Yesterday clocked in at 3.8 inches of rain in Westport. The local rivers are all the highest I've seen. The Aspetuck is pouring over Old Redding Rd at Easton Rd, unprecedented in my memory. The cascades above the swimmin' hole on the Saugatuck (which some Specs will recall from our outing at last year's SpecParty) are roaring like Niagara, and the swimmin' hole itself, normally placid, is boiling whitewater.

A lamentable waste — since it's only 45 degrees, homemade rafting trips are right out, unless one braves it in a wetsuit. Would otherwise be a perfect day to hang out the "Gone Raftin'" sign and take a trip down the Norwalk, the Mill, or even the Aspetuck or Saugatuck.



 The efficacy of white LEDs is about 12 to 19 lumens/Watt, which is much less than the 36 to 55 claimed by manufacturers. Compact florescents have efficacies 1.5 to 3 times higher than LEDs.It it said that compact florescents last indefinitely, which is far from true. The screw-in types last much longer than incandescent bulbs, but don't last forever, and their life is shortened by the fact that the "ballast," the electronic guts, is located very close to the bulb, thus the heat shortens its life.

It used to be true that compact florescents were expensive, gave off a harsh light, and could not be dimmed. But now the screw-ones cost less than $2.00 in quantity (not everyone agrees with this, but I'll sell anyone who doesn't believe it as many as he wants for $2.00 each).

The best deal is a real florescent fixture, as the reflector is shaped optimally for the bulb, and the ballast is remote, thus protected from the heat, and is seperate, so it doesn't need to be replaced when the bulb goes bad. The bulbs are available in five different colors and more and more of them are dimmable, especially those made by Phillips.

florescents are now hard to tell apart from incandescents without taking the fixture apart and looking, so energy geeks are resorting to using fancy light filters to tell them apart without climbing on a ladder.

Rich Bubb remarks:

Our firm has been using the spiral bulbs for five years. Recently I was in the room where we'd installed the earliest ones, and noticed an odd smell. Then the bulb burned out. Probably the mercury in the bulb vaporizing.

I didn't know they contained mercury at the time of the first burn-out. From now on we'll raise the windows and go outside to let the fumes dissipate. Maybe go get a cup of coffee in the meantime. 



April 16 (Bloomberg) — Federal Reserve Bank of Dallas President Richard Fisher commented on the yield curve in the question-and-answer period following a speech to the Equipment Leasing and Finance Association's Financial Institutions Conference today in Irving, Texas.

A flat yield curve, with little difference between short-term and long-term yields, is "a vote of confidence in central banks around the world. Part of it is a vote of confidence. They (investors) know we will not throw caution to the wind. I don't view it as a harbinger of a recession. This is a vote of confidence in central bankers."

Alternatively, a flat yield curve? That would show inflation expectations to be well anchored deep into the future.

A positive yield curve? That would show investors are bullish on the economy, thanks in part to their faith in central banks.



A great big fall
it scared us all
They saw the writing
on the wall

The end was nay
to market play
Bears would finally
have their day

But now it's axe-day
before the tax-day
And up we stray
New record intra-day

When will they not fight
To just have the rite
Never to lose sight
Of their interminable plight



H L MenckenReading Benjamin Barber reminds me of reading Thorstein Veblen, and of Mencken's question after he'd read that "great geyser of pishposh": "What was the sweating professor trying to say?"

15 April 2007

Editor, Baltimore Sun

To the Editor:

Benjamin Barber laments the great diversity and abundance of products available in modern market economies ("Overselling capitalism with consumerism," April 15). His lamentation reaches its crescendo when he proclaims that "When we see politics permeate every sector of life, we call it totalitarianism. When religion rules all, we call it theocracy. But when commerce dominates everything, we call it liberty."

He compares rifles to roses. Totalitarianism and theocracy are evil because, under them, persons with power bend innocent people to their will though the use of violence. Commerce is the opposite. It is a peaceful series of voluntary offers to buy and to sell. It IS liberty - and it is profoundly good.

Sincerely, Donald J. Boudreaux 



 RIP: 2/6/2004 - 4/13/2007

No, this isn't about someone who died. It's about selling a stock that I held even though it tanked after I bought it. The Buy-and-Hold Blues. Perhaps one of the usual suspects will regale us with a modified song of that name.

A little over 2 years ago, Feb 6 2004, to be exact, I bought a little bit of MRK. You know, of Vioxx fame. It was down in the mid-40s, a bit from its recent peak of about 60, so I bought in. Just a few hundred shares to get started; I planned to add more later (fortunately never did since it sort of oscillated in a narrow range). I didn't pay a lot of attention to it.

Well, we all know what happened to MRK. Come around the beginning of Oct 2004 it went over a cliff and proceeded to go down to nearly $25. But for some reason I decided to hold on to it. Can't tell you why. Little did I know it would take more than 2 years to come back! Something gnawed at me - take the loss, dummy. But I didn't. Nope, can't tell you why. Felt a bit dumb about it, actually. Watched it claw its way up, fall down, dust itself off and climb again.

Well, I said goodbye to my old friend on Friday when it gapped up on news of Vioxx trial success, several upgrades, and earnings. I was used to seeing it on the screen every day. It became an old friend. But my hand reached out, I clicked the mouse, and sold within 20 cents from the HOD (not bragging, just fortunate). My suspicion is that a lot of people will be selling it on Monday as they prime the pump via Schwab and Ameritrade websites over the weekend. So what if I'm wrong? So it goes.

But what's odd to me about how I handled this was how I anthropomorphized this stock. Maybe it was a way of deflecting the shame reaction: rationalizing my bad decision not to sell it when it originally broke down on the bad news. Because it had to be a rationalization - there was really no good reason to hold on to it.

RIP, my MRK shares. May you enliven someone else's life. You're out of mine.

Paolo Pezzutti adds:

If you like them so much you can buy them again lower on Monday! 



 Gangsta rap that glamorizes violence and demeans women is an insidious cancer overtaking our culture. I believe that the dominant thought that you hold in your mind will manifest itself in your life in some form of outward reality.

St. Louis, once a fine city, is now really several distinct microcosms. North St. Louis city and East St. Louis are shells of their former selves. They are the living, breathing personification of statist government policies, which makes me wonder: wouldn't that then make gangsta rap simply a symptom of the more advanced stages of the cancer that statist policies bring about?

On one hand you have the cancer of statism destroying inner city communities, and gansta rap is merely a symptom along the way — like an organ system shutting down in a body riddled with cancer. But in the suburbs the latent cancerous stage of statism manifests itself in the form of the "COPS" genre.

I wonder: Are all societies doomed to slow cancerous degradation? Is it somehow part of human nature that over time, prosperity leads to further and further degradation of morals and our sense of right and wrong?

History is rife with case after case of societies' collapsing because of hubris. Is this really the cancer that effects the soul of man and destroys us slowly and patiently over time, without our even noticing it — the boiling frog?

And if this is the case, how do we profit from this long-term trend? If I can't change the world, I want to profit from it while I'm here and leave my family a legacy of wealth, both in financial terms and more importantly in philosophic terms, so that they have the ability to maintain and grow the wealth legacy that I've begun.

Todd Tracy adds:

 Stevie Wonder had a couple of songs that highlighted some negative aspects of society: Living For The City and Frontline.

The record companies will take the line that the market decides who gets the promotion budget, just as their big brother the films studios do. As far as the suburban kids buying the stuff, I don't think they really get into it. The rappers just do it to make money.

With gangsta rap music, it is hard to tell which is the cause and which is the effect. In all cases it brings to light an awareness of things that need to be changed, and music is always a perfect tool for the job. Sometimes it comes down to who has the hardest-core believable vibe. Stevie was hardcore in his day. The way that he produced his records was badass. 



In comments earlier this year the Chair wrote, "When will someone explain to Fed. Governors that the stronger the economy, the less likelihood there is of inflation, as there is expansion to absorb the money supply."

Sympathetic to your view, Dallas Fed President Richard Fisher wrote the following in a Wall Street Journal op-ed earlier this month: "… faster output growth dampens inflationary pressures … A new formula emerges from an economic model being developed by the Federal Reserve Bank of Dallas. It reveals something the traditional doctrine misses: Inflation varies inversely with growth not only in the domestic economy but also with growth in other countries…".

Also, one of the Bloomberg top stories last week was about how "Most Americans See Recession in the Next 12 Months." I channeled the Chair in my reply to it. See update 2 to the entry entitled "Expert Testimony" on Donald Luskin's blog.



 The Game of Life is like the real thing. It gets complicated over time. I bought it to play with my daughter, and it is a lot different than the one I played as a kid. Now, there are various careers, which creates a bit of complexity.

The worst aspect, however, is that they have functionally removed the "buying a house" angle to the game. Although I have not done the math, it would appear that the expected return for most of the houses is negative. Perhaps for one or two of the better houses (different kinds of houses is also an addition to the game) the expected return is slightly positive if you don't buy insurance, but with the risk of a massive loss. So, I just don't buy houses ever, and my daughter seems to have figured that out as well.

Some of the careers pay off depending on what number is spun. For example, if you are the artist you get 10,000 every time the spin is "1". Also, one can buy stock. Each stock certificate has a number on it, and whenever that number is spun, you get 10K.

This necessitates everyone paying attention to what number is spun, which causes arguments because people forget to ask for their money, and then someone else says "too late, etc".

Adding to the mix is that the spinner has apparently been outsourced to China, and is a piece of garbage. It is near impossible for a kid to spin without it spinning off of the track, getting stuck, etc.

So, I have a little excel sheet (really open office) that does a few things. First, it is a 1-10 random number generator, so instead of spinning the wheel, one hits F9. Next to that is a 100-100000 random number generator. This is a control number that makes it clear if when you hit F9 you got the same number again, or you hit F8 or something by accident and in fact did not "spin".

Also, I have a little matrix where I put in the numbers that people need to keep track of, like their stock certificates, and it flashes "pay Gordon" or pay whoever's number comes up.

Here is the help I need:

One of the careers is the entertainer. He starts out on a low salary scale, but if two 8s, two 9s, or two 10s are spun in a row, he "hit's it big" and gets a higher salary.

What is the best way in Excel (anything in Excel I can translate to open office) for tracking when two 8s, two 9s, or two 10s have been drawn in a row? It should be simple, but once I sat down to do it, I could not recall ever having to have the computer remember a previous random number. Any thoughts?



 I recommend the article Run A Fast Mile, however, I would add a few things that they left out.

The article said that on the day of the time trial, to recruit a pacer is perhaps the most important thing. Better yet, recruit several. People believe that a 6 min mile is easy. But it is important not to get boxed in. Like they said, plan to go slightly fast on the lap, run a steady pace on the second, then maintain on the 3rd lap and 4th. Think smooth and relaxed, but fast.

I am not use to giving advice to anyone getting back in shape. In but in general my advice is realistic. Don't try a sub six unless a 80-quarter is possible. Try to build confidence with more minor steps you know you can achieve.

Finally, more is not always better. Train to maintain something you can live with.



I have been considering the many confidence games that players in the market are exposed to with particular reference to the many false signals of imminent decline, programs of fixed quasi arithmetic bent, and expert con men who claim to have an easy way of making money. I used to use myself as an example of playing an unwitting role, i.e., being a key middle brow naive person who blindly goes his happy way allowing experts to take his money.

Indeed, I've written on the subject. And when I asked the collab the best way to research this subject she said, "go to our past writings on it." But I'm a little rusty on it and I think there have been so many new cons in the market lately that are so extensive that any previous typology has to be augmented. Any help or ideas that you all could give on this subject, particularly those related to some of our discussions on funds, that might be not as good as they seem, would be appreciated. I found the following article very helpful as a jumping off point for eliciting some market cons. 

From Jim Sogi:

It is something about the mark that allows the conman to 'turn' the victim. As with the baseball maven, the appeal to the esoteric investor who has the depth of capital to withstand drawdowns must appeal to some 'streak' in investors. In confidence games it is the greed, or dishonesty of the mark that is the key to the game. Each person, no matter how optimistic and bright, has a dark side.

Often the most apparently cheery have the darkest side. It is the job of the conman to find that side that can be used to turn the mark to his advantage. Or he finds his specialty niche. This is how elderly are preyed on with winning drawings, or the Nigerian scam. It is the combination of need with greed and a dose of dishonesty in the mark. The typical description of a con focuses on the perp, but the study of the victim yields more lessons. Most do are not aware of these seeds of darkness within, and there lies the danger.

This is the same technique used in sales, cross-examination, and religious proselytizing. Leading the victim down the primrose path feeding the victim's inner need and darker impulse. It is what happens in the market so often. Look to the victim. Look to yourself for the secrets of the con.

Eason Katir writes: 

If ya gotta lotta nerve
And ya gotta lotta plenty
Five'll get ya ten
And ten'll get ya twenty

— Singsong of the 3 card monte grifters, as they throw the

It has been written that, "In religious confidence games, this means that the religious leaders must convince the prospects that they (leaders and present members) have a special relationship to a personal God."

Market equivalent: the supplicant must prove he is worthy (accredited) and have a pious bankroll (high minimums) to have a special personal relationship with the elite hedge fund.

"The doctrine of a personal God supports: (a) perfect (infallible) leaders, (b) perfect (inerrant) sacred books, (c) perfect (marvelous) miracles, and (d) perfect (eternal happiness) posthumous rewards."

Market equivalent: the hedge fund prospectus supports (a) managers who have had a good run at some period, supported by much media hype, (b) infallible trading edge supported by scholarly white papers, (c) backtesting, hearsay, testimonials (d) eternal retirement happiness: the TV commercial or glossy magazine ad depicting the WASPy looking character in his argyle sweater sailing his wooden boat through retirement with his loving wife by his side.

"Incorrect details can expose a con game. Accordingly, details such as the location of Heaven and means of transportation thereto are not mentioned. The posthumous rewards are claimed to be wonderful, but no details are given which can be checked in the present. "

Market: black box systems. Opaqueness of current hedge fund positions.

"The advantage of the confidence games with posthumous promises, of course, is that no deceased person is going to return and ask why he did not receive his reward."

The market hasn't worked this one out as well as the article's example yet. Best it can do is provide tables and charts showing hypothetical increase in value over some long period of time, and a posteriori rationalizations about why a system stopped working.

"The religious leaders have another advantage. They carry little inventory and have small expenses."

Financial salesmen have this same advantage. They don't have to finance an inventory of expensive cars or other widgets. The mark puts up his money, and sees only flickering pixels in his browser representing his bet. Another confidence game: Feng Shui is popular. The delusion that one can fix one's problems by rearranging the furniture.

Market analogy: Beat the market by rebalancing sectors.

Michael Cook writes: 

On of the most interesting insights in "The Big Con", for me, was that it represented a new insight into human nature, namely, the depths of delusion and self-deception a mark can be led into. The very fact that the "big con" is possible was an important discovery.

And if you look at the world through the eyes of a con, it seems that everybody is conning everybody all the time, and everyone is conning himself most of all. The con, in his sociopathic cynicism, thinks that everyone is being conned except himself, but there's some saying to the effect that it's always easiest to con a con man. Why should this be true? I think it is because the most effective way to con someone is to believe the con yourself. As George Costanza said: "It's not a lie if you believe it." And once you get in the habit of believing your own lies you lose the distinction between what you know and what you don't know, the "taste" of knowledge. So the most dangerous cons suck you in by virtue of people who believe in them, and who you trust.

Hypnosis has always fascinated me as a phenomenon, and as a description of the state of mind we inhabit so often, a sort of "waking sleep", in which we are driven by suggestions, associations, and habitual patterns and reactions. Con men harness this power of the mind, as do advertisers. Are not advertisers con people? And salespeople? And don't we all sell ourselves and promote ourselves, and in so doing, engage in cons? Creating a resume is a good example - the goal is to gain the confidence, or at least the interest, of the person (or machine, these days) that is reading it. And it is shaped, edited, selectively biased - from one point of view, a "pack of lies".

The con man uses a person's propensity to con himself against him, like the way a judo master uses the momentum of his opponent against him.

If I try to convince you of anything, i.e., persuade you that it is true, am I "conning" you?

It is a compelling metaphor for all human interaction, which is a little depressing. I don't really like looking at the world through a con man's eyes, and yet I have been conned, and didn't like it, and am therefore skeptical of people's hidden motives at times.

But someone said "you must be as wise as serpents and as innocent as doves" - alert to the confidence games all around you, and even in yourself, but somehow not going through life assuming the worst about people.

One of the most visible "behavioural biases" is overconfidence, and it always amazes me when people make claims to know something that they can't possibly know. Which happens every single day. And that's their job - there is a demand for that. Portfolio managers want analysts to "pound the table" on their ideas, to have confidence, and some don't care to hear what that confidence is based on.

So overconfident salespeople marketing products they believe in - Caveat Emptor!

Russ Sears adds:

I have been attending dog-training classes on Saturdays, which is really a class on "trainer training." One thing the instructor said that struck me was that most of your dog's behavior problems can be corrected, if you can get the dog to believe you have a omniscience about everything important to them.

To paraphrase, the dog won't go nuts over that leaf that flies by the window. He will say 'my master must know it, it must be ok.' And eventually you can take him for a walk and that squirrel running by your path, will not cause him to bolt if you say 'no.' He will say, 'its ok, my master saw him and knows what he is doing.'

Dogs want you to correct them before they do it, while they are thinking about it. Still, there certainly is some element of physical force to establishing dominance. This is downplayed as many owners overestimate the need to be "omnipotent." It's more about consistency. Always show them you know what they are thinking.

It seems many of the con's tricks are similar. People have a need to believe that someone knows everything, and therefore the assumption is they are in control. One does not imply the other, however, as the media and dooms-dayists would have you to believe.

For the pacifist owner, dominance need not be harsh, but rather omniscient and omnipresent. Always have a plan. Rattle the keys annoyingly, throw rocks over their heads when they bolt etc. The preparedness causes the dog to think they knew that would happen so he knew what I was thinking. Rather con thinking is, you knew it "could" happen and were ready to imply that it "would" happen.

Perhaps this is the "set-up." Where the journalist digs out the "dirt," the reader never suspects that the story was planned, even written long ago. The subprime is a good example…



 Lately the local paper has had front page headlines on how to eradicate a growing seagull problem. But tonight I witnessed a newfound appreciation of their skills.

The seagulls flew along next to me at the front of the boat against a very strong headwind. Using light reflected off the water to sight fish, and then using this stiff breeze they swooped down to nail their prey. After missing more times than not, they built enough speed that they actually glided back into their original position to undergo the same sequence of events once again. Those who persevered were rewarded as we came into port and the boat speed decreased, and the success rate became much higher for those who were successful using the power of the headwind to increase speed and fly away from the pursuers.

From a market viewpoint they reminded me of counter trend traders in a roaring market. They waited for the right setup. But time again they failed with only the odd one being successful. As the momentum of the market slowed, more and more were able to get the prize, however, it wasn't a meal for a lifetime, just enough to keep them in the hunt for next time.

However, some smart ones, like Jonathon Livingston ("begin by knowing you have already arrived"), instead of going the whole journey waited near port where conditions were more favorable, and just traveled the last 500 meters in, where the success rate increased exponentially, maybe something to consider for us all.



 Her is a good case study in attribution errors, illusion of control, and other cognitive biases that relate to financial markets.

In memory of Kurt Vonnegut, from Slaughterhouse Five:

"It was about an Earthling man and woman who were kidnapped by extra-terrestrials. They were put on display in a zoo on a planet called Zircon-212. These fictitious people in the zoo had a big board supposedly showing stock market quotations and commodity prices along one wall of their habitat, and a news ticker, and a telephone that was supposedly connected to a brokerage on Earth. The creatures on Zircon-212 told their captives that they had invested a million dollars for them back on Earth, and that it was up to the captives to manage it so that they would be fabulously wealthy when they were returned to Earth.

The telephone and the big board and the ticker were all fakes, of course. They were simply stimulants to make the Earthlings perform vividly for the crowds at the zoo–to make them jump up and down and cheer, or gloat, or sulk, or tear their hair, to be scared shitless or to feel as contented as babies in their mothers' arms.

The Earthlings did very well on paper. That was part of the rigging, of course. And religion got mixed up in it, too. The news ticker reminded them that the President of the United States had declared National Prayer Week, and that everybody should pray. The Earthlings had had a bad week on the market before that. They had lost a small fortune in olive oil futures. So they gave praying a whirl.

It worked. Olive oil went up."

Also, from a column by Bloomberg's Mark Gilbert:  

One of the tests featured a chart on a computer screen. The line on the graph started at zero, and then increased or decreased every half-second for 50 seconds. The traders were told that pressing keyboard keys Z, X or C might affect how the chart developed. When the chart stopped moving, they were asked how much influence they thought their typing had on the chart.

The test was a placebo. The typing had zero effect on how the graph developed. While some traders realized the chart was predetermined, others were convinced they had full control. (The mental image of a guy in shirtsleeves bashing impotently at a keyboard, convinced he's making a difference, is very appealing. Not so different from what he does for 10 hours a day, maybe.)

`The results produced a statistically significant negative association between illusion of control and both total remuneration and desk profits, but not risk management, analytical ability or people skills,' the authors wrote. `There is a clear case for saying illusion of control is associated with poorer performance and lower earnings.'



