CurveHow can we avoid curve fitting when designing a trading strategy? Are there any solid parameters one can use as guide? It seems very easy to adjust the trading signals to the data. This leads to a perfect backtested system - and a tomorrow's crash. What is the line that tells apart perfect trading strategy optimization from curve fitting? The worry is to arrive to a model that explains everything and predicts nothing. (And a further question: What is the NATURE of the predictive value of a system? What - philosophically speaking - confer to a model it's ability to predict future market behavior?)

James Sogi writes:

KISS. Keep parameters simple and robust.

Newton Linchen replies:

You have to agree that it's easier said than done. There is always the desire to "improve" results, to avoid drawdown, to boost profitability…

Is there a "wise speculator's" to-do list on, for example, how many parameters does a system requires/accepts (can handle)?

Nigel Davies offers:

Here's an offbeat view:

Curve fitting isn't the only problem, there's also the issue of whether one takes into account contrary evidence. And there will usually be some kind of contrary evidence, unless and until a feeding frenzy occurs (i.e a segment of market participants start to lose their heads).

So for me the whole thing boils down to inner mental balance and harmony - when someone is under stress or has certain personality issues, they're going to find a way to fit some curves somehow. On the other those who are relaxed (even when the external situation is very difficult) and have stable characters will tend towards objectivity even in the most trying circumstances.

I think this way of seeing things provides a couple of important insights: a) True non randomness will tend to occur when most market participants are highly emotional. b) A good way to avoid curve fitting is to work on someone's ability to withstand stress - if they want to improve they should try green vegetables, good water and maybe some form of yoga, meditation or martial art (tai chi and yiquan are certainly good).

Newton Linchen replies:

The word that I found most important in your e-mail was "objectivity".

I kind of agree with the rest, but, I'm referring most to the curve fitting while developing trading ideas, not when trading them. That's why a scale to measure curve fitting (if it was possible at all) is in order: from what point curve fitting enters the modeling data process?

And, what would be the chess player point of view in this issue?

Nigel Davies replies:

Well what we chess players do is essentially try to destroy our own ideas because if we don't then our opponents will. In the midst of this process 'hope' is the enemy, and unless you're on top of your game he can appear in all sorts of situations. And this despite our best intentions.

Markets don't function in the same way as chess opponents; they act more as a mirror for our own flaws (mainly hope) rather than a malevolent force that's there to do you in. So the requirement to falsify doesn't seem quite so urgent, especially when one is winning game with a particular 'system'.

Out of sample testing can help simulate the process of falsification but not with the same level of paranoia, and also what's built into it is an assumption that the effect is stable.

This brings me to the other difference between chess and markets; the former offers a stable platform on which to experiment and test ones ideas, the latter only has moments of stability. How long will they last? Who knows. But I suspect that subliminal knowledge about the out of sample data may play a part in system construction, not to mention the fact that other people may be doing the same kind of thing and thus competing for the entrees.

An interesting experiment might be to see how the real time application of a system compares to the out of sample test. I hypothesize that it will be worse, much worse.

Kim Zussman adds:

Markets demonstrate repeating patterns over irregularly spaced intervals. It's one thing to find those patterns in the current regime, but how to determine when your precious pattern has failed vs. simply statistical noise?

The answers given here before include money-management and control analysis.

But if you manage your money so carefully as to not go bust when the patterns do, on the whole can you make money (beyond, say, B/H, net of vig, opportunity cost, day job)?

If control analysis and similar quantitative methods work, why aren't engineers rich? (OK some are, but more lawyers are and they don't understand this stuff)

The point will be made that systematic approaches fail, because all patterns get uncovered and you need to be alert to this, and adapt faster and bolder than other agents competing for mating rights. Which should result in certain runners at the top of the distribution (of smarts, guts, determination, etc) far out-distancing the pack.

And it seems there are such, in the infinitesimally small proportion predicted by the curve.

That is curve fitting.

Legacy Daily observes:

"I hypothesize that it will be worse, much worse." If it was so easy, I doubt this discussion would be taking place.

I think human judgment (+ the emotional balance Nigel mentions) are the elements that make multiple regression statistical analysis work. I am skeptical that past price history of a security can predict its future price action but not as skeptical that past relationships between multiple correlated markets (variables) can hold true in the future. The number of independent variables that you use to explain your dependent variable, which variables to choose, how to lag them, and interpretation of the result (why are the numbers saying what they are saying and the historical version of the same) among other decisions are based on so many human decisions that I doubt any system can accurately perpetually predict anything. Even if it could, the force (impact) of the system itself would skew the results rendering the original analysis, premises, and decisions invalid. I have heard of "learning" systems but I haven't had an opportunity to experiment with a model that is able to choose independent variables as the cycles change.

The system has two advantages over us the humans. It takes emotion out of the picture and it can perform many computations quickly. If one gives it any more credit than that, one learns some painful lessons sooner or later. The solution many people implement is "money management" techniques to cut losses short and let the winners take care of themselves (which again are based on judgment). I am sure there are studies out there that try to determine the impact of quantitative models on the markets. Perhaps fading those models by a contra model may yield more positive (dare I say predictable) results…

One last comment, check out how a system generates random numbers (if haven't already looked into this). While the number appears random to us, it is anything but random, unless the generator is based on external random phenomena.

Bill Rafter adds:

Research to identify a universal truth to be used going either forward or backward (out of sample or in-sample) is not curvefitting. An example of that might be the implications of higher levels of implied volatility to future asset price levels.

Research of past data to identify a specific value to be used going forward (out of sample) is not curvefitting, but used backward (in-sample) is curvefitting. If you think of the latter as look-ahead bias it becomes a little more clear. Optimization would clearly count as curvefitting.

Sometimes (usually because of insufficient history) you have no ability to divide your data into two tranches – one for identifying values and the second for testing. In such a case you had best limit your research to identifying universal truths rather than specific values.

Scott Brooks comments:

If the past is not a good measure of today and we only use the present data, then isn't that really just short term trend following? As has been said on this list many times, trend following works great until it doesn't. Therefore, using today's data doesn't really work either.

Phil McDonnell comments:

Curve fitting is one of those things market researchers try NOT to do. But as Mr. Linchen suggests, it is difficult to know when we are approaching the slippery slope of curve fitting. What is curve fitting and what is wrong with it?

A simple example of curve fitting may help. Suppose we had two variables that could not possibly have any predictive value. Call them x1 and x2. They are random numbers. Then let's use them to 'predict' two days worth of market changes m. We have the following table:

m x1 x2
+4 2 1
+20 8 6

Can our random numbers predict the market with a model like this? In fact they can. We know this because we can set up 2 simultaneous equations in two unknowns and solve it. The basic equation is:

m = a * x1 + b * x2

The solution is a = 1 and b = 2. You can check this by back substituting. Multiply x1 by 1 and add two times x2 and each time it appears to give you a correct answer for m. The reason is that it is almost always possible (*) to solve two equations in two unknowns.

So this gives us one rule to consider when we are fitting. The rule is: Never fit n data points with n parameters.

The reason is because you will generally get a 'too good to be true' fit as Larry Williams suggests. This rule generalizes. For example best practices include getting much more data than the number of parameters you are trying to fit. There is a statistical concept called degrees of freedom involved here.

Degrees of freedom is how much wiggle room there is in your model. Each variable you add is a chance for your model to wiggle to better fit the data. The rule of thumb is that you take the number of data points you have and subtract the number of variables. Another way to say this is the number of data points should be MUCH more than the number of fitted parameters.

It is also good to mention that the number of parameters can be tricky to understand. Looking at intraday patterns a parameter could be something like today's high was lower than yesterday's high. Even though it is a true false criteria it is still an independent variable. Choice of the length of a moving average is a parameter. Whether one is above or below is another parameter. Some people use thresholds in moving average systems. Each is a parameter. Adding a second moving average may add four more parameters and the comparison between the two
averages yet another. In a system involving a 200 day and 50 day
average that showed 10 buy sell signals it might have as many as 10 parameters and thus be nearly useless.

Steve Ellison mentioned the two sample data technique. Basically you can fit your model on one data set and then use the same parameters to test out of sample. What you cannot do is refit the model or system parameters to the new data.

Another caveat here is the data mining slippery slope. This means you need to keep track of how many other variables you tried and rejected. This is also called the multiple comparison problem. It can be as insidious as trying to know how many variables someone else tried before coming up with their idea. For example how many parameters did Welles Wilder try before coming up with his 14 day RSI index? There is no way 14 was his first and only guess.

Another bad practice is when you have a system that has picked say 20 profitable trades and you look for rules to weed out those pesky few bad trades to get the perfect system. If you find yourself adding a rule or variable to rule out one or two trades you are well into data mining territory.

Bruno's suggestion to use the BIC or AIC is a good one. If one is doing a multiple regression one should look at the individual t stats for the coefficients AND look at the F test for the overall quality of the fit. Any variables with t-stats that are not above 2 should be tossed. Also an variables which are highly correlated with each other, the weaker one should be tossed.

George Parkanyi reminds us:

Yeah but you guys are forgetting that without curve-fitting we never would have invented the bra.

Say, has anybody got any experience with vertical drop fitting? I just back-tested some oil data and …

Larry Williams writes:

If it looks like it works real well it is curve fitting.

Newton Linchen reiterates:

 my point is: what is the degree of system optimization that turns into curve fitting? In other words, how one is able to recognize curve fitting while modeling data? Perhaps returns too good to believe?

What I mean is to get a general rule that would tell: "Hey, man, from THIS point on you are curve fitting, so step back!"

Steve Ellison proffers:

I learned from Dr. McDonnell to divide the data into two halves and do the curve fitting on only the first half of the data, then test a strategy that looks good on the second half of the data.

Yishen Kuik writes:

The usual out of sample testing says, take price series data, break it into 2, optimize on the 1st piece, test on the 2nd piece, see if you still get a good result.

If you get a bad result you know you've curve fitted. If you get a good result, you know you have something that works.

But what if you get a mildly good result? Then what do you "know" ?

Jim Sogi adds:

This reminds me of the three blind men each touching one part of the elephant and describing what the elephant was like. Quants are often like the blind men, each touching say the 90's bull run tranche, others sampling recent data, others sample the whole. Each has their own description of the market, which like the blind men, are all wrong.

The most important data tranche is the most recent as that is what the current cycle is. You want your trades to work there. Don't try make the reality fit the model.

Also, why not break it into 3 pieces and have 2 out of sample pieces to test it on.

We can go further. If each discreet trade is of limited length, then why not slice up the price series into 100 pieces, reassemble all the odd numbered time slices chronologically into sample A, the even ones into sample B.

Then optimize on sample A and test on sample B. This can address to some degree concerns about regime shifts that might differently characterize your two samples in a simple break of the data.




 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



 With nations across the globe rushing in to support their ailing car industries I've been wondering where's it's all going to end. With the industry as a whole producing a huge oversupply, the cash bleed to support these industries doesn't seem like it's going to improve until some of the players start to 'fold'.

So who's going to win? In this case the cards may be secondary to just holding the most chips. Just keep raising until enough of the other guys cave in.

So what strategies should governments adopt? If you start with a small pile of chips it's probably best to fold quickly. And as soon as the oversupply has evaporated you end up with holding a profitable business.

Alternatives? What about mothballing your car plants until the rest of the world has exhausted its cash and then getting them up and running again? Enter the game late and fight with a fresh army!?

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



 This question is akin to an inverse of the rabbit from the empty hat trick. The rabbit has to be there in the hat before it has been taken out. The inverse of this trick would be that the affairs of men relating to wealth and money during a downturn and crash are prone to imagining a rabbit vanishing into a hat that was never put into the hat.

Money in its broadest realm is a state of the mind. Cash and currency are but one tangible subset of money, a much smaller one. There are many other tangible subsets. Then there are the intangible ones. The wealth effect espoused by financial behaviorists is but nothing else. Today's context is nothing different really conceptually from the Tulip mania or any other that has happened in between since.

Value is what money is supposed to store. Cash is one form of money. Central Banks are creating money in modern times as their dutiful function. Financial markets are producing money and consuming away their own and others' money creations periodically as a by-product of their other core functions. Whatever can be a store of value and a medium of exchange is money. That's how there was a time not too long ago when the Tulip bulb was the most important store of and producer of more money. As confidence and thus belief in the existing amount of collective wealth and value goes up so does the amount of money perceived goes up. When the amount of money perceived around exceeds far beyond the utility or the utilizable value, mankind is presented with the bills enabling reality check.

Where would the money go that never existed? That rabbit was never put in to the hat. No point in searching it there at least. But then in such cases, there were several rabbits that never existed.

Now markets, crowds, societies and the entire mankind are known to have swung from one extreme to the other one. So, as this all gets prepared to be relegated back behind to leaves of history, yet again the real rabbits will be put into the hat and won't be visible before being pulled out. In markets, non-existent rabbits are being put into hats and existent rabbits don't get seen inside the hat. Men of the markets are indulging in relishing and enjoying the magic of both kinds they are themselves creating again and again.

George Parkanyi asks:

But where has the actual cash that's been created (not the intangibles) gone? Every balance sheet begins and ends with the current assets line-item Cash. I understand that the Treasury can create money out of thin air - but whatever dollars it has created to date exist somewhere as cash - net of those dollars that have been taken out of circulation. It cannot not exist. A big chunk of it may not be CIRCULATING, or at least not in our economy, but it's SOMEWHERE. My question is where? and what would cause the money not circulating to begin circulating again?

Now some balance sheets are of course over-stated because they value assets at a market value that is not realizable. And real cash was lent against those unsustainable values. This just means that a significant amount of cash was deployed unproductively buying a house for $1,000,000 that could be replaced for $400,000, or a $1,000,000 mortgage backed issue that may only receive back $300,000 of principal. But even where cash went to purchase intangibles, the seller of the intangible still received the cash, and either "saved" it or went and bought something else.

If we assume that the cash the Treasury has created over time still mostly exists, then I believe the question becomes to what extent have balance sheets been bloated with unrealizable intangible values? And to what level do these intangibles need to readjust down for businesses to again begin investing and for people to still show up for work and maintain and grow an economy?

There are some potential implications. For example, if you have $30 trillion of cash around the world (I have no idea what the real number should be), then adding another 2, 5, or 10 trillion may not necessarily be all that inflationary. Also, if intangible "assets" on books are 3 or 4 times the amount of cash available, and they suddenly go out of favor (e.g. real estate prices drop, no-one wants junk bonds, no-one wants to pay more than book value for stocks), then demand for cash and "safe" cash equivalents will soar (and cause one godawful depression- especially if the cash is just hoarded). There may even be bank runs despite federal deposit insurance. And what if the real cash is mostly overseas, and we're holding the bag with mostly intangibles? Ouch.

I would expect that the tipping point to inflation will come when we begin to see shortages (or perceived shortages) in real assets (e.g. from droughts causing food shortages or commodity shortages due to global supply disruptions) to meet current needs, but especially if there is a fear-driven demand to acquire and hoard real assets (loss of confidence in the currency), possibly leading to hyper-inflation. That doesn't seem to be the case right now, especially in North America and Europe.

My gut reaction on this is to lean toward the deflation scenario, because even though the Treasury may throw a few $trillion out there, much of it may be absorbed by born-again savers and foreigners, and still mostly stay out of circulation while asset prices fall. However, that deferred latent purchasing power, when unleashed, could be enormous when asset prices finally turn.

Easan Katir comments:

George, here is the train of thought I think you're asking about/ applying your line of questioning to what everyone says is the root problem: housing.

Trillions were in pensions and sovereign funds. Pension plans, sovereign funds, no doubt Orange County ( they get in on all the deals ) bought CDOs from investment banks. So their cash went to investment banks. To create the CDOs, the banks had to buy mortgages from lenders. So the cash went to mortgage lenders. To originate the loan, mortgage lenders gave cash to home sellers. At this point in the logic train we have two layers of paper, not cash: CDOs and mortgages, which have had to be reduced in value because the home buyers overpaid.

Buyers and lenders gave their cash to the homebuilders, who were of course, sellers. So the homebuilders should have mountains of money. Since they don't appear to, one assumes they must have taken their money and bought more land, built more houses, which they couldn't sell, and have had to write down. Some cash went to the land sellers, the subcontractors and the materials suppliers. Private homebuilders bought more investment real estate, and gave their cash to those sellers.

Those who now have the trillions don't seem to be standing up and waving "it's here. I've got it", do they….

So a "nutshell" answer to your question, "where is the cash?" might be, it's in the bank accounts of anyone who was a seller of houses, land or stocks a few years ago. Herb and Marion Sandler, for example, who sold in 2006.

Stefan Jovanovich comments:

Most of "the money" is gone. Some very little of it is sitting in safes and vaults in the form of greenbacks and bullion, but most of it is simply up in smoke. Very few of the people invited to the A-List party have the wisdom to want to leave early or the guts to be seen leaving early. The homebuilders here in California put most of the money they made into options for and outright purchases of new lots, heavy equipment and (in the case of the public companies) stock buy-backs. They also paid a lot of money in income taxes. The value of the lots they bought or optioned here in California is close to zero, and I assume it is the same in Florida and the other places that saw a boom. The heavy equipment is worth between 10 and 25 cents on each dollar they paid in 2005, 2006 and 2007. (It is not just the slow-down in orders from China that is killing Caterpillar right now; the competition from used equipment is murderous.) The idea that somehow only we poor Americans were the suckers is funny. If anything, we have gotten off comparatively easy. The property markets in Europe and the Middle East and Asia have, as the Beach Boys might have put it, all become California dirt; and their central bankers bought far more of our crap paper than Helicopter Ben bought of theirs. What is also funny is the notion that the money center banks need to start lending again to get the economy moving again. They ARE lending - to the Treasury. Why, in a world of ZIRP, should they do anything else?

Bud Conrad writes:

Bud ConradThere are so many good questions and answers it is hard to focus on simple explanations. But first a few clarifications on George Parkanyi's initial point of view: Money is not a real thing of substantial value, and it is not created by the Treasury, but by the Federal Reserve. The Dollars in your pocket are Federal Reserve Notes. This is a minor point because your question makes perfect sense if you wrap the word "government" around both the Treasury and the Federal Reserve, and replace your use of the world Treasury by the word government.

Then your question still stands: Where did the money go? First, the real assets of homes and land and factories still exist, and they are still owned by someone. What disappeared was the value expressed in dollars. This is a form of money implosion as experienced by holders of deeds of trust that don't cover the defaults. It means less money in total. That is why we have deflation.

But as you say the government (Fed) can print money pretty much at will to keep things going. The system of fractional reserve banking is set up so that most of the "money" comes from the banking system as it makes loans. For example, mortgages are used to buy homes, not the money from a down payment. These mortgages were based on the banks making money by creating loans. About 6 times as much "money" was made by the banking system as by the Fed. In boom times and according to theory, banks always want to make more loans as that is the way they make money. They are constrained by having enough reserves to meet the Fed's requirement of supposedly 10% of deposits put on deposit at the Fed. When the Fed adds new reserves by buying Treasuries from banks, the theory expects the banks to make new loans an "multiply" the money throughout the economy making new loans. In this situation today, the Fed has bought Toxic waste giving the banks new money that could be lent. But the banks aren't lending because they have bad debts, and need to have capital adequate to meet regulatory review and because they can't find lenders they can trust who want money. So the banks have piled up "Excess Reserves" at the Fed and the money multiplier is leaving the Fed "Pushing on a string" getting no expansion of the money, even after their bailouts that they thought would be stimulating.

P.S. I like the rabbit that isn't there being put in the hat as explanation as it makes as much sense as all the details here. It is only an illusion that money is worth anything, that is left over from convention before 1971 when foreign central banks could convert dollars at $32 per oz for gold. De Gaul reached for the gold and Nixon slammed the window on his fingers after we sold off half our store. Since then it is mere historical convention, image and illusion that keeps the dollar afloat.

Nigel Davies offers:

Here's another take on it. What if most energy in any system is lost simply through friction, this frictional tendency actually increasing during an asset bubble. When the bubble deflates again, most of what you have left is the huge waste caused by people chasing something that never really existed in the first place. They were pursuing an optical illusion caused by increased liquidity and dissipating real wealth via their frenetic activity.

Jim Sogi writes:

Money, cash, and credit, is merely a counting method for confidence, or now, the lack thereof. It is created as an ether, and disappears as the fog. It is a strong only as our full faith. With mass communication, global memes seem to spread faster, turn on a dime, so to speak. I wonder if there is a correlation between speed of decline and recovery time?

Vincent Andres responds to Nigel Davies' questions about China:

Once upon a time they did build a big wall, I would posit it's now imprinted in their DNA. The surface inside the wall + the number of people there seems already a nice piece to manage. And btw, In 2008, everybody also knows how too big empires end.

So, I'm really not worrying too much about China. China managing China is already a really great challenge. Kudos if they succeed.

Just my two cents feeling, I would like to hear the flaws/missing points above.

George Parkanyi adds:

The mitigation of risk and the collective formation of capital in the capitalist system incents exploration, invention, innovation, and experimentation. Look around you at the marvellous things it has built, and the amazing discoveries it has facilitated. Next time you take a flight think about all that went into you being able to do that. Or even just driving a car. There's nothing really wrong with the current monetary system other than we've allowed it to run amok. Credit is fine as long as there is a reasonable expectation of most of it being repaid. (But even if it isn't the stuff gets built anyway; someone eventually just takes a haircut.) With some better checks and balances, there is no reason we can't dust ourselves off from this face-plant and continue to progress - hopefully a little less rough-shod over the environment and each other. The key is to keep enough people incented to keep innovating and working productively to sustain the complex societies and systems we have built.



