Ralph Vince writes: 


Christopher Cooper writes:

I can confirm this from personal experience, but it has been building since before the Covid issues.

At my beverage co-packing facility we have been cut off by our can maker (Crown). We have really had to scramble to get out hands on cans for ourselves and our customers. We were able to find some in Canada. We’re probably OK until mid-2021, but will have to find a reliable source before then.

This is driven mostly by the advantages of cans over glass for many beverages. We shut down our glass bottling line in favor of making more room for canning. It is simply the preference of the brands that come to us, most of whom are startups.

Ralph Vince writes: 

I wonder how deep this goes though? is it affecting cans of aerosol spray as well, or other industrial componentry?

Christopher Cooper writes:

Not to my knowledge, Ralph. This is due to growing demand for aluminum beverage cans combined with constrained capacity due to the cost of building new plants. The beverage can plants don’t make anything besides beverage cans, and they are running at full capacity.

No doubt there are supply chain disruptions due to the current economy, I just don’t think this is your best example.




July 13, 2020 | Leave a Comment

Henry Gifford writes: 

My uncle was a New York City police officer for a few weeks in the 1960s. Tall, strong, handsome, Irish (when that helped a lot), Navy veteran. He and some other cops answered a call for a burglary at a jewelry store. The other cops started stuffing their pockets, but my uncle took nothing. The others urged him to just take something. He didn’t. They explained “the owner will just do the same before the insurance company gets here.” He took nothing. He was off the force within the week. Until an honest cop can be trusted, there is no room for an honest cop.

In the 1980s I lived and owned apartment houses in a part of Manhattan where drugs were sold openly on the street, by people yelling at the top of their lungs about the quality of their heroin and cocaine. The cops came for raids with the sirens on from three blocks away, going the wrong way on a one-way street (slowed them down a lot). I saw the cops rob drug dealers in broad daylight, and was then asked to be a witness because “if I show up emptyhanded they will kill me – please be my witness.” Who was right and wrong in this situation?

Years later, in the 2000s I think, the newspapers reported that in “the dirty thirty” – the 30th precinct in Harlem - an undercover cop from another part of the city parked himself in an abandoned building with no apparent reason for being there, just sitting there doing nothing, and some local detectives figured he must be dealing drugs, so they came into the building and beat him up and took his money and his gun, and never arrested him, and never turned in the gun or the money. I think over 10 cops were caught in the sting, and the worst any of them got was 30 days in jail. Is it that different in another part of the city? What did the light sentences teach?

Today I was driving back from The Catskill Mountains – formerly and fondly known as “The Jewish Alps” to an older generation, resort area two hours drive North of NYC that has never recovered economically from the invention of the jet plane, and got off the highway and pulled into a gas station on the main street of a not-prosperous small city to fill up. I quickly realized I was the only person not there to buy or sell illegal drugs, and got out of there. If I could tell in seconds, how long have the local cops known about this, and why don’t they do something about it? A car parked there, or a few cameras would make a huge difference to the people living around there and to the children of the participants, but the semi-open drug market thrives with no apparent hindrance from anyone.

I don’t have a solution, but I have three ideas for things that might help just a little:

1 – double the police salaries, and if that doesn’t produce a competition for the job based on quality, increase the salaries again.

2 – don’t hire anyone for the job until they are 30 years old with a clean police record. This will weed out some career criminals, while enhancing the real-world life experience of those on the job.

3 – require that police officers live within X miles of where they work, preferably in the same city or county.

Not solutions, but they will help, I think.

Christopher Cooper writes: 


“Throw more money at it” seems to be the solution for everything these days.

I do think that Scott has the right ideas, but the chances of them happening are nil.

In my family there are 4 male siblings. Two are in law enforcement, and 2 are ex-felons. We’re not a close family!

I don’t think this problem gets solved until you can trust that police, and the rest of law enforcement, will do their jobs and prosecute each other instead of protecting the brotherhood in blue. I wouldn’t trust my brothers to do that.

Russell Sears writes: 

Until we get prosecutors and cops incentives to reform criminal not just prosecute them then there will not be too much of a solution. 




Zubin Al Genubi writes: 

I've been eating plant based for 8 months.  I feel great, lost all body fat, breath better, sleep better. 

BBQ veges are very good with oil pepper, garlic baste.  Eggplant, onion, asparagus, squash, mushrooms,zucchini are great.  BBQ browning gives them a great taste.  I love to put them in a bun salthered with lots of dill based vege mayo, tomatoes, pickle, lettuce.  Its easy to broil them if you don't want to start up the barbie.  We just harvested the first round of sweet corn and it was fun and delicious.  The corn can go on the barbie in their husk to a light burn outside.  We just planted the second round of corn which will be ready in 60 days

Christopher Cooper adds: 

Interesting. I’ve had pretty much the same results, over the same timeframe, from a combination of working out more and time-restricted feeding. No other change in diet, which is carnivorous but moderately low-carb.

I’m down to the weight I graduated from high school with, 50 years ago. In my case, it’s the fat loss and exercise that is responsible for the benefits, not the diet.



"These Guys Just Drove an E63 AMG Across America in a Record 27 Hours 25 Minutes"

It's amazing the high tech that is used to smash the cross country speed record. This article provides a look at that most illegal race in the country and the massive preparation and planning it takes to break records.

Chris Cooper writes: 

I wonder…has anybody ever seen evidence that experts at video driving games are any better (or worse) drivers than their non-expert peers? For that matter, are race car drivers any safer on the roads than non-racers?



I flunked out of college 3 times all by myself. Too much pinball, too much poker, too much basketball, too much drugs, too much sex…all excuses, when the real cause was too little self-discipline. Still, I managed to learn a few things each time they let me re-enroll, and finally graduated. With a little more motivation, graduate school turned out better.

I don't think there is much difference between video games for this generation and whatever excuses we used decades ago.



"Caltech's Rocket Science: Shoot More 3-Pointers"

The school known for scientific innovation and embracing technology has its most successful basketball team in decades. Why? Because the 3-point revolution has come to Caltech.

Chris Cooper writes: 

I played 3 years on the Caltech varsity basketball team in the early 70s, and was captain and MVP. I never won a conference game in my career. I can't even imagine what it would be like to win 8 games in a season. In our defense, we didn't have a 3-point line then, and normally tried to work the ball inside, where of course we were over-matched.

Besides the fact that there are no athletic scholarships, a class size of only 200 made it pretty difficult to find players. It must be even more difficult now that the class is nearly half female, while only 10% in my day.



Centralized, broken hash function, aggressive developers, highly questionable PR, rolling their own crypto. Avoid like the plague. Happy to be proven wrong.

Chris Cooper writes: 

Yes, that's the FUD, as they say. It pays to investigate deeper.

Centralized — a temporary measure only until the network reaches adequate scale.

Broken hash function — supposedly on purpose, never led to any loss of coins, corrected without subsequent issue.

Aggressive developers — true…but what I care about is extremely competent developers, and they have that.

Highly questionable PR — founders don't care about PR, which means that it gets little attention.

Roll their own crypto — true, and it was good…but when they got feedback about potential issues, they changed to standard crypto. They will likely change back at some point.

You could add these negatives:
* Crappy wallet
* Protocol designed for machines, not humans
* Uncertainty in confirmation time, though it's faster than most others

All these negatives, and still the coin is worth 12 billion USD at this writing. Why?
* Zero transaction fees, enabling micropayments
* Zero miners
* It scales



 "How Moneyball Tactics Built a Basketball Juggernaut":

AS A LONGTIME partner at Kleiner Perkins Caufield & Byers, Joe Lacob had a reputation for backing high-risk, high-reward startups. But when he paid $450 million in 2010 for the Golden State Warriors—then valued at a measly $315 million and considered the worst team in the NBA—even die-hard fans scoffed.Seven years later, the Warriors are two-time champs worth a reported $2.6 billion.

In his new book, Betaball, Erik Malinowski (a former WIRED staffer) credits the slingshot turnaround not to Steph Curry's swishing three-pointers but to Lacob's application of Silicon Valley strategies to revitalize a sluggish team.



Now there is an announcement by the MFMP group which has been performing Live Open Science, which means that all of their methods and results are published, as well as live interaction with observers who can criticize and make suggestions. The announcement is that they have a replicable method of demonstrating the production of heat due to what used to be called "cold fusion" and is now referred to as Low Energy Nuclear Reactions.

Since many people will be able to test it, it won't be long before the effect is either confirmed or falsified. Take a look here for a trailhead. And here is an email that they just sent out, with more to come on Wednesday. Maybe they are mistaken, but it is very unlikely that they are scammers.

During ICCF-17 in South Korea, shortly following the sad death of Dr. Martin Fleischmann, it became abundantly clear to a group of fresh attendees that the old approach to science, combined with the ostracisation of the great minds that had worked in the face of ridicule, was not delivering on the promise of of what we immediately called, "The New Fire".

It also was clear that there was something to investigate and we were morally bound to do it.

We said that people would not believe, until they could experience it as if they were doing themselves and so the idea of Live Open Science was born. That was not enough, it had to be an effort that was free from commercial or government interests and that result and so it had to be conducted by the people, for the people. Our journey was made possible by the courage of Francesco Celani and we thank him profusely.

Your donations played a critical role in realising this vision, but you know that, what we know you will want to hear is what we have to share tomorrow.

We have been running and analysing an experiment live over the past Month. First for us in this experiment were:

- Parkhomov Baking of Ni(correctly done)

- Pre Hydrogenation of Ni

- Proper baking out of cell under vacuum

- Parkhomov pressure

- Piantelli de-oxygenation

- Piantelli 'loading' + proper dwell times

- Piantelli capture analogue

- Use of free Lithium

- Use of calibrated NaI

- Cycles attempting to create nano Ni distillates (inspired by "Bang!" discovery of dissolved Ni)

- Long Run

You can see that there are steps in there that came about only because of activities that were made possible by donations. The critical visits to Piantelli and Parkhomov.

Around the beginning of the month we saw what appeared to be up to a COP of 1.2, not earth shattering, but sustained and robust and in line with both observations by others and the Lugano report when adjusted for correct emissivity. Over the next weeks we tried various bookend calibrations which supported this finding.

We have said that only two paths would satisfy us:

Statistically significant Isotopic or elemental shifts from Fuel to Ash Statistically significant emissions commensurate, correlating, or anti correlating to excess heat We are happy to tell you that we believe we have satisfied our condition 2, yet of course we'd like to replicate ourselves. Actually, though, it goes much further than that. What we will share is that the way in which we discovered it and the journey of analysis that makes it virtually impossible to say that Rossi does not have what he claims. It also shows that, whilst he may have been optimistic in how fast this would play out, he has been telling the truth, quite openly for years. Not only that, nature itself has been telling the same story and it told us too.

By the 16/02/2016 we had given up trying to destroy the *GlowStick* 5.2, part of a long lineage of []=Project Dog Bone=[] experiments. After the reactor was turned off, Alan shared the remainder of the data files from the NaI scintillator kindly donated by a project follower called Stephen (Thankyou Stephen, really).

Project follower and open science legend, Ecco, first took a look at the data and found some anomalies - one SO striking that we thought there had been an equipment failure. We did not know the time that the anomalies occurred and had to wait until Alan woke to explain the time stamps so we could correlate it with the thermal and power data published live to HUGNet (Thankyou Ryan and Paul Hunt).

To our extreme surprise, the onset of excess heat followed the massive anomaly in emissions and the minor anomalies were during and only during excess heat.

This led us on a path of discovery, the sequence of which explains:

The massive count signal discovered by Francesco Celani during Rossi's first public demo

How Rossi knew his reactor had started

How the E-Cat generates excess heat

How it self sustains

How it can scale easily

That it is safe

It also showed us how replicators can know they have succeeded in triggering the New Fire and how to enhance the excess heat.

Subsequent to this, we found out Rossi had traveled the same design journey and had publicly shared it in the past.

The irony is - this was all being conducted live in the open, including discussions and graphing, whilst people were distracted with news of the end of the 1MW 1 year test. Same day…

In the past week we have been checking, cross checking to verify and this morning we cleared our last serious doubt, again live, with shared data. Because this is already in the open we want people to know so that they can start replicating based on what works, moreover, the insight will allow people to immediately start improving on our results.

Thank you for making this possible.

We did it.

We lit the New Fire Together!



 To my surprise both "alarmist" and "deniers" (I guess that I'm quoted as a "denier") measure the average temperature for the whole earth for a whole year to a fraction of a degree, and that the result is significant. Of course it's not!

How can you possibly measure the average temperature for the whole earth and for the whole year and come up with a fraction of a degree? So, I have this cry here. I think the average temperature of the earth is equal to the Emperor's New Clothes. There was a boy who said, you know, who cried at might, "The Emperor has no clothes on," and I would cry out and say, "You can't measure the temperature for the whole earth with such accuracy!"

Chris Cooper writes: 

Is this not addressed by the law of large numbers?



 On the currency moves versus the dollar the headlines get it sort of correct. A currency change seems to effects the non-US country much more that the US. For example since 2003 when the Euro/$ gown down 3 points over 10 days on average,n35 the Dax goes up 50 over next 10 days. When the Euro/$ goes up 3 points over 10 days, the Dax goes down -32 over the next 10 days on average, n05. In both cases the SP is relatively flat during those period. Admittedly the R square is very low. Todays outperformance of the DAX so far is unprecedented since 2003 with the Dax up over 200 and SP up a fraction or possibly down.

Meanwhile, the US consumer is the envy of the world. Energy cost halved, currency at 12 year highs. Rate at historic lows. What's not to like, except US equity markets which lag every other Western nation, except of course Greece.

John Floyd writes:

"I skate to where the puck is going to be, not where it has been." -Wayne Gretzky

I for one would consider the IMF assumption that a 20% rise in the US dollar has a 1% impact on both GDP and inflation. What if the Fed tightens in June to September and the US dollar is still appreciating and markets approach more Greek issues, a UK election, and upcoming Portuguese and Spanish elections?

Chris Cooper writes: 

I've been short non-US currencies for some time. But this appears to have been successful mostly because it is a "risk off" trade. In other words, one theme. My question is similar to Mr. Floyd's. Even if we assume that "risk off" will continue, at what point does USD cease to be a good vehicle for this theme? Is there, or will there be, a better vehicle, such as corporate bonds?



 Okay. What market situation is similar to The Seahawks decisions to pass with first and goal on The Patriots 1 yard line with 1 minute to go which pass was intercepted.

anonymous writes: 

Working a bid/offer to get flat with a profit ahead of an announcement only for it to come out 1 minute early and go the wrong way resulting in a painful loss.

Andrew Goodwin writes: 

That play call will go down in the annals of history as one of the worst calls ever. The folks who gathered to watch where I watched included one most vocal who cried for Lynch to get the ball to run. Many were calling for the run.

Let us call this a trick play that backfired. The deception factor was high but the pass call was otherwise a poor decision.

David Lilienfeld writes: 

Respectfully, with the benefit of a good night's sleep on it, I disagree. Go take a look at the defensive line. Where was he going to run. The line had been getting a surge. I'm not sure that's the exact passing play to use. A screen might have been better, but a run wasn't going to necessarily do the trick, and with time running down, an incomplete pass buys time for another play. Bad passing call, but going to the pass makes sense. Just not that play. Something a little harder for New England to read would have been better, though.

Chris Cooper writes:

I'm in the middle of reading Scorecasting: The Hidden Influences Behind How Sports Are Played And Games Are Won by Werheim and Moskowitz. The authors do an exceptionally good job of demonstrating how conventional wisdom in such situations can remain wrong. I would not be surprised to find that this particular example was a theoretically correct call which nonetheless always leads to opprobrium by the masses.

I recommend the book, and note that it is on the Chair's reading list as well. The insight into referees is particularly well expounded. Likely many market lessons.

Tim Collins writes: 

At the very least, you try the run. Lynch is truly hard to take down. Call time out if he doesn't make it. Use a QB roll out on 3rd down. Throw it away if not there. That would leave any play open for fourth.

anonymous writes: 

The play made sense in terms of clock management. It was about NOT giving a guy like Brady an extra 20 seconds to come back and beat you. Further, one must wonder why Seattle didn;t let the play clcok run down to :01 and call a timeout at that point.

A similar analog occurred at 2:02 left in the fourth quarter, when NE kicked off winning 28-24. I was certain they could kick the ball short, allow for a run back, let the clock burn on the play and then stop for the 2 minute nonsense, rather than giving away a pass play for free by kicking a touchback.

NE didn't do that of course, and by the two minute warning, the ball was at midfield.

The point is,running down the clock, or not, is not without its risks. The hypothetical — give the ball to Lynch, could have been a fumble as well. The game is comprised of such things, and no play is without risk, as is no trade, hanging out there by its lonesome.