"If You Think You Can Beat Buy and Hold, Try Looking at Taxes"

Standard and Poor's gives SP500 returns with and without dividends back to 1990. Here are the returns at year ends, without and with dividends:

date       1yr rt  total rt
12/1990 -0.066 -0.031
12/1991  0.263  0.305
12/1992  0.045  0.076
12/1993  0.071  0.101
12/1994 -0.015  0.013
12/1995  0.341  0.376
12/1996  0.203  0.230
12/1997  0.310  0.334
12/1998  0.267  0.286
12/1999  0.195  0.210
12/2000 -0.101 -0.091
12/2001 -0.130 -0.119
12/2002 -0.234 -0.221
12/2003  0.264  0.287
12/2004  0.090  0.109
12/2005  0.030  0.049
12/2006  0.136  0.158

Mr. B. Holder (BH) puts $100,000 into the SP500 index 1/1/90, reinvests dividends into the index at year end, and pays tax on dividends out of his salary as school janitor. BH sweeps into retardment 12/2006, and notices that without taxes his initial investment became $555,637, including reinvestment of $22,271 in dividends along the way.

For this exercise, let's assume that long-term capital gains and dividends are both taxed 20% (they are currently taxed less, have been taxed more in the past, and will no doubt be more in the future). When BH cashes out 12/06, he gets to contribute $91,128 and keeps

Also in 1990, recent refugee Natasha Otradeskaya (NO) plows $100,000 of hard stolen capital into a U.S. trading account. Like others from her country, NO has degrees in math, physics, and nuclear medicine, but unlike competitors in the US and A, does well enough with trading (after slippage, commissions, and opportunity costs) to exactly equal yearly SP500 returns including dividends. Exhausted after 16 years and 10^16 quantitative studies, she decides to look back at her results:

date      100000     P/L     tax        net
12/1990   96896   -3104       0
12/1991 126416  29520   7925  118491
12/1992 127526    1110    333  127193
12/1993 140004  12478   3743  136261
12/1994 138060   -1945        0  138060
12/1995 189939  51880 14980 174959
12/1996 215129  25190   7557 207572
12/1997 276825  61696 18509 258316
12/1998 332140  55315 16594 315546
12/1999 381941  49801 14940 367001
12/2000 333588 -48354        0 333588
12/2001 293938 -39650        0 293938
12/2002 228973 -64965        0 228973
12/2003 294665  65692        0 294665
12/2004 326724  32060        0 326724
12/2005 342770  16045        0 342770
12/2006 396907  54137   4490 392417 <<<<Final balance

NO trades full-time 100% of her account every year, and pays income tax of 30% on her gains (the calculation carries forward losses, which are balanced against future gains; which is the case for a trader who has no other income tax to offset capital losses. Note also that losses carried forward from 00-02 are not used up until 2006). Thus she is unable to reinvest what is lost to taxes, and these amounts do not compound.

In the end, BH cleans up: He gets paid an extra $72,093 for not doing studies or trading frequently, and uses it to order a new bride who happens to be NO's grand-niece from the old country.

J T Holley adds: 

The old gray mare ain't what she used to be. You can actually get no load low M&E annuities that aren't as bad as you would think. Most people think though that investing should be free and that one bp is too much.

Vanguard's isn't in the example above but its M&E is .20 basis points with a .10 basis point administration charge and the S&P 500 clone sub account is .44 expense, bringing the total to 74 beeps. Anyone counting this out remember that annuities are like mutual funds and take fees out daily on an annual basis.

I'll take the ordinary income later in life over the stg/ltg now and avoid Uncle Sam. Even with the 74 beep vig annually that is better than the taxable stg/ltg combination paying taxes now, that the S&P 500 tax toll can be annual. I like the compounding and pay later acting as a quasi spigot trust if you have enough time and persistence.

Steve is right though. There are tons of annuities that have a lot higher costs. The industry average is around 250 beeps in M&E and charges, but even these higher vigged charges show the tax deferral outperforming the pay as you go in a taxable account if you hold long enough to let it happen.

Also, annuities have a 10% penalty much like IRA's if you yank out before 59 ½, unless you 72T. I would recommend neither unless "liquidation" is really needed.

Mr. Sears might help us here. I'll defer all annuity and running knowledge to him.

Steve Leslie writes:

ETFs are not fairly new. Diamonds and Spiders have been around for a decade or more. And irrespective of their longevity if one's goal is to replicate an event using an ETF, what difference does it make how long they have been around? This is not Morningstar; as we know track records do not matter.

There is a big misunderstanding as to the elimination of estate tax law in 2010 and the questions surrounding it. The reason there is a gap in 2010 is that it is my understanding tax law cannot be written for more than 10 years. So it is clear that the next administration will rewrite the tax code. Who knows what they will come up with then?

There are some very low cost variable annuities which stripped down to the bare minimum may have an attractiveness. When I was a broker (sounds like my father) the lowest cost one we sold was the Nationwide Best of America. Still, be very careful that there are some pretty good back end charges if you redeem the annuity. I think there are some no load annuities with low M&E perhaps in the Vanguard family. M&E is mortality and expenses.

This is where all the hidden charges show up. You pay for that death benefit. And the charges are rarely below 1% and then you add management fees of the funds on top of that. The management fees can be higher in annuities if they are funds outside the annuities family of funds. You pay to play. And once again there is no stepped up cost basis on date of death. That is an extremely expensive thing to have the heirs have to face should that happen.

I still argue there is no perfect solution, however, ETFs stack up very well against no load index funds, in performance for expenses and after tax return ease of ownership and liquidity. One added thought; they are a heck of a lot easier to track the cost basis for reinvested dividends than mutual funds. You do not get average cost basis. First in first out, etc.

I am not sure about the dividends being left in cash as Mr. Sasmor suggests. I thought by definition they try to be as fully invested as possible. Not even open-end index mutual funds are fully invested at all times. They do by the mechanics of the machine have to keep some cash on hand. And in open ended mutual funds, when a run on liquidity happens they must sell stocks accordingly to handle redemptions. Whereas with closed end funds this does not happen. There may be times when closed end funds trade at a discount to the NAV. Open ended mutuals are marked to the market on the end of business. And purchases are restricted to last day's closing price.

Bill Rafter adds: 

Regularly I get an idea from an investment professional who typically does not do any quantitative research, but has a "hunch" that he thinks will work. More often than not the investment pro got the idea from some huckster. Investment professionals are really no different (nor less vulnerable) than the public at large. To keep the investment professional devoted to quality research, I have to disprove the cockamamie hunches, lest he wander off following outlandish ideas.

The latest is the "gravity idea" based on "celestial mechanics". Every good con job contains a certain amount of truth, and this one evokes Isaac Newton, Kepler, and some other luminaries. The celestial mechanics is BS to make the huckster sound important and establish him in an intellectual pecking order. I think this is something they teach in huckster school on the premise that the mark has to look up to the huckster.

The system the huckster is peddling is really just based on tides, which of course is a function of celestial mechanics. But neither the huckster nor the mark knows that. I can tell the huckster doesn't know that because he claims to use both the celestial cycles and the tides, which in his case is redundant.

The huckster uses tide schedules from a point in Delaware Bay. I cannot really find out why because all conversation has to go through the mark. Apparently the mark has told the huckster that he has had conversations with another one of his confidants (me) who is skeptical. This gets the huckster's back up: how dare the mark give any credibility to non-believers! Another lesson from huckster school: get indignant when challenged and threaten to cut off communications. The mark always wants what he cannot have.

The huckster really has the mark convinced. I try all sorts of arguments, like why we cannot find any evidence of these cycles using Fourier analysis. And if the idea were true, why isn't there more volatility during the "spring tides" when the earth is at perigee? However, I'm getting nowhere because the huckster has a track record with great performance. Of course there are reasons why he cannot show it, so no one has seen it.

Well I don't want to go searching for the Delaware Bay tide schedule. And since I live near the seashore, I have the Barnegat Light tide tables bookmarked on the PC. That data are neatly presented in a spreadsheet with the date and four columns representing the two daily high and low tides. The similarity with bar-chart data is overwhelming, so I copy the data, import it into my charting software and have it displayed as open, high, low and close. I send that chart back to the investment professional with my commentary that the highs on the 2nd of the month will be higher than the highs on the 16th, and the lows of the 23rd will be lower than the lows of the 9th.

At the end of the month the investment professional (i.e. the mark) gives me a call and tells me that my trading signals were right on target, and the gravity man (i.e. the huckster) complements me on having mastered the technique in such a short period of time. I know the trading signals did not work and I suspect that the huckster is now using me to validate his own importance. This must be another lesson from huckster class: if confronted with an outside challenge, turn the challenge around to support your own claims.

I have no choice but to have a personal meeting with the investment professional and show him exactly what I did, which takes about two minutes. He really doesn't want to believe me, but when he sees that my tidal signals did not work and then realizes that the gravity man is just playing him, I finally win him over.

Hey, anyone want to buy my gravity system?

Steve B. adds:

The con game is not so much about the con be it in financial services, health and beauty, or the red-hot real estate (mortgage) market. The con game is about the mark - the one who must get conned for the game to work. The con in this game has the advantage of instant feedback from the mark. The mark is spotted by the type of work he does, the kind of car he drives, his or her age. These are just general and to get specifics he needs to talk directly with the mark.

How is it that the con can come to know about us? We provide him the information via physics and other shamsters. But in this case we feel we are dealing with a respectable person and our guards are down. Basically, one starts with general statements and through feedback (verbal and body) the con figures out which of his general statements are specific to you.

We all have the desire to trust our fellow human and the con operates with this advantage. You may not always know when the con is on but if you feel the flattery (and a feeling you may miss the boat) then you may be a mark.

From Henry Gifford:

While it seems so many con games include some true physics in the story, the physics are usually redundant (as already mentioned) or not relevant. My favorite is energy-saving devices that incorporate the use of "bipolar" magnets. As all magnets have two poles, the statement is meaningless yet true. 



 "Sometimes the British Shoot an Admiral to Encourage the Others." Horatio Hornblower's Worst Nightmare By William S. Lind

The tiff over maritime boundaries in the Shatt-al-Arab between Iran and Great Britain seems to be over, with the British sailors and Marines released and returned to the U.K. I continue to suspect a deal was made regarding the five Iranian Revolutionary Guard officers held by the U.S. in Iraq. If they go home in a few weeks or months, it will be a quid pro quo, regardless of how much Washington and London deny it.

For Britain, and especially for the Royal Navy and Royal Marines, the incident ended in utter disgrace. The initial surrender of the British boarding party to what appears to have been a much larger Iranian force is the only defensible British action in the whole sorry business. Even in Horatio Hornblower's Royal Navy, a British frigate captain was not disgraced if he struck to a French or Spanish ship of the line. Force majeure remains a valid excuse.

But everything else that was said or done would have given Hornblower or Jack Aubrey an apoplexy. The failure of HMS Cornwall to foresee such an event and be in a position to protect her people; the cowardice — there is no other word for it — of the boarding party (including two officers) once captured; their kissing the Iranian's backsides in return for their release; and perhaps most un-British, their selling their disgraceful stories to the British press for money on their return — all this departs from Royal Navy traditions in ways that would have appalled the tars who fought at Trafalgar.

Yet that is not the worst of it. The worst of it is the reaction of the Navy's higher-ups. According to a story in the April 7 Washington Times, the Royal Navy's top commander, Admiral Jonathon Band, leapt to the boarding party's defense with virtually Jerry Springeresque words:

He told the British Broadcasting Corp. he believed the crew behaved with "considerable dignity and a lot of courage" during their 13 days in Iranian captivity.

He also said the so-called confessions made by some of them and their broadcast on Iranian state television appear to have been made under "a certain amount of psychological pressure."

"I would not agree at all that it was not our finest hour. I think our people have reacted extremely well in some very difficult circumstances," he said.

Had the captives been 10-year old girls from Miss Marples' Finishing School, Admiral Band's words might make some sense. But these were supposed to be fighting men from the Royal Navy and Royal Marines! Yes, I meant men. What Politically Correct imbecile detailed a woman to a boarding party?

To understand just how bad the whole business is, one must first know a bit about Hornblower's navy. In the latter half of the 18th century, the Royal Navy developed and institutionalized what we now call maneuver warfare or Third Generation war. By the Napoleonic Wars, it was all there — the outward focus, where results counted for more than following orders or the Fighting Instructions; de-centralization (Nelson was a master of mission-type orders); prizing initiative above obedience; and dependence on self-discipline (at least at the level of ship commanders and admirals) . It is often personified as the "Nelson Touch," but it typified a whole generation of officers, not just Nelson. In the 19th century, the Royal Navy lost it all and went rigid again, for reasons described in a wonderful book, Andrew Gordon's The Rules of the Game. But Hornblower's and Aubrey's navy was as fast-acting, fluid and flexible at sea as was the Kaiserheer on land.

I told Andrew Gordon that I would someday love to write the intellectual history of that first maritime incarnation of maneuver warfare; he replied that the source material to do that may not exist, since Royal Navy officers of that time were not writing things down. He may be right, but I think one incident holds the key to much of it: the execution by firing squad, on his own poop deck, of Admiral John Byng.

In 1756, at the beginning of the Seven Year's War, the French took the island of Minorca in the Mediterranean from the British. Admiral Byng was sent out from London to relieve the island's garrison, then under siege. He arrived, fought a mismanaged battle with the attending French squadron, then retired to Gibraltar. Deprived of naval support, the garrison surrendered. Byng was court-martialed for his failure, found guilty, and shot.

The reason Byng's execution played a central role in the development of maneuver warfare in the Royal Navy is the main charge laid against him. The capital charge was "not doing his utmost" in the presence of the enemy. In other words, Byng was executed not for what he did, but for what he did not do. Nothing could have done more to spur initiative in the navy. As Voltaire famously wrote, "Sometimes the British shoot an admiral to encourage the others." Encourage the others to take initiative and get the result the situation demands is exactly what it did. Without Byng, I doubt there would have been a Nelson.

Byng's execution points directly to what went wrong in the Royal Navy in the Shatt. It is not so much what people did as what they did not do. Neither the fleet commander nor the commander of HMS Cornwall prepared for such a situation. When it happened, Cornwall did not react. The captured sailors and Marines did not think about anything except their own skins. The Royal Navy, as represented by Admiral Band, seems decided to do nothing about its disgrace except pretend it did not happen.

It is perhaps appropriate that the Royal Navy's senior officer in the boarding party was a Lieutenant Felix Carman. The whole business represents Hornblower's and Aubrey's worst nightmare: the Brits have become the Dons.

William S. Lind, expressing his own personal opinion, is Director for the Center for Cultural Conservatism for the Free Congress Foundation.



We've talked here about the importance and nobility of marketing, and how important it is to our society.

Someone sent me this website because it was cool, but I couldn't help thinking about how the web has changed marketing and what a groovy thing that is.



A meaningful understanding of statistics and their proper application is a most rare talent. In my occasional chats with the one known as the future laureate, it is clear that he is possessed of such talent. Other so-called experts, however, would appear to twist statistics for their own devices, especially by reducing everything to a single dimension. Early training in functional analysis would appear essential to making one as comfortable in mathematical worlds of unbounded dimension as in the uni-dimensional one favored by the over simplifiers.



A very unusual score at the recent Championship League soccer match between Manchester United and Roma: 7-1 in favor of Manchester. I can remember only one such big difference in the 60s. The match was between Borussia and Inter FC of Milan and it ended 6-1 in favor of the Germans. The match was later replayed on the grounds that an Inter player was hit by a missile while on the pitch. Inter eventually won and passed to the next round. Such an unlikely score raises the question of betting: I wonder if anybody knows what the bookies were quoting on score differential before last night game.



By reading Victor and Laurel's books many times over I've absorbed the wisdom that they wrote about. My suggestion is to get copies of EdSpec and PracSpec, take off the dust covers and set them aside, invest in a highlighter and a good pen, and begin to read and highlight and underline those things that are important to you and relevant to what you are trying to accomplish.

After that task is done then go get another notebook that will be a journal. As soon as possible do the following in any order that you'd like and record the results:

  1. Grow a plant
  2. Take a hike down a path
  3. Visit a stream, river, and ocean
  4. BBQ amongst friends
  5. Watch a sporting event
  6. Ride a bicycle
  7. Play a game of chess or checkers
  8. Learn to program a computer
  9. Make a homemade volcano
  10. Fly a kite
  11. Jump rope
  12. Go to store, view the variations in vegetables
  13. Count different birds in a park, their sounds
  14. Try to solve Pi manually
  15. Bake a cake and apply icing
  16. Go fishing
  17. Run a mile as fast as you can
  18. Listen to The Four Seasons by Vivaldi
  19. Make a campfire
  20. Tell a stranger hello
  21. Grab some clay and make something
  22. Identify different clouds for two weeks
  23. Watch the squirrels in a local park
  24. Fold a newspaper in as many shapes possible
  25. Go bowling
  26. Play poker

Bottom line: if you want to think outside the box, then really get outside the box.



 It's been questioned by a friend whether I broke a six minute mile in this decade. He's obviously seen my ample frame in the last couple of years.

I can assure you it was 5:48 in 2001, with a stop watch on a regular 400m track. I played rugby at the time.

I can do it again if anyone wants to give me a month and bet me 100 bucks, but I would rather stick to running sprints and suicides at the local YMCA.

I used to run track in high school to stay in shape for football. I would run the 400m, and the 300m hurdles. These two events were usually back to back with little rest in between. I would turn in 1:03 to 1:05 (never cracked one minute) in the 400m and :44 to :45 in 300m.

Times have changed though!



 Tuesday night was interesting in the Brooks household. It rained in St. Louis, a long, hard relentless rain. Since the bad ice storm this winter, my flat Mansard roof has developed several leaks. Needless to say, the roof was leaking last night.

As I drove home from my office, I knew I was going be greeted with buckets on the floor. That was only the tip of the iceberg.

I pulled into yard and drove around to the garage under the house and noticed it was flooded. My sewer was backed up. Not just a little backed up, oh no. It was so backed up that we couldn't even flush our toilets.

So I called Rescue Rooter and arranged for them to come out. They couldn't arrive until 8:30 am. Not good. As I hung up the phone with them I heard some major drips start in the kitchen. Kitchen? The kitchen doesn't leak. Wrong! It was pouring into the room. Something wasn't right.

So I went upstairs and opened the door that leads out onto the first roof over the kitchen. There was easily four inches of water sitting on that roof, so much so it was overflowing through the door. Time to act quickly.

So I pulled my shoes and socks off, pulled my pants off and proceeded out onto the roof (yes, in my undies. But don't worry; we're somewhat isolated and it was nearly 2 am). I stepped barefoot into four inches of freezing water. Did I mention that it was 45 degrees outside, it was pouring rain, and the wind was blowing hard?

The first things I noticed were my toes. They instantly froze. Consider your toes for a moment. How often do you really think about them? If you're a guy, probably only when they're hurt. Mine hurt.

I am a creature of comfort and I was decidedly not comfortable. As my toes numbed to the point where I couldn't feel them I noticed I didn't have a ball cap on. Those of you with hair probably take for granted the insulating capability of hair. It was then and there that I was struck with the cold hard reality of my baldness. The wind was freezing my ears, water was running down my face and neck, and rain was crashing onto my unprotected scalp. I was not the least bit comfortable.

It was then and there that a smile crept across my face and I realized how blessed my life was!

Here I am on the roof of the house that I told everyone that I was going to buy when I was 10 years old. I now own that house. I was flooded with memories of my father and how hard he worked and how he did a lot of uncomfortable things in his life to make sure we had what we needed. I remember my dad telling me that sometimes "you just gotta do daddy things." As I stood on that roof in the pouring rain and freezing water I knew then and there, that I was doing "daddy things." I was doing what it took to protect my house so my family could be safe and have shelter.

As I cleaned out the drain, my hands were getting cold (the water on that roof was real cold). But as I dug my hands into the muck filling the drain and felt the pain of the cold, my mind interpreted that pain as success. Success because I was doing what I needed to do. I was doing daddy things.

I then climbed up to the highest roof on the house (I have 3 roofs) and unclogged those drains. As I climbed the ladder, I actually couldn't feel anything but a bit of pressure on my feet and my toes were completely numb. It didn't matter. I climbed that ladder, unclogged the drains and waited while the water drained off, as I had to keep unclogging it. I did this on two drains on that roof.

I then looked over the side of the roof to see the second roof over the master bedroom/sunroom. It was flooded too. I opted to go back down the ladder (by this time I could hardly feel my feet at all). Back into the house I went and then I climbed out the window in David's room. I repeated the process of cleaning two drains on this roof and waiting while the water drained out as they needed to be unclogged several more times.

Finally, the roofs were drained and I was able to go inside.

I felt great. I felt like I had accomplished something. I felt like I had lived up to the standards my dad had set. Sure, there are a lot guys in this world who would think nothing of this, but I'm not one of them. As a rule, I avoid any kind of physical labor unless absolutely necessary. But tonight was my night. I felt victorious. I know that may sound corny to many of you, but I was sure feeling good!

I firmly believe that a positive attitude is a the cornerstone of success. It is the impetus for everything good that will happen to you! As I walked into my bedroom, my wife awoke, looked at me and said, "What have you been doing?"