GM NigelAt this time when many people are trying to move to 'safe' jobs I wonder if a contrarian approach and enterprise is in order. It strikes me that whilst the timing may still be a little early there seem to be many strong arguments in its favour:

1) If a week is a long time in politics, how long will it take the man on the street to decide that those in cushy but unproductive government jobs are just a waste of valuable resources?

2) With many firms in the process of closing down, what demand there is will go to the survivors which offer the best service and value.

3) With resources becoming ever cheaper, research and development (especially on a technological front) can be achieved at lower cost whilst simultaneously reducing the tax bill.

4) Nations may soon be competing to house growing businesses in order to rebuild their economies.

Some questions come to mind, for example how one should identify areas of growth. My first instinct is that the areas with demand will be those which haven't been propped up by government, ie businesses with few employees. But then fewer of these may have gone to the wall.

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



 Is that true that chess software cannot deal with incoherent, random, crazy, moves?

My own chess is very low ranked so I am no match to most chess software. I was playing (in the absence of a available friend) with web-based software named Jester. Playing "fairly" I wasn't able to beat the software. Ever. Then, one day, while listening to Philip Glass's "Etude N.3" loud in my earphones, I started to play furiously, just reacting, not thinking, making whatever move I could make. Crazy chess.

Guess what: the game didn't last few moves (as it used to) and I was able to go to the end game, and I saw a weakness in Jester's game. I went for it (this last couple moves were "rational", the ones before them, not). I won the game, amazed that the Jester wasn't able to "see" the weakness in his own end game.

PS: In a "fair" game, I usually felt like the software "knew where my stops were" and just hit them.Is that true that chess software cannot deal with incoherent, random, crazy, moves?

Nigel Davies replies:

If you got better results over many trials it could be that you're 'switching off' some aspect of your reasoning that leads you to play weaker moves, i.e. that at some level there's a misconception. This of course has huge implications for traders — they may be using an approach with a negative expectancy in a highly disciplined way.

So just guessing moves represents a better chance of beating Kasparov than those thought up say by 1500 players because they'll lack systematic error. There's a chance (albeit a very small one) that every move will be perfect!

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



The posts on pain & gain got me thinking about whether such things are culturally dependent, and whether this then extends to the ways different markets behave. For example the S&P has traditional had a cyclical nature which seems to mirror the concept of pain resulting in gain.

These patterns certainly aren't universal, for example the Nikkei behaves quite differently. This would seem to reflect a different attitude to suffering whereby forbearance is more highly valued.

So I wonder if it's possible to classify different cultures according to their attitudes to pain and see if greater forbearance manifests itself in longer moves in a particular direction. And would such behaviour change over time, for example if a particular nation goes through good or bad times.



 During my chess career I learned a lot about the dark side of psychology. One thing that I didn't put into 'Chess for Scoundrels' was how to talk a tournament leader into self destruction.

It goes like this. Let's say that a particular player is leading a tournament and is really 'in the zone'. The way to ruin him is to congratulate him on his magnificent play and then innocently ask what exactly is he doing right? This works in 2 ways, the first part (the flattery) being to cultivate vanity (more preening, less vigilance) and the second (requesting the explanation) fosters the kind of self-consciousness which takes them well and truly out of the zone.

Now I don't use this myself, but I've seen it done many times by, let's say, 'well meaning' fans. They flatter and beg advice, thus unknowingly sowing the seeds of self-destruction in their hero. And of course they promptly move onto a new hero when that one happens to fall.

This is why it's better to only flatter your enemies. And run like the wind when you're the lucky recipient.

Pitt T. Maner III adds:

Gamesmenship is practiced in many sports. And Stephen Potter was one of the masters in a good-hearted way:

All this failure is important, for it never would have occurred to a successful man to devise the four strange books that were the making of Potter's reputation as a comic artist. The idea for these books first arose while Potter was playing tennis with the philosopher C.E.M. Joad as his partner, against two younger and better players. After hitting a ball that was obviously well out of court, Joad called, "Kindly say clearly, please, whether the ball was in or out." By suggesting a slight lapse in etiquette on the part of the younger players, good sportsmen both, it threw them off stride, a stride they never regained, and Potter and Joad went on to win the match. "For me," writes Potter, "it was the birth of gamesmanship." "Gamesmanship" is devoted to "the art of winning games without actually cheating." Actually is the key word here. In tennis, golf, chess, poker, cricket, bridge, hunting and other games, Potter suggests delicate ways of breaking the flow of concentration in your opponent so that he stumbles and falls off his game. A gamesman does what he can to make sure that the best man does not win.


George Parkanyi comments:

This would suggest a corollary that insults and criticism would only just strengthen the already confident, i.e. the rise to the challenge gets the creative/competitive juices flowing.

It reminds of a recent football game — I think it was the Super Bowl. For some unknown reason, this huge Pittsburgh player went after this much smaller Cardinal player tossing him around like a rag after the whistle had blown. I remember commenting at the time — "What did he say to that guy?" It certainly was something.

Paolo Pezzutti writes in:

It happened to me after a long streak of winning games during a tennis match. For some reason I was in the game, focused and ready to exploit any weakness of my opponent. But when I would start to rationalize what was happening and why it was happening and building scenarios for the final victory I was finished, and eventually I would lose at least the set. Maybe it's because you take bigger risks: you think you can do even better and change something in your tactics. This makes you out of sync with your physical and mental condition which builds an advantage to your adversary. Similarly in the markets, after a long winning streak, when I try to analyze the what and whys, I end up changing the way I have been trading up to that moment and things get worse.

Nigel Davies adds:

Empty sycophants can be bad news for any teacher, especially teachers who are active participants in their activity and need to maintain great focus and self discipline. I've found in my own mentoring work that the best students can be very difficult, but they can actually help you raise your own game.



Information overloadDoes more information equal a diminished ability to process it and create? Seems to make sense from a hand-count point of view.

"Paying attention isn't a simple act of self-discipline, but a cognitive ability with deep neurobiological roots — and these roots, says Maggie Jackson, are in danger of dying.

"In Distracted: The Erosion of Attention and the Coming Dark Age, Jackson explores the effects of "our high-speed, overloaded, split-focus and even cybercentric society" on attention. It's not a pretty picture: a never-ending stream of phone calls, e-mails, instant messages, text messages and tweets is part of an institutionalized culture of interruption, and makes it hard to concentrate and think creatively.




 Here's something that I've been thinking about for a while. Big cats appear to have an innate odds calculating ability whilst hunting, so are we humans devoid of such intuitive talents? A lot has been written about deficiencies of such abilities in humans, thus implying a need for formal structure. But what if we have a natural odds calculating ability that can be developed?

Twenty-nine published and four unpublished studies of leopard diet that had relative prey abundance estimates associated with them were analyzed from 13 countries in 41 different spatial locations or temporal periods throughout the distribution of the leopard. A Jacobs' index value was calculated for each prey species in each study and the mean of these was then tested against a mean of 0 using t or sign tests for preference or avoidance. Leopards preferentially prey upon species within a weight range of 10–40 kg. Regression plots suggest that the most preferred mass of leopard prey is 25 kg, whereas the mean body mass of significantly preferred prey is 23 kg. Leopards prefer prey within this body mass range, which occur in small herds, in dense habitat and afford the hunter minimal risk of injury during capture.


Pitt T. Maner III comments:

I think that humans have retained quite a bit of this innate assessment ability if you expand your definition of "hunting". Body fat percentage, symmetry, beauty, likelihood of being fertile, health, etc., etc., etc. is done in the blink of an eye although not assigned a particular number…

Take this research for instance:

Such a drive might underlie the utility of attractiveness. And elucidating how the brain responds to large, obvious differences in attractiveness could help researchers understand how the brain responds to differences that are subconscious and difficult to articulate. Platek says he does have results, as yet unpublished, that look at the brain’s response to good-gene indicators.

It's just when you are looking for an attractive stock that you get into trouble since stocks have only been around a few hundred years. And one can be fooled by cosmetic surgery and such…

Having spotted an escaped pet boa constrictor (later picked up by its owner) from 100 feet away along the side of the road in Lake Worth, Florida while driving home at 30 mph one day, I can attest to the fact that humans are very adept at spotting moving, linear, snake-like structures too, in an urban landscape. Another innated carry-over from the Serengeti…



I like GM Miguel Najdorf's definition of intelligence; the speed with which someone is able to change his mind about something. But it strikes me that this may be mainly a trait that can be acquired via education.

There seem to be two major parts to this process:

1. Having enough curiosity to look for alternatives.

2. Being able to admit you were wrong about the previously held view.

This leads on to a possible definition of an 'educational environment', i.e. a place which is able to foster these two.



AristotleMuch ado has been made in the media about the market decline, the bailouts, TARP, and the excesses on Wall Street. The average guy on the street has had his fill of listening to the constant scandals, price declines, loss of jobs, and real fear of a big depression. For many, opening their 401-K statement puts a knot in the pit of their stomach and the resolve to have to delay their retirement a few more years. Many people stoically accept their victimhood with a sense of camaraderie, comparing their brokerage statements with their peers during their morning coffee breaks. Despite this outward bravado, a sense of hatred is developing with many passive investors regarding the markets, traders, speculators, and the whole system. This isn't the hatred described by Descartes, but is a more insidious hatred, a type of hatred described by Aristotle. This is the hate that results in the destruction of the entire capitalist system. Right now, speculators and traders aren't very popular on Main Street, being blamed for everything from the crash, the low values of 401-K's, to all the crooked scandals. We're denigrated, admonished, bashed, and set to be the fall guy for all the ills that have beset the country. The media and government seems to ignore the political social engineering decisions that started the downward spiral. Never mind the fact that many speculators have been hit hard by recent market action, the public sees us as parasites, contributing nothing to society while taking everything. Portraying speculators as looters is a brilliant method the genuine looters are using to camouflage their agenda of control. Whipping up public hatred of risk takers will enable the real looters to justify the nationalization of the economy and solidify their control over the means of production and our lives. It is already starting, and this crisis is playing right into the hands of those citizens who loathe and fear the productive. The public is ripe to willingly go along, being duped by a partisan government and complicit media, and being offered the empty promise of forty acres and a mule or whatever the modern equivalent is. Meanwhile, the speculators might have to lay low for awhile and let this whole mess play out. Whether business is nationalized, the country is socialized, or we end up in a series of five year plans, there will still be room for risk takers and individuals in the future. Ideally, it would be nice if we all were able to go on strike, but that won't happen. However, in my humble opinion, as long as there is a difference in the opinion of two or more people, there will be a market somewhere. And this fact, and this fact only, makes me cheerfully optimistic for the future. No matter how bad things might get in the USA, it will always be worse in Pakistan.

Jim Sogi writes:

J SogiThings were way worse in the 60s and 70s, then again in the 80s. Remember the stench of the bums lining Grand Central station, the bums everywhere on the streets, the crime, garbage in the streets, New York City under Lindsey almost bankrupt, riots, anti war demonstrations, race riots, lynchings. Remember the 50,000 dead in Viet Nam. Remember the savings and loan. Remember 24% interest rates? Remember the 50% drop in 74? The S&L thing was really bad. Real estate tanked for a decade after that. Remember the junk bond crisis? This "crisis" for all its blown up to be, is not as bad. Sure real estate is down 20%-30% , but it ran up 600% before. Sure there are some foreclosures, but in Hawaii there used to be 4 on every block. Mexico went down. Asia went down. Japan went down. Its not as bad now. Sure the market is down 38% or whatever, but wait a few years. All these people complaining at cocktail parties now will be daytrading again in the next decade at the new highs and bragging how they bought during the end of 08 during the crisis. But really, its time for some new blood. A new generation is coming up. The baby boomers are done. Bankers were always chumps no wonder they are going down the tubes. Those egomaniac overpaid CEO's deserve to go down. Let the fires clean out the filth and waste, finally. Remember, the public is usually wrong. Its a new dawn. I can almost smell it coming. Its been in cycles like this for all of history. An its happening again. Heck, the bottoms are only 50 or so points away, so what if there are new lows. Good, we got over it really fast and we should be happy about it for crying out loud. When it takes off, its going to make your head spin.

Nigel Davies comments:

The greatest irony of this situation is that it hasn't been the traders and speculators who are to blame, at least not those with this title who assume risk. It's the politicos who operate within the financial world, the guys who have looked for a risk free return from finance by manipulating the system. It's not hard to identify them, just look for signs like the creation of frankenstienian instruments, paying themselves huge amounts for having done and only ever risking the wealth of the shareholders who own the company they're leeching.

These same guys will perform this role in whichever system they find themselves in. As a case in point look at how the KGB 'elite' went from milking the socialist system to owning companies and getting elected as presidents etc. They never took a real trade in their lives.

I think this is what confuses the public, the villains change their costumes. And what better way to stay one step ahead than by yelling 'THEY'RE THE ONES', whilst pointing to those wearing the clothes that they had on last.



 I've been thinking about the nature of counting and the intent involved. For most people who examine markets the aim of looking at data is, I believe, to consciously find some pattern which will lead to a winning market system. But what if one were to count without any particular intent in mind, purely as a means of familiarizing oneself with the nature of the beast we are called to dance with?

Vic and Laurel have mentioned many times the virtue of counting by hand, and I've listened because this somehow chimed with my chess experience without my being able to fully identify what the analogy is. Now I think I know; when I prepare for an opponent I've found it to be far more effective just to look at his games in a holistic way, familiarizing myself with how he plays rather than look for a particular move to play against him in a position he has reached before. And this works better still if you play through the games with a real board and pieces rather than do it on the computer.

I think there's a very subtle but important distinction in these two methods, the 'hand count' in both chess and markets being a method of familiarizing the mind at a subconscious level without the burden of conscious effort. I can't find any Western sources that adequately describe what's happening, but there seems to be a wealth of knowledge from the East.

"The mind of a perfect man is like a mirror. It grasps nothing. It expects nothing. It reflects but does not hold. Therefore the perfect man can act without effort." — Chuang-Tzu

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

Jeff Watson adds:

J WAlthough not a member of the technical analysis cult, I do update my daily charts by hand at the close. It’s an exercise that keeps me connected to the markets and affects my trading on the subconscious level. Abandoning hand-drawn charts in the late 80s in favor of having a chart spit out on a computer had negative impact on my trading. After quantifying my below average personal performance for a 19 month period, I reviewed what behavior had changed, and all indications led towards the charting issue. Resuming the task of putting up charts by hand had an immediate positive effect on my trading, right out of the gate. Perhaps it was a confidence changer, a talisman, or something else; That’s worthy of another study entirely.



 If one were to deliver a last lecture like Randy Pausch, what would it be like? I'd start with trying to prolong life. It's terrible to die at an early age like he did, and there are many things that a person can do now to prevent it. Let's start with the Mediterranean and Okinawa diets and statins, Tagamet, and nsaids like Vioxx and Celebrex. In addition to the added time to enjoy and liquify the wealth, this gives one the power of compound interest.  

The second thing I'd say is always be aware of deception. The market is at least as smart as the caterpillar which has a hundred ways of deceiving its predators. A good understanding of deception in nature, and models that go into first, second and third level deception in various games is a good start.

The third thing is similar to Randolph's head fake thing and is contained in Liddell Hart best. The power of indirection. A frontal attack is often met by the adversaries best defenses. It wastes too many resources. Absolutely essential is to divide and conquer.  

The fourth thing is to develop a good character. All your faults will come out in the market. and if you are a chronic complainer, or liar, or compulsive gambler, or procrastinator, the market will ferret them out and do you in.  

The fifth thing is to always be humble. The market is so smart, so changing that to think you ever have the answers for too long, is certain to lead you to be behind the eight ball when things change.  

The sixth thing is to develop good fundamentals. Randolph says that he likes to use football analogies and to get a good three point stance and to play well without the ball. I'd go back to coach Wooden and start with washing the hands, and putting on the socks, and keeping your execution costs low, and making sure that you don't pay too high a cost in promotion or that you're carrying too many people on your shoulders who aren't paying an appropriate part of the passage.  

The seventh thing is to learn how to count. Too many people are prey to wishful thinking and an inability to distinguish regularities from randomness too many are subject to real psychological biases, (not the ones talked about by the Nobelites) to think that you can overcome them without some hand studies and calculations of variability.  

The eight thing is to learn how to handle failure. It's bound to happen, and you have to learn from it.  

The ninth is to read good books. We have many that we recommend on this site.  

The tenth thing is like Shakespeare to suit your apparel to your position, and to suit your positions to your size so that you don't get in over your head.  

The eleventh thing is to have some escape hatches and contingency plans i.e. the mouse with one hole is quickly cornered or as Randolph says, what happens if the wolves are after you. I could go on and on, and perhaps I will but I"d like to get your insights on this.

Valery Kotlarov comments:

I’d take the best of the best writers and begin with something like what Kurt Vonnegut said here. I love every book he wrote, and the most important thing that I took from them is the fun– that every situation in life can be so comical and funny, so we should never take anything too seriously. As humans, we are driven by language, and sometimes it’s funny what one can understand from the same sentence or even word– something totally different from what another would understand. Also, I’d speak about the charismatic and optimistic personalities, like Ayn Rand. I’d mention the legendary people. I’d also speak about the bank robber, whatever his name, just to show that success is something that we can create and follow, but we should never be slaves of it, or friends of it.

When I was in Turkey, I heard that many families build homes for themselves. Each year, they build it higher and higher, step by step, so in a few years they get a warm house. And I’d speak about some of the greatest inventors like DaVinci, Edison, Tesla, Archimedes, and what they did to show the achievements and that dreams can come true. I’d take some of the Gregory Bateson’s ideas, and emphasize that the ideas and dreams are things we are made of. And from here again to Vonnegut: “We are what we pretend to be, so we must be careful about what we pretend to be.” And, well, I’d also emphasize reading and learning– the importance of it, and to try make fun of it all–life, whatever it is. Also I’d never think or call it my last lecture, just too optimistic for that, even if 99% of facts would point that it is (gimme events not the descriptions) Last, I’d buy some S&P or other stocks of  healthier, economologically speaking, countries, and give it to someone I love (so he or she could only use it after some 15-20 years.) 

Nigel Davies writes:

There's only one major addition that I can think of, and that's the importance of having a higher purpose or mission in life. This is something that all the great people in history have in common, whether it's 'queen and country' (e.g. Nelson), 'the truth' (e.g. Galileo) or helping others (e.g. Mother Theresa). This could even be the biggy, the one that holds other principles in place.

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

Victor Niederhoffer adds:

Find a good mentor. You can ride on their shoulders and they will achieve immortality and pay back for the mentoring they received through you. But by the same token, never take a tip from anyone, a trade for the day, because you won't know if it fits in with your persona as it did with theirs, and you'll never know how strong their convictions are, and when they change them, and you'll be weak.

Be optimistic. Nothing good has ever come to those who hope for the destruction of civilization or the market or who fight the upward drift which must continue up to follow the strands of human progress, which is still grand, even today especially if you consider all the individualism unleashed on the world in India and China.  

One of my mentors, Dr. Raymond Chang, says that the best meal for a lifetime he knows is to take a vitamin D3 Supplement each day, and I would add it to the list. Exercise is always helpful as it prolongs the life, and eases the tensions, and improves the digestive process, and makes you look better, thereby attracting better mates, and mentors, and is in keeping with the fundamental nature of humans, which involves play and sympathy.  

Family. The people that you can always count on are your extended family, and the more you use this to support you, the better you'll be. Conversely, be aware that most of your non-extended family, except for your very good friends, can never be trusted to support you when you need it the most and indeed are likely to disappoint you over the long run.

Friends. Friendship based on business is always better than business based on friendship. I would augment my little thing about deception above by saying that one should always beware of the negative lie as a tool of deception. The thing where the deceiver tries to say something bad about himself so as to get you off your guard so he can go in for the big kill. I was interested in this regard to see that the French firm that killed itself out of honor on the Madoff matter was taken in by the very self deprecating manner in which B. M. told them that he once lost too big while his kids were tugging at his coat, and telling him not to help others, when he tried to intervene with big bucks against his kids advice. It is interesting how the kids "apparently" did not tug at his coat vis a vis any of his other less noble activities.

Stephen Stigler comments:

That is a good list, although I'm tempted to repeat a comment of my father's, "There are not ten good reasons for anything." Which would suggest focus and priorities.

James Sogi adds:

Do what you love. Love what you do. Don't do what you hate. Many people will tell you what to do. There are social and family pressures, some hidden. Follow your own agenda. Trade your own style. You can't follow someone else's style. It won't fit, and you will lose money. Trade and make money the way you know how, they way that is comfortable to you.

Spend time with your family. As Vic says, no one but they will really be there when your really need them. There is not much time, and it will soon be gone. Spend time with them. 

Kim Zussman writes:

Regarding Vic's "fourth thing," use the market-mirror for self-diagnosis, but never rule out the possibility that your condition (you + the market you're in) could be pre-malignant and require complete excision.

Laszlo Birinyi comments:

There are two things I would add. One, read different books and develop breadth. Drucker amazed me in school because he could illustrate ideas from history, literature, life and whatever. I encourage my kids to take courses in Arab culture or Norwiegen or whatever, not just literature and art which are their major interests.

Second, learn to listen. I find at bonus time everyone has inflated opinion of their contribution. I did well in my career because I never argued with my bosses. If they paid me x, my contending that I was worth 2x wasnt going to fly. If it was .5x (fortunately it never was) that was a signal to shape up.

David Brooks writes:

All of Victor's ideas about ways to prolong our mortality are right on. I particularly like the comments about deception, because I have always believed that one of the things that differentiates excellent surgeons from merely good surgeons is the ability to see things that others don't, such as tissue planes, obscure vessels, the deceptive picture that disease often presents.



 One reason why markets fascinate people is that they offer a means of self-cultivation as our decisions provide a unique insight into and training ground for the self. I learned this about chess after decades of playing and studying; it's not about what someone can achieve, it's about the opportunity such art forms present for developing your mind and spirit.