Tim Collins replies: 

Fourth down play doesn't matter, so you have one run and one pass with the one time out. As long as my QB doesn't take a sack on the rollout, I'm fine. Plus, I thought they took too long to get to the line. There was 55 when they huddled up/lined up. Seattle took over 30 seconds to run that 2nd down play. Either way, I run on 2nd down. I'm stopped short and call time out. I now have roughly 20 seconds (plenty more if I actually get lined up in a timely fashion and run), so my QB rolls out. He is told to throw it away if there is not a wide open lane to the end zone or no one is open. As long as he does what he is told, I have plenty of time to run one last play from the 1 yard line. It doesn't matter what the last play is. I either score or the game is over as I will turn over the ball.

Sure, you could switch these and run the roll out on 2nd and the running play on 3rd down. I might even leave that decision up to Wilson based on his read of the defense, but these are my 2nd and 3rd plays. And, yes, I would run it again with Lynch on 4th down from the 1.

Pitt T. Maner III writes: 

My 2 cents and second guessing– Don't lead the receiver. Aim at his body so he boxes out the defensive back(s). The bigger and stronger the receiver you run across the middle the better. More chance of a defensive interference call. It was a play with poor execution. Lynch can catch the ball too as was seen– one would rather have him fight a rookie DB over a short pass. A fade to the corner with your tallest receiver might have been good too. It's all about size and position and ball placement.

Victor Niederhoffer adds: 

"Seattle Coach Pete Carroll Stands By Decision to Pass"

Scott Brooks disagrees: 

I disagree.

He had one time left and The Beast in the backfield. Run the ball twice and then use your timeout. At the very least, he Belichik would have been forced to call a time out to preserve the clock in the (likely) event that Seattle could have Beasted that ball across the goal line.

Worst case scenario, if you pass, do a fade route to the corner.

The Pats were stacked in the middle prepared to take on Lynch, why throw it into a sea of blue?

They even had time to do a play action and give Wilson time to improvise and still throw it away if there's nothing there. Then run two running plays and use the timeout in between.

It was a stunningly poor call, one that will haunt Carrol for the rest of his career.

Pitt T. Maner III writes: 

Think of the money involved (excluding endorsements and lots of other things): "This year, the salary bonus for players on Super Bowl teams has inched up a bit to $97,000 (up from $92,000 a year ago) for each winning player, compared with $49,000 for players on the losing squad ($46,000 a year ago). So the total gap between the game's winners and losers should be a bit higher than it was last year, when the difference was just under $3 million."

anonymous writes: 

Read a paper earlier this year that the most statically reliable goal line play was the slant pass. The least was the fade pass. In my observation the receiver needed to be about 2 yards deeper. He was too shallow to get separation.

Craig Mee comments: 

This reminds me of turning a winning position into a loser. We have probably all achieved this in a number of ways. Spreading off risk and turning over possession has got to be up there. I must include talking to a fellow trader and after the chat swinging your position from net long to net short, and watching the market go limit long.

anonymous writes: 

What about the quarterback sneak?

Would be good to have stats on how many inches/feet can be reliably picked up on a quarterback sneak, even if everybody knows it's coming:

"Around the time Pro-Football-Reference added the Game Play Finder in 2012, I used it to look up Tom Brady's rushing success in short-yardage situations (third or fourth down, 1-2 yards to go). The results were staggering. Including last season, in his regular-season career Brady is 88 out of 91 (96.7 percent) on these runs, including 56 straight conversions. That's almost as efficient as the extra point. After researching some other quarterbacks, I found that most of them had great conversion rates. This is largely due to the quarterback sneak, which has worked 85.9 percent of the time since 2009".



 Good morning Mr. Niederhoffer,

In your bestseller, The Education of a Speculator, you wrote:

I need to know what is happening in the markets…I hooked up a music synthesizer to the computer, linked it to the interface between the computer and quote screen, and generated a program that would give a musical summary of the markets. I used piano tones for stocks, strings for interest rates, the cello for short-term rates, and the violin for the 30-year bond. The Japanese yen was registered with the high flute, corresponding to the favorite instrument in Japan, the shakuhachi. The English horn, the French horn, and the Alpenhorn stood in for the other currencies.

A lot has changed since then, particularly in terms of software tools becoming available to achieve this. In that spirit, the "music" in this video has been created by turning market data (prices, returns, volatility, and other time series) into MIDI-format (via our software tool) which subsequently was imported into what is called a Digitial Audio Workstation (DAW). The latter allows users to assign instruments (from a single guitar to a whole orchestra) to those data-sets and turn them into sound.

I created this video as part of my PhD research. The fact that it does, indeed, sound like music with a certain rhythm and timbre (rather than random audio-signals) is exactly what distinguishes my approach from earlier attempts at sonification of market data. In the final step, the resulting "composition" is linked to software which allows the creation of visuals that dynamically respond to the sounds (e.g. the small coloured spectra you see appearing against a backdrop of coloured fog).

The video captures a specific period in finance history. Usually I then ask watchers how they would allocate percentage wise a hypothetical portfolio across stocks, bonds, and cash based purely on this video (i.e. "Don't analyse the video but focus on how it makes you feel; what did it convey?").

What's the purpose of all this? Please allow me to share another quote, this time from Jack Schwager's The New Market Wizards:

"Every market has a rhythm, and our job . . . is to get in sync with that rhythm . . . There's no sense of self at all. There's just an awareness of what will happen. The trick is to differentiate between what you want to happen and what you know will happen. The intuition knows what will happen."

Although some investors/traders have a natural ability to intuitively get a sense for market rhythms, others may need a little help. The investment research method I'm developing is aimed at that: offering a structured, disciplined approach (including advanced software) to train investors' intuitive abilities to sense the market mood in general and its rhythms (i.e. swings) in particular. Massive amounts of data can be efficiently transformed this way to benefit from the whole spectrum of the human-computer bandwidth. Perhaps you're familiar with the behavioural finance concept of System 1 and System 2 of the human mind (e.g. Kahneman, 2011)? Audiovisuals are particularly suited to appeal to System 1 abilities.

Why is this important? Because I believe we have gone way too far in quantifying markets, inspired by the flawed premise of the "market as machine". As a result, what we casually refer to as "the market's mind" has become imbalanced (at multiple levels). Apart from the obvious suspects like HFT, VAR, and flash crashes, monetary policy is also misinformed by this bias. Moreover, we try to understand market sentiment and moods purely analytically (e.g. put/call ratio, bulls/bears spread, etc.) while increasingly repressing our emotions by outsourcing decision-making to algorithms. By distorting the delicate process of discovery it is no wonder we're facing secular stagnation, for example.

Admittedly, this is just my opinion, but should you be interested in the background to all of this I would be happy to send you a short introduction (derived from my thesis + draft paper).

Happy to discuss and clarify.

Warm wishes,


Chris Cooper writes:

Here is some cool sonification of measurement data from the LHC in search of the Higgs boson.

And a good article about it: "Unlocking Big Data: Lessons Learned From the God Particle".

Jim Sogi writes:

I like the phrase in the article "ski the stock market" using virtual reality goggles. There are few good VR rigs coming out soon. One for the Samsung Note 4. In Dataclysm, Rudder plotted some big data on a scatter plot to get a handle, and in the case of language usage to determine ethnicity, focused on the rare outliers. It was the things people both said a lot and didn't say at all that allowed identification. Black people never say "my blue eyes" and asian women say "single parent family". Only white people say "my blue eyes" and "snowmobiling".



Do any of the sports bettors on the site (Jeff?) have a sense of the following:

Scottish Independence is a binary event, thus the simplest to balance your book. You should therefore be able to make a dutch book?

Further, if the odds don't reflect the real probabilities, in theory, speculative money (or the bookmakers proprietary money) should balance them back up.

But, for uncommon events which involve a high percentage of public money, for which prediction is relatively difficult and unproven, do the odds generally manage to find equilibrium at the true percentages perceived by educated bettors? Or are they sometimes set to balance the money flows?

So for Scotland: if English will "emotionally" bet No, and Scots bet "Yes", and there is a 10:1 population imbalance, will the odds overstate a No?

More generally, say, could Manchester United odds (who have a huge number of world fans versus other football teams) generally be tight relative to the real odds, as "smart money" is insufficient to balance the emotional money? Or is this a sufficiently deep market for proprietary accounts?

Chris Cooper writes: 

Relating it to the practice among American sports books, the overriding concern is to balance the money flow. Thus it is possible to make a dutch book, considering the variations due to location and randomness. I'm not sure how true it is today, but in the past the Las Vegas lines for games involving Los Angeles teams could easily vary from the same lines elsewhere, especially as it gets close to game time, due to the proximity of the cities and thus the money flow.

The lines also vary depending on emotional factors or being public favorites. For example, as "America's Team", the Dallas Cowboys used to command an unjustified perception leading to perhaps a point difference in the spread. Again, the book is just trying to manage the money flow…if it gets too out-of-whack, they will normally try to lay off some of the action.



 I was at the Whole Foods this weekend and spotted a very attractive woman giving out samples of a new, "Small Batch" whiskey made by a new "craft" manufacturer. Naturally, I stepped up and requested a sample. While I sipped (slowly, as I am not a regular whiskey drinker) she rambled incessantly, providing the charming "back-story" of this "craft manufacturer." It was a "secret recipe" passed down for generations, etc.

I pulled out my phone and took a picture so I could easily research the brand further when I got home. It turns out this "craft" brewer was featured in the following article.

The "secret recipe" of this "brand" is the unaltered factory product from the standard, generic producer of this Whiskey variety. The entire "charming story" is a work of fiction. I am not naive enough to think that this not often the case, but at some point it gets ridiculous. I think it was that this woman wasted three minutes of breath telling me the ludicrously bogus story that put it in a different perspective. Perhaps if she was not busy telling the fraudulent story, we could have had a decent conversation — which would have made my time sipping the mass-industrially produced whiskey far more enjoyable.

Victor Niederhoffer writes: 

As the Senator would say, where's the picture of the con artist?

David Lillienfeld writes: 

My wife is a pathologist who also completed post-doctoral training in epidemiology/outcomes research. Her thesis was on reasons physicians adopt new laboratory tests. It turned out it was the first time the question had been posited, at least in the academic sphere. It blew her thesis advisor's mind. I was in my Marketing 201 class at the time, and both she and her advisor were surprised with my response to her finding-"Don't you think that the marketing departments earn their keep? If they didn't, that cost would have been cut already." I've been told that mine is a naive view, that no one in a business would dream of cutting marketing back do the degree I suggested if the exercise had little ROI.

Same thing here. Someone in marketing had some rich ideas, and it sounds like the sales department was executing nicely.

John Floyd writes:

What are the usual tells and ways to decipher such marketing? I wonder about market parallels such as market reversals shortly after events that were fully priced, i.e. the market reaction after the first shots in Gulf War, etc….also makes one think of the famous Schlitz live beer taste during NFL games.

Chris Cooper writes: 

It has always been hard for me to understand the appeal of small-batch, "artisanal" marketing stories. Nevertheless, we sometimes use it ourselves in marketing our bottled iced coffee. But the sooner I can scale to big-batch brewing the happier I'll be. I designed the process so that it would scale…now I just need the sales.

Better than any marketing story is simply letting people sample the product. Even better is blind tasting against the competition. When people try it, they know it is the best. But that marketing approach does not scale.



 One thing that is striking to me is that many of the online businesses that appear to be bubbles would be incredibly great small/medium sized businesses if the founders and people involved were not dead set on hitting a grand slam home run via market capitalization.

On one hand, the massive valuations stimulate investment in new technology, which is good.

On the other hand, selling stock to investors with a grand scheme to dominate the world could make hundreds or billions while running some of these sites as "small businesses" might still pull in high 7 or 8 figures of real economic profit from customers, without the public scrutiny or "cashing out".

The bubble pops when all the spending to make the "world beater" can't help a niche become something it never really could become. So the company becomes a vehicle to satiate speculative desires, which founders and advisers can take advantage of.

I wonder if on net that home run mentality helps or hurts. I'm inclined to think it adds a pyramid scheme element to enterprise that is not necessary. On the other hand, it does fund research and allow little ideas and little companies to compete with the bigs.

Chris Cooper writes: 

In my experience, it is not just money that motivates founders to swing for the fences. It turns out that there are a whole new set of challenges and things to learn with each order-of-magnitude increase in revenues/size. If one happens to find oneself in a high-growth, high-potential situation, one quickly realizes that it may be a once-in-a-lifetime occurrence. It can become one's chance to gain new experience and knowledge, to learn how to manage an organization as it grows, and many other things that most people never have a chance to attempt. It sometimes leads to failure, but that's part of the experience, too.

Knowing that probably doesn't change very much the way it looks on the outside, but to attribute "a grand scheme to dominate the world" to purely monetary motivations is not an accurate picture of what is really in the heads of many founders.



 Voyager 1, launched back in 1977, has become the first man-made object to pass into the unknown vastness of interstellar space. News Report.

I have a serious challenge for you. Name a single man-made device that has worked continuously for 40+ years without any human physical intervention. The winner will receive Rocky's usual prize: A unique gift of dubious monetary value.

Chris Cooper has a go at it: 

There must be any number of vintage self-winding watches that still work. If it must be wound, does that still match the spirit of your inquiry? Of course, there are many watches and clocks which must be wound by hand that are still operating. You can find some self-winding watches for sale on eBay.

Kim Zussman replies:

I am man-made and have worked continuously for well over 40 years (though currently half time for the government).

Bill Rafter adds:

Without doing any looking, there are lots of low-tech human creations that have survived the test of time. Many dams have performed their functions for decades and even centuries. I'm not speaking of hydroelectric dams, but simple river control devices. The Marib dam in Yemen is still there (after two millennia) and would be working if there was enough rainfall. Many artificial harbors also have exceptional longevity. Some Roman harbor constructions are still operational; the Romans having been expert in concrete manufacture. And don't forget Roman roads.

In more recent times, I am certain there is some electrical cable that is still functioning from half a century ago, if only to ground lightning rods.



 Sports are selling a dream to the kids of one day making it.

People watch sports because we mirror the players' motions in our heads. People imagine they did what the stars did, despite the impossibility of it. But you throw drugs into it and most will reject the idea that they mirror substance abuse. You put drugs into it and it is like finding out the secret ingredient to your favorite restaurant is small dose of poison or that their bakery is rat infested and did not pass the health inspection. It has to be dealt with harshly once exposed, or it is like a player shaving points for the bookies, it can and will destroy the brand.

Body building was still a sport when Arnold did it because it was not known they all took roids. Now it is like pro wrestling, a freak show. Nobody want their kids to become a bodybuilder, except bodybuilders. Finally, it is cheating, nothing to be admired, anymore than messing with accounting to get your bonus while ruining the company. If you had lost money to a drug cheat, it is easier to comprehend. For runners EPO is like playing Russian roulette. Your heart can literally explode, as you dehydrate. Now this is like World com executive cheating and knowing that it could destroy them in the process. Or a Ponzi scheme, wanting the good life at least while it last, despite the misallocation and destruction of wealth that goes well beyond their millions.

Craig Mee writes: 

That's true, Russell, excellent points. What I'm thinking is that sports may in fact drive advances in clean drug and herb technology that benefits the human body more than it wrecks it, or advances other sciences where they need to push limits like space travel. I, too, worry about the children. I wonder what will happen to trying to improve your performance and competition–the very nature of sports. But hopefully what started out a bit dark may lead to good things. 

Chris Cooper writes: 

There already is plenty of overlap between drugs that make you healthier (when taken in moderate doses) and drugs that improve performance. Look at the list of drugs taken by Lance Armstrong, for example: testosterone, hGH, EPO. All of them make you healthier when used moderately. But elite athletes have the motivation to increase dosages to potentially unsafe levels, which is where concerns about safety spring from. I have no problem with the use of PEDs, but I abhor the lying and cheating that normally accompanies it.



 I was watching an interview of Jim Rogers the other day and he was discussing why he ultimately settled on Singapore as his new home. He's clearly very into Asia for its growth potential (and issues he has with how the US is being run), and moved there with his family so his daughters would learn Mandarin more easily. When asked why Singapore and not, say, Shanghai or Hong Kong, he said he really liked those places, but they were just too polluted. So a man moves hundreds of millions, if not billions of dollars to one country but not another partly because of the relative cleanliness of the air. Now China has announced tighter air pollution regulations (ostensibly not necessarily to accommodate Jim Rogers). Of course there's a lot of new chatter around platinum and palladium (used in catalytic converters), but is there some kind of a bigger trend emerging? - "Do business here - we're cleaning up our mess."