I told her. I told her the whole story of my victory. She looked at me, rolled her eyes and said, "Oh please. I've been on that roof in a blowing rain storm, in mid November while I was 8 1/2 months pregnant, with a 2 year-old and a 4 year-old standing at the door crying their eyes out bawling for me to come back in screaming 'I'm scared mommy, come back in' while standing in freezing water, climbing up and down ladders and unclogging drains, wearing nothing but my pajamas."

So much for my victory! But I'm still a blessed man! (By the way, the next morning, my wife did give me a kiss with a wicked smile and tell me that I'm a manly man!)



 I am a physician who practices Anesthesiology at a community hospital. I recently attended an academic meeting in which a well known critical care physician gave a couple of lectures relating to glucose control in critically ill patients, and evidence based medicine. The physician in question, Dr Avery Tung, is a faculty member at the University of Chicago, and discussed his collaboration with some of the members of the University of Chicago Business School. I found his observations enlightening, and I thought that some of the key points might have some relevance for this forum.

The biochemistry of glucose metabolism and insulin's role in regulating it have been understood since the 1920s. Low levels of glucose are known to be dangerous, and high levels are known to lead to atherosclerosis, coronary artery disease, stroke and peripheral vascular disease. Very high levels are known to acutely lead to acidosis and coma. It is also well known that the closer one can get one's glucose into the normal range, the less likely that one suffers long term consequences. Short term, moderate fluctuations in glucose do not demonstrate any short term disability in healthy patients. Until recently, no one thought to ask what the affect of modest fluctuations in glucose would have on the critically ill. It is not unusual to see modest increases in glucose in the critically ill who are not diabetic as a result of the stress of illness. Van de Berghe and his colleagues published an article in the New England Journal of Medicine in 2001 that prospectively put Surgical Intensive Care patients into either a "standard " insulin regimen of intramuscular insulin for serum glucose of greater than 220, or an intensive regimen of intravenous insulin designed to keep the serum insulin less than 110. Only 13% of the patients had a history of diabetes. The results of the study were shocking. The group that had very tight glucose control had a 50% reduction in mortality compared to the "standard " therapy group. No other finding published in the intensive care literature has had the potential to improve outcomes as much as this one. The key breakthrough was that someone had the insight to question whether well understood data for non-acutely ill patients held for the acutely ill. Nobody asked this question for decades.

 The second lecture on evidence based medicine covered a number of topics. I wish to discuss one point in the lecture, the use of the pulmonary artery catheter. The pulmonary artery catheter is a flow -directed catheter that is inserted into a central vein and is advanced slowly into the pulmonary artery. It directly measures the pressures in the right side of the heart and the cardiac output (the pumping capacity), and indirectly measures the pressures in the left side of the heart. Since its introduction in the early 1970s, it has ben instrumental in training Intensive Care physicians and directing treatment algorithms. One of the most difficult clinical decisions can be whether low blood pressure is the result of sepsis (infection), or cardiac pump failure. The PA catheter had been at the forefront of the decision making and treatment algorithm for this issue more than two decades. Since the mid nineteen-nineties, multiple studies have been done trying to demonstrate a survival advantage in using this monitor as part of the care of Intensive care patients, and none has been able to do so. The first key point is that it took two decades to question whether this monitor made a difference. The information didn't appear to change outcomes. The other point is that while multiple studies have come out which have not demonstrated a survival benefit, the use of this monitor, while declining, persists. There was an economic incentive to place these monitors in the past, but managed care has removed much of the economic incentive. A generation of physicians used to making patient care decisions with certain treatment algorithms may be finding it difficult to make decisions with less information, even if the outcome is no different

The lesson for traders is never to assume that a question has been asked. In looking at conventional wisdom, investigate how a consensus has been reached. The question may not have been asked, or if it was, broad generalizations made that do not pertain to smaller subsets. The most spectacular results may come from investigating and challenging long held assumptions. Data may help you in you decision algorithms, but your decisions may be no better that guessing if you don't test whether the data affect outcomes. Understanding the mindset of those using data which you know to be useless may help you to decide to take the opposite side of a trade.

Yossi Ben-Dak remarks:

It is always the particular insight that comes from taking a fresh, uninhibited look at the system as a whole but also at the components that sometimes, or actually quite often, are considered by the majority, as of less than pivotal interest, that produces the struggle with the true optimum. This is especially true in engineering an effective technology solution that benefits from other fast changing sub technologies for a constantly redefined purpose range, as compared with technologies that are more purpose-limited and are from known manufacturers.



Philadelphia Homicides Caused By… Global Warming?

In Philadelphia, Mayor John Street blames global warming for the soaring murder rate in his city "because of Philadelphia's unique proximity to chemical plants (Allied Chemical), oil refineries (Sunoco), and pharmaceutical companies (Glaxo SmithKline), the burning of fossil fuels from these sources, as well as the port of Philadelphia's role for the importation of paper products, which as we all know causes the clearing of forests, Philadelphia dramatically increases the amount of carbon dioxide in the atmosphere and the temperatures of Philadelphia are rising."



 I believe in trends. They seem ubiquitous; how can they be ignored as if nonexistent?

There are trends in skirt length for women of fashion. The shortest lengths are the hottest trends. The longer lengths with slow curves attract different investors, long-term thinkers, which many women prefer, and trendy lookers too.

There are trading trends, for technicals for instance. At times John Bollinger's Bands are the trend, then Larry Williams's %R gets trendy, then point and figure become the rage.

News becomes the trend. Everyone gets on the news bandwagon, then news fades away to be replaced by math wizards, computer wizards, and fortune tellers who look into the guts of technology for signs of trends.

There's always a trend. Trends never go away, they just fade away, dematerialize, then surface in different forms. One can always find a trend.



 I tried to convert a few $100 bills to Ukrainian currency (the hryvnia) today. The woman behind the counter looked at them and gave them back. I got my interpreter to ask if she thought they were counterfeit. She didn't, she just thought they looked old and frayed. She offered me $90 in hryvnia apiece for taking such old money. I declined, and tried at another bank. They took one, but not the other.Then I went shopping and bought several things at one place, and pawned the old $100 on a merchant. Apparently devaluing currency due to its appearance is common here.

I talked to a guy who bought a bride at lunch yesterday. He was desperate to talk to anyone who knew English, and I looked American. We chatted for a while, then his "bride" came over. He was distraught because the ad said she was mostly fluent in English while in reality she knew none. She didn't like my talking to him, so she pulled him away. I think they'll be a great couple.



 From time to time I wonder if a man from Mars could make a profit in the markets. I figure a good way for the Martian to start might be with Bunds, which trade one million contracts of a 100,000 Euro item, each day.

The bund is approximately a 10-year German debt security, and if one is going to make a beachhead, this seems a good way to start. Rather than starting with sequences and reversals the way the early stock market men from the weather bureaus, (such as Davis, Jones, and Cowles) did, I thought I'd start with survival, as it somehow seems more 'Martian.'

When thinking about this, I asked myself what happens when a plus or a minus Bund move has survived for a given number of days. This is as they do in medicine; "how long can a person expect to live, given that he has already survived x years, and taken this or that medicine?"

Expected survival for a bund move based on past number of events.

event exactly      number     life expectancy to rise
1 day down            523                  2.0
2 day down            232                  2.1
3 day down            107                  2.3
4 day down              58                  2.3
5 day down              31                  2.4
6 to 10 days down    53                  2.2
11 to 15 days down    2                  1.5 *

* expectancy to rise or next decline 36.

     event             number         life expectancy
     exactly                                  to decline
     1 day up         516                       2.2
     2 days up        276                       2.1
     3 days up        143                       2.1
     4 days up          72                       2.2
     5 days up          36                       2.3
     6 to 10 days up 46                       1.9*

It seems that one must marvel at the utter randomness of the results. That is, the incredible constancy of the life expectancies after survivals plus or minus so many different rises or declines in a row. What a fathomless mystery the market is, but that makes the challenge all the greater and more to be desired. 



 Hidden Sword is a chick flick masquerading as a samurai movie. There was one good scene where the samurai went to his teacher Toda before the big showdown to the death with his friend who was ordered to kill him.

The teacher told him, "Whenever a man draws his sword, he becomes emotional and tempers go up." The teacher taught the samurai to duck and dodge, and draw the attacker. "Withdraw in body, but the spirit still advances." In that way the opponent is drawn in to attack. As the fighter withdraws, the opponent attacks and his temper goes up as there is no engagement. However the samurai waits for the opponent to have a moment of emotion or temper and rushes in reaching. At that moment, the samurai turns quickly and attacks under the opponent's sword and kills him.

In our market operations, despite quantitative signals, strategy is useful. When the opponent in the market is engaged, tempers go up. When looking for an entry, it is sometimes good to withdraw orders, but not the spirit. The opponent's temper is aroused and when there is a rushing in, that is a good time for an attack. By the same token it is good to recognize this as the market retreats from the order. Care must be used when tempers are aroused and there is danger from rushing in. There are many variations of this move in judo and aikido.

Today's market was notable for the linearity of the move after the early reversal. There have been hints in posts about automated systems. Globex is a backdrop to any system and the linearity of its function seems unnatural and nonrandom and a buffer or framework to the participants.



 Here's a funny story. About five years ago, some guy in Kansas City who was mad about gas prices went to the Board of Trade there with a pistol that he used to tap on the glass of the visitors gallery. The entire pit scattered off the floor as soon as they saw him and it being Kansas City, a couple traders went to their cars to get their guns and roamed the halls looking for him.

I might as well recount another story. The day before I started as a clerk there (July 1st, 1998, one of the happiest days of my life) a female clerk got her car bombed in the parking lot across the street. Someone walked up, broke a window, threw in some sort of explosive and ran away. The resulting fire roasted the cars next to it as well and could be seen from the trading floor. From what I heard, the female clerk was pretty crazy and slept around but I never met her as she left the floor after that day.

It's these types of stories I'll entertain my grandchildren with someday after the floor is long gone.



I went to buy pool supplies today and found that the chlorine/shock I usually use has gone up in price by almost 100% since last year. So I logged on to Leslie's Pool Supplies and bought from them but they said their prices were up by about 50%, too. Of course the clerk had no idea why. Has anybody else run into this or know why this is happening? Twenty-five pounds of chlorine/shock for $94.99. I kid you not!

Gordon Haave replies:

The pool at my new house is a salt pool. You put in salt, and a little box zaps it and turns it into chlorine. The end result is a clear pool that is very slightly chlorinated and very slightly salty. Very refreshing.

Joyce Shulman adds:

I don't know if it is cost-effective for large pools, but we have a spa in our backyard and purify it with an ozone generator. The water is sparkling clean and clear and has never had a drop of chlorine or bromine in it. We heard that ozone generators were used in the pool in the Atlanta Olympics at the insistence of the Europeans, then returned to chlorine later. I wonder why? Ozone is wonderful. 



 Just saw "The Lookout." It's "Fargo" without the twang-y Dakotan accent or snowbound meat-grinder. Though it celebrates the Gen X cynicism and party-hearty drug-culture. In the end I enjoyed it, not least because its star is a solid new performer, Joseph Gordon-Levitt, formerly the runt in 3rd Rock from the Sun. Jeff Daniels plays a mysteriously visionary blind cohabite. Isn't it always that way with blind guys in flicks? and the film is a rare entry in good finishing up battered but best in the end.

Here, broody Gordon-Levitt, a face and force to be contended with, is coping with head injury difficulties that have rarely, if ever, been treated before. His confusion and malleability make him a prime target for petty thugs bent on a heist of mom-n-pop local banks. Not autistic, not schizoid, the character he plays has an affliction that few understand, though externally he looks unfazed and unchallenged. His overcoming of the considerable odds against him is compelling. He has a mesmerizing presence, at once innocent yet deeply at war and coiled. Gordon-Levitt is probably, what Adam Sandler wishes he could be in that strange and unfilling current "Reign Over Me."

Along with "Grindhouse" (not reviewed here), Lookout also features what we shall call amputation porn. What is a society saying that gets its rocks off over women with replacement extremities [some with strategic weapons of mass destruction screwed into the available apertures]? Is Heather Mills McCartney setting the stage for a slew of limb-lock oeuvres?

What to say about "Reign Over Me?" Someone must have paid previous reviewers to give this oddity, with its catatonic, rageaholic, stupidaholic Sandler a thumbs up. Don Cheadle, with all his graceful understatement and silken downplaying could not rescue this peculiar indulgence from its formicary plot elements.

Many scenes with Sandler evoke guffaws of disbelief, though the predicament of a man destroyed by the loss of his entire family to the murderers of 9/11 is a valid conceit that still awaits its Boswell. He lacks the necessary gravitas from too many "Waterboy" moments.

"Black Book," Paul Verhoeven's important "Schindler'' offering, is an important contribution to the Holocaust canon, despite a few quibbles with plotline liberties–offers style, noir nudity, authentic-feel sets, spine-tingling suspense, unlikely delicious costumes, authentic-sounding dialogue (Dutch, German, French, English, excellently subtitled, for a welcome change) historical settings, and a few not-likely scenes or predicaments.

Russian sci-fi "Day Watch" (to be released May) is a hipper-than-thou update of a decrepit modern-day Russia pitting Forces of Light vs. Forces of Dark. It is extremely popular in the former USSR, upsetting all box office records. It has a "Minority Report" and "Matrix Unloaded" trick slo-mo and transmogrifications with a bit of in-your-face Tarantino and splashy gore ghosting over all the CGI, amazing cinematographic effects, especially considering the Wal-Marty $4 mm bargain-basement budget. Even more surprising than the plush look of this intriguing futuristic thriller, the credit roll includes, uh, about 3.5 million cast and crew. How such Terry Gilliam-like fancy footwork and eye-popping effects were achieved on so modest a budget is a caution for eager Western filmmakers.

Then, decidedly not recommended is Fassbinder's incomprehensible, s-l-o-w homage to what must be narcoleptic Warholiana. This is interminable filmmaking and overall misogyny, "Katzelmacher" ("Cat-Maker,"1969) (MoMA). A companion left after only 15 minutes. In black and white, of historical if not entertainment value, "Katzel" left me wondering how Fassbinder managed to scrape up funding for further filmic enterprises after this one. It features an abuse of one of his key repertory females every couple of minutes. It is enchanting to see that they don't even react at the oafish louts who perpetrate the casual assaults. An optimist, this reviewer stuck it out, then bemoaned the theft of 88 minutes. Fassbinder did, however, make other and far better films, one of which, "Berlin Alexanderplatz," Parts I - 13 (1979/80) occupies almost the same number of hours as a post doc degree.

Bringing up the rear is the satirical long-suffering "The TV Set." It is a beady stare at the disemboweling compromises necessitated by participating in the TV drama field, whether one is David Chase (Sopranos) or just humiliated journeyman Mike Klein, the congested David Duchovny, playing a non-X-Files, all-too-human scriptwriter. "TV Set" shows in sly, warty close-up how one must sell not only one's soul to become finally green-lighted for the average TV pilot, but lower and higher portions of one's anatomy. Rapacious producers (Sigourney Weaver is particularly hilarious as an acid-reflux-afflicted power-punchy exec) vie with all the hierarchy of self-important crowd and crew in gnawing off chunks of the heart of a production, until it is a freakish smidgen of its original.

"The Hoax," presents Richard Gere as Clifford Irving, the scammer par excellence who persuaded a whole corporation that he had entrée into the forbidden walled city of obsessive Howard Hughes. The experience of this film was one of discomfort. It teetered between empathy for the sham-meister and disbelief that his shamelessness was bought into hook, line, and stinker, by gullible McGraw-Hill.

In the end, I do not think I would go again, though Hope Davis ("American Splendor," "The Secret Lives of Dentists," "Proof") and Alfred Molina ("Chocolate," "Spider-Man 2," "Frida," "Murder on the Orient Express") are heartbreakingly good (as we have come to expect). The normally sexy Gere is, well, smarmy, not fully inhabiting the skin of this slippery individual. One could ask how the hoax could have succeeded in the first place. As one could question why one would make a film about this embarrassing episode in America's ever-bankable nincompoop season.



 "What kind of animal would you be if you were reincarnated?"

"Where would you live if you were the richest person in the world?"

"What would you do if you were the president?"

"What happens to compounded returns by excluding extrema, empirically and simulated?"

OK, that last one has a dollop of testosterone. However inspired by a friend, here is a revisit of prior study on effects of final sum compounded by simultaneously removing (as if by magic!) the paired top and bottom daily returns for SPY from 1993-present (includes dividends): "But wait; we can't get right to it. Let's first do a simulation!"

(Yes dear.)

Using SPY daily returns since 1993, calculated daily mean return and standard deviation. From this used random number engine to generate 10,000 daily returns with a normal distribution having the same mean and st dev. This series was then ranked, and compounded returns calculated after successively removing top and bottom return pairs. Here is the graph of final compounded return.

From this graph, one notes that removal of top and bottom returns initially boosts compounded result, but quickly the final value declines monotonically as the normal distribution tails are clipped. This suggests that were returns normally distributed, both tails contribute to final compounded return (since their symmetrical removal reduces final sum).

"But wait!"

This graph compares this result to the actual empirical SPY series, successively pruned of top and bottom day returns. 

"Oh that one's different!"

Here we see the same short initial boost in final cpd sum by removal of tips of tails, followed by a decline in total return as more of the tails are clipped. However unlike the simulation, further paired pruning of tails improves final compounded sum, and for many iterations this sum exceeds buy and hold. Evidently removing the non-normal/fat tails (but-yours is perfect, dear!) of the empirical distribution actually improves returns, whereas cutting tails from the normal hurts.

"So just by taking away the top and bottom returns, we would be even richer? Have you figured out how to do that?" 



 A recent NY Times op-ed reminds me of your Junto remarks last Thursday about how insider buying can transmit a deceptive signal. Daniel Gilbert's op-ed has some examples of other potential false signals. Gilbert wrote:

"In an advertising campaign that began last week, Nissan left 20,000 sets of keys in bars, stadiums, concert halls and other public venues. Each key ring has a tag that says: "If found, please do not return. My next generation Nissan Altima has Intelligent Key with push-button ignition, and I no longer need these." …There is no selfish reason to bend down and pick up a key ring, but Nissan knows that we will bend without thinking because the impulse to help is bred into our marrow. Our best instinct will be awakened by a key ring and then punished by a commercial. Like rubes throughout the ages, we will be lured by a false cry of distress and quickly cured of our innocence and compassion. We are used to commercial tricks that play on our fears. The official-looking letter marked "Verification Audit" is actually a magazine subscription renewal form; the credit card company's ominous call to "discuss your account" is actually an attempt to sell new services…" 

Gordon Haave adds:

The biggest investment disaster I have been a part of was Edison Brothers Stores, which went to zero. A couple of months before it went under, all the directors bought some shares on the same day. After the fact, it was clear that it was doomed when they purchased. It was a clear head-fake.



 Do any of you still have your marbles from when you were little? I have a few that were my father's when he was a boy. They are clay fired and quite old. I have a jar full of my own when I was a youth. I also still have a couple of my leather marble bags that I used when in grade school.

I can remember at recess a few of us gathering and someone would take a stick and draw a circle in the dirt and then make a small notched mound in the ring's center to rest marbles that we would shoot at from outside of the ring. If you leaned 'in' too far someone would shout "no hunchies."

Most of us had our own favorite 'shooter' marble and we all dreaded losing our prized shooter in a game. My area years ago had the Vitro Agate Marble Company, long gone. I still have marbles from that company and they made beautiful cat's eyes.

Every year in St. Mary's, W.Va., they close of the streets and vendors come from all over to set up and hawk their marbles to collectors who come from everywhere to buy and sell. Marbles are beautiful and some are highly collectible. Yes, I have a few good ones tucked away.

The Discovery Channel had a nice program on the making of marbles tonight and it made me think back to my youth and the fun I used to have shooting marbles.

J. T. Holley adds:

My son has his marble belt loop from Cub Scouts. Many vintage games are still part of the Cub Scout program. I get a kick out of remembering and participating in the games with him as we move through the ranks. We have a marble racer game and invented a marble soccer game, and we also spend hours playing traditional marbles.



I'm looking for a book or paper that will help me think about trading and building trading systems from a fresh perspective. I am not looking for a trading book. I am looking for something that tackles a big question in a big way.

Three examples:

  1. In his notebooks, Da Vinci tackles learning to draw by thinking about and exploring straight lines (linear solution).
  2. In The Timeless Art of Building, the author integrates art, flow and aesthetics into architecture (gestalt solution).
  3. In Notes on Programming, Alexander Stepanov talks about knowing when a program/function/algorithm is correct (correct solution).

I have found that the way to get better at what I do is to choose a path, incrementally improve until the delta improvements become too small too matter (or be interesting), and then find a new path and start the process all over again. The book I'm looking for will help me find a new path.

Russ Herrold writes: 

In scanning this piece, it refers to TAOCP by Knuth,

1. Knuth, Donald E. "The Art of Computer Programming," Volumes 1-3 Boxed Set, 1998 Addison-Wesley Professional (1998), Edition: 2, Hardcover, which I too have used for years (decades) as my polestar (I have a set for the office and a set for home); but times change, and my coding partner has convinced me that I also needed to look more broadly, and see more modern approaches. As he spent over a decade attaining his Computer Science PhD, and teaching along the way, I tend to listen to him in such matters. Also the code inside are an expression of "the software engineering techniques [which he, Bill Pippin] used to control program complexity [as Stepanov also mentions early on]. Those techniques extend the implementation work done as part of [his] doctoral dissertation, "Optimizing Threads of Computation in Constraint Logic Programs," in particular by demonstrating a non-trivial instance of the single-tree pattern, whereby all singleton types are parameterized and then stratified by their binding pattern.