This facet of markets is probably unappreciated for several reasons, the first being that they also offer a unique means of making money and cultivating one's bank account. The second is that western culture has a heavy bias towards external things, so who needs inner cultivation when you can have fun prior to the inevitable snuff time? But the subconscious disagrees and yearns for such things, leaving us with the problem of how to rationalize.

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

Adam Robinson replies:

Nigel's thoughts on self-cultivation were echoed in an unlikely philosopher, Juan Belmonte, an illiterate street urchin who, though completely unsuited to the sport physically, rose to become the greatest bullfighter in Spain nearly a century ago. I extracted this quote from his autobiography and reflect on it often; I believe it to be one of the wisest things ever said:

Any life worthy of the name consists of nothing more than a continual series of efforts to build up a character through the medium of whatever struggle one has adopted for a career.

Russ Sears adds:

Dr. Brett's blog had an excellent link on the "Corporate Athlete" from Havard Business Review which describes how to self cultivate.

What I would add to this analysis, is that keeping a healthy physical base is excellent to refresh yourself, "clean the slate." When the best laid plans fall apart, hard excercise puts the loss in perspective and shows you can rebuild the pyramid over and over.



 TA patterns could have an influence on markets, whether or not they actually work. For example they could provide a kind of 'mirage effect', all of which helps us chase our tails and generate friction (and no doubt much numerical stuff does the same).

Are scientific studies on TA patterns the final word? I don't know, but I very much doubt it. Some TA practitioners who have made very good calls (like the ancient Brian Marber) say it's an art rather than a science.

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



 1. They say a good symphony ends on the same motif that it starts on in many respects. Would you hypothesize that the market will do the same with respect to its beginning and end?

2. Aside from the admonition of the British Navy that politics and religion not be discussed at dinner, and that no one speak before the captain, and that articles of war are to be read every Sunday, and that no one argue with an officer publicly (a capital offense), and that all invitations from the captain be accepted, what are the major customs of the British Navy that made them the source of so much peace and prosperity and victory for 200 years, in a field where, like ours, just one plank separates you from life or death, and the only certainty is that you always have to be on your guard, with two lookouts always on duty?

3. What are the requirements for a market move to replicate and exponentiate? After a very quiet five up days in a row, what does the market have in store for us, especially considering the unchanged day in Japan, and the fantastic 1 1/2 % moves in 10 minutes at the early stealth close in the Europeans?

Paolo Pezzutti comments:

The following are customs and traditions of the Royal Navy that I find significant in this regard:

- Until 1825 some pay was held back as a guarantee against desertion
- Capt. Cook was determined to avoid deaths from scurvy. His success was an important step in the creation of the British Empire. Other diseases were avoided through keeping the ship, the crew and their clothes clean.
- Organization. Each man's role on board was efficiently defined.
- Discipline was important. Punishment also reinforced organization. Men were punished if they failed to do their duty and put the ship in danger.
- Training made the difference. British ships handled sails and fired guns more quickly than others.
- Navigational skills. They were by far superior.
- Promotion to Commander and then Captain was through merit or bravery. Incentives are key to success of an organization.
- The best officers through patronage could pick their followers. This would create cohesive, ambitious teams willing to pursue victories and prizes.

I would add also:
- Wardroom drinking (which must be social and not solitary), and the toast of the day
- Men remove their caps entering a mess
- The rule about not to call anyone a liar in the wardroom 
- Using the ship's bell to mark the passage of time
- Seniors board last and leave first.

My view is that you do not build a Navy like that only with money. You need to have an organization which attracts brilliant minds, able to understand the strategic context, conceive and implement successful visions, capable of commanding men. On the other hand, you need people who can develop the best operational concepts, understand the operational requirements, design ships and weapons better than others, an industry base able to support adequately the fleet. You need to have good sailors and fighters to achieve the command of the sea and it is not only a matter of money. They need to be professionally skilled, motivated and share common values and objectives.

Nigel Davies adds:

There's also a question of motivation. Britain, being an island, would be able to defend itself by commanding the waves. And being good at seafaring was also essential from a trade point of view. You can still see the influence of these times in today's UK with our preference for preserved foods such as marmalade and port.

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



 I've just started reading Richard McCall's The Way of the Warrior Trader. The author maintains that the cultivation of the spirit of the trader is more important than 'the system' or 'method'.

I think this idea is a very important one; paradoxically it may be far more important in the achievement of profits than trying to get them directly. Perhaps this is also the true meaning of this unique site we are contributors to. Via training we cultivate our spirits and that this in turn can lead to greater proficiency in the battlefield of financial markets.

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



 Reviving an ancient DailySpec discussion, I believe I can now answer the question of why someone would use a more vivid type of data presentation. Bar charts and especially candlesticks provide a more vivid experience; bars have the advantage that more data can be represented, candlesticks very clearly show the open, close, high and low. For a counter there are other options, like counting by hand or writing prices down. I'm sure this approach will reach parts of the brain left cold by more 'modern' methods, and I suspect that looking alternating visual and numerical data is better than favoring just one kind.

The candlestick experience is like using a nice wooden chess set as opposed to a computer screen for chess analysis. You can't turn Fritz on but the experience is much richer in sensory input. When computers first started to be used for playing through chess games and online competition, the board and pieces were thought to be redundant. But a number of players have been drifting back, and many at least using 3D representations of the board rather than the flat 2D.

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



 After wading through 372 pages of Marcel Link's High Probability Trading, I found the following nugget: "A trader needs to learn when to let go of a position. He is not marrying a trade; it's more like a typical date. Find the trade, get in, get what you can out of it and then get out without looking back. Sure, you'll promise to call the next day, but by then a different stock has caught your fancy." Many different questions come to mind. For example is instrument monogamy reflected in a trader/investor's personal life? Does getting used to trading multiple instruments mean that one never finds true happiness in the markets? Can one hope to apply the same pick-up method on different instruments, or is this just left to luck? Presumably a large number of stocks correlate closely to the averages, but many will not.

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

Scott Brooks writes:

I'm not sure if this author beat me to the punch on that saying, but I've been saying it for years. You marry your wife, but you only date stocks. You date them until you are no longer getting what you want from them, then you dump them. And unlike a women, if you ever choose to go out on a date with them again, they'll take you back in a heartbeat.



 When you are in love with someone, you refuse to see certain aspects of his/her personality and behavior. You find always a way and a reason to justify them. Although you are humiliated and hurt, you do not manage to free yourself from the situation. You are willing to accept any condition provided that the link with the loved one remains established. At any price and any cost. It is impossible to think of a different relationship or even life without that person. When you finally manage to leave this blurred perception of the reality, you may have damaged yourself seriously. Similarly, there are investors who are in love with a specific stock they have been following for years. They look at the ups and downs of prices with the idea that eventually their loved one will reward their patience and trust. When prices go down, they continue to find justifications about the good fundamentals, the strong cash flow, the new products the company is about to launch, the improved market share and so forth. Or even the charisma of the leadership. They average down their positions as prices plunge, but they do not even think of buying something else which could perform better.

Falling in love implies a "fall" into a new state of mind, a dramatic, uncontrollable and sudden emotional change. A state of vulnerability for the investor, but also of irrational excitement to start a new life. During the dotcom bubble these situations were quite common. This is typical of some companies such as Google or Apple. For their fans, it is difficult today to justify why the stocks have lost more than 50% in one year. Actually, I would refer to infatuation more than love at this point. Love is a mutual condition and in this case there is no reciprocity. But we'll see what happens to these emotional relationships and their investors' portfolios in the next months.

Nigel Davies adds:

This is one of the great truths of very many activities. I sometimes think that it's especially dangerous for counters because we can find new numbers on the fly and convince ourselves we're being scientific. I've become convinced that the proper approach is to adopt the same rigor as some of our TA cousins and have trades worked out beforehand and have them written down trading plan. This should of course include escape routes.

By the way, I understand that some hard-nosed American women conduct early dates like a kind of interview, which would be the, er, 'romantic' equivalent. Once their potential beau meets the appropriate criteria (shoes, manners, absence of hair in ears etc) they allow themselves to 'fall in love.' In many respects this actually seems very sensible though I wonder how well it has been tested. If any successful trades had actually been made, presumably they wouldn't still be looking. So the criteria must therefore be arbitrary.



 As an exercise in falsification I suggest looking for all the cases of the wrong lessons that were learned from 'history' which led to disasterous actions. The only problems here are that they won't be too well documented, firstly because people try to hide their mistakes and secondly because a lot of them will have been made by the currently extinct. A good place to start is with fallen empires, all of which will have thought they were acting very reasonably at the time. Similarly great books tend to be viewed as great until they were discovered to be just baloney — for this we need the best seller list of 1600.



ShoeDecember 14, 2008 - (Buleumberg News). This evening at a press conference in Iraq, an unidentified assailant threw two shoes at George Bush in rapid-fire succession, which the president nimbly avoided.

Given the lackadaisical Secret Service response - no agents dived to take a shoe for the president, nor returned fire with their own shoes - the breakdown in security was considered complete, and it is expected heads will roll.

It’s not yet clear what shoes were used in the attack, but according to Jane’s, Florsheims (which several experts have suggested they might be) are more of a long-range shoe, whereas the Gucci is favoured by NATO countries for short-range tactical operations (and mess parties). Nike’s may look scary, but they are mostly just rubber and canvas, and generally better suited for crowd control.

It’s not clear how the assailant acquired the shoes, or who financed them, but there’s been no shortage of shoes on the black market since the collapse of the old Soviet Union.

The anti-shoe lobby, born of the sordid Imelda Marcos years, is of course outraged, sparking worldwide demonstrations outside Italian embassies for better shoe-control.

The president had not yet revealed what he plans to do after he steps down in January, but the White House did acknowledge that dodgeball offers have started pouring in from across the country.

Dec/15/2008 03:52 GMT FR/23B

Nigel Davies remarks:

I was quite impressed with the Prez’s deft shoe avoidance and wonder how many other politicians would have shown similar dexterity. For example out of the last three Democratic Prez nominees I believe that only Obama would have shown a similar level of skill.

Dan Grossman agrees:

T JeffersonI agree with Nigel, Bush was very deft in dodging the shoes, with minimal movement, not flinching or making a big deal of it.

Raises the question, what President was the best athlete? Probably Bush 41, at least at time in office, because good athlete and relatively young. A runner and cyclist, undoubtedly an infinitely better golfer than Clinton (even though latter made such a big deal of it) and Eisenhower. But consider:

Bush 39 was a star baseball player at Yale, while Bush 41 only a cheerleader. Bush 39 a wartime fighter pilot, survivor of crash, parachuted on 70th birthday.

Kennedy a good athlete and golfer, although severe back problems.

Ford a star football player, so could well have been best of all, athletic reputation unfairly ruined by Chevy Chase.

Washington was best horseman in Virginia.

Jefferson rode horse for days to inauguration in Philadelphia or some such.

Don't know enough about 19th century presidents.



 Reading the remarks of some economists today, I wonder whatever happened to professional reserve. Is is really useful to have melodrama such as this:

"You can't get much uglier than this. The economy has just collapsed, and has gone into a free fall," said Richard Yamarone, chief economist at Argus Research in New York.

"It's just a disaster," said Stephen Stanley, chief U.S. economist at RBS Greenwich in Greenwich, Conn.

As an Englishman, I'd like to point out the correct response is to tinge one's objectivity with understatement. Thus if one's leg gets taken off by shrapnel one should complain that 'it stings a bit' before estimating the time required to be fully mobile using the remaining one. That way we avoid spreading unnecessary panic.

They should pull themselves together.



This story about 150 beached pilot whales struck me as having curious parallels to the humanity's recent troubles. Clearly there was some form of group error and for the whales just a 20% survival rate after bail-out.

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



 I've been thinking a lot about essentials lately and how many tasks and systems are made unnecessarily complicated by our attempts to guild the lily. My hypothesis is that strength and quality in any field or product come from doing the basics very well.

Numerous examples come to mind, for example the sophistication of many cars and computers (both hardware and software) may increase the odds of something's going wrong. Not to mention overloading the human they're expecting the machine to interface with.

Of course this is going to be sales driven; human buyers are actually attracted to fancy gadgets and capabilities. But by going this route they may be decreasing their efficiency.

This tendency to over complicate may be even more destructive in fields such as board games and speculation. The human mind is only capable of so much, so to fill it with distractions destroys its effectiveness. Many of my chess students have reported a deterioration of their results if they had other concerns or stressful trips prior to the games. And the 'chess act' itself can be rendered much more difficult by over complicating.

Lasker wrote about this saying that what was important was the 'method', stating that memory was too important too be stocked with trifles. Accordingly I've been trying to simplify my approach, reducing the need for information intensive studies or ideas that are too intricate.

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



Seems to me that the current meme is that governments can underwrite any amount of bad debt, and in the worst case sell more bonds, print money etc. As long as this is credible, the credit crisis can simply be transformed into government debt. But what if this were not true, would there be a tipping point?

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



 I agree with Vic that level of market probably (more than) reflects future difficulties in the economy.  But in case this not so, I have been unable to find good articles or explanations of worst-case scenarios, i.e.:

1. What would happen on the downside if credit crunch/market seize-up continues?

2. What in some detail would a "depression" as opposed to a "recession" mean in today's modern context, with all the changes built up since 1930s?

3. Probably most relevantly, what are the downsides of bailing everyone out and of new, larger stimulus packages, which are paid for by borrowing trillions of dollars –not so much how it is repaid, which it never will be, but what gets gets closed out when resources are diverted in this way?

4. Also, downside of uncertainty of continued government measures, and of delaying or not letting markets clear, of keeping bankrupt companies in business, keeping housing and other asset prices from falling to a level that would cause money on the sidelines to come rushing in?

I have not seen good articles or opinions of smart economists or financial writers on the above — can anyone point me to some of these?  Or can any readers who have thought about give a quick opinion?

Kevin Depew responds:

1. what would happen on the downside if credit crunch/market seize-up continues?

If the market were allowed to fail, there would be great devastation as many bankers and their friends, including the captains of the so-called "good industries," would go out of business. Then, chaos would ensue as enterpreneurial-minded men and women create untold ways to save and then re-direct capital to all manner of business ventures we can scarcely even imagine.

2. What in some detail would a "depression" as opposed to a "recession" mean in today's modern context, with all changes built up since 1930s?

"We live in a world of euphemism. Undertakers have become "morticians," press agents are now "public relations counsellors" and janitors have all been transformed into "superintendents…But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957-58. For since then, we have only had "downturns," or, even better, "slowdowns," or "sidewise movements." So be of good cheer; from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns." Such are the wonders of the "New Economics." - Murray Rothbard (1969), "Economic Depressions: Their Cause and Cure"

3. Probably most relevantly, what are the downsides of bailing everyone out and of new, larger stimulus packages, which are paid for by borrowing trillions of dollars (not so much how it is repaid, which it never will be, but what gets gets closed out when resources diverted in this way)?

"[T]he government must never try to prop up unsound business situations; it must never bail out or lend money to business firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression phase into a lingering and chronic disease. The government must never try to prop up wage rates or prices of producers' goods; doing so will prolong and delay indefinitely the completion of the depression-adjustment process; it will cause indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The government must not try to inflate again, in order to get out of the depression. For even if this reinflation succeeds, it will only sow greater trouble later on. The government must do nothing to encourage consumption, and it must not increase its own expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting the government budget will improve the ratio. What the economy needs is not more consumption spending but more saving, in order to validate some of the excessive investments of the boom. Thus, what the government should do, according to the Misesian analysis of the depression, is absolutely nothing." - Murray Rothbard, "Economic Depressions: Their Cause and Cure"

Rothbard wrote this stunning essay in 1969. Today, a mere 39-40 years later, we have succesfully ignored every paragraph, contravened every prescriptive statement and chosen the diametric opposite of every word he wrote.

Nigel Davies writes:

Chess players use the term 'unclear' for such situations, there's no precedent so who knows. So good articles will, by definition, be a contradiction in terms as there's no way to establish an opinion based on any kind of historical precedent. The case of Japan may be very misleading because they experienced a deep recession whilst doing business with a world which was booming (or at least bathing in temporary liquidity).

Of course things may be more understandable when one adjusts one's time scale. When, for example, did we last have three closes up?

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

Laurel Kenner writes:

Mark Pittman, whom I'm glad to have helped hire at Bloomberg some 10 years ago, reported yesterday that the U.S. government has pledged $7.7 trillion to ease the credit crisis. The total U.S. debt just topped $10 trillion, and does not include most of the new pledges. Mr. Pittman has been way out in front of his media peers on this story.

My other favorite source is Amity Shlaes, a scholar who writes excellent columns for Bloomberg. This year, she published The Forgotten Man: A New History of the Great Depression, and it is quite illuminating as to how the New Deal affected the economy.



 Much has been written on Daily Speculations about the correlation of music and markets. I've found quite a lot of literature comparing charts with the notes on a musical score. Vic and Laurel have written extensively about this, and quite a number of articles have appeared in Daily Speculations comparing music with markets and trading. I, myself happen to be blessed/cursed with perfect pitch. I was diagnosed with this affliction/talent at a very early age, and my parents always attributed it to the amount and variety of music we had around the house. Later on, I did some reading about it and found much so contradictory information regarding perfect pitch as to render it useless. The curse of it has been that I simply cannot listen to things like beginning orchestras, or bad karaoke singers, which are like fingers on a chalkboard to me. I find myself out of my comfort zone when listening to "less than perfect" pitch which appears quite frequently in day to day living…

I've noticed that perfect pitch also can help me stay out of a bad situation when I'm in the market, and all of the sudden where it's trading effortlessly in what could be compared to a C-Major scale, then it suddenly shifts to a to a C-sharp minor. Such shifts are often a good indicator of the ever changing cycles in the market, especially when a flat note appears out of the blue. It has been my observation that my perfect pitch has allowed me to keep from stepping on the many landmines that the mistress of the market spreads in our path, however this is anecdotal and cannot be proved… I would be interested if any psychologist has ever studied the prevalence of traders with perfect pitch (sometimes referred to as absolute pitch), and the effects of such. I would also be interested in any anecdotes from Vic and Laurel, or any readers of their experiences with perfect pitch. Perhaps I'm going up another blind alley, but this is a subject that should, or ought to be quantified. One blessing of perfect pitch is that I can tune any stringed instrument by ear, which amazes my friends.

Nigel Davies writes:

N DaviesStrong chess players are similarly pained when they see a move which isn't in keeping with the position. And coming from a musical family I've long been fascinated by the connection between music and chess, outstanding practitioners of both having been Mark Taimanov (GM and concert pianist), Lajos Portisch (GM and singer), Vassily Smyslov (GM and singer) and Andre Philidor (the leading player of his day and operatic composer).

One theory I have is that whilst music represents harmony within differentiated sound, chess has a similar kind of harmony within differentiated space. Is it too fanciful to believe that markets are similar in having a harmony within differentiated price? I don't think so, and it's interesting to speculate that many list members have an interest in all three disciplines precisely because of this similarity.

Jim Sogi adds:

The physics of many musical instruments do not allow them to be in consistent tune on the various octaves. For example, a guitar is not perfectly in tune along its neck and for open strings at the same time and requires some fiddling with the nut and bridge to get the notes to be consistent along the length of the neck. The Buzz Feiten tuning system is a corrective measure to address these issues. I submit that the mechanics of the market do not allow perfect tuning and harmony, and some discordance is inevitable.

Laurence Glazier writes:

Seeing the similarities between music and market is bound to be helpful, but is unlikely to be predictive. They remain two different fields. An analogy in music would be to take the first several chords of a Bach Chorale and try (without sight of them) to predict the next few chords. Or likewise to predict the next few moves of a great chess player. So while the Market may walk with a recognizable gait, that might be as far as it goes.

I'd also suggest that while it seems that the rules have broken down, it is just that things are playing out faster, Volatility nudges the metronome setting - but interference by government is stirring the pot. When writing music one may adjust the harmonic rhythm for dramatic effect, perhaps there is are equivalents in the market to changes in the durations of chords in a chorale, or to a series of measures on a dominant pedal.

Laurel Kenner writes:

I play a lot of chamber music, and learned recently that string players tune to A=441. Pianos are tuned to A=440. The strings tune to the higher frequency for more "presence."

The market abounds in such slippage, and sometimes it pays not to argue over a the odd quarter-point.

Jim Sogi adds:

J SogiOne more comment on this subject. Playing music, one never really hits a perfect pitch. There's no emotional content to it. That's why those funky Kmart keyboards sound so bad, they are in perfect pitch. A good singer, a guitar player, a violin player, all waver around the note with vibrato, or bend up to the note or bend down to the note, and move it around, stretch it, giving it much more powerful feeling of discomfort and resolution in a subtle manner.

Let's take today, Friday, in the market. A straight run up after the gap would not have had nearly the emotional impact the midday drops to new lows, the wavering about the bottoms, and the strong surprise finish. That's emotion.



 It is interesting to watch the monkey rope that ties the Nikkei and the S&P together with almost exactly the same prices day after day, having moved in lockstep down from 1500 to 848 in S&P and 15000 to 8360 in Nikkei with a co-terminous correlation of 95%. Though separated widely in temper and geography, economy, and culture, they move to the beat of the same drum. And amazingly, the psychology within the day is almost as good to know as the predilections of the scholarly market people who react presumably after reading our mail.              

The lessons in the book The Wild Trees by Richard Preston about falling from above the red line of certain death of 50 feet should be taken by all market people. Of 16 such declines of 50 or more in last 20 years, half of them came in 2008, and the first such decline  since 9/11 came on 2/27/07 at an ending price of the then terrible 1451. The first of the 8 declines in 2008 came off 9/15 at a closing price of 1196. The lessons in surviving such declines that Preston relates in The Wild Trees, including quiet, counting, and counterbalance, are valuable for market people as apparently is the death warrant that such falls indicate in the forest and the market.

