needing that item the next day. Feng Shui has some good tips on clearing the clutter. There must be some sort of hardwired effect causing one to collect stuff. Look at the bag people pushing around carts of junk.

Craig Mee writes: 

I'm with you, Jim, and in the tropics, clutter, dirt and smells brings mosquitoes, which is a very good reason to keep things clean.

On a side note. I've had a lot of trouble with mosquitoes, though I went to a friend open air villa the other evening , and when dusk hit, no mosquitoes ? I looked around and put it down to a) everything was white, walls , furniture, coverings, a well cared for garden, two ceiling fans, (some sea breeze) and importantly I thought …lights under the table we were sitting at. ie everything was clean , tidy, and white, with air.

Further, I read once, if you haven't worn clothes for a season, toss them. That's certainly worked for me.

No doubt those who make money in one particular stock , get attached, (you see it)…it clutters their mind, and they will drag any positive out of fundamentals, value, whatever to get back involved. Got to clear the clutter, or put it out of sight, to free the mind.

Rudolf Hauser writes:

In considering the impact of the pure psychological effect on value from ownership, one should not ignore the economic effect. The cost of the purchase is not just the purchase price of the item but the value of all the effort that went into finding the item in the first place and how difficult it might be to be able to buy it again. Then there is the risk of the replacement being defective or other problems in the acquisition thereof that might happen. One also has to consider the potential cost of needing an item and not being able to acquire its replacement in time to meet that need. As an example, I once wanted to buy a new ink eraser to replace the one that wore out. I then found that I had to run around to seemingly countless stores to find this inexpensive item –an effort countless times more expensive in opportunity cost than the price of the item itself. Needless to say, when I finally found the item, I purchased a whole box full to insure that I never would have to spend so much in search costs again for that item. Nor would I have sold those again except for much more than I paid for them.

As for the psychological impact, say one has purchased an object of great beauty at a price that subsequently appreciated considerably. The new higher price might be one at which one would not consider it prudent to buy given the overall state of one's financial resources even though it is an item one might wish one could buy. But already possessing it one has the excuse for buying it via not selling it because one already had done the deed in effect. When an item is not unique or rare and is easily replaced when a new one is needed, one would not suspect that same tendency to value the item in possession more than the same item not in possession. It would be interesting to see if this effect still persists in that case and how it compares to the former.

A stock would be of the latter type at least in small quantities. With larger quantities there is always the uncertainty as to how much such purchases might impact the price, which would the economic reason as opposed to a psychological reason. A psychological reason might be the emotional difficulty of making a decision that one is not anxious to repeat, ignoring the fact that with an investment an implicit decision has to be made every day as to whether to continue to hold or not. The difference is that to sell or purchase is an active decision whereas to hold can be a passive decision. In effect holding is also a way of putting off a decision.



 Kona, Hawaii is a small town and usually lags behind the rest of the country in booms and busts. We've had a bad bust here the last few years, but this month was the best month ever for tourism numbers and spending. Looking around the little town is bustling. The increased population is evident in a wider divergence of classes of tourist is notable in more bums and pan handlers who tend to stick out. This leads to the broader conclusion that despite the problems in EU and issues being harped on in news, there is a recovery occurring. I even had an employed carpenter trying to rent. He was one of over 20 applicants at a 20% higher rent for a unit I had trouble renting a few years back.

When the market was touching negative territory last week, it didn't sound right that the year would end up negative. The president and other flexions have too much to lose at this juncture to let it go negative. Plus, there was all the public who bought the spring bull run all going underwater getting cleared out.



Some new research shows that most of the population is below average with a few individuals with outlying performance. Empirical studies of the market display fatter tails than normal and slightly skewed distributions. Anecdotal evidence supports this idea as well. I am wondering how this affects the performance of normal based models.

Put Away The Bell Curve: Most Of Us Aren't 'Average'



 I am researching and reviewing my contact with hats over a not uneventful life. I am considering their value, their uses, their symbolic significance, the great people I know who have worn them, the hat corporation of America I bought as my first trade, the hat that Tom Wiswell always wore to prevent sunburn and cover up baldness, the hat that Shane wore that made him an icon, the hat that the accountant in Monte Walsh wore that Hat Hendersson just couldn't resist noting was just right for a pistol shot, the hat that I wear now to show my respect for those previous, the man I called Hats H.  because he always had a million different conflicts of interest while working for us. The importance of a hat outdoors in the West to shield from rain, sun, and the elements. Et al. What value do you see in hats these days? What anecdotes? They seem to have gone out of style because of the automobile. You don't need protection from the elements any more. Also they're hard to store. How do they relate to markets?

Alan Millhone writes:

Mr. Millhone

Dear Chair,

I remember well the hat Tom wore. The ball cap I wear has a board on it (see picture). The Market trader might wear such a hat to remind them to look ahead and make the right moves (trades).





Sam Marx writes: 

On the subject of "Hats". I am reminded of the aversion that John F. Kennedy had to hats and the picture that has stayed in my mind, since 1961, is of his carrying and not wearing his hat at his inauguration. I believe it was his attitude that caused the downswing in hat wearing in the U.S.

Tim Hesselsweet writes: 

 Seems like a good example of ever-changing cycles. The hat has been making a comeback for the last several years. Kate Middleton has become a popular figure and she frequently wears hats. Upscale department stores like Saks now carry a large selection of hats as well.

Alston Mabry responds: 

Yes, but…mens hats are a different dynamic:

Look at this photo of mens hats at a Liberty Rally in Columbus Circle, 1918, and mens Hats at the Horse Races 1920s style, and 1950s Men with hats.

Scott Brooks writes: 

When I graduated high school, the guy who measured my head for my mortar board said, "Young man, I've been doing this for 35 years and you have the biggest head I've ever measured".

 As a result of my freakishly large cranium, hats rarely fit me. I wear one from time to time, but only out of necessity, and occasionally for functionality.

Necessity is when I need to keep my bald head from burning in the sun or freezing in the winter or dry in the rain. Never under estimate the insulating and protective qualities of hair.

Functionally is because I need a hat when I hunt to keep the sun out of my eyes when I'm scanning for game, peering through my scope to place the cross-hairs on the shoulder of my intended quarry, or placing the aiming pins of my bow in the middle of said quarries chest cavity.

I avoid hats otherwise as I can rarely get one big enough to fit. If I wear one too long, it gives me a headache. Therefore, when it comes to trading, if you see me placing a trade while wearing hat, fade my position as I'm likely making a losing trade because my mind is clouded by the hat that is squeezing my brain all to tightly.

Pete Earle writes: 

I wear a hat, and have for seven or eight years. When I began to wear one, I expected to be lightly razzed by friends; that not only didn't deter me, but never occurred. Instead I've received unexpected compliments, and over the last few years other have seen a higher frequency of hat wearers in Manhattan, Washington D.C., and even when I'm down in Auburn and Atlanta.

Christopher Tucker writes: 

The grandfather of my best friend from college was one of the kindest and most sensible men I have ever met. He was a traveling sales rep for the John B. Stetson company. The man always had the best (the absolute BEST) hats.

GAP Capital comments:

 Born and raised in Chicago, so "hats" remind me of only one person…Dorothy Tillman!!!

Anton Johnson writes: 

"By some accounts, Christopher Michael Langan is the smartest man in America……….he has a fifty-two-inch chest, twenty-two-inch biceps, a cranial circumference of twenty-five and a half inches–a colossal head, more than three standard deviations above the norm"

Esquire article on "The Smartest Man"

Alan Millhone sends another photo:

Here is Tommie Wiswell with his trademark hat tilted back.  Might also been used to keep
overhead light from his eyes while he focused on the many boards.














Russ Herrold writes: 

 I am traveling, and so cannot conveniently post, but I placed orders this week for a new Stetson, a couple of Fedora designs, and some other … I forget …and have in my car, for the conference I am at this weekend, easily 5 or so, which I use both for their protection of my head from the cold, and also so I can 'do some branding' work in the community the conference represents (I also have other 'branding' in my clothing, and appearance), such that people I deal with, who don't know me by sight, can recognize me anyway.

Marion Dreyfus adds: 

I think I am fairly well known as a hat person, and have been since I wore unusual chapeaux /to synagogue and school when 12 or 13.

Aside from style and stating an individualistic aspect, I think a hat harks back to a gentler, more mindful age, perhaps 100 years ago. It also keeps the head, inside of which are all these excellent ideas and scenes for a better tomorrow and a niftier evening today, comfy-cozy. Hats also show, oddly enough, respect. Hatless men in the 1970s were declaring their freedom from the mindfulness of suit and hat, and perhaps we are the poorer for having abandoned hats.

They also keep milliners in funds, and milliners I went to grad school with in the early 90s were aghast at the drop in hat-wearing citizens, alleviated only by temporary crazes or fads that fade as swiftly as they arise.

As a biker, for me, even mild days produce a breeze when one is on that leather seat, and a hat prevents sunstroke and sun in one's eyes as well as too much wind over one's head.

In the Orthodox world, wearing a hat connotes one is married, so it may be foolish of me to wear hats, because i communicate a status I do not currently entertain. But i do like the fashion and focus statement being made by wearing a lid, many of which, actually, i create myself.

Finally, one can maintain a superior air of mystery in a hat, which is impossible to the same degree in a hatless state.

Alan Millhone adds:

What really amazes me on hats are the clods at football games I attend who don't remove their head cover when the National Anthem is played.

Ken Drees muses:

 The baseball cap trend: rappers wearing the caps askew, wearing caps with logos of designers and companies, wearing caps for status/advertising, caps as gang signal, wearing caps in restaurants/indoors, wearing hoodies in lieu of caps, caps as fashion, caps on backwards, caps with brim curved just so, it all has to do with being cool. Lebron James wears Yankee cap to Indians games–it's all about me, fool.

Gary Phillips writes: 

"Wearing a cap backwards is a baseball fan tradition that started with Yankee fans. It wasn't because they liked Yogi Berra, either. The Yankees and Red Sox have a century-old rivalry. A group of young guy Yankee fans, around 1980, took the train up to Boston to catch a couple of games. Boston fans are loud and boo other teams. The young Yankee fans were seated in front of loud Bostonians. The New Yorkers didn't want to start an altercation, but made statement. Those guys turned their Yankee caps around backwards to show the Bostons that they were Yanks fans and proud of it."

Anton Johnson writes: 

On baseball's rally cap superstition:

"A rally cap is a baseball cap worn while inside-out and backwards or in another unconventional manner by players or fans, in order to will a team into a come-from-behind rally late in the game. The rally cap is primarily a baseball superstition."

And hockey's Hat-trick.

Victor Niederhoffer writes:

It would be nice if this worked in the market. But then the adversary could always tell if you were weak or strong, especialy if signals could be reflected from the hat. I was surprised to see that in all the uses for hats I have collected, including flopping the rump of your horse, and fanning a fire, and collecting water from a stream or the rain, I did not see many variants of using it as a signal to get a cab or alert a Native American that a interloper was near, or to collect bets, or to conceal a salt shaker. This latter is particularly effective in the west because to ask a man to remove his hat is akin to a date with boot hill. 

Gary Phillips adds: 

 Surely not a hat, barely a cap, let us not forget the kippah or yarmulke. The Talmud says that the purpose of wearing a kippah is to remind us God is the Higher Authority over us. He alone is Lord of Lords and King of Kings. When we pray and worship with our heads covered, we are saying that we are in total and complete submission to the will of God Almighty now and forever.

I was recently in the hunt for 2 of the crocheted variety for my 2 and 4 year olds to wear to school. My elder son demanded that the kippah be white with a blue Magen David. The synagogue gift shop was unable to fill our order, so I turned to a higher authority - E-bay. As J. Peterman would say, it is 6" in diameter — one size fits all. Handmade in Israel with a *very small* fine stitch. The yarmulkes are from Israel and are made by people who have made Aliyah; low income and handicap people, generating income to make a living.

I grew up and observant Jew until I had my first taste of bacon and blondes, and I never looked back. However, I now find myself lighting the candles, saying the hamotzi, and making Kiddish on Friday nights… Nice.

Jim Sogi writes: 

 A hat is essential in Hawaii to keep off the sun, rain and wind, to keep glare out of your eyes, and at night on the mountain for warmth when it gets cold. There are different hats for different situations. A baseball cap is good all around since it keeps the sun off your face, stores easily, can be worn in a car and is cheap and stays on in a brisk wind. A good brim hat is good to keep the sun and rain off the back and shoulders as well. A nylon hat is light and can be washed. A waterproof rain hat is good for extended rain, and a light nylon brim is good for hot sun. A small brim bucket with a strap is worn in the water while surfing to keep intense sun at bay for hours in the water, and to stay on in the surf. A knit or fleece watch cap is good for boating at night or sleeping in the cold. A helmet is good for sports to protect the skull from boards, rocks, trees and impact. The Original Buff is an adaptable piece that can be worn as a hat, scarf, or facemask. A balaclava is good for winter conditions and can be used as a hat, or face mask in windy conditions. I must have 20 or more hats.