 I have been wondering, is there any strategy for slots? I know there is a lot of strategy for blackjack and other casino games that is applicable to trading but I've never really read about/considered slots. My quick online searches returned nothing very scientific. I assume slots have a routine (low) payout ratio. I wonder how random the results are (the conspiracy theorist in me is highly skeptical, especially of video slots).

It seems the time to play would be after a string of losses as the payouts do need to come. Sort of like counting in blackjack, you could watch other players on machines, wait for them to lose a lot and potentially assume the odds were going up. It also seems (much like old horse racers) the best recipe would be to bet a consistent amount. Watching players I see bet sizes swinging all over and a lot of loss. Usually it is bet big, lose, reduce size, win, up size, lose, repeat until broke.

Bets could vary but only as a constant function of capital (I.e. 1 with 10 in capital, 2 with 20, etc). This would be subject to casino limits but would probably beat changing size due to martingale risk. I also figure different machines would have different odds. Best to play the machines with the highest odds. The scratch lotto for example publishes the odds of their games in ny, I imagine one could find similar publications with slot odds.

Next I wonder how stop losses could be tied in. Would it be best to use a set number of losses to move to the next machine. When playing with house money should you let it ride or use a rolling stop. Rolling stop sounds better. Also if you had a big win it stands to reason that machine was not going to be paying out big soon so you should cash in and move on.

This all may be virtually impossible too unless there were teams working in shifts (people have to sleep) but casinos don't.

Welcome any thoughts or ideas. I know slots aren't sexy like table games but the anonymity and lack of fellow players makes them fun at times (but it would be more fun to walk away up money).

Will Weaver writes: 

If slots are random they don't have a 'quota' of payouts… and as in flipping a coin, every iteration holds the same probability. So there shouldn't be any advantage. But I know nothing about the machines other than they probably are not completely random, though closer than would generate an edge.

Sam Marx writes: 

If they are electronic slots, I believe they use some sort of random number generator. So I've had the theory that if there was some way to determine the formula used, then they might be beaten.

Craig Mee writes: 

Watching the payout numbers on a screen a long time ago when a technician was working on one– this was a poker slot– showed the payout to be approx 80% before double up, and after double up it went down to the low 60% if memory serves me correctly. When playing I took the strategy of banking all my small wins due to this, and doubled up on any large wins i.e 4 of a kind and the like. From there I would work a stop at flat after doubling the stake (if I won my doubles) and then a trailing 20% stop of total win one tripled my initial stake. It seems to let you have a plan, and walk away, rather than the guy next to you, tipping money into that feeder all night. If you must play, then having a plan of attack is the most important aspect, so you bank or your stop goes off …quickly…and you're out of there. 

Jeff Watson writes:

There s one great slot strategy that hasn't been touched on. The best way to win at slots is to not play at all. Even the places that offer 98% payouts. What they are really saying is that for every $100 you feed through the machine, you will get 98 dollars back. The vig is too tough for me, or any other sensible person, for that matter. One has noticed that the really easiest games of chance usually have the highest vig. Things like wheel of fortune, chuck-a-luck, slots, and keno all have outrageous vig and should be played by no one. Save your money and go to a great show.

Pitt T. Maner III writes: 

 Along the lines of the slots thread, here is some info about roulette strategy:

1) Under normal conditions, according to the researchers, the anticipated return on a random roulette bet is -2.7 percent. By applying their calculations to a casino-grade roulette wheel and using a simple clicker device, the researchers were able to achieve an average return of 18 percent, well above what would be expected from a random bet.

Read more

2) "There have been several popular reports of various groups exploiting the deterministic nature of the game of roulette for profit. Moreover, through its history the inherent determinism in the game of roulette has attracted the attention of many luminaries of chaos theory. In this paper we provide a short review of that history and then set out to determine to what extent that determinism can really be exploited for profit."

full article here.

Chris Cooper writes:

The most obvious and effective countermeasure is to disallow betting after the ball is released. The casinos allow betting after release because customers like it, but if they have any doubt it is a simple matter to change that practice.

Secondly, Thorp's original work (and mine) were based on finding wheels which were not quite level. After he hit a few casinos successfully, he found that the number of out-of-level wheels decreased. The paper cited in the original post details an approach for level wheels, but notes that more accurate timing is required.

Plus eV roulette did make it to book form, if not the front pages, by a group from Santa Cruz. More recently, a Hungarian was purportedly successful to the tune of over one million. My paper many years ago is lost to the ages, but in any case you can learn much more by reading the paper cited in Mr. Maner's post.



 Between working 100 hours a week (which few do) and being a ski bum (which few also do) there lies the vast majority of people. Too many of them have ample opportunity to bring forth some of the songs inside them, but instead they fritter their time away and thus end up leading lives of quiet desperation.

It does not need to be so.

Chris Cooper writes:

I am lucky enough to do both. I spent a while as a ski bum when I was young. Later I did a stint of 6 years of 100-hour weeks. It paid off as I hoped, enabling me to be a ski bum again. Which I tried, and found that somewhere during that time I acquired some workaholic characteristics. So now I oscillate between taking it relatively easy, and working hard, and at the moment am working hard and wishing I could take it easy — but if I did, I would soon enough be restless again.



 It's my experience that if you need to sell a portion, even if that portion is 100%, via a stop order, you're in too heavy to begin with. Being in too heavy is to be too dependent on luck.

Dylan Distasio writes: 


Can you expand on your definition of "need"? Let's use the case of HPQ as an example. x had an investment hypothesis that no longer necessarily holds true after the potential value destruction of recent company decisions. As a result, he decides to liquidate half. Maybe someone else gets in a few weeks ago after the discussion on HP here, as they agree it looks like a value play, but they have a rule to always attempt to minimize losses on new positions to a flat 10% to protect capital and to always use stops because they need them for discipline. So they get a ~20% haircut after getting stopped out on the gap down.

I'm not sure either situation of a 50 or 100% liquidation was based on what I would call need, but rather some kind of capital preservation or very basic risk management rules.

In all serious, how would you define need as I think it is worth looking into this further? Potential loss of all capital? Forced margin liquidation? I agree that being in with too much leverage or too large a position opens you up to getting taken out by noise, but what is need versus risk management?

Chris Cooper writes: 

I took a big loss on Monday of the week before last. I then cut my trade size in half, and manage to end up flat at the end of the week. The week actually would have been very profitable had I been willing to stay with my original sizing. But Ralph is correct, and I decided that if I am getting scared by a big daily loss, I'm trading too heavy, so I have left the trade size at that halfway point.

On the other hand, one might choose a rule that pares back the trade size when volatility increases. These were intraday forex trades, and clearly that week was exceptional in terms of volatility. The problem is that the volatility spikes that kill me do not appear to be predictable. Therefore I have to trade most of the time at a level that seems relatively placid in order to avoid being frightened into damaging behavior occasionally.

Gary Rogan writes:

I think this illustrates the point I was trying to make originally about the lack of logical underpinnings in the "sell half" decision: it's an emotional decision because you (a) get scared by the suddenness and violence of the move an its effect on your net worth (b) belatedly realized that you were in too much. Now the second part is sort-of logical, but it really points to the lack of imagination about what a position can do when you get into it: you imagine a slow gradual move and the thing suddenly loses a big chunk of its value without much warning. This is not theoretical for me, because for the first time ever I have faced the following: two days after buying a stock it suddenly loses 25% of it's value in a day. This happened TWICE in a row on top of that, and only underscored to me that you never know enough to say with confidence that you will not lose all, and quickly. Therefore you should assume that that's the case from the very beginning. 

Ralph Vince replies:


I'm really referring to liquidity concerns; Rocky's decision to liquidate half, I assume, is a risk-management procedure here, as opposed to a strategic one based on changed fundamentals (I may be, and, in retrospect, likely am wrong about this!).

Any risk-management concern where someone "needs" to get out, shy of that investment being entirely wiped out, will, in time, be entirely wiped out, or damn near whether by an Enron, or those gilt-edged AAA GM bonds at one time.

Dylan Distasio responds: 


Although I don't typically trade that way, I don't think the sell half is necessarily an illogical or emotional decision depending on the scenario. We have no way of knowing what the reason behind selling half is for a given individual. Reducing a losing position size is, in my mind, a way to mitigate risk of additional loss while still having some skin in the game. Keeping some powder dry is (I would imagine as an amateur) one of the more important survival skills in this game. The person selling half doesn't have to be in too deep to their overall capital pool to want to protect half of what remains of that position based on changing circumstances. Losses do add up over time.

Alston Mabry writes: 

I have found that trading breaks down into (1) analysis, and (2) execution. With "analysis" being a period of calm, quiet reflection (maybe with a cold beer) over a crowded spreadsheet; and "execution" being whatever I have to do to manage my lizard brain once there is real money at stake. They can be such radically different modes of being that sometimes it's very difficult to establish a link.

If I make "analysis" and "execution" the axes of a graph, I can place each of my trades on the graph in the appropriate quadrant: {analysis(good), execution(good)} = exhilaration, {analysis(good), execution(bad)} = regret, {analysis(bad), execution(good)} = relief, {analysis(bad), execution(bad)} = self-loathing.

The challenge of trading is that there is only one quadrant you *want* to be in.

Chris Cooper adds: 

Rocky wrote:

"I challenge anyone to demonstrate a single person who blew up while sticking to the rule: "Only add to a winning position.""

I can't meet your challenge, but I did have a week where I lost 50% of my equity. Your observation does not apply to those trading with leverage. I am now learning to scale back the leverage, make adjustments in trade size more frequently than weekly (should be real-time), and to write models which account for higher correlations during times of stress.



 One would imagine the Sunday open to close in Israel might be predictive of the open in the US on Sunday night, and possibly the open to close of us on Sunday. By Israel open on Sunday, the US has already passed Friday close. And Israel would be catching. Of course the US Open is not a predictive thing since it can't be acted upon, but a descriptive one. The whole subject of the influence of Indian, European, Asian, and mideast markets on the US is an interesting one and calls for much counting, correlation, and finesse.

Anatoly Veltman writes:

I'd be the first one to stress the equities "rolling wave" over the timezones, as well as inter-market influences (as in currency-gold-stocks-bonds-oil, etc). Being said, there are two clear new ingredients that make historical statistics less than meaningful: central meddling and modern algos.

1. What can possibly be the use of percentile correlations and sequences observed over any historical duration, if current market interventions and near-global ZIRP are unprecedented.

2. Modern algos thrive on constant change/adjustments. To paraphrase Jim Simons: what feeds "our" fascination is that our former immersion into discoveries (within pure science) would eventually yield an ever-lasting law or theorem — while (market) discoveries we achieve today will only live a blip of time, and so you have to journey on (almost daily) to your next discovery and implementation.

So in consideration of the above major influences, my current MO would be: do not rely on hard stats. Do rely on your instincts, understanding of the new world financial order and good occasional privileged information — and trade discretionary.

Chris Cooper adds: 

I can accept Anatoly's "two clear new ingredients" but reach different conclusions. My conclusions are:

1) Trade at a higher frequency so that you can get enough recent stats to be meaningful.

2) Trade fully automated, not discretionary, so that you don't fool yourself about your alpha. Also, it's the only sensible way to trade at a higher frequency.

"Relying on your instincts and understanding the new world financial order" are important only at the meta-level.

Paolo Pezzutti adds: 

I think:

1. Cycles are ever changing. Today it is because of ZIRP, tomorrow it will be because of new rules or products coming on that influence market structure. I don't know if cycles will be shorter or longer. You trade them until they work. Counting still works.

2. Frequency depends very much on commissions. Some regularities at shorter time frames cannot be traded if your commissions are too high. Frequency depends also on technology you have available. Also, one should trade a frequency where you have less competition.

3. New cycles means new patterns to come up and old patterns to die. Keeping track of ongoing patterns is important and also establishing criteria to determine a pattern has stopped working. Early discovery of new patterns is vital for your performance. But how much data and evidence do you need to validate a new pattern? More importantly on the tech side is how you implement the search of new patterns. A continuously running search can scan the data according to certain criteria and propose pattern to be evaluated further.

4. Trading should be fully automated to trade higher frequencies, more markets simultaneously, and decrease stress.

Newton Linchen writes: 

Dear Paolo,

You said: "Keeping track of ongoing patterns is important and also establishing criteria to determine a pattern has stopped working."

I once asked this question (how to measure the "death" of a trading strategy) to the List, and the answers were disappointingly vague. ("They work until they don't anymore", and such kind of answers).

To my knowledge, this is a vital question.

Recently, I backtested a strategy a colleague was trading, to discover that in the last 6 years you would lose your entire wealth trading it. But he kept trading it, due to an anchoring with an event when "it worked", plus a kind of empirical testing of only few months.

This means he was caught by the siren song of a series of "lucky strikes" within a larger distribution of years of losses.

This behavioral concept ("anchoring") is quite interesting, and we smile at the poor guy who don't count.

But what concerns me is that we can behave the same way, (although counting), when we face a regime shift (ever-changing cycles) and keep trading the defunct strategy… Until when?

Perhaps a rough answer would be to establish a drawdown metric related to the maximum historical drawdown? (i.e., we trade it until a drawdown x% larger than the greatest historical, and then quit?)

Or maybe the reason to trade a strategy must be quantitative whether the reason not to trade it anymore should be qualitative? (i.e., acknowledgement of the regime shift…)

A final thought would be a strategy based on market microstructure — in the way it is present in ALL regimes.

Any thoughts?




 A couple of months ago I was trying to put together a container of coffee from Indonesia, and my experience is somewhat different from SBUX. I find that the "speculators" responsible for the very tight current supplies are the coffee producers themselves. Many farmers have seen prices going up and up, and they therefore hold on to their current supplies in the hope that they can get even more for them. If you do manage to buy some coffee you must be very careful that what you receive is what you tested because there is strong incentive for the farmer to mix in lower-quality beans. Thus it is very hard to put together a large order of high-quality beans. This situation will only rectify itself when prices start to decrease. In this part of the world, that may be around June or July when the new crop comes in. Buyers are now having to consider buying for their anticipated yearly needs at once and storing the beans. Of course, due to their heavy volumes, SBUX has been using forward contracts for a long time, so they have been partially insulated from price hikes.

Though I do not yet have much experience in this field, I do think that higher coffee prices are here to stay. The gross margins on coffee are pretty high, leading to an inelastic demand curve. There is more and more demand for "specialty" coffee, which sells for higher prices and is not price-sensitive. It is also interesting that pricing for Indonesian beans tracks very closely to the New York price.

Ken Drees writes:

If you do manage to buy some coffee you must be very careful that what you receive is what you tested because there is strong incentive for the farmer to mix in lower-quality beans.

An unscrupulous cantonese tea farmer in the late 1700s had the idea too: a very detailed account of tea and its trading, of how it was evaluated, graded and which trading houses bought which varieties was described. The usual cheating methods were illuminated for the reader-stale tea added to fresh tea, chopped willow leaves added for increasing bulk, additives of Prussian blue added for brilliant appeal.you needed a good Chinese point man at the cantonese port to ensure that what you bought was what was loaded onto your ship for the return trip.

From Otter Skins, Boston Ships and Chinese Goods by Gibson.

Craig Mee writes:

When looking at traditional gold mining in local areas of Indonesia, I noticed I could buy good physical 10% below spot, however this was unrefined, and no doubt paying the bro, and slippage would negate the edge in this case. Then with the added query of dealing size, and you really need another 15% off for "local" risk.

I spoke to local geo about one such query, about a new mining venture. He mentioned a company who had claimed the title got approval for mining (no easy task), shipped in all the machinery, and at the 12 hour, a man's brother appeared out of the forest waving a "title paper", and they had no choice but to pay him off.

It seems there is no better place for knowing your market and its participants.



As far as I have ever been able to ascertain, Larry Williams was the first to attempt to apply the Kelly Criterion to outright position trading, and the first to openly discuss it. His pursuit in this regard not only was my initial immersion to the ideas, but he funded those attempts. Whatever I've uncovered along the way is a product of that — Larry's unquenchable curiosity, fearlessness regarding risk, and willingness to fund pursuits others would never touch.

A couple of points further in the post worth mentioning here because I think the other interested members deserve to have light shed on some misconceptions, some of which are a little dangerous to ascribe to, but are widely held.

"One "plays" forever, or practically forever."

But no one does and no one can, and it is this very notion of there being a finite "horizon," that changes not only the calculation of a growth optimal fraction, but every other metric related to it, giving rise to an entirely new discipline in and of itself.

"If one is somewhat risk averse, one can establish a half Kelly criterion, essentially betting half one's full Kelly bet. This results in a lower probability of one's bankroll halving."

