Nov

3

 1. In the old days, one had to take account of the high and low of intra day prices because the range could be 4% and the market could change by 15% in a year. These days, the 5 minute prices often move 3 % and the hourly prices 7%. Again that is 25% of the yearly range, but this time within a 10 minute or hour interval. The idea that one can buy or sell within the day based on what happened yesterday or what you expect tomorrow is a terrible fallacy.

2. One of the biggest mistakes in markets is to worry about how much is for sale or demanded at specific prices. This is the source of the reason that the Teutonic - - - - -  savant who used flow of funds was always wrong about the interest rate moves the next year. Also, the idea that prediction markets can be manipulated by an interested large buyer or seller to their discredit is another speculative canard.

3. There has been a terrible increase in interest rates in the last week, and unless this is dissipated the market is not going to Lobagola and back as quickly as it would until fear and pessimism brings the expected future rate of inflation down to a level consistent with the recent and inevitable Julian Simonesque predicted decline that just occurred.

4. One of my most astute employees bought a company and brought it public and had a tremendous gain and desperately wanted to sell. He sold all he could and more, but the analysts would always say, "Why are you selling if the company is so great?" He had a good answer . "It's because you guys wanted me to provide liquidity and diffusion of ownership out there." I am reminded of this as the CEO's talk about how reluctant they are to put a cap on bonuses or raises. (We have to keep the talent.) They will as reluctantly agree to foregoing these bonuses as Brer Rabbit was reluctant to be thrown into the briar patch.

5. Has there ever been a time when the enterprise system has been in greater retreat than now, and how will prices adjust to this change in tempo and paradigm? One can always recall that during the French Revolution, the equities apparently went up the most after diamonds (one must check this).

6. Here are some books I am reading and recommend. Sam Wyly Entrepreneur to Billionaire. It applies the insights of football to making money and explains why so many football players achieve great success in business if they live long enough to get there. Leaves in Myth, Magic, and Medicine by Alice Vitale. It shows for the layman how the simple structure of leaves and blood are similar, and the unity and connectedness of all things, and provides a foundation for growth and life. Almost a Miracle by John Ferling. Finally shows how the British managed to lose a war they could have won so easily if Aubrey had been involved. The Enzyme Factor by Hiromi Shinya. No matter how many times I read this wholly unscientific book, I always come up with something worth testing that almost invariably turns out to be true, including his avoidance of dairy. Difference Equations by Paul Cull, Mary Flahive, and Robby Robson. I believe that difference equations are the best mathematics for market people to know. Prices are not continuous and they follow the last x ticks in a fully orderly difference equation.

The problem is that there are systems of simultaneous difference equations going on at all times and they are always changing. I have about a dozen books on difference equations, and I am always so hopeful when I start them, as each one has a different notation, and triple summations with very small differences in the top and bottom. Index numbers must be gleaned and put in the context of difficult to remember formulas for infinite series. This book however is the best one and it covers all the topics we usually read about in the modern math like chaos and rates of convergence, and periodicity in a fully accessible fashion. A very good discussion of many different approaches to the basic second order difference. The Fibonacci equation is nice as is their extension to graphing theory.

7. One of the hardest things that every kid goes through is to change teachers in tennis or music et al when they outgrow them. It happened often to me, and I still remember the trepidation I felt when I dared to change from Rubell to Nogrady when I was a tennis hopeful, or from L. Taylor to Mosteller when I was an undergraduate. This preparation however, like most things that kids go through is essential for success in life. There's nothing more important than giving up the old for the new and better in markets. Many turn now to those who believe in bear markets, and rising commodities, switching out of stocks when they look bad, and the underpricing of volatility as their current mentors. Who can blame them? They look good now. Even the weekly columnist who took over in 1966, who as far as I know has never written a bullish column, has finally been vindicated after 42 years. The problem is that one must always look forward and I have never found a qualitative analyst whose ideas were consistently good. They have their day, they attract billions from their followers, and then make their contribution to the market cycle, losing a net of billions in the process while still maintaining a high internal rate of return.

Russ Sears writes:

The beauty of the predictive markets is that very little explanation of your vote in $ is allowed, except the amount bet. But on stock markets, I would disagree, it is the natural tendency to follow a leader. This should be clear in the election season. But also clear should be the tendency to lead one down the wrong path. Further, madness of the crowd happens when the masses favorite analysis is confirmed by the leaders. Or the experts. It's incredible to see how much money was wasted on models and analyses whose purpose was to confirm decisions already made. This of course in now blamed on the modelers, not the decision makers. The greatest mistake is to believe your analysis must be right because the crowd is following it, for the moment.

Anatoly Veltman adds:

A VeltmanI understand what you're asserting. At the same time, there are subtle differences at times. For example, it has become known near Fri close: that Small Specs have Net Shorted the futures trade around the 825 S&P contract low. The S&P has been creeping up since, without material corrections that would allow them comfortable cover. This sure increases probability that they'll end up covering uncomfortably.

If, to the contrary, the Commitment of Traders (C.O.T.) report indicated Commercial shorting into the lows — then there would be less reason to be afraid of panicky cover to ensue. After all, hedgers are rarely forced to cover…


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