As with all equipment, each type of hat is specialized for specific conditions, and there is not one that is good for all conditions. As with markets, its good to have specialized systems and rules for the differing conditions or cycles and no one rule is good in all conditions but must be tailored to match the expected conditions.

Rudy Hauser writes:

I do not wear a hat indoors with the exception of trains and planes or if there is no good place to put the hat. If there is a draft from air conditioning it helps to keep me from getting a headache. But more important is that unless I just want to hold my hat in my hands there is no good place to put it. I prefer to read, not hold a hat. I once made the mistake of putting a Panama hat in the overhead rack in a plane. The motion of the plane bounced it around enough to ruin it. That gives me little choice but to wear it. If I have a hat without a brim, such as my winter hat, I can a do take it off aside from trains which are not that warm.

Bill Rafter adds: 

 Glare, particularly from lensed overhead lights or high-hat floodlights can cause headaches and eyestrain. That can easily be counteracted by wearing a baseball cap or other large-brimmed hat indoors. I have kept one at my desk for decades.

For years I noticed that whenever I saw a certain actor & director, he was always wearing a hat, even indoors. Then I saw him entering a food emporium at a ski area and he removed his hat. I immediately understood why he always wore one — his particular baldness aged him at least 10 years. So his vanity choice was either a wig or a hat, and he chose the hat.

Hats indoors also provide a level of anonymity for those who do not want to be recognized in an airplane or robbing a bank.

My first "real" hat was a Homburg, which was required for one of my college jobs: pallbearer.



 Karen Kingston's book Clear Your Clutter with Feng Shui really helped me to clean out the clutter in my house and my life. Before, I lacked the skill to clear out much of the unnecessary clutter that obstructs the flow of energy. Too much stuff physically and psychologically gets in your way. It can accumulate dirt and dust. Worse, it affects your life, health and business. Truthfully, you don't need a lot of stuff that gets stored or saved for the wrong reasons.

She gives specific techniques for getting rid of clutter. Clothes are worn according to the Pareto principle: you wear 20% of your clothes 80% of the time. Put the clothes you wear on the left side of the rack…throw away the 20% on the right that you never wear.

Your office is important. Can you move around easily? Are you comfortable? Move out old files, old papers.

Examine your clutter individually. Ask yourself how you feel about it, does it give you a good feeling or bring back bad associations. I talked to a friend about this, and she told me a story about how she has been holding 10 boxes for an ex husband for ten years. She threw them all out the next day. They only brought back bad memories.

How about those old wood golf clubs covered in dust? Throw them out; their time is gone.

I feel much better now, more energy. I'd been meaning to do this for years. It took a lot of time. It opens up energy. I'm glad I did it.

You could probably get rid of 20% of the systems that don't work anymore as well.



 Inspired by Vic's grandfather's advice "people will never stop wearing hats", I wonder if perhaps shoes will lose favor with people. This seems to have occurred to me. I used to love shoes and bought many. Now since I work mostly from home, a pair of socks or sleepers are what I wear the most. Then since I mostly live in warm climates, sandals are what I wear the most for outdoors. The next is sport shoes for working out. Formal leather shoes, which I have a bundle of, are rarely worn. What is going to happen 50 years from now?

Victor Niederhoffer comments:

This will be very bad for China. There is not one manufacturer of shoes left in America. They're all in China an India now. When I worked in Wilkes Barre 50 years ago as tennis pro, there were at least 30 shoe manufactures in the Scranton Valley alone, all of whom where members of the club. Alas, Poor Yorick. 

Leo Jia replies: 

Hi Vic,

Yes, that would be very bad for China. But I tend to think that it would also not be easy for the world either.

Simply looking at the iPad shares in the world, we can see how big an exaggeration are China's GDP numbers from its real economic contributions/benefits. In the iPad case, China records the full $275 while its real contribution is only $10. I presume the shoes industry (and all others) would be similar only in varying degrees, with many American and European brands taking the big shares.

Look from the other way, China's economy is not as big as we think it is.



Jim Sogi writes:

 In Hawaii, everyone wears slippers and goes barefoot often. The feet get tough and the toes spread out in a more natural position which is wider. City feet get cramped in misshapen in the form of the latest fashion almost like Chinese foot binding. Native kids who have gone barefoot their whole lives have wide feet with space between their toes.

There is a new trend in running shoes towards a less structured shoe with a flexible sole that allows the foot to naturally flex during the running motion. Prior technology in running shoes put a large and rigid heel which forced a heel strike, which unintentionally caused greater impact on the knees. The flexible sole allows the foot arch to naturally flex and absorb the impact resulting in less impact to the knees and back. A popular shoe is the five toe design, similar to ancient Japanese toe socks. African runners run long distance barefoot.



 It was Superbowl Sunday about 20 years ago and we were moored in my boat at my favorite remote bay. The night before there was no wind and absolutely no waves with the ocean flat as a bathtub. Its never like that. I thought to myself, "This is strange. So calm. Very unusual."

Sure enough around 2 am the palm trees start to sway. By dawn the wind was blowing 60 plus. My anchor let loose and the boat headed for the rocks. Just before hitting the rocks, the anchor caught. I was trying to move the boat but the motor wasn't strong enough to fight the wind so I had to pull the anchors one by one to pull the boat away from the rocks.

I remember distinctly my surfboard flapping in the wind horizontally on its cord totally out of control. I could not look into the wind as the rain and wind stung my eyes. The sea was foaming. That day 7 boats went up on the rocks or sunk. Later that afternoon the storm abated, sun came out, and I made it back to harbor.

Pitt T. Maner II writes:

There is a belief in the health and safety field is that "all accidents are preventable". The key is to properly access the range of risks and the "worst thing that can happen" and have the plan in place to mitigate those risks.

It appears that a good portion of local sailing instruction these days is devoted to teaching youngsters proper health and safety.

Strangely the least experienced and most experienced people, however, are often the ones that have the majority of accidents. The young have no experience and do not realize the risks, and the older ones have the experience and knowledge but have become complacent or willing to cut corners since "nothing like that has happened before".

Often there is technology and knowledge available to prevent accidents and deaths. So for those to suggest that a "true sport" need be associated with risk of death and imply "acceptable number of deaths" doesn't seem quite right for modern times— definitely heresy for those in the health and safety field. An idea best left for Hemingway stories.

One would think that once the full facts about the tragedy are learned that new safety procedures will be considered and improvements made.

I had the chance to hear Gary Jobson speak here in S Fla at a leukemia charity benefit about 10 years ago and he is a very impressive individual.

For example,  

Safety tethers have been proven to have saved countless lives, and their use is absolutely the best accepted practice for sailing offshore, at night, or anytime that there is even the slightest chance of a crew member going overboard; PFDs, of course, should be worn at all times. These practices were exceeded by the WingNuts crew.

Is there any Health and Safety product made or which could be made to handle such extreme conditions? In cold water you have to fight hypothermia and drowning in rough seas.

Advanced survival suits?




Eyeballing June and July turns shows the turn off the bottom characterized by volatility and a range but the turn at the top is characterized by stagnation, a few doji's, then a sharp reversal. Is this a generalizable characteristic of big turns a la Magee or Nison? Second question. Will the top of the June range at bottom provide "support" at this level? What is "support" and how does it work? Is it psychological, or are the actual orders in place? Despite despised topic of the question its kind of hard to ignore. Certainly patterns can be quantified and tested but not without problems of generalization.

Paolo Pezzutti writes:

The top was printed as exhaustion of buyers. But the importance of the 1300 level should also be considered. It means that at present few people have the guts to buy new highs. However there are still many out there willing to buy dips, supports (such as round numbers), retracements, new moons and so forth. Don't know what would be needed to change this approach of investors and traders and start a new 'cycle' with different behaviors. What is needed to shake this confidence? Bad news about the US debt? Or the European crisis? No way. Already tried… Probably an unsatisfactory earnings report by Apple…. Paolo



Posted here some years ago.

A study showing that a Country winning World's Cup has significant out performance of stock in following year.

Japan up?



 One guesses that the review by the ratings company of the rating on US debt is a shot across bow to force service revenues from the rich to be putatively increased and must have been vetted before hand for that venerable purpose.

Jim Sogi writes:

You can be sure this whole dance is choreographed. When the music stops, some one will be out of a musical chair though.



As Lionel Ritchie sang, "All night, all night, all night long."



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

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

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

Victor Niederhoffer writes:

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

Ken Drees writes: 

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

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

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

Ralph Vince writes: 


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

Gibbons Burke writes: 

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

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

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

Phil McDonnell writes: 

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

Ralph Vince writes: 

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

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

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

Russ Sears writes:

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

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

2. If there are union grievances making the press.

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

These rules are simply my adjustments for my own shortcomings.

Jim Sogi writes: 

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



 Between the Folds, on Netflix, is a fascinating movie about origami and the new directions modern practitioners are taking the art form. Everything has folds, space, the galaxy,DNA, and market moves. The flat plane of a piece of paper, when folded takes on complex and dynamic forms, curves, moves and can mimic forms of nature and remarkably realistic forms. The new generation of origami including mathematicians and physicists use complex math and computers to design the folds to create realistic and beautiful forms.

I've always talked about the higher dimensions of the market above the flat charts, but reflecting on the transformation of a flat paper to complex design based on folds may reveal some interesting approaches and ideas to analyzing the folds, the turns of the market and what kind of forces and dynamics are being created. Paper, you see, is not a flat plane, but has dynamic properties and memory. The folds are memory, but the paper wants to return to flat and the tension creates a dynamic force with the intersection of the many vertices. What is the force created when the market reverses? What is the effect of the intersection of two or more folds or turns in the market. How does the turn in the market represent a memory and what force is trying to return to the old form.

We've recently seen a turn off the bottom in this market and there seems to be a memory in the turns from the down turn. How might this "unfold"?



In trading, we can all agree that fewer conditions or filters results in better conclusions, better understanding, and less curve fitting. Conditions or filters block information. Too filters can result in less new insight and fewer opportunities.

Here is where trading is a good lesson for life. As we grow older our tendency is to filter out information, people, paths. It's partly a necessity to avoid the bad or overload, but good things can be missed. Our experience tends to specialize our knowledge and narrow our focus. Though this has some benefit in expertise what opportunities or knowledge or growth may be missed. Ignoring, filtering or refusing to hear or listen to ideas we disagree with or that are different than our own may lead to narrow mindedness, missed opportunity to change and important information. For younger people it might be seen as closing doors. Meeting new people, hearing new ideas, going to new places. Nobel laureates advise not to tighten parameters too tightly as the surprise result may reveal itself. I recommend opening up parameters, let the fresh air in. Let's not become grumpy old men. We've seen closed small minded people and don't look on them with respect. Broad vision is necessary to see above and beyond the noise. You really need to force yourself against the tendency to close the mind.



 Most people love to think and act alike. It starts in infancy when you mimic your parents or siblings. Teens are notorious for talking, dressing, acting, and thinking alike, and many dangers arise for them as a result. Young adults I notice tend to dress alike and sport similar hairdos. In Japan, consensus is a compulsion.

In trading it has been common recently to see everyone piling on in the same direction during the day. The internals confirm this. Big players seem to like to wait to see which direction the day is going and all pile in the same direction. Are we much more than fish? Apparently not. There doesn't seem to be much science, analysis or thinking going on in the market recently, nor in the news coverage. It looks like group think. The problem is it's hard going against, in life and in markets. However when used as strategy it's productive, but when used for misdirected frustrations, its not.



 I was reading about the famous double slit experiment and then thinking about the Heisenberg uncertainty principle, the math, and the observer effect. I wonder what types(if any) of market implications could be attributed to the observer effect.

Ken Drees writes:

Interesting. I was contemplating this more than a few weeks ago too, but let it drop. It made me think of Schrodinger's Cat:

Schrödinger's cat is a thought experiment, usually described as a paradox, that Austrian physicist Erwin Schrödinger devised in 1935. It illustrates what he saw as the problem of the Copenhagen interpretation of quantum mechanics applied to everyday objects. The thought experiment presents a cat that might be alive or dead, depending on an earlier random event. In the course of developing this experiment, he coined the term Verschränkung (entanglement).

I was considering how a trade is alive and real only when one puts it on or opens the box and everything else is meaningless– the counting, the theory, the expected outcome– all meaningless unless you commit and then make it real and apart of consciousness, reality, an entity. 

Michael Cohn adds:

 Schrodinger's kitten's also interesting as a thought experiment across space and time. What I recently learned about the uncertainty principle was that there is a different way to think about it. I always thought about it in terms of how the observer may be creating the uncertainty in measuring both mass and acceleration with the instruments. What I now understand is because of quantum uncertainty these particles actually don't really know exactly where they precisely are at a given point in time beyond a prob distribution so if they don't know where they are I certainly can't help them as much as I would likes to be able to do so…

Jim Sogi comments:

2 closing related issues:

There's the insidious cursor and key watcher viruses.

