If you asked me would I recommend Hedge Fund Masters by Ari Kiev or buy it for someone, I would have to respond weakly with a shrug of my shoulders and a non-committal “I don’t know”. I’m torn because I felt the book was reasonably expensive at >$50 (for a book with no pictures) and I just didn’t get what I hoped to get out of it.

Kiev lures unsuspecting traders with the title above and subtitle: “How traders set goals, overcome barriers and achieve peak performance”. Stirring stuff indeed.

The book is subdivided into three parts, “What is mastery?”, “How do you get there?” and “What comes next?”, and takes the form of interviews/case studies with 70 hedge fund managers.

This is where I had a slight problem. Often, the traders in question are not masters per se. In fact, they are having some difficulty in their trading, and they talk to Kiev, who prescribes a pretty inoffensive remedy- “cut your losses and hold onto your winners!”.

This isn’t a book where you are reading interviews with Market Wizard types where you can learn from their mistakes…or how they overcame obstacles and disciplined themselves: no such luck! To me the interviews and the running commentary all seemed a bit vague and muddled by the end of the book, and I don’t think there was much follow up with the interviewees as to how they got on…certainly nothing of a verifiable nature.

The message he keeps repeating is not one without value: that the best traders, the masters, are the ones who are the most committed. Moreover, in taking risk, he says that one should shed one’s inhibitions and if one has done the work then in the long run, it’ll pay off. Messages not without value, but I didn’t feel the the price or length of the book (298 pp) was worth it.

Finally, looking it up on Amazon, there appeared to some diverse opinions on the merit of the book, such that one reviewer pointed out 11/14 reviews at the time were 5 stars, and all posted over two days!

Dave ‘Surf’ Goodboy adds:

I interviewed Ari Kiev for Yahoo and TradingMarkets. He works with the king, Steve Cohen, for what that’s worth.



With the recent success by Democrats in the House of Representatives and in the Senate, coupled with the recent rally in the US stock markets there are some thoughts that come to the surface.

A quick review of Adam Smith’s comments:

In 1776 he wrote “An Inquiry into the Nature and Causes of the Wealth of Nations” in which he promulgated his invisible hand theory, which stated that each individual, while striving for his own gain, of necessity advances the public interest by the free exchange of goods and services creating division of labor and a free market economy.

Some natural questions:

Gary Rogan replies:

The market is obviously saying that major pharma, HMOs, and large defense contractors are likely to lose. It’s re-valuing non-dividend-paying stocks slightly higher relative to dividend-paying stocks and smaller stocks slightly higher than large-caps. It obviously thinks that gridlock is good, and it seems to have preferred the House and Senate to be controlled by different parties, at least as far as above-mentioned groups are concerned. Overall, it’s happy with the results.

The only thing that’s likely to get done for sure is “immigration reform”. Whether that’s good or bad is in the eye of the beholder. I think it will be a long-term disaster, but the short-term economic impact just isn’t enough to worry the markets.

The market got the big picture correct, the House situation and the Republican loss of control, because it was a relatively well-behaved stochastic event that could be pre-sampled and processed, but couldn’t deal with the Senate because it simply could not have known what fewer that ten thousand people who decided the election in Virginia and Montana would do. This illustrates perfectly both the power and limitation of markets: they deal with distributed information better than almost any individual, but fail with highly non-linear situations where small noise-like perturbations are amplified dramatically in a digital fashion to produce a significant outcome.

Rick Foust adds:

I just had a visit with a good friend and fellow engineer here in the risk-averse world of nuclear power. He is a devout Democrat and Bush-hater. He has been strongly bearish since 2001. I have pulsed him since 2003 when I first advised him to become bullish. He has consistently responded that everything is horrible and will stay that way. In return, I have teased that when he finally turns bullish, I am going to sell everything. This teasing has only strengthened his resolve. Today I asked him how he is feeling now that Washington power is shifting. He tells me that today he increased his 401K contributions and the increase is going to stocks. His choices are popular with risk adverse engineers: Fidelity Magellan, FMAGX, and Fidelity Equity Income, FEQIX. He believes that the market does better when the power in Washington is divided. He is eagerly anticipating trouble for Bush. If I am guessing correctly, he will be right (for a while) and one day he will come to my desk gloating over how the market has advanced coincident with Democrats’ taking vengeance on the Evil One. I will sell on that day.




Jay Cost’s Horse Race Blog was the best single source of political information for the 2004 race. Alas, Mr. Cost is now pursuing his doctorate in political science at the University of Chicago and has retired his blog. He still writes for Real Clear Politics occasionally. Before the election, he saw the Democrats picking up between 15 and 18 seats in the House; being a biased Republican I thought the range would be 12 to 16.Jay and I will both be dining on humble pie and crow for a while. He can make his own explanation. Mine is that I failed to look at what was the appropriate parallel — the Korean War elections. In 1950 the Democrats lost 28 seats; in 1952 they lost another 22, and the Republicans gained control of the House. I should have listened to the smart people in my clan, all of whom are women. As mother, wife and daughter reminded me this morning, “Americans don’t like foreign wars, especially those where the natives seem not be willing to do any of the fighting.”



                                                                 Open to
Election Day   Close  Day after     Open    Close  Open Move  Close Move
11/4/1986      246.3  11/5/1986    245.7    247.2       -0.6        +1.5
11/8/1988      275.1  11/9/1988    274.0    274.1       -1.1        +0.1
11/6/1990      311.8  11/7/1990    312.1    307.3       +0.3        -4.9
11/3/1992      419.9  11/4/1992    418.5    416.2       -1.4        -2.3
11/8/1994      467.0  11/9/1994    471.6    465.8       +4.7        -5.8
11/5/1996      715.4  11/6/1996    715.8    729.4       +0.4       +13.6
11/3/1998     1114.0  11/4/1998   1125.5   1124.6      +11.5        -0.9
11/7/2000     1444.0  11/8/2000   1445.0   1413.3       +1.0       -31.7
11/5/2002      914.0  11/6/2002    920.5    925.7       +6.5        +5.2
11/2/2004     1130.6  11/3/2004   1145.8   1145.1      +15.2        -0.7
11/7/2006     1389.0  11/8/2006   1382.5   1391.6       -6.5        +9.1 



The Carrier Intrepid Runs Aground In Hudson’s Muddy Bottom
By JILL GARDINER, Staff Reporter of the Sun, November 7, 2006

A panel of politicians, including senators Schumer and Clinton, spoke at a bon voyage ceremony for the ship early yesterday morning, and mayors Koch and Dinkins cast aside the yellow mooring lines.



Applying Regression and Correlation, by Jeremy Miles of the RAND Corporation and Mark Shevlin of the University of Ulster, illustrates the proper and pitfall-laden path that lead to the many beautiful and illuminating things that correlation and regression can accomplish . The book is written for psychology students without any training in calculus, and it contains simple examples and extensive commentary on the regression output from standard statistical programs such as SPSS. However, the applications for psychology are almost identical to those that would be used in markets, with such variables as industries substituted for classes and companies for individuals.

And what a wonderful array of applications and extensions this book contains. I found myself augmenting my knowledge or learning something new on almost every page, and I have read many dozens of books on this subject. There are great sections on how to code your data so that you can do categorical regression, categorical covariance , structural equation analysis. There is a very good section on how to go through all the steps of logistic regression with simple examples and calculations to show how the maximum likelihood solution is computed. There is a very fine discussion of the reasons that you should never use stepwise regression and why hierarchical regression is much better. There is a complete chapter on all the computational methods of measuring the individual contributions to the prediction and the influence of each independent variable and each observation in the regression.

One of the main themes of the book that hold everything together is that everything that can be done with the usual analysis of variance techniques can be done with regression, but that regression does so much more. While I had read this before, I had never seen such a clear exposition of how to code the data so that you can actually accomplish the transformation and always come up with the more complete and useful regression solutions to such problems.

Chapters in the book cover simple model building with regressions and correlation, multiple regression, categorical regression, assumptions in regression, issues in regression, nonlinear and logistic regression, moderator and mediator analysis, and multilevel modeling and structural equation modeling. Its amazing that after reading this book, one comes always with a good appreciation of how to accomplish all the bells and whistles that a researcher might wish to accomplish in all these fields. The chapter on multilevel modeling is particularly useful as it fits in naturally with the simple approach and groundwork of the previous chapters, and by the time you come to these not-often-used techniques, you have a feel for the extra information and utility and practicalities of actually employing such techniques. The discussion of power that the author gives as an aid to determining the proper sample size for one, two and multi variable regressions, with helpful and easily understandable charts was also crystal clear and highly illuminating.