But why "half?" Why this arbitrary number? (Or any other arbitrary dilution for that matter?) Remember, we're dealing with a function that has an optimal point, implying a curve, and it is the nature of this curve that is important to us. Being at different points on the curve has vastly different implications to us. Further, the various and important watershed points almost all are a function of that "horizon" mentioned earlier, i.e. the points migrate about this curve as a function of that horizon. Advocates of a "Half Kelly," or other arbitrary point along this chronomorphic curve (with respect to the horizon and events transpired) are seemingly unaware of the implications of their arbitrarily-chosen points.

"The criterion is to maximize the expected value of the logarithm of one's bankroll."

Yes, that is the Kelly Criterion which, in trading, does NOT result in the growth optimal fraction but a far more aggressive (and dangerous, without growth-commensurate benefit) number. No one seems to understand this.. The number returned in determining the value that satisfies the Kelly Criterion can be converted into a growth optimal number (which I call the optimal fraction. or optimal f) but in and of itself, the value that satisfies the Kelly Criterion is NOT the growth optimal fraction in trading. Incidentally, the so-called Kelly Formulas (put forth by Thorp I believe, and market applications attempted by Larry Williams in the mid-1980s) do NOT satisfy the Kelly Criterion in trading applications, but DO in gambling ones (that is, in trading applications they will not yield the same results as the value which satisfies the Kelly Criterion. The Kelly Formulas do, for dual-outcome situations, return the growth optimal fraction). For more on this I can only refer those interested to the most recent Journal of the International Federation of Technical Analysts 11 (available at admin at ifta dot org) or the 2-day course on Risk-Opportunity Analysis I am having in Tampa Nov 13 & 14 see http://ralphvince.com)

"The biggest issue of application is that one makes many assumptions about statistical distributions, correlations, returns, etc. that are all wrong."

I agree. In a strange, ironic twist to my modest participation to this story, it was (again, but some decades later) Larry Williams (rather recent) insistence of a way to apply what I know of growth maximization in a robust way. As a result of the pollenization of these ideas by Larry, I can state unequivocally that there are clear, simple, mathematical solutions to these impediments — in short, if someone wishes to apply a growth optimal approach to their future trading, these impediments ARE readily surmountable. But be certain your criterion is growth optimality, and be sure you really want to get into the cage and fight the gorilla. Most just want to sit and watch Dancing with the Stars.

Nick White comments:

Dancing with the stars….brilliant and well said.

We're all fortunate beneficiaries of Mr. Vince's investigations into the intricacies of these issues.

Phil McDonnell writes:

Kelly originally wrote his paper based on race track examples with binary outcome. You won or lost with assumed probabilities and you knew the wager size and payoff. So strictly speaking his formula only applies to wagers with two outcomes. Even a blackjack hand has at least five possible outcomes (win, lose, blackjack, double down, split) and not just two so strictly speaking Kelly's formula does not apply. Some people have erroneously tried to modify the binary Kelly formula by using average win size and average loss size to compute. All such formulas are dead wrong. The reason is that, in general, the average log does not equal the log of the average.

As Larry Williams pointed out most people do not feel comfortable using the optimum log approach even if the math is done correctly. I believe there is a simple reason for this. Most people do not have a simple logarithmic utility function. Rather they seek to maximize ln( ln w), where w is wealth. This is an iterated log function and results in a much more conservative ride. I talk about this distinction toward the end of my book. Ralph Vince also has written extensively on this subject using his term optimal f.

There is another issue with simply maximizing returns and that is it may not really take into account risk in a proper manner. It is true that the log function weights the largest loss the most in a non-linear manner and reduces the weights of gains so that the largest gains are weighted sub-linearly. But that may still not be enough to satisfy one's real risk aversion. That is part of my argument for the iterated log form but it may be that an explicit metric such as standard deviation is still needed.

Larry Williams writes:

Optimal or Maximum Wealth (possible gain) only comes with Maximum Risk; therein lies the problem. Not loosing…risk…is more important than gain in the art of speculation business.

Chris Cooper writes:

More important, as far as my practical experience goes, is that one's estimate of the edge is always subject to uncertainty. The reasons have been discussed on this list before, but certainly include changing regimes, limited history for the models, curve fitting, flexionic machinations, scaling nonlinearity, etc. I relied on the Kelly formula extensively in the mid-'70s when gambling, and uncertainty in your edge was no less important then. The problem arises because overestimating your edge is so destructive to your terminal wealth.

It might be interesting academically to consider an approach, such as Bayesian, where your estimate of the edge is not stationary, but in fact must decrease when you hit a losing streak.

James Arveson writes:

I am a newbie on this site, but I can assure y'all that any finite amounts of outcomes can easily be handled by maximizing the expected value of the logarithm of one's fortune. I have also executed these theoretical outcomes for many years in AC and LV in BJ, and yes, in Bethlehem, PA in Texas Hold 'Em. See Mathematics of Poker for a better exposition of these issues than I could ever present.

Remember that each bet is a single bet, and one can bet forever. Leo Breiman has actually proved that (in the most general cases) that this approach DOMINATES all other strategies.

Now, IMHO, this approach is irrelevant to the market. NO ONE can get all the statistical assumptions correct-statistical distribution, EV, correlation, return, s.d., etc.

Have fun until we get to the next level. Same goes for Markowitz. Check out www.styleadvisor.com. I have no piece of their puzzle but wish I did (I might be able to get a write-off ski trip to Lake Tahoe where they are located).

Actualizing all of this crap may be the next Nobel Prize in Econ, but it will probably not help schlepers make money in the markets.

Ralph Vince replies:


Pursuing awards is for schlepers like Krugman or other academic dweebs –it's an award voted upon by dweebs for dweebs, and its pursuit bridles and constrains the mind (as *any* political pursuit will. Usually, the truth lies with things that - people off). To-wit, the lack of challenge to the notion that Kelly presents on p925 in the conclusion of his now-famous paper wherein he asserts that geometric growth is maximized by the gambler betting a fraction such that "at every bet he maximizes the the expected value of the logarithm of his capital."

This is accepted by the gambling community, and, by extension (falsely, mistakenly) accepted by the trading community. HOWEVER, a critical analysis of this notion reveals that it does NOT result in the growth optimal fraction, but rather in a multiplier of one's account to risk (the two are different indeed, the latter being less than or equal to the former, resulting often in over-wagering). In fact, the multiplier on one's stake equals the optimal fraction to risk only in certain, specific instances which manifest in gambling, but are rare still in trading (e.g. only on long positions, etc.). I would gladly go into this in depth put I cannot publicly do so as the paper on this has been publish in a current issue of a journal, and I have agreed to refer those interested to the article instead. The upshot is, that the Kelly Criterion, as specified above, is not what Kelly and others thought it was except in the special case I just mentioned — it is NOT the growth-optimal fraction, but something different, equal to the growth-optimal fraction only in the special case — a case that manifests in gambling with ubiquity, and oddly, in trading very rarely.

Again, the gambling community has accepted it for reasons mentioned –because it does give you the same answer for the optimal fraction to bet as the formulations for the optimal fraction in the gambling situations. But just because it gives you he same answer as the optimal fraction in special situations does not mean it is the formulation for the optimal fraction –it isn't.

Secondly, even the "optimal fraction"it is never optimal. Suppose you are playing a game with a 50% probability and odds of 2 to 1. Your optimal fraction is .25 (if you were to play forever). However, after the first pay, the phone rings, it;s your wife, and she informs you of an emergency and you have to bolt the game (with your winnings from the one play, make you a popular guy). If you knoew beforehand you were going to only play for 1 play, you should have bet 100% of your stake to maximize your gain. If the call came after two plays in this game, you should have bet .5.

Tomorrow, you come back to this game — and you bet .25, reconciling yourself that yesterday you bet .25. (so….the game possesses memory?)

Wait, it gets worse in trading, where we see that each individual bet is, in fact, NOT a bet. Let's say you trade only XYZ stock, and you put on 300 shares. Let's say you have a stop below your buy price but it;s a different level for each of 100 shares, so you have three stops below the proce for 100 shares each at different levels. Now, let's say onyl the closest stop, for 100 shares, gets hit, resulting in a loss on 100 of the three hundred shares. Weeks later, you sell out 100 shares at a profit, and, a few weeks after that, another 100 shares at a price higher than that.

But these are NOT three separate trades. This is ONE trade, one wager for the purposes of growth-optimal calculations. And the reason is because you are ONLY trading XYZ — there has been NO recalculation of positions to put on until the entire thing has been closed out. IF, on the other hand, you were having other trades throughout the course of your aggregate position in XYZ, then you WOULD consider each of these a separate trade.

Trading is not the same as gambling. There are similarities, but don't make the assumption that because you risk something and gain something that it is the same. There are things which are proxies for truth, that asymptotically appear to be truth, but they are only proxies (such as the Kelly Criterion) as well as the widely-held (in the gambling community, and hence the trading one as well) but incorrect notion that a wager should be assessed based on it's asymptotic mathematical expectation. This too is a mere proxy and an incorrect one that can, in extreme cases, lead one to accept bad wagers and reject favorable ones.

Again, critical thinking has been absent and trumped by the acceptance of industry catechism.

Finally, you speak of SD's and EV (mean-variance is dead incidentally, as dead as dead can be everywhere BUT academia) correlations, and Chris mentions the (valid) problems of assessing the edge in the future and the problem of non-stiationarity.

The solution to growth optimality in the markets, lies in NOT accepting the Kelly Criterion, but instead accepting what IS the growth optimal fraction– because that then reveals (in the simplest of ways!) how to address the problem of non-stationarity in the future and it doesn't require any of these parameters, or even a computer, it's really THAT simple if you want to attempt growth optimality in the future.

Phil McDonnell comments:

Ralph raises a lot of interesting philosophical questions. On some points I disagree, so let me elaborate. For the purposes of this piece I will assume one is entirely risk averse and seeks only to maximize expected wealth on a compounded growth basis.

First he raises the point that there is no guarantee that a game or investment opportunity will continue. Certainly a true statement. However it is also true that there will be a succession of such opportunities available in one's lifetime. Thus some rational basis for choosing bet size each time should include consideration of expected logs of the outcomes.

Philosophically I disagree with Ralph's analysis of bet it all on the last bet. His math is correct, in that it will maximize the expected dollar outcome. But there will always be other bets, so one's lifetime objective should still be to maximize the expected log not simply the arithmetic expected value. I believe Kahneman and Tversky made the same error in their Nobel winning papers.

I have an alternate take on Ralph's argument that it is hard to define a trade because you can put on 300 shares and exit 3 times at different prices, unknowable in advance. Rather than look on each trade as the basic metric one should look on the portfolio as the metric and a basic unit of time as the portfolio re balancing decision point. For example if you invested .25 of your wealth in a trade that doubled you know have .50 of your 1.25 wealth in the trade. That is too much if you want to maintain the .25 ratio so you need to sell .1875 to get back to your optimal ratio. But the simplest way to look at it is to look at the investment portfolio in each time period, be it a day, week or whatever.

One of the reasons the mean covariance model is in disfavor is that it seems to fail when everything hits the fan. In fact the model is incomplete in the sense that EV and COV are stochastic variables and vary over time. (I am implicitly including VAR here.) You need to explicitly include the correlations somehow in order to take into account how an entire portfolio will vary together. Using the formulas for optimal bet size on a trade level will always lead to serious over trading if there are multiple trades put on at the same time except in the case of a negative correlation between the trades. So it is misleading to calculate an optimal trade size for one system or one trade without consideration of any others that might be on at the same time. At best it is a dangerous upper bound for any single trade size. But it will almost always be an estimate too high. Optimization of expected log of wealth can only be done at the portfolio level.

Ralph Vince responds:


I am not raising ANY "philosophical questions." Just because people may have to think about them doesn't make them philosophical questions as opposed to facts:

1. The value that satisfies the Kelly Criterion is NOT the (growth) optimal fraction of ones stake to risk (although, in special circumstances which we find ubiquitously in gambling and not in trading, it is an equivalent value to the value that IS the optimal fraction). And the pervasive mistake by those attempting growth maximization in the marketplace of using the Kelly Criterion result puts then OVER exposed, to their unwitting peril. They are NOT growth optimal. In fact, the value that satisfies the Kelly Criterion NEVER returns the growth optimal fraction. This was a mistake on the part of Kelly and Shannon. The very fact that it is still accepted by others is testimony to the absence of critical thinking in this matter.

2. Further, what IS the growth optimal fraction is a function of the horizon of the game — and all games have a horizon, including the game of evolution on earth. Further, all metrics, including the analysis of drawdowns (including VAR where a horizon of 1 is implicit), even the analysis of whether a wager should be accepted or not, are a function of horizon. Disregarding the horizon leads us to incorrect conclusions at every turn in risk-opportunity analysis. In fact, it is the necessary introduction of "horizon" that gives rise to this entire burgeoning discipline.

3. Once we accept points 1 and 2 above, the obvious solution to solving for the non-stationarity of the distribution of outcomes we are dealing with becomes obvious. Growth-maximization, unlike attempts at it in the past, now CAN be performed with informed assessments of what the best growth optimal fraction value to use in the future will be.



 The leading historian says that he'll buy me a $ 8 cup of coffee under certain considerations. And I don't know much about coffee. But I've had occasion to have coffee at Stumptown Coffee, an Oregon firm with branches in New York now, and it's far and away the best coffee i've ever had. Next in line is the coffee at Kaffe that Mr. Florida surfer has recommended. The web mistress is a vegan, and I don't pay her that much to do all the editing and picturing so she usually doesn't put our stuff on barbecue up unless I get her mother on the case, which isn't that effective since she doesn't believe in coercion. Let us expand our mandate from bar b que to good beverages like coffee and tea.

Vince Fulco comments:

I wouldn't say THE top tier but for solid, day-in, day-out coffee, a NYC mail order institution which we order from is portorico. It's been around for over 100 years and we especially like their couple times a year sale with numerous versions of beans $5.99-7.99/lb, a veritable bargain when retail goes for similar prices for 10 ounces. They also have a weekly sale of one kind or another.

Jeff Sasmor writes:

For NJ suburbanites, the local roasting of primo beans and a nice college town quasi-hipster atmosphere is provided by Small World Coffee in Princeton. In spite of a Starbucks opening around the corner, Small World has actually grown larger.

David Hillman writes:

Stumptown is among best ever drunk here, too. We have a pound or two shipped in regularly. They ship the same day they roast and deliver in about 2-3 days, so coffee is very fresh. Currently in the cabinet is Indonesia Sulawsi Toarco and the African's are exceptional this year. An admirable direct trade business model worthy of support.

 Also, when in Portland, breakfast at Mother's. They serve Stumptown varieties in a french press at the table. That and the wild salmon hash is more than worth the long weekend a.m. waits.

Boom Bros. in Milwaukee is also happily recommended. Excellent roastmaster, their Velvet Hammer is the 'every morning' coffee at Cafe DGH.

Another favorite is this coffee from the D.R. Very cheap, very good. Best drunk in a cafe on the beach in Sosua. Maybe there's a Caribbean store of some sort in NYC?, but if not, there's always Bonanza:

"…..Always the most fresh production guaranteed! Manufacturer send my orders 3 times a week…..Thanks for looking!!!"

Chris Cooper writes:

Coincidentally, I have recently embarked on a quest to brew (consistently) the best cup of coffee. I have started roasting my own beans, and now it is evolving to importing my own green beans. Next month on the container arrives 300 kg of single-origin green beans from Indonesia from five farms. We call them Bali Kintamani, Java Jampit, Aceh Gayo, Sumatra Lintong, and Torajah Kalosi. I guess this may become more than just a hobby.

 While Mr. Surfer and family visited not so long ago, we served some Kopi Luwak, famous due to the journey of the fresh beans through the digestive tract of a civet. It turns out that there are various grades of Kopi Luwak, and since that time I've found a verifiably authentic version, which is rarer because often the growers will mix in other beans. I may try to import that as well, but it's very, very expensive, and I can probably only get 10 kg per year. The taste is really different, much earthier.

Larry Williams comments:

My cup runneth over with coffee from these guys, but thanks for the tips. I will begin my journey again for greatest java.

By the way, Overstock.com seems to have the best deals on espresso machine.

T.K Marks writes:

All this talk of coffee has gotten me nostalgic for one of my life's more squandered opportunities.

There was this little coffee spot on the Upper West Side, just a stone's throw from Lincoln Center, called Cafe Mozart. I used to spend much time there.

I would get a pot of coffee. Once even this thick Turkish stuff that perhaps made one look of Left Bank sensibilities, but tasted like tar. Would while away the hours there with reading, backgammon, or chess. It was a peaceful place.

So one night I'm sitting alone at my table reading when walks in and approaches, a woman.

A woman with a very fetching smile.

Bob?…she asked hesitatingly, as one would when meeting a blind date.

I stood up politely, smiled at her for a few seconds, and, No, was all I said.

