One myth is that Hollywood song and dance men, actors, etc., are not all that smart or business-oriented.

The death of Merv Griffin reminded me of the substantial fortunes Merv, his good friend Clint Eastwood, Bob Hope, Michelle Pfeiffer and many other Tinseltown wonders have created.

In 1982 I was on Merv's show discussing my book How to Prosper in the Coming Good Years. Our pre-show green room chatter made clear Merv knew a lot more than I did! He was a superb long-term investor, accepted risk and paid great attention to details.

We both dated the same girl about then; that issue was not discussed!

Steve Leslie adds:

 I remember as a youth watching the Merv Griffin Show at 4pm. He was introduced by British actor Arthur Treacher, "And here is the dear boy himself, Mervyn." He waltzed out, smiled and waved to Mrs. Miller in the front row, and opened his Botany 500 sport coat to expose a garish lining, his trademark.

He worked as a talk show host for 25 years, then went on to syndicate the two most successful game shows in history, Jeopardy and Wheel of Fortune. He was also an incredibly successful real estate investor, part owner of Resorts International in Atlantic City and the former Atlantis resort in the Bahamas.

Quite an outstanding life for someone who began as a singer with the Freddy Martin big band.



 There is a book that lists most bestsellers from 1900-1999 called Making the List by Michael Korda.

You can claim "NY Times bestseller" status if you made the list one week, which is, theoretically, relatively easy to do (I overstate, of course) by selling 5,000 copies, give or take depending on what other books are selling in any one week period, through tracking accounts (such as Barnes & Noble, Borders, Amazon, etc.). Thus, one may be a NY Times bestseller and still sell relatively few copies. Conversely, a book may sell quite a lot of copies over, say, a year period and never make the NY Times list because: 1) other books outsold it in every reporting week period; 2) it sold through outlets not tracked by the Gray Lady; 3) it had legs vs. a one-hit wonder.

Marketing everything involves utilizing "ploys," much as I dislike that word. Whether we are selling a product or service or ourselves for a job or a romantic partner, we use anything that will give us an edge, make us seem sexy and appealing and wanted. Animals do it — the cliched example is the male peacock strutting his colorful feathers. Imbuing ourselves or our products with seemingly important or sexy attributes may be ploy but if we didn't do it then there would be no books, no movies, no Google, no Ford Explorers, and so on.

Why do some Specs have such disdain for "marketing"? How do they imagine that the companies whose stocks they buy sell their products and services? By magic?

Steve Leslie writes: 

I agree with Pamela. What is so unseemly about marketing? It may have to do with the people who work in marketing and advertising.

When you think about it, they are hired to do one thing. That is to represent the client and promote someone or something. Their tastes, political views, morals, opinions as to the quality of the product etc. do not matter. They are hired to do one thing and that is to sell a product to the public however unattractive that product may be.

There are some other professions that come to mind who perhaps stand out in this respect.

Lawyers for example. When you hire a lawyer it is for one purpose. They represent the client to the best of their abilities and with great passion and prejudice to their cause within the confines of ethics and the law. The lawyer has latitude to accept or reject representation but once they come on board they are expected to bring their full skills to the arena of play.

We hold athletes in high esteem, yet they are just paid entertainers who are promoting themselves constantly through their skills and statistics. And if there is a market for their skills in another venue, such as when Shaquille O'Neal left Orlando for Los Angeles and onto Miami, we soon find that they are more than willing to accept another offer.

My point is that everyone is involved in some form of marketing and advertising and even "ghast" selling. It is the form of the promotion which may be uncomfortable to the observer.

Look at money management. One may be one of the finest money managers around however that is defined, but if nobody knows about it and you don't have money to manage, then you won't be around for very long.

In my view, a professional can be both, excellent at their work and excellent at promoting themselves.



 I disagree with Vic and Laurel's statements that they do not think Technical Analysis has a scientific approach. I can find strong similarities between technical analysis and well-established scientific theories. How familiar are the Specs with quantum mechanics and Schrodinger's Cat? Essentially, you have to imagine a cat in a closed box which is armed with a gun, you hear a shot go off and you wonder whether the cat is alive or dead. You then open the box but it is only upon opening the box and after the event that the cat decides whether it is alive or dead. This has been used to explain the behaviour of some subatomic particles and their "spin". They exist in both possible states until you try to observe them, when they decide to select a particular state. I do find technical analysis highly accurate but, unfortunately, only after the event.

Steve Leslie comments: 

Let us assume that technical analysis has a scientific basis to it. The author suggests that it only has usefulness in hindsight. The major question now becomes how useful is it as a tool in making money. If it is only effective in hindsight then it has no practical usage. If it can be used by only a few then it has great value to those who have discovered its properties. If it has intermittent usefulness then it can be dangerous in the hands of the one who is attempting to use it.

Therefore it may or may not have practical use depending on who is trying to use it. One cautionary note here. Emerson said "to a hammer everything looks like a nail." 

Venkatesh Chari writes:

As the sampling frequency increases (and time period decreases), you see more of a noise and less of a signal. Also, I don't believe that anyone can really forecast or predict anything. If anyone can, he doesn't need to be in the "investment advisory" business. He can become a perpetual money making machine.

All I am saying is that there are certain market patterns (not geometry-based like drawing lines, rectangles, etc.), which give positive expected returns. And these I believe can be scientifically tested. If you had bought the new high on Malaysia or Thailand you would have made a lot of money. Of course, this was just one path and I am telling this with the benefit of hindsight, but you could have always played the same idea with a tight stop. Keeping an open mind is good for our wallet! 



 Early last spring, Vic and Laurel mentioned they were doing something they had not done before and were making a personal investment in Google stock. I recall this because it reminded me of when Jim Fassel, then head coach of the New York Giants, made a bold statement that the team was on their way to and through the playoffs and on to the Super Bowl. Everyone who wanted to be a part of it had better get on board. Those who were not willing to make that commitment could just get off.

At the time the stock was approximately $350. Around the same time, Jim Cramer devoted a show to Google and said the stock would climb above $500, noting fundamental reasons such as its per-share earnings and its ability to hold a 50 P/E.

Naturally there was the usual back and forth discussion. Google commentary was ubiquitous and bull and bear camps were established to debate the merits of the stock.

Today, Google is $514 per share. One year ago, Apple was $50. Today it is $144. Garmin was around $50, and now it is $80.

The lesson to learn from this: Great stocks are to be owned. Companies who dominate their space are to be kept and allowed to grow. Those who have built fantastic franchise names should be accumulated. Buy Google over Yahoo. Apple over Dell. And most importantly, the speculator should be willing to hold on, eschewing the quick buck in search of the really big gains that can be achieved through diligence and patience.

Easan Katir remarks:

"Pride cometh before.." notwithstanding, I feel compelled to relate that Thursday afternoon after hours I shorted GOOG at 547. Instant gratification feels good! Most trades have elements of shoulda woulda coulda been bigger, better, higher, lower, earlier, later, faster, slower. But not this one. This time I earned my keep! Please forgive this anecdotal, non-counting, horn toot.

Steve Bal writes:

The market favorite GOOG last week became the poster child for a market sell off. Was this the result of great earnings? If I hold average securities whose earnings are average then what chance do my stocks have of rising when GOOG, with great earnings, is selling off?

This impact is significant in the short term as stocks that have earnings releases early this week may come under selling pressure. However, by Wednesday we come up against the firm that has been setting higher records than GOOG, has rallied more than 60% this year, and has more earnings than GOOG. That stock is the new poster child for a great stock, AAPL. 



Should you ever question the fragility of life and our own vulnerability to tragedy, consider this article. Statistically, the chances of this happening are most assuredly very rare, however it still happened.

Minor league coach dies after being struck by ball. The Associated Press, published: July 23, 2007

NORTH LITTLE ROCK, Arkanas: Minor league coach Mike Coolbaugh of the Tulsa Drillers died Sunday after being struck in the head by a ball during a game, police said.

The Texas League game against the Arkansas Travelers was suspended in the ninth inning after Coolbaugh was struck by a hard-hit foul ball off the bat of Tino Sanchez and taken to Baptist Medical Center-North Little Rock.



 The fixing scandal involving NBA referee Tim Donaghy raises many questions for markets. Who would have known that one of the key insights that he gave other gamblers was information on who was going to ref the game, which affected the outcomes of games because of how they were going to call offensive and defensive fouls?

Also, he was able to ply his trade without any of his fellow refs or even the players knowing he had an ax to grind. Particularly creative in this regard was his adding an extra 1.2 seconds on the clock following a missed Portland shot in the Dec 1, 2006, Orlando-Portland game, won by Orlando 91 to 89, with Orlando favored by 4 points. The game would have gone into overtime without it. It appears Donaghy also used technical fouls and mismatched fouls.

In racket sports, I always could tell when a player was fixing the game. Often my own partner in handball was fixing the game against me and I had to kick him off the court if I couldn't beat him up. In tennis you can always tell if the other side is trying to lose by their muscle moves and gait, and apparently a sister game was once found out this way.

If basketball games can be fixed this way, how much easier is it to disguise stock market fixes?

Vance Humbert replies:

A couple of examples I view as fixing the game-

1) In the hedge fund world, there are many managers labeled "talented" and "consistent performer" by external analysts, but who are in fact blessed with a few Street relationships that provide most of the generated alpha. I think back to certain convertible arb funds in the early 2000s with stellar returns which were a function of taking every new deal that came down the pipe as a matter of facilitating the issuance process. It was common knowledge that, within a matter of hours to days, they could flip the bad deals back to the underwriter for a .20-.50% loss but the good deals they would hold for 1-3% gain. Where is the portfolio management skill when you have to take every deal?

2) Referring back to perceived stellar high frequency managers, how about the one who takes down a bunch of stock and then strongly suggests the sell-side analyst change his rating for the better? Of course, this is all in the name of improving fundamentals. But it doesn't hurt that the fund does a lot of transaction volume with the firm. Once the rating change is announced, the hedge fund's minions make sure to call all the other research desks on the Street to ensure they are aware of a "good call" by another house. While the stock ramps, they unload their inventory.

Steve Ellison comments:

 One evening last summer while playing blackjack, I began to suspect the dealer was cheating. Four times, the dealer's face-up card was a five. The best playing strategy in this case is generally to stand on any hand of twelve or more. In no circumstance should the player risk busting because the dealer is at high risk of busting.

In all four cases on this evening, the dealer managed to draw a third card with a value less than ten that brought the dealer's total to 20 or 21. Of course, it could have occurred by chance, but Edward Thorp documented in Beat the Dealer various sleights of hand dealers can use to view cards still in the shoe and deal the second card rather than the top card.

Andrea Ravano adds:

The first and most important principle here is of human nature. What is it that motivates Americans, Chinese, Italians and everyone else? Greed, passion, hatred? There are many desires that make up the complexities of human nature, but the afore mentioned are among the strongest in determining our actions.

Thus, corruption in all its parts, belongs to our nature regardless of our culture. Weak people will always seek a short cut to obtain what has been built by endeavoring , trying, suffering and sweating. Racists will tell you that a certain culture, brings about corruption and weak thoughts, as if a political system or a social group could stand up and offer the perfect model for us to admire.

Einstein said "it is easier to break the atom than prejudice" and the same goes for the markets. Prejudice is your worst enemy. The lack of clarity when analyzing data, or your inability to understand the nature of the ever changing cycles, will lead you directly on to the wrong side of the trade.

My grandfather considered the stock exchange a place for depravates who didn't want to work and sweat, and he taught his children to keep investing their assets in "real" economy. His ideas were largely influenced by the fact that one of his brothers (out of a family of fourteen brothers and sisters!) had lost a considerable amount of his fortune in the 1929 Stock market crash. Thus he taught his children to stay away from the corruption of the faster moving parts of the financial world and to keep investing their money in a sound way.

When the time came, after his death, to sell assets and increase financial holdings, none of his sons thought of doing so as the great early 80's bear market in shipping wreaked havoc among ship owners (which they were) and brought to its final conclusion the danger of believing in an idea without testing it: prejudice had taken its toll. 

Steve Leslie extends:

Poker is a game that lends itself quite nicely to fixing because there can be up to 10 people at a table during the course of a game, and the players are constantly touching the cards. Poker can be manipulated in a variety of ways.

The obvious ways to cheat in poker:

1. Mark cards

2. Manipulate the deal

3. Bring extra cards in and out of a deck such as the occasional ace to fill out a hand

4. Post incorrect bets

5. Pull back a bet when it is obvious that you are beat

6. Deal from the bottom of the deck and "deal seconds"

7. Conspire with the dealer to steal an occasional pot

Less obvious ways to cheat include:

1. Play teams at the table, splitting the winnings with an accomplice

2. When handing out chips or changing out a player, giving an incorrect amount

3. In tournament play, having an accomplice dump his stack to you by going all-in with a vastly inferior hand in heads-up play

4. Having an accomplice consistently raise the pot while you hold the best hand, drawing attention away from you

5. "String betting"

More subtle ways include:

1. Having the more experienced players go after or attack the weak and unprepared "fishes" or "pigeons" at the table

2. Having the large stacks go after the small stacks

3. Having dealers rake more money than they should

As they always say, if after 20 minutes you can't figure out who the pigeon is at the table, it's you. Always ask yourself why you were invited to the game in the first place.