Another related aspect is the inadvisable practice of putting your cursor over the execute button onscreen and having it execute without having touched the mouse, or accidentally touching the mouse or keyboard at the wrong time triggering the trade. Been there, done that.

There is also the issue of order field depth, which is a form of "disclosed" watching, and other order related manipulation issues perhaps posing, perhaps honest bid, perhaps flow bashing or bandwidth hogging, flashing. Lack surely can speak to many of these techniques he sees in individual stocks.

Russ Sears adds:

 If risk is defined as what is not known in the future that if it happens would hurt you, than imagination of what could happen causes you to avoid and prevent that perception.

Done to extremes this creates new risks from the over abundance of care and lack of focus on any other risks even to the point of altering the minds ability to cope. Think interest rate duration management and the creation of the tranches in the securitization process and modeling of those securities. Done in mass this creates bubbles, hysteria, or pop-stars. ( I believe this is the "Lady Gaga" "Apple" link. It is not mysticism but the creation of popular mystic.)

Much of psychology is the study of how unrealistic risk perception creates a difficult life and alters their reality for the fearful and anxious. Why should the markets be immune?

Ken Drees comments:

Lady Gaga is to Apple as Amy Winehouse is to Rimm.



For SPY from 2000 on here is the count of "inside" and Outside days, if inside day is defined as High < prior day High and Low > prior day low. Likewise outside day is High > prior day high and Low is < prior day low.

It would appear that the inside days do not like to occur in middle of week. While outside days like to occur in the middle. But Mondays do not have many occurances of outside days.


Binomial Distribution

          Inside   Outside Count      In        Out 
Mon.       68       34       542   86.07%     0.03%
Tue.       65       80       590   48.61%    99.05% 
Wed.       54       82       593    6.00%    99.46% 
Thur.      63       54       581   43.38%    17.42%
Fri.        72       55       577   85.60%    22.89%

Jim Sogi comments:

Very interesting study by Russ. Would imply that its going to be hard to beat Friday's high in the next ten minutes.
My initial thought was that Fridays were more volatile making it harder for Monday to be an outside day, but on counting the vol using SD, its not so.
M 15.74
T 15.64
W 14.86
T 15.32
F 14.27



 Steve Nison in Candlesticks describes the "Abandoned Baby" pattern where price gaps up, then gaps down the next day.

This occurred two days ago. The pattern was bearish (despite prior drop) according to traditional candlestick theory and modern scientific analysis.



It has been just over 100 points pretty much straight down since the high over a month ago to today's low. Common sense and hope tells you it ought to be bullish, but it ain't necessarily so scientifically speaking. The drops sure are dizzying and the pops are breathtaking as well. You can see see how they design them to scare the living daylights out of you or suck you in deeper and the rallies are designed to give you hope but just shy of a new high. Takes some strength, stamina and savvy to be involved here. In 08 the drops went into the hundreds. The action is all day and all night long without let up.




The Winners of the least effort contest were jointly in a tie. Mr. Gary Rogan and Mr. Steve Ellison. I will split the prize between them. The creative and physical ideas of Mr. Rogan were very excellent and best of all, but there was no testing. Mr. Ellison gave a great test, and a complete answer, but Rogan can't be denied his place either. vic

I'll give a prize of 1000 to the person or locus of his choice that comes up with the best way to test the principle of least action or a related principle of least effort.

It's in honor of my grandfather. Whenever I'd ask him which way he thought the market would go he'd say, "I think the path of least resistance is down" starting with Dow 200 in 1950. We need some more quantification around here.

You might consider max to min or a path through a second market back to home. Or round to round? Or amount of volume above or blow. Or angle of ascent versus angle of descent. Or time to a past goal versus the future? Or some mirror image or least absolute deviation stuff?

Sushil Kedia writes:

With utmost humility and clearly no cultivated sense of any derision for the Fourth Estate, I would submit that since it is the public that is always flogged and moves last, the opinions of all media writers, tv anchors are the catalysts, the penultimate leg of the opinion curve. A test of the opinions of the fourth estate on the markets would provide the most ineffective wall of support or so called resistances. Fading the statistically calculated opinion meter (if one can devise one such a 'la an IBES earnings estimate a media estimate of market opinion) and go against it consistently over a number of trades, one is bound to come out a winner. Can I test it? Yes its a testable proposition, subject to accumulation of data.

Alston Mabry writes:

The following graph (attached and linked) is not an answer but an exploration of the "least effort" idea. It shows, for SPY daily since August last year, the graph of two quantities:

1. The point change for the SPY over the previous ten trading days.

2. The rolling 10-day sum of the High-Low-previous-Close spread, i.e., "max(previous Close, High) minus min(previous Close, Low)". This spread is a convenient measure of volatility.

Notice how these quantities move in tight ranges for extended periods. These tight ranges are some measure of "least effort", i.e., the market getting from point A to point B in an efficient fashion. As one would expect, the series gyrate when the market takes a temporary downturn. Also note how when one of the quantities swings above or below it's mean or "axis", it seems to need to swing back the other way to rebalance the system.

Bill Rafter writes:

 This nicely illustrates how relative high volatility is bearish on future price action.

Jim Sogi writes:

The path of least resistance would be the night session. Low liquidity allows market mover to move market. Every one is asleep. Dr. S did a study some years ago. Updating shows total day sessions yielding 94 pt, but night session yielding 232 points. Don't sleep…stay up all night or move to Singapore. Recent action is in line with hypothesis.

Bill Rafter writes:

Haugen's "The Beast on Wall Street" (i.e. volatility) came to the conclusion that if you want less volatility in the markets, keep them closed more, to essentially force the liquidity into specified periods. That is, 24 hour markets promote volatility. Or a corollary was that a market is never volatile when it is closed. [this is from memory and I may also be regurgitating from a personal conversation with him]. An oft cited example is the period in the summer of 1968 when equities were closed on Wednesdays to enable the back offices to get up to date with their paperwork and deliveries. During that time the Tuesday close to Thursday opening was less volatile than expected (twice the daily overnight vol).

One could take this thought and stretch it to say that the periods of least resistance would be those without heavy participation. One could easily compare the normalized range (High/Low) of those periods versus the same of the well-participated periods.

Craig Mee writes: 

Hi Bill,

You would have to think that in 68 there was sufficient control of price and news dissemination. In these times of high speed everything, that this could create bottlenecks and add to the volatility. No doubt a bit of time to cool the heels i.e limit down and up for the day restrictions, is a reasonable action, even if it goes against "fair open and transparent markets" but unfortunate it seems little is these days.

Bill Rafter replies:

I should have been more specific about the research: take the current normalized range for those periods of high liquidity (when the NY markets are open) and compare that to the normalized range of the premarket and postmarket periods. Do it for disjoint periods (but all in recent history) so you don't have any autocorrelation. My belief is that you will find there is less volatility intra-period during the high liquidity times. While you are at that you can also check to see during which period you get greater mean-reversion versus new direction.

If that research were to show that (for example) you had greater intra-period volatility during the premarket and postmarket times, and that those times also evidenced greater mean-reversion, you could then conclude that those were the times of least resistance. That would answer Vic's question. Okay, now what? Well you could then support an argument that with high volatility and mean reversion you should run (or mimic running) a specialist book during those times. That's not something I myself am interested in doing as it would require additional staff, but those of you with that capacity should consider it, if you are not yet doing so.

Historical sidebar: '68 was a bubble period caused in part by strange margin rules that enabled those in the industry to carry large positions for no money. The activity created paper problems as the back offices were still making/requiring physical delivery of stock certificates. The exchanges closed trading on Wednesday to enable the back offices to have another workday to clear the backlog. The "shenanigan index" was high during that time.

Phil McDonnell writes:

Bill, you said "During that time the Tuesday close to Thursday opening was less volatile than expected (twice the daily overnight vol)."

For a two day period and standard deviation s then the two day standard deviation should be sqrt(2)s or 1.4 s. So the figure of twice the volatility would seem higher than expected.

Or am I missing something? 

Steve Ellison submits this study:

The traditional definition of resistance is a price level at which it is expected there will be a relatively large amount of stock for sale. 
Starting from this point, my idea was that liquidity providers create resistance to price movements. If a stock price moved up a dollar on volume of 10,000 shares, it would suggest more resistance than if the price moved up a dollar on volume of 5,000 shares.

To test this idea, I used 5-minute bars of one of my favorite stocks, CHSI. To better separate up movement from down movement, for each bar I calculated the 75th and 25th percentiles of 5-minute net changes during the past week. If the current bar was in the 75th percentile or above, I added the price change and volume to the up category. If the current bar was in the 25th percentile or below, I added the price change and volume to the down category.

Looking back 200 bars, I divided the total up volume by the total up price change to calculate resistance to upward movement. I divided total down volume by the total down price change to calculate resistance to downward movement. I divided the upward resistance by the downward resistance to identify the path of least resistance. If the quotient was greater than 1, the past of least resistance was presumed to be downward; if the quotient was less than 1, the path of least resistance was upward.

For example:

                           Previous 200 bars
   Date     Time     Up Points Volume  Down Points Volume Resistance

3/25/2011   15:50   53   6.49  99431    61  -7.38  149867     15311

   Down       Resistance     Actual
Resistance      Ratio      net change
     20310       0.754       -0.03

Unfortunately, the correlation of the resistance ratio to the actual
price change of the next bar was consistent with randomness.



 In the summer reading vein, I very much enjoyed Alex Berenson's first novel, The Faithful Spy, with his main character, John Wells. The next two books in the series, The Ghost War and The Silent Man, were very good, too. The next book, The Midnight House was just okay, and Berenson's most recent effort, The Secret Soldier, is unfortunately a failure.

Jim Sogi writes:

My son turned me on to the spy series by Vince Floyd, including Transfer of Power, The Third Option, Extreme Measures. The books are surprising well written current historical fiction with three dimensional characters with full backstories and touching personal details. The bad guys are complex but the series has a decidedly non PC attitude, so that's fair warning. Its good entertainment though and hard to put the books down. Great for airplane or vacation reading. The main character is an assassin but has realistic doubts and feelings. I briefly compared it to Clancy, but it is astonishing how the technology just a decade back seem so archaic and outdated. I have them downloaded to Kindle for iPad.

David Hillman writes:

And given our particular interest in markets here, one might enjoy the David Liss's "Benjamin Weaver" series. Set in early 18th Century London, Weaver is a former pugilist and highwayman come "thief-taker", i.e., private detective. The son of a Jewish Portuguese stock jobber, his cases involve intrigue and deception revolving around the relatively newly formed stock exchanges, combinations, Bank of England and corporate giants of the time.

Liss' has also written "The Coffee Trader", set 50 years before in Amsterdam, the locus of which is cornering the market in the newly discovered "coffee fruit" and "The Whiskey Rebels", set in America just after the revolution focusing on the attempts of those whiskey rebels on the western frontier attempting to bring down Alexander Hamilton and the Bank of the U.S.

Liss began by writing his first Weaver novel, "A Conspiracy of Paper" while a doctoral candidate at Columbia. All are well written and offer looks at finance and markets, many pretty familiar, not to mention murder, a large cast of ne'er-do-wells, prostitutes and a pretty frank look at the cultural and social biases of the time. He even has a Watson-like sidekick for Weaver, Elias Gordon, a likable bounder of a Scottish surgeon given to bleeding and such, who also schools Weaver in scientic method and probability. A lot going on, fun and good stuff.

The Collab writes: 

William Gibson plays with the theme of pattern recognition in his technologically edgy, subversive books. One of the books, in fact,is called "Pattern Recognition." I have devoured all of them as soon as they come out. The newest one, "Zero History," contains the throwaway insight that when/if someone succeeds in aggregating order flow, the market will cease to exist. Hubertus Bigend — not a hero or a bad guy, but rather a nexus — is one of the most fascinating and ambivalent characters in fiction — comfortable with unpredictability, glinting Bertelsmann, Ralph Lauren and Goldman Sachs.



 My family had a great adventure on an ski mountaineering expedition to the Ruth Glacier in Denali National Park Alaska last week. We stayed at the Mountain House.  We were skiing several objectives in the area and had good weather. We could see Mt. McKinley close by. The primary danger was falling into a crevasse in the glaciers. The glaciers are 3 mile acres, 30 miles long, and 4,000 feet deep. I read a number of books on crevasse rescue, bought gear, practiced and headed into the wild. It's quite amazing how much one can learn from books. We flew in a ski plan from Talkeetna 50 miles into the wilderness and were dropped off with our supplies of food and wood for 5 days. We had to melt snow for water.



The flexions are over their head in water, or lack thereof. The solution if any will take years. The flexions don't have years, they operate in bits and days. This is a bigger problem and uncovers systemic flaws in technical as well as flexionic issues. The nuclear storage and energy issues go deep to the core of our system.