If you think: "wow, that sounds dense", and you read C++, take a moment and read the headers and the code. Bill recently wrote a roadmap to reading it.

The 'single tree' and its (relentless) application to the problem and space we are addressing (exploring the conflicts between the theories trusted by fundamentals investors, and the practical results observed by technical traders in reality [a favorite topic of this list] — Bill and I each started as Nixon Era Economics wonks in Washington DC, in the era of the now forgotten religion of Chicago School monetarism) is a really _big_ and non-trivial system. But perhaps not a formal work per se. Yet…

Each of the following either looks at a 'big question' area, or apply a method to solve a non-trivial (big) question. Reference to trading and investing are tangential.

2. Skiena, Steve S. "The Algorithm Design Manual" 1998,and 3. Skiena, Steven "Calculated Bets" 2001. The first is a more contemporary yet sound algorithms (tying to the mention of provably correct" solutions) work (with a fine bibliography), and the latter just plain thoughtful and fun.

4. Cormen, Thomas H "Introduction to Algorithms, Second Edition" 2001. This is the modern leading work on algorithms, but appallingly dense; I recommended the Skiena works first, as I find them more approachable.

5. Hofstadter, Douglas R. "Godel, Escher, Bach: An Eternal Golden Braid." It is one of those books one should take a month to read, and which has delighted me with new insights for twenty-five years each time I re-read it (another delightful bibliography).

6. Aronson, David R "Evidence-Based Technical Analysis: Applying the Scientific Method and Statistical Inference to Trading Signals" 2006. Not as to trading, but it applies scientific method in thinking about our trading beliefs.

7. Mehrling, Perry "Fischer Black and the Revolutionary Idea of Finance" and 8. Black, Fischer "Exploring General Equilibrium" 1995. This delightful pair being what I feel will be the reference biography, and the last work, as to unanswered questions, of this major 'counter' taken from us too soon.

This personal library inventorying tool has finally solved the desire I had for a tool to feed an ISBN, letting it gather and retain the rest. Also recommended.

Sam Humbert adds:

Perhaps too obvious to mention are the Tufte books. I got a lot out of his first book, The Visual Display of Quantitative Information, and sequentially less from the later volumes (much as I found food for thought in the Expert's first book Dynamic Hedging, but less in his later writings).



There is still an enormous number of subprime and stated income loan programs available for people with low credit scores and few assets. Only the programs for the most marginal borrowers have been taken from the market. And new creative programs have been introduced to fill the temporary void at startling speed. It has truly been a marvel to behold.

Far from being the contagion I was expecting, the mortgage markets and residential real estate markets have not only absorbed this shock but are exhibiting signs of even greater confidence and liquidity now that the underlying concerns about fraud and irrational underwriting in the mortgage markets and loose appraisals of collateral have been acknowledged.

There will still be more headlines but those unscrupulous players not already knocked out are quickly being isolated from participating by the mbs markets. Underwriting to exact specifications for each loan program has returned following the sloppy underwriting that was at the heart of the real problem in the mbs market.

This tension release and resulting rapid tightening up of the industry appears to have worked amazingly well and amazingly quickly.

Charles Sorkin writes: 

Just throwing this notion out there, but is it accurate to say that "home-ownership for all Americans" is a stable economic regime? For instance, jobs for all Americans (i.e. 0% unemployment) is widely considered unstable, and would lead to sporadic regional labor shortages and is associated with inflation pressure.

Is there a NAIRH (non accelerating instability rate of homeownership) associated with the American economy, much like the much-debated NAIRU concept?

An insightful reference to housing stock, homeownership, and the means of financing it, are referenced in Paul McCulley's monthly commentary on the Pimco website.

Ken Smith writes: 

The next step in America will be to follow Britian which in the period 1979 through 1997 converted municipal housing to ownership housing. Well over a million former tenants became homeowners.

This was the era of privatization. In 1979 British government institutions owned much or all of coal, steel, gas, electricity, water, railways, airlines, telecommunications, nuclear power and shipbuilding, and had a significant stake in oil, banking, shipping and road haulage.

The agencies responsible for these changes were called Next Step Agencies. So the next step in America is conversion of municipal housing to private ownership by individuals or corporations.

The Bush Administration has voiced, many times, the goal of home ownership for all Americans. It appears the goal is to implement this program without regard to ability to pay. I can see a way to profit from this. Get the loan without ability to pay, peddle the property for an appreciated value, pay off the loan and keep the difference. Do another flip, and another.

So what happens when everything falls apart? When jobs are lost, as in Illinois, Ohio, and other hard hit states? Nothing bad happens. Since anyone can get a property without income then anyone can pay up for the property being flipped. So another person steps in, without income, to purchase property that has been appreciated by an appraiser willing to be part of the game, for compensation, of course.

Is this magical thinking? Is this reason? Is this logic? Is this traditional? Is this paradise? Is this the new economy? Is this a bubble?



Pearls Before Breakfast, which describes violin virtuoso Joshua Bell's performance on a Washington subway platform, is one of the most important articles I have ever read. The best line is:

Then, Collins said, life slowly starts to choke the poetry out of us. It may be true with music, too.

It has more market implications than I can think about right now.



 There are times that financial markets can make you feel like a mythological character. One in particular that I think of when things are going particularly difficult is Sisyphus .

Sisyphus was a king who promoted navigation and commerce, but was avaricious and deceitful in his killing of travelers and guests — in violation of the laws of hospitality. As a punishment from the gods for his trickery, he was sent to the underworld and was compelled to roll a huge rock up a steep hill, but before he reached the top of the hill, the rock always escaped him and he had to begin again. The maddening nature of the punishment was reserved for Sisyphus due to the mortal's hubristic belief that his cleverness surpassed that of Zeus.

However if we end there, and focus exclusively on Sisyphus, there in fact would be no reason to get up in the morning and climb out of bed to face the challenges of the day: Fast forward to modern times and we are introduced to a Sisyphean character of a different sort and one who has a happy ending.

Enter Daniel Ruettiger, one of my all time favorite characters. Daniel is the inspiration for the movie Rudy . Rudy is the classic story of a nobody from nowhere without exceptional intellect and with apparently no physical talent but with a lifelong dream to attend the University of Notre Dame.

He has a few things that stand in his way. He comes from a middle class family in Joliet Ill., the third of 14 children. He is also 5'7" weighs 165 lbs., has no money and suffers from dyslexia. After a stint in the Navy, he attends Holy Cross Junior College in South Bend In.. After two years and three rejections he is finally accepted at the University of Notre Dame. He works his way onto the football scout team and in the final game of his senior year he gets to dress for the game, makes one tackle and is carried off the field by his teammates. Not even Joe Montana was accorded such an honor.

Daniel's life includes all the aspects of a captivating story. It has pathos, tragedy, death, discouragement perseverance and ultimate victory. It also provides inspiration for all of us who tend to get absorbed in our own challenges and problems, and serves as a reminder that most of success in life is showing up for work every day and "pounding the rock". And if we stay the course and never yield and keep swinging, eventually the rock will yield and break up and victory will be had. There is a light at the end of the tunnel if we do not quit and no matter the challenge, success is far closer than we think it is.



If you recall that after Friday's blowout payrolls report, on a light news day, CNN buried the info far down its page, noting that interest rates had risen.

What's leading CNN.com at 11:15am est today?

"Citigroup announced today it is cutting 17,000 jobs in the company's first restructuring in 10 years, eliminating about 5.2 percent of its work force…"



 The weather is important for surfing, sailing, skiing and markets. The weather in Alaska comes in large systems that move across the Pacific, lasting two weeks or more as they spin across the Gulf of Alaska.

These large weather systems have many random eddies. From day to day or hour to hour the sun or rain and snow may vary, but in a weather system more then 80% of the days are rainy, windy or snowy. In good weather, there was a stretch of nine days of sunny calm days up in Valdez. The big satellite pictures give a good sense of the scale of the systems and storms, more than just looking out the window from day to day. Seeing the spin of these large systems allows better prediction over days. A harbinger of a storm is sometimes very calm conditions with little variance in the wind speeds. After a very turbulent storm, there is a period of calm as the pressure and temperature gradients stabilize.

The markets have large systems that spin across the globe, visible as price history structures. Market systems are similar to large weather systems or structures that span the oceans or continents and last a similar period of one or two weeks before spinning out. This last big market storm in March lasted a few weeks, then we had nice sunny weather for a few weeks after. It takes a few days or more for the systems to change, and then they pick up speed, with good or bad days predominating for a week or two.

A period of flat calm may signify the winds of change are coming. About 15 years ago we went camping on Superbowl weekend. That night, the ocean was smoother than a bathtub with nary a ripple, and dead calm. We commented. "How odd!" Then at 3 am the wind started to pick up, and by dawn it was blowing over 60 mph. Eleven boats were blown on to the rocks that night. It was called the Superbowl Storm.

We have had two days of below six point ranges in the S&P500. A period of unusual calm. I wonder if it might portend turbulence.



 After a series of up moves that would try the patience of Job, all shorts will be covered very close to the top. This is usually after a 1-tick decline just to get the reversalists leaning the long way. This applies to individual stocks as well as the general market. After being squeezed out of one's last shorts, there will not be any up ticks, and the decline will be too precipitous to ever catch the falling knife.

A general feeling of euphoria will precede a violent move.

All remembrances of vivid moves of the past year will be telescoped into one or two fatal moves well before you set up for it.

The market is never content until it fills in all the areas of potential trade that can induce the public to do the wrong thing, including the final euphoric day where for once bonds go up while stocks go up.

After a big decline, like Feb 27, all future days that bare even the slightest resemblance to the preconditions will be raging buys.

The upward sloping yield curve, the cornerstone of bullish ambience, and the downward sloping yield curve, the one key conventionally thought of predictor of a decline in stocks and a Greenspanian recession, are and have been, in fact, completely opposite in their predictivity over the last 10 years or so.

Past chairmen of the Fed are particularly subject to old man's disease. As the second most powerful men in the world while in office, they are treated with such reverence (and as the most valuable person to know aside from the secretary of the interior) while in office, that when they get out they crave the roar of the lions.

James Tar adds:

No one in hedgefund world, or in real money world, is buying into these recent stock market gains, which suggests to me we are going up much farther than anyone expects.

The sell-side trading desk that I use — a real modern-day bucketshop — has not seen a decent buy order in over six weeks. All sales and shorts, except from me. I prefer that my tickets are written the old-fashioned way — in ink. I tell my broker/trader to mark the tickets as "Just Buy".



  James Kynge, in The Financial Times:

The first inkling the British had of the 13th-century Mongol invasion of Europe, a cataclysm for the continent, was when the price of fish at Harwich, a harbour on the North Sea, rose sharply. The explanation for this, people learned later, was that the Baltic shipping fleets, abruptly deprived of sailors required to fight the enemy approaching by horse from the east, had remained at their moorings. That had reduced the supply of cod and herring to Harwich, and prices had risen accordingly.

Ken Smith remarks:

That was a fishy tale. Pacific salmon are disappearing and lovers of the odor of fish cooking in an apartment building with no air conditioning are lamenting this fact.

For one six-month season I worked out of Dutch Harbor, on an ocean tug pulling a fuel barge around the Bering Sea and Gulf of Alaska. Dutch Harbor in the Aleutian Island chain has a stream running from the hills above to the harbor. This steam is lined with homes built by natives. Homeowners fished off back porch, simply stepped into the stream and grabbed a meal if willing to risk the rushing water.

That was in 1955. Fish were free then. Since salmon are disappearing, there may soon be fish wars in the village at Dutch Harbor.

In the harbor, moored at the Chevron tank-farm wharf, we merely dropped a line over the side to snag 100 lb halibut, any time, day or night. Things have changed since Asian fisheries now have boats on every wave crest. 

From Denis Vako:

Here is an outlier's observation. Never was there such a thing as a Mongol invasion of Europe or Russia. It is a fairy tale invented by Romanovs to legitimize their power grab in Russia. Cossacks, Slavs, Vikings and other Russians are the ones who in fact invaded Europe.

A history book, fiction or science, by Anatoly Fomenko has the whys and the proofs. I found only 2 volumes on Amazon in English, but he has seven in Russian, including mathematical evidence.



Stocks, stocks
Like musical charts

The more I look
The less I smart

The less I look
The less I trade

The less I trade
The more I make

The more I make
The better I feel

Looking less:
A lifetime meal



 Previous posts have focused on signals that baseball players make before the pitch, and the efforts that teams make to hide their own signals and decode the enemies'.

I have often thought that there are hidden signals in markets. My favorite signal is silver, which I call the omniscient market in that whenever something is good or bad it seems to hit the silver market first. Recently, I have been discovering the hidden signals in the Dow Jones, which seems to go the 50 and 100's during the day, much more than randomness would suggest. Another hidden signal is the movement in bond prices that always seem to predate a major move in stocks. Another one is the Israel market, which I have found quite useful in predicting where the US markets will waft.

In particular the move in the Israel market on the Tuesday morning before the war in Lebanon started was or should have been quite helpful in predicting the war. I note that the Israeli market at 1004 is at an all time high. I predict a good first day of the new quarter based on this signal.

Rodger Bastien writes:

I have spent some time in the last day or two trying to discern whether there are predictive signals one can ascertain prior to a baseball game that might parallel what has been mentioned here, as one seeks an edge in determining how activity in one market may be a precursor to a particular move in another. I would compare this to the preparation that a hitter or pitcher goes through prior to a game studying previous starts by said pitcher or at bats for hitters.

There is a tremendous amount of film study these days due to the availability and the predictive nature of the human animal, that has been successful and will be repeated. Taken further, it's no secret that crafty veteran pitchers will often change their pitch patterns, recognizing that success is often found by throwing the unexpected pitch. The truly clever don't wait until their pattern has been revealed before they change the pattern. Just as a pattern of trading is seldom successful in perpetuity, so goes a pattern of pitching.

Much has been made of successful pitchers pitching "backwards," that is to say, throwing a breaking ball on a fastball count (2-0, 3-1 etc.) and a fastball on a breaking ball count (0-1, 0-2 for example). Though not your classic example of signaling, it is certainly a great example of the importance of preparation and varying patterns to confuse the adversary.

Alston Mabry writes:

"Stylometry" is the use of quantitative methods to determine the authorship of written works. Methods have varied over the centuries, but much attention has been paid to a writer's use of unusual words or word pairings. The problem is that unusual words and word pairings are easy to mimic, should one intentionally seek to create a forgery.

However, because of modern stylometry's reliance on computers, researchers can now analyze a writer's use of very common words and word patterns. It turns out that these common words and patterns are much more subtle, tend to be generated habitually and unconsciously, and are, therefore, much harder to fake or to hide.

One thinks at least of the relationship between what is highlighted in the media, and what occurs in markets.

From J.T. Holley:

For what it's worth one of my favorite card tricks involving an accomplice is utilizing any of the four tens. You lay out ten cards making sure that one and only one of the ten cards is a ten. When they are set up you have it look exactly like the ten as such:

5H              2S

3D      JH      10C

6C      5H      KS

4D              7C

You simply ask the person involved in the trick to pick a card while your accomplice has his back turned. When your accomplice turns back around you start asking him "is this the card," "is this the card." He'll keep saying "no" until you give the hidden signal with the ten card (ten of clubs in the above example layout). You always must lead with placing your finger on the exact card that the person participating has chosen. The real magic though is when the person participating chooses the ten! Then your accomplice can guess it right out of the gate with the first guess. It never ceases to amaze me that very few people figure this out.

The Mistress might be playing the very same card trick as Vic mentions above. The Israeli market being the card the market points to first, then leads to let you know where the magic returns are going to be. Or could she have the ten chosen being the silver market whereas it is the one to be in first and right out of the gate?

Oh well, magic has it's own set of signals.

Easan Katir adds:

One hidden signal (perhaps hidden only to me) I've researched is stock option volume or increased implied volatility predicting a move in the underlying. An anecdotal example was GM in February. 30 February puts were extremely overvalued and stock proceeded to go straight down from 37 to 30.

Hany Saad writes:

This is very enlightening. One wonders why Vic thinks the Tel Aviv market is leading or helps predicting the American mkts. Now, for what it is worth, the best trader I know operates out of Haifa and we correspond daily. His very rare recommendations are money in the bank.

Kovner had a theory that the Russian markets were the same and his theory was that they open our mail.



 Mr J.G. reports that he has just found the website Cramer Watch, which tracks Cramer's myriad of picks and compares his performance against Leonard the Wonder Monkey (a random coin toss.) So far Leonard the Wonder Monkey is ahead!

Ongoing Stats:
Jim Cramer is right 49.30% of the time.
Jim Cramer's picks average a 0.12% ROI after 30 days.

Leonard the Wonder Monkey is right 50.13% of the time.
Leonard's picks average a 0.34% ROI after 30 days.

Inspired by this, Vic reports that after fifty years of trading we have finally bought a TV for the office in order to track the possible ephemeral effects that characters like Cramer may have on the markets.



I believe that there may be some universal constants in the way the markets return to certain levels. This idea was set in motion for me by the Taborrok work on the capture and return rates for felons, and I have included some stats that will provide a base for the returns of stocks. Since the beginning of 1999 to present day, stocks have set 206 20 day lows. The next day was up 123 times and down 83 times, and of those 123 times that failed to hit a new low twice in row, the time to return was as follows:

The return or capture rate is much faster for the 20 day highs, with an expected duration of return about 25% less than for the lows. There were 209 occasions when a 20 day low was not returned to again for at least 51 days, but only 56 days when a 20 day high was not requited in 50 days or less. Remember that these are the durations to the next 20 day low, which could actually be at a higher level than the previous 20 day low. Similarly the 20 day highs could be to a lower level than the previous 20 day high.

In subsequent installments I shall provide base line levels of return that can be compared to Taborrok's felons. You ask me, why study a striking numerical aspect of returns that has so much to do with the drift and properties of random numbers. The reason is that sometimes a beautiful understanding can come from pursuits of this nature, and the result can be a meal for a lifetime! 

There is beauty in the bellow of the blast,
There is grandeur in the growling of the gale,
There is eloquent outpouring,
When the lion is a-roaring,
And the tiger is a-lashing of his tail!
[Continued ]



 I thought some might be interested in the following title: "Speed Mathematics - Secret Skills for Quick Calculation," by Bill Handley (published by Wiley, interestingly enough). Although completely discovered by accident, this book may actually have changed my life, and has taught me a valuable lesson about perceptions in life and the markets. I'd like to share it, if I may.

Aside from the useful techniques in the book, the most valuable lesson learned is an indirect one: The most hopeless seeming situations may carry the gravitas they do largely because a specific problem owns a person, rather than the person owning their problem. This limitation may then be continually reinforced -usually by a combination of self and external influences (teachers, friends/family, culture, market etc). The key to victory over this persistent problem seems to lie in finding a solution that is non-standard for one's particular predicament. Sometimes you can search far and wide - and apply! - a standard solution with no joy. But that doesn't mean the answer isn't out there. Indeed, the biggest problem in one's life may be overcome by some very simple solution that is heretofore hidden/overlooked.

The techniques I discovered in this book are not new, but I have had twenty years of discouragement and resignation over some of my math skills. I believed I simply wasn't "quantitative." However, at any time I might have stumbled across this technique and many things may have been different. As persistent and pervasive as the problem was, so was the solution. Within 30 minutes of learning the new technique, the problem that had haunted me for so long was solved. Most important, the problem wasn't with an intellectual limitation I thought and believed I possessed. Rather, the problem was the techniques I was applying to overcome that "perceived" limitation. Within a day, I actually saw a new and exciting path for my life - all because of being shown a way of "owning" and changing my "limitation." My brain was the same, but my methods had changed.

I think some of the biggest limitations to overcoming problems are rooted in pride. It's a tough thing to seek help in a way that damages your self-perception (such as consulting a basic math book to overcome problems with basic computation). But what a small price to pay! How many of the problems that we face - the ones that threaten to overwhelm us - could be easily solved by a yet unconsidered solution or a person we've not yet met? What would be different in your life if the biggest limitation you had were removed? I can tell you from first-hand experience, it is a most exhilarating feeling.

Sometimes a problem may truly be beyond our powers to change. We're all frail, with diverse randomness/future-coping mechanisms. We must be vigilant of our true weaknesses, but we must be equally vigilant of those "false" weaknesses that we have accepted as part of the fabric of our reality. For all that, discoveries such as the one I made may give some hope that the tide may yet turn favorably. Some may just have lost hope in the possibility that a solution could be closer than they think - and may even be hidden by their own hubris.

There are numerous other insights that arise from this foundational idea, but those can be left to the meta.

Craig Mee adds:

Yesterday somebody mentioned to me about buying a birthday gift. They couldn't quite find the right object they had in their mind. This person commented, "I've just got to let this go, and get the idea right out of my mind or I'll never move on."

Maybe in markets at times this could be a good idea. Sometimes it seems that we spend too much time analyzing the outcome without spending enough time on the suitability of the initial conception.