Till this day I regret not lying through my teeth.

Had nothing to lose.

Jeff Watson writes:

 Many of my friends are coffee experts but I am sadly lacking in that department. One thing I do know is how to make is one of the better pots of coffee on the planet. The following recipe will even make even the most mediocre coffee taste good, and good coffee taste……delicious.

1. Wash an egg then break it into the bottom of an old fashioned metal campfire coffee pot, beating the egg slightly, leaving egg, shells and all in bottom of the pot..

2. Add a cup of very cold water to the pot, covering the egg and then add a pinch of salt.

3. Pour in a whole cup of course ground coffee to the water and egg mixture, and stir it up.

4. Pour enough boiling water over the coffee, egg, mixture to almost fill the pot up, and stir until mixed.

5. Cover the pot and plug the spout with a dish towel.

6. Put the coffee pot over a fire, heat it up to a gentle boil, back off, then let it simmer for a couple of minutes.

Take the pot off of the fire, let the coffee settle for a couple of minutes then add a cup of very cold water to precipitate the coffee grounds/egg mixture. Let the coffee settle for another minute, then serve.

My grandfather was taught to make coffee this way from some real cowboys when he went to the Arizona Territory for a trip sometime before 1910. He taught me how to make coffee when I was around 7 or 8, and put me in charge of the coffee every time there was a family picnic or outing. The secret to wonderful coffee is the egg, the pinch of salt, and good water. Coffee prepared in this manner evokes many good memories, and the good smell alone will attract any friends or neighbors in the near vicinity. Once in a great while, I will make this coffee on the stove and it's almost as good as on a campfire.

I have often wondered what a Kona coffee would taste like if prepared in this manner.

J.T Holley writes:

 I'm not a professional roaster or barista, but the keys that I learned in the 8-9 years that I mentored to roast, grind, and brew coffee are the following:

1) The time between roast and grind needs to be minimal (oils of the roast and storage important)

2) Method of brewing important to your individual tastes (percolate, press, or electric drip)

3) Water is 99% of a cup of coffee! Good tasting waters need to be used and free of chlorines, flourides, and impurities

4) Filtration choice and cleanliness of the brewer of choice imperative for consistent cups of good flavor

5) Once pot is brewed then stirring the pot and stirring the cup is important regardless of cream and sugar for consistency of coffee.

That's the basics!

All good shops should know this regardless if its a private house, private shop, franchise or friend.

Kim Zussman queries: 

How can coffee gourmets taste fluoride but not civet excrement?

Jim Sogi writes:

Chris's special Java java was distinctive and earthy. A treat especially in the palatial surroundings.

The key to brewing good coffee from whatever origin, is:

1. Be sure the parchment is sun dried, not machine dried. It has a much mellower smooth flavor.

2. Roast your own coffee. My favorite roast is 462 degrees, 11 minutes give or take based on humidity and ambient. Roast until the oil just starts to show, but is not oily. The oily roast is more for show. Roast only what you can use in 3 days.

3. Grind your own fresh roast. This is the most important of all. Don't try to freeze coffee beans.

When brewing in filter, only pour a little, not boiling, water through at a time.

Oh yes, Kona Coffee is without doubt the best in the world.



 At this moment in the earth's history, we are closing in on being in a calorie per acre race against starvation. I know food shortages have been predicted for years/decades and we have not seen them (at least in the US) yet. But population is rising, and in the most optimistic scenario arable land would be a fixed commodity (it's not, we have less each year). At some point, the math takes over.

Part of the hidden cost of organic farming is the production lost. You can't grow 200 bushel an acre corn or 60 bushel an acre soybeans or 50 bushel an acre wheat "organically".

Organic farming can be economically feasible for certain crops in certain situations. I don't see it being able to replace "modern agriculture" in production capacity.

Chris Cooper comments:

Perhaps organic farming has some benefits. According to this study, strawberries grown "organically" are better.

Ken Drees adds:

Isn't the premium paid for organic foods more than enough to compensate for yield? Of course this is not regarding staples, but for boutiques?

An organic radish commands a higher premium then a pesticide radish to the right consumer. So the cost of input to the radish crop is covered in both cases and then health benefits are the "kicker" that can not really be proven and are thus under the umbrella of cult. 



New Chip Startup Plays the Odds on Probability Processing:

Conventional processors rely on the sequential processing of zeroes and ones, an approach that may not be the most efficient for applications like search, fraud detection, spam filtering, financial modeling and genome sequence analysis, which require simultaneously considering several possibilities and deciding on the best answer. Lyric Semiconductor’s chips are built around probability processing.



Google androidI had the opportunity in the last week to mix with a number of young cell phone app developers. It was refreshing to mix with such a positive group after running into negativity almost everywhere else. These people of full of ideas, full of excitement, and full of hope. It helps that they are all young; none were over thirty. They are very entrepreneurial despite the fact that many of them carry huge debt from school.

Why are they so positive? They see the world as just being created, and they see themselves as having the necessary critical skills to help shape that world. They are coming up with new ideas every day because they are exchanging ideas and using their cell phones for everything you can imagine. And they are getting funded!

That may be the most amazing thing. They are getting funded by companies like Sony and Disney. Almost none of their investors are angel investors of the type I have depended for so many of my projects. These are mainly old white guys, and they don't understand what these kids are doing.

I am one of those guys and though I admire their work, I often don't quite get it even after multiple explanations. When I do get it, I can see that they have been thinking about a whole world of possibilities that are not even on my radar. It occurs to me that you can't make tools for a world you don't live in.

David Aronson talks about how being a leading edge expert can be a serious drawback when the leading edge moves on. When you find yourself in that position, you really need to reboot and start over. These young app developers tell me rebooting time is here.

By the way, bad news for Microsoft: none of these kids carried a Windows smart phone. Not one! In fact, those that realized that I had such a device looked at me like I was carrying a pooper scooper bag. The dominant choice was the iPhone, but there was a reasonable sprinkling of Google Android phones.

Alston Mabry writes:

Remember the phase we went through when adults would tell stories about how they couldn't figure out something on the computer, and then their twelve-year showed them how to do it? But usually the twelve-year-old explained the procedure from the POV of someone fluent in "computer", and so the adult had to get multiple repetitions before understanding bloomed.

A while back I was reading a piece by a thirtysomething, about how he was seeing the future being formed around him but had only just noticed what was going on. What he was seeing was this: His friends would take their old smartphones, disable the call features, load them with games and other apps, and then give them to their preschoolers as toys. It struck him that new generations are now growing up from a very young age with a smart device in their hands pretty much at all times. These cohorts will be fluent in "smart device" and will push the use far beyond what us monolingual types can imagine.

Chris Cooper writes:

Just as you would not expect the political leaning of Fortune 500 CEO's to match that of the rank and file, so should you not expect Silicon Valley entrepreneurs to align with the majority of voters in the region. In my experience, Valley entrepreneurs tend to be more libertarian than the average. And as a company gets larger, there is pressure from shareholders and other interested parties to support the establishment. Perhaps the Google founders support Obama in public, but in private I can assure you their views are much more libertarian.



FeynmanWhy are there tides? How do the planets move? Just a couple questions you will get the answers to in the first of Feynman's wonderful lectures

Prof. Richard Feynman gave a series of lectures on physics at Cornell in 1964, which are called the Messenger lectures. They are now available free on the web courtesy of Bill Gates. Very engaging, only a few equations (at least in the first one that I have watched), so suitable for a general audience teen or older. (These are different than the Feynman lectures on physics, which are a three volume book set with all the equations based on the physics course he taught freshman at CalTech).

For those unfamiliar with Feynman, he played the bongos, drew nude art, enjoyed safecracking, helped create the atomic bomb at Los Alamos as part of the Manhattan Project, won the Nobel Prize in Physics in 1965, and was revered as a teacher of physics.

Chris Cooper comments:

Feynman taught Physics 1 and 2 only for the two years it took to complete the series of lectures which became the three-book text for those courses in the following years when I took them. I still have my copies because even at that age I realized that they were something special. As a senior, star-struck, I took an advanced course in quantum mechanics from Prof. Feynman. Although we had two texts to cover the subject, I was amazed to come to class and watch him explain the topic of the day from an entirely different angle, time after time. That was the class where I best learned my most important lesson– the people who do this are really smart, smarter than I, and they also work much harder than I was willing to. I flunked miserably, confirming my abandonment of dreams of a career in high-energy physics. In retrospect, Prof. Feynman ended up teaching me the most important lesson that I needed to learn at that time, though he never even knew who I was.



A depiction of Antigone trying to bury her disgraced brother whose body had been denied a proper burialIn order to destroy the myth and hero status of a villain and stop others of the same vein from following in his footsteps, the dead and bruised body should be displayed in all its glory. (see this story from heraldsun.com.au about gangland killers)

In trading the same can be said. Hang that P&L sheet from your bathroom mirror. Blow up that chart and stick it on the fridge. As you clean your teeth everyday and pour your OJ, you will have to remember that big spike down in P&L and what on earth you were thinking when you put on the risk. Gone will be the feeling of "it's a new day, a new dawn," and wipe that smile off your face. It will continue to make you do the work and stay in touch, without memories of past grandeurs.

Maybe give yourself a heavy punishment, e.g., a morning exercise routine — 200 sit-ups, 200 push-ups, 30 minute run — until you get the P&L back on track of pre-madness levels. (And at the same time something good could come out of the negative.) 

Ralph Vince writes:


I don't know if I would do it with P&L statements, but your post illuminates something I have been thinking about a lot in recent years. At first, it was just a nagging problem, became an obsessive one, and ended in an epiphany which has changed not only how I approach trading, but my results– dramatically. And it is the simple question that often nags us (and, when it does, the discussions usually end unresolved, or "resolved by convention") of "What is a trade?"

Some years back, I had the statements of a famous long term trend follower, and was reverse-engineering his system (because I am sneaky that way). This particular fund always had a position in a market, either long or short. These were futures positions, so, of course, there was the rollover issue going on.Did a rollover constitute a "trade?"

There was a fellow a few years back who would put on, effectively, two positions when the time came to put on one. When half the position saw enough profit such that the stop on the remaining half of the position was hit would result in a scratch, he would exit that half.
Is that one trade or two?

Is a long term trend following system an accumulation of day trades?

Is what appears on a p&l statement really a trade? Is what the software you are using to research your trading ideas give you a trade that is the same as what SHOULD be considered, by you, a trade?

Here's the solution I came to, and why it was significant to me. I determined that a "trade" is, in effect, anytime I have on a position, sized according to the moment or equity at the moment. For example, a long term trend following system IS a cumulation of day trades (sans commission on most of those trades) if, each day, the position is resized based on the current capital in the account (and this is not to say that size varies proportionally to capital — it can even vary inversely, but it varies). In effect, anytime the compounding aspect of consecutive "trades" is affected– that is a trade.

If I trade 10,000 QQQQ always, and never vary my size…it is one trade.

Why was this rule important to me? Because, the results of my trading are not the p&l statements, but rather the multiplicative effect of this stream (in fact, I regard each trade by the term I and others call an HPR, which now makes it a relevent mathematical entity). So I am racking up HPRs into a type of queue, if you will, and their multiplication together IS what I am making or losing, and does show me the drawdown I am really experiencing.And from that, I can now go and craft my trading around creating "trades" (HPRs) to append into this queue……and it is the mathematical "shape" of these HPRs that becomes important, because that IS the effect of my trading. Rather than having arbitrary "trades" handed to me, and looking at where I am at time T, and saying "Oh, look what happened there…that's odd," I am able to steer things much more in the direction I wish them to travel.

Lastly, as I said, it doesn't matter if quantity is varying in direct proportion to capital or not– in fact, it is the very function of HOW it varies, in this respect, that is the REAL puzzle of money management (for example, direct proportional variation is simply a "fixed fractional" approach, wherein one fraction would result in optimal geometric growth). But optimal geometric growth may NOT be someone's criteria– and it is the very function of how your size varies relative to your capital that must be crafted to satisfy what someone's criteria is.

Gibbons Burke replies:

Interesting insight, Ralph.

So, if I understand you correctly, a trade is any action which changes a position's risk connection to the portfolio, including initiating it? Or is a trade considered when an HPR can be calculated, that is, when an already-initiated position is changed?

As an example, how do you account for the fellow who uses the old floor trader's trick of taking half the position off the table when his objective is reached, and letting the rest ride. When the position is initiated, do you initiate two trades in your tracking system, or does the single initiating trade #x get split into trade #x.1 which is completed logging an HPR (holding period return), and trade #x.2, which remains active? What if profits are take on position x.2 when another objective is reached - you then get trade x.2.1 which is realized as an HPR, and trade x.2.2 which continues to ride?

How difficult is it to reconcile your way of trade accounting with brokerage statements, and reports which must be made to taxing authorities?

Ralph Vince replies:

Until I am flat the tradeable, I consider it as one trade. One I am flat– I have an HPR (to add into the queues of HPRs) The reason is that the initiation of any position in a tradeable is a function of the current state of compounding/equity.

So, for example, I buy 1000 shares of XYZ. IT goes up, I am still in it but now I buy 1200 XYZ (I have a total of 2200, the subsequent 1200 buy a function of the equity at the time). Thus, I would consider this two trades, two separate HPRs. The first one would be on 1000 shares and it would be considered closed when I added to it (!) The second position now, 2200 shares…ad infinitum or my own physical demise (whichever comes first!) Similarly, if I buy 1000 shares, and I say, I am buying 1200 shares, irrespective of account equity at the time, but rather based on account equity at the establishment of the first part of this position, then, this is one trade when closed out.

Chris Cooper writes:

Ralph's way of looking at the trades makes sense when the reasons for increasing size are due only to some function of your equity. But often, changes in your position are due to other causes. For example, one might trade 1000 shares of XYZ when the price reaches one standard deviation above a moving average (Bollinger Band), and 1000 more if and when the price reaches two standard deviations above the average. These should also be considered two separate trades, but entered roughly in parallel, not strictly serially as in Ralph's example. The parallel case implies different characteristics in modeling risk and reward, whereas the serial case is more straightforward.



 The confirmation bias is the tendency to search for or accept as valid information that is consistent with a prior belief and to exclude or reject information that challenges the prior belief.

As powerful a resource as the world wide web/ net is for doing research it seems that unless one is very careful this bias can impact the search words one uses thus strongly promoting the confirmation bias. Since the net has articles and posts that support virtually every point of view it is inevitable that point of view will strengthen over time as more and more articles are found that confirm the belief that biased the search.


Nick White responds:

I think your query is an excellent one. There will be other readers of the site of vastly greater eminence and skill than me in the field you have brought to our attention. However, I'll take a dilettante stab at responding by highlighting a coupe of good pieces of literature on the topics of biases / scientific method… and look forward to the honor of being corrected and informed by my betters. I'll also note that I'm not a professional scientist– merely of the armchair type, and a bad one at that. Secondly, I will cite quite a few names and sources in my response; these readings have been for personal pleasure rather than as part of a course where I've been goaded into critiquing them. In other words, my interpretations of their work might be a load of old tosh. That said….let's get on with it!

To me, your query goes to the heart of the philosophical foundations of the scientific method– and therefore difficult to answer either succinctly or with conviction. Happily, greater minds than our own have wrestled extensively with your topic and, I believe, have some useful answers for you. My aim is to present a thumbnail sketch of the thumbnail sketch of their work. I recognize that boring one's audience is the worst of solecisms so, at the risk of vast oversimplification, I will state my conclusion up front, lest anyone wish to proceed no further (likely a good idea): I believe it is fairly safe to say your answer lies with the tenets of "skeptical" empiricism. That is, one applies as best as possible the criterion of "falsifiability" in their work and research. The trick, as ever, is actual application.

Before we go on, though, I should like to define terms. You say that confirmation bias "is the tendency to search for or accept as valid information that is consistent with a prior belief and to exclude or reject information that challenges the prior belief". I'd like to demarcate that a little bit for our discussion. Richard Thaler summaries much when he writes that, "[belief perseverance means] people are reluctant to search for evidence that contradicts their beliefs. Second, even if they find such evidence they treat it with excessive skepticism. Some studies have found an even stronger effect, known as confirmation bias, whereby people misinterpret evidence that goes against their evidence as actually being in favor." In contradistinction, the behavioral literature seems to distinguish your definition as motivated reasoning, that is, "thinking biased to produce preferred conclusions and support strongly held opinions". Yet these biases themselves may simply be symptomatic of more problematic and pernicious dysfunction in our mental machinery. What could these biases be that "sum to" motivated reasoning?