John Lamberg replies: 

Casinos do not have to cheat to be profitable. The only time I suspected a blackjack dealer of cheating was at a small casino where the dealer, who was hand-dealing, correctly announced the next two cards by suit — an ominous warning to run to the exit.

While basic strategy does call to stand on 12 or more against an up five, hitting a 12 against a five would be an appropriate play if the count supported it. In a situation where the dealer repeatedly makes a hand on a "weak five or six" (or repeatedly beats my hand by one), my strategy is to find another table or sit the rest of the shoe and evaluate the next one. Red flags, whistles, and bells now sound when a player announces in frustration or anger that the cards can't be that bad and have to turn soon.

On occasion, I will watch a player fight the cards and wait until he either blows out or gives up in frustration, take his spot, and enjoy the blackjack he just missed. Nice parlor trick when it works, but certainly nothing to bet the farm on.

Sam Marx comments: 

I think the term "fixing the game" as applied to the market should be made more clear. What is included in "fixing the game"? For example, I believe you would include "trading on inside information." 



VitaliyIn the long run, the performance of a stock in isolation (ignoring the external environment, i.e. interest rates, risk, inflation) is the product of fundamentals (i.e. earnings and cash flow growth) and valuation ( i.e. P/E, P/CF).

Google and Apple may have great fundamentals: their innovation has led and may continue to lead to high earnings and cash flow growth. But are they good stocks? They may or may not be. But, more importantly, will they be good stocks at any price? No! If I were to follow the above conclusion, that since Google and Apple are great companies they are great stocks at any price, at any valuation – at 50, 500, 5000 times earnings, then I'd walk into an overvaluation trap.

Take a look at eBay in the late 90s: it was a great company (it still is), but it was grossly overvalued. So, if you bought it in the late 90s and held it until today, despite its earnings going up 100-fold, the stock is roughly at the same level it was then. I'd argue few would have the patience and conviction to hold it through the downturn the stock took in the early '00s. Most investing in the stock in the late 90s lost money on it.

One of the biggest mistakes investors make in investing is failing to separate a good company and a good stock. A great company's (fundamental) performance is wiped out by valuation compression. This is the battle of two winds: the tailwind of earnings growth and the headwind of P/E compression.

Also, with a high growth priced appropriately (even to perfection) there is no room for even a small mistake (no margin of safety) left in the valuation - a small disappointment (it doesn't have to be much) will lead to a substantial decline in price. The latest performance of Starbucks and Whole Foods stocks is a great example of being priced for perfection and delivering slightly less-than-perfect results.

This myopia in differentiating between good companies and good stocks is not just limited to wonderful, exciting, larger-than-life (Google comes to mind here), fast-growing internet companies. The bluest of the blue chip stocks, like GE, Coca Cola, Home Depot, Amgen, Johnson and Johnson (and the list goes on) were all great companies that one "had to own" but were terrible (overvalued) stocks in the late 90s. Their earnings have doubled or tripled since but the stocks have not gone anywhere.

I think it was Benjamin Graham who said that "price is what you pay, value is what you get."

Kim Zussman adds:

What are the parameters which make a good company or stock? Here are some good stock categories from the literature:

1. Large five year decline in price (DeBondt and Thaler)
2. Large one year price gain (-large 1 year price decline.) Momentum (Jegadeesh)
3. Small cap stocks (Lakonishok and others)
4. Valuation: Low P/E, P/B, P/cash flow, high dividend yield, and
various concatenations thereof
5. High (low?) short interest
6. Put/call ratio (especially when options orders are placed by grandmas in Serbia)
7. Value line timliness (used to be more timely)
8. Double tops and wiggle bottoms above and below 10 minute panting average

The problem is that they all work sometimes; actually, just often enough to keep people interested in them.

Vitaliy Katsenelson adds:

I spent a good portion of my soon to be published book called, Active Value Investing: Making Money in Range Bound Markets, discussing what constitutes a good company and a good stock. I created the QVG framework (Quality, Valuation, and Growth).

A good company should get high scores on Quality and Growth dimensions. For instance a high quality company will have high return on capital, strong balance sheet, a sustainable competitive advantage, competent, shareholder friendly management, significant free cash flows. A Growth dimension encompasses predictable (high recurring) revenue growth, multiple sources of growth, a nice dividend, etc.

If a company received high scores on Quality and Growth dimensions, for it to be a good a good stock it should pass get a passing grade on Valuation dimension - be undervalued (have a appropriate margin of safety).

As anything in investing this analysis is very subjective, but I find this framework is very beneficial to maintaining a rational head and helps me to stick to an analytical process. 

Steve Leslie comments: 

On June 28th (post number ?p=1834) I mentioned that one year ago, when Google was $350, Vic and Laurel went all-in on the search engine provider. I also remarked that Apple and Garmin were both $50 then. Today GOOG is $550, AAPL $137, GRMN $80.

When one finds a great company with a great product line and great prospects, selling at a reasonable price, it is time to buy. Strike when the iron is hot! And eschew the short-term gain for the much larger pot o' gold that lies at the end of the rainbow.

Charles Pennington responds:

I can find nothing in the original post of Mr. Leslie stating any requirement that the stock be bought at a reasonable price (let alone any definition of what a "reasonable price" would be). The concluding quote was:

".. most importantly the speculator should be willing to hold onto the companies eschewing the quick buck in search of the really big gains that can be achieved through diligence and patience."

I'm sure it was an oversight not to have included some kind of requirement of "reasonable price" in the original message. The vehemence of the reaction is because, I think, the post's assertions were untested, apart from anecdote, and Daily Speculations is supposed to be reserved for ideas that are tested.

An example among many of the way the assertions could be tested is to go back to old issues of magazines, newspapers, etc., and find the companies that were rated at the time as highly admired, and then look at their performance afterwards. If you do this exercise, you might find that highly admired companies do well.

However, it is not at all obvious. Many companies which were once highly admired are not so highly admired now, and their stocks have not done well. Enron, for example, was once highly admired.

Barry Gitarts comments:

Haven’t many value experts said Google has been overvalued since its IPO, and Apple for several years now, however both stocks have significantly outperformed the market.

Driving looking out the rearview vs. the windshield could also be the difference between over and under valued perception.



Whenever I think about politics, I am reminded of this -

With dim lights and tangled circumstance they tried to shape their thought and deed in noble agreement; but after all, to common eyes their struggles seemed mere inconsistency and formlessness; for these later-born Theresas were helped by no coherent social faith and order which could perform the function of knowledge for the ardently willing soul.

– Middlemarch, by George Eliot



 For years I've been meaning to make it to Pamplona to run with the bulls but I hadn't been able to until this week. It's regrettable that it didn't happen sooner because to show up younger and dumber would've made it even more exciting.

An hour before the run, the streets are washed clean and then about 30-45 minutes before, the runners are contained within a plaza to wait while the sweepers remove all debris. About five minutes before the run, the police allow everyone to leave the square and get into their preferred position. There aren't many rules except that cameras or backpacks aren't allowed and the runner must be at least 18. The police use the dispersion before the race to take any violators immediately off the raceway.

Positioning is extremely important and I opted to meet the bulls near the end of the run at the end Calle Estafeta as the route takes a soft left turn into an area called Telefonica and then to the tunnel of the bullring. My reasoning was that the bulls were slower after running uphill on Calle Estafeta, on the left side were wooden barriers I could escape through, the momentum of the turn would lead the bulls to my right, and that I could make it into bullring since it closes after the last bull gets in. Another precaution I made was not to run on the weekend when it's the most crowded.

From watching videos of the run, it seems that many of those injured are someplace they shouldn't be doing something they shouldn't be doing. What really surprised me was the complete ignorance and lack of planning many other tourists did as it's too dangerous a situation to just get out and run.

The most important safety rule is that if someone falls, to cover their head and stay down until another runner taps them and says it's all clear. The only foreign runner ever to die was an American about 10 years ago who fell, got up to look for the bulls and was gored. My plan was to stay on my feet and simply just keep moving forward and left until I got into the ring.

The few minutes leading up to the run and two minutes of the run itself were some of the happiest and most exciting of my life. Running up Calle Estafeta with the balconies filled with people cheering, not knowing what would come in a few minutes was exhilarating.

One rocket booms to let everyone know the starting gate for the bulls is open and then a second rocket follows once the last bull leaves the pen. As I was near the end of the course, I planned to count to 75 to begin running but took off at 60 since so many people sprinted by me with complete panic in their face.

I was equally concerned about other participants as I was of the bulls because of all the accidental shoving, tripping, and blocking which made it more dangerous. Luckily, I managed to stay on my feet and ran alongside the bulls from about three body widths away which is about where I wanted to be.

The run through the tunnel and into the bullring was a glorious moment to be met by all those cheering in the stands. High fives all around with my fellow runners and then we waited for the baby bull with rubber covering its horns to be brought out that everyone could play amateur matador. After the run, it was time to celebrate with a cigar that I picked up on a layover in London from the world's greatest humidor at Davidoff on St. James.

When I ran on the 9th, it was a pretty clean run and the bulls tended to stick together. When the bulls get separated, serious trouble begins because they'll hit anything that moves. The run on the 12th shows what happens when separation happens and how the confusion causes the bull to act.

Without a doubt the experience exceeded my imagination but I probably won't do it again. There are certain memories that I feel are so pristine that I can't recreate them because the additional times aren't nearly as good. For instance, hang gliding off the cliffs over Rio was so amazing that I won't spoil the memory even though I've gone hang gliding elsewhere since and been back again to Rio four times.

The atmosphere in Pamplona is definitely a party scene but more mature than say Bourbon St. in NOLA during Mardis Gras or the Lapa neighborhood during Carnival in Rio. Locals were extremely inviting, particularly those we met watching the bullfights in the evening.

The bulls which ran during the day are the ones which are to be killed in the evening bullfight. I was awed at the grace of a Spanish bullfight and it's worth the trip alone to see.

Steve Leslie counters:

Bull-fighting is the worst display of the barbaric nature of man. It ranks with cock-fighting and dog-fighting, and below fox hunting. It is cruel and horrid.

It is a bloodsport where the animal is led through a series of stages designed to weaken it and ultimately set it up for its demise.

First it is stabbed in the back with a lance by picadors to lower its blood pressure so the animal does not have a premature heart attack and thus shorten the spectacle.

Next a group of men called banderilleros stab the animal along its shoulders with lances to further weaken it through blood loss.

Finally, after the animal is severely weakened and defenseless, the matador enters the ring of death and performs a ritual of maneuvers with a cape –choreography of sordid and macabre design. Then he thrusts a sword through the shoulder blades of the spent animal and into the heart.

There is no majesty or glory in such a grotesque display. There is no redemption, as the end of the play is written before it is begun.

Ryan Carlson replies:

According to the book, Running with the Bulls: Fiestas, Corridas, Toreros, and an American's Adventure in Pamplona, the bulls that fight lead a life of freedom on the open range and are given the best food and quality of life. In exchange, they pay with their lives by dying in a bullfight. Counter that with all those animals which simply exist in a feedlot in order to fatten them up and die by getting stunned by electricity and their throats slit. I would certainly take the route of the toro bravo!  

Scott Brooks writes:

I can see both Steve's and Ryan's point of view. Bulls, and animals in general, are tools to be used by man as we see fit. However, that doesn't mean that we have the right to be cruel to them.

When I hunt deer on my farm, it is in my view an exchange of value. The animals on farm live a life of relative comfort, security and abundance. I create a habitat that is conducive to their needs, creating lots of quality cover including sanctuaries that are off limits to humans (except in very rare instances). There is plenty of water, and safe travel corridors to get from bedding to water areas. There is more food on my farm, planted specifically for wildlife use, than the wildlife can eat.

Some would say I do all this for the animals, but that's not the case. I do it for me, my family, my friends and my clients. I want a great place to hunt, to recreate, to watch and observe wildlife, and to get pure organic meat for my family. The benefit to the wildlife is simply a byproduct of my desire to create an environment that supports my desires.

So the wildlife benefits from my efforts, and all I ask each year is a few sacrifices.

But when one looks at the manner in which the sacrifice occurs, one will notice that it's a humane manner in which I, or my guest, inflict death on the animal we're hunting. Death in the wild is usually horrid. And to top it off, the end is usually the most hideous part, as other animals (the carnivores) zero in on the dying animals and attack. To be eaten to death is a slow and horrible process. Sure, smaller game animals may die quickly (as their backs are snapped in the jaws in a larger predator), but larger animals such as deer or bulls die slowly as Kipling states: under the tooth, fang and claw of predators.

I usually kill an animal quickly and virtually painlessly (many times it's painless and instantaneous). But there are times when it's not a good kill — what I call an ugly kill. I hate those, but they are a fact of life in the wild. And I can tell you from first hand experience, that most non-human inflicted death in the wild is hideous! So what keeps me coming back after an ugly kill? It's simple. I know that even my ugly kills are much more humane than the vast majority of non-human inflicted deaths in the wild.