 The book Denali chronicles the history of climbing Denali, tallest mountain in North America. Severe storms can set in with little warning and can trap climbers for days with winds of up to two hundred miles per hour or blow them right off the mountain. The deaths occur when unprepared climbers are caught near the peaks in a storm in temperatures down to 100 below zero with wind chill, and high altitude dehydration, and the accompanying errors in judgment that start to pile up. Small slips can lead to a fall and death.

A classic error is waiting too long when the opportunity presents itself. When near the top or the bottom when good weather presents itself, it is imperative to make progress immediately. Waiting, wasting good weather can result in getting caught later in a bad storm. By waiting, the odds of getting caught in storm increase. When caught, the climbers get stuck in a position where they can neither go up nor down. Bad situation.

In markets it is easy to let opportunity on high peaks slip by for one reason or another, be it bad judgment, bodysnatcheritis, fear, busy with something, lack of attention, a million reasons or faulty reasoning. Once the good weather slips by one is running behind. The odds of getting stuck in a bad place increase. Getting stuck, too late to enter, too late to reverse, can't go forward, can't go backwards. Stuck. Not a good situation, and all arising from the initial failure to take advantage of the good conditions.

From John Floyd: 

On a related note I remember a quote that Ed Viesturs once told me. "Getting to the top is optional, getting down is not." Ed has the ability not only to summit numerous peaks but to do so while treading the fine line of pushing limits while always remembering survival is the paramount goal.

Likewise, I have found in trading it is important to know when to push the limits of risk. In fact, without pushing the limits it will be impossible to earn high rates of return over time. On the other hand, those limits need to be put to the test in conjunction with a full focus on survival. If we lose our bankroll getting back into the game will be that much more difficult.

Alan Milhone writes:

 Aside from scaling the heights of mountains there are those who scale financial heights and lose their head when at the pinnacle.

I think about the tirade that ensued between Donald Trump and Rosie O'Donnell. Mr. Trump is at the top of his mountain (though he constantly looks for higher peaks to conquer in the financial world). However I feel he should not lower himself to trade barbs with Ms. O'Donnell and a man of his caliber should keep himself well above the fray. Did he verbally attack her for ratings? I am sure the 'haircut' bet with Vince McMahon was 100% over ratings and money.

As a billionaire I am sure Mr. Trump has a gigantic ego to feed. I like what the Chair says about being humble in what we say and do. I admire Mr. Trump for his successes and am sure he does a lot of behind the scenes donations for various charities. So when climbing the financial mountains one should maintain humility and civility in what is said and done; many are watching every move.



 I don't play golf. Occasionally I watch golf on TV, just to admire the landscape at Augusta or Pebble Beach, or to catch a dramatic last-round showdown. And I know the big names: Tiger, Ernie, Vijay, Phil. And even Retief. And the older guys such as Freddie and Davis and Ian. And, of course, Arnie and Jack.

But I'd never heard of Troy Matteson. He finished tied for 84th at the Masters this last week. He's ranked 83rd in the world right now, according to the PGA site. Take a random survey and ask people who Troy Matteson is. Take a survey of people who actually play golf and ask them who Troy Matteson is.

Who is Troy? He is a young man from Rockledge, FL, who went pro in 2003, at the tender age of 23. And Troy has made about $2.8 million playing golf since then.

Ever heard of Kenny Perry? He's # 113 in the world right now. Steve Stricker? He's # 41 in the world and tied for 77th at the Masters. Dudley Hart (# 224)? Eric Axley (# 232)? Chris Riley (# 369)? No? What about lowly Len Mattiace who is # 997 in the rankings?

Don't feel sorry for Len. Here are some stats:

Rank / Player /     Year Pro / Approx Lifetime Earn
# 41 Steve Stricker     1990   $11.1M
# 83 Troy Matteson     2003   $ 2.8M
#133 Kenny Perry       1982   $20.5M
#224 Dudley Hart       1990   $10.2M
#232 Eric Axley          1997    $ 1.5M
#369 Chris Riley         1996    $ 8.6M
#997 Len Mattiace      1990    $ 6.7M

You don't have to be the best. You don't have to be famous. Just being good, and being persistent, can really pay off in the long run. 

Steve Leslie writes: 

Disclaimer: I am not an attorney nor claim to know much about contracts or labor law. I leave this up to my friends who are. However I do know a bit about the various sports and I have known more than a few professional golfers who have played on the PGA tour.

Golfers are independent contractors and do not receive a salary nor guaranteed paydays. Therefore whatever they win in tournaments is theirs minus personal expenses such as travel, food and caddie fees which can be 7-10% of the check.

They are free to play in corporate events and other events get paid for public speaking and can be paid appearance fees in other tournaments around the world. The PGA does not allow money to be paid for appearances in domestic tournaments. In essence, they are their own entity and their own corporations, therefore the elite players own their own planes and helicopters and use them to travel to such events.

They also have to have a touring card that can be acquired in a variety of ways.

They can go to the qualifying school that is held once a year and has different stages of qualifying. The final q-school is a six-day tournament and the top 30 qualifiers and ties get a PGA card for the year. They can finish in the top money earnings from other tours such as the nationwide tour and foreign tours.

They keep their card if they win a tournament or have won past major tournaments or finish in the top 125 money earners from the previous year.

They can receive medical exemptions to play on the tour and there are sponsor exemptions that allow a player to play in a tournament with the sponsor's blessings. Michelle Wie has taken advantage of this allowance.

Certain events such as invitationals which include The Masters, gives the event organizer latitude to establish their own criteria as to whom and how many they may invite. The Masters has the smallest field of any of the 4 majors, currently 90. They have a tradition that anyone who has ever won the Masters is invited to return for life, however they actively discourage those who are no longer competitive from returning to play.

Other tournaments such as the U.S. Open and the British Open have separate qualifying pre-tournaments and criteria that players must meet. The most difficult aspect of the PGA tour is getting a card, then keeping it.

Of the 4 major sports, there are major differences in the contracts and in the collective bargaining agreements that coincide with the sports.

Baseball has guaranteed contracts and a soft salary cap. There is a luxury tax imposed on the teams who spend over the cap. In a year, there will be approximately 750 players in "The Show" at any one time. The minimum salary is $380,000 and the average salary is $2.6 million. Alex Rodriguez has a 10-year $252 Million dollar contract. I read that his agent Scott Boras wanted to include in the contract that he would always have to be the highest paid shortstop in the game. The problem with that language would have been if Derek Jeter had that same clause in his contract then the contracts would escalate to infinity. They also can go to arbitration for disputes.

Football has signing bonuses that are guaranteed. But except for quarterbacks there aren't guaranteed contracts. Peyton Manning and Donovan McNabb have $100 Million guaranteed contracts. Thus an injury can eliminate the earnings potential of a player permanently. There also is a hard salary cap. I remember a statistic that the average lifespan of a running back in the NFL is less than 2 years. Thus Emmett Smith and Ladanian Thomlinson are dramatic exceptions to the rule. Ricky Williams is currently being sued by the Miami Dolphins for his signing bonus because he retired from the game and they want a pro-rata share of the signing money back. Approximately 1500 players are on rosters for a football season. The minimum salary is $260,000.

Basketball has guaranteed contracts and only 360 players. They have maximum salary contracts at $400,000 for rookies and a sliding scale for years of service. Shaquille O'Neal makes well in excess of $25 million per year. Other huge contracts are Kevin Garnett and Kobe Bryant's.

Hockey has suffered the most, especially after the 2004-2005 lockout year. They essentially caved in and gave the owners tremendous leeway. The minimum salaries are $450,000 and the maximum is $7.8 Million. Because the revenue of hockey is far less than that of the other sports their salary cap is the lowest of the major sports. They also have 750 players in the league at any one time.

Ken Smith writes:

The observations on a sport where being in the sport is enough in itself to guarantee superior money returns, without any necessity to be a top performer, is an important story.

Golf is characterized by players who travel to events around the globe to compete for prizes. And just to be part of an elite group of golfers is enough to guarantee winnings that put the golfer in an earnings class way above the average American.

Professional golfers are doing what they enjoy most, playing with a stick and a little ball, getting their exercise on lavish green turfs maintained by establishments at no cost to themselves. Sports in general are like that. Players at the bottom of the status list bring home earnings superior to the average worker or professional in America or Europe.

Alston summed his view by writing:

"You don't have to be the best. You don't have to be famous. Just being good, and being persistent, can really pay off in the long run."

That observation should be encouraging to traders who are not pulling down headline bonuses and profits. Making a living is enough, in the final picture, if passion for this game is your raison d'etre.

Victor Niederhoffer notes: 

I started out with about 10,000 under management.



 The worst mistake in business is to get in over your head. Don't ever let yourself do it. The market will always be around. Do keep a lab notebook and hand records of all your trades. Try to do as much of your research by hand whenever you can, as it lets you see more things.

Always enumerate your entire computer output by trade so you'll see how it's doing over time and bunches. Try not to listen to smart people on a macro basis, as their views can be marginal and some are smarter than others. Only trade active markets.

Also, don't be afraid to give up on markets. Find a niche where you have an edge and do concentrate on it. I started out with about 10,000 under management. If you can make a little above average, you'll have all the business in the world.

Bill Rafter adds: 

The Chair is absolutely correct about keeping notes. And there is nothing as good as a lab notebook. But everything has the disadvantages of its advantages. I have found in both research and trading that the handwritten lab notebook is essential for thinking through ideas and theoretical problems. But it falls short in terms of practical research because your notes will essentially be anecdotal.

We have found that when researching a particular idea we get excited and may sometimes make manual research "runs" several times a minute. That's too fast to keep adequate handwritten notes. Additionally we may set up research to run thousands of variations overnight in an attempt to find the statistical "truth" of something. In such a case you must have a way of saving each result and sorting and comparing the whole lot. Anecdotal notation is not enough.

The same is true with trading. Every time you make a trade have the results saved according to the type of trade it was. The types are specific to you. Someone else might characterize them differently. The more information the better.

For both research and trading it's best if you create software to save your results. Have the results of each research run or trade stored in a text file, and then have the ability to plop the results of all such research and trades in an excel file for comparison. You may not be the smartest "natural" researcher or trader, but your documentation and filing system will enable you to avoid future mistakes.

Most people fail at the business of trading. Most people trade "anecdotally." My guess is that the Venn diagrams of these shows considerable overlap. As the demigod said, it's perspiration, not inspiration.

Hany Saad comments:

What is getting in over your head? Is leverage getting in over one's head? Is over leveraging? What is overleverage? should one be only trading on a 1 to 1 … 1 to 3, or use the maximum leverage possible? Should one diversify? if you are trading the stockmarket, is anything above 15 positions really necessary? Is anything above that even easily trackable by a manager?

It is unfortunate that the first advise seasoned managers offer you is to diversify. I believe this is the mistake managers make the most. They over-diversify and they lose track of the raison d'etre of their positions in the first place. Do not over-diversify.

On a side note, I am guilty of not following Vic's advise about hand studies. I only started after reading this post by simply putting down prices on graph paper, and let me tell you that the feeling you get out of the process is incredible. Things you would very easily miss by using the computer become clear to you. The only problem is that the process can be very time consuming, but not without its benefits. 

Alex Castaldo offers:

What is getting in over your head?

Really you don't know? We have some experts on this right here on the Spec-List. Or is it a rhetorical question?

What is over-leverage?

Ed Seykota has a good explanation on his web site. (I don't like Ed Seykota, BTW, too arrogant.) For a given expectation, as you increase leverage at some point the rate of return decreases. A hump shaped curve.

Should one diversify?

Let's not waste time on this; Markowitz already got the Nobel Prize for answering it.

If you are trading the stock market, is anything above 15 positions really necessary?

Do you think that Jim Simon or David Shaw have portfolios of fewer than 15 stocks?

Is anything above [15 stocks] even easily tractable by the manager?

With a computer you can keep track of 1500 stocks practically as easily as 15.

I believe this is the mistake managers do the most. They over-diversify.

Think of it from the Markowitz point of view. You have a quadratic program in terms of means, variances, and covariances, plus you add a constraint "no more than 15 stocks." Solve the QP. Now remove the constraint of only 15 stocks and solve the QP again. What happens to the rate of return? In all but pathological cases it increases (and it never decreases) by removing that constraint.

Think of it also from the Statarb point of view. You have an algorithm that successfully predicts stock excess returns. As long as the excess returns are greater than the transaction cost, you might as well include as many stocks as possible in the portfolio. By limiting the portfolio to 15 stocks you are leaving money on the table.

From Sushil Kedia:

The picture captioned Guru has some inspiring stories to tell. This particular snapshot shows Abhishek Bacchan - the current contender for the superstar slot in Bollywood. In this recent blockbuster titled Guru he is playing the role of Gurukant Desai - a pseudonym for Dhirubhai H Ambani - the biggest tycoon ever in Indian business.

The sea of umbrellas in the backdrop is a touching sense of cinematography and attempts to capture that historic moment when nearly two decades ago for the first time in India a Public Limited Company held its Annual General Meeting in a sports stadium for the first time. Mr. Ambani is credited to be the father of the raging equity cult in this nation. The lashing rains, it is said, did not dissuade a near histrionic crowd from dispersing. This picture thus has a story of a man, who was barely literate but had all the speculative and risk taking genetics to inspire milling crowds to supply capital.

Mr. Ambani was a rank outsider in the industrial club of post-independence India. The son of a village schoolteacher who resigned from secure employment to create the largest ever-industrial enterprise in India. The Reliance group of companies that he went onto create have had grown within twenty years of coming to life to be the largest market capitalization companies in their respective sectors, largest sales, largest profits, largest number of shareholders, largest everything.

The movie is a reasonably close depiction of many of his facets (and three hours can't be enough to justly portray the racing pace of two decades of growth). An ace natural speculator, his enterprises have continued to expand in ways very typical of a trader who pyramids correctly and manages risk. This movie depicts inspiringly enough for any trader how a rank outsider without any crutches of a business lineage or modern education applies commonsense, correct usage of the envelope and pencil device (hand-studies), intelligence and sheer diligence to beat the system at its own tracks.

Lores suggest that when Dhirubhai was working as a clerk for a commodity trader on the port of Aden at the age of sixteen, suddenly the town started discovering the trading prowess of the lad with acumen. A particular denomination of coins vanished gradually first and completely later out of circulation. The value of the silver content had gone higher than the nominal value of the coins. It is believed his first large wad of capital originated from this arbitrage. [Not shown in the movie though]

A ticklishly touching sequence from the movie shows that when the Futures exchange in Mumbai was shut down by the orders signed by a bureaucrat that described speculation as unproductive gambling, Guru / Dhirubhai hires a truck and dumps long and fat rolls of polyester yarn in the living room of this bureaucrat. The officer scared of a possible tarnishing of his reputation that others may think all this yarn is lying in his house asks him to remove it immediately. Dhirubhai walks off saying the only two ways the officer can dispose off the yarn is by either dumping it all in the sea or re-opening the exchange where it is possible to buy and sell. Perplexed for several days, the officer tracks Dhirubhai down over and orders the re-opening of the exchange turning the David a darling of the Goliaths.

If anyone is interested in figuring out how modern India's business structures operate, what is the "inside picture", what is to be not done and what must be done this is a must watch movie. For those purely interested in trading philosophies the ingenuity of the hero of this saga has continuous positive surprises. For a rise as meteoric as this in such short time, what is remarkable is that for all his aggression he clearly believed and lived inside out that, "the worst mistake in business is to get in over your head." He is more Aggressive and more humble than the competition and in equal measure.

Of the hundreds of popular Ambanisms one would in the present context mention these few:

"No one was ever issued an invitation to profits."

"If I have to salute a peon in someone's office to get past my objectives, it is part of my work to do so."

"Calamity is the origin of other opportunities."

"Think big, think fast, think ahead. Ideas are no one's monopoly."

Vic replies:

One of the greatest mysteries to me is how trading firms like the ones mentioned can garner over sized returns with short term activities, considering the massive bid asked spreads and exposure to the principles of ever changing cycles. Smart people I have known, like my first partner who was a champion bridge player as well as number one in M.A.A. comp., have never understand that whatever looks like it works is doomed to failure. Despite this, to his credit he was a buy and hold man with a reasonably positive view of the resilience of enterprise, and was thus able to participate in the drift of the 10,000 fold return per century.

On the other hand the firms mentioned are riddled by those who hate enterprise and would seem to favor things like long/short, making their inability to overcome the bid asked spread even more incredibly likely to me. But as they say, when I pose similar lacnunae against the sport-term owner, he is the one who owns the big teams and I am still a very small operator. I am a poster boy for how volatility and chronic bullishness can lead to disaster, as well as the butt of the mojo of the expert derivatives man who is so ready and able to take all my meager chips on the all too frequent black swan events.



 A lamentable aspect of the American criminal justice system is that a fourth of all the felons scheduled for trial fail to show up at the appointed date. One year subsequent to the first failure to appear, 30% of these felons have still not been located. Various incentive systems have been developed to get the felons to appear, the most common being a private system of bail bonds, along with bounty hunters who bring back those who fail to show. There is also a competing public bail system called "deposit bond," and another set, based on judges' decisions, where the felons are released on their own recognizance.

Eric Helland and Alexandar Tabarrok in "The Fugitive Evidence on Public Versus Private Law Enforcement" have compared the effectiveness of the various systems.

"When a defendant does skip, bond dealers hire bounty hunters to return the defendants to custody. We compare the effectiveness of the systems by examining failure to appear rates, fugitive rates, and capture rates, and conclude that the private system of bonds dealers and bounty hunters works best.

After Dr. Tabarrok's presenation at the Junta last night, and inspired by an effervescent crowd of optimists in the audience celebrating yet another new high in stocks, as well as the good fortunes of the predictions of imminent decline in the American Economic System by the attendant adventure travelist, I could not help but try to derive some insights into the state of the world and markets by the mechanisms that the market mistress has derived, to maintain failure to appear rates, fugitive rates, and capture rates in her bailiwick.

Many of us have been introduced to bounty hunters by the television series about Dog. His most famous capture was of Andrew Lasker, who was convicted of raping about 100 women while on drugs, and tried to escape bail in Mexico only to be captured by Dog. Dog, however, was then arrested for violating the very sacred capture and escape laws of Mexico.

As of April 2007, Mr. Chapman is still fighting extradition back to Mexico to face their "vigilant " attempts at justice. Mr. Dog Chapman should have known that it is very dangerous to interfere with the monopoly that those in law enforcement wish to maintain on their activities. Dog should also have known of their unhappiness when something is done to show the utter ineffectiveness of it.

I have often felt that my attempts to show the abuses and weak links of the market system, that takes such great pleasure in the escape of markets from new highs, would be subject to similar recrimination and retaliation. After all, unless there were a system to bemoan every failure to return to a new high every day, with the tension and abuse of those who guaranteed the return, then the public would not have that tendency to lose so much more than they have, by having the risk premium on equities taken away from them and being induced to sell to the big brokers at the wrong time.

Every new high in the market is accompanied by a system of bondsmen who insure that the market will return to these levels. If the bondsmen provide a high level of security that the market will return, I claim that the chances of a return are much higher than if the bondsmen are not involved. The recent high in the market on April 6, where the S&P is at 1459, but bondsmen are only ready to provide a 110 1/2 level of security in conjunction with the rise, (a two month low) seems to me a much less certain indicator of return than the usual where the new highs are made with much higher levels of bonds. Furthermore, most market participants are going to have to divert their attention in the next week with a form of payment to the service which often distracts them from meeting their obligations to return.

It has always amazed me how whenever the market doesn't set a new high every day, nay every hour, a host of nattering nabobs of negativism comes out of the woods to decry the woes of the economy and the market. One faced this for six years, as one nay-sayer after another talked about the bear market we were in since the S&P hit 1500 in Sep 00. We've not gone 6 1/2 years without the market returning.

It is common practice to look at statistics on the percentage of felons who return within a year under the various systems and the conditional probabilities that they will return given that they failed to return within a year. A comparable set of survival statistics should be made for random walks and compared to the actual figures that occur when the market sets a new high.

The question of what the expectations and hazard rates of the market are when there has been a failure to return to a new high for various months has to be considered. Also, whether there is a change in the distribution without a return after a year has passed. And what the concomitants of a market high are at a given time, that would determine the relative livelihoods and distributions of return once a high has been set.

In considering these statistical exercises, I will be trying to find an explanation for our inordinate tendency to focus on failures to return. Is it hard-wired in the human condition to return to home? And does the unholy media emphasis (with almost palpable ecstasy) on failures of markets to return represent pure schadenfreude, or a much deeper hard-wired tendency within us all?

James Lackey writes:

How about a return too quickly? "Too far too fast" has a googol of market references on Google. The bulls did not receive enough prison or torture? The rally back was too fast? Like the old guru the old generals call it a disgrace.

Jack Jacobs
military analyst,

"The capture, internment and repatriation of the British sailors and marines can only be described as a shoddy spectacle. From start to finish, the Brits heaped nothing but ignominy on themselves, and one can recall few instances in recent memory in which a group of uniformed service members acted with less professionalism and more dishonor."

"Many of us know brave American troops, prisoners of former wars, who endured years of captive isolation without disclosing any information, even under torture. And England has its own Greatest Generation, troops who fought a determined and superior enemy while vowing never to surrender. As Churchill observed, that was England's finest hour. This isn't."