I found at every stage of the book that I was thinking that regression should be used much more often in market work. The residuals that are routinely examined in regression — checked for such things as outliers, skew, kurtosis, autocorrelation, changes in variance, degrees of predictability at various stages of the analysis, clustering, influence of individual observations — should be subjected to exactly the same scrutiny by anomaly and system researchers that psychologists would examine in determining the appropriateness of their own sample and conclusions. The influences of path and intervening variables that the psychologist studies to find the true causes should be considered by any market researcher as he strives to get to the roots of any intermarket relation, or study of the influence of economic events on markets. The same necessity that leads social science investigators to use multilevel analysis, i.e. that individuals are clustered into classes, groups, areas or sexes are the same reasons that market researchers should use this analysis for companies which are clustered into industry groups, P/E groups, periods when the market went down or up. Indeed, once you read a book like this which tries to boil down all the advanced techniques of regression into a form designed to perform practical research, you’ll be seeing applications everywhere, hierarchies galore in seasons, years, interest rate environments, sentiment levels, differences in the recent correlation of consecutive observations, indirect effects that should be taken into consideration, methods of reducing the number of variables, ways of measuring the improvement that adding variables to a prediction would provide, problems of multiple comparisons, methods for removing data points which lack independence, methods for handling differential mortality of companies that go bankrupt or merge, or were retrospective added or deleted.

It’s a bonanza and a cornucopia. The authors style and personas in this book is that of two rather average scholars who have struggled with and solved by hard work many problems and opportunities that a student might have in dealing with regressions and correlations, and how they would guide others of a similar mind . While many good things devolve from this framework, they do leave the student a bit up in the air for some of the references and mathematics behind more sophisticated extensions of regression. Topics like the regression bias, validity shrinkage, reliability, alternate correlation measures, range restrictions, distribution theory, prediction intervals are well covered in a book by an expert statistician Philip Bobko in the book Correlation and Regression, which we’ll review shortly.



Years back I read a comment from Tom Dorsey of Dorsey Wright who stated that it is easier for a stock to go from $80 to $100 than from $15 to $20.

Is there an optimal price of a stock to purchase? $30 or above?

If one bought a basket of stocks at $80 at the beginning of the year, and held it for one year, what would be the performance of the basket and would it outperform the S&P index? What would the standard deviation be?

What price should an investor avoid? Below $12 or below $5? What are the reasons for doing so?

James Sogi adds:

Aside from the high/low price issue,

> 20/80

[1] 0.25

> 5/15

[1] 0.33

So it’s about 8% easier.

John Bollinger recalls:

I think the first to dip his toe in this pond was Frederick Macaulay, later of ‘duration‘ fame, writing in the Wall Street Annalist — a NYT publication — in the 1930s, the exact date eludes me.

Martin Lindkvist elaborates:

Ahh… the square root theory. Norman Fosback has a little discussion in Stock Market Logic. The square root theory says the the magnitude of the stocks price move is directly related to the price of the stock. Specifically, for a given market advance, all stocks should change in price based on their square root. So the $15 stock (square root is 3.873) would advance to 24 (3.873+1 squared) and the $80 stock should at the same market advance go to 99 (8.944+1 squared). Or so according to the theory. The gist in any case is that in during an advance it pays to have the lower priced stock which should be more volatile.

Fred Macaulay originated the theory in the Annalist, March 13, 1931. William Dunnigan’s New Blueprints for Gains in Grains from 1956 also has a discussion.

Gibbons Burke replies:

These lines from the first of the Quartets, Burnt Norton, resonate with philosophical thoughts on the nature of the markets, and the study of market history….

Time present and time past
Are both perhaps present in time future,
And time future contained in time past.
If all time is eternally present
All time is unredeemable.
What might have been is an abstraction
Remaining a perpetual possibility
Only in a world of speculation.
What might have been and what has been
Point to one end, which is always present.
Footfalls echo in the memory
Down the passage which we did not take
Towards the door we never opened
Into the rose-garden...



Rewriting History by Alexander P. Ljungqvist (Stern School of Business, NYU), Christopher Malloy (London Business School) and Felicia Marston (University of Virginia) provides evidence that nearly 20,000 records in I/B/E/S, a database of research analyst recommendations owned by Thomson Financial and widely used by investment professionals and academics, were manipulated between September 2002 and May 2004. This took the form of selective, ex post removal of analyst’s names from some of their historical recommendations. These were not random; they were concentrated among the worst performing recommendations.



First, whenever you logon to Yahoo-Finance, Google-Finance, MSN-Money or other mass investor website and read a stock picking columnist, any columnist, and they all say the same thing “value beats growth”. Indeed to even be invited to the table, you must pledge allegiance to Buffett. How far off can the regime change be?

Second, will the regime change be as big as 2000 and 2001, when the shoe was on the other foot in 1999?

Third, rather assuming it must remain the same because of 17 years of data. Why is this number of years chosen? Does it have to do with difficulty in determining “point in time”? What does this say about the accuracy of the data?

Fourth, what is special about 1,000 stocks? Does this method work for top 30, top 100, top 500 or top 5,000? Does size matter in this debate?

Fifth, when Buffett, the master of value investing, underperforms three years in a row, even as the chants grow louder insisting he is the guru to listen to, what does this say about value investing?

What effect does both 4 and 5 have on the “Average Joe” small potatoes stock picking value investor? And what effect does 4 and 5 have on the mega fund value camp?

Sixth, does Soros’s principal of “when someone tells me how honest he is….” apply to a value investor’s telling you how pure as snow his data are?



Anyone who has moments of feeling sorry for himself should read the uplifting Narrative of the Life of Frederick Douglass, An American Slave: Written by Himself. It must be opened slowly and read like a healing sore. As with any autobiography, I advise to bypass the introduction and go straight to the 100-page narrative. Douglass had a black mother and white father, lost both, slept in a gunny sack and grew familiar with both northern city and southern field slavery. The oft touch of the whip isn’t part of my anecdotal review and must be experienced first hand through the book. Fredrick Douglass rose through labor, education and sheer will up and out of slavery and, following an exciting 1838 escape by sea to New York, became the Lion Abolitionist. He is the best known of the fugitive slave autobiographers and this is the first of three memoirs that he wrote after the escape. I feel this narrative is the only one you need to read because it covers his twenty years as a slave while the sequels are the gravy of his victories.

The sole drawing of Douglass at the time of this narative’s publication shows a square jaw, heavy brow and tight curls, and the close-set eyes that are hard to gaze into even after 150 years. So I dim the computer screen to see my reflection and wonder how I can think myself suffering in this mayhem. This spanking new Palo Verde College Library in Blythe, California, the ‘jewel of the desert’ opens doors each 8am and the meager students- public welcomed!- weave a hundred signs, Quiet Zone, No Cell Phones, No Food, No Chat, No Porn, to the 12-computer carousel.

Chat and porn account for half the overall computer time. Cell phones are continually in use and someone’s always crunching chips next to a radio. The assistant librarians assist them, but the head librarian is apart, a grand dame and import from Yuma, Arizona a year ago. She, now graying and fifty pounds heavier, seemingly has thrown in the towel from her office to ponder my first day’s warning (having suffered a like fate as the night supervisor of the tutoring center for one term), ‘Dolly, there’s an indirect correlation between longevity and competence at this job, and I’m afraid you’ll last a year.’

There are three exceptions to the library bedlam, duffer authors who live independently out of their vehicles. The sci-fi man types around a two-foot bead and lives in a ’70’s camper in the parking lot; the bald Oklahoman is 230 single-spaced pages into his second Christian book and parks a battered van in a nearby BLM campground, and I type snips like this and crash nights in a hallowed Ford when away from my Sand Valley home.

My reverie is broken by a handicapped student twirling his cane overhead at a phantom and screaming, ‘I’ll flatten the bas___!’, even as I wonder if my peers too incorporate it into their works. The assistant librarian asks me, as functioning reference librarian until the real one arrives at 4pm, ‘What is an Almanac?’ I show her, and the Oklahoman confers for the proper capitalization of pseudo-Christian. I find it, and a behemoth adult student with a tattoo necklace of chains takes #12 with the smaller screen (to discourage pornography) and scowls across at me as usual. Ironwood and Chuckwalla Prisons lie across the desert from Palo Verde College. When he does that I reflect back to a morning a few months ago_

A blue eyeball appeared in my computer toolbar. Odd, I thought, and at noon picked a hematite from my private collection and slipped it into the mailbox of a computer technician who carries stones in his picket to polish for good luck. That evening he whispered over my shoulder, ‘They’re watching you,’ and quickly summarized that the eye means remote monitoring by one of the techs. The necklaced giant, he said, ratted me to administration claiming, ‘He sits from 8 to 8 daily and must be looking at girls.’ Disquieted, I moved to another monitor where the blue orb blinked on periodically wherever I sat for three days, and finally disappeared.