So what is the connection to this and the bulls of Pamplona? Those bulls are killed in a manner that many would find offensive. It's off the beaten path of a quick humane death in a slaughterhouse. But when you compare their death to the alternative deaths in the wild, you will find, as I have, what looks like a draw-out spectacle of death inflicted by the matador is actually a better alternative to the myriad of horrid (and much more likely to occur) deaths in the wild.

Mother Nature is the older and crueler sister of the Market Mistress. The Market Mistress will just take your money and laugh at you. Mother Nature will slowly and cruelly kill you — while laughing at you! 



Wise men ne'er sit and wail their woes,
But presently prevent the ways to wail.
To fear the foe, since fear oppresseth strength,
Gives, in your weakness, strength unto your foe,
And so your follies fight against yourself.
Fear, and be slain; no worse can come to fight;
And fight and die is death destroying death;
Where fearing dying pays death servile breath.

(Richard II, Act 3: Scene 2)



Stu UngarWhen anyone talks about the greatest poker players of all time, Stu Ungar's name will surface immediately. If it doesn't, it should. His accomplishments in poker are legend. He is considered by many to be the greatest No Limit Hold'em player of all time.

He is a three-time World Series of Poker Champion winning his first championship at the age of 24 in 1980. He repeated as champion the next year and again in 1997 after essentially disappearing from the game for seven years, the last time he competed. Out of 30 major poker events he won 10 of them.

As great as he was in poker, he was better at Gin Rummy. Gin, at one time, was The Game that high stakes gamblers played. He started playing gin in New York moved to Miami and ultimately to Las Vegas. He was so good at the game, that eventually no one would play him.

He was virtually barred from playing blackjack anywhere forcing casinos to eliminate single deck blackjack, as he had a genius IQ and a photographic memory. He could count down multiple decks of cards a feat he would replicate upon demand or for a wager.

He never held a real job. From the age of 14 his was a life of high stakes cards and games of chance. He would gamble on anything and lived for the action. It was not uncommon for him to win a million dollars in cards and lose a million shooting dice.

On the surface, his was a marvelous life, a seductive life one of gambling, action and living. Some will suggest that he made over $30 million playing poker. There was virtually nothing he could not do at a poker table and seeing him at a final table, others resigned themselves to picking up the "left over change".

Unfortunately, there is not a happy ending to this story. After 20 years of leading a storied life of incredible ups and downs of fantastic swings in capital, it all came to a crashing halt in a cheap downtown Las Vegas motel. On November 22nd, 1998 Stu Ungar was found dead and broke. The coroner's report revealed a combination of cocaine, methadone and percodan caused a massive heart attack. All at the age of 42. What a complete waste of a life. Possibly the greatest natural card talent ever completely destroyed before middle age. Imagine what could have been. Where all that talent could have taken him. He could have traveled the world, done incredible things, could have had a life that but a small percentage can only dream of.

I tell this story because it is humbling and to illustrate that the battle in life is ultimately waged not on a card table, or on a quote machine or a trading floor, but within ourselves and within our minds. It is the balanced one, the one who keeps an even keel and a steady approach to life who becomes the victor instead of the victim the living and not a weak faded memory.



 "At the corner of William street and Exchange Place, we met F. He was once a man of wealth, but he had left it all in that same unfathomable abyss. He was a harmless but very disagreeable lunatic, a Cassandra who predicted nothing but evil." Ten Years in Wall Street, by Worthington Fowler, 1870

It's much easier to learn and remember from stories than from more traditional ways. This among other things is the basis of the most successful language programs, our most popular friends, and much of children's activities. It is also the basis for much of the best selling literature including Louis L'amour who describes himself as a storyteller and whose Western books have sold more, about 500 million copies, than all other writers of Westerns combined from the beginning of time.

One can agree that stories are a great teaching tool, but one must also note that they can be used to illustrate any point. And the problem with such stories is that there are enough of them that even the most specious promoter can haul out a few great predictions and stocks that show his greatness. It would be good, therefore, in telling stock market stories to include a moral that perhaps could be tested. I'll start the ball rolling with two stories.

Jim Lorie was one of the most successful speculators I ever knew. He passed away with a vast estate and he did it mainly on a teachers salary which was very modest in those days. His method was always to ask his friends for a good stock, buy and hold it, letting go only when it was bought out. He didn’t believe much in technical analysis and when I told him that I planned to start a firm to speculate based on the multivariate analysis of the predictive properties on one market on another, he told me that he recommended against it and that I should stick to mergers and acquisitions.

When he came to New York for Merrill board meetings he liked to come to our offices to relax. He always was very eloquent, and facile, indeed, he was the only one that could stop a faculty gathering in its tracks and have a hundred people crowded around him to hear his bon mots. He always had five jokes of a free market nature to share, as well as five books he had read that he could recommend. We always talked like two brothers and there was never a halt in our dialogue, which usually subsumed our great victory 10 years earlier in the Western Squash doubles, where he said that he must have been the better player because the opponents hit 95% of the balls to me. Or perhaps the conversation would turn to the macaque monkey I had as a pet that I named after him.

But this day, just before going to a board meeting at 1 pm, he became a bit tongue-tied and reticent for the first time. Finally he blurted it out, "Vic, you don’t have to accept this. But I'd like to participate in just 1% of your action for the rest of today. What do you say?"

I can’t leave this call for stories without relating one from the times that Sam's was founded, circa April 15, 1864. "On the first of April, the bull leader, Morse was at the height of his glory. Every stock that he touched had turned into gold for the fortunate buyers. Rock Island, Erie, Fort Wayne, Pittsburgh Ohio, and Mississippi certificates responded in succession to the wand of the great enchanter. … He fought the bears as one would his natural enemies and now throughout the whole market, it was in vain to search for any of that tribe of bears…. Alas, how changed from that Morse, who but the year before, had led his dashing ranks to the summits of the market. He departed from the arena, a stripped, penniless, heartless, stricken man. Out of the troops of wealthy friends, which but lately clustered about him, only one or two still clung to him (like Doc and Wiz might cling to me) … An appalling stillness, like that which precedes a tornado, followed the words ‘Morse and company had failed.’ "The board room seemed suddenly transformed into a cyclopean workshop where a hundred great trip hammers were being plied. Pillar after pillar toppled over, till the dome fell. A three-month mad revelry of speculations, in which were concentrated all the emotions, all the incidents of a century of sober, legitimate traffic, — then the dark dawn of another melancholy awakening. … A crowd of ruined operators reeled and served up to the rostrum, half crazed by their losses, and stupefied or maddened by drink, and the whole room rang with yells and curses.

"The space outside the railing was jammed with weary faces, on which was written only the word "ruin." Above all the chorus of execrations was heard the word "Morse." Human nature now showed its basest side. No epithet too vile with which to couple the name of the prostrate financier, (you can still find many of these on Elite, traded about me today). He had fallen like Lucifer in one day (on April 15, 1864, sort of the same as me on Oct 27, 1997).

"The men who but yesterday extolled him to the skies, now vied with each other in cursing him. The king of the market was a lurking fugitive. Men calling themselves gentlemen met him in the street, and showered abuse upon him. Shoulder hitters, who had lost some of their ill-gotten gains by his fall, sought him out, and struck him like a dog…. A few month more, and he lay upon his death bed in a second-class boarding house, and without means to pay for the common necessities of life.

"Even when he died, his landlady held his body for trifling debt (perhaps one of Artie's predecessors had to forcibly take the body to the morgue, as he often told me that he had performed this duty for many failed gamblers and that all of them died broke). It was only when some friend stepped forward and paid the sum, that the funeral rites could be performed over all that remained of what was once a king of Wall Street."

I believe I could always count on Dan Grossman, and one of my wives or daughters, or a collection of friends to save me from that suspended state should a similar hiatus be visited upon me.

The moral of these two stories is that all gamblers die broke and you should never get in over your head. Let us have more stories with testable morals.

George Criparacos adds:

It was a clear day, late spring, and we decided to go horseback riding on a farm, a little outside of St. Louis. I had never ridden a horse before, and they gave me an old horse on the premise that this horse had so much experience with first timers it would follow the rest of the pack without giving me a lot of trouble. So we rode off and my horse followed the rest with me trying to hold on. It was a nice feeling and a first hand-on experience of all the cowboy stories I had read as a boy.

A half hour later, with my back starting to ache, I was enjoying the sense of being under the clear sky when suddenly the horse stopped. My friends started picking at me, that by now I should have learned how to. But the horse refused to move. Then, without notice, it turned and started galloping as fast as it could. It was really scary. To this day I do not know how I managed to stay on the horse for the five long minutes it took to run back to the barn, elongated by the fact that besides being out of control I did not know where we were going.

We entered the barn and the horse stopped. I jumped off with my heartbeat at 200 only to hear my friends laughing, as they entered the barn behind me. And then it happened.

Clouds as green as a cucumber filled the sky. It was then that I realized what the expression "out of the blue" means. A hail storm with hailstones as big as an apple started. For the next half an hour, no one was laughing. We all realized what the horse had done, and under the protection of the barn stories emerged of the secret senses animals have.

Since then, and this is the moral of the story for me, I have always paid attention to signs that are not easily identified. A muscle that starts twinkling on my right arm, a toothache that comes and goes. and I have read of the back pain a certain very successful trader has to warn him of something that cannot be seen or measured. 

Ali Meshkati comments:

Like many aspects of the financial markets, there is a razor thin line that separates the realm of speculation from the realm of gambling. It is most interesting that these two realms can become fatally intertwined as a result of poor judgment and/or strategy in speculation leading to a gamblers mentality of recouping gains as quickly as possible. It is all the more interesting that the average “speculator” will, in the heat of battle, fail to recognize when he has exited the universe of speculation and entered into the alien world of gambling. It is only after one has exited the battlefield - perhaps due to a fatal wound - that the participant realizes that the terrain in which he or she began the battle was not nearly the same as where it ended.

As a former hedge fund manager, who experienced quick success, followed by quick failure, it is true that, for a majority of mortals in the world of speculation, the greatest of failures will come after the greatest of success. The reasons are obvious, the core of which lies at the basic element of our nature, which is to survive. Success leads to a dulling down, so to speak, of our instinct to survive. With that dulling down comes a series of events that can occur in any order, but typically consist of the following:

1. Puffing of the chest, which, in modern times, comes in the form of acquiring large homes, fancy cars, expensive furniture and collector items that have little purpose or use, besides showing off to whoever is willing to look and listen.
2. Relaxed discipline, primarily in the form of enjoying yourself, to the detriment of the very vehicle (your mind and body) that got you to the point where you can enjoy or abuse the things that you are enjoying or abusing in the first place. Excessive eating, drinking, and sex, which serve to disrupt the harmony that enabled your success.
3. Lack of focus, which typically leads to an unrecognized crossing of one of the many thin lines that exist in the financial markets. Subsequently, this leads the speculator into an unknown realm, which, he or she will not recognize until steep losses ensue or perhaps even complete failure, if the survival instinct has been dulled down enough.

I know of very few speculators who have not succumb to basic human nature, which often works to the detriment of speculators, as the markets are heavily counter-intuitive and prey upon basic human emotions and nature. The only goal of the speculator then should be to always be paranoid, as the battle with yourself is never-ending.

Janice Dorn adds: 

A scorpion and a frog meet on the bank of a stream and the scorpion asks the frog to carry him across on its back. The frog asks, "How do I know you won't sting me?" The scorpion says, "Because if I do, I will die too."

The frog is satisfied, and they set out, but in midstream, the scorpion stings the frog. The frog feels the onset of paralysis and starts to sink, knowing they both will drown, but has just enough time to gasp "Why"? The scorpion replied softly and calmly: "I can't help it, it's who I am, it's my nature., it's me being me."…from Aesop's Fables

No matter who you are, how intelligent or how much education you have, if you keep doing the same thing over and over again, expecting different results, you are suffering from the most insidious form of insanity. This is self-delusion of the highest degree. Many years ago, when I first started to trade, I was so optimistic that I could make money consistently. I was smart, more educated than almost anyone I knew, a successful brain scientist and physician, and always had been able to study hard and master anything I put my mind to. I could do it and nothing was going to stop me. I would work longer and more intensely than anyone else, and show wonderful profits month after month.

Little did I know what I was facing, and that I was about to come head on with the most challenging task of my lifetime. Simple, maybe, but not easy. Not easy at all. After a few months, I found myself dancing as fast as I could, yet running on a treadmill going nowhere and suffering from vertigo, headache and a severe case of tick-itis. I studied and read everything I could lay my hands on, subscribed to service after service looking for the Holy Grail and struggled to make consistently successful trades. Why couldn't I do it? What was wrong?

Is this so difficult? What about all the people who have returns of greater than 80% a years? They couldn't be exaggerating, could they? After all, it's in print and on a heavily subscribed website, so it must be true. Mustn't it? So I studied more, subscribed to more services, learned new indicators, bought books, joined some chat rooms and saturated myself with information. This produced more vertigo, headache and sleep deprivation. I was on total information overload. I started sleeping sitting up so that I would not sleep too deeply and could awaken more easily at 4:30 AM (having gone to sleep at around 1:30 AM) in order to study and watch the markets before they opened at 6:30 AM.