There is fury as the hostages sell stories.

"The 15 British military captives who were released by the Iranians have been authorised by the Ministry of Defence (MoD) to sell their stories.

MoD officials claimed that the move to lift the ban on military personnel selling their stories while in service was justified because of the exceptional circumstances of the case. The hostages are expected to earn as much as GBP250,000 between them.

Flight Lieutenant John Nichol, the RAF navigator tortured by the Iraqis after being taken prisoner in the first Gulf war, was told by the MoD not to talk to anyone about his experience but was allowed to write a censored book a year later while still in the service."

If they can get this story out in a controlled manner I have no problem with that, he said. No one complains if a general writes his memoirs. But there is a snobbery about a junior rank telling their story.

One of the hostages, Dean Harris, 30, an acting sergeant in the Royal Marines, told a Sunday Times reporter yesterday: I want GBP70,000. That is based on what the others have told me they have been offered. I know Faye has been offered a heck more than that. I am worth it because I was one of only two who didn't crack.



 How To Get Rich is a fun book to read. Unlike the usual book and seminar hucksters, Felix Dennis really is rich (est. 585 mil pounds). Dennis has a very clear and friendly writing style. It feels like he is talking to you when you read the book. He tells a number of good stories about how he made different piles of money, including how he bought The Week in 1973 when he was totally broke and hacking a Bruce Lee biography to pay the bills. This was just at the moment Lee died suspiciously, which jump-started all sorts of money making opportunities. There is wisdom here in Dennis' tales of success and failure; practical comments on negotiation, delegation, hiring, raising capital, poetry, and also dire warnings.

"Now comes the hard part. Before we really get started on getting started, I ask you to consider carefully the short list below. It is by no means comprehensive, nor will it be the last list in this book, but should you find yourself unable to measure up to even one of these initial demands (and I mean just one), then my suggestion is that you close this book and give it to a friend, or an enemy

- depending on the degree to which you enjoy ironical gestures.

- If you are unwilling to fail, sometimes publicly, and even catastrophically, you stand very little chance of ever getting rich.

- If you care what the neighbors think, you will never get rich.

- If you cannot bear the thought of causing worry to your family, spouse, or lover while you plough a lonely, dangerous road rather than taking the safe option of a regular job, you will never get rich.

- If you have artistic inclinations and fear that the search for wealth will coarsen such talents or degrade them, you will never get rich. (Because your fear, in this instance, is well justified.)

- If you are not prepared to work longer hours than almost anyone you know, despite the jibes of colleagues and friends, you are unlikely to get rich.

- If you cannot convince yourself that you are 'good enough' to be rich, you will never get rich.

- If you cannot treat your quest to get rich as a game, you will never be rich.

- If you cannot face up to your fear of failure, you will never be rich."

Concluding his tale of acquiring The Week and slowly making it work, Dennis says,

"Trust your instincts. Do not be a slave to them, but when your instincts are screaming, Go! Go! Go! Then it's time for you to decide whether you really want to be rich or not. You cannot do this in a deliberate, considered manner. You can't get rich by painting by numbers. You can only do it by becoming a predator, by waiting patiently, by remaining alert and constantly sniffing the air and by bringing massive, murderous force to bear upon your prey when you pounce."



 I was re-reading Learned Optimism (Seligman) while with my 11-year-old at baseball practice. One point that jumped out at me was the why organizations keep the pessimists around. If optimists outperform in almost all areas, why hasn't evolution taken pessimists out?

"Lauren Alloy and Lyn Abramson, then graduate students at University of Penn did an experiment in which people were given differing degrees of control over the lighting of a light. Some were able to control the light perfectly. The other people, however, had no control over it at all.

"The people in both groups were asked to judge, as accurately as they could, how much control they had. Depressed people were very accurate, both when they had control and when they didn't. The non-depressed people shocked us. They were accurate when they had control, but when helpless they were undeterred: they still judged they had a great deal of control (p 108). Alloy and Abramson added monetary incentives to the test. But the benign distortions of non depressed people did not go away, rather they got even bigger (p 109)."

Let's examine why a trader would or wouldn't want a pessimist around. For arguments sake, let's say with the usual after the factness in market calls the pessimist were accurate. Of course no man has a monopoly on correct calls. The human nature of forecasting is we usually remember the last place we parked our car. For trading, a man can make the usual tens or hundreds of anecdotal pessimistic points. Yet the magnitude of the event, usually a decline called by the bears, is remembered. There are hundreds that called the decline of 1987, yet no one mentions what they made in the 20 years since.

The always-optimistic don't want the bears growling in their ears on the decline and every rally back. Perhaps it's human nature to believe prices the longer the exist. I can go on and on, from 10-year bond yields that "must go up" from 2002-2006, to now "a recession is imminent."

After a decline in stocks, the optimist and the bull trader do not want to lose their confidence. If prices stay down long enough, they might start to believe the bears' banter. His position goes from profiting to not losing. Perhaps the joke is pessimists already have this market stance. Therefore they are grateful to the bears' warnings of a market decline.

One must be very careful not to be hung out to dry. The realist has a system, ignores the lunatic fringe, scales in and out adjusting for current movement. These traders are reliable profiteers, never taking huge losses, yet never having a big score.

A bear that goes long, buys too late and sells too early. A bull on the short side is almost comical. "Why bother?" is the perfect quote. The poor bastards that trade news and price, buy strength and sell weakness, are almost guaranteed losses. The market eco-system's banter is set up to be more bullish after rises and bearish after declines. It's rare, once a year when the market falls or rises so much that everyone agrees it will reverse for a trade.

The lunatic fringe is always bullish or always bearish. A good question for a short-term trader is, is it better to be a lunatic or a realist? Any system is better than no system at all. I commented years ago in the bucket shops there were guys in year 2000 that went long only in tech stocks and made a fortune.

I've been hung out to dry twisting in the wind so many times. It seems it's much better to always be optimistic and bullish. For a trader it's comical how many great trading days end near unchanged. The joke is always, it's bullish for today, we will drop 10 points and close up one on the day. It is sad when you are a realist and buy small in case the market does not rally back.

None of this is to say the pessimists can't profit off the annual big declines. This is not to say that you can't keep a good pessimist around. Perhaps when a pessimist is bullish a big run to the upside can occur.

There seems to be a few kinds of traders. One that thinks everything is BS and takes a mechanical approach to stocks. Pessimists talk far more than they trade and go against a rise that any study of market history shows it happens more often than not. Yet they are accurate and so-called disciplined enough to wait for a decline and hope to sell down prices so low everyone thinks they are oversold. Then the optimist, up markets expected, down moves are great buying opportunities, everything is great. Finally the suckers that are always caught twisting in the wind.

Maybe it's the optimist that turns pessimistic who is the sucker. I sure know one when I do not trade aggressively. If a pessimist isn't saving you money from losses it's a double whammy. For certain trading not to lose, it costs profits.

After re-reading Learned Optimism I can see why an optimist can't stand to have the pessimists around.



Are traders the only people who can learn to totally control their emotions? Is sport something that we will always emote to due to things seemingly out of out control, even considering the most disciplined among us still make frequent errors? For example: consider Tiger Woods after poor shot selection on the 17th hole at the Masters.

"Honestly what the hell just happened" - I'm sure many of us say this daily, but the number one golfer in the world?



 We've all had the experience of taking an eye off the screen for a second, perhaps to answer a question or phone call, and finding the price wildly different from where it was a moment ago, almost invariably at our expense. Certainly, one would speculate the moves in a minute are much more variable than you would anticipate if prices were just random and you related the minute moves to a second. Similarly, for an hour relative to a minute, a day related to an hour, and week relative to a day. This is especially the case on Friday's hitting an extreme.

Such thinking is the basis for many statistical tests starting with one developed by working, some 80 years ago, and now encapsulated in closed form with various variance ratio tests, and related tests based on bootstrapping and simulation with actual prices. And yet, random numbers can do funny things. For every minute where there's a full 4-point swing in the S&P for example, there are hours where the price backs and fills with the two hour chances being much less variable than the one hour or one minute swings might suggest.

The subject calls out for some statistical thinking. And I thought I would approach it the way a kid might. My hope was that I might draw some insights that the normal statistical methods of considering this subject would not immediately elicit.

Lets start with ticks. If one tick can be up 0.25 or down 0.25, then after one tick the maximum change is 0.25. After 8 such changes the maximum change is 200 either way. If we looked at the range of 8 tick changes, we would find it varied from 2 to -2 with most bunched at 0, in a likeness to a binomial distribution with the distribution of number up and down given by the binomial coefficients.

If there are 2000 changes in a day, we might expect the variability using squares of 2000 changes to be 2000 times as great as for a one tick move. And if we compare the variability of two days using squares, we would expect it to be twice as great as the variability of one day. However, variability is computed in linear rather than square terms so we expect the two-day change when brought down to linearity to be 1.4 times as great as a one-day change.

A good way to estimate the variability of a distribution is with the formula the standard deviation = the range divided by the square root of the number of observations. This works because the range of a standard normal deviate can be approximated by the square root of the number of observations in a sample. Thus, the largest expected value for two draws from a standard normal is 0.7, the expected value for the range is 1.4 and the largest expected value for 4 draws of a standardized normal deviate is 1, the expected range is 2, and for 9 draws it's 1.5 and 3. The last 9 daily changes in the S&P, starting with the close of 3.23 were -2, - 05, -11, 02, 0, 2, 14, 1, and 4. The range is 19. We divide by 3 to compute an estimated daily standard deviation of daily changes of 6.33.

The last four non-overlapping 2-day changes in S&P starting with the close on 3/23 were respectively -7, -09, +2, and +15. The range is 24. And we would estimate the 2-day standard deviation as 24/2 = 12. The two-day standard deviation is a little less than 2 times the one-day standard deviation.

A good way to see if there is an inordinate tendency to momentum in prices is to compute running totals of the 1-day, 2-day, 3-day, 4-day, and 5-day ranges. If the 4-day range isn't twice as great as the 1-day range, or the 5-day range isn't as big as 2.2 times the 1-day, or the 5-day is not as big as 1.5 times as great as the 2-day range, et al, (square root of 5/square root of 2) then there's a tendency to reversal.

What other uses do you see for the running ranges?

P.S. A good estimate of the shortcut formula for standard deviations vis-à-vis ranges is on p.27 of the highly recommended book Statistical Rules of Thumb by Gerald van Belle. Also, study of the distribution of the expected value of the range led me to the very interesting paper Statistical Selection of the Best System, by David Goldsman, et al. It contains some very nice sequential methods for determining whether one system is better than another or one estimate of a mean, or one estimate of the largest observations to expect and is highly worth working through with a pencil and paper.



 Last weekend I did the Richard Petty Driving Experience in Forth Worth After a tiny bit of training, eight laps around Texas Motor Speedway.

I am glad that I did it, but I would not do it again. It's very inefficient. Basically, for 20 minutes of action (including suiting up, getting latched in, learning and then forgetting all the things to do if the car catches on fire), you wait around for 3.5 hours or more. It is such a popular product that they just herd people into every class and make you wait, rather than trying to make it more efficient.

In the markets, people often use the wrong tools for the job, often due to habit and the lack of acceptance of new ideas. In the consulting industry, this is common. Consultants operate the same way that they did 20 years ago. Now, they won't say that. Every two years they invent a new ratio that they apply to past performance and claim that it is an important breakthrough. Nevertheless, in my time, I was the only consultant who actually used factor analysis and systematic statistical techniques to separate beta from alpha. I think this is because I started on the hedge fund side, so when I moved to consulting I looked at the tools and thought "these aren't the best tools for the job."

Anyway, the simple fact is that the steering wheel is the wrong tool for the job. This might sound strange, but bear with me: Normally in a car you might hold the wheel at 10:00 and 2:00. We were told to hold at 11:00 and 5:00. Why? Because the car only turns left, and by holding at 11:00 and 5:00 you never have to roll your hands over. My first thought was, "Rather than using a new tool, they changed the way they use the old tool!"

I found that driving is actually quite physical. I had always dismissed it when the NASCAR announcers said so, but I was wrong. It's quite tiring to constantly pull the wheel hard to the left, particularly as the G-forces rise (my top speed was ~140 mph). You have your arms extended about half way in front of you as you are yanking on the wheel.

Thinking about it later, the wheel is simply the wrong tool for the job. Old bombers use a wheel because they don't engage in physically exerting maneuvers, yet a fighter plan will use a stick. Think of passengers' cars as bombers, and stock cars as fighters. For the physically exerting maneuvers, it would be much less taxing to have a flight stick lower and in front of you than a wheel up high. If you had a flight stick, it would be much less tiring, and would free up a lot of attention and dashboard space for mirrors and understanding your surroundings.

From James Lackey: 

The Petty Driving Experience is only a quick ride. The anticipation is half of the fun. The smell of racing gas and burnt rubber, the roar of the engines, the butterflies before taking the wheel is all the fun. Run any 50-lap racecar driving school. Two each ten lap warm-ups then a 30-lap draft run. On lap 27, the heat, the stress had me say "get me out of this thing."

The physical strength it takes to turn the wheel of a car or slam on the brakes is all in the mechanical systems. A stick on an airplane is a full computer controlled hydraulic system. In your passenger car, with traction control, computer assist and anti lock brakes coupled with hydraulic assist power steering and brakes makes for an effortless drive. Rules and restrictions in racing keep the tech low. The reason often stated is to keep the costs down. Yet the real reason is to keep the drivers input relevant. New technologies make some forms of racing basically a remote controlled car, with a human along for the ride. The reason a racecar is hard to steer is so you can feel if the tires start to lose traction, to correct before a crash.

In the glory days of racecars, the 1960s, technology had not yet made drivers irrelevant. It was easier to make more horsepower than the traction of the tires and the track could hold. A driver needed the ability to control the engines power to control the car. Nowadays everything is restricted by either rules or computers. The worst is the bureaucracy of racecar sanction rule makers. A good result may be achieved by restricting engine size alone. Let all things in the car be unlimited, besides cubic inches.

Trading has seen the same technological advances that make individual traders as relevant as racecar drivers today. We all have a friend that scales in and out of the market using size, time, average range and price. When you point out that they could just as easy program a computer to do the job, they point out that every year is different; the markets constantly change. They can do a better job on the fly then a pre-programmed box.

Market rules seem to restrict technology. Years ago we had limit down rules. The old excuse was in 1987 computer program trades crashed the system. Funny thing since we removed the tight limit down rules, smart traders can't save the market from stupid computers and limit down opens. It's remarkable how much profit I have lost as a trader since that rule change.

Boy, was I happy after the fact on that down 500-point day a few weeks ago. No, not at all happy for the 5th day down being a 500 pointer, I was pleased to see that computers were blamed for the malfunction. We need humans in the markets. My kids need me in the market with the ability to profit. That is a much more honest answer than that the NYSE needs the specialist system to remain intact for public benefit.

When I was a little kid in the late 70s it not only took a fortune to make a drag race car run 8 flat in the quarter; it took knowledge. Money alone could not buy a fast car. The knowledge was not readily available. A few years ago I built a car for less than half of what it would cost 20 years earlier. The first day out the car ran with in 8% of perfect. On paper the car should have run 7.97 seconds at sea level. With in a couple weeks we had the car run 98% of perfect.

Yet in my class, super comp, I would guess that some 3,000 cars in the country run 99.9% perfect and any given race. A few cars have a perfect run down to the 10,000th of a second. Most of that ability to run the 99% of paper perfection is new technology. Yet that last one percent is knowledge. Let's put it this way, you can run your car with in one percent of potential and count on a loss the first round of competition.

In the markets we do not have to compete. We can in theory just buy the market and match the return. Lets call that trading not to lose. At races when conditions are good, to win you need to be with in 0.006% to win. The other day some one mentioned it was a stop run at 1424. A two-point drop on that stop run translates into only a bit over a tenth of a percent. That is tight competition.

A real stop run was last Feb when we broke down 2% on the day; the market dropped 20 more handles in an hour. After many sessions of not having a down one percent day, many were set for tight trading. In racing that would be a nice sunny summer day of practice, then rain and a 50-degree change in the temperature. The best racers have the ability to change set ups quickly.

After heavy weather, the cool air and low humidity, racecars or trading accounts, make much more power. After a big fall in the markets, the intra day moves can be wild. After the big cold front came through in Feb, if you revved your account to 5,500 rpms, dumped the clutch at the open you blew the tires right off your account.

Perhaps it is not the tools for the job, just the calibration. After the huge down it took weeks for risk mangers and funds to adjust. Two days after the fall traders adjusted and were making more than the weeks prior on half the size. If the markets can drop 50 again, they will move 20 points on any given day. It's much easier to make 8 points on a 20 point day than to make the entire 8 point range months prior, unless your investing.

Once conditions become stable at whatever temperature and pressure it becomes much harder to win. In low temperatures engines make more power. Once the car is set up to run at the increased power speeds will increase. It's the same with the markets and absolute daily returns. The problem is taking it easy until the weather and the markets become stable. You can easily crash your account. Yet once conditions are stable, everyone has adjusted, the new problem is being very aggressive with your set up.

If you are too conservative when the conditions are great a rookie will blow you away. That is to say a rookie with a good computer. It's remarkable how quickly the markets adapt vs. just five years ago.



 Errors are rewarded in strange fashions, ways which are abnormal and thus unperceived by individuals with normal perceptions; meaning a right-minded person does not expect strange types of reinforcements to be in the mix of rewards.

One instance of strange reward I know of is referred to in some circles as a drive for self-destruction. Normal individuals perceiving an individual persisting in error that is harmful will not catch on that the error is accomplishing a reward, that reward being harm, and harm not generally acknowledged as a reward.

The hawkers of doom who get paid for their opinion to be persistently gloomy are being rewarded by an audience who appreciate the darkness. These readers return again and again to renew subscriptions with enthusiasm and this rewards the hawkers. In brief, doom hawkers speak to an audience of believers.

Stefan Jovanovich writes: 

Marshall McLuhan's theory was that the advertisements in the newspaper were the "good" news; the "doom" was the necessary bad news that allowed the ads to stand out. I suspect that, if McLuhan were alive today, he would stand by his theory but point to Google instead. The news is usually gloomy but the paid search ads promise wealth, happiness and good looks all for the low, low price of $xx.99. McLuhan would probably also suggest that the relative decline of newspapers' ad revenues compared to their Internet competitors was an indication of the fact that "good" news these days was more about price and less about image -just as it had been in newspapers' heyday (1870-1925).

Victor Niederhoffer adds: 

A correspondent from Canada writes to me that the move today in oil up and down in the five minutes after the Ahmadinejad awarding of the medal, lead him to query ways of generally profiting from such false and ephemeral signals.

I immediately thought of the many times that it looked like a vivid event that had been associated with the tremendous market decline might be occurring again, and the many opportunities that provided. Indeed, I have a confession. During the summer there was a time that I was short a line of stocks. And a former Yankee pitcher played too near an apartment building. The rest of the story is too sad to tell. However, all parents should play "a boy stood near a railroad track" for their kids.

But this method must be generalized. It only happens about five times a year, and the 50 or so points you'll make from it each year must be counterbalanced against the expert sage Mohammed's view that big risks are not properly priced so that the one time you lose, let's say in 10 years, it will be more than 500 points.

Here's one attempt. I wonder if there is a very big list out there in cyberspace of people who like to read about scandals and failings among liberals, and negativity. Much of the economic news on such a list I would presume is planted. I would assume that the source might not be an overly reliable in informant or forecaster for various reasons. These include the lack of evidence of forecasting ability of the planters, their temptation to feather their own nest (except for their high moral turpitude and altruism and the checks and balances that the receivers and transmitters of such info must have), the anonymity of the source, and their insulation from the consequences of good or bad calls.

I would speculate that such economic news would tend to lead to ephemeral moves that are copperful to the caned when directed south. Such would happen, I would speculate, much more often than 10 times a year.

However, one seeks to generalize on this subject. We all know such people. Why can some people be wrong so often and yet maintain a following? We all know such people, the financial weekly news columnist for example is one icon in this regard. The economist who is always bearish in public but even more bearish in his private briefings is another. The technician who always sells the lows and buys the highs is another. The person who writes a book that's very persuasive and then starts a fund and loses hundreds for his clients but then rises up again and again like the Phoenix in another context. A consultant is another (doubtless many of my enemies will use this opportunity to say this about me). The self-indulgent authoritarian chief executive with a terrible management philosophy who hangs on and on is another.

Still another is the old eminence Arcadian who hasn't changed his views about anything and wants to do things the same way as the past and who eschews modernity like Chair Volcker (who, when I saw him in 2004, told me he sees no need for modern things like tape recorders).

I have written on Delphic forecasts. A condition for these people to hang on is often the couching of their statements in fuzzy irrefutable terms. That would apply to most of the ones I know.

But also, the ability to retaliate with force when their views are found to be falsified. This would apply to the Jonestown type error person as well as to the adviser who will sue you if you say anything about their record.

I would add that in the cases where the errorful have good motives their inabilities seem to be inordinately associated with a lack of education. They tend to be unaware of current scholarly work in their field, but hide behind a veneer of pseudo scientific talk as described by Marin Gardner and exemplified by Velikofsky, et al.