 There are so many distractions that try to take your focus off the market when you need it the most. Wailing sirens every hour, tsunamis, earthquakes, movies, pretty girls, boats, music, food, the news, the mideast, the electrical workers strike, thunder, lighting, vacations, family obligations, phone calls, bills, errands, and the list goes on. Obviously some require a balance. Its a common strategic trick used in other contexts of battle, combat, negotiation, art, humor, magic, romance.

Alan Millhone writes:

You make good points on distractions. I know that many on the list have no TV which plays on our emotions.

At Checker tournaments I pretty much block out all around me and concentrate on the board before me. My opponent is there but only to make their move or reply to mine. I keep a legal pad handy and record my moves and on occasion make a note beside my move here and there or same with my opponent.

I suspect the Market trader should conduct themselves in a similar way.

Craig Mee writes:

Remember Tiger Wood's father used to either yell at him or play music super loud on the putting green– one or the other, from a very early age to combat distractions.

No doubt the scalpers in the pit that excelled had mastered that area as well.



There are two theories on stock valuations: 1. That the market accurately discounts the correct absolute value; 2. That the market is irrationally exuberant or depressed and overshoots the correct values. Under theory 2 the values are relative. If theory 1 is correct, it will be hard to achieve former all time highs soon as fundamentals still lag former glory. If theory 1 is correct, prior values may have been exuberant, but compared to recent lows achievable if every one piles in, especially the last few hundred points. We seem to be still in a market that won't go down. My take is theory 2 as money in general is nothing more than confidence or lack thereof.



 Despite the fact we're in the market "that doesn't seem to go down" the issue remains whether or how new affects markets. There are several alternatives: 1. Positive news pushes markets up. and vice verse. 2. News does not affect markets. 3. The reaction to the news is usually a) right, or b) wrong. My theory is 3(b), the reaction tends to be wrong. Last week news of Egypt occurred at a time when the markets were pushing to new recent highs. The market has been rather new hungry and reactive since the massive government meddling with the financial system and probably rightly so. But I am not sure why the news from Egypt is good for equities in the US. Sure its a bell for freedom and all, but it brings much uncertainty to many markets.

The second theory is the Teenage Ninja Turtle theory such that when I go out of town for a few days the market drops. Do you remember the classic scene "What if, What if??". It did last month. I'll be out of town later this week. What if?

Rocky Humbert writes:

It's not new information per se to which markets may react. Rather, it's new information versus current perception(s) that may cause prices to move. This phenomenon operates at many different levels– including the purely psychological– which can then cause feedback effects which amplify the change.

Since Mr. Sogi chose the "news" from Egypt to elucidate his point, it seems apt to reference the stock "Blue Nile" (ticker=NILE) Despite the "good" news from its namesake, this stock dropped about 12% on Friday because of disappointing quarterly results. Who said that a rising tide (or in this case, "river"), lifts all boats???



 This is one of my all time favorite news stories.

Relatedly, a friend of mine was at a karaoke bar in CA and a dirty blonde white guy was hogging the stage. He was terrible and people started booing. Then he sang a few Tom Petty songs and the crowd turned around. That's because it was Tom Petty.

This is another example , with Jewel, but staged.

Jim Sogi comments:

The question is not, "Do people recognize genius" here. What is being tested is "Do people, know, care about classical music?" Lets say they posted some brilliant computer code. Surely no one would recognize the genius therein. Let's say Bob Dylan stood with his guitar outside Alice Tully theatre. Most theater goers might ignore him and the screeching music, assuming they did not recognize his face.



 Samurai Rebellion is one of the best Japanese samurai moves. Toshiro Mifune stars as Sasahara, a mid rank guard officer. The scene is beautifully set and filmed in 1725 Tokugawa feudal era. The feudal lord orders one of the young maids to "serve" as his mistress ruining her pending engagement. Later the lord dumps her and orders his vassal, one of the guard's son, to marry her though she has the lord's son. Though reluctant, the Sasahara family takes her, and soon they have a child of their own, fall in love, and are happy. Then the lord's other son dies, and orders the wife back to the castle without regard at all for the feelings of the new couple, their child, or the family. It is intolerable morally, emotionally, politically. Sasahara has had all he can take and the result is well expected. Blood flows. The acting is powerful and touching, though it must be difficult for Japanese who do not overtly show emotion, and the seething feeling shows through the stifled masks. This is much different than other sometimes cartoonish samurai acting. They had no rights of liberty, life, property. There's a great tension the negotiations when the chamberlain asks Sasahara to ask to return the son's wife, rather than have the lord order it, so appearances are preserved.

The theme of the trampling of the rights, the feelings, the property of the lower ranks is so resonant with Chair's current themes of the flagrant abuses of power by the flexions and their brethren in command and other top feeders while they maintain appearances so properly.



 Only 59 private jets at the fixed base. Mostly big ones. There were 120 before the crash.

George Zachar writes:

Aspen airport private jet parking inventory down roundly the same %, if not a bit more. Empty storefronts during the busiest week of the year here, and real estate blather has an unseemly pleading tone.



Very symmetrical shaping in ES over last couple weeks. Symmetry seems to be one of the underlying principals of the universe, to put it most broadly. Eastern philosophy calls it yin and yang.



 There are some great opportunities for day trading. Recent months have had some good opportunities. It goes in cycles though. Some days are no good and it's just as well to go surfing instead. There are many edges available.

People have different niches. Some systems may not make as much money, but then again some make more, and more consistently than swing trading.



Does anyone know whether the samples of data IB uses to display their charts and trades in order to keep up with fast markets is representative and proportionate on either side of market or where that info might be researched?

Phil McDonnell replies: 

My understanding from list member Chris Cooper is that IB skips trades to maintain real time numbers. The way to test for bias would be to get hold of some real tick data and compare for anomalies or bias.



 The Smart Swarm by Peter Miller analyses crowd decision making by looking at ants, bees, locusts, and then humans. He discusses various heuristics making delayed response decision making difficult. The thermostat game and the beer game are good examples of difficulties in making decisions where the results are delayed. It usually ends up in a boom bust cycle. The cure is to reverse against the trend earlier. Experiments show that decisions made by 3 average persons are better than those made by the smartest person due to diversity of information. This is the Slumdog Millionaire phenomenon where the crowds answer tends to outperform the experts. Analysis of ants and bees show how the swarms make decisions: they simply follow those next to them. The remarkable aspect is how this information travels across large groups almost instantaneously and how this information is more than any of the individuals would have access.

Phase transition is the point at which the entire crowd or swarm behavior changes. Birds, locusts, fish, people in crowds, and even inert molecules can all instantly change phase. Markets seem to as well. Computer modeling requires quantification, and interestingly as Wolfram posited, simple rules create complex behavior and learning that arrive at group solutions which are not preprogrammed in. This differs and improves upon statistical analysis in its adaptability to change and new information. This recalls Wolfram's thesis where simple rules create complex patterns and reverse engineering is hard. Miller looks at the process of reverse engineering crowd decisions. Analysis of crowd stampedes in Mecca show waves in pilgrims backing up before the stampede. Traffic shows similar waves in traffic jams. Analysis of locusts show the rapid change in behavior of the locusts when crowded. One of the beauties of the market is the plethora of data and the platforms to deliver and analyze it. Half the problems the scientists faced was data collection. The question is what are the precursors and triggers to phase change in markets? There is a tipping point to every change in direction, of which there have been many recently. There are precursors, triggers and the phase change. These conditions when identified might give good signals. Pit traders seem to have worked out the dynamic in the pit, but what are the electronic signals? If ants and bees can work this out, can't traders?

Pitt T. Maner III comments:

Now that almost everyone has a smartphone, iPhone, etc, the potential for "super swarms" to develop amongst groups of people seems ever more heightened. One can imagine interesting collaborative efforts forming inside and outside of company boundaries. Swarmanomics. Or in negative cases, mobocracy—mobile vulgus.

It is reminiscent of the bee returning to the hive and doing a little dance to give the direction, distance, and quality of potential food.

One such network is Foursquare, where you can become a virtual "mayor" by being a habitue and boulevardier and a potential director of traffic (or dare say, wallets) to locations. Status and prestige are bestowed to the tireless, individual "worker bee". Where is the party today? Will not "killer" bees and killer apps be soon to follow? Facebook has entered this arena too. Marketing on steroids.

The head of Foursquare states his idea of the future here:

Crowley also offered a glimpse of his vision of Foursquare's long-term future. "In the future, I want Foursquare to be able to tell people where to go wherever they are in the world, based on their previous visiting habits, likes and dislikes and the time of day…We want to be able to push venue suggestions to you. That's what I am pushing towards as we develop Foursquare's tools and how we use our data," he explained.

While the super swarm badge is among the hardest to win, the significance of last night's event is somewhat debatable. There is very little, physically, to show for this achievement. But as social gaming takes off, game mechanics– the idea of giving out tiny rewards to encourage certain behavior– are very much in vogue, with several start-ups and marketing campaigns incorporating check-ins and badges.



 Every system has a weakness. Where or what is it? Each human has a weakness. Each argument has a weakness. Financial systems have weaknesses. Financial models have weaknesses. The last one was the mortgage system generation and securitization and rating system. That was so big no one saw it. Governmental systems have weaknesses. The prior Greenspan put was good example of a system gone bad without realizing it. This is a good place to look for the weakness in the current situation. I can't put my finger on it exactly, but this government intervention cannot help but have some very unintended consequences. Governmental incentives are not properly aligned. The caliber and tenure of government workers is low. They are rather short term and incentivized to stay in power. In China, acknowledging one party system weakness, the tenure issue is improved. It is important to know your own weaknesses and the weaknesses of the model you use for survival and defense. It is good to know the weakness of your enemies, and those of the markets or system in which you engage.

Finding weakness is difficult without lengthy understanding, study and experience. Self delusion makes analysis very difficult. The lengthy time period of the play out of over 4 years is difficult for humans to comprehend. The comprehension of humans does not extend much beyond 3 or 4 years into the future at the most.

Ken Drees asks:

Can you expand on the 4 year time frame–not sure what this is. 

Jim Sogi replies:

When you began high school could you imagine or picture yourself as a Senior? As you began college, did you imagine your self working? Can politicians, economists, market speculators conceive 4 years into the future, much less remember 4 years ago. Some deceive themselves that they can, but it is hard. Humans seem to lack some capacity for time periods in excess of 3 years. The Bible makes it 7 year cycles, but the 4 year cycle is based on my poorly articulated 4 year phenomenon. Another explanation is there are just too many variables. 

William Weaver writes:

SWOT was a big part of my corporate strategy class in undergrad and I think it holds a lot of water with regard to analyzing trading strategies, governments and other systems as well as companies.

Strengths (internal)

Weaknesses (internal)

Opportunities (external)

Threats (external)

If I remember correctly it was HBS professor Michael Porter (I think there are two; one at HBS in corp fin and another in the econ dept) who wrote two or three papers on the subject, offered through HBSP.



 Assume that only daytraders are left trading. Assume they all enter in direction of recent moves sometime after open. One would believe that they try to maximize profits by trailing or waiting til near close to close position, then on close close position and pull orders. What would market result be? I am guessing something like today's price action might result. It is difficult to verify this, but perhaps the assumption is not too far off or just a case of fitting the theory to the facts after the fact?

Jeff Sasmor asks: 

Are you talking about human daytraders or robot daytraders?

I doubt human daytraders have much effect on anything these days. Isn't it so that something like 3/4 of volume is robots trading about 100 stocks?

Jim Sogi replies:

The "robot" trader needs to be defined. There are human system programed execution bots, and perhaps a few "intelligent" trading systems which do not have pre-programed systems, but rather gather current info, process that, make a quick rule, test it, and trade on it, but I strongly doubt it. There might be market making algorithms which might be classified as bots, but I doubt they are making directional bets all day long looking for legs. IB has some entry algo's such as VWAP and I think a few more algos for order execution. Seems on the 5-6 flash crash some skirts were lifted with a glimpse into some order spamming systems which would have to be automated at that speed. You and Russ might be best to say what is out there and what is possible and I sure would appreciate what might be possible.

Russ Herrold comments:

 Yes, real time adaptive and intuitive systems are to some degree possible and exist– consider robotic market maker assistant algorithms, that are permitted to 'fly themselves' with no-one with sentient hands on a 'dead man's' switch, assuming so long as the market stays within known parameters [some of these gone haywire (or simply unimaginatively constrained) clearly could have been 'goaded' into playing on May 6]

I took the open question to be tested to be a restatement of the buy (or sell) at close, and to sell (or buy) at open, [perhaps biased by an anticipated mean reversion 'bias' to decide which way to lean, as a first extension].

As I recall we've had posts on this in the past here, and I was just going to run a couple of simple scenarios through some back testing and do some 'binning' or anticipated 'regime changes' based on the a look-back of 'scheduled news' calendar.

The market making algorithms that could be classified as Bots have performed well, all day long; other times, they fall off the tracks wildly as well. Thus the need for that 'dead man's switch'. The question becomes, can one train a few 'turtles' to spot regime changes that a bot cannot, at a low enough cost to pay them to 'play the video came' in shifts and cover a trading day.