The inevitable outcome of the bailout is clearly seen in England where people beg for the government to approve payment for standard therapies for disease that are routinely denied based on cost benefit analyses of the expected number of extra days to live from the treatment versus the costs and benefits to the average man. The move by the white shoe firm to forgo their bonuses at the top, is a nice corollary to this ultimate outcome. Of the 468 of the 500 companies that reported, third quarter earnings 272 are up and 164 are down with a market cap weighted change of up 5.4%. The 384 non financial companies reported an average market cap weighted change of +25%. 260 out of 466 were positive surprises relative to expectations. Tell me why the market should be down 60% or so based on this performance and say, a predicted earnings change in aggregate of -20% to 20% for the next year et al.

Nigel Davies writes: 

The argument put forth is that the worldwide loss of wealth caused by the bursting of the housing bubble has yet to feed through to peoples' pockets, thus profits are still running through like a decapitated chicken. There seems to be some logic to this reasoning, especially when one considers the leverage used in the purchase of housing and the presumption that corporate profits have been funded by this fast disappearing paper wealth.

On the other hand one imagines that many older folks who took equity release at the top may be cracking open the champagne right now. And the difficulty in putting figures on all of this no doubt explains the manic depressive behavior of the mistress.



 Perhaps some good economic and trading sense might be found amongst such methodologies. At present our governments appear to want to hurl themselves in after the victim.

How to Escape From Quicksand

Step 1 Quicksand can be found in many parts of the United States, especially by riverbanks, in swampy areas or near the ocean. One area famous for quicksand is Morecambe Bay, England. People trapped there at low tide risk drowning when the water rolls back in. If you plan to walk in an area with potential quicksand it’s a good idea to carry a thick wooden pole with you, as tall as you are.

Step 2 As soon as you find yourself sinking in a pit of quicksand, lay the pole on the surface of the quicksand.

Step 3 Flop your back on top of the pole. It will take a minute or so that will seem a lot longer, but in short order you will stop sinking. If you are carrying heavy gear with you like a pack, if you haven’t stabilized, you might have to let it go. Work the pole around under you so that is rotates ninety degrees and supports your hips.

Step 4 Gradually start to extricate first one leg then the other.

Step 5 Slowly start to paddle to firm ground.

Step 6 If you happen to fall into quick sand before you’ve prepared by carrying a thick pole, don’t fret. The key is not to panic. Most quicksand pits are only a few feet deep. Although the mix varies, in most quicksand, your body will be more buoyant than it is in fresh water so it should float. In fact, the density of an average human body is about 62 pounds per cubic foot, which is less than quicksand's 125 pounds per cubic foot. Unless you are heavily laden you’ll probably sink no deeper than half way. However if you panic and start to flail your arms and feet you’ll only make the situation worse, because the more you agitate quicksand, the more it will liquefy and the faster you will sink.

Step 7 Instead, relax. Take slow deep breaths, arching your back and spreading out your arms and legs to increase your surface area. Let your body’s natural buoyancy bring you to the top. Then gradually and quite slowly work your way to solid ground.



 In some market climates it may well be that an umbrella is a more suitable instrument than the cane. Some research into the matter uncovered the forgotten techniques of a Mrs. Sanderson:

Mrs. Sanderson, one of the finest swords women in England, is also an expert with other means of attack and defense. Provided with an ordinary umbrella, having the popular crook, she is quite capable of protecting herself against any onslaught, but not on old-fashioned lines. An umbrella has been referred to facetiously as a husband beater, but if merely used as an ordinary beater, it becomes useless for any practical purpose of protection. While on the other hand, if used in a scientific manner it becomes a deadly weapon in almost anyone’s hands.

The prowling bag-snatcher who infests the railway stations and busy thoroughfares, although he may secure the bag by snatching, can be promptly brought to book if his victim turns smartly, and as he runs away, catches his foot in the crook of the umbrella. Even if circumstances favour him, and he attacks a lady in a quite spot where no help is forthcoming, and the snatcher feels inclined to continue his struggle for for possession of the bag, a little knowledge will insure the ultimate defeat and retreat of the ruffian.



 Why waste time watching election returns when you could be improving yourself or spending time with your family? According to Claude Shannon's information theory, the information content of news is proportional to how unexpected the news is. Hence, Obama carrying California or McCain carrying Alabama would have near-zero information content because these events are already expected with near-certainty.

Using the Intrade state prediction markets, the five states with the highest degree of uncertainty in the Presidential election are:

Missouri:        Obama p=0.55  McCain p=0.45
Indiana:         Obama p=0.40  McCain p=0.60
North Carolina:  Obama p=0.67  McCain p=0.33
North Dakota:    Obama p=0.29  McCain p=0.71
Montana:         Obama p=0.28  McCain p=0.72

Hence, the results in these states will be highly newsworthy. However, their newsworthiness is likely to be limited to establishing Obama's exact margin of victory, since there are 26 states and the District of Columbia with a total of 338 electoral votes in which Obama's probability of victory is at least 0.75.

A McCain upset would be more newsworthy, since it would be unexpected. To win, McCain would not only have to win all of the above states, but also win 70 of the 100 electoral votes available in these seven states in which his probability of victory is between 0.10 and 0.25.

New Mexico (5):     McCain p=0.10
Virginia (13):      McCain p=0.10
Pennsylvania (21):  McCain p=0.11
Colorado (9):       McCain p=0.12
Nevada (5):         McCain p=0.14
Ohio (20):          McCain p=0.19
Florida (27):       McCain p=0.24

To narrow the focus even further, Virginia, Ohio, Pennsylvania, and most of Florida are in the Eastern time zone. If Obama wins at least two of those four states, it's over.

Nigel Davies writes:

Reminds me of the story about the Hungarian Grandmaster Lajos Portisch, who was at home studying chess as the Soviet tanks rolled into Budapest. I supposed he decided that there wasn't much he could do about the tanks.

Portisch would later become Hungary's top player and was for many years one of the top players in the world. He's the closest thing in Budapest to royalty.



 With governments of the world essentially guaranteeing most banks, why is there such a discrepancy between the yields of their bonds?

Riz Din writes:

I'm equally beat by this. Surely, no bank with a large government stake in it will be allowed to fail. Has such a thing ever happened before? Furthermore, even if such a possibility exists, why not simply buy in to the new class of bank bonds that comes with shiny government guarantees specifically written in to them [under the Brown plan ]. It looks like US banks may be holding back from issuing these new government-backed bonds until they get more clarity on the details, and an unintended consequence of the delay could be that it discourages buyers of existing bonds. But issuance of these bonds is already under way in the UK though, with Barclays and HBOS offerings already in the market (see FT link), and even these short-term bonds that piggy-back off the government's solid credit rating offer around 14-15% yield. Are we missing some pieces of the puzzle here - perhaps in the small print - or are these bonds simply extremely good value?

Nigel Davies responds:

Well, the Icelandic government was propping up Kaupthing Singer and Friedlander before they got screwed by our beloved leader when he used anti-terrorism laws to freeze the assets. Looks like I won't be playing chess there in the near future. And now, whenever I see government backed stuff being touted as '100% safe' the hairs on the back of my neck stand on end.

So is anyone for some Icelandic government high yielders? If not then my take on it would be to short some government backed debt whilst going long the debt of some of the institutions it's supporting. Which country? Probably the one we're stuck in right now.

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



 In a recent Bloomberg interview, Roubini says that markets are dysfunctional, there are no natural buyers, markets are in a situation of deleveraging, capitulation and total panic. He says to stay away from the US dollar, which appreciated too much. Stock prices will plunge another 20-30%. Relative economic, political, geostrategic power of the US over time will be eroded and reduced. It is likely we will experience a L shaped recession with long term economic stagnation. Not really an optimistic view I must say. Sen. Obama has a clearer idea of how to solve the crisis. He said a laissez-faire approach at this time cannot work. I was skeptical when I heard him speak at the beginning of this year and then the economy and markets spiraled down as he predicted.

I do not have enough information or the crystal ball to assess whether he is right or not, however, his "predictions" are quite scary. But are we really able to predict how this crisis is going to evolve? Being optimistic may sound silly at this point. The crisis is spreading to East Europe, smaller governments may default, there may be a currency crisis. The speed of this meltdown in the past weeks has been impressive. Are there any positive points? For the moment I do not see many, unless you believe that market forces will start again to price assets orderly and investors will see good value for money at these prices sooner or later. I believe, however, that we may see even a long rebound, but this crisis will have a long term effect. If you look at the charts, e.g. the Nasdaq, you can see that the bear market has actually started in 2000. The uptrend between 2002 and 2007 was only a long rebound. The long term bear trend has now resumed to print a C Elliot wave for the "secular" optimists or a wave 3 for the chronic bears.

Has the ability of creating wealth in our societies become a problem? If technology and innovation are not creating value in our economies, it may the bad sign of the shifting of geostrategic power to other powers of the world. The challenge is intellectual. We need to rethink if we want to tackle this challenge, and how our societies can re-organize and re-assess their life-style, their education, financial and industrial system.

Nigel Davies responds: 

Quite a few people have predicted something like this, though they tend to differ on how it will play out. The big unknown is how we react to this crisis, for example it's a moot point about whether we should have tried to prop the thing up at all.

One very interesting feature to emerge from this is that the World's nations have come to a very sudden understanding that we're all linked economically. So hostile acts vis a vis oil, for example, end up rebounding. I wonder if this will be the great good that emerges from this crisis, an awareness of our shared predicament.

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



 Being a bit disappointed with Peter Schiff (in 'Crash Proof' he recommended that Americans borrow on their homes so as to buy 'foreign stocks', so as to emerge with a massive overplus when the US unilaterally collapsed) I've been thinking about the art of the doomster. My pick for being the greatest master of the art is Frazer from the ancient UK TV series, 'Dad's Army', a character who may not be known in the US: excerpt.

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



greenspan"Alan Greenspan, the former Federal Reserve chairman once considered the infallible maestro of the financial system, admitted on Thursday that he “made a mistake” in trusting that free markets could regulate themselves without government oversight…. But in a tense exchange with Representative Henry A. Waxman, the California Democrat who is chairman of the committee, Mr. Greenspan conceded a more serious flaw in his own philosophy that unfettered free markets sit at the root of a superior economy."

article from

"Citizen judges, I want to tell [you] how a man who spent thirty years in the party and worked a great deal, stumbled [and] fell … I have committed heinous crimes. I realize this. It is hard to live after such crimes . . . But it is terrible to die with such a stigma. Even from behind bars I would like to see the further flour-ishings of the country I betrayed." Genrikh Yagoda

"… I confirm the admission of my monstrous crimes . . . We were preparing for a coup d'etat, we organized kulak insurrections and terrorist groups … I would like those who have not yet been exposed and have not yet laid down their arms to do so immediately . . . Their only salvation lies in helping the party." Alexei Rykov

article from Time

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

Kim Zussman replies: 

I doubt Mr Greenspan has as much at stake as the bolsheviks did, though the interesting parallel does illustrate the easy job inquisitors have.

Given government ownership of assets and increased regulation decrease the risk premium, keeping risky assets at a durably lower price level?



Looking on the, er, bright side, we shouldn't get 6% daily declines for the next two weeks. Stocks should be worth something no matter who wins the election.

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



lamaAlbert Jay Nock wrote of the regular recurrences of panic, of unreasonable and debilitating fear that takes over a society. Henry Clews wrote of the regularity of panics with the regularity of the seasons. In fact, on a recent visit to New York I actually saw the very same wealthy old codgers hobbling on canes on Thursday night in the splendor of their private clubs. I don't think I will ever forget them despite my own state of panic. It happened in Orson Welles's reading of the Martian invasion, it happened in ancient Greece.

I have seen panic in the water and the unreasoning behavior it creates. In our discussions of survival, I see how panic leads to mistakes, and then the mistakes can compound and lead to death. We're in a panic, no questions. I've felt it. Everyone has. It's an unreasoning blind fear that takes control of your mind.

But as empiricists, we need to take a look at what is happening and what will happen after, and what has happened after and avoid the series of mistakes that leads to death. Rather follow the path to survival. And like in Forrest Gump, mere survival might be success.

The Dalai Lama said that compassion is the key. I might modify that to say that compassion is the key to investing. By acknowledging that other peoples feelings are the same as your own, you understand their needs. In a panic their need is to stop the pain, stop the uncertainty, and have some cash. Your job as a compassionate investor is to give them what they want, despite your own similar feelings. You should be rewarded for such altruism and compassion.

Michael Cook agrees:

I like this point of view. It suggests investing from an "enlightened" point of view, which might also include: not being obsessively attached to outcomes, rather enjoying the process; being relaxed, maintaining an expansive, embracing view of things grounded in acceptance; being mindful; and relaxing and quieting the mind thus allowing spontaneous insight to manifest itself.

This does not necessarily mean assuming the demeanor of a Zen monk, or a Bodhidharma in a cave (although that might work); I think one can be "enlightened" and also be a man (person) of action. See Chogyam Trungpa's "Meditation in Action," for instance. But the best athletes are the most relaxed, aren't they?

The idea of compassionate investing has many more suggestive connotations — thanks.

Jeff Watson remarks:

SpockWith all of the volatility in the markets of late, my protege gets very excited every time he has a trade on. His knees swing, he chews through pencils, and he has to use the bathroom a lot. He develops nervous tics, and talks just a little too fast, a result of his brain going 900 mph. Contrast that with me: I approach the screens in a slow, languid motion, sit down and relax. I look at my positions and don’t panic because of the bad ones, I eliminate them quickly without vocalization. My good positions cause me to absent-mindedly ask questions to myself and ask him about arcane scenarios that might have some value. Since I’m rather dispassionate about the whole deal, he gave me the nickname “Spock.” Whether that’s good or not, I’ll let you know after this storm blows over. He can’t ever find out if I’m mad or glad after a trade, because I do the same thing after every trade. Take a breath, and drink from a glass of water, and change whatever song is playing. I still maintain a cheerful disposition whatever the outcome, the same disposition I had when played ”Chutes and Ladders” in first grade.

Nigel Davies writes:

I'd need some convincing that balanced emotional gearing is an essential for the pursuit of excellence; I think a lot of champs just learn to channel their emotions into doing the right thing at the right time.

Thus it was OK to vent one's frustrations on the cat on Friday as long as one didn't sell.

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

Larry Williams comments:

The Dalai Lama is not a trader. There can be no compassion in trading; compassion does not make a wrong call any better.

The enlightenment is making the correct decisions, understanding and compassion are for marriage counselors, not investors. There are absolutes here; rocks are hard, water is wet, margin calls must be met.

Dr Williams is the author of How I Made One Million Dollars.. Last Year, Windsor, 1998

James Sogi adds:

I'm talking about the philosophical definition of compassion, i.e. awareness of others' emotional states, rather than the softer emotional state of kindness or pity with which the definition is mostly associated. The idea is to understand them in order to take their money, and hence some irony in the definition and its utility in speculative life. Sometimes they are willing to pay for the solace of giving up the position. Tends to be at the worst time. I know — I've done it.



holidaysWhy do you hypothesize the Tel Aviv market rose before the holiday? Yom Kippur prayer, as Prof. Schnytzer suggested? What else do they know?

Adi Schnytzer comments: 

I simply couldn't come up with a better hypothesis. I guess you get so low that up is the only feasible direction left, right?

Nigel Davies responds: 

I think there's a flaw in this logic. The concern here is 'system failure,' which if it happens can mean that the profits from being short may be worthless anyway. Who knows, under some kind of post system martial law, short-sellers might even be rooted out and put on trial…

In my view there are two long bets; long the system's surviving and long personal/familial survival in some post-apocolyptic nightmare. So the most reasonable hedge is to buy survival items like freeze-dried food, blankets, medicine, weapons, a horse, some chickens and a couple of goats.

Anatoly Veltman adds:

A VeltmanYou are thinking of V-shaped bottom. Of course, other shapes of bottoms have occurred in history of every contract.

V-shaped bottom's dilemma is that environment created in course of a rout doesn't facilitate one's large reversal position - even if one correctly times reversal. The entire ecosystem deflates; so due pay-off will not be mathematically possible in favor of the bottom picker.

Theoretically, this should not be the case vis-a-vis a trendfollower, who correctly stays short all the way down, possibly even pyramiding. Except in 2008 — when shorting became restricted.

Sam Marx adds:

I agree regarding Cramer but in this downdraft we don't know how far it will go even if stocks are undervalued now. But stocks have a tendency to overshoot at opposite ends.

In '87 when there was a one day sell off of approx. 23% I was clearing through a firm that had its start in commodities and the head of the firm was almost in tears claiming that the stock market was vicious compared to commodities. He gave up clearing and bought a bank in Chicago.

I saw Mike Huckabee on Cavuto's Saturday program say that a "knowledgeable" friend of his suspects "economic terrorism" is behind this sell off.

In the end, undervalued stocks with growth potential will come back in price. That's the basis of Buffett's large purchase of KO (Coke) in '87. The stock was driven down by being part of an index where arbs bought the index future and sold a stock basket that included KO.

In '87 on the floor after that big one day down, I sold overpriced far month out of the money calls and bought an equal number of shorter month calls at the same strike price. Both were grossly overpriced. The plan was when the volatility dropped because of time the spread decreased and I unwound them. As a saving grace if the stock started to move up the volatility would've dropped and I could also unwind at a profit.



I don't know about the US, but over here in the UK REITs are now trading at a huge discount to presumed asset value. Looking at some charts, they also seem to be leveling off. Any views on REITs as an investment right now?

Al Humbert writes:

Just happen to be following hospitality REITs, and they are getting pretty cheap by any measure. Many are priced such that if the dividend is reduced by 50%, they will still yield double digits or more. Also, most if not all have market caps below net equity, some as much as 50% below. Equity is mostly the value of the properties, but even if that is reduced substantially, there is still a lot of value. A big concern is refinancing existing debt, but many REITs have debt structures that do not significantly re-fi until 2010 or even later.



GM NigelIn the wake of the recent debacle, I wonder if some more traditional ways of doing business are about to boom. I'm not convinced that the gloating described below forshadows the return of the Roman empire, but perhaps we will see asset based finance services doing well.

BTW, noting some other posts comparing today to the 1930s, I believe that we are dealing with two individual samples of one, which have very little to do with each other. What we have is something new, and completely unknowable despite the comfort that might be derived from labeling it.

From the FT :

Giulio Tremonti was almost gloating when he addressed the Italian Parliament on Thursday. He described the geography of the financial crisis with relish: the Northern earthquake, with its epicentre in Iceland, its problematic “Continental dimension”, the troubles in the UK, and the fear of a spill over into the Baltics and eastern Europe. As for Italy’s banks, the Treasury Minister said they were sheltered from the crisis because they were “less advanced and sophisticated” than elsewhere.

Back-handed praise, indeed. But Italy is a demonstration of the merits of doing nothing, a conservatism that has served its stay-at-home banks well. Although Italian bank stocks have collapsed, depositors have not rushed to withdraw their cash – to the disappointment of the paparazzi waiting to photograph panic outside branches.



golden gooseI took out a personal loan today for no other reason than the fact that the banks are hoarding cash. I figure that's what's good for the goose is good for the gander.

Meanwhile I had a look round some estate agents posing as a cash buyer of repossessions and/or remnants of what property developers want to unload. Whenever they tried the usual sales patter (e.g. people are queuing up for this one) it was interesting to see how much I could make 'em squirm with statements such as 'the banks aren't lending to anyone right now' and such like. My impression was that the agents are also exasperated with the high prices as there's no liquidity at these levels.



G M NigelChessplayers have a strange vocabulary that may be of benefit to market people. For positions in which they know what is happening they'll say, 'White is better' or 'Black is better' or 'equal' or 'absolutely equal'. Either side can also be 'much better' or 'winning'.

For positions in which they don't know what's happening the word 'unclear' is often used. This means that they don't know what's happening but apply a term to it so that it represents and intelligent assessment. It's this point that I believe can be of most interest to those involved in markets, as usually people feel obliged to have an opinion.

Accordingly I'd describe a whole range of market scenarios as 'unclear', as well as the likely outcomes of seemingly obvious interventions. What has most struck me about the various bailouts, for example, is that they appear not to consider the dynamic effects of various parties' reactions. For example, I doubt that a war for capital had been considered, which now seems to be developing between both nations and banks. Presumably this kind of thing will also happen at an individual level when the credit crunch becomes more apparent to the man on the street. It only seems like these events might be controlled whilst in reality the situation is… completely unclear.



GM NigelIt's good to see that at least someone's enjoying himself. Which reminds me of the vultures in the kid's movie 'Ice Age: The Meltdown'. Some quotes:

Lone Gunslinger Vulture: [singing] Food, glorious food / We're… anxious to try it!

Traffic Vulture: [giving "traffic report"] We've got an overturned glytpodont in the far right lane, traffic backed up as far as the eye can see. Lone Gunslinger Vulture: Ooh, and it looks as though there may be a fatality! Lone Gunslinger Vulture: [pause] I call the dark meat!

Lone Gunslinger Vulture: Look around. You're sittin' a bowl. Bowl's gonna fill.

Lone Gunslinger Vulture: It's real alright, and it's comin' fast. I mean look around, you're in a bowl, the bowl's gonna fill up, and no way out. Unlesss you can make it to the end of the valley. There's a boat, it can save you.

Lone Gunslinger Vulture: Y'all better hurry, grounds melting, walls tumbling and rocks crumbling, survive that, you'll be racin' the water. In three days time it's gonna hit the geyser field. Boom!

Lone Gunslinger Vulture: There is some good news, though. The more of you die, the better I eat. I didn't say it was good news for you.