I'd be interested in augmentations, even example of why errors persist so that we can try to reduce the hard and persistence of same.

Jim Sogi adds: 

It is gratifying to disparage our opponents, however, even as we dismiss the turtles or news oriented lists, breakouts/breakdowns which have not worked for years seem to be occurring more and more as ranges widen again. The market seems "newsie" moving on Fed news, oil news, war news, and economic announcements. Contempt can breed complacency. 

From J.T. Holley:

Two things stick out for me: the lack of recognition of change, and laziness. The pack, herd, society, for the most part, don't like change. They would rather hang themselves and repeatedly take the easy way out than utilize anything remotely scientific that requires blood, sweat, and toil.

Miller's Willy Loman is a wonderful example of this. He would rather stick to his old sales ways than change like the young guns. Get rich quick schemes involving his son show this as well by Miller. Even in the end, Willy tries to leave more for his family by suicide but fails. This was laziness and lack of effort involving changing his ways.

I don't know. My PaPa told me on his deathbed to embrace change. It was like they were the most important words to me than anything else he had taught me up to that point. From that moment on I have always seen that as a sign of success in others, their willingness to be flexible and bend.

The persistence of errors-types would rather die in all forms than change! They'll take their hardheaded ways to the grave. This is laziness. Why else would someone be willing to succumb to such? How could you face the truth dead in the eye and not change? Denial must have its talons deep within people of this nature.

Once a charismatic type possesses both persistence of error disease and gathers a congregation it becomes lethal and the flock thrives.

Guys like us who are individuals, hardworking, non-altruistic, and embrace change, don't have big congregations! We just have empathy to fire us up occasionally.

Abe Dunkelheit writes: 

The errors persist because, psychologically, there is no alternative. One could go on and on, but everything would come back to the same basic thing: the impossibility of living without repression.

"[M]an is the more normal, healthy and happy the more he can … successfully … repress, displace, deny, rationalize, dramatize himself and deceive others." [Otto Rank]

The whole dilemma is perfectly elucidated in the Pulitzer Price winning book The Denial of Death, by Ernest Becker. But I am not sure if one should want to know too much about it.

When we say neurosis represents the truth of life we mean that life is an overwhelming problem for an animal free of instincts. The individual has to protect himself against the world, and he can do this only as any other animal would: by narrowing down the world, shutting off experience, developing an obliviousness [to facts] to the terrors of the world and to his own anxieties. Otherwise he would be crippled for action. (p. 178) 



 There is a maxim in poker: Poker is not so much about the hands you win. It is about the hands you do not lose.

I stress this point from a perspective that there is one ultimate fact that must drive the winning poker player. That is the objective of poker is not to play hands; it is to win money and to play each hand correctly. Sounds simple right?

If it is so simple why do so few find success in the pursuit of the game? I offer these thoughts:

Mistake number one:

There are no entitlements in poker. Sometimes you can do everything right, calculate all the proper odds, and still lose. Poker is not always fair especially in the short run. You can be a huge favorite to win a hand and still lose.

Example: I was in a tournament recently when I went all-in on the second hand in a big tournament. I was in late position and there were two people ahead of me who raised the pot. I had A-A. The first raiser reluctantly folded and the second raiser called me. He had Q-Q. I am instantly an 80% favorite to win the hand. The flop comes out no help to the queens. Now I am a 90% favorite. No help on the turn. I become a 95% favorite. Lo and behold I drowned with the Q showing up on the board. I go from potential chip leader to the rail. All within 2 minutes.

Example: You hold K-K. There is only one hand that you are an underdog, A-A, and there is a 2.5% chance this will happen. Yet be aware that it will happen and in accord with Murphy's Law.

Mistake number two:

You stay with a hand too long.

Example: A-K. This is known notoriously as Big Slick. It is called this for a reason. It can be a beautiful hand or it can become a very slippery slope. Heads up, pre-flop it is a very good hand but it is almost always a drawing hand. This means that it usually needs help after the flop. If it does not improve on the flop, its value shrinks greatly. After the flop and against any pair it is a 3-2 underdog.

I have seen numerous lose all their chips. They lament, "Well, I could not fold; after all it was Big Slick."

Mistake three:

Arguing with the cards. The cards do not have ears. The deck does not know that you need a 9 to fill out your straight so don't implore it. And don't ask the deck to cooperate with you. Don't blame the deck or the dealer when your open-ended straight gets snapped off on the end, or you have two over cards against a medium pair and lose. Especially, don't argue with the table when you decided to make a bone-headed play and "Donkey Off" your chips because you misplayed a hand or misread the board, or got outdrawn by the last guy at the table catching a miracle flush on the river.

Mistake four:

Letting the last hand dictate how you play the next hand. That is, don't stay in the past and argue or discuss what just happened. A fresh deck has no memory. Forget about the past. Stay in the moment.

This is extremely hard to do especially after losing a hand. I have seen people discuss a hand for a long time and thus miss out on a hand that they easily could have won had they played it correctly. Or worse, they steam, go on tilt, and play this hand with the hope they will win money that they lost on the last. They go all-in on a marginal hand or search for a miracle that just won't come. Worse, they use the excuse that they misplayed this hand because they lost the last hand.

In short, every hand is its own entity and needs to be dealt with accordingly. I hope these views are helpful to the poker player and the speculator alike. I believe that if one embraces these points and reflects upon them it will improve their chances of success.

In Poker they say, "It takes a few minutes to learn but a lifetime to master." I would argue that one never masters the game. One only gets better.

The same with speculating.



 The situation in Spain puts the US housing market into perspective. There is plenty of sub-prime lending plus steep sales taxes (6% plus) which would exacerbate any problems if they have an economic downturn.

"The chill winds of the home loan crisis in the US are having a sobering effect in Spain, where mortgage lending and house prices have risen faster than anywhere else in continental Europe.

"As with the US, low interest rates and a buoyant job market have made home ownership affordable to lower income groups in Spain. Fierce competition has driven some Spanish banks into the riskier segments of the market. In particular, Spain's 4m-strong immigrant population - young, low-skilled and with no credit history in Spain - have proved to be too large and tempting a group to ignore. Mortgage brokers who specialise in arranging loans for immigrants are doing a roaring trade."

John Floyd writes:

 Spain has gotten itself in a difficult situation now that requires a lot to maintain current stability. The Spanish economy is roughly $1 trillion versus Germany at roughly $ 2.7 trillion. Spain's current account deficit is running around 8% of GDP and the country has lost about 35% in competitiveness to Germany over the past few years. The funding on the capital account side has come in part from direct investments and debt as the sovereign and corporate are in many cases highly rated and bought by pension funds despite tight spreads. The government fiscal accounts are in good shape with a surplus of 2%.

The fact the Spain is somewhat pinned by monetary, fiscal, and currency policy constraints makes this a difficult predicament.

The market currently has a very benign scenario priced with Spanish sovereign credit in the 5 and 10 year trading about 5 basis points over Germany. The heavily bank weighted stock index has also been doing well.

It is unclear what the trigger is but the sustainability of the situation seems tenuous at best. The likely sequence of events may be a weakening economy leads to strains on the fiscal accounts that lead to downgrades of the debt and political noise.

Opportunities to investigate seem to be the stocks that may be heavily levered to the housing market and credit spread widening.



 I'm following the bio-fuels market lately. Ethanol does not appear to deliver the net energy return needed to make it a viable large-scale replacement technology for oil in the transportation sector. Another factor is the question of using food and agricultural land to 'grow fuels' that in the end both raises food prices and decreases the amount of arable land necessary to support our food industry.

We are starting to see the effects of Bush's energy plan, primarily focused on corn ethanol, driving up the prices of food and feedstock for cattle, chickens, pigs, etc. Further, corn growers have been reducing their soybeans to make way for additional corn capacity, thus driving up soybeans and related commodity prices. Soy is a massive component in feedstock across the country, so commodity prices for animal protein food can be expected to escalate.

One thing that we have in this country is a lot of coal. Clean coal technology should be coming down in price over the next decade and could have a more favorable impact on our energy security profile than ethanol.

Over the weekend, I spent time with several scientists who were touting –futilely, it seemed to them — the commendable aspects of relatively inexpensive, renewable, and available nuclear energy. Not dependent on extortionate nations of South America and the Middle East. Their goal is to get the government to reinvest in the industry, which has not seen a new nuclear plant in the country in some 30 years. They seem like those wild-eyed men in pod-people films, sure of their facts, but hopeless insofar as getting their point across goes.



 All news is not equal. Some news tells you what has happened in the past, other news tells you what is coming in the future. Some news becomes important again, like knowing the Sage had bid 15% below asset value for LTCM. That's where the market cleared in 2002. For example, on 9/11 there was news about the attack that drove stocks like INVN from $8 to $50 over the next three months, because it led to the installment of baggage screens at every airport. It led to a fundamental shift in air travel demand leading to airline bankruptcies.

Other news, like the Congressional hearings and the questioning of high profile investment bankers in July 2002 signaled a market low of significance. Currently, news of the Fed pause has led to expectations of a Fed rate cut, which subprime reinforced, so if there is news that shifts that expectation it would be dramatic — much as Clinton shifted expectations at the high in 2000 with a comment on genomics. That's why I continue to watch gold closely here, because the expectation is for an easing of inflation and gold at a new high would shatter that expectation.

Gregory van Kipnis remarks:

Words betray us and never seem to mean what they intend. What is meant by news, what is meant by prices? Here are the principles that guide me:

First, There is something called analysis; analysis of news or analysis of prices.

Second, if markets are very efficient there will not be many occasions when the analysis of news or prices will yield predictive insights.

Third, "news" is generally used to refer to fundamentals, i.e., events that shift supply or demand or any of the assumptions that govern the stability of prices. Prices, on the other hand, refer to the unfolding outcome of changes in views about fundamentals.

Fourth, most fundamentals are discounted, so prices move in advance or swiftly. Therefore, I rarely get an information edge about changes in fundamentals. Nonetheless, the persistent analysis of human action yields insights, from time to time, to the prepared mind. But there are false positives. Monitoring prices in relation to quantitative tripwires can also signal a fundamental is changing, but here too there are many false positives. I may never know why views are changing, so I would have to satisfy myself that it is sufficient to figure out that others are valuing things differently and that is all I need to know.

So I pick my poison.

I would always prefer to have an independently obtained opinion about the likely causes of changes in equilibrium rather than constantly trying to figure out if others are changing their minds about what to value, and never understanding why. However, there is a caveat. Just as when driving on a busy highway, to use an analogy, fundamentals first –but also a wary eye always cocked to discern technical signs to avoid risk. I don't have to know if a bad driver was drunk or having a heart attack, I just have to pick up quickly that something is wrong and make sure he doesn't take me out on his way to his maker.

Hany Saad replies:

News does not drive prices. I would like to see empirical evidence to the contrary.

Prices predicted 9/11 and other events if you look close enough at the options markets. Now, if you suggest that 9/11 drove prices with an open gap down when the market finally opened, how would you have profited as an operator? In retrospect you were handed the same cards every other operator was and you had to make a decision based on your historical views, your system, your statistical edge — but not on news.

Even if news drives prices, it is very questionable that an operator will be able to benefit from public news from off the floor. Can one really profit from the news in real time? Yes, news might have an effect on price but this ignores the main use of news for the speculator — profitability. The correct question is whether a speculator can trade profitably using news.

I maintain that prices predict news, and trading on statistical patterns and measuring psychological biases is the only good niche in a market where there are more newswires than brokerage houses.

David Higgs adds:

It's the interpretation of when good news is bad news and bad news is good news. Changing cycles, sea changes. Those with the knack of getting these right become wizards.



 In the days of non-convertible rubles, Western chess players visiting the former Soviet Union were given a fistful of rubles as 'pocket money' and maybe a lot more in prize money if they did well in the tournament. This presented a unique problem: you had a lot of money, not much to spend it on and very limited time in which to spend it.

The electric samovar which adorns one of my shelves is from this time. I didn't particular want it and it has never been plugged in. But what else can one do when the tennis racquets were a bit on the heavy side and several tonnes of cheese would never make it through customs. Perhaps Larry Christiansen had the best idea, after a great result in the Moscow Interzonal he went to one of the best restaurants in town and bought dinner for everyone in the place.

This experience may seem surreal but I think there's a clear analogy. In life itself any prize money has a time limit of when you can spend it, and as far as we know there's nothing we can buy which will be allowed in by the customs officials at the pearly gates. Give it to the kids? It seems that kids who get their parents' money but not their time, don't seem to lead productive and happy lives. So how should we play it?

Money is a kind of energy which needs to be transmuted, the two main limitations being the extent of our personal freedom and the time we have to do it. Money can also be converted into time, say with labor saving devices and good health care. But it is not in itself a thing of permanent value; it has to be traded.

Thus everyone is a trader whether they like it or not. Refuse to trade and your life and any money you have withers away and will be wasted. And this is why I keep the electric samovar, it reminds that there's limited time in which to trade, exchange and transmute.



 I spent some time reviewing the DS site and the discussions of deception. I did this after noting that the upcoming featured article on Wikipedia is a piece on one of the most amazing deceptions in the history of chess, "The Turk." Apparently many of its age were drawn in by the fake computer/machine, including Charles Babbage, Fredrick the Great, Catherine the Great, Edgar Allan Poe, Benjamin Franklin, and Napoleon Bonaparte. The ruse was made all the more credible by the construction that allowed the cynic to look through the cabinet and the fact that a Hungarian grandee, Wolfgang von Kempelen, was its creator and sponsor. There were vocal critics, however, the machine continued to attract attention as long as it remained on display in Europe.

The Turk was purchased by Maelzel and brought to America, which allowed Poe to create an account. It is interesting to note the skepticism and fascination in the following passage by Poe:

"What shall we think of a machine which can not only accomplish all this, but actually print off its elaborate results, when obtained, without the slightest intervention of the intellect of man? It will, perhaps, be said, in reply, that a machine such as we have described is altogether above comparison with the Chess-Player of Maelzel. By no means–it is altogether beneath it–that is to say provided we assume (what should never for a moment be assumed) that the Chess-Player is a pure machine, and performs its operations without any immediate human agency. Arithmetical or algebraical calculations are, from their very nature, fixed and determinate. Certain data being given, certain results necessarily and inevitably follow. These results have dependence upon nothing, and are influenced by nothing but the data originally given. And the question to be solved proceeds, or should proceed, to its final determination, by a succession of unerring steps liable to no change, and subject to no modification." 

How many times do market operators take for granted that some function of the market is beyond being gamed, a mere logical extension arising from "certain data" and the ensuing calculation? Might the artifice we see be constructed to allow for examination, but concealing the kernel of deception? Might sponsorship of the esteemed be the final cog that turns the deception to its highest degree?

I saw many of the items at work in the late 90s in the OTC market as large bids or offers were flashed by proprietary traders on Instinet creating the perception that a natural buyer/seller was available in size. The ensuing stampede would generate the desired profit courtesy of the deception. 

Nigel Davies adds: 

A book has been written about the history of the Turk. The idea of human intervention in 'machine' decisions was echoed by Kasparov's 'hand of god' accusations during his match with Deep Blue. But now the focus is on humans receiving machine help, signifying that there's been a turning point during the last decade. 

Victor Niederhoffer adds: 

Turk in its modern incarnation is somewhere on 42nd street with Pillsbury playing inside it and another checker midget champion. I believe I may have played against it in the 42nd street freak shop that Larry Ritter wrote about in some of his NY stories, next to a great former pitcher.

Alan Millhone:

Was this the checker playing automaton that was at Eden's old Musee? 'Ajeeb' was another one that appeared for some years at Coney Island and you played against it for a dime a game. Samuel Gonotsky reportedly played inside of 'Ajeeb' for some time as well as other checker players. Pillsbury was a terrific 'blindfold' chess & checker player. Branch Rickey loved checkers as well as Christy Matthewson. You can find a little information on 'Ajeeb' in William T. Call's long out of print Vocabulary of Checkers. The art of playing both games 'blindfolded' is another interesting story.

I quote Mr. Call on page 12 of Vocabulary of Checkers. He describes "automaton" as follows:

A lay figure that apparently plays the game mechanically, the moving arm being operated by- but the ethics of the pastime forbid details, because of the harmless pleasure the public finds in telling how it is probably done. The impassive attendant, when pressed for an explanation, gives rapid vent to something like the following: 'The board is sensitized by that the move you make operates a corresponding change in the power of the piece controlling the square reflecting the correct reply.' Ajeeb, Mazam, Ali, and Akimo are the names of some famous automatons.

Recently Durgin's Single Corner, by E.A. Durgin 1894 was sold on eBay for $13,000.00 becaue this little book belonged to Baseball great Christy Matthewson and he signed his name inside of the book showing that it was his.

Checker's is deep in history and dates back to the Egyptians.



 On 2/5 we acquired a 4-5 year-old field English Setter stuck in shelter hell since at least November. His name is Boomer and he's excellent. Upon entering our home with three Newfies he immediately got the message that he's low man on the totem pole. When he saw our cat, Shitty Kitty, he was overcome. Clearly here was good bait. Well, maybe not. Mr. Kitty proceeded to march right up to him and telegraphed an important message about the pecking order. Check. Read you loud and clear. Most evenings Boomer and Mr. Kitty can be found curled up on the sofa together.

Boomer does have one flaw: outside means hunting time. He is forever on the chase and alerting to whatever small creature may be around. The other day we were perambulating down the block when a loud bang burst forth from a construction site. Boomer stopped, cocked his head, and when the boom/shot happened again, the hunt was on. All of which served to have me flat on my you know what, sliding down the sidewalk, legs straight out, like a Looney Tunes cartoon. Thankfully no YouTubers around.

So Boomer got a personal trainer. Someone convinced me to call in the positive reinforcement people (otherwise known as clicker trainers). Thankfully the clicker has been replaced with voice commands and treat rewards. I was skeptical about the methodology but have become a convert. Boomer is now sporting a handsome magic halter and I've got this groovy new command "Watch me" that really works. Even better, it works on people including punk teenagers. Turns out that animals, human and otherwise, can't resist responding positively to eye contact accompanied by a happy yet commanding voice and a smile. And there is the secret to getting your way in life. No charge.



 The Psychology of Risk: A Brief Primer, Paul Andreassen


In principle, the distinction between skill and luck would seem clear. Skill situations are characterized by a causal link between behaviors and outcomes. Success in skill tasks is controllable, whereas success in a chance activity is not. Yet the distinction is often not recognized. ln a series of essays and studies, Ellen Langer showed how people often treat a chance event as if it involved skill and was therefore under their own control. Studies conducted in Las Vegas casinos have found that a dealer who experiences a run of bad luck risks losing his or her job. Dice players often concentrate carefully on the outcomes they desire, throwing their dice harder when they need higher numbers and tenderly when low numbers are required. Langer argued: "by encouraging or allowing participants in a chance event to engage in behaviors that they would engage in were they participating in a skill event, one increases the likelihood of inducing a skill orientation; that is, one induces an illusion of control. By introducing choice, familiarity with [the situation], active involvement, or competition into a chance situation where people cannot influence the outcome, they will show behavior more appropriate to a skill event." 

Alan Millhone writes:

"Luck is the residue of preparation." Vince Lombardi

In Marion, Illinois this past week-end I was playing young Patrick Parker in the final round of the Illinois Checker Tournament. Patrick 'pitched' me a piece (checker) and got a King and was behind me causing havoc with his free King. We got to a critical juncture and I made a brilliant move and considered all of Patrick's replies. He made his move and we made a couple of jumps and he ended up with his free King 'pinning' my King and one of my singles in mid board.

I looked over the situation and noted I had to move out my sole single piece from my King row and thus allowed his long trapped King to move. The situation appeared hopeless and I resigned my position as untenable. I must have become 'brain dead' as I was still a Checker piece up on Patrick! Mr. Larry Keen took me aside after the game and set up our ending and asked why I did not move here and here to a draw. The draw was easily seen after he showed it to me! In the end I failed to review the total situation in our game and never even counted each side's pieces.

The Market can also be deceptive and induce one to sell too quickly at times. You have to do your homework in checkers and in the market to make educated decisions that affect the final outcome. Mr. Tom Wiswell said to "keep the draw in sight." In other words, don't overreach your position. Better to live to play another day.



 My five-year-old daughter (now in Kindergarten) inquired this evening as to how money is made. She was clearly not asking about how people get jobs, or where money comes from, but how people (or companies, as she is familiar with them) actually cause wealth (in an abstract sense) to be increased in the world around them. And she clarified that she was not specifically interested in how I make money.

Perhaps there are thoughts on how to answer this question? Besides people having jobs, she knows that I trade things, and that kids her age have been known to set up lemonade stands, and she often grasps quickly all sorts of complex ideas about people's behavior as well as simple economics.

Sam Humbert remarks:

When my younger son was five, he offered this bit of economic analysis after tagging along with Mom on a series of shopping errands, and noticing that at every stop she gave the cashier some money, then the cashier handed her back some change: "It's good that you get change! That way, you never run out of money!"

Rod Fitzsimmons Frey writes:

Wealth was created from imagination and energy. Since there is no limit to the way creative and energetic people can increase the value of the things around them, there is no limit to wealth. It is literally created by the human spirit. 