Concerning what you said about how "IB has some entry algo's such as VWAP and I think a few more algos for order execution. Seems on the 5-6 flash crash some skirts were lifted with a glimpse into some order spamming systems which would have to be automated at that speed"…

The data response feedback loop rates have long since gone beyond the limits of a remote link and having an electron crawl back and forth. Local computers in a data center are competing with one another, and the trick at this point may simply to predict how the battle will progress, grab hold, and hang on for a ride!

I am set up to test it fairly readily, and that ZH listing seemed promising. I rather hate to publish my personal culling screens rather than to use one explicitly in the public domain, as I invest some effort 'sharpening' how I look at data and would lose the benefit of the effort by floating that personal symbols list.

Ken Drees comments:

The motorman–someone drives the train, someone slumps and the dead man's switch kicks in. The Taking of Pelham 123, the great movie from the 70s, not the butchered remake, was telling about an operation–a good sleuth can sniff out your footprint and catch you as you sneeze unknowingly. Gesundheit!

Robots all have humans in charge and humans are chained to their human condition and flash speed just makes a human's mouth open on occasion and then they do something emotional. We are now into the area of advanced human overload error–flash crash redux will not be hiccup. 

Russ Herrold replies:

I was approached a few years ago by a couple of vendors on the design of such feeds, and the meta-tagging to be added. An XML delivery is easy to parse with existing Open Source tools, about which I wrote a couple of years ago.

Just as one of the themes of this list is 'ever changing cycles', it seems to me that another 'ever changing scales' having fractal repetition of patterns as one 'zooms in and out' (a la Mandelbrot). Interestingly, the site includes a 100 page Word document of capsule reviews of 'The (Mis)behavior of Markets', for those of you who have not slogged through the whole work… the takeaway being that the bots can play for the penniescompeting against one another, without a lot of analytic skill perhaps; while the humans still can play in longer time frames, again (perhaps) with the benefit of deeper insight.

It is a Brave New World, every morning, and perhaps the trick is to adapt and swim with the flow of what one cannot control, and to stand firm when one can make a difference.



Summiting mount kenyaI have been learning about ski mountaineering and climbing. One aspect of safety is setting anchors and belay points called protection. When starting up a steep pitch where falling and injury or death is possible in case of a mistake, the climber creates an anchor by tying a loop around a rock or putting pitons or nuts in a crack which will hold the rope tied to the climber to limit how far he can fall. As the climber climbs higher, the rope is shortened, and new protection is placed limiting the fall length. In case of a fall, there is some give in the system to avoid too hard a shock.

In climbing there are other "stops". One is the summit…goal reached, or back home. The other stop is time. If the climber has not reached the summit by enough time to return home by dark or before bad weather hits, its time to stop and turn around.

The trading applications are obvious, and in both cases it appears to be an art. Phil has stated that stops do not improve performance, but merely lower deviation of return. Senator has always advocated using stops. What is unclear to me is some scientific way to determine the optimum stop. Time stops seem common. Profit stops are too common. The difficult question is the use to trailing stops and the distance or adjustment and size. I've never seen a satisfactory analysis. Adjustment for volatility seems a must. Chair has advocated adjusting or limiting leverage, rather than stops as "protection".

Advice sought.

George Parkanyi writes:

This is very timely, because I just set three rows of stops in August trying to catch the down-leg (short) while keeping my risk low, and I got taken out of the meat of my position all three times– FOMC fake-out, sheared right before the 20-point drop, and sheared again this morning before the market settled down again. Arggh. Luckily still made a little something on the scraps, but basically managed to completely miss the move. (Please feel free to point and laugh.)

Sometimes taking a larger position (and risk) and commensurately narrowing your stops can pay off big, but there's something to be said for taking smaller positions and more forgiving stops (and a longer holding period to adjust reward to risk). While I was frantically trying to catch the equities just so, my relatively smaller short oil position (whose stop I had not touched) was plodding along building up nicely, looking over now and then going "What's YOUR problem?" Maybe you do a hybrid. I don't know.

So, what looks good on the long side then? Bargain-hunting in the long bonds perhaps?

Phil McDonnell comments:

There are many interesting themes in this discussion so I will address a few.

First a few basics assuming a random walk - if you use stops:

1. Your expectation will not change. You will neither make or lose more money assuming a random walk.

2. Your variance will be reduced (a good thing)

3. Your probability of having a loss as least as great as the stop will DOUBLE! Suppose the odds are about 16% that a stop loss set at 1 std deviation will be exceeded to the downside. If you use a stop loss at that price point, the probability it will be hit is 32%. The reason is the Reflection Principle of Statistics which essentially says that every path that reaches that point has an equal and opposite path that reflected back from that point. There are some graphs in my book Optimal Portfolio Modeling (Chapter 4) which illustrate this point.

4. If you use profit targets the preceding points are reversed.

5. On Friday I posted a 9 minute video with charts to theStreet.com which discusses my use of stop profits with respect to options. It is in the Options Profits section but people can get a free trial at the site.

In my opinion it is possible to optimize a stop loss or profit target provided you first specify an objective function that you want to optimize. My preference would be something that includes both risk and reward like a Sharpe Ratio. In one sense a stop loss and a stop profit are much alike. They both double the odds of winding up there. But a loss is more important in the sense of compounding your money. A 25% loss needs a 33% gain to break even. But this information is captured by taking the log as your weighting function. The trick is to take the log at the portfolio level and not the trade level.

Optimizing stops can easily be done in Excel using the solver. But I am not saying that such optimization will always be productive. Essentially it is a search for an anomaly just like a trading system. Just like a trading system it requires a significance test and sufficient data. Adding the stop parameters brings one that much closer to the slippery slope of data mining and curve fitting.

Nick White's interesting point about information is spot on. If you compare the formulas in my book to the formulas developed by Claude Shannon the father of Information Theory they are essentially identical. Yet mine were derived from first principles and compound interest math. As an aside the formulas in list member Ralph Vince's book are essentially the same math even though when you look at them Ralph does not use logs (mostly) so on the surface they appear different from the formulas Shannon and I wrote, but they are not.

To me this says that the market pays for information. That explains the beautiful symmetry between the formulas of Information Theory and portfolio optimization.



 It's rather startling to realize how much of the time we stumble about completely unaware of what we are doing, moving on autopilot. A simple example of this is if some asks you to tell them what color your wife's dress is without looking. Or more commonly, finding your keys after you've put them somewhere and can't find them. As you try recreate the minutes the realization hits that you were totally unaware of what happened as you went through your motions.

One of the most difficult tasks is determining where the market is. Is it high, is it low, where is it going, what is it doing. We watch, but are we aware of what it is doing? Do we overlay our preconceptions on it. Are we mindful of its movements and what they mean? Are we looking at the current situation or trying to pigeon hole the market into our prior experience?

In Eastern transcendental philosophy one of the main concepts is mindfulness. It is an awareness of current actions and avoiding the trap of autopilot while the mental tape runs blinding us to what is going on. It would be good to apply this to the market before entering a trade and during. During a trade bias and emotions can overwhelm a calm observant mien. The conflict between prior expectation and current action is not easy to resolve during the fray.

Another interesting thing is the ability of the human mind to comprehend complexity and perform at high levels based on experience and intuition. Playing catch with a baseball is a good example of complex things done naturally. I am sure there are great traders who trade on instinct and do well. Can they beat a rigorous systematic approach. Probably not consistently because of the fallibility of the human condition prevents continuous high level performance. How about a combination of systematic analysis and discretionary trading. Will that beat systematics?

I've argued this with list members who concede that even systems are tweaked in a discretionary manner blurring the line. Their argument says that "discretion" is really just an unstated system that may or may not work better. The human mind can observe changes in cycles faster than a lookback system and also incorporate qualitative input. The human weakness is sadly the stumbling block.



 This talk about the "new normal" reminds me a little of the new economy at the turn of the century where by high p/e's were the new norm, where sky high values were the new norm. The talk has shifted to bonds, where the sky high values and super low yields is now the new normal. We saw what happened when that last bubble burst. Is this another one of the Fed's bubbles like the last one they created? It seems many of the market disruptions are cause by the unintended consequences of governmental actions getting out of control. Like the thermostat experiments.



 The market trades much differently at bottoms than in the middle, and the tops. How to figure where we are is in part disclosed by how the market trades. Entries and trades should be completely different, but its very very hard to switch gears from day to day.

Seems like Sumo trading where one side gets the momo and knocks the other side clean out of the ring till the next match at few moments later.



Being Wrong by Kathryn Schulz [cat]

Horse Trading by Ben Green [cat]

Analyzing Multivariate Data, J. Latvin [cat]

S&P Security Price Index Record [cat]

On Fencing, Nadi [cat]

Conceptual Physics, Hewitt [cat]

The Ticker, volume two [cat]

Short Novels of Jack Schaefer [cat]

Difference Equations, Paul Cull [cat]

State of Humanity, Simon [cat]

Introduction to Biomathematics, Robeva Kirkwood et al. [cat]

Modeling Dynamics, Adler [cat]

Musimathics, Loy [cat]

An Introduction to Regression Graphics, Cook [cat]

The Energy of Nature, Pielou [cat]

Biological Invasions, Williamson [cat]

Epidemic Modeling, Daley [cat]

Science of Swimming, Counsilman [cat]

Fifty Years of Wall Street, Henry Clews [cat]

Court Martial of Mackenzie [cat]

Checklist Manifesto, Gawande [cat]

Fourteen Methods Magazine of Wall Street [cat]

Wall Street Stories, Lefevre [cat]

Makers of Modern Strategy, Paret [cat]

Elements of Forecasting, Diebold [cat]

Statistical Methods in Psychology, Howell [cat]

The New Bill James Historical Baseball Abstract, James [cat]

Stocks and Shares, Withers [cat]

Price Theory, Landsburg [cat]

Price Theory, Friedman [cat]

Discrete Mathematics, Rosen [cat]

Extraordinary Chemistry of Ordinary Things, Snyder [cat]

Conceptual Introduction to Chemistry, Bauer cat

Introduction to Sun and Stars, Green [cat]

Handbook of Linguistics, Aronoff [cat]

To Rule the Waves, Herman [cat]

Rainbows End the Crash of 1929, Klein [cat]

I would like to reread all of these if I had some good light and time and money.

Jim Sogi writes: 

Here is my current top shelf.

Wild Snow, by Louis Dawson (Classic ski descents North Am.)

Free Skiing, by Choukas (best encyclopedia on subject)

Glacier Mountaineering, Andy Tyson  (best book on subject)

Statistical Models, Freedman

R-Reference Manual, Vol I

Alaska Backcountry Skiing: Valdez & Thompson Pass  by Matt Kinney                                           



canarySome pretty awesome symmetry forming up this last month or so.

Chair commented before that the big down bars often seem to get mirrored by the big upside bars like today.

The other thing I've noticed is what a difference the next week makes. Last week the news stories were all end of the world, even trotting out Prechter. What a joke.

Why is it that a lot of big buying seems to occur at the highs?

As for pilot fish, seems like a big out of place vol bar is a good canary. (Sorry to mix metaphors.)

Nick White comments:

One would note that the sword in Asia has certainly not been sleeping since Friday…Therefore I would argue that such a rise as we saw in the S&P today is simply the US playing catch up with the Asian move from the holiday weekend.

I would also contend that there's a bit of relative catch up yet hanging in the stars.

Sushil Kedia writes:

How would a counter convert the concept of symmetry in prices over any time frames to testable hypotheses? I confess, I continue to have weaknesses in converting ideas to testable hypotheses. So, I will be learning from those who will share.

Pardon kindly if this next question diverts the thread to any other: How do folks like me sharpen our imagination to focus on converting vivid thinking to be able to arrive at testable hypotheses?




 As a first-time homebuyer a few years back, I am now working on becoming a first time homeseller. I was told by our realtrix that she recently had a closing that was held up by a house that failed to appraise at the selling price. Since she specializes in old houses (and ours is pushing 95) she told us that it was unlikely but possible that a sale of our house could be held up for the same reason, depending on how much we were able to get for it.

I nodded my head at the time, but thinking on it later in the day, I was more and more baffled the more I considered it. In the financial markets, if you value infrequently traded securities, then you know that the absolute holy grail of a security's valuation is an arms length trade, in size, viewable on the "tape" (stock exchange, TRACE, MSRB, etc.). Even if you have no trade, an appropriately sized offering on the security sets a ceiling on the price, while a live, executable bid sets a floor price beneath which there's no justification to value the piece. The terminology varies from sector to sector, but fair valuing, marking to model, etc., should be avoided whenever possible.