This is similar to what happened to the H#nt brothers when they made money from buying silver and gold. Not only did they lose their gains,…

Nigel Davies adds:

It's difficult not to feel some sympathy for the shorts. The chess equivalent would be for the tournament director to take a look at your position and, on seeing your rooks poised to penetrate the opposing ranks, declare that for the next ten moves they could move only backwards.

Kim Zussman agrees:

Who wants to compete in games where the rules are unstable?

Victor Niederhoffer comments:

When the exchange rules on silver were suspended, the gold and silver markets ceased to exist for about eight years, especially in Chicago. I wonder if many people feel as Dr. Zussman does, and whether this will lead to a tremendous diminution of trading.

Sushil Kedia writes:

SushilA short position, in general, turns out to be a postponement of purchases. Even though they are intended to be opened with an objective of purchasing lower, it is just a potential demand in the future; since buying may happen lower or higher out of a short position.

With short sales not existent or not allowed afresh this one key source of periodic demand into the future is absent. Such markets tend to go down with way more ease than those markets that do have an existing short interest. A large subset of emotive responses that can be forced into buying the dips or the squeezes is non-existent.

Likewise, a ban on short sales rather than solving the problem of weak markets only postpones the inevitable weakness into states where there are only herds of long only hands turned into sellers and no motivated buyers to step into the dips.

This perhaps can be studied, if data can be obtained, by comparing the downside swings during periods when short selling was not available and since when it has.

Kevin Depew sees another historical parallel:

Arthur "Bull" Cutten some 70-odd years ago was trotted out before the grain futures commission where he was declared guilty on six counts of "price manipulation." Same type of villification of short sellers occurred then too. I wrote about this in June during the "oil speculator" hearings because I found his declaration after the trial quite apt. I don't wish to self promote my article, the gist of it is this:

Some 70-odd years ago, the Grain Futures Commission declared that Cutten was guilty on six of the price manipulation counts he was charged with and ordered him suspended from all U.S. grain exchanges for two years. After the verdict Cutten declared, "What's the use of trading? The market doesn't move."



A CNN program, Deep Survival, comes to some conclusions about the people who survive serious accidents and disasters:

many of the disaster survivors he studied weren't the most skilled, the strongest or the most experienced in their group. Those who seemed best suited for survival — the strongest or most skilled — were often the first to die off in life-or-death struggles, he says. Experience and physical strength can lead to carelessness. The Rambo types, a Navy SEAL tells Gonzales, are often the first to go.

Steven Scoles adds:

I read Gonzales book "Deep Survival" a couple of years ago and found it full of intriguing stories like the one noted in the article. I would highly recomend it. I do fair bit of mountain hiking and river kayaking and it made me realize how my experience has made me complacent in those activites (e.g. more willing to go off on my own in unknown territory)… not unlike bull markets make people complacent about risk.

Gibbons Burke preaches:

Faith in a G_d who promises life everlasting to those who believe and follow Him gives the faithful believer a great deal of peace of mind in the face of dire circumstances.

Kim Zussman replies:

Kim ZWhat then is one to do when faced by (the all too frequent) dire circumstances in a world without objective evidence of supernatural benevolence? Do you become forced to take up formerly illogical beliefs, and with that admitting your weakness and defining your faith?

Many traders share the experience of putting on a well-reasoned position which turns around to crush you. During the decision to fold or not (or G_d forbid, Martingale), does your internal voice change from "T=3.2!" to "WTF do I really know?" and if it doesn't, how is this not faith which transcends scientific self-doubt?

Gibbons Burke persists:

Gib BurkeWe're speculating with regards to the true meal of a lifetime and beyond — or eternal barbeque, depending on your freedom to choose outcome you will. Seems perfectly on topic, no?

With apologies to Blaise Pascal for mangling his famous wager… the gaming odds for the prudent eternal investor favor belief, without even considering the utility of belief:

= A believer, if wrong, will never realize his error: he will be dead and to dust. Poof! His upside is limited to the benefits of that belief - peace, joy, happiness, fortitude, patience, courage, etc. (so-called fruits of the Holy Spirit) and perhaps the blessings of a life well lived, depending on the breaks.

= For the same reason, a non-believer, if right, will never realize any returns from his correct bet, so the upside on this option is capped at his expiration date (death). He, too, may have lived a seemingly good life, relatively uninhibited by the constraints of the believer's conscience and avoidance of sin.

Advantage: subjectively neither at this point.


+ A believer, if right, will enjoy the eternal and infinite upside alpha of his investment in belief: life everlasting in communion with God, who is Himself Truth, Beauty, Virtue and all good things - to behold him face to face, for eternity, as well as the benefits which accrue to a life lived on earth in faith - even perhaps suffering for that faith. What a small premium to pay, relative to the potential reward, no?

- The non-believer, if wrong, will bear the eternal and ultimate lock-limit drawdown, with no stop loss in place. A literal margin call from Hell. Separation from God the Father. He will know he was wrong - for ever, and ever, world without end.

So, to put this into option terms:

The risk profile for investing in the LEAP of faith — a 'call' option of belief in the Underlying Security — is unlimited upside if he's right; limited down side if he's wrong.

The 'naked put' option of the who doesn't believe in the value of the Underlying Security, is a limited upside if he's right; unlimited downside risk if he's wrong. He may end up with a debt he can never repay. (Paging Dr. Faustus…)

For all that is in the world, the lust of the flesh and the lust of the eyes and the pride of life, is not of the Father but is of the world. And the world passes away, and the lust of it, but he who does the will of God abides forever. [1 John 2:16-17]

Stefan Jovanovich  generalizes:

One of my favorite pulp fiction moments is in Joss Whedon's Serenity. The preacher, who like many godly men has had a great deal of experience with his own capacity for evil, is dying. Mal, the atheist hero, calls for medical help and tries to reassure the preacher that he will live to preach many more sermons to Mal's skeptical ears. The preacher is having none of it; with his dying breath he replies, "Don't matter what you believe. Just believe in something." I am afraid I share the preacher's hopelessly ecumenical notions of gospel. Belief in the magic of markets, chess, checkers, one's friends, something is the necessary precondition for humility and humility (not passivity) is the necessary precondition for wisdom. The survivors I have known do not necessarily believe in God but they do believe in "something" greater than themselves. They did their best and kept at it - all the while accepting that what happened to them was never entirely under their own control. Or, as the philosopher said after banging his thumb with the hammer, "it happens."

Nigel Davies tries to get back on subject:

GM Nigel DaviesThis got me thinking about how one should survive in chess and markets. I'm not sure these should be treated in quite the same way as both stakes and sample size are very different. In Gonzales's examples there is a sample of one person in a one-off situation, so luck will be at a premium. As such it may be difficult to separate this out from genuine skills.

In markets too there is a lot of luck.

Turning to chess one can find excellent advise on 'defending difficult positons' from both Lasker ('Lasker's Manual of Chess') and Keres ('The Art of the Middlegame'). Very briefly, Lasker suggests having no weakest point in one's position whilst Keres advises that one should make the opponent's win as hard as possible rather than focusing on counterattack. I think these are both very useful, but there is another dimension which I think is important.

The ability to keep one's position afloat when things go wrong is a function of the earlier disposition of one's forces. So players who proceed in an aggressive and taut style find it very difficult to change this disposition when things start to go wrong. Firstly their forces may be committed to attack, and secondly they may have compromised other parts of their position in a belief that the attack will win.

It's noteworthy that many of the greatest master's of defence (for example Lasker, Capablanca, Korchnoi, Karpov, Kramnik) haven't usually played for the maximum in the opening, looking instead for a certain harmony and balance in their positions. Their games have an unpretentious feel, very few weaknesses and balanced forces.

Chess masters are not noted for their humility but years of experience can teach them how to create balance intuitively. Will reading about it help? I don't think so. And it may even be damaging by providing false confidence or theories which haven't been tested by pain.



Beijing MarathonWatching the Olympics, it was clear that distance running has moved up a notch from 1996. It was only 12 years ago that I thought with some hard work and perhaps a miraculous race of a lifetime one day I could make the USA marathon team. But what I watched this past year with the US team trials and then the Olympic marathon was a spectacle most amazing. I was left wondering how I ever thought I had a chance. What was I thinking? I don't know how to convey how good a 2:06 marathon is, especially in those hot conditions.  It is something I think you can only feel, by running with those who have that capability. The only way to understand it is to feel the intensity of the competition, by keeping pace with those amazing talents for a few miles of such a marathon. You can only understand the inner strength of such athletes if you've tried to built up that strength brick by brick — if you knew intimately the effort necessary, and built up within you a magnificently strong structure and then felt it melt by the heat of their calm efforts.

But what I found most amazing was not the asymptotic curve of times as displayed by the 4:00 mile, or the swimming pool. The line gets moved downward as methods, coaching and even equipment improve. But what I found amazing was the great diversity of talent. Any of those top 10 marathoners could have won, given the right venue. But the diversity of talent ensured that even given a terrible venue, one would still shine.

It's impossible to say who would have been best, given today’s knowledge, methods, equipment and training using yesterday's top talent. Everybody responds differently to different methods, especially the extreme training you need to do to be competitive today. For example altitude-simulating chambers  will give one guy a bigger edge than another.

Many have said that yesterday’s talent would never be the best today. And I know in my case, it is probably right; I wouldn’t have gone as far as I did in today’s deep field of youth and talent. But in general I disagree. It's not that they wouldn’t be the best, it's that they would be the best only under a much narrower set up of circumstances. It reminds me of the high school three sport athlete star who gets to college and has to decide which sport to play. Running today is more specialized, for example one marathoner may do better in heat, another in higher altitudes, another on hilly course, another on rougher roads. So it's not just survival of the fittest narrowing the field, but heightened competition responding to the need for more diversity.

Hence the market continually responds differently, not just because the competition is more cut-throat and getting tougher so all must learn new tricks, but because intense competition prepares for strenuous times by developing more diverse talents.

Scott Brooks adds:

If my math is correct, these runners are moving at a rate of ~12.5 mph to cover that distance in 2:06. They are running ~4:48/mile pace for all 26.21875 miles. That is a stunning pace! It makes me ask a question I've always wondered. What is the limit of human endurance? How much more time can we whittle of those numbers? Sure, I guess as time measurements get better we can break it down to the 1/10000th of a second someday to measure the difference between athletes. But when do the changes stop becoming meaningful? In 100 years from now, will marathoners be breaking the two hour barrier with regularity and how much will they break it by? What about 200 years from now?

Russ Sears replies:

The physics of the sport are more important than the time measurement accuracy. For example in measuring a marathon course, I believe it is officially 42,195 meters, then you must add 42 meters, because the course may shrink with temperature. So there maybe some truth to the joke, perhaps they needed to measure the distance of the cube again with so many records being broken. In about 1992, I read an article in Sports Illustrated claiming to analyze the Track and Field events for the physical limits of what is possible. All were well past the then current world record, but I believe that several have since been broken, such as the 10k time.

But for every ten innovations that shave a 1/10th of a second per mile you get one innovation that shaves a full second. Perhaps eventually you reach the point where for every 100 innovations you get 1/100 and one you get 1/10th but you never know if the 1 millionth innovation shaves that full second off again. But what I think you are seeing is that rather than just the talent and training, controlling the conditions of the event starts to mean more than the control of the talent/training. Hence on any given day one can beat the others.

Adam Robinson predicts:

The marathon world record will be under two hours in the year 2023, according to my projections, though it could be broken earlier with superior terrain and weather conditions.

The equation I fit was:

Marathon post WWII times (in minutes) = 159 - .00044 * (world pop.)^0.5

Nigel Davies queries:

Are you sure this will be linear? Training methods and superior equipment may be part of the equation but other factors could include things like human height (with a direct effect on stride length) and population size (increasing or decreasing competition). And it seems there's a cyclical element to human height at least; it declined in the late 19th and increased in the 20th century.

Adam Robinson replies:

There's no way to model training method improvements, and I assume in something like the marathon that technique and training is probably close to asymptotically perfected as we're likely to see, unlike shorter events where a better start or something might shave off a significant fraction of time.

But note that the relationship is not linear, it's based on the square root of the world's population, which is how the bell curve of talent will disperse, so the model's based on the very simple assumption that the fastest time will improve simply because the sample size has gotten larger.

I did this quickly, back-of-the-envelope, when in fact a better model would have been the world record as a function of the accumulated population of the world. But as a rough (90% accurate) prediction, it's not bad.

Clive Burlin says it all depends on incentives:

Idolize and pay huge sums of money to marathon winners and sub two hours will be broken long before 2023.

Why would anyone but a narcissist endure all that pain when you can go out on a field, catch a ball, run a few yards and make 20 million a year?

When marathon runners start making mad Benjamins, more will come out to train and break records.

Stefan Jovanovich rectifies:

There has only been one baseball player paid $20 million/year; and, as Yankee fans know, Mr. Rodriguez is not being paid for his glove work. As for running backs, none is paid $20 million a year or anything close to it. One of the great successes of the NFL — compared to baseball and basketball — is that the spread between the publicly-announced salaries and the net cash received by players is 50% or more; it was one of Gene Upshaw's many burdens that the NFL Player's Unions strikes were not nearly as effective as the baseball and basketball player unions "job actions" have been. (Anyone have any idea why?)

Compared to what they made even ten years ago, track and field athletes have made remarkable gains; there are now several thousand professionals who actually make a living from their pains. In Carl Lewis' heyday the number was fewer than one hundred. There may be more than narcissism motivating those guys in Mexico City who train in the smog every day.

One of the fascinating ironies of the Olympics regarding money and sports was that the Russian women's basketball team won the bronze medal by having the American Becky Hammon as a ringer. When one of the newsies complained that she has playing for the U.S. cold war enemy, she pointed out that the U.S. team did not invite her to play (itself puzzling since she is the best pure shooter in the history of U.S. women's professional basketball). She also pointed out that she makes far more money playing for the Moscow team in the Russian professional basketball league than she makes playing for San Antonio in the WNBA.



OlympicsThe Summer Olympics is the one time that I watch way too much TV and so far there have been many lessons for life and trading.

Phelps in general:

1. Stating a goal publicly leads to personal commitment to keep it.

2. Families that support each other go further individually.

3. Use others' antagonism as motivation.

4. If you are passionate, dedicated and talented about something, people will find you fascinating even though you are singleminded about something most people consider dull.

5. Give credit to those who helped you. Never forgetting to thank your coach, especially after a tough win.

Phelps miracle touch win:

1. Stay focused on what you can do, not what success others are having

2. Momentum or Acceleration/Deceleration are very deceptive to predict, but in hindsight can have dramatic results.  On second thought everybody "knew" he would come through. Remember, even the experts called it wrong immediately after the race and before the results, even his Mom.

3. Keep your head down, don't raise your head in victory, until it's done.

4. The biggest of kingdoms may occasionally be lost by want of a nail, but the biggest of kingdoms usually got there by always having that spare nail to draw on when needed.

The Chinese Dominance of Gymnastics and Diving

1. A country that is authoritarian and values rules above the individual can excel in a sport that has strict rules, close adherence to "the system" and where perfection is based judges' acceptance. But it has difficulty excelling in the non-arbitrary judged and purer individual athletic sports. You will get the results that match the way you rule your people.

2. Success of such an authoritarian system is terribly inefficient despite its new found embrace of "competition".

3. The USA 1, 2 in womens gymnastics, was a sharp contrast for their artistry and exuberance, to the rigorous and painful to watch approach of the young Chinese. Implying you can't demand passion and love.

4. Extreme youth and their resilience can bear such a system only for awhile. In contrast to the now 33 year old German medalist  who continued in the sport winning a medal for the love of her western womens coach who saved her son from leukemia.  But in such a harsh system the youth dreams quickly turn to being the authority rather than the producer.

The medal count China versus USA, China many Gold few silver very few bronze. USA more bronze than silver, or gold:
1. While the west, capitalism, especially the USA  version, are accused of the
unhealthy "win at all cost" attitude., it would appear to me that USA values the individuals more who clearly tried despite not winning.
2. Making their women's gymnasts age an officially sanctioned lie shows that the system "win" is the goal, not the sport. Again long term such a system will
crumble due to inefficiency.

The emergence of Jamaica as the new fastest country:

1. Talent with increased opportunity gives results.  The more competitive and
global USA college coaching system has given both.

2. The same with many more high caliber meets and more global competition. The more competitve the system, the more chances to win and the more winners the system can support. This makes picking the best harder, but making the best better.

3. Even with raw talent, great coaching or standing on the shoulders of the experts of the past is necessary.

The 38 year old Romanian Women's Marathon gold medalist:

1. She was a surprise gold medalist by making a gutsy daring surge on miles
12-16 gaining about a minute lead on the crowded "lead pack". When the
conditions are brutal, often the biggest risk is taking no risk and playing it safe.

2. Sticking to your plan, despite others' reaction, if built on study and understanding of the problem, is best.

3. While in the long run anything can happen, it doesn't happen unless you
train and sweat for many years, believing with conviction, "anything can happen" if I put my mind to it.

And now I have to go back to NBC, and perhaps more insights on these and other events.

Nigel Davies comments:

This is an interesting post, but I think it may be overly simple to define China's approach to sport as just 'authoritarian' given its millenia old culture and long standing traditions of personal cultivation. As Bronstein once wrote, we already know that one horse can run faster than another. So is it really surprising that China doesn't 'get' 'competition' in quite the same way that the West does?

This doesn't, however, mean that its athletes are merely acting out of obedience. Having hung out with lots of former Soviet chess players I learned that there are very strong incentives to succeed at sport in a communist country. Add to that the fact that national pride is much stronger in China than it ever was in the artificial entity that was Soviet Union and you have a potent mix. Sure they may lack 'joy' and 'passion', but these things didn't stop surly Soviet chess players kicking our joyful asses for decades.

It would be interesting to get expert insight on this, but the Chinese seem to have promoted some sports more heavily than others. For example they became utterly dominant in table-tennis without showing too much elsewhere but have recently branched out. Now they're the top nation in women's chess and look like they could soon dominate the male game too. And just like the Soviets they never crack a smile.



VNThat Little Extra

There are so many market lessons that one can learn from the Olympics. To me the most important was that that little extra is the difference between success and failure. This was most apparent in the two big 0.01 second differential swimming races involving Phelps and Torres. In one case, Phelps said it was the difference of a "shaved finger" and in the second Torres said "I shouldn't have filed my nails." The former apparently referred to better streamlining and the latter to extra reach. Phelps had broken his wrist in 2007 and the extra kicking training he did helped him on the last reach, creating the winning margin. He stated that when he practices it's like a bank deposit. So often during the year, during a career, one decision, one wrong practice can mean the difference between success and failure. It underlines the importance of total concentration at all times, and constant practice.

The Blake/Gonzales match

Much has been written concerning the sportsmanship involved in the Blake semifinal. Right after the match in a press conference Blake remarked that his father would never have let him do it, and would have taken him out of the tournament. Jack Kramer has a similar remark in Ed Spec about his father's breaking his racket in a similar moment of poor sportsmanship and presumably Blake knew of this instance which is tennis lore, although I have found that among tennis players Kramer is derided for his treatment of Pancho. However, the key to me was that Blake must have been brooding about the incident from 5-5 in order to come up with such a lengthy exegesis right after the match. The brooding probably caused a lack of focus that led to loss. I had a similar revelation in my career when, at an early age, I used to complain about all the bad calls the refs made in squash. I subsequently realized that the complaining did me more harm than good. It not only took away my subsequent energy, but gave the infractor the advantage of seeing how much misery his misdeed caused. I stopped complaining during the last 10 years of playing and it was very helpful. Time and again I won when I would have lost if I had stuck up for my rights on the point. The same is always true with bad fills. By the time  I've complained about bad fills, or bad equipment, or bad treatment by a counterpart… By the time I've complained about it, and taking into consideration the extra costs involved and the missed subsequent opportunities, it's over. The legal system is such that on all matters involving less than 10 figures the costs are greater than the differences at issue. So that avenue never pays.
Putting it all together, one learns never to distract oneself worrying about the other side's problems and to concentrate on improving oneself and playing harder to compensate for the wrongdoing.

Denis Vako replies:

I can't define what "shaved finger" margin is, or unshaved for that matter, that is surely a joke, but in swimming hitting the wall makes the great difference for the result; as when one swims his body/hands/legs are doing cyclical movements and ability to break this cycle or accelerate it, to cut time on touching the wall, will win the race at the finish. In other words, when race is short, i.e. 50m or 100m, among equal sportsmen (as almost always the case), it is the touching of the wall which will determine the winner.

Different strategies there are, depending on the distance; when it is 50m race it is about how you jump into the water, how long you spend gliding under it and on the distance that left one must exhaust all his reserves before promptly touching the wall. While in a 200m or 400m race, one has more margin for error and strategy is more or less to "swim with the pack" and then to have an ability to explode the last 10-25% of the distance.

Stefan Jovanovitch writes:

It wasn't the finger; it was the half stroke before the final full one that gave Phelps the acceleration to touch out Cavic. Cavic's technique was the right one except he looked up a fraction before he touched. That lift of the neck and the added drag is probably what cost him the race. These are not my opinions but those of daughter, who — before her back injury — was good enough to be one of the field horses in Natalie Coughlin's 14-18 year old races at our County swim meet. Whether Cavic's looking up was a failure of character or just the inexperience that comes with being in a big race for the first time is also a question I leave to those who can read others' minds and souls. 

Reid Wientge adds:

Athletes "letting up" at the finish line seems to be endemic. It's in baseball and can be found almost every game. In the Olympics, I watched a German lose in one man paddling (the paddler kneels in the boat) because he slackened his pace just before the finish line. And I do mean just — he had the Gold in his canoe but his opponent, who had been challenging for more than half the race, pulled hard all the way to the line and won by a fraction of a bow.