A far more serious incident a few years ago cost me a snowflake obsidian and trip to NYC to visit the Chair. For one month in 2002, many others thought I was going crazy with the stress of daily writings at the college but I knew that someone was breaking into my Email account. The hack reordered my list of addressees, greeted me from my own address with, ‘This is your morning cup of coffee’, and one time typed my password while my fingers floated above the keys. A couple friends got Emails from my address that I didn’t send and I received ones that they didn’t mail. The meddler caused no real harm but I sweat at the screen and cast sideways glances about the library until one day realizing that the pirate was probably too clever and charming to be operating from Blythe, and I began to look outside. Moreover dismayed that the invader could be affecting the moneyed people of the SpecList, I drove to Phoenix and flew to New York to settle the matter.

I climbed the outside stairs leading up to the trading office where day and night I knew I would find the Chair trading, studying or running in place next to the computer, and silently entered the screen door. His head was bowed before the screen and though we hadn’t seen each other in many years his blue eyes only flicked up and then down. I sat at a computer across from him and wrote an Email, ‘Vic, how are you?’ He immediately replied, ‘Fine. You’re looking well.’ I responded, ‘There’s an issue.’ He smiled typing, ‘Let’s meet on the outdoor court at midnight.’ I left and unpacked in a downstairs room, and in a few hours went out to the racquetball court to hit. Soon he burst under the sodium-vapor lights and embraced me crying, ‘Show me your new backhand, and then tell me why you’re nuts.’

The upshot is that without really saying so the Chair didn’t believe there was an invader inside my Email account, and felt there was no danger to the Speclist. After an otherwise pleasant week’s visit I returned home to the Sonora desert and Palo Verde College. Maybe I really was going mad; I finally thought to slip the prized obsidian into my friend’s mailbox and that evening he materialized behind me at the library computer. ‘They caught a disgruntled computer tech hacking the college systems and staff’s Emails. He generated your Email password with a special program, but has gotten fired and you’re safe. ‘ Then he walked off with the stones polishing in his pocket.

And today, months after the blue eyes and years after the visit to New York, I glance up from the screen where I occasionally escape and look around at the same troublesome library. I’m not going to read this drivel any more and feel sorry, and I suggest you cut your losses short too. I’m going to break away and read the last chapter of the Narrative of the Life of Frederick Douglass and then go for a hike.



An incredible run. The Dow made a new high today 79 days since its last 14 day low, and it has covered just of 14% during this move. Given that there are only 8 rallies in history that have carried on as long and as far without a correction to the three week low, one must be impressed that it happens on election day.



I awoke with the rising sun and stretched in my hollowed Contour. Then I took a long walk through the desert north of Blythe, Ca. and discovered an old foundation with the rusting legs of a chair. I returned to the car and drove a track though 120 beehives tossing thousands of honeybees that dissuade anyone from tracking me. A letter at the post office from my father told of his new hip replacement and cane, and of the memory of putting a horsehair mat in our Idaho Falls basement and teaching me to wrestle. Then I ambled to the Kitchen and was intercepted by two snapping dogs at the a-keely’s tendons, but I leapt lightly and kicked one in the ribs with the right foot and the other in the teeth with the left. I haven’t kicked a dog in years and called ‘Sorry’ over my back. At the Kitchen I ate four barbeques knowing it would make me sick later for an hour but it’s free. A man walked in the door as I exited and a child dashed up hugging his leg and shouting joy, ‘Daddy!’, and he responded, ‘Who?’ Apparently delighted, a black man called the pastor jigged on the linoleum exclaiming, ‘It’s the light!’ I left and drove to the college with sand stretching in every direction under the hot November sun, and strolling to the library met a thick line of black ants passing ten feet from their hump nest to a Palo Verde tree. I jumped it and was suddenly struck by my last brush with technical analysis, plus an illumination.

I knew then that an uptrend tends to continue and a downtrend tends to fall, however if the pivot for either could be exacted and its mechanism understood then I could get rich. Subsequently, I poured over the daily market and a few dozen stock charts for six months before yielding and thinking, if only I can find a model that fits the market reversal then maybe I can get famous. I studied the ocean surf breaking on the beach, dominos falling, elementary calculus, bird wings, train cars, fluid and gas movements, light, and so forth before acquiescing and taking up racquetball. Today on alighting on the far side of the ant line, I wheeled and sat to observe. There seems more than a vague resemblance to a market move. Of course, a market waves and ants line_ or do they? The tip of the market wave is a line and the ant column has a fluctuating width, and so I sat a little longer. A trend of short duration meets small resistance and breaks, and so does an ant column, but a longer trend creates stability and similarly the ant column actually wears a trench that causes greater resistance to change. There are outside influences in both cases. But the intrinsic key between the ant model and all the others- surf, dominos, wings, cars, fluids and gas, and light- is that there is individual as well as group intelligence in the elements only of the ant line and market movement- the ants and the investors. I sprung, brushed them off, and turn the idea over to others better versed to qualify and quantify the parallel influences including intelligence of market and ant trends. Further clarification is in The Ants that won the Pulitzer Prize (science) for authors Bert Hölldobler and Edward O. Wilson. It’s a starter anyhow, I could get print, and in any case today’s trend in Blythe is up and fierce.



The recent S&P moves relative to open, high, and low cry out for description and prediction.

S&P Futs  Day   Open    High      Low     Close
20-Oct-06   Fri   1374.5  1375.5  1369.8  1374.9
23-Oct-06   Mon   1371.6  1384.2  1370.1  1380.7
24-Oct-06   Tue   1379.0  1385.3  1378.2  1384.8
25-Oct-06   Wed   1383.0  1389.5  1381.4  1389.2
26-Oct-06   Thr   1392.0  1395.2  1385.0  1392.9
27-Oct-06   Fri   1391.0  1392.2  1381.2  1384.8
30-Oct-06   Mon   1381.3  1386.8  1378.9  1383.2
31-Oct-06   Tue   1385.3  1387.1  1377.1  1383.2
01-Nov-06   Wed   1386.1  1386.9  1370.9  1372.9
02-Nov-06   Thr   1368.8  1373.5  1367.3  1371.3
03-Nov-06   Fri   1375.8  1377.2  1365.6  1368.5
06-Nov-06   Mon   1372.8  1386.3  1372.6  1383.8
07-Nov-06   Tue   1385.0  1391.7  1383.3  1391.0
  1. A run of six lower lows in a row was broken on Monday.
  2. A run of six days without a rise was broken.
  3. The high on Monday was below but within 1 point of three highs of the previous week.
  4. The change at the open on Monday was within a quarter point of the change on the previous day.
  5. Two up opens in a row more than four occurred in conjunction.
  6. Hopes were dashed on Friday when a nice up open was followed by a move down of 12 points.
  7. Wednesday of the previous week the high-low range was 16 points and Friday the high-low range was 12 points but the other three days the range was below 10.
  8. A string of six weeks up in a row was broken last Friday with a down week, giving the bears hope.
  9. The volume on Tuesday end of month was 50% higher than the average for the other days in conjunction with an unchanged day.
  10. The low on Monday was just a quarter point below the open and the high last Friday was just 1 point below the open. Similar low maximum within day moves above open occurred on 10/27, 10/31, and 11/03.

Many queries as to randomness, predictability, and further observations and hypotheses arise.



Live from Baton Rouge, it’s Barron’s abridged:

Abelson: It is a great challenge being a worrywart right now. There are so many things to worry about, that it is hard to figure out what to worry about the most. An actual bull was lose in Newark and was lassoed, this is a bad omen for the stock market. Corporate Fat Cats set up a committee to undermine regulation and lawsuits that they don’t like. Growth stocks can be overpriced because there is career safety for money managers in buying well known names, says Jeremy Grantham. The sky is falling.

Page 18-20: Walmart not doing so hot, investors should apply a nice discount to shares. SWS group is a buy. The movie Saw 3 is so good that Lions Gate might do well.

Page 22: Evercore partners is overpriced, it is also risky since a lot of its revenue comes from a few clients.

Page 24: Adidas, which owns Reebok now, is looking pretty good because it is big in the world of soccer, a sport that is apparently big around the world. A guy from Evergreen thinks it can go up 30%.

M3: In case you have been in Spitsbergen all week, the Dow slipped below 12,000 at one point. Unemployment came in at 4.4%. Investors are worried about inflation. Guy from Banc of America says that is is going to be hard to make the case that inflation will be less than 3% for the next three years. In other news, no human character traits were observed in any of the well known indicies.

M4: CIT group could go up if it spins off its aircraft leasing business.

M5: Canada has proposed changing the way it taxes royalty trusts.

M6: Far Eastern stocks are cheap, and have been doing well, even though there is all sorts of crazy stuff going on over there. Goldman likes Daewoo Shipbuilding, and CSFB likes United Microelectronics. Thai banks could be a good short term play.

M9: UBS is pricey, this could be troubling because the more risk they take trading the more money they seem to lose. Plus, they are dependent on a large financial advisor force, which is expensive.

M10: Le-Nature filed for bankruptcy, which could be the start of a bad season for junk bonds and leveraged loans

M11: To hedge the election, buy DJX strangles.

