Should one trust the judgment of the 'experienced'? Experience counts for a lot as long as positions behave normally but in a non-standard game it can lead to stereotyped responses. This probably has market applications in times when everyone is looking for a rock to cling onto.

Here's a question: does a stats based approach to markets equate to an experienced one? If so, how can one avoid being stereotypical?

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005

Scott Barrie comments:

Not quite the answer you are looking for but experience vs. youth reminds me of two things… besides approaching middle age I am not young, but still not old enough to be experienced. Back in early 90s when I worked on the CBOE, I heard stories about the founding days. The CBOE was a dumping ground for the "Men Who Don't Fit In" (aka the rabble) or the young, seeking opportunity, or both. Those quick to adapt to the environment, were doing arbitrage trades (boxes) left and right and making a pretty penny –with very minimal risk to boot. It was those who adapted to the difference in trading options vs futures(equities) quickly who scored big and quick. As I heard the stories told, they were STUCK there, away from polite society — like many would consider the CBOT polite society. My point is the young, the pioneers, made good money, and pretty easy money as I heard it told (of course, things are always better in the past, so the story is probably just that).

The second market based example comes from the SEOS crowd. The small players ruled for a few years, making fortunes on a shoe string — as legend would have it. The pickings were easy, as the rules changed and those who spotted the change and were able to implement its nuances made lots of money, at least for a while. Many were young, or off the beaten path (rabble) hence they became known as "bandits" for stealing the tick or two that was the "god given right" of the specialists and market-makers (exchange members). In both cases, I have only been able to meet people who heard the stories of these developments years ahead of me. Those who survived and prospered, gained experience and have lost their youth. Those who didn't only managed to lose their youth. 

George Parkanyi replies:

It depends. You also have to assess the motives. General, broad experience can come in handy when things change greatly or rapidly. There are more potential avenues and adaptations open to someone who has seen how things turn out in many different situations. However, say someone is experienced, but they are willing to live within their existing paradigm come what may (e.g. someone owns a house in a hurricane zone, knows the risks, but is willing to accept those risks - even of death - because they CHOOSE not to change their lifestyle). You may have a very experienced captain that suddenly finds himself in overwhelming circumstances, but ultimately chooses to go down with the ship - that may not be your choice. Depending on your own motives, you may want to follow the example of someone who may not be that experienced, but is determined as hell to survive.

In the current situation as a trader, your first question should be — are the financial markets themselves going to survive? If you think not, then maybe selling everything now and buying some guns and a 5-year supply of Spam is the way to go. If you CARE not (like me), then keep trading and if it goes it goes. Your screen trading experience won't count for much in a Mad Max world, and then your choice is to accept its over and just take what comes.

After you've decided that you'll keep trading, then markets typically do one of three things, go up, meander sideways, or go down. If you're really smart and have lots of experience at reading the signs, you may be able to deduce which environment you are in and likely to stay in for a while. Trade accordingly. If you have no idea, then you may want to build an approach for each scenario, risk manage each, and hope the correct one delivers you more profits than the loss management of the other ones costs. I still think experience will be decidedly helpful to the person who was creative and flexible on the first place, regardless of age. Successful traders tend to be students of human nature — and I would think have a better understanding of how people are likely to react in different situations and environments, and use that to advantage.

As to the stats question, it would depend on what you are measuring. You would still have to assess relevance to current circumstances on a case-by-case basis for each metric you are using. And to avoid being stereotypical, you might want to turn basic assumptions and sacred cows upside down and see what falls out, and just keep asking lots and lots of questions and thinking them through. Also broaden the scope of scenarios you could imagine — it would be kind of like thinking many moves ahead in chess.

It would actually be very interesting to have a brainstorming session on the case for each type of potential market — up, down, sideways or even total collapse.

Nigel Davies adds:

I have a concept I use in my chess teaching which is something I've called 'gardening moves'. This is when you try to find a move which is useful in 'all possible worlds'. These tend to come when one has falsified most of the one dimensional possibilities.

Is the decision to trade a good one in all possible worlds? Probably not. Are there investments that would be good in all possible worlds? Probably not. But there are certainly those which can be OK in most possible worlds.

Go down with the ship? Not flamin' likely! I take the view that any creature worth it's salt has a duty to adapt and survive as well as it can and ensure that its progeny do the same. In my book there's no glory in defeat.

GM Davies is the author of Play 1 e4 e5: A Complete Repertoire for Black, Everyman, 2005





Speak your mind

7 Comments so far

  1. Rufus Rpund on March 3, 2009 6:26 am

    The stats will give you a framework for probability, a step on the ladder to an 'edge'. Experience will take you a few steps higher up the ladder.

    Or maybe this is better: the stats give you a map, experience tells you where you (roughly) are on the map. So in my view a stats based approach does not equate to experience. A shining example is the host of quant funds that blew up in The Great
    Deleverage. Is Dr Niederhoffer a better trader since his mid 90s
    misfortune? I would wager he is.

  2. Legacy Daily on March 3, 2009 10:14 am

    Great question! I think it's only possible to answer this in hindsight.