I guess people for a while have been saying the appraisal system for houses was a contributor to the housing crisis, but most claim it was improperly performed appraisals which led to the problem. To me, the whole structure of the system is wrong. Right now, it works like this: customer pulls a price less than selling price out of the air, and probably after some negotiations, a price is settled upon by the buyer and seller. At this point, it is probably a written, binding offer, contingent upon inspection and appraisal at or above selling price . THEN, an appraiser is brought in to determine "market value." But the market price has already been set! If the appraiser can't take the live, accepted bid on the very property in question as the house's value, then what can he possibly go on?

The answer, incredibly, is that the appraiser is marking to market. He is marking to a model, based on comps, accouterments, neighborhood, lot size, rebuild cost, etc., but it is undeniably a model. If the system made any sense, it wouldn't go offer -> negotiate -> agree -> appraise -> close. The appraisal would be conducted prior to the offer and negotiation as a bidding tool to the buyer… or even as justification by the seller for the offering price. As it is, the appraisal serves two purposes. One, it gives the buyer a false sense of security that he paid the right price, and it gives the bank a false sense of security that sufficient equity will be coupled with the down payment to motivate the mortgagor to perform, and/or that a sale under duress could make the bank sufficiently whole to take the loan risk. I know that theoretically appraisers don't try to "hit the number" but it seems like the knobs on the appraisal are probably turned a little bit at least to get in the right ballpark. I know that it's supposedly a science and they are professionals, etc., but still…

The structural problem, of course, is that the buyer and the lender are trusting an appraiser's mark-to-model to protect their long-term interests. It allows lenders to be more impersonal and buyers the sense they are delegating responsibility. To me, it's yet another example of unintended consequences of regulation: a process that was intended well but ultimately creates an environment where a buyer's biggest purchase in a lifetime and the financier facilitating the trade are entrusting huge sums of money to the model and signature of an interested (but probably not interested enough) third party. A signature counts more today than it ever, in a time when it probably means less than ever.

But I sure hope my house appraises right when I accept an offer!

Jim Sogi comments:

The appraisers' methods have been well tested in the courts, and recently not so well in the markets. There are 3 ways to value property:

1. Comparable Sales

2. Income

3. Replacement Cost.

Marginal price in liquid markets are set by comparable sales of that security. But we know that they can be wrong also. Comparing the appraisal methods to see if there is undue variance give some back up to each method. If one or more are way off, perhaps something is not right. Chair's Fed Model looks at the income for stocks. Replacement cost is rarely used and does not account for things like location or in the stock market, goodwill. Over reliance on comparable sales, which are set at the margin, resulted in the boom and crash of real estate and derivatives of the mortgages.There is quite a bit of play in the range of price that an appraiser can defend, and it plays out regularly in court with the IRS in estate tax cases so the method has been well tested.
They key is getting a good appraiser.

Sam Humbert explains:

The prospective buyer of your home isn’t the young couple with the cute kids and Labrador retriever you’ve been “negotiating” with. It’s their bank. The bank takes all the risk, aside from the small haircut the down payment represents. And appraisals are how banks roll. If you don’t like it, sell to an all-cash buyer instead, so there’s no bank in the picture.

Jonathan Bower writes:

Appraisers are part of the vig in a real estate transaction. As recent first time homesellers (about a year ago) who "scratched" the house, we discovered the long line of people with their hands out to help facilitate my transaction…

City (Sales and Stamp Tax)

County (Sales and Stamp Tax)


2 Brokers (on the market less than 2 weeks…)






Municipal Service Fee

Document Preparation Fee

Closing Fee

Wire Fee

Overnight Fee et al

This is when I realized why the gov't is so interested in stimulating the housing market…

Ken Drees writes:

In general, during the housing boom there was no restraint on the appraisal part of the transaction. The appraisal price was matched to or above the agreed upon sale price in order for the loan to go through. The appraisal person often asked the real estate agent what number they needed. Once again, this is not true in all cases–but obviously lax rules and lax ethics swirled around this function during the boom. Now there is a lot of heat and scrutiny on the appraisal part of the process. These people can and will be held liable and responsible for any questionable values. So naturally they are over reacting and sharpening their pencils to the point of overkill on the low end of ranges. It really is a buyers market–and only now the appraisal needs to be at or below the selling price for the loan to go through.

No wonder that money supply is high at the base level and crashing in terms of reaching the people. Where is the lending?

Rocky Humbert comments:

If a lender isn't involved, there's no need for an appraiser, and there's no bank closing fees. If one has engineering expertise, an inspector is optional. A knowledgeable buyer can also conduct his own title search from public records and (bravely) skip the Title insurance, and can also (in most states) represent themselves "Pro Se," and not retain an attorney. You can also buy and sell without a broker. All of these people are providing risk-reduction or other services for the parties.

The real "vig" in a real estate transaction is not only the stamp tax and bid/ask spread, but also new drapes for all of the windows, and the discovery that there's no way to fit your 9-foot Steinway Concert Grand Piano through the front door.

Real estate markets have one unique peculiarity: In what other market is the seller's identity and cost-basis a matter of public legal record, but the buyer can remain anonymous prior to the closing?

Phil McDonnell adds:

In a market with fungible items the fair market value is the gold standard. The reason is that the previous transaction is a good measure of value given that all items traded are identical. But in Real Estate every property is unique. Even in cookie cutter developments the locations are unique.

Real Estate also differs in financing because the margins are only about 10% or so. Your broker can and will sell you out if your stock falls in value below maintenance margin even momentarily. The bank cannot do that to a homeowner. In effect a mortgage is a loan and a put option. This is because the homeowner can put the house back to the bank if it falls underwater via a foreclosure or short sale.

In California during the boom an immigrant gardener was able to buy something like 10 houses from his friend for inflated prices because of lax mortgage appraisal standards. In scams like that the friend walks away with fast cash from the overpayment. Appraisals are really designed to weed out the risk of less than arms length transactions for the banks.

Stefan Jovanovich writes:

Around here (Contra Costa, Alameda Counties) in California the appraisers were usually in on the deal and their justification for the absurd valuations was the "fair market value" of the lots on which the houses were built. The primary fallacy was– and is– the idea that the dirt itself could be adequate security for the loan. That has been a recurring delusion throughout American history– that land alone could support debt. In the bad old days when money was itself the gold standard, bankers refused to lend against land; they limited their risk to the earnings power of the improvements - i.e. the buildings or the prepared soil. Rents and reliable crop yields were seen as the only reasonable estimate for comparable value; and, since those were expressed in dollars, properties were not considered unique. That was, of course, one of the limits of the gold standard that the newer, more flexible currency was going to solve. And it did in one sense; imagine what dirt prices would be without FHLBs, FNM, FRE and the AAA of 1938.

Rock Humbert replies:

Maslow's hierarchy of needsOuch. Maslow's Hammer just came down on my head, as Stefan once again suggests that society's ills would be cured by the gold standard.There is an important difference between saying "appraisers were usually in on the deal" (which suggests fraudulent intent), and saying the justification was "fair market value.""Fair Market Value" (FMV) is a defined term: the "price" where a willing buyer and a willing seller complete a transaction. This concept is applicable to all assets (including land, copper, gold, horses, equities, etc.), and the price can be stated in any agreed medium of exchange (dollars, gold, salt, seashells). Although it wasn't called FMV, the FMV concept dates back to at least King Solomon and the Talmud.

If a third party (e.g. a bank) provides capital for an asset purchase/investment (debt, equity or barter), and the third party is falsely induced to provide capital, this is fraud. And the existence of fraud also pre-dates modern history. Hardly an argument for the gold standard.

If the third party provides capital based on assumptions (including FMV) regarding the asset purchase that turn out to be wrong, this can be called a bad business decision. And bad business decisions are not a recent development either. Again, hardly an argument for the gold standard.

However, if the bank makes an investment because it plans to flip the loan to Fannie & Freddie– that's a completely different story. And much of the recent mess can be attributed to this phenomenon.(Yet I don't understand why a gold standard and the existence of a gold-rich Fannie & Freddie are necessarily mutually exclusive.

Perhaps Stefan will explain…. 

Stefan Jovanovich explains:

No Fannie or Freddie could possibly be or want to be "gold-rich"; if you can exchange your paper with the central bank why would you want to endure the vicious discounts that 19th century merchants imposed because they insisted on valuing their inventory by what it would sell for in cash, not what it could be appraised for or securitized into? No one here has disagreed that the state has a monopoly of legal tender. What the medium of exchange folks have said is that the government monopoly (and the potential for abuse inherent in any legal monopoly) does not matter because you can always trade your horses, copper, land for money whenever you want and the government's self-regulation will prevent abuse. Or, as Rocky put it, the tax man will take property instead of cash in payment of taxes. Alas that part is simply not true: the tax liability remains even after the taxpayer's property is seized; it is only discharged when and if the property is sold. (One of the interesting interactions of the present tyranny is how the drug laws have revived debtors prison.) Perfect liquidity, like FMV, is a notion that works better on paper than it ever does on the barrel head where - even now - legal tender (Fed reserve balances and notes) remains in limited supply. Because legal tender is in limited supply, there is the unavoidable temptation for the holders of the government to make more money available whenever Congress and the President want a war - whether against poverty or Iraq. That was what the Founders properly feared. They wanted the unavoidable monopolies of our central government - the powers to make Money and War - to be constrained by the requirement that both be approved by an actual vote of the Congress. Since they knew that no unpopular war could be waged without a debasement of the currency, they imposed the further restraint of insisting in our Constitution that the Money be Coined to a Standard Weight and Measure. Credit would regulate itself, even in a world of mark to model and foreign military/aid adventures, as long as the government monopoly could not create legal tender as needed. Money exchangeable on demand into specie was the ballast for republic itself; it might seem useless to waste all that precious cargo space carrying heavy weights that were only hoarded– until you found yourself caught in a storm– and then the ballast would be the only thing that would give the ship of state's righting arms the weight with which to do their work.

David Hillman writes:

Speaking of real estate, more particularly of having the ranch foreclosed upon, TCM [Turner Classic Movies] will air this evening at 10 EDT/9 CDT, a chair and list favorite, the original 1970 version of the classic 'demise of the old west' tale, "Monte Walsh" starring Lee Marvin. Thought some might like a heads up. Enjoy. 

Stefan Jovanovich adds:

And now for a brief jab at Maslow: anyone who would compare being the lonely Jew in a New York school full of gentiles in 1920 to being "the first Negro enrolled in an all-white children" had a sense of self-importance that would have made even our country's original hammer head (aka George Washington) blush. Talk about a hierarchy of needs!



 Recent cycle changes have been instantaneous rather than phasing in over time. The big recent drop changed the stultifying lack of vol and upward crawl which persisted over the last 15 months. Weather wise here in Hawaii we've had drought for 5 months, but since spring arrived, its been raining ever since. Another interesting and instantaneous change in cycles.

A related but different idea is the effect of cataclysmic events which have occurred historically with profound effects on dinosaurs and weather. We are seeing some recently such as Iceland, recent year's and recent weeks market crashes. A cataclysm is an obvious departure from recent norms which seem to kick off changes in cycles or make it clearly recognizable. Perhaps analysis of cataclysm or cycles norms rather than overall norms and means might be a good way to look at data. The dividing line might be tail events.

Paolo Pezzutti writes:

We are all used to changing cycles. In our lives, things go on routinely for months and years, when suddenly an event modifies things dramatically. It can be so disruptive to put into discussion values and relationships that have been quietly developing for years. Unpredictability, ironically, is what counts the most in our life. Most of us live their life striving for stability. We want a family, we want an indefinite contract job, we work to build a pension, we pay expensive health care insurance policies and so forth. Suddenly, a thunderclap, such as a death, a divorce, a new acquaintance or a new job opportunity accelerate the speed of our life. We find surprisingly ourselves making decisions with new parameters that we would have never considered only a few weeks before.

Similarily in markets, cycles changes suddenly, with no possibility to predict when they change. (Or is there any clue that this can happen?) Similarily, investors move from a low volatility environment to wild swings in a matter of days. At first, they are disoriented and react emotionally. Then they get accustomed to it and play according to the new rules of the game.

Also, robots seem to have the same approach– because they are built by humans. They slowly trade crawling up prices, printing higher opens and strong last hours for weeks, and then suddenly go wild selling all they can until the orders book is empty. I am not sure all this can be predicted. If one knew the logic with which robots (and humans) operate, one could try to anticipate… Alternatively, fast adaptation to the new environment is key. What are the parameters and signals that indicate that a cycle has changed? Is it possible to automate this process of monitoring and learning? Is it only a matter of volatility or is there something "less visible"? Visually, it was clear after a couple of weeks how the market was developing the up leg after 8 Feb. Visually, in fact, we noticed how the market changed pace during the past week. In this case, we should try and find quickly the new way of trading this environment post Eurozone sovereign debt bailout announcement. 



Live CowsJust made some killer BBQ sauce: tomato sauce, Worcestershire sauce, molasses, brown sugar, cinnamon stick, garlic salt, liquid smoke, chili powder, rice vinegar, Jack Daniels, fine chopped onions, clove powder. Soak braised ribs for a couple hours before heating in the oven or over coals. Oh my gosh, "Broke da mouth" as they say in Hawaii.