Jordan Low extends:

We should trade by following our models, and constant meddling, i.e., looking up, while a trade is still in play, causes drag. Trading is like competitive swimming: there are many factors that you have to perfect, from the stroke to the turn, etc.

Nigel Davies replies:

I believe that Stefan is right in implying this goes much deeper. Trying to compensate for what seem to be the errors ('looking up' or 'not sticking to systems') tends to do little other than consume the attention after which a thousand other small errors appear.

So instead of vowing never to look up again, the guy should seek out the small vanity that distracted him with the thought of medals and glory. But this is somewhere most people won't go; it's easier on the ego to find some other excuse.

Jeff Watson writes:

Back in my old days at the Mid America Commodity Exchange, the weekend before my trading debut, I remember practicing hand signals in the mirror for hours and hours on end. I wanted to hard wire them into my brain so they would come out effortlessly, with 100% accuracy. Anything less than perfect might end up with my having bought 20,000 bushels of March wheat at 3/4, when I meant to sell 20,000 bushels of May at 1/2. Vic and Laurel understand the value of practice, and know exactly what the fruits of practice will bear. Even though it's the oldest cliche in the book, "Practice makes perfect" is still an integral path in the road to success.

Ian Brakspear corrects:

"Practice makes permanent" — each time you repeat something incorrectly you are making the mistake more ingrained in your mind. It is crucial to have the right program/instruction before you start.



A VeltmanToday, I want to open the following idea for discussion: I noticed that Bond O.I. has diverged bearishly in recent days. (Definition is simple: O.I. is declining, while Price is moving into new highs.). I eyeballed a daily chart covering about 40 trading days, since June Bond left the board June 19th . It appears that on 75% of those 40 trading days the Price and the O.I. went either both up or both down! To flip this observation: on only 25% of the days the Price and O.I. diverged! What surprised me: Price since that date is 3%+ higher, while O.I. since then is 3%+ lower! (O.I. has now fallen to its lowest in almost a year!). Does that mean that one should fade current rally, once one gets Sell signal from one's other indicators? Note: I'm also intrigued by the fact of continuing bullish pattern of "O.I. down on down-days, up on up-days." How does one reconcile the two?

Christopher Tucker asks:

Shouldn't one fade any rally when one gets a sell signal from one's "other" indicators?

Nigel Davies extends:

GM NigelWe've this kind of issue with cycles. The parameters are intuitively obvious to the human mind but the very devil to explain in a way that a computer can understand.

There is the same problem on the chessboard, for example in understanding positional elements such as pawn structure. Humans are able to divine what is important in a position whilst the computer will assign the weights it was programmed to do even when these things are unimportant. The problem is that it cannot take a holistic view, it can only work on already disected parts.

Besides the Senator's book I think it's worth reading Dee Belveal on this. But once again it's not going to be something that lends itself readily to 'testing' via quant methods because the parameters are very difficult to define. I suggest instead that one adopts the approach chess masters use, and that is to play through all the games by hand in order to acquire a 'feel'.

BTW, I'm indebted to Anatoly for posting in the way that a games player can finally understand.

Manuel Bravochico adds:

I just got back from my monthly luncheon with my friend. He used to manage a restaurant before trading. About all he knows how to do on a computer is flip through charts looking for momentum. He amassed a small fortune and has compounded at the highest rate of return — although with some 50% drawdowns — that I’ve seen, north of 60% since 1999. Verified.

I keep asking him how he does it. He always gives me the same answer, “the chart just looks good.” He has a “general” set of rules that I have never been able to program over the years. At the elite level — Rentech excluded — most trading I think cannot be programmed, i.e. a holistic process unable in this age to be programmed.

Shmuel Layla writes:

The way I deal with false divergence signals that start occurring in the course of a Trend is not by looking at other confirming indicators, but rather by looking for the occurrence of a divergence on a higher time frame corresponding to a different set of peaks and valleys that has yet to resolve itself. I then find that the “local” divergence has more reliability. This is fractal trading for the mathematically challenged such as I. This works on volume charts of the ES contract. Maybe other issues with stronger trending properties require a more sophisticated solution. For the time being there is sufficient liquidity for me in the ES.

Rocky Humbert muses:

Anatoly’s post is indeed thought-provoking. It hits on many different issues. One approach might be to adjust position size to reflect confidence: i.e. you don’t have to go “all in” on every hand that you play. Certainly, this is how some gamblers might handle the problem.

Taking his question literally, however, I continue to argue that increasing open-interest reflects a coincident indicator of trend persistence, rather than an indicator of absolute direction. For an illustration of this phenomenon, look at the bond contract from March 2006 to May 2006 when the contract fell from 112 to 106 and the aggregate open interest increased from about 0.6m to 0.9m.

As the bond contract has been range-bound for the past year, this would be consistent with a declining open-interest. Of course there are other fundamental deleveraging explanations for declining open-interest too.

Anatoly Veltman responds:

Rocky, you picked a remarkable 2006 example! It really helps to understand one of your points: that the reason for currently stagnating O.I. is that bonds have been mired in a boring range (as opposed to the clear chart breakdown in spring of 2006). However, I will always take issue with outright scepticism about using O.I. to derive signals, at times. If not used properly, as in my own hand-picked current bond example, it sure may be of little use. But I know, and have utilized throughout my career, so many fantastic opportunities where I was able to make use of O.I. for prediction/confirmation.



J SogiThe use of fixed mechanical resting stops seems to be an admission of inability to trade your way out of a paper bag. It is also an admission you are undercapitalized. It is one thing to realize you were wrong. It is another thing to give up on the bottom tick.

Isn't it better to trade your way out of a bad situation rather than give more of your money to the opposition in defeat? It is a harmful mechanical crutch. It is better to watch for a better opportunity to exit with some grace. It is better to know the market, and know yourself.

Larry Williams objects:

What if you cannot exit with grace — market goes limit down 10 days? No way to trade your way out of that…

Stops prevent failures and allow one to regulate the size of the loss.

I'm talking trading here; not investing… value investors buy and hold until value changes or overall market gives a sell, that seems to be best strategy.

Shui Kage adds:

The old Japanese market proverb: "Mikiri senryō".

"To ditch a small loss is worth a thousand ryō" (In today's language: is worth one million dollars).

Most amateurs are unable to take losses at small size and most amateurs are not very good traders.

Phil McDonnell dissents:

PhilIf the market goes limit down (or up) against you then stops will not help either. The stops will not be executed. In that case only proper position sizing in the beginning or an option hedge will protect your position. There is no guarantee a stop will be executed at your price or anywhere near your price in the event of a gap open.

There is no theoretical basis that stops should work either. I have written about this here on numerous occasions. Thus the best advice is to back test, taking stops into account explicitly. When testing stops one should use great care to increae the assumptions regarding slippage. Invariably stops will be hit during fast markets when slippage is the greatest. Compare that to a back test without the stops. If the test using stops gives a superior overall risk reward profile then it is reasonable to use stops. One should never think of stops as the sole money management technique because of the slippage and gap issues discussed above. Rather stops are more of a trading tool to reshape your risk reward profile.

There is another reason to consider stops and that is psychological. Many of us are simply unable to pull the trigger when we get into a losing situation. Suppose you had a trading model that predicted that tomorrow would be up by the close. The obvious way to trade that would be to get in and get out by the close tomorrow. But if your system was wrong (and they all are sometimes) then you may find yourself holding the position simply unable to admit the loss and freezing on the trigger. It is easy to come up with all sorts of rationalizations for this behavior. "The drift will bail me out" might be one. Suddenly your plan has changed from a one day trade to hold it for ten years until the long term drift bails me out. So if you find yourself doing this too often then having a preset stop may be the psychological crutch you need to be successful. Better than that, of course, might be to simply write your plan down and execute it as planned.

Dr. McDonnell is the author of Optimal Portfolio Modeling, Wiley, 2008

Janice Dorn adds:

J DornI would add to this that placement of stops is both art and science. It is among the most difficult concepts for a trader to grasp, and there is more confusion surrounding stops than almost any other aspect of trading. How often do we hear: “They see my stops” or “There is clear stop-running going on” or something similar re: stops. That is why when I trade ( not invest), I use multiple contracts, keep taking profits and trailing stops ( on a good trade) and get out as quickly as possible when the trade is not going right for me. Also, I am prepared to lose on a certain percentage of all trades per my trading plan. I used to hate and could not accept getting “stopped out” but now accept it as part of the cost of doing business.

Also, it is very challenging for most traders to “stop out” and then get back in again. Part of the reason for this is inexperience, and the other part is the way that losses are seen by the brain. Losses are weighed about 2.5 times as heavily as gains. This means that if you are down 10% on one position and up 10% on another position, you are break even on paper, but are down 25% in your brain. There is a complex process that goes on inside the brain of the trader that is looking at losses. But that is another topic and I have already digressed from the “stops” thread.

Dr. Dorn is the author of Personal Responsibility: The Power of You, Gorman, 2008

Jeremy Smith tries for the final word:

Everyone uses stops.

Some put them in immediately.

Some keep them stored in gray matter for later deployment.

Some wait for the margin call.

Kim Zussman exclaims:

Kim Z"Say uncle!"

If you trade less than 100% of your investable capital, that is a stop.

If you trade predominantly the capital of others, that is a stop.

If you let the account blow up without borrowing against your home or retirement accounts, or hitting up   friends/family, that is a stop.

If you decide to trade small enough to preserve your marriage, sanity, or life, that is a stop.

Even the Kamikaze had stops.

Nigel Davies suggests extending the discussion:

What about broadening this discussion still further to include the 'reverse-stop', ie a profit target? I don't see much difference between the two from a conceptual point of view, the issue here being psychological (one represents a loss, the other a win).

Can one be ideologically opposed to stops without also being unable to take a profit? I don't see how we can discuss one without the other and they all come under the category of 'planned exits'.



NigelHaving recently abandoned the barbaric practice of shaving in the morning I've been looking into the history of facial hair. It seems that the killer blow was dealt by Gillette in 1903 when they started making razors with replaceable blades that could easily be used by anyone at home. This certainly made shaving easier and more convenient (not to mention safer), and when you add in a modern obsession with youth the clean-shaven look was bound to win out. But will this continue into the future? Who knows.

The impact Gillette had on beards got me thinking about what higher energy costs and ever greater wonders on the technology front might do. I think there may be many different effects, not least of which will be to make home based working a lot easier and commuting a lot more difficult to justify. So perhaps a new paradigm will govern the property market with people wanting to live in either the city (no commute) or genuinely pleasant places whilst 'commuter towns' will become an anachronism.

What does this mean in practical terms; bullish on York, bearish on Milton Keynes. And the coming viability of working remotely via tech might also explain the relative strength of the Naz, despite the fact that conventional wisdom would have us believe it should lead any decline.

Misan Thrope adds, somewhat off topic:

Shaving a 'barbaric act'? Until I recently I thought a 'barbarian' was someone who did not shave (from the Latin Barba = Beard).  However it seems that there is some controversy on this point and some say barbarian derives from the term ba-ba-ba which the Greeks used to caricature those who spoke any foreign (i.e. non Greek) language. You learn something new from Daily Speculations every day.

Riz Din remarks:

I have spent most of my life in Milton Keynes and am living in the town at present. It is a strange place, made up of extremely straight roads intersected by endless roundabouts. In my childhood, I would often venture to Birmingham or London to see my family, and for a long time, I thought these places were very strange, what with there bendy roads and the like. Over time, I realized it was Milton Keynes that was strange. Fortunately, the town managed to avoid the tidal wave of ugly concrete buildings that swept across the country in the 70s and so is relatively easy on the eye. It is still a somewhat sterile place though, and because the 'new city' was created by top-down city planners, it lacks any sense of organic evolution. Personally, I think it is a fine place to grow up as a child, or to retire if you want the quieter life with all the conveniences. For one's middle years, it isn't so much fun - the proximity to London maintains my sanity. That said, Milton Keynes is growing, and growing. Some people clearly like it. Technology reduces barriers and makes remote working possible, but the impact on the workplace has been less marked than many expected. It still pays to be in the thick of it.

P.S. I was disappointed to learn that the name Milton Keynes has nothing to do with the great economist and investor.



 Not more than a dozen years ago it took weeks to get to the deep upper Amazon jungle. There used to be terrorists here. Now in two days by plane, bus and motor canoe we reached the upper Tambopata research station in the headwaters of the Amazon rain forest. We saw six species of monkeys, macaws, poisonous spiders 6 inches across that can jump a meter, snakes, frogs. tapir tracks, vultures, hawks, otters and more. The guide wrestled a small Caiman and brought it into the canoe.

The jungle has the greatest biodiversity with thousands of species each occupying a specific niche. The only direct conflicts we saw were between two spiders, and two monkeys fighting over the same niche. The forest had three main levels, first at the ground to 15 meters, 15-35 m and the canopy above 35 m.

Some market ideas from the learning experience involve the separation of the levels and the specialization within each level of the forest. The occupants and action at the bottom of the forest are much different than those in the middle or top. As in markets different techniques are needed at tops, middles, and bottoms. It is hard for one species of trader to hope to avoid death at all the levels. It is very hard to start on the bottom of a market and survive to the top.

Extreme specialization is the rule in the jungle. There is no reason that same type of specialization would not be required in the market jungle.

However in many ways, current markets lack real diversity. The correlation among markets has been a result of this lack of diversity. Too many in the same niche or trade. The lack of diversity causes inability to absorb market shocks.

In the jungle, when a large 800 years old kapok tree falls, a huge gap is created. Many species rush in to fill the gap, but due to the rush, the vegetation is weak. Similar action may occur in market gaps when a shock hits. The initial occupiers of the gap are weak holders.

More reports later from Cuzco, Peru, in the Andes…

On May 30, Jim Sogi added:

Jim SogiNavigating the jungle:  The jungle canopy is 35 or more meters high and cuts out most of the light. The jungle floor is dense and dark filled with creepy crawlers. It would be easy to get lost and survival would be hard. We wondered what tactics could be used if lost in the jungle. The only way out is to find the river. Overland travel is impossible.

We learned that the macaws travel at dawn to the clay licks which are located on the riverbanks. The macaws are large, brightly colored and make noise. At dawn one could look to see the direction of their travel to determine the location of the lick. Kennerhoffer grads might recognize the trade navigation information in the dawn trade direction as a navigation tool for the days trade.

in the jungles there are small streams that caiman like to use. One might use the flow direction to determine the direction of the larger river and follow that. The obvious trade parallel is to follow the flow of the orders of the bid or ask

The tapir makes vague paths through the undergrowth through habitual use. There are meals for life in following well worn trading price paths as well as they tend to be habitually used. in the market jungle.

I would welcome other trades ideas arising out of such navigation ideas. We've discussed open ocean non instrument navigation some years ago. Its a jungle out there and every advantage is needed.

Nigel Davies reports:

Coincidentally, the Independent newspaper featured the following story today on a tribe that has only recently been discovered. I can't help but think that it is they who possess the real secrets of Amazonian survival.

BTW, a thought keeps coming to mind since my investigation of the game of Go. This tends to have pockets of recognisable patterns scattered across the board's landscape with chess, by comparison, being much more 'homogenous'. Perhaps the key to the jungle lies is analogous to Go, with intuition being required to recognise these more disparate patterns.

Pitt T Maner III reminisces:

Daniel LudwigThe difficulties encountered of one of the early billionaires (and richest man in the world), Daniel K. Ludwig, when he attempted an ambitious development project in the Amazon come to mind.  He failed to anticipate problems associated with the fragile, thin, Amazonian jungle topsoil– and how the jungle's existence involves a continual recycling of organic materials from the canopies mentioned. It  made for a strong cautionary business tale back in the late 70s and early 80s. Beware the "Amazon factor".

"A touch of hubris without humus" you might say…. Mr. Ludwig was, however, by many accounts a very charitable fellow— and his intentions may have been good. Perhaps the story relates (as suggested in the articles below) to taking on too big a project in advanced age… at some point you need to enjoy your wealth and partially retire. Eschew eccentricity, listen to others, give up a bit of control. Then again maybe some people make it to old age because they thrive on these type of struggles.

The "before" story:

Time Magazine

Ludwig is a restless recluse at 80 and, some employees suggest, is seeking to build a pyramid to himself, a monument to his ten-year quest to tame a stretch of jungle almost the size of Connecticut and make it productive. Says an associate, Luis Antonio Oliveira: "Mr. Ludwig is nearing the end of his life, and he is more interested in undertaking something of great socioeconomic significance than in earning quick profits." Still, Ludwig is betting that a worldwide paper shortage is coming by 1985 and will make his gamble pay off.

"After" stories:

Wikipedia[Jari project]

Problems also begun to increase due to so-called Amazon Factor - the combined effects of soil, insects, humidity and tropical disease. Workers contracted malaria. Insects devoured the harvest and supplies. Then Brazilian government officials began to criticize Ludwig's methods and the extent of his land ownership. They also questioned the project's exemption from taxes, not to mention his methods - he had fired twenty-nine directors during the thirteen years of the project and preferred to decide everything essential by himself.

Time Magazine

Ludwig threw money and manpower at problems thrown up by the jungle. But in many cases he made costly mistakes. In attempting to start his lumber and paper business, for example, he had to clear the land to plant new trees. Several Caterpillar "jungle crushers," giant bulldozers costing $250,000 each, were brought in to do the job, but the machines proved inappropriate because they damaged the unexpectedly delicate Amazon topsoil.

I believe Forbes Magazine wrote a good article, about 30 years ago, on Ludwig's venture that may still be available with a bit more digging.



Justine Henin, one of the top five or six most complete tennis players of all time — male or female — decided to retire today while still ranked as the number one female player in the world. Though she has won only seven grand slam titles in her career, I believe her game had no weaknesses whatsoever, thus putting her in elite company with Steffi Graf, Pete Sampras, Martina Navratilova, Chris Evert and Roger Federer. Her retirement comes at a time when she still could have competed at the highest level in grand slams. How many she could have won is an unknown, but at least three or four in my opinion.

She was tired. It was as simple as that. There is much more in life than tennis according to her press conference today.

With respect to the market, I suspect we all will ultimately face the day when we decide to stop competing, and most of us will do it at different times and for different reasons - burnouts, setbacks, age, success, or death. As for me, I have quit the trade a few times for a few of these reasons, and also was almost out of the game for the last of these. But, I continue to trade on.

Henin chose the high road, one marked with tremendous success. I hope my end, and all of yours, will be similar.

Vince Fulco adds:

Speaking of "When to Quit," picked up Professor Randy Pausch's book "The Last Lecture" while on vacation last week. He was a computer science professor at Carnegie Mellon who surprised his class by giving a lecture on realizing one's childhood dreams. All those in attendance realized it would be his last public presentation due to his advancing and inoperable pancreatic cancer at age 47. While written in a breezy "Tuesdays with Morrie" style, his heart-wrenching and impactful life stories with a moral attached to each are poignant reminders of our finite time on this planet and the need to strip away the superfluous and focus acutely on one's chosen task at hand. Of course, while not forgetting the importance of cultivating strong families, relationships with work colleagues and friends.

The lecture is available online.

A great summer read written by a genuine straight arrow.

Nigel Davies responds:

There may be a difference between quitting and moving on. Quitting, at least in my book, means a total discontinuation of a particular activity with a huge loss on the time/money invested. 'Moving on' is different, you keep the accumulated 'wealth' (skills, lessons, experience, money) and subtly redirect it within the context of your life.

Perhaps we should always try to move on rather than quit, just change the balance rather than go in with major surgery. I think this applies to all walks of life; professions, sports, games and relationships. And it may be better for trading too, readjusting positions within shades of grey rather than opting for black or white.

This line of reasoning also makes me wonder if we should always look for things in life that will have ongoing value rather than face the expense of multiple 'quits'. This may be a useful guide in everything we do, and I only wish I'd thought of it earlier.



The market is smarter than ever. [Comment from a Trader.]

The market isn't 'smart', it just is. A huge amazonian flow of human consciousness.

There's a danger in ascribing intelligence to this thing, tempting as it may be. For the thought that it's 'you against the market' stems from the ego, a false belief that we are in some 'mano a mano' battle and need to 'outwit' an opponent. All we are doing is outwitting ourselves.

The market does not care about our existance, it just continues. And the best we can hope for is to hitch a ride without being swallowed up in its ebbs and flows.



It was service payment day minus 1, a traditionally very bearish day, and the ppi reported tomorrow is forecasted to be up 0.7% and the wire broker house issued a very bearish forecast (in opposition to rational expectations) that the market will go down 7% and then up 5% in the second half; considering all these it was an extremely positive day.

Brokerage houses are reporting the number of days they made money each quarter on proprietary and the magnitudes these days and it's amazing to see they make money, in Lehman's case for example, all but 2 days. Others have similarly impressive records. But considering the bid ask they must pay, and the magnitudes of losses that they must extract without risk from the weak, and the tendency of markets not to do the same thing too often, I consider the reports on their surface an impossibility . What is likely is that they report profits from transactions, including principal trades when requested to make a bid or offer to clients.

I received a must unusual heads up from psychiatrist Ms. Moonnut. She told me the key to market movements is Oprah Winfrey. She controls all the women and the women control all the money, and she tells them whether to be positive or negative through " the Secret " or something. I have given up watching financial news since the upside down promoter advertiser is always on, predicting Dow 5000 when I'm long, but I believe that it might be apt to watch Oprah instead.

Every now and then the stock market goes thru a period when there are runs of up or down opens. As of Monday, there was a run of exactly 5 down opens and exactly that number has occurred 53 times. Believe it or not, the opposite of exactly 5 up opens in a row has only occurred 23 times, and it's bullish after the 5 up opens.