 The National Hurricane Forecasting staff came out of their winter hibernation today and beamed over the airwaves their perpetually gloomy forecast for this upcoming hurricane season. I have lived for the past 14 years in a high risk area for hurricanes and in all of those 14 years, each and every one, they have made dire predictions this time of year for the upcoming season. Not once have they said that this year we get a break, nothing to worry about; the chances of a bad year are very low. Not once.

The perma-gloom forecasts of Alan Abelson come to mind here. Consider what would happen if the forecasters predicted a benign storm season and they turned out to be wrong. Jobs would be lost. Lawsuits would be filed. It would be unmitigated disaster for the storm prediction gang. So each and every Spring we can look forward to another Abelsonian prediction of Summer doom, the gang will keep their jobs and perpetuate the tradition, and we have no way of knowing if this is likely to be a bad storm season or not.



 A while ago I left my full-time employment to start a software business. I'm only a month in, but already I've got some bruises to match the bags under my eyes.

The Chair and some of his colleagues have their racquets to help relieve stress; some others play golf or go biking. I play hockey. I was driving home after a particularly character-building game thinking about why I had enjoyed it so much even though we got thrashed. My conclusion was that it is impossible for an entrepreneurial spirit to not enjoy hockey. I give you:

The Top Five Reasons Entrepreneurs Like Hockey

5. There are piles of ways to be a successful hockey player. You can be small, fast and agile; you can be strong and determined; you can be good with your hands; you can have a powerful slapshot; you can be deceptive; you can have the world's best balance. You don't need them all. Likewise the entrepreneur does not need to satisfy some master checklist of qualities. She can find a way to leverage her strengths to succeed.

4. Hitting is allowed, and encouraged. The game is real: if you allow your attention to wander you will be knocked off the puck. No reality distortion field protects you from that harsh fact. What rules exist are there to prevent serious injury, not give you a glass bubble to wander around in. Coming from school or an internal corporate project to an entrepreneurial endeavor feels like shifting from a ballet class to an NHL rink.

3. Speed and agility are key. Not everyone on the ice knows where the puck is all the time, but you better believe at least two of your opponents do. Always. And they are skating for it as fast as they can. If you cannot beat them you will lose. If you do beat them to the puck, you will have between 1 and 3 seconds before your opponent is there trying to take it away from you. You therefore have an average of 2 seconds to move the puck someplace where he cannot remove it from you, and dance out of his way so that he cannot remove you from the puck instead.

2. Hockey is played by the players. The game happens so fast, and there is so much information flowing on the ice, that there is no way a coach can even begin to puppeteer his team. The coach's role is to prepare the team during practice and maybe pull players if they're not up to snuff, but if a coach calls a timeout it's really just to let his squad rest. They have to play the game, all of it. Books and mentors and investors and seminars and support groups can help prepare the entrepreneur, but once the game starts, their help is over.

And the number one reason hockey is the King of Entrepreneurial Games:

1. Hockey is a game of time and space. Good hockey players are like chess players at warp speed. They see the rink as it is now, and they visualize it as it will be in five seconds. They see the spaces and they know how they will be filled. When a player is in the right spot to receive a bounce and go in on a breakaway, they were not lucky: they saw the pass, they saw the bounce and its angle, and they moved to get there — before the pass happened. They're wrong a lot. But when they're right, it's magnificent.

Steve Leslie adds: 

I can think of several other fascinating things about hockey.

I. On the surface, hockey appears to be chaos, five skaters trying to advance a black object and flying all over the ice with the ultimate objective of shooting the object (puck) into a net with a stick guarded by some warrior-like creature who is protecting his turf.

There are line changes when players are being substituted for other players all the while the puck is in play and sometimes traveling at speeds of 100mph. These line changes can occur ever 2 minutes or so.

There are well-defined rules such as icing, off-sides and two-line passes, all to control the flow of the game.

There are penalties assessed against a player for rules-of engagement errors such as cross-checking, interference, high-sticking, roughing. This forces a team to skate short-handed and thus utilize a host of strategies to combat an offensive onslaught by their opponents.

Conversely there are power-plays when a team has a one-man and sometimes a two-man advantage. Here they have a huge advantage for a minimum of 2 minutes, which in hockey terms is a very long time. They then resort to strategies such as power plays designed to take advantage of their personnel advantage and to score.

In order to score and potentially win a match, each player must work within the concept and framework of the team. It is virtually impossible to score without all the players working in concert both offensively and defensively.

All in all this leads to hockey being a very cerebral game and quite appealing to those who can think very quickly and creatively.

II. Hockey is performed on a very magical and special stage. It requires a rink that must be carefully built and the ice meticulously maintained. Plus rinks tend to be spread out geographically, thus preparation time and travel is involved.

III. Hockey is a very expensive sport and thus can be considered elitist. Not only is ice time expensive but also the equipment required to play is quite broad and very costly. Skates are made out of leather and titanium and can cost $500 or more. A player also needs a helmet, shoulder pads, chest guard, hip pads, uniform, gloves and a stick. A complete hockey outfit can easily run into the thousands.

IV. Hockey requires special skills. Some of which are quite unnatural. Not only must players be able to balance himself or herself, to skate forwards and backwards, they must also handle a puck and face collisions. They must be in extremely good shape muscularly and cardiovascularly. They have to be able to shift gears quickly going from a glide to a mad dash and then stop on a dime. A fit player may lose 10 lbs or more during a hockey match.

V. There seems to be anecdotal evidence that the skills required to play hockey translate very well to other sports particularly golf. Some who have made the transition to golf from hockey have been Wayne Gretzky, Pierre Larouche, Dan Quinn and Mario Lemieux who have played with distinction on the celebrity golf tour.

It then becomes obvious why an entrepreneur would appreciate such a wonderful sport as hockey and find it a marvelous outlet to enjoy and revel in.

George Zachar writes: 

I played goalie. The goalies are the only players on the ice for the full 60 minutes. The goalie must keep track of who is on the ice for both teams at all times. He must know not only the strengths and weakness of them all individually, but must know how the lines match-up against one another.

He must constantly maximize the area he presents between the puck and the net while simultaneously calculating how the opposition will move the puck to create an opening. He must be utterly indifferent to pain, reflexively placing his limbs in the path of a frozen, rock-hard rubber disk traveling upwards of 100 mph.

Finally, the goalie knows that he is the one instantly faulted when the opposition scores. It's hard to think of a better metaphor for trading.

Steve Ellison adds: 

I liked playing hockey because skating is so much faster than running. While in San Jose a few months ago, I attended a Sharks game. It was interesting to watch Joe Thornton, last year's NHL scoring leader. Mr. Thornton likes to set up in the offensive zone either behind the goal or along the boards halfway between the blue line and goal line and look for a teammate to pass to. Both of these locations are on the edges of defensive players' coverage zones, allowing Mr. Thornton an extra second or two before somebody is trying to take the puck away from him. Wayne Gretzky also liked to set up plays from behind the goal. Similarly, entrepreneurs can establish niches in areas not well covered by the big companies. 



 The best coffee is Arabica. You guys drink the worst coffee. I'll bring some good Kona stuff out when I come next.

I got a sampler of eight different international coffees with the new iRoast 2, in green bean from Mexico, Peru, Timor, Sumatra, Congo, Panama, Nicaragua, Guatemala, and a few others. I'm not sure if it's what they're trying to sell or just trying to get rid of, but none held a candle to fresh roasted homegrown hand-picked sun dried Kona Coffee. Most were bland. Peruvian was about the best of the bunch, but still rather bland. Some were close to undrinkable. Sumatra tasted like dirt, Panama very bland, Nicaragua very bitter, and Peru mellow, good to mix 10% with 90% Kona.

Sam Humbert asks:

Why does anyone voluntarily drink "flavored" coffee? I'm having a cup just now, because "hazelnut flavored" beans were all we had on hand in the office today. But I feel like the high-school stoner who's so desperate he'll smoke roaches. The stuff tastes like something the EPA would send HazMat-suited guys out to Jersey to detoxify.

Who buys it? Is it a ladies' drink? Would appreciate insight.

Yishen Kuik adds:

A coffee importer once told me that the flavoured coffee industry grew out of a desire to use cheaper robusta beans and yet avoid the inferior aftertaste that caused manufacturers to prefer arabica. But then flavoured coffee took off. 

J T Holley writes: 

Having earned and financed my college education working at various coffee shops such as Mill Mountain Coffee and Tea in the Roanoke Valley, and Food For Thought in Missoula, MT, I can tell you very few [buy flavored coffee]! Most coffeehouses have pots of coffee lined up on the counter of some sort for self pouring. The ratio to the best of my knowledge on refilling those was around 5 to 1 compared to regular coffees of many varieties.

Not that what you drank was good but there are two ways to flavor coffee. I have utilized both ways. One is with a horrible flavored oil and the other is via bottled syrup. The oiled way is to roast a rather cheap Columbian bean and then mix the oil and coat the beans (like applying chemicals to kill weeds). The other is much better and that is having an individual cup of coffee and adding a shot of flavored syrup. This seemed less toxic to me even though both are probably the same.

I witnessed very few people other than women that would order flavored coffee. Espresso drinks would be the exception to that. I would classify flavored coffee along the lines of 100 cigarettes. We used to joke that those extra long 100's were for people that like to ash not smoke. They don't smoke the cigarette they simply puff to be able to "ask" so they look sleek and sexy or something. Same with flavored coffee drinkers I've witnessed. They don't drink coffee like you and me, they sip and end up throwing half of it away in those plastic lined trash cans that weren't made to hold liquids!

My experience in the Navy taught me something about coffee as well. Cream and sugar were rarely added to a cup on my ship. Your sexual orientation back in the early 90s when I served was questioned if you had a stir stick in the cup. It was taunting or hazing thing on my ship. Words were slung at you in humiliating ways and made a man either quit drinking coffee altogether or go with the straight black cup of coffee to avoid the hassle.

It's amazing how psychological warfare works. I drank my coffee straight anyways so it wasn't a bother to me, but literally saw fights break out. Can't even imagine what would've come about if someone would have brought their own International Flavored Coffee onboard.

On a lighter note, I spent 6 to 8 years of my life roasting and serving coffee in all of its varieties. I have to confess that it is amazing how much caffeine is abused and that literal addicts consume the beverage. The mark-up on a cup of coffee from raw bean, to roasting, to brewing and serving is utterly amazing to me as well. The shops that I worked in did absolutely zero advertising as well, another fascinating fact of the coffee business.

Pitt Maner adds: 

I hate to think of the abuse one might get for using the following, but based on a crude experiment it does seem that cold brewing makes for a smoother (some say lack of) taste.

With respect to Nicaragua there seems to be a fair amount of variability in the taste of the coffee. The best coffee growing region is up around Matagalpa and Jinotega in northern Nicaragua.

The Nicas seem to like to drink it black with a fair amount of sugar.

Problem with all coffee though seems to be how long it has been sitting on the shelf. You don't always get a "born on date" on the package. Of course you can pay $9 a pound for some of the brands that are sealed with nitrogen gas.

I know of someone who actually was marketing small discs that you put in your coffee maker to flavor the coffee of your choice. Better living through chemistry indeed. 

Pamela Van Giessen writes: 

The Irish coffee flavored stuff is the worst. My mother served it to me once when I was visiting. Being sleepy I didn't focus on the malodorous nature but the second it hit my taste buds I literally spit it out. Thankfully we were outside. I think that stuff was made for older ladies. 

Scott Brooks writes: 

Chicory is a plant that I use in my food plots to feed and attract deer and turkey. It is highly desirable, palatable, and nutritious to deer and turkey as well as many species of birds, and other assorted animals.

Gordon Haave adds:

I am a big chicory fan. The only kind to get is Cafe Du Monde. Every other kind I have tried is terrible. That being said, I don't know that it mellows the flavor, unless the underlying coffee is much more harsh than regular. I drink it with sugar and cream. 



 I wrote a few months ago about simple ways to handicap games such that children are competitive with adults heads-up but this week I found the shoe on the other foot.

We got my son Remote-Control Soccer for his 9th birthday. He'd requested it for months, and now I understand why: he beats me like Rodney King at this game. I just can't get the hang of it.

We've played three times, with scores: 11-0, 11-0, 11-1. And the 1 was an own-goal by my son.

So now I need to find a way to handicap him, rather than me. Maybe he can use ordinary batteries for his shoe, and I'll use alkaline.

Scott Brooks adds:

Make it a great learning experience for him. Since the teacher always learns more than the student, have him teach you how to become a better player. Tell him in advance what to expect — that by teaching you how to be a better player, he will in turn, become a better player. His overall understanding of the game will improve. He will have a more skilled opponent to play against and will thus be challenged and become better. And finally, his wins will be much more satisfying, as it is always better to beat a worthy opponent than it is to beat someone you know you can whip. 



 This afternoon I went to an estate sale close to where I live. I have to say that I do not feel at ease entering the home of someone who very likely died only a few days before. I feel it's violating the privacy of the person. I feel like it's accessing his or her intimate secrets through the objects, the books, the souvenirs, the mementos, the medicines, even the food which is still in the fridge.

You are able to assess a lot about this person: hobbies, culture, interests, and financial status. Everything is left as it was the day before his death. Everything has a price and a ticket. You buy her life. In this case it was a navy officer who died. I walked through the rooms willing to respect the man and his home. I was immersed in his life: the pictures at the Naval Academy, the flight jacket, his wife's wedding dress, and the bowling league prize. He's gone now. In a few hours his life will be sold.

I came across a book: Watch Officer's Guide, issued in 1956. He must have been young at the time. As a naval officer I was immediately attracted by the book and bought it for $9. I started to read it. After the introduction it reported:

"It is not humanly possible to be letter perfect in everything that may concern an officer of the deck. The superior watch officer, however, is always ready for any situation that may arise and, for that reason, the most important faculty to be cultivated is forehandedness. Always look ahead, a minute, an hour, or a day, and make it to your pride never to be caught unprepared. Rehearse mentally the action you would take in the event of a fire, a man overboard, a steering failure, or any other serious casualty.

"Eternal vigilance is the price of safety. [He must] observe intelligently all that comes within his vision, both outside and inside the ship, but his vigilance must extend beyond this. He must cultivate the faculty of foreseeing situations, as well as seeing them. The same type of mental lethargy which will permit an officer of the deck to stand abreast a lighted gangway after sunrise _ will fail to detect in time an incipient collision.

"On a darkened destroyer in high-speed work at night only essentials count and you must key your mind to its keenest pitch. Finally, he must have technical knowledge of his job. He must know the relative importance of his many responsibilities. He must have experience."

I went back with memory to the time when I served onboard ships as officer of the deck, and I recognized myself in these words of wisdom. "Still valid at sea after quite a few decades." Then I left his home with an undefined sense of sadness.

Thanks, old man, for the time spent together today.

From Victor Hrehorovich:

The Watch Officer's Guide applies to many officers of the deck. The "deck" is everywhere; everywhere an officer is given responsibility to make sure that unforeseen events are kept from becoming catastrophes. They are very applicable to the medical profession! Thanks for sharing these thoughts with me. I will incorporate them in my upcoming address to our first graduating class. 



 Each day seems to have its theme. The stories connect from day to day, as chapters in a longer booklet continuing a theme for a few days, or maybe a week or more, referencing back elements from the prior days. The same characters are involved from day to day. Sometimes, as when watching a movie, it is apparent what the theme will be and you can figure the outcome. Other day, it is hard to figure out and often the ending is a surprise with unexpected plot twists. Looking back, the plot and the surprise always seem obvious, just as looking back at Friday's doji reversal bar, in retrospect, seems so obvious. It is easy to lose track in the middle of the week. It is good to remember when watching how the theme started, how it is likely to resolve. Where you are in the story? What are the clues to the plot? Who are characters? The timing is designed to deceive. There are periods of suspense and denouement. As in fiction and drama, there are several broad themes around which many sub-plots are woven. The main stock market theme is one we discuss often, the upward march to new highs and redemption and the battle between the Force and the Dark Side.



If, as expected, the Cubs sell for 600 million, it will be a 13.5% compounded return since the Chicago Tribune bought the team in 1982. That's not a bad return, but some truly horrible baseball over 26 years.



 My high school baseball coach in Vermont a few decades back had been a catcher in the Yankee organization. I was the catcher and our pickoff play at second base came from the Yankees. This play worked a dozen times in high school and Legion ball. I can't remember it ever failing.

The shortstop would signal to me (by rubbing his hand across the letters) whenever he thought we could pick off the runner leading off second base. Instead of giving a regular pitch sign, before the next pitch I'd put a fist down, then rub my left thigh so the pitcher would know the play was on and it was the shortstop covering.

The pitcher would never even look at the runner, just stare intently at home. And before he'd go into the stretch I'd make a fist with my right hand. After the stretch, just before the delivery, at the instant the shortstop broke for second, I would open my fist and the pitcher would whirl and throw to second. The timing was perfect and there was no counting involved. So the play was called by two guys most runners worry less about and was executed by the guy who looked the most unconcerned.

I can't say I've been able to use this for anything else in life or investing, but I still use our Legion coach's "indicator" sign (a tug on the earlobe) whenever I want to let my wife know we're leaving the party early.



After reading the paper the Chair found, my memory has been jogged. Introduction to Statistical Quality Control, 5th ed., Douglas Montgomery, pages 95-6 discusses the use of the range to estimate the standard deviation.

An unbiased estimator of the standard deviation s of a normal distribution is s(hat) = R/d2
R = range
d2=variable depending on n

So the factor 1.6926 is really d2 for n=3 (the # of GPS measurements Schwarz used).

For n=1 to 10, Appendix Table VI on page 725 of Montgomery gives:
n d2
2 1.128
3 1.693
4 2.059
5 2.326
6 2.534
7 2.704
8 2.847
9 2.970
10 3.078

Montgomery notes that the range method works very well (retains high efficiency) for small samples sizes (n <= 6).

Victor Niederhoffer writes:

An interesting article on
ranges shows that a good estimate of the standard deviation from a normal
distribution is range/1.7. Sequential estimates of the standard deviation from
the range, for example:

              date    range   stand dev

                4 02     10        6
                3 30     22      14
                3 29    14         8
                3 28    12         7
                3 27     8          5
                3 26    15         9 

For S&P futures this might provide a good template for thinking about short-term volatility. 

Bruno Ombreux adds:

Here is one of the early articles on the ratio of range to standard deviation, featuring tables for the ratio. Of course, today one can use resampling methods to get these kinds of ratios, even from non-normal populations.



 This has been used of late in a political context, but the Costanza Doctrine (taken from a Seinfeld episode in which George Constanza temporarily improved his fortunes by doing the opposite of what his instincts told him) would seem to offer hope to thousands of losing traders. The trick would seem to be to buy when you feel that knot of fear in the pit of your stomach, or sell when you feel the joy and excitement of a trade going your way.


"Why did it all turn out like this for me? I had so much promise. I was personable. I was bright. Oh, maybe not academically speaking, but I was perceptive. I always know when someone's uncomfortable at a party. It all became very clear to me sitting out there today, that every decision I've ever made in my entire life has been wrong. My life is the complete opposite of everything I want it to be. Every instinct I have in every aspect of life, be it something to wear, something to eat… It's always wrong."


"If every instinct you have is wrong, then the opposite would have to be right."

Jim Sogi adds:

There is a twist to this. In the markets, and in life, there is an asymmetry of some sort that throws this equation off. How it works in life will take some thought. But in markets, long is not the exact opposite of short.

From Kevin Depew:

A funny application of the Costanza Doctrine (pre-Seinfeld) appeared in the movie "Let It Ride," which may be the closest the movies have come to real-life racetrack bettors in action. The main character, played by Richard Dreyfuss, is a degenerate gambler/loser who one afternoon mysteriously begins winning. (That the notion of winning at the track would be considered a) mysterious, and/or b) noteworthy enough for a film or book, is itself a pretty hilarious inside joke.) Anyway, in the middle of his winning streak he decides he's not even going to handicap the next race and instead walks around the track asking various degenerate gambler acquaintances of his who they like. Whichever horse they name, he scratches off the program and eliminates from contention.

When he gets to the one horse that hasn't been named, he lets his winnings ride on the unwanted horse with predictable winning results. As an aside, Robbie Coltrane has a nice turn as a dour teller. Also worth noting, the hatred emanating from his fellow degenerate gambler "friends" as his winning streak grows; everyone hates a winner; everyone loves a loser.

Interestingly, last night on the Black Donnellys (clearly, I'm watching way too much television these days), two of the Donnelly brothers are at the OTB to place a bet and hopefully recapture some money they owe to a crime boss. The "expert," Kevin, (a fictional character who nevertheless I am convinced is a direct blood relative of mine) can't decide between two horses. After much prodding from his brother, Tommy, he chooses one rather indecisively. Naturally, Tommy bets the one Kevin didn't choose, with predictable winning results.

By the way, the Black Donnellys is not a good show. The main character, Tommy, seems to have modeled his mannerisms on Tony Soprano, and the Irish stereotypes run for a full 47 minutes, laddie; may misfortune follow you the rest of your life, and never catch up. This may sounds strange, but I think I watch the show because Eisenberg's Sandwich Shop is one of the locations for filming.

Art Cooper adds: 

One of the first things taught in a first-semester computer class is that the opposite of > is not < , but rather < or = . This applies to markets as well. The opposite of "long" is not "short," but rather "short" or "flat." 

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