I was in total immersion, so why couldn't I make consistently successful trades? I became paranoid, thinking it was a kind of conspiracy since every time I took a position it went against me. I knew the stop and was stopped out in my minds, but we didn't take the stops because I had faith that the position would come back. It was some kind of a misunderstanding or misinterpretation by the market that was responsible for the price spiraling downward.

Buy more. That's it. Average down and keep averaging down and eventually, I will get it right. Eventually, the price will come back up and I will be justified. Why isn't the price coming back? I know it has to. After all, I studied it, charted it, listened to the gurus, read everything on every bulletin board, and it absolutely has to come back. Oh, that news that just came out… Ugh! Must be false or overstated because there is no reason that the stock should be selling off like that.

I know it is coming back, so I will buy more. Wow! Look at the size of the position now. Hmmmm. I better kick it up a notch and start participating in every message board and study every report and watch every tick every day for signs that life is returning and I can get back from underwater. Most of you know how this feels. I do. I have been there, lived it, and suffered losses from it. Life was miserable this way. I became depressed and irritable. I walled myself off from the rest of the world just trying to figure out what to do. I had dug a really deep hole and the only way out was to sell and take the losses, or waited and be in agony day after day, watching my account and my self-esteem (what was left of it) erode like sifting sands.

I tried too hard, studied too much, and pushed myself to the point of both physical and mental exhaustion. Why? Why did I not honor the stop, continue to hold on and even average down? I had to figuratively kill the frog and kill myself in the process. In order to be reborn, I had to destroy the internal self-defeating programming and start all over again. I had to step back, look at what I had done with a sharp and penetrating glare in the bright light of day. I decided to take the loss, to stop trading for a while, to take a vacation and center myself. My health returned. The dizziness and headache went away. I didn't care so much about watching the flickering ticks (so, at least, I was in remission from a severe case of tick-itis).

It was not the market, the charts, the software, the gurus or anyone/anything else. It was me! I was my worst enemy. Nothing was going to change until I got right with myself.

"The most exquisite paradox is that as soon as you give it all up, you can have it all. As long as you want power, you can't have it. The minute you don't want power, you'll have more than you ever dreamed possible." Ram Dass

Steve Leslie adds:

The depth of this fable is remarkable beyond belief. There is a meal that is worth a lifetime here alone. The speculator would be well served to read this several times and reflect on its enormity since we have all been guilty of doing something that we blame on "our nature" and ultimately suffer the consequences. It can be a convenient excuse.

I can think of so many illustrations of this that a book could be written on this one fable alone:

Phil Mickelson had all but won the 2006 U.S. Open by holding a two stroke lead with three holes remaining. He had played beautifully for 69 holes on Winged Foot in Mamaroneck N.Y. Winged Foot had lived up to its reputation of being a brutal challenge for the greatest players in the game. Mickelson came to the 16th hole and on the par five he bogeyed. He parred the 17th hole and came to the 18th hole needing a par to win the tournament. He had been struggling with his driver all week and Johnny Miller commented that all he needed to do is put his drive in the fairway and the tournament was his. He would become only the 2nd person in the last 50 years to win three major tournaments in a row. Miller suggested that he should take out a three wood and just smooth it into the fairway.

Inexplicably, he takes out his driver and pushes his shot to the left, it caroms off a hospitality tent, and lands in a trampled patch of dirt with an obstructed view to the green. He tries to pull of a Houdini-like shot and hits a tree leaving him with essentially the same shot. This time the ball is struck and flies into a bunker. From there the nightmare continues. He overcooks the sand shot and makes an up-and-in. His double-bogey practically gives the tournament to Geoff Ogilvy who had to chip in for par on the 17th hole himself to preserve a totally bizarre finish.

"I still am in shock that I did that," Mickelson said after his final round 5-over-par 75. "I just can't believe that I did that. I am such an idiot. I just couldn't hit a fairway all day. I tried to go to my bread-and-butter shot, a baby carve slice on 18 and just get into the fairway and I missed it left. It was still OK, wasn't too bad. I just can't believe I couldn't par the last hole. It really stings. I came out here and worked hard all four days, haven't made a bogey all week [on No. 18] and then double-bogeyed the last hole. Even a bogey would have gotten me into a playoff. I just can't believe I did that.

"So, it hurts because I had it in my grasp and just let it go, as opposed to somebody making a long putt or what have you."

Let us learn from this and remember that as Caesar remarked "The fault dear Brutus is not in the stars but in ourselves." 



 I remember back in the mid 1980s, the huge battle when AT&T and IBM entered the personal computer market. The Commodore 64 was the product that first entered the market place as I remember, in 1982, and it was an amazing hit. Then everyone else decided to pile in.

I also recall the Bowmar Brain that was so popular as a hand held calculator. Bowmar was later overtaken in market share and technology by Texas Instruments, Hewlett Packard, and others.

AT&T, after years of losing money, exited the PC business and left it to HP, Apple and Dell to charge forward. IBM is as strong and as powerful as any technology company ever was — they did not get the name "Big Blue" for nothing.

Ultimately IBM decided to leave the PC business and focus on their bread and butter mainframe business. Technology can be a very very difficult boat to steer, and it can be extremely hazardous and dangerous to stay ahead of consumer needs, wants, and demands.

Andrew Moe comments:

Talking of advancing technology, these guys are in the news today after taking apart an iPhone step by step, and identifying all the parts by make and model. If the profits are ephemeral, they won't be for Apple alone. 

James Lackey adds:

The iPhone may be a leap of innovation, but of course others will adapt, and prices will fall. What is uncertain is how much innovation and cost will trickle down to the sedan market of cell phones. Perhaps that equation, how the mass market accepts and is willing to pay for the new bells and whistles, will set the pricing and production of future iPhones? Will the iPhone still be a sporty two seater high performance vehicle, or just another used sedan at 50% off current retail, in five years time.

Greg Calvin offers: 

The fear of competition eating away market share of the iPod has been one of the chief concerns for aapl shareholders over the last few years. Somehow its market share has held up, despite an array of competitors entering the arena, including Microsoft and Sony. The iPod, and it would increasingly seem Apple themselves, have garnered cache, or an enviable 'cool' factor. Cache, when ingrained into the social consciousness, draws and retains business, wards off even possibly superior competition, and protects profits that would all but disappear with commoditization. Sony had it, and for the most part lost it.

The first generation iPhone needs a good number of improvements, notably Web speed, voice rec., an expansion slot, and availability of keyboard in landscape mode. A shame not to have GPS with that big beautiful display. If Apple can address the most critical of these issues, the challenge of attaining 1% market share might be done more with brand than technical wizardry. Who knows what the competition might come up with however. Advanced voice recognition apps, maybe.

Just a few of the countless names that still do at least reasonably well and lever their brand names to command premium over cheaper generic and/or superior competition include Coke, Bayer, Nyquil, Listerine, Marlboro, Intel, Rolex, Bose Wave $400 alarm clocks, Oakley, diamonds, Baskin Robbins, Harley Davidson, Jim Beam, Windows, Rolls Royce, Foster Farms, Chanel, Federal Express and Starbucks.

Alan Millhone adds: 

In 1964 my parents took my to NYC for the World's Fair. My father worked all his life for the telephone company and I remember going to the 'Ma Bell' exhibit with them. There we saw things of the future like being able to see one another when you talk! 

Scott Brooks adds: 

I am reminded of two things from college (1982 - 1986) at little 'ol Southeast Missouri State University.

I took a statistics class and we had what I believe were Texas Instrument calculators. They were a bit bigger and bulkier than the units we have available today (maybe the size of two or three calculators stacked on top of each other). Their read-outs were all and you had to push the buttons real hard to the point where they "clicked". But what I remember most about them was that they were "caged" to the desks. Literally attached to the desk by some sort of metal unit that prevented them from being stolen.

The other thing I remember was that the statistics professor, who was also a psychology instructor, had me do an experiment with him of the effects of Scopolamine Hydrobromide on mice. It was pretty cool. I got to give mice shots of SHB, and put them in spinning apparatus to make them dizzy. Then the coolest part was that I got to do brain surgery on the mice.

At the end of the experiment, I had to type up a paper on my findings and notes. Bob, one of my fraternity brothers, had this typewriter looking thing that had a small screen on the front of it (similar in size to the read out screen on an calculator). You could type the words and see them scroll across the screen. As a result, you could proof read what you were typing, but only one or two words at a time. And there was no spell check so you’d better know how to spell. If memory serves me right the read out was so small that I couldn't even fit big words or phrases on the screen at the same time.

It was a very slow and tedious way to type a paper. Finally Bob, who was a computer science major, decided to type it for me since he figured he'd need the practice to be ready for the real world. I remember thinking to myself that he wasted his college career on a worthless major. I couldn't see how computers were ever going to catch on. There was no way that this tedious machine with a small 10 or so letter screen was ever going to achieve wide spread public acceptance!

I don't know what ever became of Bob. What I do know is that I was completely wrong about computers. I've never forgotten that lesson and try to apply it to my life everyday, especially when confronted with something that I think is stupid and a waste of time. I try to look beyond whatever that something is today and see what it can become tomorrow!



Murder on the Orient Express, with Albert Finney as Hercule Poiroit and a cast of all-stars, is truly an amazing delight. Albert Finney gave a spectacular job as Monsieur Poirot. If you like Agatha Christie it is required viewing.

The cast comprises Michael York, Vanessa Redgrave, John Gielgud, Lauren Bacall, Martin Balsam, Ingrid Bergman, Jackie Bisset, Sean Connery, Tony Perkins.



 Today is an historic day.

The Interior Department will announce it is removing the American Bald Eagle, the most majestic bird, from the protection of the Endangered Species Act, capping a four-decade struggle for recovery.

Government biologists have counted nearly 10,000 mating pairs of bald eagles, including at least one pair in each of 48 contiguous states, giving assurance that the bird's survival is no longer in jeopardy

There was a time when the American Bald eagle's future was in grave doubt, with only 417 mating pairs verified in the 48 contiguous states. It was a victim of hunting and of excessive pesticide use, most notably DDT, which seeped into the ecosystem, killing the bird and its eggs.

This time, American Conservatism got it right. It preserved a symbol that has carried through the founding of this country, and was established by the Continental Congress to be on the official seal of the United States in 1782. It has been worn with distinction by the 101st Airborne as its official patch, and has seen our armed forces through their most bitter campaigns.

The bald eagle is the most powerful symbol of America we have. It is the national bird of the United States and appears on most of its official seals including the seal of the President of the United States.

The Eagle is sacred in some North American cultures and its feathers are central to many religious and spiritual customs among native Americans.

One never forgets the experience of seeing an eagle in the wild, spreading its majestic wings, with over a 7 ft span, and soaring with the currents above the mountains and the plains. It would have been a crime against nature to have lost such an amazing creature to excess and abuse.

Alan Millhone adds:

I just now caught a segment on the return of the eagles to the Catalina Islands. It appears DDT did the trick in eliminating them for decades. Today the chicks are incubated and hand-fed for weeks before being taken to the Islands. All of us need to take care of our precious resources and our native animals and birds. 



 In 1979 Doyle Brunson released the bible of all poker books: Super System. It is a 624-page compendium of useful information, notably instructional on hold-em poker. It also has chapters devoted to different poker games such as 7-card stud, lowball, hi-low, and draw poker. Contributing authors include Bobby Baldwin, Chip Reese, Dave Sklansky, and Mike Caro. Caro also devotes a chapter and he has very interesting insights.

Since the recent atomic explosion of no-limit hold-em, many how-to books on poker have surfaced. Books that I would recommend are Harrington on Hold-em , Volumes 1 and 2, and Play Poker Like the Pros, by Phil Hellmuth. Both are instructional and will do much to advance the knowledge of the game. Zen and the Art of Poker, by Larry Phillips, deals with the psychological side of poker and is critical to have in the poker players arsenal of book weaponry.

These are five books that if studied, read, and re-read will go far in the development of a sound poker acumen.

I do caution the student that this will only serve as a foundation for a sound poker mind. The next step is to log in very important hours at the poker table. Live poker is preferred as poor habits can be developed by playing online. And live poker is the only way to learn how to read opponents and develop a "feel for the game." The great T.J. Cloutier said that every time he sits down at a table he tries to learn something about the game or the people he is playing.

It is interesting to note that after releasing Super System, Doyle Brunson had to alter his game strategy as many who read his book began to use Doyle's own methods against him. Just as with all other games, the pursuit of poker is a never ending one. Mike Sexton who has played professional poker for more than 25 years commented that he became a much better tournament player after watching the top players and commenting for the World Poker Tour.

Poker can be a great game, a rewarding game financially and emotionally and it also can become a nightmare. It offers many paths and a student will be well served to be a lifetime practitioner of the game if they expect to extract the maximum positive aspects of poker.

Alex Forshaw writes:

What gets me about all those poker players is how much better they could do trading on a bigger market than nine people's buy-in at a table at the Bellagio.