M12: Orange juice prices are up due to a small crop. This affects KO and PEP. Randolph and Mortimer Duke unavailable for comment.

M18: Possibility of democratic win leading options players to hedge their prescription drug co. positions. CSFB says sell large cap health care and buy biotech - since the dems like throwing money at their favorite biotech fads. Overall risk perception in the broad market is low.

Page 29: The Big Money poll says that the Dow is going to 13,000 Democrats will gain in congress, rates will fall.

Page 36: Despite the fact that the world is, as a whole, the best fed it has ever been, Barron’s thinks that the population boom means people are going to starve in the future. It will take a lot of fertilizer to avoid that, so buy Potash.

Page 37: GPS stocks have been up lately.GPS devices are powered by chips made by SIRF Technology, buy it. Paul Wick looked like a fool telling people in Barron’s to short APCC, it got bought out right after publication. Logitech Z-10 interactive 2.0 speaker system if pretty good.

Page 38: We told you a few weeks ago that Oracle might go out and buy stuff, they are already at it. They bought Stellant, and it is a good fit for Oracle. Red Hat is up the creek without a paddle.

Page 39: Annuities can be a big ripoff, so if you are going to buy one do some research. …some good websites.

Page 41: There are more and more long-short mutual funds, so hedge funds better watch out.

Page 43: Technology mutual funds are very volatile, sometimes they are up big, sometimes they are down big. MFS Technology fund is no exception.

Page 44: ASV stock is down big, and should go lower. Nobody noticed that their mini bulldozers were piling up in inventory until the CEO abruptly quit. Investors should have noticed this earlier, but didn’t.

Page 45: Interview with Gary Greenberg, Muse Capital. He is a specialist in global investing. Unlike anyone else, he thinks renewable energy is a good long-term play. Naturally, he recommends a bunch of renewable energy stocks. He also likes CVS, the State bank of India, Lundin Mining, and British Airways.

Page 47: The stock and bond markets are giving divergent views on whether or not their will be a hard, soft, or no landing. Who knows?

Page 48: After ruining Lucent and HP, Carly Fiorina rights a mostly useless book, with no honest self-appraisal. See Dan Quayle’s book. Didn’t know he had one? That’s the point.

Page 49: We told you to buy US Steel. You should have, it has raised its dividend payout by 50%. The Canadian Gov’t is changing how it taxes royalty trusts. ACAS has been a great company for dividend owners, should continue to be. FCX and CHKE also raising payouts.

Page 50: You thought Brazil was an emerging market? Try Bulgaria. Emerging Emerging markets are now called Frontier markets. They key to not getting burned is to buy a good mutual fund that invests in these markets. If you want to invest in Africa, you should check out this site.Vietnam is already looking overbought.

Page 54: Politics needs more speech, not less. As it turns out, the Canadian politicians can’t be trusted either when it comes to stable tax policy



In Roman mythology, Disciplina was a minor deity and the personification of discipline.

The word “disciplina” itself, a Latin noun, is multi-faceted in meaning; it refers to education and training, self-control and determination, knowledge in a field of study, and an orderly way of life. The goddess embodied these qualities for her worshippers. She was commonly worshipped by imperial Roman soldiers, particularly those who lived on the borders of the Roman Empire; altars to her have been found in Britain and North Africa.

Her chief virtues were frugalitas, severitas and fidelis-frugality, sternness, and faithfulness. In worshipping Disciplina, a soldier became frugal in every way: with money, with energy, with actions. The virtue of severitas was shown in his focused, determined, not easily dissuaded, and decisive behavior. He was faithful to his unit, his army, the officers and the people of Rome.



Just when you though corruption allegations might be abating in equity markets, along comes an explosive new study. A paper to be delivered to the January 2007 American Finance Association annual meeting in Chicago suggests that investment analysts’ historical buy recommendations have been manipulated to put them in a better light. Rewriting History, by Alexander P Ljungqvist (Stern School of Business, NYU), Christopher Malloy (London Business School) and Felicia Marston (University of Virginia) provides evidence that nearly 20,000 records in I/B/E/S, a database of research analyst recommendations owned by Thomson Financial and widely used by investment professionals and academics, were manipulated between September 2002 and May 2004. This took the form of selective, ex post removal of analysts names from some of their historical recommendations. These were not random; they were concentrated among the worst performing recommendations. Here is the authors’ abstract:

Comparing two snapshots of the entire I/B/E/S analyst stock recommendations database, taken in 2002 and 2004 but each covering the same time period 1993-2002, we identify nearly twenty thousand changes of an unusual nature: the selective removal of analyst names from historic recommendations (anonymizations). This practice turns out to be pervasive and non-random: Bolder recommendations are more likely to be anonymized, as are recommendations from more senior analysts, Institutional Investor all-stars, and those who remain in the industry beyond 2002. Abnormal stock returns following subsequently anonymized buy recommendations are significantly lower (by up to 11.0% p.a.) than those following buy recommendations that remain untouched, suggesting that particularly embarrassing recommendations are most likely to be anonymized. Analysts whose track records appear brighter due to anonymizations experience more favorable career outcomes over the 2003-2005 period than their track records and abilities would otherwise warrant.

As the authors note, the period not only coincided with close scrutiny of Wall Street research by regulators, Congress, and the courts, but also saw a substantial downsizing of research departments of major brokerage houses in the US. The manipulation benefited the careers of those whose dud recommendations were anonymised. The paper concludes: Whether or not analysts were in fact behind these changes, however, their track records undeniably look better than they should, and we show that the analysts concerned apparently benefited in the sense of experiencing more favorable career outcomes than their track records and abilities would otherwise warrant: Anonymizers are more likely to move jobs, to be hired by a large brokerage firm, and to move from a small to a large firm (Hong, Kubik, and Solomons (2000) measure of a promotion). Anonymization easily has the largest economic effect in our career outcome models. These are very disturbing findings, and as the authors note, given the “non-random nature of the results” it is very unlikely they are attributable to chance. While “it is possible that the brokerage firms were in fact the culprits ..the patterns we document seem at odds with this interpretation”.




Nov. 7 (Bloomberg) Federal Reserve Bank of Richmond President Jeffrey Lacker, who dissented from the last three decisions to forgo an interest-rate increase, said the central bank has failed to communicate sufficiently its willingness to reduce inflation, the Financial Times reported.

A big deal? No. A “big deal” in Fedland is an official action, Bernanke diktat, or data point. Lacker is speaking truth to power, but he’s not powerful enough to actually do anything besides stake out his ideological turf. Such posturing by regional bank heads has ample precedent, and, at the end of the day, does next to nothing policy-wise.



Are traders backing the wrong horse in the grain markets? Corn and soybeans are rallying strongly in part because of expected extra demand coming from the production of bio-fuels. At the moment the main focus is on corn and the corn grain ethanol produced from it. However, a recent article in The Technology Review refers to research that shows that the net energy gain from corn grain ethanol after taking into account all the energy used in farming and processing corn is small. The net energy gain from biodiesel made from soybeans on the other hand is much greater and biodiesel produces less greenhouse gases to boot. A possible catalyst for the switch of attention from corn to soybeans could be an article mentioned today in the Fort Dodge Messenger about a local trucking company embarking on a two year study comparing biodiesel to normal diesel in every day commercial use. This and the increasing spread of soybean rust seems to augur well for continued soybean price strength in absolute and possibly relative terms.



I thought I was a lion tamer taking on the volunteer job of counseling in an old folks home. Armed with a veterinary degree and psych tech certificate, I made my daily rounds. The first room belonged to Gloria, bedridden with a bad bowel for two decades, who always screamed as I entered, ‘Read to me of the coming of the Lord!’ Dutifully I took up the King James Version from the bed stand and, holding it upside down as is my habit, read from Revelation 6, ‘And I looked, and behold a pale horse and his name that sat on him was_’ Through the narrow passages Gloria gradually calmed, turned her face to the sunny window, and fell asleep every time. I put the bible back and continued down the hall.

The next challenge was Mildred, fit to be tied to a hard stool, staring vacantly and silently for as long as any memory in the home. The general staff dare not broach a three-foot radius about her chair but each shift I spent ten minutes sitting closer and closer and staring off in her same way. After two weeks, I imagined a rapport and cautiously scooted my chair until our knees touched. A hand snaked out with claws that raked my face! In bloody retreat I speculated that that one required more training.

Down at the day room, Crying Annie presented a special peril of disheartening the entire population with sequential tearful outbursts. No one knew why she cried but it was said that she had never laughed. My single afternoon’s ledger of her one minute mean bawl six times per hour related to various stimuli yielded zero correlation, however, it sparked an idea. ‘Annie,’ I opened cheerily, and as she burst into crocodile tears I yanked my curls and blurt, ‘I will make you laugh or eat my hat!’ Miraculously she subsided looking over my head. I explained how in school I had bent and picked a horse’s hoof to clean and the animal had chomped my hair thinking it hay. ‘Ever since, when I need a haircut_’ Annie’s explosive laughter shook all the old cats out of their rooms to ring us and laugh themselves silly until they cried. It was a circus and, ahead of the act, I bowed out.