A non-exhaustive inventory might contain at least five other biases in particular. First up is survivorship bias - that only the winners and survivors get to tell their story and present their data (irrespective of how one frames the enquiry to them). Next, we must account for Kahnemann / Tversky / Slovic's availability and anchoring biases. Availability is "the ease with which relevant instances come to mind". Anchoring is our propensity to estimate solutions with disproportionate reliance on– and influence from - the initial conditions. Fourth, we have the work pioneered by Kelley in the area of attribution, "man …infers causes for the effects he observes. The causes he attributes determine his view of his social world, and this view may determine his behaviour". Fifth, we have K/T's "errors of prediction" which, inter alia, states three principles. First, people rely too much on their "prior" intuitions when making assessments -even in the face of new, objective information. Second, people do not vary their predictions in line with the validity of the information on which their predictions are based and, fInally, people place more confidence in predictions based on highly correlated predictor variables than rational analysis affords them. The preceding doesn't even begin to touch on the personality dimensions of bias - that is, why our egos are constantly on the hunt to be "proved right", or the evolutionary ones - that biases are survival mechanisms!

So, given this diagnostic, what conclusions can we draw so far? It seems we can say that we're wired to confirm our hypotheses because it's convenient, it's fast and it's pleasant. As a result, we make judgment and inference errors that could be avoided if we had more robust methods to compensate for them. But why is confirmation "bad"? What's wrong with the proposition of reinforcing your beliefs and proving your hypotheses with more evidence of the same?This dilemma is not a new one. English polymath Francis Bacon highlighted the problem in the 17th century– and it has been a source of debate for much of the period since (incidentally, he was all for confirmation; though I put this down to his being a lawyer and the legal climate of his times). Today, the problem lies within the domains of philosophy; principally epistemology (what do we know, and how do we know that we know that we know it?) and the problem of induction; in other words, the realm of * falsifiability*. Sir Karl Popper (your principal, go-to guy on philosophical questions of method) argued forcefully that a hypothesis is not empirical -let alone scientific - unless it is falsifiable. What does this mean? For example, an unbroken string of sightings of white swans does not confirm the hypothesis that "all swans are white". But a single sighting of a black swan shows the hypothesis to be false. Conversely, claiming "there may be aliens in space" is not falsifiable. This is important because of the elusive nature of truth and certainty (at least this side of Heaven). One can never prove anything in this life with absolute certainty. All we have are probabilities. Once that notion is at the heart of one's scientific investigations, the door to statistical introspection swings wide open.From that point, at best, we can say with certain degrees of confidence that something "isn't" something else.

Ultimately, I can do no better than quote Sir Karl:

*Science is not a system of certain, or well-established, statements; nor is it a system which steadily advances towards a state of finality. Our science is not knowledge (epsiteme): it can never claim to have attained truth, or even a substitute for it, such as probability…

*We do not know: we can only guess. And our guesses are guided by theunscientific, the metaphysical faith in laws, in regularities which we can uncover - discover.

*But these marvelously imaginative and bold conjectures of ours arecarefully and soberly controlled by systematic tests. Once put forward, none of our anticipations are dogmatically upheld. Our method of research is not to defend them, in order to prove how right we were. On the contrary, we try to overthrow them. Using all the weapons of our logical, mathematical and technical armory, we try to prove that our anticipations were false– in order to put forward in their stead, new unjustified and unjustifiable anticipations, new ' rash and premature prejudices' as Bacon derisively called them.

*The advance of science is not due to the fact that more and more perceptual experiences accumulate in the course of time. Nor is it due to the fact that we are making better use of our senses….bold ideas, unjustified anticipations and speculative thought are our only means for interpreting nature…and we must hazard them to win our prize. Those among us who are unwilling to expose their ideas to the hazards of refutation do not take part in the scientific game.

Thus, I would contend alongside Popper (oh, how I deign!) that empiricism untempered by proper falsification might be many orders of magnitude worse than no empiricism at all. The safeguard you seek in your query is to, as widely as possible, practice rigour in all your habits and research - most importantly, the principle of falsification. Around these parts, the Chair et al have been known to throw out more than the occasional, "um, have you tested that?" to those making a particular claim of one sort or another. It's not for show.So, that's my thoughts on your query. We may avoid confirmation bias and the multiplication of its effects in the following (non-exhaustive) ways: Know which biases may impact your research. Run Popper's Logic of Scientific Discovery over your processes; especially the criterion of falsifiability. Will bad research persist? Sure. It has for centuries. Will it become ubiquitous? Not if science and scientists are doing their jobs properly.What practical steps can we take to effect these principles in our daily work and lives? Bischoff has provided some helpful guidelines: Know your cognitive frailties. Actively seek contrary evidence…force yourself to do it, or have a mentor well versed in creative destruction of your bad hypotheses. Put confidence estimates around the quality of information / data you have obtained. Educate yourself constantly (but don't rely on it too much - heavily discount your own smarts).

From Taleb: know in which domains you can safely apply induction (largely stable, natural phenomena) and which ones may get you into hot water (complex / contingent outcomes relying on inferences drawn from limited observations…because of the massive distortion and impact of rare events in the distribution of outcomes). Relentlessly build in redundancy to all you do and hypothesise. Be humble, and know that you know nothing– even on your best day. Visit graveyards and consider the untold stories of those who "didn't" make it -only survivors get to tell their stories with conviction and credibility. Consider alternative histories, and adopt the probabilistic mind-set. Apply the lessons you have learned from your textbooks to your whole life, not just the narrow, specialized context in which you learned them.I hope this sparks some good discussion! I'd be very interested to hear critiques, comments, additions etc. I'm attempting to stand on the shoulders of giants, so any misinterpretations, misquotes, misattributions or any other mis's are entirely my own.

Source / reference list:

- Kahnemann, Slovic, Tversky (eds): Judgment under Uncertainty: Heuristics and Biases, Cambridge

- Kahnemann, Tversky (eds): Choices, Values and Frames, Cambridge- Slovic et al: The Perception of Risk, Earthscan

- Taleb: The Black Swan, Penguin- Popper: The Logic of Scientific Discovery, Routledge

- Thaler: Advances in Behavioral Finance (Vol II), Princeton Publishing

- Peterson: Inside the Investor's Brain, Wiley- Forbes: Behavioural Finance

- Gauch: Scientific Method in Practice, Cambridge.

- Chamley: Rational Herds: Economic Models of Social Learning, Cambridge 

Pitt T. Maner III writes:

A quick overview of a few of the issues you have discussed is presented by James Montier in his latest book, The Little Book of Behavioral Investing– How Not to Be Your Own Worst Enemy. Problem examples in the book illustrate many behavioral traits that one can become susceptible to. Montier shows that one must be ever vigilant and self-aware of narrow-thinking, over-optimism, faulty statistical reasoning, over-conservatism, majority group thinking and assorted biases. One quote from the book reads, "Question authority, but don't accept the answer".

Montier's own soft spots, however, may be an over attachment to value investing and Graham techniques. More knowledgeable critics can decide.

Here is a two part interview with Montier related to the book.

Part 1
Part 2

A snippet from the 2nd part of the interview:

Miguel: Give us some insights – how can we become critical thinkers.

James Montier: Critical thinking is really all about being a contrarian in thought. Learning to be skeptical, to question what you hear, and evaluate it based on merit, rather than emotional appeal. In essence taking a contrarian view point requires us to learn three skills.

The first is highlighted by the legendary hedge fund manager Michael Steinhardt, who urged investors to have the courage to be different. He said, “The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view.”

The second element is to be a critical thinker. As Joel Greenblatt has opined, “You can’t be a good value investor without being an independent thinker—you’re seeing valuations that the market is not appreciating. But it’s critical that you understand why the market isn’t seeing the value.”

Finally, you must have the perseverance and grit to stick to your principles. As Ben Graham noted, “If you believe that the value approach is inherently sound then devote yourself to that principle. Stick to it, and don’t be led astray by Wall Street’s fashions, illusions and its constant chase after the fast dollar. Let me emphasize that it does not take genius to be a successful value analyst, what it needs is, first, reasonably good intelligence; second, sound principles of operation; and third, and most important, firmness of character.”

Chris Cooper writes:

I recommend the blog called Overcoming Bias for discussion of many other biases and their application to real-world problems. You may also like Less Wrong.



Sir Steve Redgrave was one of the best rowers in history. Apart from the amazing fact that he won five Olympic gold medals for Britain in five consecutive Olympics as a endurance athlete, he also won nine world championship gold medals, two silver world medals and two bronze, one at the Worlds and one at the 1988 Seoul Olympics where he doubled up in the coxless and coxed pairs! What a lot of people do not know about Steve is that he was a product of being in the right place at the right time.

Redgrave's first stroke of luck was attending a comprehensive school in Marlow where he was fortunate enough to have an English teacher, Francis Smith, who was a member of the Marlow Rowing Club. Smith invited Redgrave and his three friends to come down to the boat house to try their hand at rowing. Steve, who is dyslexic and, by his own admission, not a good student, excelled at rowing. From the very beginning, his four dominated their competition. At the time, Redgrave, in a single, was so good that he would get bored racing other juniors. To make it more interesting for him, Steve would not actually row full pressure for three quarters of a race, but just paddle down the course, before turning on the burners and blowing away his competition!

The second stroke of luck for Steve was that Marlow was also where rowing coach Mike Spraklen lived. Spraklen is notorious in the rowing world for training his athletes too hard. Redgrave just ate it up! At seventeen, Steve left school and began rowing full time. He was so good he joined the Senior National Sculling Squad who were training out of Spraklen's back garden, which was beside the Thames. Redgrave would have been selected for the 1980 Moscow Olympics had it not been for the Junior rowing selectors insisting that he race at the Junior World Championships held in Hazewinkel, Belgium. They desperately wanted a junior crew from Great Britain to win a medal and Redgrave and his partner, Adam Clift, were odds on favourites to win gold. However, the crew were beaten into second place by an East German boat. Redgrave was so disgusted at his performance he threw his silver medal into the lake!

Over his career, Redgrave continually challenged himself by trying the impossible. For example, he would double up in the coxless and coxed pairs events at the Worlds! Not only would he have to qualify for the event by being the British national champion in both boats, he would also have to race the events back to back at the world championships. On a number of occasions, this meant that as soon as he had raced in one boat, he would have to immediately switch into the other boat, row down to the start and race again, against his rested competition!

It was not all plain sailing for Redgrave during his career, however. Apart from the niggling injuries he had to contend with through out his time as a rower, Steve was diagnosed with ulcerative collitis in 1992 and with diabetes in 1997. Just as he did with his competition, Redgrave was determined to dominate his illnesses and not let them affect his rowing performances. They became part of his "training" that had to be dealt with in order to win.

In retirement, Redgrave has transitioned very well into a motivational speaker and head of various charities. He is an inspiration to those who had the privilege of sharing the river with him and to those who look back at his legacy as an exceptional rower and living legend.

William Weaver responds:

 Good rowers can be considered great only if they have mastered the single. I don't remember if Redgrave won the single at Henley, but I'm more inclined to attribute greatness to oarsmen like Lange, Muller, Kolbe and Karppinen who showed they were not only strong enough, but technically brilliant enough and mentally tough enough, to win the single. The pair is possibly the only shell as technically challenging (if not more so) than the single, but the meat lays with the toughness of being a single sculler.

If you're ever in Philly I'd be happy to host you at Fairmount or Vesper for a row and a beer; both clubs have bars — one great part of rowing in Philadelphia! Just don't visit during the winter — I've done my fair share of rowing in December and January and have suffered from frostbite twice, so I'm done with that!

Chris Cooper says:

 I'm also a rower, though not active at the moment. Did 6:21.6 on the erg at CRASH-B in 2008, which was only 0.7 seconds off the world record for my age group (55-59 HWT), set in the same race. But I'm not very good in my single, having taken up the sport only recently. There's a long learning curve! Last year I convinced my mother to try the erg, and this year she turns 80 and is hoping to set a world record in her new age group, or at least take first place.

I haven't rowed in Philly, but I paddled there for several years on their world-championship dragon boat team, which is composed primarily of ex-rowers. The river is a beautiful place to row or paddle, but only when it isn't freezing.

Sam Humbert observes:

Chris Cooper rocks! His ~6:20 time (in his late 50s!) is equivalent to ~1:35 500m splits. Wow! My 38-yo trainer, who's a longtime weightlifter and quite fit, can do 1:35 for a single 500m — then he's toast. Me, at age 48, and moderately fit, 1:45…



MosquitoThe mosquitoes in Hawaii are gnarly, fast, smart. They hide behind your leg where you can't see them. They hide in the dark under my desk. They circle smelling the blood. They love fresh meat from the mainland. They're fast compared to the bombers in Alaska. They've wiped out most of the native birds.

Chris Cooper responds:

I live part-time in Indonesia (Bali) now, and can't say that I have found the mosquitoes to be much of a problem. Granted, where I live in the hills it is better than in the lowlands. I sometimes will spray repellant on my skin around sunset. I used to use mosquito netting over the bed, but now find it is unnecessary as long as you keep the door closed around sunset. I would be much happier if my neighbor would do something about the standing water in his rice fields, but really it's not bad at all. It's also very pleasant to sit in the open-air living room as it is getting dark and watch the local bats fly around the room looking for mosquito morsels.

Another tactic is to stay near my partner, who seems much more attractive to the bugs than I am. I don't have to be entirely unattractive to mosquitoes, I just have to be less attractive than he is.



One of hardest things to do is nothing. To rest. It goes against everything. The urge to do something can result in disaster. Especially the urge to catch up say when price passes you by or you miss a fill.

Victor Niederhoffer writes:

In reading Deep Survival ( which one has eschewed for many reasons), one comes across the chapter on panics. The conflict between trying to achieve a goal, of food shelter and a mate, (always there) , and being lost causes great discombobulation. Great foolish activities leads to people refusing to survive when it was so close. One finds the same conflict between lost and goal in markets. For example, one has a target. You put your limit in. The algorithm boys move in front of you. The price moves away. You are lost. You have a goal. There is a tendency to panic, to die when it would have been so easy to go down the previous path, or use your tools. A terribly poignant and applicable sensation.

Chris Cooper responds:

Those lessons about paying attention are reiterated in depth in a book I recently finished, "Traffic: Why We Drive the Way We Do" . It is full of counter-intuitive evidence regarding driving and safety. Especially noted is that seemingly unsafe situations can be safe simply because people pay attention.

Dan Grossman replies:

I agree with Chris, Traffic is a great book. Both for understanding driving/road safety and for other aspects of life.

Book was the only advice in my life that changed the way I drive. For example, now realizing statistically how dangerous changing lanes is (what a high percentage of accidents are caused by it), I change lanes far less frequently.

Also makes one appreciate how less safe red light cameras (now common in NYC) are: More accidents caused by stopping short at red lights to avoid camera tickets, than by finishing scooting through.

Alan Millhone writes:

Hello Mr. Sogi. I had an old friend that told me , " if you miss one deal there is usually another around the corner somewhere ". Regards, Alan

Legacy Daily comments:

So true… I don't know which is a bigger regret: the buyer's/seller's remorse or the regret of chasing a price to get a fill then seeing the market go back to the original order level. The price frequency distribution helps (not always) against my wrong instincts so the new routine is to remember the eye exercise program in those moments. :)

1. Blink ten times by closing the eyes as if falling asleep (very slowly). This help re-wet the eyes.

2. Look away from the computer and gaze at a distant object outside or down the hallway. Looking far away relaxes the focusing muscles inside the eye to reduce fatigue.

3. Look far away at an object for 10-15 seconds, then gaze at something up close for 10-15 seconds. Then look back at the distant object repeating the cycle 10 times.

4. Take a break, stand up, move about and stretch the arms, legs, back, neck and shoulders.

Kevin Eilian writes:

Wisewellian - that which effects your move the least effects your opponents the most (courtesy of chair).



 I trade mostly spot forex, so my comments are limited to that market. Also, my trading is moderately high-frequency.

From my perspective, there has been a pretty big change since mid-2008. Liquidity has dried up, and spreads have increased. That makes it more difficult to be profitable. For example, one year ago a typical spread in a currency pair might have been 2 pips, and now it is 3 or 4 pips. Furthermore, it is hard to get filled at a decent price for larger orders…it seems like market reactions to your order are a little more sensitive.

Not surprisingly in a time of such turbulence in all financial markets, volatility has increased. I'm seeing more breakouts, which I attribute to greater uncertainty and thus sensitivity to market-impacting news. Or, perhaps it is just that the news recently has been of greater "amplitude".

I think there has been a gradual trend to return to what I would, with my limited experience, consider "normal". That process will likely require many more months. As you may know, liquidity in the forex markets is primarily supplied by banks, and to the extent that they become more risk-averse, the market will continue to suffer.