I agree that "Super System" is a true poker bible. Can't say the same for Hellmuth's book, though. It’s kind of like how he was on TV, pretty high ratio of drama/braggadocio to substance, but that's just my two cents.

One sort-of poker book I'd recommend is The Professor, the Banker, and the Suicide King: Inside the Richest Poker Game of All Time. It's about a Texas banker who took up no-limit hold'em at around 40, became utterly devoted to it, and challenged individual poker stars to multimillion-dollar heads up games and started blowing them up, because the stakes were so unbalancing to the hold'em stars (who were not nearly as rich as he was). That's how it starts, anyway. 

Nick Marino replies:

Readers should realize that at best these books will only help you lose money at a slower rate when playing against professionals. The game is constantly changing because the players and their strategies are constantly changing. Sound familiar?

Gabe Ivan writes:

I read both Brunson's and Helmuth's books recently and I agree that Helmuth's writing is very shallow. His only theme is to play tourneys super-tight at the beginning and change gears as you go. Nothing about the game philosophy. Brunson is a delight and the Caro, Baldwin, and Sklansky chapters provide you with nuggets of knowledge about poker and betting in general. I also recommend Sklansky's "The Theory of Poker," which explains very clearly the nuts and bolts for beginners such as I.

The meal of a lifetime is the opening paragraph where Brunson says, "I made millions playing poker and I lost them at sport betting." This speaks volumes about staying within one's circle of competence when dealing in probabilistic fields, where every niche is so competitive that a legend like him gets wiped out when he steps outside. 



 One of the interesting aspects of the great Tiger Woods is that he is an extremely composed person. He always is meticulously groomed and very gracious in public especially during interviews. Arnold Palmer also displayed such characteristics and is one of the great reasons why he is so embraced by tens of millions worldwide even 30 years after he has stopped being a force on the PGA tour.

Tiger also has the character to summon awesome Herculean powers to focus instantaneously on the task at hand. Ben Hogan and Jack Nicklaus had such a skill. This may very well be the reason why they could separate themselves from the field seemingly at will especially during the latter stages of a tournament or at crunch time.

To this end, however, each has been perceived at times to be standoffish and unapproachable. Even Tiger has been criticized for not signing as many autographs as some think he should after a tournament. I feel that this is an unfair assessment by the public looking for flaws in character, perhaps even a dark desire to pin something unsavory upon them. Even more, it could be a futile attempt to search for something to find unlikable or at the very least printable to satiate a fringe group who finds delight in bringing to light that these people are human and flawed after all.

My point is that their fantastic focus is spun to reflect a weakness especially by those who have never won anything of consequence or excelled on their own. And yet why should we really look for any reasons to cast aspersions? Should we not look for the positives to build upon to improve our own lives?

There is an old adage: "Milk your own cows first." I think upon my own cows that I need to milk and find this enough of a challenge. My goal is to be a better milker.

On markets, The Chair makes a statement here that is most interesting: When will someone get up and say that all this hawkish talk about the threat of inflation is the most bullish possible thing for bonds, as it beats down expectations and prevent succumbing to short-term solutions and keeps the lids on any bad policy?



I am compelled to share the following article because I noticed today that Apple shares are up nearly 1000% over the last 5 years, while the NASDAQ is approximately 50% of where it was 5 years ago. What is the key to Apple's success over that of the NASDAQ in general? The obvious answer is their Captain, Steve Jobs.

The Secret of Superior Stocks.

The essence of the article originally posted on The Motley Fool website, is consistency of management. In other words, having the right CEO on board to navigate the ship is critical to the success of a company and it's long term performance. ….. The results were astounding. Sixty-six of the best had founders or a CEO who had more than five years of experience at the helm of the company 10 years ago, and who had stayed ever since. An additional 18 had the same CEO at the helm throughout the company's years of incredible performance. Chico's — the second best-performing stock of the past 10 years — is a great example. Chairman Marvin Gralnick founded the company in 1983 and served as CEO until 1993. He returned to lead his company in 1994 when the new CEO resigned. This is a leader who would not let his business down, and the returns for long-time shareholders have been simply mind-blowing…….

Great stocks have great leaders. [Read More at Motley Fool]

Riz Din comments:

Just under 5 years ago I participated in a presentation on why everyone should buy Apple shares (I've uploaded the slides here). At the time, Apple was trading at $14.72 with a conservative liquidation value of $12 cash per share, so the brand and products were valued at next to nothing. This was an extremely rare opportunity — the stock stood up well on value grounds and with the ipod just around the corner, it had the potential to flower into a good growth stock, which is just what happened. I bought a few thousand pounds worth of shares but eventually sold them to invest the money in a small property. A few days later the stock started to rise.

James Lackey mentions:

The remarkable thing to me is that people pay a premium for ease of use, aesthetics and branding. People will flock to Walmart or Costco for the lowest price on a gross of paper products, yet when it comes to electronic devices, some will pay a huge premium for various intangibles. I've used the hand held mp3 players for years, and I've always bought the cheapest system that actually worked, a sandisk. I looked a the device as disposable, as I am certain to break or lose the device in a mud puddle at the BMX track.

Ease of use, branding and the payment of premiums is in the stock market. It's fine to buy the cheapest stocks and treat them as disposable. After all these years, I have no idea why at times we are surprised people pay a premium for aesthetic markets.



NEW YORK (AP) — Stocks wilted Wednesday as comments from former Federal Reserve Chairman Alan Greenspan and worries about upcoming economic data deflated a rally fed by takeover activity.

Those who have been around as long as I have seen these ephemeral events played out many times before after comments were attributed to the hot hand with an esteemed reputation.

There was a time when Dr. Doom Henry Kaufman was known to dramatically impact the markets, especially the bond market, with his interest rate predictions. This was while he was with Salomon Brothers in the 70s and 80s.

There have been others who had limited success with predictions and moving the markets, such as Elaine Garzarelli of Shearson, Abby Joseph Cohen of Goldman, Bob Farrel of Merrill Lynch, Bob Prechter of Elliott Wave, Bill Gross of Pimco, and Joe Granville in the 70s. Even Alan Abelson could comment on a stock in his weekly column for Barron's and have a big effect on its opening on Monday. A comment on a stock in the Heard on the Street column could also be worth a point or two. There have been others over the years.

From John Tierney: 

Here are some examples of Greenspan's forcasting history. 

From Stefan Jovanovich:

I believe Mr. Leslie was referring to the total increase in market valuations, not the percentage gains alone. By that standard the late 90s were qualitatively and quantitatively different from the other periods Professor Pennington noted.

The recovery in the ticker from 1932 was hardly viewed by the public as a "rise"; Americans remained hostile or, at best, indifferent to securities investing for another generation. It would be equally hard to see the post-Spanish-American war boomlet as comparable since the U.S. was not yet considered a financial center equal to Berlin, let alone London.

While the 1926-28 Wall Street boom may have outperformed the late 90s by a slight margin, the level of public participation was not comparable. As a percentage of the total adult population, fewer Americans had checking accounts in the 1920s than had securities holdings in the 1990s.

Charles Pennington adds: 

3-year moves following:
12/31/1932: 139%
12/31/1925: 92%
12/31/1903: 92%
12/31/1994: 106% *
12/31/1995: 79% *

(*Partially overlaps the 3-year period after 12/31/1996)

It is true that the market went up a lot after December 1996, but I don't see any basis for saying that post-December 1996 was the "greatest rise in the history of the United States."

Why make such sweeping statements without checking them first? It is like saying, "Nobody hit more homeruns than Willie Mays."

Sam Marx adds: 

Back in the early 50s or maybe the late 40s, Walter Winchell would end his heavily listened to Sunday program with a stock tip that would create a buying binge for that stock on Monday morning. The Stock's Specialist would open the stock substantially higher and buy back at lower prices as the institutions would come in selling their holdings.

When someone asked Winchell where he kept his money, he quipped, "In rubber bands".

From Sam Marx:

 Michael Milkin should be given a pardon.

He created the junk bond market, was influential in financing many of today's largest businesses including CNN, and building the modern Las Vegas. Now he is using his funds for prostate cancer research.

I believe that with all his capital and important character witnesses he could've stalled and defeated the charges against him which were mainly "stock parking" charges. He pleaded guilty to save his brother from going to jail.

He was a threat to some of the moribund corporate boards because he was able to raise the capital, through junk bonds, to enable the takeover artists (Ivan Boesky was not a takeover artist, he was an arbitrager) to gain control of these companies and remove those moribund boards and revitalize those companies. I've heard that the word came from the highest office in the government to get Milken because he was a threat to the entrenched country club set.

Ironically, although he is credited with it, the idea of using junk bonds to take over companies was not Milken's idea. A superior at his firm suggested it to him.

Some such as Ben Stein consider Milken a charlatan. I do not know the exact details of Stein's reasons but I do know that Milken used a Harvard study that showed that a portfolio of high yield bonds would over a period of time outperform higher quality bonds. This may have been valid at first when he was selling existing high yield bonds as a bond salesman but the type of bonds that Milken later created did not fit the properties of the high-yield bonds in the Harvard study.

Before he moved to California, Milken worked in Philadelphia and then N.Y.C. and lived in Cherry Hill N.J., two blocks from my house. When he was commuting to N.Y.C. he would take the bus very early in the morning wearing a coal miner's helmet to read company reports in a dark bus.



 For the vast majority of people, the best thing to do is concentrate on their personal residence when it comes to real estate. Building a portfolio of real estate can be an extremely complex venture, as there are many moving parts to the process.

There are so many variables that come into play. These include location, negotiation skills, liquidity, devotion of management, time commitment, closing costs, insurance, taxes, repairs, etc. Most people would be better served if they focused on their personal residence and looked to maximize the profit through this venue.

If one wants to become successful in investing in real estate, one needs to be very knowledgeable about mortgages. Not just conventional mortgages but interest only, balloons, ARMS, and some other esoteric mortgages that all can be used depending on the needs and wishes of the investor. Rates and points also factor into the equation, as do credit ratings, down payments, etc. Thus, this is not a market that lends itself well to the neophyte.

And nefarious and ill-informed mortgage brokers abound. In my view, the barriers to entry in the mortgage broker business are few. It is easier to become a mortgage broker than a massage therapist. So finding a qualified mortgage banker or broker can make all the difference in the world. I have found that similar to the bond market, where the really big money likes to play.

One of the great plusses of real estate is that it is the only investment that one can make and live in it at the same time. Also, you can watch it on a daily basis.

If one wants to play the real estate market, one can use such vehicles as ETF's, REIT's, and stocks of mortgage companies and builders. Subcategories include aftermarket stocks such as Home Depot and Lowe's. Further down the line there are subgroups such as cement, wiring, and plumbing construction equipment like Cat and Gradall.

Before considering purchasing residential real estate, I suggest an intensive study of the industry and the markets that one wants to be involved in. All real estate is regional. Commercial property can become even more complex. Once again, in my view, caveat emptor.



 One of the best things that I've done in my own speculative career is to realize that I am a loser in various niches and to exit those forever.

I retired relatively gracefully from squash after losing for only a year or two. I did the same with fixed income, and after a loss with foreign currencies. Vis-à-vis the latter, I concluded that whichever way I traded the market would go the other way — It wasn't so much a matter of running my stops and taking advantage of my fixed decision making, it was more a matter of the banks making say 300 billion a year from the markets. How in the world is there going to be enough money left over for me to make?

I shudder at how active and how good one has to be at something just to try to stay above water. I would urge all who trade the markets to periodically stop and think whether they have an edge. They should decide if they've made money, taking into consideration all their bad luck and the rule of ever-changing cycles.

The market loves to let you make money on small capital (like they did with the trend followers and so many hedge funds) just so you invest humongous amounts on 'the system that can't fail', only to take you for billions later on.

But of course the rate of return is still positive, and the manager still has 50% of the fund that he owns, since he takes out the fees monthly — the customer takes the losses on the big capital.

If only managers and customers were more humble, more willing to admit that they are guaranteed to lose in certain niches, the public would lose so much less than they have to. Moreover, the world of markets would be a much healthier place, and we would have fewer poseurs and flimflam artists in our midst.

Mark Goulston comments:

This post makes a great point. Here are a couple reasons why people don't cut their losses.

If as right as you thought you were is as wrong as you turned out to be, the fear is that you could be wrong about lots of things.

People confuse making a mistake with being a loser. If, however, you see every loss as a mistake and learn the lesson it teaches, you never have to view losses as a failures, just as lessons.

A friend of mine, Jason Calacanis, who has made and lost lots of money in Internet ventures, told me that if you make a decision that turns out to be dead wrong, recognize it when it is obvious, change direction, and never make the same mistake again. Then you'll be better off than 90% of people.

Steve Leslie adds: 

One of the great lessons in poker is that it is a game of imperfect information. Therefore you have only so much to go on. And you have a very limited time to make decisions, never more than a minute or two at the very most. Now in no limit hold-em this can be a decision that can end your tournament hopes or advance you to the championship.

Once you make your decision there is no going back. You can call, raise, or fold. That is it. And all decisions are binding. Just like trading.

After playing serious poker for a decade, I have made many incorrect decisions. I have also made plenty of correct decisions. But I think I have made more correct ones that wrong ones.