  3. Steve Leslie on March 3, 2009 10:31 am

    There has been an incredible rise in no-limit hold-em poker over the last 5 years. It has been attributed to Chris Moneymaker's winning the 2003 World Series of Poker main event. He parlayed a win in a satellite tournament into a first prize of $2.5 Million, Since then the tournament has grown incredibly in popularity to the peak when over 8500 people competed for the first prize.. Interestingly, for his final winning hand he held 5-4 and made a full house to win the tournament. This spawned the evolution of the World Poker Tour and tournament poker the world over both in card rooms and the internet.

    Along with the popularity, it has brought with it a whole new stream of amateur and professional competitors. The young guns. Those as young as 21 years in the U.S. and 18 (the minimum age requirement) in Europe. These young players, tend to play an extremely aggressive style of poker frustrating many of the standard professional players most notably the Poker Brat Phil Hellmuth. He has commented that as a result of this irrational and unconventional play, it is becoming much harder to compete in tournaments. Also these young guns are much more knowledgable understanding such aspects as the mathematics, implied odds, etc. through the vast information available through publications in print and the internet.

    I look as this as to how similar bubbles are spawned in the recent markets. The internet bubble of the 90's when people were quitting their jobs to trade stocks. They bought every new issue available, sometime flipping it the same day. This created the modern online brokerage accounts we see at Fidelity, Scottrade and Ameritrade to name a few. Trading Rooms were built to accommodate the huge demand of the speculator. Some became wealthy I am sure but I also guarantee that many ended up financially destroyed confusing brains with a bull market. As a result of this unbridled insane enthusiasm the NASDAQ went to over 5000. Today it sits precariously at 1335.

    The real estate bubble of 2003-2007. Once again, we see young guns, even mature retired souls, speculating in real estate, aggressively flipping houses buying up tracts of unbuilt homes mortgaging their future by overspending for a home, financing it with a 1 year or 3 year ARM and finding themselves upside down and unable to pay the new rate of interest. They even created an investment club where a group would put their money together together to invest through committee.

    History shows what eventually happens when irrational markets roll back to the mean and become less volatile, less speculative and more "normal" The resultant pain can be brutal which is what we are living through today.

    The big question in my mind is how long will it take for us to work our way out of this quagmire. The last fiasco, y2k took 3 years this one is anyone's guess.


  4. Steve Leslie on March 3, 2009 1:02 pm

    I would like GM to expand on his thought here.

    I recall that Garry Kasparov defeated Deep Blue in their initial battle by using unconventional moves and disguising it by craftily mixing it with conventional styles.

    In Poker, we have different styles from Tight Aggressive, loose aggressive, tight passive, maniac, gunner, defenders. The successful young players like Tuan Le and Gus Hansen change their styles regularly to confuse their opponents. Action Dan Harrington got his nickname by being perceived as a rock and then mixing in a few maniac moves catching the other less observant off guard.

    Moral: nothing works all the time, adaptability is the key to survival. Sometimes it is a traders market, sometimes a stockpickers, buy and hold. It is very fluid. The successful ones adapts their style to the market. The loser, argues with the market losing more and more until their erode all their powder.

  5. Nigel Davies on March 3, 2009 6:24 pm


    One of the characteristics of amateur chess players is that their plans tend to have just a single goal. Very strong players are able to find moves which help a number of possible goals simultaneously, and this makes it harder for their opponents to defend against all these potentialities. Similarly there a defensive moves which fulfil many functions.

    A fairly close analogy might come from tennis when a player’s actions prior to hitting the ball will not tell their opponents which shot they’re going to play. And the application of this kind of thinking in markets is that we’re often presented with a situation in which a number of scenarios are possible depending, for one thing, on how governments decide to do things.

    Are their investments that people can make to deal with all possible scenarios? Well I think that one very good thing to do right now is to invest in oneself. Whatever comes out of this people with certain skills and know-how will always be needed.


  6. Jim Davis on March 3, 2009 6:33 pm

    Both the early options market and the SOES execution system provided the few with huge structural advantages. That coupled with a little bit of brainpower provided them with almost risk free money.

    There was a long period where I could buy stock on Selectnet 25 cents (sometimes more) away from the SOES market and sell instantly for a profit. This was the case because market makers could not trade out of inventory on the SOES system. This was eventually changed.

    Both games lasted longer than they should have, because systems are slow to adapt . The Real Estate market also provided those inclined to abuse it with a very generous cash flow. We are now paying the price for that adventure.

    I can't remember any SOES bandit going to the Fed for a bailout, or a failed options floor trader asking for government help. Seems even Bernake is not amused at the antics of AIG. Sorry, but where were these guys when the crime was in progress? It was his job and his predecessors to cuff those dice rollers before all the damage was done.

    As for experience, it's a double edged sword. Perspective is hard to maintain when you've been successful for many many years. I think Mr. Buffett fell victim to this when he sold those puts. He didn't need that money , and he should have been looking for ways to hedge his own massive exposure, not add to it. Selling the puts probably distracted him from doing just that.

    Apparently the rationale was, if that huge PUT trade fails then its all over anyway so you might as well take in the premium. The claim that the put was mispriced is secondary. He still left his portfolio unhedged against a significant adverse move.

  7. ld on March 4, 2009 9:38 am

    Nigel - You said it perfectly! “Well I think that one very good thing to do right now is to invest in oneself. Whatever comes out of this people with certain skills and know-how will always be needed.”

    Along these lines, I have always been fascinated by the systems of retraining and career change/advancements available to people here in America.


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