There has been much talk about how AA and GE dismal earnings already reported are harbingers of the future. That it overrides the 50% prediction of 4th quarter earnings increases. I would demur on many counts. First, of what moment is it if earnings go up 15% on the year with a down or up quarter. Second, GE was down because they couldn't sell and AA is a commodity.

Jeff Watson writes in:

I read "The Secret" to appease one of my new-age friends who regularly buys into the snake oil du jour. "The Secret" tries, through pseudoscience, to explain "The Law of Attraction." Since the theories in that book cannot be proven or replicated using the scientific method, I remain very skeptical. However, one might postulate that there is an inverse correlation between the true believers of the theory, and success.

Nigel Davies adds:

If this is the same 'The Secret', it's an area I started investigating recently, much to the dismay of one of my more scientifically oriented friends.  This was due to the fact that this book was based around the ideas of one Charles Haanel in his one hundred year old book 'The Master Key'. And I got to Haanel as I understand he was a student of Baron Fersen, who practiced a form of standing still exercise similar to Zhan Zhuang.

All these guys were into mind over matter ideas, which recently received some attention due to some apparently very dodgy quantum theories of the mind body relationship, culminating in the reopening of pseudo-science flood gates with 'What the bleep do we know anyway'.

What can one conclude from all this? Perhaps mainly that Grandmasters really need to keep busy playing chess so as not to get sidetracked. But if there's any truth to this quantum stuff, Oprah and friends better be thinking very positive thoughts to counteract the presumed good guy who's telling everyone the US is in recession already



Crew RaceProper preparation: Went to a boat race at St. Andrews recently and saw the senior crew rinsing and washing their boat one hour before game time. They said it adds a small fraction to their time and gives them pride. The importance of getting everything in place and order for your trading day, with every little thing, and every little extra and everything prideful is underlined. John Wooden's first meeting with his players where he teaches them how to wash their hands, and put on their socks, comes to mind.

Playing for keeps: Federer is having the worst start of a season ever, not getting into a final in his last six tournaments. Before he started competing for real, he played a series of exhibition matches with Sampras, and each went three sets into extras. He obviously was fooling around, trying to keep it interesting and this kind of "customer's game" is hard to extinguish — even the memory of it is odious for competition. How many times does a market player put on a reaching trade, for the fun of it, or just take a roll of a dice with a small edge after a series of big wins, and how often does he end up like Federer this year?

Pat EwingHall of Fame: Patrick Ewing was inducted into the Hall of Fame yesterday, and certainly Doc Greenspan would have been a better choice. His grotesque and sullen disposition, his outside game that prevented any rebounds, and the general aura that he created for the team during his last eight years there must have had much carryover effect on why the Knicks are still the world's worst. Sort of like the residue of the bridge player on the take-no-prisoners brokerage house that recently saw a 90% decline in stock price.

Success factors: The Memphis-Kansas game illustrates a myriad of truths about markets. First, the little things that were done wrong made the difference between success and failure. A Memphis player argued with the referee and saw Kansas score an easy basket while he procrastinated. How often does one argue with the floor, or the counterparty and lose much more than he would have by calling it a day? If litigation is involved, know that the legal costs in the typical court case are far greater than your net expectation.

KansasLittle things: The game decided by little things and letting up with Memphis ahead by nine with two minutes to go. It reminds me of days like today where the market was way up as of 1:00 or 2:00 or 3:00 and everything was grand for the bulls, the sun was shining, the water was beautiful (a la Memoirs of a Superfluous Man) and then one minute after the close, the market had dropped 2% from its three month high, a 20 day high, which, incidentally, took the longest to realize of any in the last eight years. One also notes that Chalmers seems to be the best thief in recent memory, and his four steals meant the difference between success and failure. Specialization in one market, one part of the day is often sufficient to give one the victory.

Steve Leslie adds:

I am reminded of the saying "G-d is in the details." This is generally attributed to Gustave Flaubert, who is often quoted as saying, "Le bon D-eu est dans le detail." Others have used this quote, such as Michelangelo and Le Corbusier. Paradoxically it is quoted by the architect Ludwig Mies Van de Rohe as "The Devil is in the details." Interestingly Mies and R. Buckminster Fuller are credited with the saying "Less is More." If one wants to get a healthy dose of attention to detail, watch a pit crew at a Formula One race. It is true poetry in motion. They can fuel a car and change tires in less than eight seconds.

Rodger Bastien comments:

I would agree that the difference in the Memphis-Kansas game was preparedness. The sequence leading up to the three-pointer by Chalmers that sent the game into overtime was badly mishandled by Memphis coach John Calipari and he knew it. You can't afford to overlook anything lest it cost you the game and it was evident that he didn't make it clear to his kids just what to do in that situation (which was clearly to foul to prevent the three-pointer). What's more, an immediate timeout should have been called with two seconds remaining in regulation — again, coach's fault. Reminds me of the poor judgment I too often demonstrate in fast market conditions…

Tim Hesselsweet suggests:

Be aggressive. The passive play of Derrick Rose, who advanced the ball beyond midcourt then promptly passed and ran to stand in the corner, diminished one crucial source of leverage for Memphis. Rose destroyed Texas's 1st-team All-America PG Augustin in the regional final and took advantage of UCLA's guards by penetrating to either score or draw additional defenders and find open teammates for easy baskets.

Alan Millhone notes:

Sean KempSaw on the news a current NBA player has 10 children by eight women and has not paid his support payments to any of them. Not a good example for any young athlete who aspires to greatness in basketball or anything else ! This player might get into the "Hall of Shame."

Nigel Davies assays:

There are two different forms of preparation here; technical preparation and psychological preparation via ritual. Washing the boat is technical whereas John Wooden's hand/sock washing would have been mainly ritual, which is not to underestimate its importance. Rituals provide valuable triggers to enter a particular state of mind.

At the chessboard both are used. For example one might study an opponent's games and/or prepare a particular variation (technical) before going to the board at a prescribed time (e.g. five or 10 minutes before the start), carefully filling out the score sheet, cleaning one's glasses or some such (all mainly ritual).

Good preparation includes proper consideration of both of these. And one of the main strengths of experienced players is that they often have their preparation routine well worked out.

J.P. Highland offers:

JuventusEuropean soccer is played in a way that guarantees the cream always comes on top at the end of the season. The winner is the team that obtains more points after a long 38 game season. The only problem with this system is that it leaves almost no chance for surprises. Real Madrid and Barcelona have won most championships in Spain, so have Juventus and Milan in Italy and Manchester United and Liverpool in England.

American sports are more socialistic, impose salary caps, revenue sharing, give a chance to bad teams to draft before winners and have a playoff system that gives a higher probability of having a winner th product of randomness by inviting underdog teams that are graciously called wild cards that can later become champions like the New York Giants.

Speculation is closer to the European system. You can get lucky some days and reap a good reward but in the long run the lack of sound money management and a strict trading plan will put you out of business.

Clive Burlin recounts:

I took an introductory flying lesson recently. I was shocked at how much checking gets done before you roll down the runway. While the instructor was going around the plane checking the propeller, flaps, gas, tail, etc., I was thinking to myself "you know, if you did half the amount of prep before putting on a trade, maybe your results would be a bit better." This thought was totally reinforced once inside the cockpit where the pilot sat with this long check-list seemingly checking every button and switch there was. A few more checks before take-off and we were barrelling down the runway.

Scott Brooks recalls:

Some years ago, I was listening to an interview of several NBA players and the focus was on Patrick Ewing. One thing all the players agreed on was that Ewing was cheap. He never picked up any tabs. Don't know if it's true or not, but I found it interesting that the biggest personal matter that they all agreed on, and spent a inordinate amount of time talking about, was his "cheapness."



BearsHedgefund monitoring service Greenwich Alternative Investments reports 58% bears on the S&P, 58% bears on the dollar and 67% bears on the 10 yr T-Notes. Sentiment is overwhelmingly negative.

Nigel Davies replies:

Seems odd that these learned gentlemen would be so bearish on both the dollar and the S&P. I would have thought there'd come a point at which a weak dollar would start to get good for exports.

Jim Joyce writes:

Sentiment stats must be tested. One can't just glibly assume they are contrarian indicators.

Victor Niederhoffer remarks:

The key to this market was when Abbey Cohen refrained from making any more bullish forecasts and it was accepted that we were in bear market by Goldman itself.

Stefan Jovanovich explains:

Measures of the current cycle need to include adjustments for the change in the value of the dollar. If those changes are included, the S&P 500 at 1374.9 is still down roughly 25% from its 12-month high on May 29th of last year and down 7% from its 3-month high at year-end. One could argue that the "bear" market is still intact — given that the S&P 500 adjusted from the value of the dollar is down 60% from its high on August 30, 2000 and up only 17.3% from its low on March 3, 2003. Comparisons with 1938 seem appropriate when looked at with this particular historical lens.

Nigel Davies agrees:

It is helpful to consider the value of assets relative to other assets rather than just the dollar. The dollar is by no means a fixed entity, though when one talks about 'bottoms' or 'tops' in assets like stocks or gold, there's an implicit assumption that it is.

J.T. Holley replies:

The dark clouds cover only the Big Apple. The dark and dirty forecasts are associated with NYC. My assumption is cutbacks, losses, write-offs, and a slowing beat of the heart of the financial world. Outside NYC, in beautiful Brentwood, TN where the buds are blooming, daffodils sprinkle the green fields, and opportunity is much appreciated, I'm as bullish as ever. It seems that far and few are remembering the drift, that bear markets exist only by looking at the rearview mirror, while one is driving forward utilizing the windshield to block the bugs and grit. 

Kim Zussman reports:

Yesterday was third highest first day of month in 14 years (SPY c-c). Those >3% gain were, on average, followed by gains the rest of that month:FDOM



RainbowWhy it is some look for more out of themselves than is there is one of those human psychological mysteries that will never be solved, I guess. Maybe its too much hype from gurus who cover the media with propaganda that stimulates monetary responses from suckers.

I fall into this trap, expecting more of myself. For instance, expecting myself to profit like a professional when I totally lack predictive skills.  I know, intellectually, I am gambling when I hit the trade button; yet an irrational hope lingers on that my analytic competence has correctly foreseen the outcome.

So there it is, in black and white. Prudently I ought to adjust my life to this reality. I won't, though.  The next time that hope manifests itself I will again go through the same process, mentally, emotionally, behaviorally.

Nigel Davies explains:

One of the problems with trading is that outcomes are not directly linked to performance, especially over a short period of time. This alignment is much closer in games with a smaller random element, which is what makes them a good training ground for the ego.



No CountryWith moves in the first hour of trading on several occasions reaching half the yearly average move in prices, limit moves in the agricultural commodities happening almost one in two days, and volatility in stocks recently showing that a 2% daily change is average, the fifth biggest brokerage saved by just a hair from going under, and Fed infusions to preclude a market meltdown a la 1907 and 1929, it's apparent that the market is no longer for old men.

I've developed a few indicators of this. One being the 90 second, two point move down in Bunds on Friday ("in den Keller gerauscht"), down five points at the time for the week, shifting the decks for $6 billion in value from those with the stops, and the 14 days of 1% or more moves that we've been running each month in stocks, the daily moves in soybeans of limit up or down 10 of the last 20 days, the half-hour declines of 15 points in S&P at the end of the trading day and the frequent air pockets in all markets with 25% of margin moves in 30 minutes.

James Lackey recounts:

For the past month, for all the big up and down opens the total sum of only about 10 points. The problem isn't the open, its the the open to lunch. One day this month the S&P had a glorious comeback to close the day up 48 after a down 15 pointer, but that was a tough 28 point up open pullback to buy. An up open-12:00 had another big up day of 53, sell that big up open of 23 and you missed out. Often the down moves closed down for the day and the ups, up.

If you didn't catch the open or jump on an up open for the open-12:00 you missed many a move. Worse, buy a down open after down days and you get pinned to the mat. That is nothing new for March. How about a double dipsy doodle failure? Friday was miserable.

Janice Dorn writes in:

These movements may be related more to psychological state than to age. Those in their sixth and seventh decades know best when to be in and when to stay away. It looks like there are a lot of novice traders,  likely of every age, suffering from manic-depression, who are unable to hold positions for more than 10-30 minutes, and whose moods vascillate from sheer depression to euphoria in fairly rapid sequence. I don't know how to test this other than the types of mail I get every day from traders. They want "in on the action" in the "hot commodities" and don't have a clue what they are doing.

I got mail from someone the other day who had never traded real money and has to go to the back room of a store owned by his cousin to watch the markets since he does not have high speed connection at home. He told me that "some big firm" in the east wanted to hire him immediately and give him $2 million to trade. This was based on his paper trades that showed that he could make 0.4% a day scalping.

I think that we may also may be dealing with increasing emotionality and overconfidence among traders, for a number of different reasons, including instantaneous worldwide communication. Add to this the relentless and shameless promotion by futures and commodity trading services and firms, and one has a recipe for at least part of what often seems to be an incomprehensible, violent and volatile mess.

Usually when someone says "I've never seen anything like this before," it means he is losing. In the past months, it is becoming clear, in a number of commodity markets, that we really have never seen anything like this before.

Nigel Davies proposes a remedy:

Perhaps the more mature speculator should head for Mauritius where the stock exchange is open from 9am to 12.30pm. This leaves plenty of time for hot tea before the open and it finishes in time for lunch. And then one can have a nice game of checkers in the afternoon.

Alston Mabry comments:

J BardemThe scene that gets shown over and over is where the hit man goes into the gas station and tells the old man to call the flip of the coin. The hit man explains how the coin has been traveling all these years to come here at this moment for this decision. The old man, bewildered, asks, what am I gonna win or lose? Everything.

Which strikes me as an interesting metaphor for what many investors have experienced in the last year or so. That coin is all the things you didn't know about, that were coming your way: the mortgage derivatives, the borrowed money, the margin calls, the collapse in home prices, the volatility, the troubles at Bear. One day a guy walks in the door and says, "Call it."

Gregory van Kipnis adds:

My take on this provocative film is along similar lines, but without the comfort of an apparent opportunity for a decision. For me the "hit man" is pure evil that may come your way and give you the sense you have some control (chose heads or tails), or that the outcome is probabilistic (50/50), when in fact the outcome is predestined, it is all fate made to look like a game. Notice the line, which comes close to the end, when he appears in the wife's bedroom. When asked why he was there he says you were doomed when your husband didn't accept my offer to trade the money for your life. I got him, I got the money and now I getting you. Then he adds, 'this is all I can do for you.' He gives her the appearance of control with the offer of a coin flip. She refuses. The rest is left to your imagination.

James Sogi opines:

Big SurfTruth is, we have seen this before, the consecutive afternoon drops — right at the bottoms of July and August during 2002, before some big rises. Too few to be robust, but as precedent. But it seems the micro action is slowing down. Like Friday, quite odd. 2-3k on the bid and at the ask. I think the sides are starting to equilibrate. Ranges and gaps are dropping.

In the surf lineup, I'm the oldest guy out except for Makalwaena Bob at 72. I see lots of teens and 20s out. Fewer in their 30s and 40s. None after that. They're strong and careless about danger. They talk about silly kid things. I've seen many of them drop out of the surf lineup: weight, beer, kids, job, drugs, lack of interest, injury, arrests. Its good to still be out there after all these years. It's a different perspective. Its hard to stay in shape and strong and flexible. The speed is down. I try to be in the right spot at the right time. Wait for the nice sets. Avoid getting caught inside. I keep an eye on the horizon, the weather, the buoys, the tides, satellites and can be there when the waves and conditions are right. I like having nice equipment to fit the conditions. I see many parallels in the markets and trading.

Mr. Albert reports:

Here are a few recent qualitative observations from an equity day trader:

1) The speed of price changes is way up and the 'noise cloud' around price is much expanded.

2) The change is volatility from one day to the next is dramatic.

3) Stocks often trade very hard in one direction and then stay there without much of a reaction.

4) My 10 mbps line is compressed to ~1.5 mbps and pinging Yahoo times out for three iterations at the open.



Nigel 1975For a chessplayer it's part of the job to consider that the opponent will try to test you with the most unpleasant possible line of play. But I suspect there's a problem here for countists in that the main thrust of the thinking is in what happens in a 'typical' case.

Nevertheless we have to consider what the plan is when the market does exactly what you fear the most. Is there a plan?

Perhaps the most pernicious scenario is the margin call that acts effectively as a stop loss. Let's call them margin stops. If considered during tests, margin stops would render a lot of the systems useless in the first place. Might as well be betting on the ponies.

Bruno Ombreux asks:

Isn't it easier to aim for 10% a year, which is achievable with far less risk, and far less work? I mean, at 10% a year for 20 years, one would probably rank high among the top 1% of market participants. And it is incredible what 10% a year can achieve compounded over 20 years if one keep living expenses reasonable in the meantime.

What matters is the end game, isn't it?



PolaroidPolaroid's announcement last month that they will stop making film is a timely reminder that the world moves on and that those who want to survive must move with it. All that's left now is the usual bit of nostalgic kicking and screaming.

This reminds me of one of the habits of International Master Bob Wade, OBE, who is still playing tournament chess in his late 80s. He makes a point of not keeping trophies, saying it would make him live in the past.

Sam Marx reminisces:

I formerly worked at Polaroid in '56-58 as an engineer in the polarizing film department. (Had no relation with the camera or instant film divisions). We were making the lenses for sunglasses and polarizing material for the government.

Polaroid was then located in two buildings exclusively in Cambridge across the street from MIT. Actually you had to walk across the MIT grounds to get to Polaroid's administrative building on Main St. This was before the move to Route 128.

It was a very progressive company guided by the inventor businessman Edwin Land. He developed the method to produce polarizing film in wide strips while still in college, Harvard, and then dropped out with his professor (George Wheelwright) to start the company. In the mid '40s he invented instant film and the Polaroid Land Camera.

Kodak damaged Polaroid's business by coming out with their instant camera which the court decided a number of years later was based on Polaroid's patents and had to pay Polaroid, but the damage was done.

Recent digital photography really put a virtual commercial end to the Polaroid instant film process and by then the Polaroid's driving force, founder Land was dead.

I remember in Dec. 1956 at the Polaroid Christmas Assembly when Edwin Land made the following announcement," All the major problems to develop color film have been overcome and it is now only a matter of time before we have it commercially". After checking with a friend from NY who was high up in the chemical research division, I went out and bought 200 sh. at 40 OTC. It dropped to 30, I sold 100 sh. in panic in what I now recognize as a selling climax, but kept the other 100 sh. I believe in '59 it was trading for 110. I sold the 100 shares a few years later.

By the way, Polaroid color film did not come out commercially until 1963, six years after Land's Christmas announcement.

As a small note, Edwin Land drove a black 1956 Ford Convertible with a continental tire kit on the back which I thought was pretty racy for the head of a large corporation in the '50s.



CrabsI learned about this for the first time this weekend: If crabs are trapped in a bucket, they'll drag back any of their number that tries to escape so that they all share the same fate.

Stefan Jovanovich adds:

In describing his early days as a scuffler and then a scuffling actor, Michael Caine used the same expression. Among his fellow poor — friends, family and neighbors — "Whenever anyone tried to get a leg up, people would reach their hands — not to help push but to pull him back down. It was like crabs in a barrel."



PebbleI'd love to know whether Joe Lewis played golf with Jimmy Cayne prior to taking his billion dollar stake in BSC. I think that with a shared interest like this the defences go down. Is it right to trust people that we instinctively like? Or is this the time for caution, certainly with regard to business matters?

Bill Humbert replies:

GM Davies asks a good question. I wonder if this has to do with the departure of happy times. The rising tide lifted all boats, but now those who cannot do are left with no support except their ability to deceive. I have encountered more smiling, pleasant backstabbers, liars, and hoodoos in the last three years than in all the rest of my life added together. I have successfully used the cockroach theorem for years with individuals, but find it highly predictive with regard to organizations as well, nowadays. Noticing one little oddity almost ensures worse, and soon. Get the facts. Follow the money and power flows to see what they are distorting in order to ensure gain for themselves or avoid threats to their pleasant and undeserved situation. Been pulling out books like "The Prince" and "The 48 Laws of Power." They read like a checklist some days.

Kim Zussman extends:

RoachSpeaking of cockroach effects:

1. Are there more big problems to come at financials?
1a. Is illiquidity of the banking system the only fear?
2. Are we in/headed into recession, and if this is all, wasn't it quick and painless?
3. How long/far will real estate decline?
4. Will central bank actions ameliorate or postpone?
5. Isn't a long-term bottom when no one even wants to discuss the stock market?
5a. And a negative wealth effect because investable capital is needed for consumption?
6. Is there a put in SP500 at -20% from October's high (cash 1250)?
7. Can bear rallies be distinguished from a major turning point?
7a. Can bear rallies be timed and bought without an irregularly declining P&L?
8. Are some markets not tradeable and how do you recognize them ex-ante?



As my Zhan Zhuang teacher said, when I mentioned a different way of standing to what we do in class (Baron Ferson's Fearsome Stance), a little knowledge is a dangerous thing. Here I played 13.f4, ignorant of the fact that it is new whilst my more knowledgeable opponent knew that it was new. Accordingly he thought it must be bad, and in his efforts to refute it overlooked the backward knight move, 22.Ng3.