My goal every time I sit at a table is to try and play each individual hand as correctly as I can. Once I decide to play a hand I try to conjure up energy in my mind to focus exclusively on this event, to attack with laser like focus, eliminate as many distractions as possible, and to play within myself. That is all anyone can expect in the game of poker. The rest is a result of mathematics, statistics, and luck or variance. Sometimes you win; sometimes you lose. But unlike baseball you never get rained out. And you accept the outcome.

Finally, after these many years, I believe that my first impression of the correct play is the best one. After observing, calculating odds and my bet, I go with my initial decision. I do not try to talk myself into something else. It may not be the one, but it is the clearest one, the one that has the best vision, at least in my view. And this is the one that counts.

There are plenty of coulda, woulda, shoulda's, but after all it is all part of the game. If it were easy, then everybody would do it and they would be good at it and there would be no value left, or exploitation, or need to try to get better.

Just like trading.

From Dylan Distasio: 

I firmly believe that there is a meal for a lifetime in this post. Even with an edge, beating any particular market average over the long term is an incredibly difficult proposition. Without an edge, it becomes impossible.

Besides gauging the dynamics of a particular market, and examining your edge through experience, knowledge, or other empirical means, I think it's also critical to examine whether a particular style or timeframe of trading agrees with your personality and psychology.

As an example, some people are able to thrive in an intra-day environment, whereas others due to psychological makeup alone may not be suited for this pace of trading despite having the informational tools available to make a go at it.

There are a myriad of timeframes, markets, and methods of trading out there. Finding one that suits you from both an empirical edge and a psychological edge is your best chance at finding long-term success.

The psychological edge, I believe, becomes extremely important during the inevitable draw downs, mistakes, and bad luck that accompany all trading.

Alan Millhone writes:

Would there be any fund managers who would honestly admit in public that they are not making money? The Chair makes a well-founded point for a person to leave alone areas where they are not familiar. I try to stay with areas where I have some knowledge and familiarity. In construction we have two major hospital additions going up as I type. This type of commercial work is out of my realm. I don't have the crew, equipment, or bonding capability to ever consider undertaking such projects.

As Clint Eastwood says, "Man's got to know his limitations." This holds true in the market and with about any other undertaking we can envision in life. Years back I did a lot of work for a local oil and gas business. It was interesting to watch them pour over a map of an area and decide where to drill and then go out and find investors. I think I could have pinned the map to a wall and thrown darts at it and been just as accurate. The owner once told me the definition of an oil well. He said it was a hole in the ground with a bunch of liars standing around the hole looking down into it! 



 The average child spends 34 hours watching television a week.

A recent poll indicated that over 90 percent of the population of the United States never reads a newspaper. Fewer read more than one book a year.

There are 1440 minutes in a day. If one spends 15 minutes reading, one can read a 300 page book in a month.

Question: What is the difference between someone who can't read and someone who won't?
Answer: Nothing!

Alan Millhone asks:

 I had not heard these terrible statistics before. The United Negro College Fund coined the slogan "a mind is a terrible thing to waste." Children today sit endlessly in front of the boob tube, which serves as a babysitter for many parents. Thirty-four hours per week is staggering.

Recently my daughter took her cable TV back to "basic" and has no Internet for her two young sons. Solomon makes all A's and Forest is a B student. She is conscious of the time they spend on video games and TV, and she makes sure they are involved in school and after-school sports (currently soccer). They also have to do their homework as soon as they are home from school.

Pizza Hut and Tim Hortons in our area have a book program once a month for students, where they read and have their reading certified by a parent. My daughter says Pizza Hut is under fire for this because they are, in a way, encouraging bad eating habits for children. I suppose Tim Hortons will come under the axe next for selling donuts!

I am lucky that my parents encouraged me to read and I enjoy learning new words to this day. I wonder what can be done to change the terrible trend amongst our nation's youth?

Tom Ryan replies:

I really hate to be the park ranger, but is there really a study that actually has data about kids and 34 hours of TV a week, and what poll was it that indicates less than 10% read one book a year? Can we get back to numbers on the table?

Conversations on how "things are going to heck these days" only bring us all down and serve no purpose, not to mention that I don't believe in the premise in the first place. I, for one, am very encouraged by what I see going on with young kids these days. 

George Zachar offers:

When technology permitted advertisers to study viewership with greater detail than the old Nielsen diaries, they discovered that having a TV on counted as watching, whether there was anyone in front of the box or not. Cooking, chatting, copulating, sleeping all counted as viewing, as long as the tube was clicked on. 

Stefan Jovanovich adds:

The periodic release of alarming statistics about the decline and fall of literacy in America is one of our country's most enduring traditions. It usually coincides with the discovery by publishers that they are losing market share to another medium. Forty-five years ago the new scandalous fact of America's illiteracy (prompted by the rise of color television) was that Americans were now spending more on pet food than on books. When I told my father the book publisher of this alarming fact, his comment was that it confirmed the obvious: dogs and cats eat more than they read. I think that (yet again) the apocalypse may be a bit farther off than the New York Times fears.

Jim Sogi writes: 

As our esteemed resident philosopher states, "happiness is the end that alone meets all the requirements for the ultimate end of human action." The distinction between wants and needs makes it harder to make a concrete rule for action. For example the desire for honor is not something that is needed, but is a worthy aspiration. The more concrete way to frame the dichotomy is to put it terms of "stuff". If the goal is to get a lot of stuff, the wants never end. If the goal is to get rid of stuff, and end up with a wooden bowl and a robe, there is a finite goal. Once the stuff is gone, only the needs are left and true happiness is possible.

Regarding television: it is evil and promotes the acquisition of stuff, thus fostering unhappiness. Those who seek happiness in stuff are never happy, for there is always more. Eliminating television will improve life. The least benefit is the added 14 hours per week available for self-improvement; the greatest is the freedom from incessant exhortations to feed a desire for more stuff. For children, it avoids the frenetic programming of the brain into 3-second sound bites, which can destroy the ability to concentrate and focus.



 The book The One Minute Manager by Kenneth Blanchard and Spencer Johnson has sold more than seven million copies and has influenced many for the good. As far as I can see its message is to have those you manage set goals (on which you agree), then praise them for a minute when they behave in a way that will help them achieve there goals, and reprimand them for a minute when they don't. ("The One-Minute Manager" recommends to touch the person you are managing when giving your one-minute compliment or reprimand. I would suggest that you be careful with this as it can lead to unintended consequences, especially with the opposite sex.)

I wonder if there is a one-minute way to manage an investor's stock investments. I would suggest to read Dimson, et. al., and the threads on Daily Speculations on how incentives, respect for property, rule of law, and encouragement of innovation work to create returns for investors.

On the other side of the ledger, read the posts on chronic pessimism and note that all those who populate same tend to be visited with -97% or worse returns of people like the weekly bearish financial columnist.

Read mine and Tom Downings' work on the fed model, and note what its yearly forecast is and if this has changed over the past quarter.

Decide what percentage of your net worth you wish to have in the market at all times, and how much you wish to borrow when you want your exposure to increase — choose between adding when the chronics have a winning day, week, or month, or just constantly adding or subtracting, depending on your liquidity and lifestyle needs as they vary over time.

Figure out how to maximize the after-service amount you get to keep, through compounding and cap gains, with your accountant, and see if there is a field where you have an edge that can augment buy and hold with individual stocks, or that you can buy when everyone else wishes to throw in the towel, or is not suitably optimistic about them.

Finally, be sure your frictional costs and grind are at a minimum. Pay attention to ever-changing cycles and never believe a guru. Keep records in a logbook of your good and bad moves.

That's how I would teach someone in one minute to be a good stock market investor.

Tim Hewson writes: 

I would suggest to be prepared for those inevitable down days. They will happen at times, so come up with a plan to handle them so it doesn't unduly impact your morale. Personally I have found reading interviews with other traders like some of those in the market wizard series have a useful motivational component. Anything really, which reminds one you have to take a few knocks trying to climb up the stairs. 

Steve Leslie adds: 

In my faith, we are encouraged to spend a quiet time at the beginning of each day, to pray, to read the Bible for 15 minutes and reflect upon the wonder of the universe and the many blessings that have been bestowed upon us.

Other faiths and secular teachings recommend an "altar" or special place that one visits at the beginning of each day to offer their prayers and positive affirmations to strengthen one for the upcoming day.

I recommend along with this a handheld recording device or writing pad, to immediately record any relevant thoughts. And to always have the recorder available to add additional thoughts that might be inspiring. Once recorded, this releases the mind to pursue other things.

If you think this is unnecessary let me remind you that once a day and for his entire life Thomas Edison practiced this ritual and allowed no interruptions during this time. No further comment necessary.

Finally, I recommend a timeless classic by Napoleon Hill, Think and Grow Rich. It is a short but incredibly powerful book that should be read time and time again.

Scott Brooks adds: 

Another book to that I consider a must read every few years is Dale Carnegies's, "How to Win Friends and Influence People". Every time I read this book, I pick up another tip to apply to my life and interaction with others. I keep a copy of it in my lobby as it has short, concise and to the point chapters. 

David Lamb suggests: 

Perhaps one could change the term "one minute" into the term "one mistake". And by keeping records in a logbook of all of these one mistakes one could go back and read of what not to do and how not to trade. I have hundreds of recordings of one mistakes in my recordings. I know hundreds of ways how not to trade. In fact, I'm a genius in the ways of trader error.

It has been said that Thomas Edison failed in thousands of attempts at producing a better light bulb. He recorded these failures and never repeated them. But oh! How many cousins do types of failures have! I hope I don't have to record too many more one mistakes in my record book. I'm running out of room. 



 "Cheap" is a word that I have yet to embrace after 29 years of investing.

I always hear fundamental analysts use this word to support their reasons for owning their stocks. Or strategists use the phrase, "At X earnings the market is cheap here, and "based on a dividend discount model, our work indicates the market is relatively cheap here, or "with the long bond at X we think the market is cheap here."

Is this something that is taught in Market Strategist School or CFA classes? Or can one purchase a book that contains such sayings?

I have seen securities that are "cheap" get a lot cheaper before they became valuable. And there is an entirely separate school that teaches, "good things aren't cheap and cheap things aren't good."



 The first books every investor should read and study are Peter Lynch's One Up on Wall Street and Gerald Loeb's The Battle for Investment Survival. Although many of the examples are outdated, the ideas and suggestions are timeless and invaluable. Novice and veteran alike can benefit from them.

One of the great lessons from the books is how to build a shopping list of stocks.

Lynch suggests there is a 10 to 1 ratio for buying stocks. If one wants to buy one stock one needs to research 10. He believes the reason most people are not successful in investing is that they will not devote the necessary time and effort. They buy something, but they don't really know why they bought and are not really sure what to do with it once they own it.

I was struck by this idea in light of the pullback today. Plus I thought that today was a good day to take off from any trading so I had plenty of time to research my stocks.

Of the 50 stocks on my screen five are green while the rest are red. So I decided to review the stocks on my screens and try to determine why I own the ones that I own, and which ones I might like to own. I took out a legal pad and wrote a small research report on each one. Was it work? Yes. Did it take time? Yes. Was it fun? No. Will it be rewarding? I certainly hope so.

As Vic and Laurel like to say, it is very hard to gain an edge in trading and speculating. Imagine how hard it is to get an edge without doing the work.

I saw Floyd Mayweather Jr. on Jay Leno Monday evening after he defended his title against Oscar de la Hoya this past weekend. He commented that he would train four times a day to prepare for Oscar. He would even get up at 3am to do an early session. His belief was that if he would put the time in when his opponent was sleeping this would give him the edge he might need to win.

He won a split decision and the reason he won was that one judge voted for him in the 12th and final round. Otherwise the fight would have been a draw.



 There is a point of view out there that the best performance comes when you're having fun. In my lifetime I have played in more than 10,000 refereed squash matches, and won at least 50 national tournaments, and I never had fun in any of my matches. When I tried to have fun, it was disastrous, and I shudder at what a horse's ass I was on those occasions.

To someone who's a serious competitor, the idea of having fun in a tournament is ridiculous. There's so much work, and so many better athletes that you have to beat. So many officials working to do you in, and so much equipment to properly deploy. So much practice and preparation before and during the event. You might think that this is a matter of individual differences or different sports, and I grant that there are some so great that they can soar so high and so much better that it's possible for them to have fun.

I believe that Sharif Khan and Hashim Khan had fun when they beat me, but they didn't have that much fun when I beat them, on those much too rare occasions.

I do know it's totally wrong to try to have fun in the market — it's much too hard, and there are no naturals. The cycles are always changing.

One of the best things I've done in my operation is to make sure that no one has fun in my office. Every now and then, I catch someone who doesn't get the joke, and I upbraid them. 

I try to suppress all exuberance, and when I hear of some former trader who loves to have fun by trading I know he's a straw man waiting to be exposed, and I only wish I could short his fund. Normally I wouldn't comment on a subject like this but I am sure that all frivolity should forever be knoced out of the speculative arena, especially when even an iota of other people's money is involved. They should have their own fun with money you make for them through serious and scholarly discipline and improvement, with no fun whatsover.