Jim Sogi's question was:

Have you noticed a change in the markets due to the changes in the large investment banks such as GS, Leh, Bear Stearns or other large funds? I can't really quantify it or pinpoint it in a meaningful way yet, but it just seems different, more rhythmical, less jerky, and easier in some ways. It seems more large crowd oriented, fewer huge orders in the pipe or ts.

Stefan Jovanovich adds:

In the days when boxing was THE American sport and New York City was its Mecca (when, according to the promoters for the old, old Madison Square Garden at least one of the fighters had to be or pretend to be Jewish if you wanted to draw a decent crowd), fighters would work a whole round to set up one punch. George just won the prize for champion of the List for January with a knockout right cross at the bell.

George Zachar writes:

The few pools of liquid discretionary capital remaining face the prospect of Barney Frank acting as a Caligulan Nero overseer.

Transient calms of nostalgic transactional ease only remind us of the wreckage on the seabed, and capriciousness of our new masters.

The fixed income market, once the most comely of mistresses, is now a Frankenstein's bride; a halting, disfigured, spastic wreck.



21, from Steve Ellison

October 27, 2008 | 2 Comments

 I enjoyed the movie "21" about students at my alma mater counting cards at blackjack. The main character, Ben Campbell (loosely based on the real-life Jeffrey Ma), catches the attention of his math professor by correctly answering the question that has been discussed on this site about whether it would be advantageous to change one's door selection in "Let's Make a Deal" after being shown what is behind one of the other doors.

The movie has many applications to speculation. The professor recruits Ben for the blackjack team because he believes that Ben will make decisions based on statistics, not emotions. Ben is reluctant to join, but is desperately short of funds for medical school. He decides to join, but only for long enough to earn the money he needs.

The professor tests Ben by having two men suddenly throw a pillowcase over Ben's head in the midst of a game at a Boston Chinatown gambling den. The men drag him into a back room. As Ben protests, "Let me go! I haven't done anything!", the men demand, "What is the count?". Ben answers, correctly, "Plus 17". The men remove the pillowcase, and Ben sees his professor, who says he had to test whether Ben would remember the count even under great stress.

Later, the professor says, "Remember, Ben, this is a business. It is not gambling. In the excitement it can be easy to lose your head. You will not do that."

To avoid detection by casino managers determined to prevent card counting, the team uses elaborate methods of deception. All the players have assumed names and fake IDs. One team member plays, betting only the minimum. When the count becomes highly favorable, this drone player uses a gesture to signal the big player, Ben, to come to the table and place large bets. The teammates act as if they do not know one another, but the drone makes a casual comment to the dealer containing a code word to convey the count to the big player.

As Ben consistently wins, he becomes hooked on the game and keeps playing even after he has enough money for medical school. He betrays his friends, fights with a teammate, and finally lets his emotions get the best of him at the blackjack table, losing $200,000 in a night. Meanwhile, a casino enforcer determines that Ben is a counter. It all makes for a thrilling climax.

Charles Pennington writes:

They made a few hundred thousand dollars in Vegas, and that's a story worthy of a $35 million dollar film that grossed $150 million? They made real money snowing the public, not the casino.

Chris Cooper says:

Prof. Pennington is, of course correct. It is worth mentioning that casino gaming has served as a springboard into trading and speculation for many, who have become much more successful in that arena than they ever could have been in the casinos. Ed Thorp is the legendary example, but there have been many others. My gaming experiences certainly inspired me, many years ago, to return to school so I could learn the math (control systems, signal processing) I thought I would need for trading. Also there was the "Eudaemonic Pie" team. Blair Hull is another instance.

Trying to make a living via casino gaming teaches you many lessons which are directly applicable, even essential, to effective speculation.

John Floyd observes: 

 There is a lot to be learned from casino games, much of it applies to trading. In particular, deciding when you have a positive expected return, varying bet size, risk of ruin, etc. Not to mention that one should study the games, as is true in financial markets, and develop an understanding before putting serious capital at risk.

Many of the games offer one the ability to get a statistical edge on the house such as blackjack and some of the progressive poker machines. The problem is that any success is usually found quickly by the house. The house then takes methods to decrease your odds such as reshuffling often in blackjack and then asking you to not play anymore at their fine establishment.

A player therefore needs to take several steps to camouflage what they are doing, such as: spreading bets across several hands, decreasing bet size, not varying bet size too much, making some "dumb" bets to throw them off the scent, moving around casinos and tables when necessary, playing odd hours, wearing hats, etc. The casino runs like a machine and grinds out the vig. The pit boss is evaluated on a per hour basis of what he takes in, a hit of a few thousand dollars draws his and the house's attention very quickly.

While the challenge is fun for some time it can get tedious. Furthermore, the return on an hourly basis even if one is a good player pales in comparison to successful trading in the financial markets.



EducationI rarely use stops in the ForEx market, but yesterday I decided to use one for this trade, and the result is something right out of the currency trading no-no's in Education of a Speculator.

Broker: The SL got executed correctly at the quote you specified at 1.55185
ME: It was the bottom tick
ME: market spiked right toward my stop and then continued away
Broker: The quote got reached as you can see on your chart
ME: sometimes you see these huge short spikes on the chart, are those always correct?
Broker: There was no spike, the spread was wider due the NFP news release
ME: how can one see the spread at any given time?
Broker: You use for example the Min/Max Graph which will give you the valid quotes for order execution
Broker: Please have in mind that Candles are only used as price indicators to predict future price movements.
Broker: Candles give you only the average price per time period and cannot be used to see order executions
ME: what was the bid/ask at the time the stop got executed?
Broker: The quote was 1.55144/861
ME: how many pips wide is that spread?
Broker: the spread was 10 pips at this time
ME: thats a horrible spread especially for eur/usd
ME: thats more then 10x the .9 spread advertised
Broker: During news releases this a common spread
ME: y?
Broker: Please have in mind the spread are variable and spreads will widen during news releases
ME: if the spread was .9 at that time, would the stop still have been triggered?
Broker: No.

Chris Cooper clarifies:

There is a big difference between stops based on executed trades (ticks) and stops based on quotes (bid or ask). The forex market typically provides only quotes. If the liquidity providers at your trading venue all decide to back off for awhile, the inside bid/ask may move dramatically, because the liquidity has temporarily evaporated. This normally happens around major news releases, and around 5:00 p.m. Eastern time when trading quiets down. Using stops based on bid/ask at these times is suicidal. Don't blame the broker — it's your own fault for not knowing better.

Tom Marks remembers:

Tom MarksYears ago in my bumbling youth of a silver trader on the floor, I adventurously ventured from picking the low-lying fruit to be found in the pit and started to get an additional nocturnal fix trading with the dealers overnight.

And what a cagey lot they proved to be.

Given the itch, I would call up and they would make a five-cent market. Somewhat wider than the ordinary half-penny spread to be found during most of the daytime hours. That should have been the first clue, but, hey, I was young and impetuous.

So the would-be boy genius would make his gentleman's wager of five lots and implore his new best best on the other end of the line to kindly stop him out should the market make an adverse turn of 20 cents, a $5000 loss.

I did this about four times, paid my $20k in tuition at that stately School of Silliness before the lightbulb, however dim it might have been, finally lit up above my head.

Used to the (somewhat) organized chaos peculiar to the pit, I finally asked the guy about the times and sales. He explained that such niceties didn't exist in the midnight hour. It seems in that parallel universe prints held no sway and quotes were the order of the day.

I asked, OK, how many of you guys are playing in this card game? About three of us, he explained.

I smiled at that, however wanly, and waxed Nietzschean: Alright, they fleeced me, but didn't kill me, therefore I'm stronger.

That is, of course, until the next lesson rears its head. There are few things as continuing in life as continuing education.



HGHGiven the remarkable performance of older players like Clemens and Pettitt, has anyone pointed out that perhaps one of the main thrusts of investigation should be whether there would be a beneficial effect for all of us in using moderate replacement quantities of substances like steroids and HGH that decline significantly with age?

I for one would like to know more and would appreciate article citations, book recommendations, and information on physicians specializing in the field.

Chris Cooper replies:

Such beneficial effects are apparent to anybody with an open mind. Nevertheless, the idea that a performance-enhancing drug might actually make you healthier is the kind of message that is not acceptable to the mainstream.  Aging is not "normal", it is a disease, and should be attacked like any other disease, with an eye to minimizing the deleterious effects.

What you are referring to is often called hormone replacement therapy (HRT).  The approach is to use drugs and nutrients to bring the body's hormonal balance back to what it was when you were a young man.  Is it surprising that if you achieve this, you actually feel much more like a young man?  Why does our culture consider this to be undesirable?  My goal is not simply to be healthy as it is commonly defined, but to strive for optimal health, a very different concept.

A good book to start with was written by my doctor Philip Lee Miller, called Life Extension Revolution: The New Science of Growing Older without Aging. Dr. Miller is in the SF Bay area. Also I've heard good things about the Kronos Centre in Phoenix.

Janice Dorn writes:

One of the contributors to my just-released book is a world-renowned authority on optimal health.  I took nine years of my life, and traveled 1.5 million miles outside of the United States to every country in the world (some many times) in search of life extension and radical wellness methods. Needless to say, it was an incredible journey, and it continues to this day.

Caveat Emptor. There are many charlatans out there, and we are in largely-uncharted waters. It is a passion for me, and I believe that the goal in this area of life is to delay, avoid and eventually reverse death.

Jim Sogi suggests:

SurfPerhaps a better way is hard effort. I still get out and surf 20 foot waves last week and take time to surf at least four times a week and train when there is no surf. No pill will keep you in shape without effort. Just the thought of a pill is enough to kill the will to motivate effort required to maintain and build strength, flexibility and stamina. It's like technical analysis, it offers an easy way without the work, and will lead to more harm than good. I see many men really going downhill. They don't stay active. Laird Hamilton says, "Keep Moving!" That is the best way to stay fit. I compete with the young guys everyday in a competitive lineup in the water for waves. I can't outperform them, but have other strengths which give advantage.  It's hard work. It takes hours everyday to stay moderately fit, and more to build strength. That's the problem, most don't and won't take the time and effort to maintain and build strength and gradually lose it. Strength from a pill won't help without the agility, flexibility and stamina that are the other components of fitness. Don't worry about the pill, just get out and spend the hours everyday to stay fit.

Chris Cooper responds:

BodybuilderYes, a better way is hard effort. I have gotten more benefit from the sports that I train for than I have from the drugs that I take. The drugs are an incremental benefit, though, and I am certain that I am better off with them than without them. And you may find, as I do, that instead of being de-motivating, they actually increase one's desire to participate.As an example, suppose you are taking testosterone. If you are not exercising, it will do little to build muscle. You still get the other benefits, such as general feeling of wellbeing, increased libido, increased optimism. It enables you to build muscle faster, because that only happens if you put in the effort. It's not magic, you still have to do the work — but testosterone also makes it possible for older men to train as hard as they did when they were younger, because your body will recover more like it used to. 

Larry Williams opines:

The flap about HGH in baseball is pure propaganda, based on my personal extensive testing of it. I concluded it was expensive and of little, if any help, in waging the war against old man age — a view that is now also backed up by science.

Ken Smith responds:

Studies are studies and not reports from individuals. I am an individual. The studies cited older people. I am an older people. My individual report differs from the studies as reported.

I can tell you resistence exercise will promote better body tissue and that the same exercise will tear tendons, ligiments, induce on-going pain. There came a time when the benefits diminished and the pain increased.

I am reminded of a story told by an author about his last visit with his grandmother. She was quite old, in her 90s As they conversed during her feeble days, on one of those days, her last it turned out, she asked him for a small glass of wine, told him there was a time for everything, sipped the wine, closed her eyes and passed on to the next dimension.

Russ Humbert remarks:

I would not be so quick to rule it out Growth Hormone for enhancement. The Chinese women seemed to have had much success with using it for distance running in the mid 90s. Several of the women were running times better than the men. However, they also ran extreme high mileage and were practically starved while setting several women's world records before their coaches where caught transporting drugs through customs before an international competition. Several of the stars went insane under such a regiment. 

Charles Pennington enquires:

Dr AliI'm open-minded about this, and I went as far as to buy the book written by Chris's physician, who seems like a reasonable guy. But the Life Extension directory of doctors isn't re-assuring. There is just one doctor listed in Manhattan, Dr. Majid Ali, whose website is Fatigue.net. Featured there are "Hydrogen Peroxide Baths and Foot Soaks" "The Oxygen View of Pain Management," "Bowel Detox," "Water Therapy," and "Dr. Ali's Castor-cise."

I also checked for a practitioner nearby in Connecticut. Doctor Warren Levin, in Wilton CT, is at Medical-Library.net. The general garishness of the site, the endless list of specialties — "Magnetic Field Therapy," "Juice Fasting Therapy," "Auriculotherapy" — and even the Ron Paul promotion (Ron Paul == more permissive environment for quacktitioners [which is fine]) all leave me skeptical.

I wonder if Chris's physician could recommend someone in Manhattan who has a more rigorous, scientific approach than these guys.

Chris Cooper replies:

Perhaps these links will be more productive:

American Academy of Anti-Aging Medicine

The American College for Advancement in Medicine

Steve Leslie extends:

Philip MorrisI think back to the 1960s when the medical profession and the tobacco industry discounted the evidentiary link between lung cancer and smoking as anecdotal. And for 40 years after that the tobacco industry still fights in courts as to smoking and COPD, lung disease, heart disease and emphysema — long after they have paid billions of dollars to settle various class action lawsuits and agreements with attorneys generals throughout the country and have watched 450,000 American citizens die every year from smoking related illnesses.

I watched my father wither away and die as a result of a lifetime of smoking cigarettes.

Now some want to debate that the beneficial effects of steriods and HGH in adults outweigh the anecdotal risk. And I think of those in professional wrestling such as Chris Benoitk who committed multiple murders of his family and then suicide, professional footballers such as Lyle Alzado, dead from brain cancer, professional baseball players such as Ken Caminiti, dead and an avowed steroid abuser, high school boys by the tens of thousands who experiment and take steroids and commit ‘roid rage and suicide, and the untold thousands of recreational users who develop enlarged hearts and forms of cancer such as prostate cancer while juicing just to get bigger muscles.

Chris Cooper clarifies:

Chris BenoitThere is no medically documented connection between suicide and anabolic steroids. The medical data also say, "Supraphysiological doses of testosterone, when administered to normal men in a controlled setting, do not increase angry behavior." 'Roid rage is a convenient media myth. Steroids may very well cause changes in feelings, but that is far from causing major behavioral changes like those suggested above.

Take Chris Benoit as an example. When doctors examined his brain they found that it resembled the brain of an 85 year-old Alzheimer's patient. It had suffered so much trauma and had so much dead tissue that normal function was not a possibility — while dangerous personality, behavior, and temperament changes were more than probable. During his time as a professional wrestler with the WWE, Benoit had subjected his body to head trauma hundreds of times, most notably with his signature "Flying Head Butt" as well as dozens of other highly flashy (and dangerous) moves.

Steroids are being unjustly demonized, just as marijuana was in Reefer Madness, followed by equivalent media behaviour regarding LSD, Ecstasy, and many other drugs. Certainly steroids have their downside, and just as with recreational drugs, should certainly not be used by minors. But perspective is not allowed in times like these, where fear is inflamed to further the objectives of those who will benefit. 

Steve Leslie continues: 

Taylor HootenI dispute Mr. Cooper’s assertion that the is no medical documentation connecting steroids and suicide or rage. That is ridiculous. At a Senate Caucus hearing Don Hooten testified that his son Taylor, while in high school, began using and abusing steroids and committed suicide.

Mr. Cooper furthermore claims that Chris Benoit murdered his family and then committed suicide because of years of suffering numerous concussions and possible dementia. Did he personally perform an autopsy on Mr. Benoit? Has he examined the autopsy report? Where does he draw his conclusions from? In short, what specific research does he quote? Furthermore, what are Mr. Cooper's qualifications in forensic pathology and/or psychiatry?

Mr. Cooper further argues that it is some sort of a myth, steroid usage and its association with massive mood swings and subsequent rage. He then compares steroids to marijuana and says that it is being demonized by an uninformed public. Not to stop there he equates such unfair demonizations with LSD and ecstacy and “other drugs.”

He diminishes the risks to an absurd level and I am severely shocked and alarmed.

Chris Cooper responds:

Don Hooten runs the Taylor Hooten Foundation, established after his son committed suicide. Now Mr. Hooten runs around the country telling everybody that it was because of steroids, when there is no evidence pointing to that. According to Steriod.com,

There had been no active anabolic steroids in Taylor's body for two months prior to his suicide (according to a report on the THF website) At 17, when he killed himself, his hormone levels had likely returned to completely normal, and only metabolites of nandrolone (not active compound) were still detectable.