Jeff Watson adds:

If you were to sauté the onion and garlic in butter instead of oil, the chemistry dictates that the onion will be sweet instead of bitter.



 Last summer I had to take down a large Birch tree that had died from infestation of Bronze Birch Borers. The tree overhung the site where I was preparing to build a shed and I decided to remove it first to prevent damaging my new creation.

Upon climbing the tree in preparation for its removal I found myself reflecting on trading metaphors. There are tremendous risks in being high in a tree with a powerful chainsaw.

When one gets very high in the branches of a tree one finds it is critical to take the effects of the prevailing wind into account before doing anything. The wind can determine which part of the tree to remove first and where to drop the debris.

I think about safety first and at all times during the operation. I wear a climbing harness and attach myself to the trunk of the tree in two places with two separate lines. I pay close attention to where I place my feet and hands.

Familiarize yourself with the tree. Is it recently dead or has it been for some time? Can it be climbed safely or should it be taken down from below or from a cherry picker? A recently green tree will support large weights on a one inch diameter branch, a dry or rotten tree will do no such thing. Can you drop branches safely or are you too close to the house? Sometimes each piece has to be secured prior to cutting and lowered carefully with a line.

Use a ladder to get into the tree. Tie the ladder off to the tree in a way that prevents it from wobbling or rotating. In markets, sometimes one must stand on others shoulders to get oneself in place.

Have the necessary tools with you before you climb. It is time and energy consuming to have to go back for them. And not having the proper tool can induce you to use the wrong one rather than go all the way down and back to do it right.

Be familiar with your tools and know how to use them and care for them. Powerful tools, like leverage, allow you to do big jobs quickly but they bring powerful risks. It is amazing the number of ways a chainsaw can ruin your day. Chainsaws can bounce back out of the cut right at you so it is important to keep your face and body off to one side when cutting. Chains can break and fly back as well and fly or wrap in entirely unexpected directions. Be aware of the damage that your tools can do to you, not just the tree. Pay attention to them and treat them with the respect they deserve. Try to make allowances for the unpredicted. I've seen a chain fly off the saw and become entangled around the large branch it just removed and very nearly pull the user out of the tree.

Secure heavy tools to you or to the tree with a line strong enough to hoist them but light enough to part if the tool becomes ensnared in falling debris.

Never start using a heavy power tool until you have secure footing. I usually rest my weight into the harness and let my lifelines support me, using my feet to keep me stable.

Take your time. Being rushed will get you hurt.

Never bite off more than you can chew. When removing large portions of the tree with a single cut, they can behave in unpredictable ways, such as twisting or bouncing the tree or grabbing your lifeline and pulling it down with them. Once a very heavy piece begins to fall, there is absolutely nothing you can do to stop it.

Never extend your reach beyond what is comfortable. Using a tool at more than arms length puts you in a position that prevents you from reacting quickly if something goes wrong. It puts undue stress on you and the tool. It removes whatever leverage you have on the tool. It also prevents you from "feeling" properly through the tool. When using a power tool you receive signals about the material you are cutting and the nature of the stresses on that material. You can always tell when a branch is about to go if you are listening carefully to the tool. That feedback is denegrated by reaching too far or by using only one hand.

Several years ago a friend was cutting off a tremendous horizontal limb from a large oak. He was on a ladder extended to its maximum height and leaned up against the limb. The ladder was resting on the limb between the trunk and the cut and as the limb came off, this stub end jumped up and the ladder fell away beneath it. My friend tossed the saw and grabbed the three foot thick trunk and tried to hold on but slid down and finally fell off, shattering his femur and tearing up his chest and the insides of his arms. Had he and the ladder been secured to the tree he probably would not have fallen.

What have I missed?

Scott Brooks adds:

Hunting is considered by many to be a dangerous activity, what with a bunch of guys running around with shotguns or rifles. However, there are very few actual injuries from shooting accidents. The main cause of accidents are not the inanimate objects that send forth projectiles, but another inanimate object…tree stands.

Every year, people who feel that they are immune from the laws of gravity climb into stands and sit or stand waiting for their prey to wander by. And every year there are people who are stunned to find out that the laws of gravity are much more brutal and punishing than they thought.

There are only two types of tree stand hunters: Those that have fallen and those that haven't fallen yet. No matter how much you think you'll be able to hang on, or how adept your dexterity, you simply can't react fast enough to ward off an accident or mechanical failure.

I can personally attest to the feeling of bile rising in my throat from the fear of lost balance while perched 15 up in the air…and that was when I was wearing a safety strap.

I have a standing rule on my land. If you climb up into a tree stand, you must not only wear a safety strap, but it must be the first thing you put on when you get into the stand, and the last thing you take off when you climb down. I have asked (told) people to leave my farm because I caught them up in a tree without a safety strap.

So why even climb a tree stand if it has that much risk? It's about risk vs. return. I love the return I get from arrowing a nice buck. Same is true with trading. I love it when I get a great return for my clients. But the reality is that it's important to wear a safety strap when trading. Just as I profited in my poker playing days by taking a slow grind it out approach (never going all in), I do the same with trading. I'm satisfied with the inferior returns of a non-leveraged portfolio. My theory is that the more you leverage, the higher you're climbing and the thinner your safety strap gets.

All of my bad losses and sleepless nights have come from leveraging or taking too much risk.

That's why I'm a pretty boring guy these days.

Jim Sogi comments:

Professional tree trimmers all use a belay.  Mountain climbers also belay themselves for protection or to 'hedge' their position in case of a fall.

Ken Drees writes:

Never lend your chainsaw to someone who doesn't use them much. As in don't give stock advice to people or just give them advice that is general in nature–this saves on friends. Always remember torque and twist. If you don't read and predict how the cut will behave, rethink it. I have seen trees twist and pull the wrong direction, seen limbs bind back on the saw and have trees fall off course because of hidden dead spots. Be ready for the twist of the market as it takes your trade and bends it slightly the wrong way. Once I saw a dead tree being taken down by a friend. This large straight tree as it was falling broke apart into 3 huge sections. The trunk part closest to the ground went the right way and the other two in tangents like a V. Market wise–don't mess around with a junk-trade–its just not worth it and you can get hurt. And lastly don't drink beer before operating a chainsaw, nor chop wood with only shorts on, or put your hot saw down in a pile of dead leaves.

Pitt T. Maner III adds:

 Ok, this is a little bit like what I have been doing the past 2 years–namely Health and Safety oversight for pipeline and tank construction workers… guess who the least favorite person on the jobsite is?

There are probably better business analogies than below but here it goes (this is the short list! and not complete by any means, OSHA website would be a good resource):

1. I would have a health and safety plan in place with contact numbers and how to get to the hospital. Is there a written plan of action for each step of the process with the risks involved and the ways to mitigate the risk. (Investment plan)

2. Use a "buddy system". Have a friend nearby that can help you in case of an emergency. Have a 1st Aid Kit and someone Red Cross trained in 1st Aid and CPR. (Mentors and advice of others)

3. Survey the tree to make sure there are no hazards you have missed. Electrical lines. Red ants. Poisonous plants. etc. Ask yourself what is the worse thing that could happen (What could go wrong with your investment? What could come back to bite you?)

4. Inspect your equipment. Is your climbing harness worn anywhere? Are the lanyards of the proper length? (Guys have died or hurt themselves badly by not having the proper length on the lanyard, yeah they had their fall protection on it just didn't stop them in time from hitting the ground). Is the ladder rated for your weight? Do you have a GFCI if you are using an electric chan saw? Do you have cut resistant gloves? Do you have on hearing and eye protection? Level D OSHA clothes?

5. If it is hot or cold you need to take a break. Drink water. If you get tired you are more likely to make a mistake. (Take regular breaks from the computer screen)

6. Do you have enough light? Night time operations are doubly dangerous for workers. You need visibility. (Transparency in your investments)

7. Have you set up for disposing of the branches and such. You don't want the city to fine you unnecessarily for yard trash. (Tax consequences)

8. Wouldn't it be cheaper given the risks to have a professional service do it? (ETFs/mutual funds vs. individual management)

9. Are you sure the tree won't fall on someone else's property or their fence? (What are the liability issues?)

10. If I do get hurt what will the effects be to my family and others? Do I have the skills, knowledge, and physical abilities necessary to do the job right and do I understand the risks? Am I in a good state of mind and able to stay calm and not get angry if something doesn't work out right? Do I have a fear of heights?

We always carry a card around in the wallet for safety reference and it sort of boils down to 3 steps: 1) Assess; 2) Analyze; and then 3) Act.

It sounds like overkill but an effective safety "culture" within companies has been shown to dramatically reduce injuries, deaths and all sorts of economic and emotional costs. And it is a good idea to teach everyone at home how to stay safe too. If you do not have a sense of vulnerability then you are susceptible to hurting yourself or others around you.

Russ Sears comments:

In the last four years I took down three cedar trees that were dying. Here are a few things I did that were missing from the lists above.

1. Limit the access to the area. Shut down the drive-way, no extra people or kids allowed etc. Tree cutting is not a spectator sport. The trading room is sacred. No extra people or kids. Never show off.

2. Notify the neighbors when near their property. Likewise no kids. They let me know if they would be outside etc. I worked around their schedule. When working with others money, its all about them, not you.

3. Call the buried cable hot-line to have it marked before. Know the hidden risks and try to avoid them.

4. Have lots of rope. Extra rope tied to the tree and other trees can help prevent the tree from going the wrong way onto the house. Controlled slack on a large trade is a must.

5. Keep the area clean, limbs dragged away as they are cut. You never know when you may need that exit.

6. Rent what you do not have, but get the right size saw above all. It may cost more, but do it right.

7. Have patience. Take it in small pieces. It is only impressive in the vast woods when it all comes down at once. In your yard it will only be damage. Know your size. And do not try to meet a schedule. Pay that extra day's rent, Leave the stump up till next weekend. Do not try to swing for the fences to meet some arbitrary goal. 

Vincent Andres writes:

All valuable advice in this tree thread! Not to say it's missing, but I often add an iron chain as a line (with mountain climbing equipment).

Among dangerous things a falling tree is able to do, having the foliage act like a spring is a rather vicious one. The tree falls nicely with its big round green foliage, everything seems OK, but the green foliage is slowly compressed/crushed (for 2 or 3 seconds) and then the compressed unbroken foliage uncompresses and moves the 3 ton trunk in whichever direction. If you're in the way you're killed without even noticing it. (Certainly a market analogy here!)Folded branches are also a very classic cause of injures.

Many things can happen when cutting trees– unexpected things, so as a general rule, better be largely too cautious then slightly too incautious. Even if other people do not understand, you are in the tree with the chainsaw, not them.



The Ohia Tree Walking up hill is great exercise. Walking on the flat is not very aerobic and doesn't do the trick, but as the grade gets above 10 degrees it becomes good cardiovascular conditioning without any jarring or pulling on bones or tendons like running or other sports. You can easily walk for several hours and get a great feeling as you really warm up and get outside while burning the fat off surprisingly fast.

Above my house are three volcanoes 8,000 and 13000 or more high. There are11 of the 13 microclimates, rain forest, jungle, alpine, desert, fields. There are even glacial moraines from an ice field during glacial times. There are native birds, turkeys, hawks, pheasant, quail, chukkars, Franklins. There are wild pigs, sheep, cattle, even buffalo, goat, horses. As the altitude gets higher, the climate changes from warm tropical to subzero. Another fun part is orienteering with maps, compass, and GPS. It is rather easy to get lost in the jungles, or when enveloped in a cloud. A compass is indispensable to maintain the correct direction and to fix a position. Old topo charts reveal hidden or abandoned trails and paths.

In Hawaii much of the attention is fixed on the coastal areas which are subject to use pressures. Very few are up in the huge expanses up in the mountain areas. There are huge forest reserves with beautiful trees and vegetation. One day while hiking in the high forest enveloped in a cloud with no rain and high humidity an Ohia tree cupped leaves trapped the moist air and formed water droplets which fell to the ground to water the trees roots. The tree waters itself out of the thin air. Quite remarkable. Victor often speaks of trees so companies such as Google could be comparable to the Ohia tree as companies that take profits out of the thin air where nothing existed before and sustain themselves where none could before with an adaptive mechanism.



parabolaAn interesting and scholarly article on basketball angles and spins in the Washington Post, kindly sent my way by Dan Grossman of Florida, indicates that physics calculations show that the angle with which a shot is thrown influences its accuracy. The gist is that the higher the arc, the greater then chances it will go through. Also, the higher the height the ball is launched from, the greater the margin of error on the shot, and the greater the success. Taking one thing with another, a launch angle of between 45 degrees and 55 degrees seems best.

Angles have played a big role in stock market technical analysis. The most influential angles are those derived from the work of W. D. Gann who believed that when price breaks through an angle of 30, 45 or 60 degrees from a previous low to previous high, a continuation in direction of the break through was possible. As to how to compute the previous low or high, where it should start, where it should end, and what the time scale should be — why, that's why there are 1.4 milion entries on the subject of Gann angles with most concluding that they have been superceded by more sophisticated tools in these days of modern computers.