Charles Pennington adds: 

I don't know whether he considered himself to be having fun, but I remember a quote from Rod Laver in which he said that he would just swing for his big shots until they started landing in. If they didn't, then he would lose. I guess he knew that losing when you're having a bad day was inevitable when you're playing at the top of the game.

Regardless, I remember that he was my favorite player to watch when I was a kid. It's difficult to find footage of those old matches now, except for a few minutes of a match with Borg in 1977. Laver is past his prime, but he's definitely holding his own with Borg. His modest height of 5'8'' makes the court look like a football field. Notice the beautiful drop shots he makes, even from near the baseline, which are so startling when mixed among his blasting drives. 

From Alan Millhone:

Your remarks carry over into competitive checkers with ease and are sound advice. When you play in a competitive tournament you had better be focused 100% or get crushed by your opponent. I have not had the proper time to devote to serious study for some time and my game has suffered accordingly. You have to spend time preparing for any tournament. The better players have obviously prepared with diligence.

Our World's 3-Move Champion, Mr. Alexander Moiseyev has often said that he is wary when making a move as his opponent (regardless of their strength) can make any reply move, and their reply may be a very good move. He is watchful in every game regardless if he is playing one of the top players or an average player as myself. You might play 'skittle' checkers at a party for fun on occasion, but in a tournament leave the fun outside of the playing room or suffer the consequences .

" Knowledge is power" in the market, checkers, chess, or any athletic event.

From Russell Sears:

At least in marathoning nobody comes to the line and expects to "have fun." The fans don't say, "look at how much fun he is having out there." The best they used to say of me was "he doesn't even look like he is trying." But believe me I was "trying." It's funny now that I am older, and much slower, they don't say that any more.

It's good to hear from Vic, that it's only the weekend warriors that think it's all about fun even for the serious competitor. The fun is left for after the finish. Or as the old country song goes, "time enough for counting, when the dealings done."

Nigel Davies writes: 

I think there must be a difference between how a games player or sportsman defines 'fun' and how the average person on the street does so.

Steve Leslie adds: 

Here is a profound clarification of fun that is so on the mark from my perspective.

I heard tournament poker pro Amir Fahidi say "If you are not willing to die you cannot live."

George Patton said, "Compared to war, all acts of human endeavor pale in comparison." In the movie Patton there is a dialogue between Omar Bradley played by Karl Malden and George C. Scott as Patton.

Bradley: "You know the difference between you and me George? I do this because it is my job. You do it because you love it."

Upon reflection Patton remarks: "God help me I do love it so."

From Alfonso Sammassimo:

Playing a tournament match with the aim of having fun has only occasionally entered my mind since junior days, simply because it has always been such a costly attitude to take onto the court. In particular I recall matches where I subtly tried to imitate players whose styles I admired and envied, especially when I had only recently watched them, and how badly it affected the score for me, cost me more matches than I can count.

I recently had my first competitive match (our annual club championships) in a while after a shoulder injury, meeting up in the second round against an older fellow who used to tour our satellite circuit and played a for a few years as a pro. He had been playing club matches for months and was in sharp form, typical Australian grass style player. I was very fit going into the match but hadn't played much, and my plan was to just enjoy myself. But after realizing my range was way out and seeing that the guy couldn't hit three high forehands in a row I decided to turn the match into a hack-fest, the only game plan I was capable of executing well on the day.

Fortunately fitness and concentration won the day for me, and as ugly as the game was it satisfying to win knowing that I managed to change plan, use my available strengths to make him push himself to hurt me - no fun involved until shaking hands.

The tournament player walks onto the court to win, and it's no fun losing no matter how fancy you looked - the fun is in the prize. With so many things that need to be done in consecutive matches to win a tournament and the concentration that is required, there is no room to think of enjoying it. My P&L tends to suffer the same fate when I trade for fun or try to get fancy, not playing the game that feels most natural to me. And I have more recently been prone to some imitation of market players, but that hasn't hurt me much.

From Stefan Jovanovich:

What poker has to do with either running or baseball, I have no idea. I do know that Don Schlitz wrote "The Gambler" in 1976, and Kenny Rogers' recording of it was a hit in 1978. As "old" wisdom, that is bit on the short side even for the more synthetic products of Nashville. I will defer to one of the many poker experts like SL to comment on whether players at the table count. My amateur observation tells me that they can tell you the history of every chip they have in the stacks in front of them.

Those of us whose sporting careers were limited to the John Kruk school of athletics ("M'am, I'm not an athlete; I am a ball player") have no way of understanding what Russell Sears knows as a marathon runner. We are even more puzzled by why he is so moved to anger when told that fun is a necessary part of baseball. Baseball is a game that you can only play well after 10 years of daily practice, study and good teaching. The first time a player gets to the major leagues he fails - either mostly or completely. (Tim Lincecum's debut yesterday with the Giants was a "mostly" so he may, in fact, be the next "pheenom".)

If, thereafter, you are hard working and talented and lucky enough to stick at the major league level, you get to fail only 3 out of every 4 tries. If you are that 1 in a million player whom God has truly blessed, you fail only 2 out of 3 tries instead. Precisely because it mostly about failure, baseball has one cardinal rule: you never "show the other guy up". If you do, the guy standing 60 feet 6 inches away holding a rock-hard ball has the right to aim it for your ribs instead of the inside corner; and even the players on your own team will think you had it coming. What almost all baseball players share, whatever their degree of success, is the capacity to find joy in its daily grind of failure and humor even in its worst moments of humiliation.

Rodger Bastien writes:

Have fun all of the time? Ha!! I think the struggle to excel is universal, in any sport. The idea that it's more "fun" in baseball or that the struggle is less is to me absurd. However, I would give anything to be able to enjoy that struggle again! 

Russell Sears adds: 

Perhaps there is an element of frustration, in what I wrote. The original reply was not meant in anger, but from a Spartan spirit. Nigel said it much better.

Age has forced me to run marathons for "fun" and feel many of the same sentiments Nigel expressed. However, unlike Nigel, my game suffers no matter the discipline I bring to it. But discipline can be exhilarating, even in defeat. Discipline can make the game fun.

Nigel Davies adds:

After some further thought I think I know exactly what the fun is in competitive sports (and trading) if you play for blood. It's the intensity of the experience which is completely off the spectrum of those we have in 'normal life'.

A chess game in which one puts everything in can lead one to feel either great highs or great lows, but always the feeling that one is more intensely alive because of the rich tapestry of emotions. Strong players will also tend to have feelings of pride and self-worth linked to good performance, and not necessarily to favorable outcomes, though the two tend to run side by side.

Those who can't bring themselves to play with much intensity are those I'd describe as dabblers. And they'll never be much good because they won't be able to fire on all cylinders.

Rodger Bastien adds:

My intent wasn't to diminish Mr. Jovanovich's knowledge or opinion pertaining to baseball as much as to respectfully disagree with the idea there are absolutes unique to baseball, especially regarding that difficult period at the beginning of a major league career.

I suspect that the first year in any sport at the major league level is especially daunting. The NBA is a prime example where the first or second year is often a year of learning. I'm convinced that these elite athletes do such a good job of making it look easy that we mere mortals can't begin to understand how gifted they are. When we relate our experience playing the game to the game they play at that level it is truly comparing apples to oranges, their game being that much more difficult.

That all said, I have always enjoyed Mr. J.'s musings and am partial to anyone who loves baseball and respectful to their opinions of it as it certainly is expressed from the viewpoint of greatest affection. Now Vic, I am still trying to figure out how you achieved such great success in the racquet sports without indulging yourself in a modicum of fun! Is it that to label it as fun is to infer a lack of seriousness? I know that at the moment of my most outstanding athletic achievement the almost orgiastic release would be defined in many ways, fun being nearing the top of the list.

Stefan Jovanovich replies:

Rodger: I think you are right. I was going to offer pitcher's WHIP stats as an example of baseball's uniquely absolute level of failure and compare that to the number of unforced errors in a tennis match. But, when I looked at the statistics for matches between professional players at the same level of excellence as the best major league hitters and pitchers (the top 25), their ratios of points won on service games vs. double-faults, unforced errors and winners by their opponents were roughly the same - 1 in 3 or 4. I am afraid that I got mesmerized by my memories of looking at the game through a mask and the joys of doing something well, at least at the orange level. 



 Something happened this week in the National Basketball Association that has never happened in the history of the sport. A number 8-seeded team defeated a number 1 seed in a best of 7 series. There were several instances in the past, where the lowest seeded team defeated the highest seed, but this was in a best of 5 series. It had never happened in a best 7 series up to now.

The Golden State Warriors finished the regular season at 42-40 and the Dallas Mavericks had a regular season record of 67-13 and a road record of 31-10. The Mavericks had a 17 game win streak and 3 streaks where they won at least 12 games in a row. The Warriors had to win the final game of the regular season just to make the playoffs. The Mavericks came in to the playoffs with one of the best records in the history of the NBA. They were led by their MVP Dirk Nowitzski and were set to return to the finals, which they appeared in last year only to lose to the Miami Heat in six games. The Warriors were just fortunate to make the playoffs.

The Warriors won the series in 6 games and sent the Mavericks back the lone star state a very humbled and very beaten team along with their flamboyant and outspoken billionaire owner Mark Cuban.

This got me to thinking. What was the decisive factor in the series? What was it that tilted things in the favor of the Warriors? I am sure there are many theories and views floating around on this subject. So I thought I would weigh in with my thoughts.

Was it because their 66-year-old coach, Don Nelson had a personal score to settle? After all, he coached the Maverick just two years removed and was replaced by current coach Avery Johnson. Was it that Stephen Jackson had something to prove. He was one of the players who was involved in the worst fight in sports history when he was a member of the Indiana Pacers and was traded to the Warriors. Was it because they dominated the Mavericks in the regular season series and thus had confidence going into the playoffs?

I am sure those who know far more about the game of basketball than I can give a statistical and analytical analysis why the Warriors won. They can throw out the concept of match-ups and strategy, perhaps luck, officiating and a host of other tangible and intangible factors that came into play. This is of course very plausible.

I submit they won because they had nothing to lose. They looked like they had fun in every single game. They played with energy and enthusiasm and at times with reckless abandon. They looked like young kids running up and down the court. There was no doubt that they were the team that displayed the most confidence and showed no great tension at crunch time. .

The Mavericks just looked like they were worried much of the time. And when it came to critical junctures of games, they just came up short.

I share this story as I feel that there is a lifetime of lessons in this one event that we can learn from. That maybe just maybe, at the end of the day and the series that many times it comes down to the fact that the team that wins just has more fun along the way.

I would like to hear others' personal stories about just having fun making the difference between winning and losing. And maybe not even winning but coming out ahead and leaving with a personal feeling of accomplishment.

Stefan Jovanovich writes:

Somewhere in the archives is a video clip of Chili Davis, one of my favorite Giants players, snapping his bat over his thigh while walking away from the plate after striking out. What is amazing is not the strength it takes to do that but that Davis did it without breaking stride. He left the pieces behind him while continuing his walk back to the dugout. Even when he was angry, Davis played loose.

As a reminder that baseball should never be more than a game, Davis used write 70 on the end of each of his bats in indelible marker. "I do that," he said, "to tell myself only use 70% of my strength when I swing. 110% is a guaranteed pop-up."



 Here is a nonsensical list from the billowing bag bloviating in Omaha.

There were no audio or video recordings allowed of his comments so much of this is hearsay. This is reminiscent of a Skull and Bones meeting or at the very least a Shriners' cabal.

  1. It will take four CEOs ultimately to do the job of one Buffett because of the complexity of his job, and at least three CIOs because of the vast complexity of his job.
  2. Don't try to do what he does; don't piggyback on Berkshire's investing. Don't buy the same stocks. See above.
  3. Forty-six billion in cash looking for a home for the money but finding a whale to land unlikely.
  4. Looking for deals abroad. Evidently U.S. offers little appeal.

These great and powerful comments were made after he paraded into the arena like Julius Caesar upon entering the Roman Coliseum.

Victor Niederhoffer remarks:

The latest emanation from Omaha is truly pathetic and fin-de-siecle'ish. The Sage says he is truly able to make a large acquisition and is looking for a big one. It's exactly as in The Old Man and The Sea when the little boy says that after 93 days without a catch, the old man is due for a big one, and the old man tries not to make the boy cry. The idea that buying yet another company to add to the 63 the Sage already owns is good is against all experience of conglomerates, practical and theoretical. And the desire of the old man to see the lions again, to make the big one, one that he might have to borrow 30 billion for, makes me want to cry out that imposture and falsity abound.

Steve Leslie adds: 

One final addendum to the ministrations from the noxious noisemaker from Nebraska and the attendant effluvium is that he and his buddy Billy Gates fellow Board member, played a game of table tennis against a young Chinese champion never scoring a point and sat down and played a game of chess afterwards.

Nuff said.