And no, I didn't personally perform the autopsy. But here is a quote from the doctors who did, via SportsLegacy.org,

SLI's tests showed that Chris Benoit's brain had large amounts of abnormal Tau protein in the form of Neurofibrillary Tangles (NFTs) and Neuropil Threads (NTs). Multiple NFTs and NTs were distributed in all regions of the brain including the neocortex, the limbic cortex, subcortical ganglia and brainstem ganglia, and were accompanied by loss of brain cells, a condition for which no other neuropathological evidence for any chronic or acute disorder could be found.

Gordon Haave adds:

QuoteIt is silly to say that one can't quote the work of someone else. That is, one can't comment on an autopsy unless one performed it himself. If we took such an approach all of the time, there would be nothing to write about.

Furthermore, in the interest of scientific inquiry, providing anecdotal stories to a statement about a lack of research does not prove anything. I have no dog in this fight, but I admire people who challenge orthodoxy.



I have noticed that my trading systems suffer whenever there is a so-called "flight to quality". By this I mean not simply that the stock market is down, but that all "risky" assets are suffering uniformly as funds are redeployed toward safer instruments. When everything starts to trend is when I get in trouble.

What is a good list of indications that we are in such a regime? I would like to recognize this within the day, not days after it has begun. I can think of a few possibilities for what I would call an FTQ indicator:

  1. Simultaneous rise in strong currencies, such as CHF and perhaps a couple of EUR, GBP, JPY.
  2. Change in the spread between government bills, notes, and bonds, and the equivalent duration commercial paper.
  3. Large jump in intraday correlation between interest rate instruments and currencies.
  4. Dramatic sector rotation in equities.

FTQ happens when some market participants start to panic. I guess what I am looking for is an early-warning panic indicator.

Philip J. McDonnell writes:

To Mr. Cooper's list I would add:

1. The VIX
2. The VIC (increased range in the SnP)
3. Large positive correlation between diverse assets possibly due to margin calls even if the swoon starts with alt a debt it spreads to S&P, silver and soybeans because of cross market liquidations
4. The ratio between the S&P (quality) and the Russell 2000 (lesser quality)
5. The SPY (stocks) / TLT (bonds) ratio 



 FX trading has become huge and very popular with the public, system sellers, and brokers. This report is from a dear friend.

I recently spoke to one of the largest Forex FCM's in the country, who has thousands of clients. He made a statement to me that is very telling. Out of the thousands of clients who have accounts with them, only about 60 - 80 are profitable this year so far. A majority are down significantly.

From Riz Din: 

Welcome to my world. FX does not afford sufficient protection to the public, and unscrupulous brokers abound. I hear complaints of trading platforms freezing up around the big numbers (payrolls etc), of orders being slipped, and of stops not being honored. I will not question the validity of these complaints but I do not believe they lie at the heart of the problem. Instead, I attribute most retail level blow-ups to inadequate capital and excessive leverage — with just 10k the inexperienced retail investor can command up to 4m of underlying.

There is also a high level of price uncertainty due to the lack of an underlying marketplace (this is being addressed). Also, while the manipulative marketing by brokers and system sellers is worrying, I have faith in the development of the market over the long-term. Spreads have tightened considerably over the past five years, and banks are moving into the retail space, offering trading platforms with more credibility than the off-shore broker who sends marketing e-mails offering 'price guarantees,' 'no slippage,' etc.

Also, while this may be less relevant to the day trader, another factor that makes FX trading a tricky proposition is the absence of a clear upward drift. Individual exchange rates may appear to exhibit long-term trends. But at their core, we are just dealing in relative prices and there is no such thing as a built-in reward for the entrepreneur such as is found in the equity market. Banks are now launching various ETF-type products that claim to capture the exchange rate beta — incorporating strategies that have proved rewarding over the longer-term, such as the carry trade. But I believe this is far more questionable than equity beta.

I find the dynamics of this marketplace fascinating, but there is no doubt that it's a tough racket. Still, I am surprised by those numbers.

From Chris Cooper: 

I, too, have been trading a lot of forex recently. I don't find it too hard to believe that there are very few profitable retail traders. Most retail brokers run operations designed to milk money from their customers. That, plus the leverage available, pretty much guarantees that few will profit. My commissions are not high, but since I trade fairly frequently (not scalping) I know that commissions alone cost me 50% of my equity annually. Slippage is even more costly. That's a pretty big nut to overcome.

There are retail brokers who are built with ECN technology, and these tend to give their customers a better deal. I would recommend either Interactive Brokers or EFX Group.

Once you move past the retail stage, I have noticed that another serious issue is liquidity. Because of the lack of a central exchange, you end up having to execute in multiple locations to find liquidity and that complicates the trading. Claims about forex being the biggest market in the world (trillions!) are so much hogwash. I can see that my trades have a brief but visible effect on the market occasionally, more than I see by trading index futures. It doesn't take much to buy the entire amount offered at the best ask.

I am optimistic about the industry, and one of the reasons is the big increase in numbers of small retail traders. They are certainly losing more than they have a right to lose, but the competition engendered for their accounts will ultimately better the experience for all customers.

Alan Millhone writes:

You all talk of 'slippage', lack of liquidity, costly commissions, retail brokers who milk their customers. Do all of you stay in the market as a challenge, make a living, just something to do to pass time?

In construction we also have 'fly by nights' who prey on the elderly and the unsuspecting and give the good builders a bad rap. Perhaps it is the same in any business. I have had plenty of experiences in the construction business where on the other end some people run out of money and simply will not pay you. Because the court always assumes the builder is making a fortune, 99% of the time it rules against the builder.

Chris Cooper replies:

To be fair, one must distinguish between the costs of doing business, which are simply features of the marketplace, and those which are borderline fraudulent.

Commissions, slippage, and lack of liquidity are all costs of trading which are fair in principle, and the magnitude is determined ultimately by competition among providers. Also, brokers in the forex markets artificially widen the spreads and take the difference for themselves, and trade against their customers. While perhaps not unethical, such practices don't enhance the perception of fairness that will ultimately lead to increased participation. Traders can educate themselves to avoid these brokers, but for now plenty do not. 

From Yishen Kuik: 

This brings to mind epidemic models. If account fatality rates are so high, should one assume that marketing is a key driver in this business (to renew the population of accounts)? 

Vincent Andres adds: 

My experience in the market is short. For what I understand from this retail market, I don't see that brokers need to do great marketing. In fact FX customers are too optimistic. They see what they want to see, e.g., "Mr. X won the FX contest with 1000%." They don't see what they should see, that 99% of participants loose their account.

I posit that some of the overconfidence may be due to the presumed knowledge each of us has about currencies, which seems simply better than what we have about stocks, etc. I believe I understand the Euro better than Merck & Co./Soybeans etc, simply because I practice/use/own them everyday.

The FX market is a closed finite market, with ten main currencies, 10×10 main vehicles. This may calm people, the liquidity meme, forgetting to look at the granularity of this liquidity. FX is de facto an oligopoly archetype, the guru. I understand nothing. But I rely on somebody who understands. In fact, the simili-pro is like one of Mr. Rafter's nice examples. The only thing the simili-pro understands is how to dupe his customers.

The reading of FX forums is a 4th dimension experience. The customer's innocence/ignorance/unwillingness to try to understand/learn/look seems without limits. At the retail level, there are few attempts to know the market, the brokers, who are the players, what is the leverage, the spread, etc. It seems like people want deliberately to play blindly. When they buy a piece of fish at the fish market, they will carefully compare, weigh, smell, touch, remember, etc. When they buy 10,000 euros with leverage 10, they will base it on two crossing lines from a surrealist Picasso like painting.

It is not so hard to quantitatively verify that a great part of the losses is not due to the market, but to the broker. People focus on the market (even completely wrongly), while the real play is not there. A great percent of trades/plays don't happen at the market level, but stay intra broker. (Hence, if you want to make money, you'll strongly have to make it from your broker, and not from the market. That's a rather different game.)

Despite all the above remarks, I found the FX a very nice teaching and training field. Since the broker's big obstacle, an oligopoly, etc, searching edges is quite hard. It's thus quite formidable. I do not pretend other markets are marshmallows, but the FX is specific. 



I recently returned from a month in the Philippines and Vietnam, and one of the highlights of the trip was learning how to drive competently in such alien conditions. For example, I spent a lot of time in General Santos, a city of about 500,000 on the island of Mindanao. GenSan has only one traffic light, and it doesn’t work, anyway. The roads are packed with bicycles, tricycles, motorbikes, “cyclos”, cars, and trucks, and the widely varying speeds mean that you are passing somebody, or being passed, every few seconds. And of course, there are people, dogs, kids, pigs, and buffalo wandering onto the road at random. You have to drive with one hand on the wheel and one on the horn, as the horn is used to warn pedestrians and slow traffic that you are about to hit them if they don’t move over. The concept of traffic lanes is a very fluid one, but at least the slower traffic tends to stay to the right. I also did a lot of motorcycle riding on dirt roads in the country.

In Vietnam, you cannot yet rent a car, which would probably be a very bad idea, anyway. But you can rent a motor-scooter if you are brave. The traffic, especially in Saigon, is incredible. What used to be a human flood of bicycles is now the same, but faster, on scooters. If you go too slow, you die. If you are hesitant and unpredictable, you die. If you don’t react quickly when cars and trucks try to squeeze you out of the way, you die. For me, driving in Vietnam was exhilarating, but for my partner riding on the back it was terrifying. Crossing the street on foot is also a mind-expanding experience. Since there are few traffic lights, and no crosswalks, there is only one way to do it. You have to just step out into the middle of the flowing traffic and trust that you won’t be hit. Just keep walking slowly and predictably, and amazingly the traffic flows around you. It reminds me of smoke flowing around a wing being tested in a wind tunnel. I did see some accidents, though. Usually they were motorcycle riders, and since helmets are rarely used, accidents can be traumatic. I don’t know if the lack of traffic lights, laws, and cops makes people better drivers. Maybe it is just survival of the fittest. It is a fun adventure, but I must admit that modern traffic engineering leads to faster, and probably safer, travel.



2004: St Louis Cardinals
Regular season: 105-57
Best record in baseball.
Playoff record: 7-8
World Series: swept by Boston

2006: St Louis Cardinals
Regular season: 83-78
Worst record of all playoff teams, requiring a last-game loss by Houston to Atlanta to get into the playoffs at all, and Houston lost that game by out-hitting Atlanta 9-3 but leaving 11 men on base. Playoff record: 11-5
World Series: beat Detroit in five games

There must be some market lessons in there somewhere. Probably about randomness.

Steve Leslie replies:

I am not sure as to the market lessons here. However I do know something about playoffs in baseball.

Baseball is unique from the other two sports. In baseball the regular season record is completely meaningless. Due to one major factor. In the other sports, home field advantage is critical to getting to the championship series. In baseball, it is all about qualifying for the playoffs. After that, anything can and does happen.

Basketball is the most critical for regular season success. Without home field advantage you are swimming upstream the whole way. There is perhaps no greater factor in predicting a winner than looking at who has the home field advantage.

In football, if you have the best record, you are rewarded in two ways. First you get a bye week to get well and rested (and after 20 games this goes a long way to making your team well) and secondly, you don’t have to travel at all. When the regular season concludes, you can be at home for 3 weeks and only have to play 2 games. Plus your team is usually designed with the type of home field you play on.

Winning baseball games in the postseason is all about two things: Pitching and momentum. If you pitching comes out strong, like Boston two years ago or the Tigers this year, you can get on a roll and continue on a roll. Anecdotally, the Tigers lost their momentum by having to wait a week for the Cardinals to conclude their long 7 game series with the Mets.

Furthermore in baseball you can win a series by having your #1 and #2 pitcher carry the series. Who can forget Schilling bleeding in his ankle and giving the pitching performance of a lifetime. Or Kenny Rogers coming out of nowhere and pitching an amazing number of scoreless innings.

So if there are corollaries to be made to stocks, I will submit these two suggestions:

Pitching = earnings. great stocks have great earnings. They get their earnings from a great product with great margins. Microsoft in the 1980’s. Xerox in the 1960’s and Resorts International in the late 1970’s. I find it interesting that GE wanted to be #1 or #2 in the fields that they chose to compete. They were not interested in filling out the roster for the sake of filling out the team. The moral is if you have a great franchise coupled with a great product line, this will translate to success in the stock.

Momentum = trends. Stocks once they get on a roll, stay on a roll for some time. Look on Taser a few years ago. Oil stocks for the last year. Stocks tend to take on a character all its own when they become in favor.

There a many more examples and I hope I have stimulated some thought for additional corollaries.

Allen Gillespie responds:

Having the pain of being a Braves fan, I can tell you what it is. The regular season is long, so a deep pitching rotation is more important than a lot of good bats as the weaker teams you will beat with either and the stronger teams may or may not be focused on a particular night. So, if you have a strong 3 or 4 pitcher, then you will likely win one of those two games giving you a solid record. In the play-offs, however, pitching rotations are shortened so the best guys get on the mound more. In fact, it has been demonstrated that two really good pitchers are about all you need in the play-offs. You need, however, bats that go at least 5 deep with some moderate production 6-8. The one year the braves had 6 decent bats, they won, the other years, check the record. Painful.

The lesson I think is that for long pull trading, statistics and time work for you, while in short term trading and series being able to score quickly is critical.

Larry Williams responds:

Baseball has more stats than stocks; some are just obvious: for example, teams that reach the playoffs can be quite different later in the year due to injuries and trades — good to great pitchers are added to the roster of teams headed for the playoffs so the team then has more “mound power”. Case in point this year was David Wells going to San Diego.

It’s not just all numbers…

Steve Leslie replies:

My points are not assertions not supported by anything. I am not sure what you want to have counted. However if you want to go into greater detail about sports betting, I can tell you that it is an interesting exercise and in all likelihood futile because I have never met anyone who had a successful career as a sports handicapper. There are countless books on the market that one can research on the subject. I can not reference any since I learned years ago that sports bettors are losers.

I can tell you that the Yankee offensive lineup was so lethal this year that everyone went in thinking that they would overpower their opponents. They were overwhelming favorites to win the series. Until the pitching took over. In 2004 Boston was down 3-0 and won the series against the Yankees and went on to win the World Series. Thus momentum took over.

It is a fact, that good pitching trumps good hitting. This has been proven I don’t know how many times. Look back to Arizona Diamondbacks beating the Yankees and The Florida Marlins last World Series championship. Their team was loaded with young and great “arms”

As far as stocks are concerned. William O’Neill proved overwhelmingly that stocks that are in the highest quintile in earnings growth and relative strength outperform all other stocks. so when you combine these two facets your chance of success goes way up. especially in the long run which as far as I am concerned is a minimum of 9 months and longer. Read his books

Read William O’Shaughnessy book How to retire rich. He has some great strategies for success in selecting stocks. Look at an extremely successful no load mutual fund the Cornerstone Growth Fund offered by Hennessy Funds. This is a quant fund. or Bernstein’s book Against the Gods. The remarkable story of risk.

Other than that I am not going to type endlessly in an exercise to convince one of anything. If one does not agree with my points so be it.

As they say “That’s what makes markets.”

Professor Charles Pennington replies:

It is always tempting to say that some particular field, in which one thinks he has a special understanding, can not be approached through counting, but it’s usually not true, and especially not here.

For the examples here:

In baseball the regular season record is completely meaningless.

A rudimentary, better-than-nothing way to test this would be to look at the playoff series for the past N seasons and count the fraction of them that was one by the time with the superior preseason record. If it’s not substantially bigger than 50%, then that would support the claim.

[In basketball] there is perhaps no greater factor in predicting a winner than looking at who has the home field advantage.

Here you could take all NBA games played over the past N seasons and count the fraction that were won by the home team. If it’s greater than 50%, that would show that playing at home is an advantage. But is there “no greater factor”? Hard to prove, but you could try to DIS-prove it by looking at some other factor that might be important. For example, it’s possible that knowing which team has the best record over the past 100 games is more important. That could be tested as well.

Winning baseball games in the postseason is all about two things: Pitching and momentum.

For pitching: The question, I guess is whether pitching is more important than hitting in the post-season. You could take the past N series and count the fraction that was won by the team that had the better ERA during the regular season. Then you could count the fraction that was won by the team that had the highest number of runs scored per game during the regular season.

For momentum: For each series, calculate the fraction of games won by a team for the full series, call that Y, then calculate the fraction of games that they won when they also won the previous game, and call that fraction X. Now calculate X/Y for each series over the past N years. If X/Y, averaged over the past N years, is much bigger than one, then that would support the momentum idea.

Chris Cooper replies:

In contradiction, I have a close friend who has made a nice living for 15 years exclusively from betting football in Las Vegas. He is not a “handicapper”, though. He applies a computerized, brute-force strategy to tournament-style contests.


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