Six months passed until the day I was rotated to the geriatric psychiatric ward where a codger stalked me to counsel, ‘Get out of here; this ain’t a dress rehearsal!’ I lay the whip down and walked out.



The key to success in just about any endeavor is to have a process that works over time, adjusting this process to changes in the environment, and not letting short term noise get in the way of the long term success. As a hedge fund manager this process gets clouded when we get paid quarterly, and get marked and overly scrutinized on a monthly basis. This has a tendency for the manger to get off the long-term track and do things like book a good month for marketing purposes or book a good quarter for incentive fee purposes. This may get in the way of the long-term success of the process, but it feels justified when short-term money is involved.

I believe a baseball hitter can go through this same psychology. A hitter may have a great swing, practice habits, and a coach that helps him make changes as necessary, and this process over 162 game season or even 1620 games over 10 years will lead to great success. This success of course says nothing about any individual one week or 10 game period of time. Come playoff time these long-term numbers get thrown out as the fans and media (the investors) want great performance when it counts most. The hitter is now in the same dilemma as the end of month hedge fund manager. He forgets the process and tightens us trying to ensure short-term success even though he may suffer a short-term setback in his long-term success. This thinking certainly affects the psych of the hitter and in fact makes matters worse than just the short-term randomness may indicate. I think this helps to explain the A-Rod scenario come playoff time as well as the performance difference in hedge funds.



1421, by Jim Sogi

November 6, 2006 | Leave a Comment

Those who enjoy Rule the Waves and the Master and Commander series will enjoy 1421: The Year China Discovered the World about Chinese voyages of discovery around the world in 1421, their navigation and ships. The conclusions are not quite as :”clear” and self evident as the author states but is a big improvement over the Chariot of the Gods thesis. It is interesting to compare European and Chinese voyaging. Here is an excerpt:

On the 8th of March, 1421, the largest fleet the world had ever seen sailed from its base in China. The ships, huge junks nearly five hundred feet long and built from the finest teak, were under the command of Emperor Zhu Di’s loyal eunuch admirals. Their mission was ‘to proceed all the way to the end of the earth to collect tribute from the barbarians beyond the seas’ and unite the whole world in Confucian harmony. The journey would last over two years and circle the globe.

When they returned Zhu Di lost control and China was beginning its long, self-imposed isolation from the world it had so recently embraced. The great ships rotted at their moorings and the records of their journeys were destroyed. Lost was the knowledge that Chinese ships had reached America seventy years before Columbus and circumnavigated the globe a century before Magellan. They had also discovered Antarctica, reached Australia three hundred and fifty years before Cook and solved the problem of longitude three hundred years before the Europeans.



Trading is a physical endeavor requiring stamina, quickness and alertness. Physical training benefits the trader as any sportsman. Long hours at the screen take a physical toll. There is no mind body duality, and the body affects the mind and emotions and decisions. There are many parallels between music theory and the markets and why not in the physical and mental aspects of playing music and the market.

I am studying voice and singing under the theory of The Tao and the Voice by Stephen Cheng. He suggests a series of Tai Chi warmup exercises for singing. His approach would be beneficial to trading warmups or breaks. I know I like to go sing a few songs with loud electric guitar and big amplifiers during breaks to get away from the screen. Gets the lungs to open up. Yoga helps too. The Japanese Salariman has a routine to stretch the up body from sitting hunched over a screen or desk too long which they all do together in the office. Chair likes to go an play tennis during his trading breaks as the quotes are called out the window, “New lows on the day!”

One of the exercises involves circling your hand in circles above the head. The effect of this is to integrate the left and right sides of the brain. Some of the difficulties in decision making on trades is in the left and right brain functions. Perhaps the experts could add on this subject. The motions physically cross signals in the two brain halves and get them working together better. When my kids were little they taught them at school to rub their ears and turn figure eights with either hand in front of their bodies across both sides saying,” I love school”. It became a joke, but it may have some good effects. Now all chant, “I love trading, I love trading”.

Western philosophy and religion adopt the premise of the disembodiment of the spirit from the body in terms of soul and the ultimate. This leads to many issues which can be approached differently by integrating body and mind, the inside and outside, not as separate things, but as a unified process. We are after all part of the market and it is part of us.



Yesterday’s dramatic finish between Dallas and Washington with a blocked field goal, a run back, a penalty, and another field goal kick to the opposite side, all with six seconds remaining, reminds me of the closes that often happen in markets where until the last moment you’re winning and then a 1 in a billion event occurs to snatch defeat out of the jaws.

Russell Sears replies:

When you are tired, some frustrating and very unexpected things can happen.

This is what makes racing the marathon such a love/hate relationship for me.

You can train and train, be physically ready. When exhaustion hits you, you can out think it, with mental toughness. But you only get a few brief seconds to decide if you really are ready. You must be both physically ready and mentally looking for it. Even then, it can take you by surprise, with a moments mental lapse. Then expect it to turn ugly and the unexpected.

But when you are on, it is powerfully exquisite.

This is a very hard painful lesson to learn and most marathoners, never do. They either give up on the marathon, or give up on doing them for times.

Ask Lance about this.

I suspect when people are on a team, or a large group of speculators, people often rely too much on the others. At that critical moment you are exhausted but needed most. Some will step-up, some will drop the ball.

J. T. Holley responds:

This was felt by Joe Gibbs if you watched the game and heard him speak immediately afterwards. During the Cowboy field goal attempt he had his head up watching his own defeat happen right in front of him, but when Novak (1 for 5 in attempts this year) miraculously got an attempt to win the game in the above mentioned 1 in a billion, coach Gibbs had his head down unable to watch the outcome. Afterwards he simply replied “that doesn’t happen a lot”.

My Hokies had a similar but not the same time frame outcome against Miami on Saturday night. They too blocked a kick that led to their victory. The relevant counting part is something I heard spoken by Coach Frank Beamer some years ago at an alumni function. When questioned in regards to his “Beamer Ball” style i.e. blocked kicks, blocked punt, he — being also the special teams coach utilizing the best athletes on the team instead of reserves — responded with, “one out of every eight plays in a game is a kicking play, that’s where we can make a difference”.

Steve Leslie adds:

In 1999 Jean Van de Velde, France’s greatest golfer of all time, had an opportunity to be the first Frenchman to win the British Open since 1907. He came to the last tee with a three stroke lead, needing only to double bogey the last hole and win the tournament. After hitting the fairway with his driver, Van de Velde hits his next shot far to the right careens of the grandstands and into the rough. He flubs a wedge into the water, takes an unplayable lie, hits his next shot into a bunker, and hits out of the bunker and sinks the putt for an unimaginable seven. He then goes into a four hole playoff where he loses to another improbable winner in Paul Lawrie.

Perhaps the most amazing finish in golf history.

John DePalma replies: calculates “win probability.” These calculations have become popular in baseball. Conditional upon home/visitor status, inning, # of outs, runners on base, and score differential, a team’s probability of winning is derived based upon what has happened historically. For football ProTrade describes “Win Probability” as “a percentage that states a team’s chance of winning at any given point in a game.” The probability reflects “score, clock time, field position, home-field advantage, available timeouts and many other factors.” Before Dallas attempted the field goal with 6 seconds left, the team’s probability of winning was roughly 91%. After the field goal was blocked Dallas’ odds dropped to 43%. The odds fell incrementally to 19% on the runback and penalty. And of course the odds dropped to 0% on Washington’s field goal. (See

As an aside, it’s interesting to note that at least with respect to the baseball calculator, there is no path dependency. Momentum is assumed away. (Momentum and “hot hands” as mostly a statistical illusion.



There is an ancient Chinese story about a peasant whose horse ran away. His neighbors extended their sympathies at the misfortune, he responded, “Maybe”.

The next day the horse returned followed by six wild horses. The neighbors exclaimed at his good luck. He said , “Maybe”.

The next day while trying to ride a wild horse his son broke his leg. “Too bad!”, said the neighbors. He said, “Maybe”.

The next day the government officers came by to conscript soldiers, but the son was excused for his injury. When the neighbors exclaimed how well it all worked out, he simply said, “Maybe”.

This surely reminds me of my path to trading and each trade as well.



One of the best books on hunting is “Meditations on Hunting” by the Spanish philosopher Ortega y Gasset (he likes it, by the way).

One of his amusing points is that while people speak of “defenseless” animals, every hunter knows that every animal has a great defense, that of being elsewhere.

Hunting really doesn’t fit into any categories. It’s not nature, because there are rules. It’s not a sport, because one of the participants doesn’t want to play. It’s not economic behavior (nowadays, anyway), and it’s not relaxation.