Being one to believe that taking the pencil to paper might help to find regularities, I computed some subsequent prices moves for the last 15 years for daily, weekly, and monthly prices. I looked at the angle between the two last moves of an index. For monthly prices, I looked at the subsequent moves following the moves in the previous two months. For example I looked at the moves in January and February to predict March. For weekly moves, I looked at the two previous weeks to predict the third week. For exampe the first and second week of the month to predict the third. For daily moves, I looked at the previous two days to predict the third. For example, Monday and Tuesday to predict Wednesday. The angles formed could be computed by using trigometric identities to compute the adjacent angles and noting that the sum of the three angles is 180 degrees. Here are the results:               

subsequent period   prior     previous    expectations   number of obs

monthly                    +         +                       4                53

monthly                    +         -                      -4                 41

monthly                     -         +                      7                 40

monthly                     -          -                      -6                33                                                                                                              

weekly                      +         +                      -2               185

weekly                      +         -                       4                186

weekly                       -         +                      -3               189

weekly                       -         -                        1               147          

daily                        +         +                      -0.7             952

daily                        +         -                       -0.5             898

daily                        -         +                        0                904

daily                         -       -                          1    744                                                                                                          

The many regularities that this table reveals are a good start to find angles that are useful for success in shooting for profits in markets. 

Bill Rafter offers:

If there is some mystical or otherwise relationship of price to time, it would perforce need to dictate the scale of the price charts for any angles to describe that relationship. In earlier times graphs and charts were drawn in pencil on standard graph paper, such as 10 x 10 to the inch. If everyone kept the same charts in the same scale, an argument can be made (i.e. the self-fulfilling prophesy) for various angles, Gann or otherwise. However the person who used a scale not similar (in the geometric sense of the word) to the standard scale would have different points of intersection with respect to the same angles as the standard scale. Fast-forward to today and we find computers rescaling charts to fit on the visual page to the extent that no longer is there a standard scale. So at the very least, there can no longer be a self-fulfilling prophesy. Whether there is a price-time relationship, I do not know. But the next time I see Master Yoda I will ask him.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy

Jim Sogi writes:

 One of the problems is asymmetry. Contrary to symmetry theory, the markets are not symmetrical. It makes the Gann ideas or other symmetrical equations inaccurate. This includes normal distributions.

Sushil Kedia comments:

A few years ago Mr. Sogi had written a review of a book from a publisher in Australia providing co-ordinate geometry treatments of the Mathematics of the Divine Ratio. The Chair and Dr. Castaldo too have written about the applications of polar co-ordinates to transforming prices to study appropriately, thereon. Perhaps a number of ideas from that book could be applied to produce suitable transforms and then fitments to the effect of say treating the rate of drift as equivalent to an angle of zero or one would provide perhaps some worthy examinations of the other standard angles as 1/3rd or 2/3rds (pi/12 or pi/6) etc.

Jim Sogi replies:

Why is it that the last few weeks, the price followed an upper and lower line so well as moving mechanically upward? It has kind of broken that recently, but it seems more than random things the mind puts together like a taking patterns out of random dots. I've graphed random series and seen the so called trends, but they don't seem as linear. And it seems to continue for days and weeks.

On the subject of the negative time idea Rocky talked about earlier, and since it's spring now, a look at our Gregorian calendar shows the inaccuracies in the counting system. Assume as a mind experiment that the market operates on absolute time. Given an inaccurate Gregorian system, at times the measurement of absolute time might appear to jump or reverse at various adjustment points. See the wikipedia entry on Julian Day Calculation and on the accuracy of Gregorian Calendars.

Pitt T. Maner III writes:

John WoodenThe discussion on shooting angles in basketball reminded me of one of John Wooden's favorite ideas which is to use the backboard or "glass".

Within days of implementation of this new 'back' board, players found that they could gauge the angle and use this new tool to their advantage to make shots. The problem today is that players have either forgotten or never learned its full advantage. Arguably the most successful coach of his era and probably of all time, UCLA Hall of Fame Coach John Wooden was renowned for teaching his players to use the glass both in the post and especially off of fast break transition. Coach Wooden's teams won 9 straight NCAA Titles (10 in 11 years) a feat unparallel before or since in collegiate basketball. Coach Wooden believed that if his players practiced making 5-10 foot bank shots at the 45 degree angle off the break and could make them at a rate of about 75-80% these shots were nearly as good as getting a lay-up. For those young players that missed the opportunity to see the great UCLA teams they were almost always successful in transition. Probably the single greatest scoring performance ever in an NCAA Championship Game was by UCLA's Bill Walton’s 21 for 22 field goal shooting performance against Memphis in the 1973 title game. Bill Walton’s' patented move was the up and under using the glass.

I have found that it is possible to use the target square on the backboard to advantage when shooting free throws and banking shots in instead of trying to get a "swoosh" each time. Having a visual target behind the "bucket" seems to help.

Banking in shots, however, is probably best used (like Wooden suggests) when shooting from the sides in basketball. Wooden believed in playing percentages and when a basketball hits the backboard it has almost a "second" chance of going in as opposed to hitting the front or side of the rim or completely overshooting or undershooting the mark. I think the coach would have preferred a sure layup over a dunk any day—and how many times has one seen a sure dunk pop out when thrown down with too much force when a layup would have scored two.

Not quite sure what a market analogy would be for a backboard–perhaps some type of straddle where you can make money on the continuation of the angle in either direction?At any rate one of the fun aspects of the NCAA basketball tournament is getting a chance to see various styles of play and the leveraging of seemingly higher risk approaches. The Cornell–Kentucky game on Thursday night, for instance, if it stays close, could be an example of excellent, confident outside shooting and defense vs. more pure interior power, younger talent and athleticism (and good outside shooting too). But as they say, you can "live and die by the 3-pt. shot".



Always play tennis with a proThe recent moves by central banks around the world to spend and add trillions of dollars to their balance sheet leads one to revisit the great coup when an investment firm speculated that a foreign currency was too high, took a short position against the currency, and was so powerful and correct that the central bank succumbed and devalued thereby leading to a 10 figure profit for the investment firm. I knew and spent considerable time in both business and personal activities with the head of that investment firm before he severed his connection with me, and thought that it might be apt to reconsider what I should have learned from him so that I and others might learn from his wisdom for the future.

1. Play sports every day, but not golf, and always use two cans of balls, and hire a pro as a doubles partner, so that you don't waste time chasing the balls around. There is a high opportunity cost to your time, and don't distract yourself with mundane activities like changing diapers or knowing where the refrigerator is, or make trivial investments that would distract you from the main chance.

2. Make your entire persona and investment approach consistent with the idea that has the world in its grip, i.e., the purpose of life is to do good for the needy. Like Lady Gaga, be the kind of person who should be a frequent visitor to the Oval.

3. Never marry a woman you wouldn't wish to divorce, i.e., never get into a position you couldn't get out of with ease, and think of this before you make the commitment. I would add that the selfish wife or selfish price or selfish dog should never marry a man that will leave her in oblivion if things don't work out. Imagine the great harm that the selfish dog did itself by killing a human. Now they're all likely to be rounded up.

4. Never trust anyone. And especially the more they talk about their honesty, the faster and more closely you should count your silver.

5. Foster above all relations with lenders so that you will have enough collateral and staying power at all times as the banks.

6. Be sure that you can play the float that unrealized liabilities provides.

7. Develop economical habits so that you can apply them in the business. Demand a discount on all transactions even if you are going to donate a million times that much to charity at the end.

8. Never waste your time with old ties and loyalties if they that don't have an immediate short term benefit, i.e, "what can you do for me tomorrow and today." Be careful you don't get roped into going to too many funerals and choose your acquaintances accordingly.

9. Never admit to having made a profit, but always emphasize your losses.

10. Surround yourself with big and powerful players so that your positions will be with the forces when you disseminate or implement them.

11. Have a loyal and very tight friend, preferably a retired accountant who vets all your deals with family and only invest in them pari passu with your friend if he invests in it on his own. Be sure that your lawyer is your best friend, and run everything by him at an early stage.

12. Always be humble and admit that your future looks bleak, that you yourself couldn't understand your own thesis, and surround yourself with people that you know are much smarter than yourself.

13. Stay away from attractive women aside from your wife as they can be too expensive and distracting, but feel free to admire them from a distance.

14. Develop a few flow hobbies like chess or music that can take your mind temporarily away from the business.

The most important lesson of all is that survival is the key. Never allow yourself to be expunged from the game or life. If something life-threatening is in the air, get out — whatever the cost.


Always hire a pro to second you when you are playing tennis or investing. The pro makes you look good and can always win his serve and two or three points on the return of serve. It's important not to make a fool of yourself when doing something you're not so good at, as people mistakenly think your abilities in one thing are related to your abilities in another. (People, including myself, have mistakenly made that mistake about me, thinking that because I was so good at hardball squash I might be almost as good at something else). Having a pro besides you for your investments in a field is something I first learned about when I met a friend of the head of the investment firm under consideration and he told me that he was in charge of his investments in Bora Bora or some such which had a population of 136, and I realized that similar pros were handling investments in every other country with population above 50 around the world. Since then I have been amazed at the quality of the pros that the head of the investment firm under consideration has hired or partnered with to lead him to victory.

Also, never wear an overcoat to a restaurant. When you're as rich as Gino or the aforementioned, the hat check people will hate you if you leave too little, and if you leave too much you'll ruin it for the other people who aren't that rich. The investor I refer to was a very economical tipper, and always said that he adhered to this abstemiousness because he didn't want to ruin it for others that couldn't afford it like him. This had the virtue of maintaining the economical habits so essential for business, as well as the benevolent affect on those less fortunate in the investment battle.

More important, what are the lessons that you have learned from persons almost as, equal to, or even more influential and helpful in your life than The Pal was in mine before he sagaciously severed his connections with me?

Tom Marks adds:

 To make it an even baker's dozen to the 12 of those original 10 while perhaps being more idealistically precise, any truly estimable sort would also have found a way to convey the following precept.

In matters of rooting for other people, and with everything else being genuinely equal, always have one's heart wager unabashedly on the underdog as determined by society and convention's Vegas. Maybe it's the temporal variation on Pascal's Wager, as the potential payoff joys dwarf the ante of possible disappoint. Besides, even if the sporting sort loses, which they oftentimes do, they still earned karma dividends simply by rooting for another in the first place. It's win/win. I take that shot every time. Why not, it's amazing how many loses of that type one can endure while still being spiritually solvent. 

Jim Sogi writes:

What I have learned is that it is the wave from within that swamps the canoe. All problems come from within. Most mistakenly blame external sources for their woes. This is called denial. The world is basically beautiful. We are all defective in some way. Learning how to accommodate these various intrinsic human, and particular peculiarities is the road to self realization. It's a long hard trail. 

An anonymous commenter adds:

1. Invest in stuff you do not understand. The Complexity Premium will carry you for awhile, see Enron and Alphabet Soup of securitization for proof. In the mean time people will think you are really smart and that is why you out perform in the short term.

2. Never let someone go over your long term results. Focus on what you just bought in any analysis or comparison.

4. Blow up only when the economy stinks, that way you have a good excuse. Many decent years followed by one excusable bad year. The opposite of course can apply to hedge fund guys. Only have one spectacular year, and everybody will think you out smarted the optimist.

5. If someone models your risks and says it is too high, call the models garbage. After all nobody could model the stuff you bought.

6. Buy everything complex from your friend you played on the same intramural team in college. After all he has a McMansion and would never hurt a friend. He has great contacts, and loves being the middle man and controlling what you and your boss sees. Besides he will then take you to all the greatest golf courses when you are in town.

7. Call being in front of the herd, "herd following" and "group thinking". But bottom selling and top ticking is simply an irrational market and bad economy. If you are in front and something goes wrong, you simply look stupid. But if you get caught at the tail, nobody could have seen it coming, because everybody was doing the same thing.

8. Always be quick with a joke, but make sure it is at somebody Else's expense, not your own.

9. The better people are, the more you need to dig to find their weakness. Once it is found, make sure to define them by this problem.

10. Never win at golf, but prove your expertise in the clubhouse by knowing your liquor. Be sure to always be in the "power" group when you play and drink.

11. Make sure you are friends with your bosses mistress…you never know when you will need to call in a favor and have someone fired.

12. Control the minutes of every investment meeting, nobody reads them anyway, but it is a great way to not have to do something you do not want to, but those in charge want you too.

OK, so this was a conglomeration of several poor guys I've known. 

Tom Marks adds:

One recalls that the stock market last topped out with Scott Browns'
 election. And this weekend may in fact mark the passage of Obamacare.

If the markets rally despite Obamacare, might this be an example of the "busted hypothesis" of which a certain famous speculator wrote?

keep looking »


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