This game helped me towards my first clear first in a long time. Clawing it back…

[Event "Bolton Open"]
[Site "?"]
[Date "2008.03.23"]
[Round "4"]
[White "Davies, N."]
[Black "Haslinger, S."]
[Result "1-0"]
[ECO "A07"]
[PlyCount "127"]
[EventDate "2008.03.23"]
[SourceDate "2008.03.23"]

1. Nf3 d5 2. g3 c6 3. Bg2 Nf6 4. b3 Bg4 5. Bb2 Nbd7 6. O-O e6 7. d3 Bd6 8. Nbd2 O-O 9. h3 Bh5 10. e4 e5 11. Qe1 Re8 12. Nh4 Nc5 13. f4 dxe4 14. dxe4 exf4 15. gxf4 Ncxe4 16. Nxe4 Nxe4 17. Bxe4 Bc5+ 18. Kh2 Bd4 19. Bxd4 Qxd4 20. Nf5 Qxe4 21. Qxe4 Rxe4 22. Ng3 Bg6 23. f5 Bxf5 24. Rxf5 Rd4 25. Raf1 f6 26. R5f2 Re8 27. Kg2 Rd5 28. c4 Rd3 29. Rf3 Red8 30. Rxd3 Rxd3 31. Rf3 Rd2+ 32. Rf2 Rd3 33. Ne4 Rd4 34. Nc5 b6 35. Na6 Kf7 36. Nb4 Rd6 37. Rc2 a5 38. c5 bxc5 39. Na6 c4 40. bxc4 Ke7 41. Nc5 Rd1 42. Re2+ Kf7 43. Nb3 a4 44. Rd2 Rb1 45. Nd4 c5 46. Ne2 Rb4 47. Rc2 a3 48. Kf3 Rb2 49. Rxb2 axb2 50. Nc3 h5 51. Ke3 g5 52. Kd3 h4 53. Kc2 f5 54. Ne2 g4 55. Ng1 Ke6 56. a4 Kd6 57. Kxb2 Kc6 58. a5 Kb7 59. Kb3 Ka7 60. Ka4 Ka6 61. hxg4 fxg4 62. Ne2 g3 63. Ng1 g2 64. Nh3 1-0



 Another way to look at changes in volatility (increase/decrease in price swings per unit time) is to view it as having a typical overall move in price but with the time scale expanding and contracting. This might offer some additional insights, for example point and figure charts by ignoring time also ignore volatility. So if you test these they'll produce a quite different set of patterns which are essentially 'volatility blind.'

Sushil Kedia replies:

A filtration process such as Point & Figure is essentially based on defining one's tolerance for noise in the price series. The box size achieves that. Point & Figure is the only method in Technical Analysis to not plot the time axis. It is perhaps the only method of looking at prices which has a nature similar to the time/distance equivalence in Einsteinian physics. There perhaps is a case for finding a congruence in defining a unit of time for a particular security based on a certain standard movement in its price.

Bill Rafter explains:

Point & Figure purports to separate "signal" from "noise" and discard the latter. Every time you run data through a filter, you eliminate both some signal and some noise.  The short-term data that you assume to be all noise contain substantial signal.  Thus, it is illogical to assume that you will improve results by discarding information.  Further, and most-importantly, we applied Point & Figure filtering to all of our trading methodologies and the degradation of results was universal.

Phil McDonnell expands:

PhilThe Grand Master poses an interesting question and Mr. Kedia wisely suggested an analogy to Einstein's relativity theory. There is much to be learned from these ideas.

Suppose we have two assets which substitute for each other in investment portfolios. For example they might be stocks (s) and bonds (b). Given that there is only a constant supply of funds (m) available for these two investments we can posit that their combined value would be equal to:

m ~= ( s^2 + b^2 )^.5

The above is essentially the equation of a circle of radius m. One possible flaw is that the market for s may be much smaller than the market for b. Thus a given fixed disinvestment from b might move s by considerably more. Our model would therefore no longer be a circle. Without loss of generality we can assume the fixed quantity m to be 1 (100% of all the money). Then we have:

1 = ( s^2 / a^2 + b^2 / d^2 )^.5

where a and d are two constants of proportionality which relate to how quickly the two markets move. Thus each market now has its own ease of movement parameter in this new elliptical model.

One of the key properties of the theory of relativity is that as one approaches the speed of light both time and space are distorted. In particular the Lorentz transformation governs this process and is given by:

gamma = 1 / ( 1 - v^2 / c^2 ) ^ .5

where v is the velocity of the spaceship and c is the speed of light. This represents the transformation in the x direction which we shall assume is the direction of acceleration. Referring back to the elliptical model formula above we see that the one dimensional form looks remarkably similar to the denominator of the Lorentz transform (gamma).

Qualitatively such a model would be consistent with the Davies/Kedia conjectures. Time would slow down as the market moved faster. Magnitude in the price direction would dilate as well as a function of velocity.

Having a theoretical model of the market is all very nice but unless the market follows it then it is useless. To test this a study was done of the above stock to bond relationship using SPY and TLT ETFs. Fitting the parameters a and d to past data one finds that the constants were 200 and 100 respectively. Then the fitted model was compared to the actual past history of SPY and TLT and found to provide very good agreement. Perhaps we may look at these constants as the speed of financial information (light) in the stock and bond medium respectively.



DunceThe current financial "crisis" is somewhat surprising given that less than five months ago the market was at all-time highs. The only other times the market was down in a five month period 10% or 20% was toward the end of the big bear market of 2002. It is interesting to note how the pattern occurrence has shifted to the period more at the end of the 2002 bear market rather than the peak period of 2000 where many of the patterns had been showing up. It is not statistically significant by any means, but a good example of what I discussed under the idea of precedent or case-based reasoning. Overlapping occurrences show that 100 days out there is a good probability of a significant rise in the market after a five-month 20% drop.

Sometimes when I go out and around in public I look at people and think to myself, "Gee, they look kind of stupid." They probably think that about me too. Dr Goulston and Dr Dorn would rightly advise that compassion is better. They are right. But when I see what goes on in the market sometime I think to myself, "Gee, that is kind of a stupid thing to be doing." Like a 27 point gap down. These are opportunities that seem to occur with more frequency than one might think, given all the sharp operators out there. Sometimes its just a matter of sitting around waiting for such an opportunity. I do stupid things in the market too and berate myself over the stupidity, "What was I thinking." In the context of the evolutionary fray this is acceptable and expected as out in the wild. Tomorrow there surely will be some silly things going by both the Fed and the market. Hope I don't do something stupid.

Nigel Davies adds: 

There are helping professions (psychologist, doctor, clergyman) and predatory ones (chessplayer, trader, lawyer). Those with predatory professions shouldn't feel bad about seeing the worst and trying to exploit it. It's just part of our job in the rich tapestry of life.

Stephan Jovanovich replies:

GM Davies is too modest. The predations of the professionally helping can be the worst of all precisely because, far too often within the confines of their safe authority, there is no second opinion. Like the school teacher the professional helper almost always has the last and final word. Traders, chessplayers and lawyers have to battle it out. Without their examples of contest, we would have no idea of liberty.



In an article about Toyota, J. Brian Atwater and Paul Pittman highlight the importance of systemic thinking.

"Through the analytical paradigm, we attempt to understand complex phenomena by breaking them into smaller parts, then trying to understand how the parts operate in isolation. All evolved fields of study — from chemistry to business — have used this same analytical methodology as a basic building block to understanding."

"Systemic thinking is, fundamentally, the opposite of analysis. Rather than trying to break a complex phenomenon into smaller pieces, it attempts to understand complexity by examining behavior within the context of the larger system in which it belongs."

The authors say Systemic thinking consists of holistic thinking, dynamic thinking, and closed-loop thinking.

  1. "Holistic thinking–studying the role and purpose of a system and its parts to better understand why they behave as they do."
  2. "Dynamic thinking–examining how the system and its parts behave over time."
  3. "Closed-loop thinking–investigating how the parts of a system react and interact to each other and external factors."

Issues that make understanding some systems difficult, as identified by Jay Forrester, are also applicable to speculation:

- Cause and effect often are separated both in terms of time and space.

- Problem resolutions that improve a situation in the short term often create bigger problems in the longer term; actions that make things worse in the short term often have long-term positive effects.

- Because of these first two characteristics, people often do not learn from their mistakes.

- Complex interactions between the various parts of a complex system often create counterintuitive behaviors. Consequently, what appears to be the obvious decision is often a bad choice."

Toyota's introduction of the Prius in 1997 provides a good example of systemic thinking. U.S. automakers took years to respond with their own hybrid vehicles, partly because the U.S. automakers' priority in the late 1990s, a time of low energy prices, was selling high-margin sport utility vehicles. There was no discernible customer demand for hybrid vehicles.

"By examining their industry holistically, [Toyota] realized demand for oil was going to increase significantly as India and China became more industrialized. In addition, political unrest in oil-rich countries and geological concerns that oil deposits may disappear made supplies dubious at best. Finally, worries over global warming made the development of fuel-efficient vehicles an attractive public relations move."

Nigel Davies remarks:

Seems to me like the kind of thing that is written after the fact. I'd need some convincing that Toyota's policy was nothing more than a happy accident. We chessplayers do this all the time, especially when we blunder and it turns out to be good: "Of course I'd seen everything; the bishop sacrifice was the only logical continuation…"



LockThere's a metaphor that keeps popping into my head whenever I think about markets these days. It's that of a lock, the device for raising and lowering boats between stretches of water of different levels on river and canal waterways.

Now suppose that thus far the world economy has thus far been a system of canals and waterways which has thus far functioned via locks. And what if globalisation is breaking this down so that the economic streams have started growing beyond limiting pathways. What would be the effects?

It seems to me that the waters must burst out of the canals and then level off, meaning that the geographic disparities in land values, currency and wages will gradually erode. Such an outcome would seem to be a very positive one in the long run, but meanwhile we've got a lot of flood water to mop up.



There is a lot of discussion of 'style' in many arts, but perhaps the ultimate goal is to go beyond style to a point at which one does everything in one's sphere with the same high level of excellence. To fall short of this means having weak spots which will sooner or later be found out.

Two very disparate sources on the matter:

When one has reached maturity in the art, one will have a formless form. It is like ice dissolving in water. When one has no form, one can be all forms; when one has no style, he can fit in with any style. — Bruce Lee

I don’t think so. I’m not even sure what, “Fischer’s style,” is or if it exists. A very dear friend, GM Miguel Najdorf, who had strong, very strong, opinions on just about every topic and every subject, delighted in baiting me and drawing me into animated, emotional discussions. He was a passionate man who loved chess very much. He postulated a theory which I’ve thought about often and think he was right. His theory went like this: “Jasser (Miguel would always mispronounce my name in this Spanish way) you know, Bobby had no style.” Such an opening gambit to start a conversation was perfect bait. “You see, when you show me a game of Capablanca, I think, ‘Aha. Very nice. Very smooth. Logical. Beautiful play. Must be a game of Capa!’ Then you show me another game, I think, ‘My God! Who is this bandit playing the white pieces? Look at these reckless, daring sacrifices. And this quiet move as well! Incredible! Down two pieces and he stops to make such a move. And he won! Of course, I realize, this is Tal.’ And another game. ‘I can’t understand what the player is doing. He is taking extraordinary precautions and his opponent isn’t even attacking. Now he has maneuvered his pieces backwards and then to nice squares. He improves his position but has done nothing concrete. My God! The opponent is suffocated and is dead. Of course, that is Petrosian.’ You see Jasser! I recognize style. But you see when I play a game of Bobby, there is no style. Bobby played perfectly. And perfection has no style.” We argued for hours, but in the end I found Miguel’s theory quite convincing.” — Yasser Seirawan



DrinkIn most pursuits it's a bad idea to burn bridges. Trading is an obvious example, if one keeps making all or nothing bets then sooner or later it's going to be nothing. Chess is like this too, the professional way of playing being to avoid leaving one's position so brittle that a failed attack means you are lost. This is why Bent Larsen liked to push his rook's pawns; an advance of this pawn rarely compromises one's position beyond hope.

There are also times that bridge burning can be good, when the bridge leads somewhere to which you never want to return. A good example is in throwing out old clothes after losing weight when retreat is no longer an option. Another is to announce to acquaintances that one is giving up the thing that lies on the other side of the bridge. Take your pick between booze, cigarettes and blondes, the statement makes it harder to go back because of the loss of face. One must, of course, mind losing face for this to work.

And this brings me nicely to the point of this email, I'm about to burn one of my own bridges with an announcement: A wonderful 30 year relationship I've had with (moderate amounts of) alcohol has recently come to an end. And I'm now left wondering why I didn't do this earlier.

Scott Brooks replies:

I've had a similiar experience.
When I first got into this business it was recommended that I read Tom Hopkins book "How to Master the Art of Selling". It was a very old-school book on selling (but hey, 20 years ago everything was old-school), but it did have some pretty profound advice that I decided to follow.
I'm going from memory here, but what Hopkins basically said was, "Remove all people and all things from your life that don't add value."

Then I made several decisions that I believe had an important impact on my life.

1. I stopped hanging around with a group of friends that were hoodoos
2. I gave up drinking altogether. I was never a heavy drinker, but not giving it up was symbolic to me in that it I believed it seperated me from the vast majority of people
3. I reaffirmed my commitment to not use four-letter words.
By far and away, giving up the hoodoo's was the best thing I ever did. But quiting drink and not using four-letter words is a constant reminder to myself (since most around me cuss or drink) that I hold myself to different standards, that are solely my own.
Now, I'm certainly not proselytizing my way of life to anyone reading this, nor do I look down on others that make choices that are different than mine.

Steve Leslie writes: 

To Nigel, I say, congratulations on your decision and I hope it has meaning for you beyond the physical benefits you will likely experiences.

The Outlaw Josey Wales said it best, “A man’s gotta know his limitations.”

I applaud Nigel for making a public and personal decision. I emphasize the word personal.

I agree that moderate drinking, consumption of fine food, recreational gambling, enjoying a fine cigar, or trading futures, in most cases is probably not very destructive. When it is a chronic condition when it might become a problem.

Even helping out those in need and advising others can be a noble pursuit.

Many of us are aware when this crosses the line and becomes destructive to our own lives.

For those who might not have the gift of discernment or may be too soft-hearted or gullible, it can be very helpful to have at your disposal an inner circle of advisors. It also is important to distinguish as to whom one includes in this circle. Napoleon Hill in his excellent book “Think and Grow Rich” discusses this in great detail. Others such as Tony Robbins, Zig Ziglar and Jim Rohn have also expounded the validity of such a strategy. It would serve us all well to visit Hill’s book and review his profound wisdom.

Nigel Davies replies:

Steve makes a good point that such decisions are personal. It wasn’t meant as a criticism of other peoples’ choice to drink either moderately or immoderately. In fact one of my all time favourite quotes is by former World Chess Champion Mikhail Tal, who on learning that the Soviet authorities were going to clamp down on vodka drinking exclaimed: “The State against vodka? I’m on the side of vodka!” It was vodka that killed him, by the way, though without the vodka he might not have been able to tolerate life in the USSR.

My purpose in going public was really just to keep myself in line; making a public declaration like this really binds you to the decision. And I made the choice to quit after starting not to feel too good the morning after even moderate consumption. This sudden intolerance could be a result of having taken up Zhan Zhuang (’standing like a tree’) some months back — I’ve been advised by that such practices can produce this kind of effect. Whatever the reason I can say that I now feel better than I have done in years. And it will be a sad day if I ever build a bridge to go back. 

Jeff Watson recounts:

I used to be guilty of not burning bridges, and it cost me dearly.  I got a reputation for being a shoulder to cry on, and found myself inserted into the problems and drama of others.  This took a physical and emotional toll on myself and my family, and I finally had to cry, "No Mas!"  About 15 years ago, I made a concerted effort to to free my life of all of this flotsam and jetsam, and the result of doing so has simplified everything in my life. I got away from negative people, the ones who suck the very lifeblood from your soul.  However, I do like to listen to hoodoos, encouraging them to give their views in great detail.  Hoodoos are great fade indicators, and I look forward to their views  like the Israelites devoured the manna from heaven.  I listen to them with a jaundiced ear, and never allow them to convince me that their views are right.  I learn a lot from them, and consider them a great source of what not to do and what to fade.  I've burned a few bridges in the past by not doing business with friends, not co-signing on loans, and not financing ill prepared business ventures.  Although I've disappointed a few people with my "Scrooge" like approach, life has been better for myself and my family, and that's what really counts.  The only bridge I never burned was that of my favorite charity.  Although it sucks up a lot of time and money, and I would personally be better off distancing myself, whenever they need something, I always answer their siren's call.

Chris James adds:

I used to have a lot of married friends who would often try to drag me into their fights to be on the man’s side or the women’s side. When I was younger I use to bite and take one side or the other only to deeply regret it later after they made up. The one I had sided against was not to pleasant to me for a long time.

This is probably a common experience for a lot of people…

Solved it with a one liner. No couple who hears it has ever bothered me again. “Listen, You guys don’t invite me when you make love so consider me dis-invited when you make trouble!”

Eric Falkenstein cautions:

I think in ridding oneself of people who don’t add value, it is important to take the long view. If you are the kind of person who only deigns to return calls or hang out with people in a position to do you favors, right now, you are all too common. You would be an unreliable friend or colleague, because when adversity hits, you can’t be counted on. Further, there are many behind you that engage in mercenary friendships, so you aren’t needed–a fun replacement who values my friendship for the favors I can bestow him is simple. Such a person would be constantly trying to get into asymmetric relationships, always the lower-status guy trying to get the better of his ‘friend’.

No one likes these people, for obvious reasons. Thus, relationships should be addressed with a long view, in terms of intellectual, business, or social growth. To the extent their interests are base, unenlightened, or self-destructive, you need to avoid them.



VNWe are all accustomed to the wisdom of "the threat is worse than the realization" which comes from the boardgame world, and Tom Wiswell and Nigel Davies have written about it. But one wonders if it's symmetric with "the hope is better than the realization," as an event like the 25 S&P point half-hour rally on the hope of a bailout, a shuffling of the risk from one to another, would be prone to a revulsion, or a 25 point down swing or some such in the near future when hope meets reality or as Galton said about Spencer, when the facts meet the hypothesis.

Nigel Davies suggests:

One way to look at this is to view weak emotional responses as being attached by elastic to the roller coaster of perceived reality. And this leads to two of the great problems in games and speculation, one's perception and the feelings this then engenders. It may also be that 'science' is no answer here except to add a layer of false confidence to already skewed beliefs. It seems very easy to prove whatever one sets out to prove, and to be too rigorous usually means saying nothing at all.



Half OffI joined a health club today, and hasten to add this is just for the pool and steam room. But the pricing was curious:

– Off Peak (to 5pm only): £24 per month
– Peak (to 10pm): reduced to £25 per month
– Group peak (access to the entire chain of clubs to 10pm): halved to £24.50 per month

No prizes for guessing which one I went for — it seems like they were having a lot of trouble unloading the more expensive membership packages and slashed them in a a somewhat arbitrary way. But now I'm wondering if there may be some predictive power for other luxury areas in their fee structure. For example in their peak/off-peak ratio and whether this is becoming larger or smaller.

This kind of thing might be applied to other areas too, for example the housing market. I've often wondered about the London vs the Rest gap, after having watched this  narrow during booms. As everyone tries to jump on the bandwagon (or through fear of never being able to buy something) he drives up the prices of the lower quality property whilst affordability constraits keep the lid on the better stuff. For sensible pricing to be reestablished a differential would need to be restored.

Riz Din adds:

A bit more on incentives and the curious nature of gym pricing:

A few months back, I took out a health insurance policy that encourages me to go to the gym and to partake in other healthy practices. Insurance can be quite a blunt instrument because it can encourage one to behave more destructively than they would otherwise, so it's interesting to see innovations that make an effort to realign people's incentives.

With this insurance product, I collect points for these various healthy activities and at the end of the year, if I have enough points, my insurance premium will be reduced by more than 70%. The quirk is that I don't care one bit about the health insurance policy. It's nice to have it, just in case, but I really wanted to join a gym and the policy comes with massively reduced rate gym membership to encourage me to stay healthy. Indeed, the gym records my visits over every quarter and provided I work out at an average of twice a week, then I get both the insurance and the gym membership for significantly less than the gym membership alone!

The catch is that if I fail to go to the gym twice a week, it can get expensive, and I guess some people will fall into this trap. However, I saw this as an attractive incentive to stay fit, and so far it seems to be working. Nothing incentivises like hard cash.

Scott Brooks explains:

ScottI'm not sure there is any predictive power to discounted gym memberships. I work out at 24 Fitness (of "The Biggest Loser" fame) in St. Louis and at Wilson's Total Fitness in Columbia, MO. Both of these gyms constantly run membership specials.
When I worked as a personal trainer in the mid 1980s (which meant that I got hired and sold people memberships and had to pretend like I knew what I was doing), we rarely ran specials, but I had tons of leeway in terms of what kind of memberships I sold. I could vary prices and length of time of membership almost however I saw fit. Basically, the goal was to sell, sell, sell.
This time of year, gyms are really hungry for new members. They've gone thru their big selling season, the New Year's resolution phase, and most of those people have already petered out and are gone, even though their memberships fees are still paid or are owed. As an aside, there is nothing more irksome than the first 4- 8 weeks of the new year when the gym is full of these people (who are going to fail anyway) crowding the machines and weight stations). So this time of year, gyms are selling heavy.
There may be predictive power in other areas of the economy, but I don't think there is in the fitness arena.



WalkingWith the weather improving here in the UK my son and I have resumed our practice of walking to school rather than taking the car. This is such a simple thing to do but has so many benefits besides the exercise, fresh air and cultivating a non-sedentary attitude to life.

First off there's a chance to see things that you don't normally see when whizzing past, both natural and man-made. There's an opportunity to talk (and sing!) without interference from phones, doorbells and email. And you get to miss the traffic gridlock on the approach to the school.

Victor Korchnoi puts his chess longevity down to walking everywhere. He hasn't driven since the shock of having hit a police car in the Soviet Union. And David Bronstein too was a great believer in the benefits of walking, advising a short walk before every chess game.

Riz Din adds:

At my gym they quote Plato on the noticeboard:

Lack of activity destroys the good condition of every human being, while movement and methodical physical exercise save it and preserve it.

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