My take is that it’s a kind of controlled participation in Nature, where deeply primitive elements are combined with very noble goals.



Several days ago on this web site there was an article regarding The Melbourne Cup. I had to see it for myself so on Saturday I attended Derby Day. Here are a few thoughts I would like to share:

Happy but Out of Pocket
Before the Carnival, I guessed the services would be overpriced. So I budgeted by placing only one Australian $50 bill in my pocket. I promised myself that I would not place bets on horses as I know nothing about racing. I kept this promise. The price structure of the complementary goods of gambling and alcohol was impressive, or dangerous is probably a better word. Champagne was ridiculously overpriced, while beer was much more affordable. It is my opinion that the beer priced at $6 had two purposes: to get patrons intoxicated so they would gamble more and to squeeze the last coins out of the unlucky pockets of losers. The small plastic bottles of champagne sold for $30 were effective in reclaiming money from any lucky winners.

The Grace Equilibrium
Everyone puts on their most beautiful outfit for the races. For men it’s simple. I only spent a minute donning my olive green Italian suit. Girls on the other hand, have been planning, shopping and using their creativity for weeks to come up with the most gorgeous dresses and graceful hair pieces they can find. I have never seen so many eye-catching combinations of colors, shapes, flowers and feathers. I wonder why hair decorations are so rare in today’s daily society. Since almost no one wears them daily, an individual woman would feel silly sporting one. However, if women wore these decorations daily they would collectively be more graceful. Maybe a small spark (designers, stars, wake up!) is all that’s needed? Tons of money could be made on decorations and designer hats if incorporated into daily fashion.

The Opposite Seasons
We are the first generation that can relatively easily cut down the four seasons in a year to just two. By having one home in each hemisphere, one can have twice as many friends and can experience the magic of spring and comforts of summer twice as often. For business this becomes a problem however. In most industries moving all staff members twice a year would be impractical. But I do see an opportunity here for some firms, especially small firms with young (childless) employees doing online business. Possibly a good way to attract the brightest minds without paying the highest salary? Offering a country swap and endless sun? I think this opportunity exists as long as there is an asymmetry between the number of firms operating this way and the fraction of people who would suit this unique lifestyle.

Craig Mee replies:

Just a quick reminder, Australia’s biggest horse race, “The Melbourne Cup”, is November 7. In 17 of the past 22 (and 11 of the last 11) years the Australian share market has closer high on the day. The average gain has been close to double the average loss. The effect on human emotion and share buying in the midst of one of the happiest days during the year in Australia cannot be under-estimated.



I read last night the first two chapters of L’Amour’s Mojave Crossing to reconnoiter my upcoming parallel adventure. Tell Sackett stops at every landmark in my memory along the trail including Fort Mojave, Piute Range, the Old Government Road, and Rock Springs. Sackett hasn’t spoken yet of the weather that would be first off his lips if the summer furnace or winter chill, so the crossing must have been at this time of year. He carried 32-lbs. of gold in his saddlebag but I’ll take his weighty story deep in my backpack to compare our views. Of course, there’s the danged black-eyed girl that L’Amour atypically opens this tale with. I nearly threw the book down in Carl Jr.’s as my favorite author always presents a flash of fists or guns with a heavy puzzle, but I held the reins of L’Amour’s grand storytelling and then looked up and around the burger joint. Black-eyed girls are not common in these parts just south of where the novel opens, though nowadays they’re unilateral with an equal number of black-eyed men. She was being tailed! To better sense Tell’s carrying a treasure and thus encumbered across the vast desert, I’m hiring such a girl whom I used to date who now has a third-degree karate black belt and a new mate. I requested this morning, — But she must be a black-eyed girl — do you have black eyes?’  If all goes well, we’ll be hot on the trail from the Colorado River to retrace Tell Sackett across the Mojave.



4.4% “headline” unemployment

231k payrolls (w/revisions)

Earnings and workweek pop back to range tops

437k household jobs print

…But let’s talk about that newly disgraced preacher in Colorado instead…



Dan Rockmore’s book Stalking the Riemann Hypothesis, written for the recreational mathematician, brought forth in me the profound emotions. Reading it seemed quite similar to my enlightenment in reading my first Calculus book. The book completely avoided the messy math and stuck to the core concepts behind the math. And what a mathematical journey is was. Starting with the early history of pure math, with the Greeks, to modern day theories. It seems that search to prove Riemann’s hypothesis has lead to many the leading edge of science. Chaos theory, Fractals, the edge of probability theory, Random infinite matrices and more.

Besides the beautiful ideas it goes introduces you to many of the great minds that have worked on this problem, and are working on this problems. Two quotes that just floored me:

Eugene Wigner: “The unreasonable effectiveness of mathematics” (sounds like a counter to me)

And for those convinced they can’t ever get through the math. Polya in his book “How to Solve It”

“If you cannot solve a problem then there is an easier problem that you can solve. Find it.”

These alone make it worth the read. You find all sorts, much like you would in our field. The magician turned mathematician. The hungry kid getting a break. Each story is inspiring. Some you probably are familiar with but, Dan writes very interesting facts on each.

But beyond this, it has a profound impact due to the underlying philosophical impact. The hope that we are beginning to understand the meaning to randomness, and through this perhaps a light showing hidden secrets of our universe, in the infinite and infinitesimal.

For those of you not familiar with the Riemann Hypothesis, it is one of the most studied areas in pure math, due to its relevance to the prime numbers. Before Riemann expanded it through analytic continuation to the complex plane, Euler expressed it as for any S > 1 as = 1/(1^s)+ 1/(2^s) + 1/(3^s) + 1/(4^s)+ 1/(5^s)…. The relationship to the primes can be seen by its equivalence to Product of 1/(1-p^-s). Though not in the book, this proof is quite beautiful and can be seen sieving out the primes.  The hypothesis is that the Reimann zeta function, the expansion to the complex plane, only has non-trivial zeros on the real line 1/2. (The trivial zeros are multiples of -2). With a little imagination and idea of what the Fourier transform does, the Fourier waves turn at the prime to give a estimate for any number how many prime their are before it. The math is beautiful, the writing is great, and the spirit is uplifting.

Vincent Andres responds:

Concerning didactic books and Fourier waves, a very didactic and commendable book is The World According to Wavelets, by Barbara Burke Hubbard.  The title of the book is about wavelets, but in fact half of the book is about Fourier, in a very didactic way.



I aim to quickly describe my thought process that may differ from yours. I willfully filter information at the sensory gate before allowing it to enter the mind. You walk into a bar and see everything but quickly cancel the things that don’t deserve notice; then you focus an instant, one by one, on pertinent items or spaces and allow the ones you desire to engrain in short term memory. Then you pick from among those-even while moving and seeing the whole bar afresh- the few things that you want to ponder. Then you ponder.

Females and kids don’t usually perceive in this way, but instead flash from one big picture or thought to the next, and feel each. That’s wasteful. Athletes move gracefully about canceling undesired thoughts by their physical movement while zeroing in on what they do want, yet jocks in general are passive thinkers. That’s molasses. Scientists stop-frame one item after another and further process- compare each and to their life memories- to infer conclusions. They are ‘good’ scientists if everything in the universe has equal value. Religious people believing in an outside control show the blank but eager faces of bulldogs never having gotten the bone. The insane have a motion picture of perception without being able to stop and frame a single item. City people unconsciously run every thought through a template of people representations from their pasts. That’s pollution. Speculators to succeed must train themselves toward a checkers mentality of the repetitive three-steps of over-sweep, breakdown into subgroups, comparison, and all the while trying to keep the present, past and future separate. Chess is a more powerful game of survivors where the thought arena is constricted and the variables fewer with those individual pieces having wide-swinging strengths that must be controlled. That’s sublime. Dogs are able to mull over only what they have repeated in experience while they overlook all else in the field until something odd pops up. That’s happiness. Cats, with the slightest hint of thought, make the greatest mental leap and physical moves on earth, and are dangerous to a person like me. Who knows how frogs think?

These certainly are quick off-the-cuff generalities on the way I think as self-studied in the nightly laboratory of bars around the country for nearly 10,000 consecutive nights. I never drank, only thank. I believe in bio-psychology, the biological factors of thought and behavior. The mechanics of seeing the world every waking second as a chess player and dancer, the supreme thinker and mover, truly racks the mind and body. When I was a heavier thinker, my facial and brain vascular musculature tightened so that at the end of some days I fell into bed feeling like Officer Bill MacCarthy after pounding his head to ask a string of suspects if any wanted to resist arrest. However, 99% of the thinking population is passive users of the mind allowing the fruitful unconscious rather than the more controllable conscious to steer their choices. That’s sad, but there’s help. One may improve his perception, acuity and stamina by exercising the mechanical process via reading books, reading people, and just plain thinking. Beware that you can overthink and become entrapped a la the bulging body builder who doesn’t know when to stop. For example, after writing from October 1 to Halloween, I feel with one hand my tight face and within the thoughts that come either too swiftly or stay too long. On the other hand, it’s a short time before the green rattlesnakes clear and the moon rises full over the Mojave Crossing and I take a long hike to get better.



The words “It’s a Trap!” have occurred countless times in movies. They happen in chess too, suddenly yelled by your inner voice.

When does the inner voice speak? A common time used to be when you wrote your move down prior to playing it, the act of doing so being a kind of announcement, a phase shift. I say ‘used to be’ because FIDE outlawed the practice of writing down the move first, saying that it was ‘relying on notes’.

There are other times too, when, for example you find a tiny inconsistency, a departure from the usual script. In the movies it might be that there’s something not quite right about a uniform, perhaps that the butler’s shoes are inappropriate or a coat is buttoned the wrong way.

With regards to yesterday the chair noted the unusual rally on the last day of October, strength when usually there was weakness. And then the higher gap open sold off very quickly, not at all like one of those days which start high and then feature a crescendo of buying as the day wears on. Not much to go on but there was a brief chance to escape. In retrospect. And it was a reminder of Tartakover’s saying, “obvious therefore dubious, dubious therefore playable”.



There has been some discussion of the jokeful nature of the market, how improbable things happen when you are set up completely for the probable. Nothing better illustrates this then the moves on this first of November. It’s invariably the most bullish time of the month, and this month the most bullish of all. No declines of 10 points or more in stocks had occurred in 2-3 months (8/9 -17 pts, 9/6 -11.9 pts), and this was the largest 1 day decline on the first day in a month since 2004 (7/1/04 -14.7 pts).

Making it even more improbable was the backdrop of support with bonds setting a 8 month high at 113-05 on the December future. It occurred after 3 down days, and to thoroughly confuse, yesterday was completely unchanged on the official settlement leaving all counters without a rudder.

A few called me at the beginning of the day. This is such a perfect setup that I’m just going to leave the screen, go out of the office, and count my winning at the end of the day, so I won’t be tempted to extricate with just a small profit.

As Berlioz said to Lasseur after he had heard the fifth and said “music like that should never be composed again”. “…There’s no danger of that…”



I am a 27-yr old professional equity derivatives trader with several questions and comments for Dr. Niederhoffer and Ms. Kenner. I just read Practical Speculation. I had previously read Joel Greenblatt’s The Little Book That Beats the Market. Needless to say, the two works propound extremely different views on the relative merits of growth versus value stocks and on the ideas of Benjamin Graham. I’m sure this is a debate that has been beaten to death before I was born, and I’m sure you are entirely sick of the whole thing, but please bear with me. I am interested in reconciling the ideas of the two authors. I would like your opinion on Mr. Greenblatt’s work and his “system” for investing.

I wondered specifically what Dr. Niederhoffer and Ms. Kenner’s response would be to the data cited in Greenblatt’s book. Is this evidence entirely worthless due to statistical and sampling errors? Is it only since 1965 (the Value Line data in the book was for 1965-2002) that growth has overtaken value? What do Dr. Niederhoffer and Ms. Kenner think is the correct way to value a stock? Since it’s difficult to precisely ascertain current or even past “real” earnings for a single stock, let alone the mkt, how can one hope to accurately predict the level of future earnings (as you must do for growth stocks). What valuation model should be used? What valuation model can be used that works for both “growth” and “value” stocks (it seems fairly silly to categorize all stocks into one of these two fairly arbitrary columns, but that’s what seems to happen).

Anyone can go to Mr. Greenblatt’s website and get a list of “value” stocks. He argues that his system (buy 20 or 30 of these value stocks and then sell them after a year and get new ones from an updated list on his website) will beat market returns over time. I am suspicious, but where is the logical flaw or statistical error in Mr. Greenblatt’s book. Will his method really work, and if not, why ? Mr. Greenblatt posted excellent returns over many years (I believe 10 years of returns are necessary to eliminate luck as the explanation of a trader’s returns) at his hedge fund. I’m sure he wasn’t simply applying the method from his book, but he is clearly a “value” investor.

To me, the strength of “value” investing, especially as described by Mr. Greenblatt, is its seeming logic. Even though you can’t buy a stock portfolio for 50% of its liquidation value as Graham suggested, the market and especially individual stocks can fluctuate fairly wildly even over short time frames, so clearly it is possible at times to buy good stocks or the whole market “cheaply.” As I write this, AMD has a 52 week range of 16.90 - 42.70… with roughly 485 million shares outstanding, that means in terms of market value AMD was (according to the market) “worth” almost $21 billion in late January, and only $8 billion or so in late July. Maybe some of this move was due to new (bad) information, but in all probability (since the stock subsequently recovered- then dropped again) it was due to the overtrading and ridiculous focus on short-term results that Dr. Niederhoffer and Ms. Kenner lambaste in their book. Take a look at the way retail stocks move around on monthly same-store sales numbers or oil and gas move on weekly reserves numbers for further examples of ridiculous overtrading and short-term focus.

Nevertheless, to ignore volatility (which is how I make my living) and keep your eyes firmly on the long-term potential of a stock leads to two pitfalls. First, you miss out on opportunities when the stock swings around in the short run (for example, you could have sold some medium-dated calls in AMD in Jan, then used the proceeds to buy additional stock in July). Second, you are ignoring risk; in the short-run, you could see such severe swings that you go broke instead of getting your 1.5million % a century return. Volatility might be much higher than it “should” be, it might be due to overtrading, and it certainly is the result of a focus on meaningless short-term information, but it is a fact of life. In my opinion, it’s better to take advantage of this fact than to ignore it.

One solution is to actually buy volatility itself. There are several studies showing that a portfolio containing a volatility component of 10% or so will outperform a similar portfolio with no volatility component (an example of a volatility component would be VIX futures or a similar instrument, essentially just a long option position). The general basis for this is that implied volatility in the options market usually increases when the market drops. You are diversifying your portfolio with a negatively correlated asset. Since the VIX hovers at a very cheap 10 or so these days, it seems like a great hedge.

Any reply or even a suggestion of further reading on the value/growth debate would be greatly appreciated. I have also emailed Mr. Greenblatt’s website with similar questions (you can find that email below).

Doc Castaldo illuminates:

He has so many inter-related questions it is hard to know where to begin. The Tim Loughran article “Do Investors Capture the Value Premium?” which some Spec (Dr. Zussman perhaps?) sent to Steve Wisdom recently seems relevant, and I sent it to him (the answer Loughran gives is no). I believe Prof. Pennington and Mr. Dude reviewed the Greenblatt book and found it well done; though some of us have doubts as to how well the results will hold up going forward.

Steve Leslie adds:

I have studied this deeply and although impossible to adequately reconcile this argument, my reply is that there is enough room in the world for value investors and growth investors. One is more of a science and the other is more of an art. And that which works for one will not work for another. And they tend to be complementary, whereas when value investing is in favor growth is out of favor and vice versa.

Case in point late ’90s. Nobody and I mean nobody wanted to be a value investor. At the time I was with a regional brokerage firm and we had one of the best value fund managers around, and he was never asked to speak anywhere. Everybody wanted growth and hard chargers. He told me directly that the worm would turn and that which one is hated will once again be loved. In 2001 and onward his style came back into vogue. His numbers became very good when the implosion of growth occurred and value turned to the good.

I feel that value investing is more of a quantitative approach to investing. It requires arcane methods and such as roe, price to sales, price to book. You can have value investors, deep value, vulture investors etc. And it is very important that with value investing that one be a patient investor with longer term time frames. I have referenced the Hennessy Funds as excellent quant funds. They have a very rigid stock selection process and rebalance their portfolio annually which they bought the rights to from James O’Shaughnessey who brought this methodology out in his book How to Retire Rich. Their long term track record is very good and they did very will since 2000 but this year for the most part the results have been flat. Martin Whitman is a deep value investor and his Third Avenue Fund has done very well over time. As has the Davis Funds. The First Eagle funds does excellent work with their global funds.

Growth investing is more of an art. It requires timing. Growth investing such that William O’Neil supports can be very successful yet very volatile. Small cap growth investors many times requires a longer term time horizon as the swings in price can be quite hard to take. I have always liked Ralph Wanger (A Zebra in Lion Country) and Tom Marsico in this area.

It is very important that the style of investing one uses incorporates their financial education, character and personality among others. They most definitely require knowledge and different wiring.

As to the trading of that the chair employs, I will let him speak for himself but I am confident that he will say the methods that one uses for value investing and growth investing would never work for his methods of day trading or swing trading.

To use a poker analogy (alas it always comes down to poker) I liken value investors to people like Dan Harrington, Howard Lederer and Phil Hellmuth. They are percentage players very methodical. They wait for premium hands and play those. These are the tight players.

On the other side of the ledger are the growth investors such as Phil Ivey and Gus Hansen, aggressive sometimes to a fault and they play many hands and many times on feel.

Both styles and much more in between are effective and can bring one to the promised land, they just take different routes.

Dr. Phil McDonnell reminisces:

Many years ago I was engaged in fundamental research on stocks for a finance class at Berkeley. Upon showing my results to one of the rising young finance Professors in the Business School I had a rude awakening. He promptly but kindly pointed out to me the myriad of biases which enter into such a study.

It prompts one to paraphrase the poem poem by Elizabeth Barrett Browning:

“How Do I Confound Thee?” Let me count the ways in which fundamental stock data can confound:

  1. Stale Data. Data are not always reported on time. Some is late, but most studies do not account for this adequately.
  2. Retrospective Bias. Most fundamental databases use the current ‘best’ information believing that is what you want now. But for historical studies that means the data may have been retrospectively edited as much as several years after the fact. This is a form of knowledge of the future. If you analyzed Enron before its collapse the fundamentals looked good and the stock was too cheap. If you analyzed today with a retrospective database you know that the company had catastrophic losses. But the truth about the losses was not known at the time and the adjusted numbers only came out years later.
  3. Sample or Survivor Bias. Use of a current database often results in a sample bias due to the fact that only companies which continue to exist in the present will be included in the sample. In order to avoid this issue one must go to an historical source in existence at the time in order to manually select the sample for each month by hand. Many companies are delisted or otherwise stop trading. For these the data must be manually reconstructed from historically extant sources. Otherwise this bias translates into a strong bias in favor of value investing strategies. A strategy which buys out of favor, or high risk or near bankrupt companies will always do well with this bias. The bias guarantees that they will still be around years later because they are still in the database.
  4. Data Mining. There are many variables to choose from with fundamental data. There are countless more transformed ratios or composite variables which can be constructed. This leads to the ability to try many things. Thus the researcher may have inadvertently tried many hypotheses before coming to the one presented as the best. Because fundamental data are low frequency (quarterly at best) there are only 40 observations in a 10 year period. True statistical significance can quickly vanish in a study of many hypotheses.
  5. Data Mining by Proxy. Everyone reads the paper and keeps up with current trends in investments. Thus our thoughts are always influenced by findings of other researchers. Thus even if a researcher did a study which avoided the usual data mining bias it may be simply because he took someone else’s results as a starting point. In effect he used their results as a form of data mining by proxy to rule out blind alleys.
  6. Fortuitous Events. In the 1990’s F*** & Fr**** published papers about factor models to augment the Sharpe beta model. Their significant new factor was Price to Book ratio. In James O’Shaugnessy’s book What Works on Wall Street one can see a sudden upward surge in value strategies in the early 1990’s coincident with the publication of the F & F model. However the event was a single one time upward valuation of value models in the 1990’s. Before and after that, the effect vanishes.
  7. Post Publication Blues. After publication of any academic paper or book the money making method usually stops working. Sometimes it is due to data mining or some flaw in the study and the putative phenomenon was never really there. The market is efficient. If everyone knows something it will usually stop working even if the original study was valid.

Prof. Greenblatt’s book is a fun read and remarkably brief. In fact if someone wanted to just get the gist of it, each chapter ends with a very clear summary of the key points in that chapter. It would be possible to get all the main points in about 10 minutes simply by reading the summaries. Let me say that if one were to use a fundamentally oriented strategy then the profit margin and Book to Price are probably the first two on the list. To be fair to the author, reciting one’s efforts to avoid sample biases in a book intended for a popular audience probably would not help sales. Such discussion is usually reserved for academic papers but nevertheless its absence does not give reassurance that all possible bias was eliminated.

The best way to test this strategy is not to go to the library and do all the work yourself. Rather one could simply go to the web site and copy down all the stocks recommended. Then in 6 months and 12 months revisit them to see how they have done and to see if the performance was statistically significant.

Ever since those Berkeley days more than 30 years ago I have always been distrustful of fundamental studies. That lesson from then Prof. Niederhoffer has helped shape my market studies in many ways. The bias of fundamental data is yet another way the market can confound the research oriented trader.

Jaim Klein replies:

Let’s simplify. The market universe is large and diverse enough to accommodate different successful strategies. One catches fish with net, another with bait. Regarding the value of anything, no such. The value of a thing is the price it can fetch in a certain moment and place. At 27 I was also confused. Experience is the best (probably the only) teacher. He has to do his own work and reach his own conclusions. It is time consuming, but I know no other way. He can also observe what successful people is doing and try to copy them till he can do it too.

Prof. Charles Pennington rebuts:

Dr. Phil lists 7 things that can go wrong in research on stock performance and its relation to fundamentals. Oddly enough, the Greenblatt book itself also lists exactly 7 such reasons on page 146! They’re not exactly the same ones, but there is plenty of overlap. I’ll list Greenblatt’s 7 with my own paraphrasing:

  1. Data weren’t available at the time (look-ahead bias)
  2. Data “cleaned up”, bankruptcies, etc., removed (survivorship bias)
  3. Study included stocks too small to buy
  4. Study neglected transaction costs, which would have been significant
  5. Stocks outperformed because they were riskier than the market
  6. Data mining
  7. Data mining by proxy

Greenblatt: “Luckily the magic formula study doesn’t appear to have had any of these problems. A newly released database from Standard and Poor’s Compustat, called ‘Point in Time’, was used. This database contains the exact information that was available to Compustat customers on each date tested during the study period. The database goes back 17 years, the time period selected for the magic formula study. By using only this special database, it was possible to ensure that no look-ahead or survivorship bias took place.”

To all the biases that we consider, I’ll add the “not invented here” bias. It’s too easy to assume that no one else out there can do rigorous research. I think Greenblatt’s is fine.

(He didn’t however do any original results on jokes. His jokes are all out of the Buffett/value-school jokebook. Fondly recall “There are two rules of investing. 1. Don’t lose money. 2. Don’t forget rule number 1.” That one’s there along with all your other favorites.)

Dr. Phil McDonnell replies:

The way we all remember the late 1990s is the dot com bubble. It was the front page mega meme. The stealth meme was the value stock idea.

Rather than think of it as a single paper consider the paper as the seminal idea of a meme. From the original paper there were follow on papers by various academics as well as FF. From there the meme spread to the index publishers who always want a new ‘product’ to generate marketing excitement. Naturally the index guys sold it to the funds and money mangers who promptly started new funds and rejiggered old funds along the lines of the new meme. The money management industry always wants new products but also each firm needs to act defensively as well. For example Vanguard cannot eschew the new fad and leave the playing field open for Fidelity. As with all memes it grows slowly and diffuses through society.

In all fairness one can never ‘prove’ cause but only correlation using statistics. But it is clear to me that something happened which caused the value part (really just Magic Formula) of the market to triple during those years albeit with only negligible public awareness early on.

For the sake of argument assume that the cause was not the FF paper and its impact on the value meme. Then what was Dr. Zussman’s ‘unseen factor(s)’ which caused a triple in value? Which factor or factors are more plausible?

My prediction for the end of the next meme is the collapse of the Adventurer’s bubble. To play it one needs to sell. But I would guess that it is only a one to three year collapse.



It seems the black swan is amorously engaged at present and thus unavailble for a repeat of the may meltdown. A fine desktop wallpaper for the day to serve as a reminder of the fickle nature of chance — and love:

A black swan swims in front of a paddle boat on the Aasee lake in north-western city of Muenster November 2, 2006. When the black swan arrived at the lake in spring, it became a local attraction, after ‘falling in love’ with the plastic swan paddle boat available for hiring on the German lake. REUTERS/Ina Fassbender(GERMANY)



In Australia the press dub The Melbourne Cup as the race that stops a nation. It is one of those rare events where almost everyone, gamblers & non-gamblers alike, have a punt on the outcome of Australia’s most famous thoroughbred race. Sadly, like a large percentage of the population, I tend to walk away from the day, happy but out of pocket.

It is truly one of the social events of the year & the mood of the nation tends to be exceedingly upbeat. It is also a very positive period for Australian stocks. Recording all 4 Day % returns including the 1st Tuesday of November (Melbourne Cup Day) from 1992 to 2005, I found that the S&P ASX 200 had a tendency to produce inordinate gains with an average move of 1.78%.

Returns on Melbourne Cup day also tend to be positive.

I posit whether mood is the major influence on these returns, not unlike the better than average returns that accompany stocks at Christmas & New Year. It is probably an area that deserves further study. Other factors may be the perceived investor relief that October is over, 1st week of the month positive bias, November through to the end of January marking the beginning of an historically positive period and thin markets around Melbourne Cup Day.

I hope the markets remain compliant, and if I’m very lucky, I may walk away from Melbourne Cup Day happy and not out of pocket.



“Without the Constitution, we remain in a market economy, while with it, we adopt the social market economy, which is a social step forward.”
–former French President and chief author of the EU Constitution Valéry Giscard d’Estaing

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