 Every businessman needs a well-defined plan of succession for his affairs, both while he is living and when he dies, including:

1. Legal paperwork, in order for the inevitable. This includes wills, powers of attorney, living wills, health care surrogates, trusts. Location of paperwork. Lists and possibly personal introductions of personal lawyers, accountants, bankers, financial advisors, insurance agents, physicians. If one does nothing else but read one book this year, read a book on this subject. It will be time well spent. Many legal documents are available from legal software companies and others for do-it-yourselfers, but if not comfortable with this, go to the next level and solicit the assistance of paralegals and ultimately lawyers.

2. Contingency plans for temporary illness. Well-defined and orderly chains of succession for businesses. Check writing, bill paying, decision making, proper names on bank accounts, money deposits, trading authorizations, access to offices and homes. Location of important documents for tax purposes and documentation.

3. Business continuation plans for after death. Purchase agreements, Buy sell agreements and insurance, legacy transfer, Order of succession. Grooming of successors.

It is critical to address these issues while one is of sound mind and body. And it is very important to revisit this theme quarterly, semi-annually or annually, contingent upon personal situations and business growth.



 Ultimately, in the game of musical chairs, there is only one chair available for the final two participants and whoever claims the final chair is the winner.

In the late 90s the stock market went on a very impressive run beginning in 1995 and continuing through the end of the century. As 1999 progressed the stocks that were making new highs began to get thinned out and the indexes, most notably the NASDAQ, had fewer and fewer stocks making new highs. It was being carried by a few big names such as Cisco, Intel, Microsoft Yahoo, JDSU and some others. Stocks were described by money managers as being "priced to perfection" and every growth manager owned the same names. This was code for "You better watch out, a day of reckoning is on the horizon." Analysts like Jack Grubman and Mary Meeker were still beating their war drums however and making strong cases for their companies using very creative reasons for owning the stock.

One public poll asked investors what return did they expect on their money going forward. The most popular responses were in the high teens. Some people thought they could expect more than 20% annual return on their money for the next 5 to 10 years through their investment in mutual funds.

This all came to a bitter end in March of 2000 and the market went into the worst slide since the great depression. Ultimately, this nadir was achieved in fall of 2002 and the market began to recover in the spring of 2003. By then major damage had been done and those who came in very late to the securities party suffered greatly. Some had lost 80% and more by investing in high-risk mutual funds like the Van Waggoner group, which bought many of the dot.coms of that era.

Now we enter a new phase of the stock market and the market has been on a 4-year climb. In the 2006 year, the S&P index was up 10 months out of 12. In 2007 it has been up 3 months out of 4 and in April the market was up 18 out of 21 days.

Where do we go from here? This question becomes more and more interesting. Unfortunately, I am not Professor Marvel and certainly not an oracle and I cannot consult a crystal ball to provide this answer. I honestly do not know. What I do know is that the music is playing in the background, and chairs are beginning to be taken away as seen by some very disappointing numbers by the homebuilders and retailers to name two.

In the business of buying and selling stocks, sometimes it makes sense to take a "Schnitzel" off the table and keep some cash on hand for the next buying opportunity. There always is another stock to by somewhere and cash just isn't necessarily a bad thing to have at times.

Somebody once said, "Money isn't everything." My response is "It is if you don't have any."

And like the old Cowboy once said, "Talk is cheap, it takes money to buy whiskey."



 A popular phrase now in business is the fox and the hedgehog. A fox is good at many things but the hedgehog is great at one thing.

GE always wanted to be number one or number two in every business it competed in. Jack Welch said one of the biggest blunders he made as CEO of GE was when he bought Kidder Peabody back in the 1980s. Kidder was a carriage-trade brokerage and investment banking firm. Very blue blood. GE's goal was to merge Kidder into GE Capital. Unfortunately, GE could never make it a good fit. Welch commented that the reason for the failure to properly incorporate the business into the GE family was that nobody in GE understood the Wall Street mentality. There was no esprit de corps among the troops. GE ultimately jettisoned the investment banking business altogether, selling it to UBS in 1994.

Morgan Stanley and Dean Witter merged in the mid 1990s and John Mack and Phil Purcell became co-CEOs. This was a marriage destined for failure. Morgan's institutional brokers did not appreciate being associated with Witter's retail brokers, and their M&A and investment bankers did not care to slice up the pie with Witter's sales force. And Mack and Purcell just did not mesh. Morgan's top executives and always felt that they were superior to Witter's and Morgan's analysts looked down on Witter's. They did not play well together. Ultimately something had to give. This led to a string of departures and a brain drain and a huge talent drain.

John Mack found it increasingly difficult to work at the combined company, and resigned and took on several other roles on Wall Street in a chief executive capacity. Phil Purcell stayed on to run the company until the board demanded his resignation. Mack was reinstated at Morgan Stanley Dean Witter and now it is just Morgan Stanley. In 10 years the company has gone full circle and the stock, which had been dormant during Purcell's reign has run very well under Mack's tenure.

In baseball, all truly great pitchers have a go-to pitch. This is the one pitch that they know they can count on. At a critical moment this is the one that the catcher is going to call for and the pitcher is going to deliver.

Bullet Bob Feller's go-to pitch was a fastball. There was a reason he was called Bullet Bob. There are very few in history who had such a ferocious fastball.

Hank Greenberg was a great baseball hitter. He was asked one time how to hit Bob Feller. He said, "Hope he throws you a curve and try to hit it." The reporter asked him why would Bob Feller throw anything but fastballs and Greenberg's reply was "I don't know — maybe he gets bored."

Dean Parisian remarks:

As a former Kidder Peabody salesman, Kidder Peabody shareholders took 2.5 times book value for a company that Ralph DeNunzio couldn't float upright at high tide. No question that Kidder had some of the luckiest guys in the 1980s on Wall Street, outside the boys in the inner sanctum of the X-shaped trading desk in Beverly Hills. 



This is in honor of the widely agreed upon birthday of William Shakespeare — baptized 26 April 1564, died 23 April 1616. Nobody really is positive when Shakespeare was born, however, tradition held that babies back then were baptized three days following their birth. If this is true, then it also follows that he died on the same day as he was born, 52 years apart.

Every year I read a Shakespeare play, see one performed, or view one on DVD. I have a few favorites, but the magnitude, variety, and volume of his works is magnificent and astounding.

J. P. Highland adds:

It is a curious coincidence that Miguel de Cervantes, the most celebrated figure in Spanish literature, also died on April 23, 1616. Though he was not as prolific as Shakespeare, Don Quixote might be the best book ever written.

David Lamb recalls:

When I was in one of my darkest days of trading last year, I went to my old friend William Shakespeare, and felt this quote was really written for me:

Wise men ne'er sit and wail their woes, But presently prevent the ways to wail. To fear the foe, since fear oppresseth strength, Gives, in your weakness, strength unto your foe, And so your follies fight against yourself. Fear, and be slain; no worse can come to fight; And fight and die is death destroying death; Where fearing dying pays death servile breath. (King Richard II, Act 3: Scene 2) 



 Almost Totally Right So Far - and Happy To Let The Market Be My Judge:

Let us look at what has happened in the markets since the FTSE overshot my 6480 target by about 35 points on Monday. But it peaked that day and it has not managed to hold above 6480 for more than two successive closes. It closed at 6449.4 on April 18, 2007. Such missed targets are common. The locals in a market will want to make the wise speculator not quite correct if he is foolish enough to make his stops too tight. That's why it happens. It might be called, I suppose, the bulls' last revenge! Figuratively, the animal is mortally wounded but still has enough energy left to kill the successful hunter who comes too near too soon.

A similar phenomenon characterized the last hour of trading on the Dow Jones today. Again, to put it figuratively, the blow to the heart delivered on February 27th mortally wounded the old bull. Yet it crawled back to its old high and then, tonight, in one final act of revenge, unexpectedly leapt up above where everyone expected. It killed off all the foolish gloating bears who'd come too near too soon. In other words it had put their stops too close to the market.

These figurative ways of thinking about the market may seem simplistic but they have enormous predictive power if used correctly.

So where do we go from here? In a word, down. The next three days, April 19th, 20th, and 23rd, will all see lower closing prices than the day before, on both the Dow Jones and the FTSE. This is the start of a major bear market which will last about three years and be the greatest one since 1929-32.

I, like many others and your esteemed self, am weary beyond words by perpetual bears that cry "wolf." Or should it be bear every other week? If I am wrong about this week, I am a fool and should never be taken seriously again. I am happy to let the market be my judge - and, figuratively, my executioner!

Janice Dorn writes:

My research (possibly incomplete and inaccurate) indicates that William Hutton is a pseudonym for a British geologist who bases much of his work on the prophecies of Edgar Cayce. He also calls on esoteric writings from Gurdjieff and Ouspensky, among others.

He is far from alone is this type of fear mongering. There are plenty of people who live and breathe this stuff as they prepare for apocalypse. The Association for Research and Enlightenment (with which he has been associated for 40 years and most likely founded) is based in Virginia Beach, Virginia. His mailing address also appears to be Virginia Beach. His webmaster, Jonathan Eagle, is the co-author of his book entitled: Earth's Catastrophic Past and Future. I should be so lucky to have a webmaster who can co-author books with me! 

Steve Leslie adds: 

I do not know who William Hutton is. I have no idea what his credentials are nor whom he represents if anyone or anything. He may very well be a very respected person in the financial world therefore I will withhold judgment. I wonder aloud where he did surface from and what his qualifications are. I suspect this is some sort of an incipient joke perpetuated by someone who is using the name of a former investment house in his name. I can see the subtle joke in that when E.F. Hutton talks people listen.

That said, I wish to express my view on his posting. I find his inflammatory comments entirely counterproductive and destructive. In fact, I warned this type of writing would spew forth directly around Feb 27th when the market took a very big hit. If one would like to read my column, you can find it on titled Cowboy Up. I cautioned against listening to "nattering nabobs of negativism" who will try to rubber stamp themselves and their careers by predictions of cataclysm in financial markets.

I wonder what good possibly comes out of such grandiose and garish predictions. This reminds me of Joe Granville who built a career out of one grand call in the market, and spent the rest of his career losing money for people, or Elaine Garzarelli who in 1987 suggested there would be a major collapse in the market. She has since become less prevalent yet she still lurks in the background. There have been many comments over the years attributed to Alan Abelson and his constant harping about an overvalued market. This quintessential uber-bear who can brighten up a room just by leaving it specializes in schadenfreude. Ad an editor, who as far as I can tell has never managed money nor had any track record, he is a very flowery and entertaining writer and an interesting character but a crusty curmudgeon nonetheless.

I must say that I cannot recall whether he has ever made any money by owning stocks or if he was ever ebullient about the stock market or the United States economy or commerce in general.

Even Robert Prechter who when properly motivated can be quite a trader, and in the early 1980s won several trading championships on a national level, has been warning about a super bear cycle predicted by his work with Elliott Wave since the 1980s.

Of course, the most sanctimonious prig of them all is Warren Buffet. The Oracle of Omaha seems to have made so much money and has decided to give so much of it away that he sees no need for anyone else on the planet to make any more money that they should therefore acknowledge their pathetic lots in life and submit to a cold and heartless destiny of insignificance. I am hard pressed to recall a time when he proclaimed that it is a great time to own equities. He reminds me of the great college football coach Lou Holtz who could never find a reason why his Notre Dame football team could possibly win a football game, yet consistently stood atop the polls at the end of the football season.

Then there was the time, I went to a national conference in 1995 and attended a lecture by a very respected financial newsletter writer at the time from Montana. He was riding a crest of stardom. His views were that inventories were rising at unsustainable rates and the markets were extremely risky here and going forward. In his view, we were to enter a period of unstained growth and his predictions were that we were about to embark on a very bearish and cruel time in the market. Any casual student of the financial markets will remember that this was the beginning of the greatest stock market advance in history.

Now we fast forward to William Hutton. Here is an excerpt from his post here:

"So where do we go from here? In a word, down. The next three days, April 19th, 20th, and 23rd, will all see lower closing prices than the day before, on both the Dow Jones and the FTSE. This is the start of a major bear market which will last about three years and be the greatest one since 1929-32.

"I, like many others and your esteemed self, am weary beyond words by perpetual bears that cry "wolf." Or should it be bear every other week? If I am wrong about this week, I am a fool and should never be taken seriously again. I am happy to let the market be my judge - and, figuratively, my executioner!"

Now, I mentioned on Tuesday that historically the market tends to rally directly after tax deadline and the 5 days following the drop date are quite positive. This was based on historical numbers reaching back 13 years. I also espoused that technology tends to do well for the quarter following April 15th.

I do not know what the future will hold. It may very well be the stock market falls dramatically; we enter a phase where equity prices erode to levels approaching that of the great depression. It is possible. It is also entirely possible that a butterfly flutters its wings in China and this causes a hurricane and an ensuing tidal wave that wreaks mass destruction in California. I am sure that there are even numbers people who can tell us what the likelihood of such an event is. It is possible but not very likely.

At the end of the day, for the week and for the year it really does not matter what Mr. Hutton has to say. Nor does it matter much what I have to say or what anyone else has to say.

What matters is how one maximize the chance to make money in the markets, how we as investors can actually deploy our hard-earned capital with a positive expectation and yield, and how we utilize information profitably so our standard of living for ourselves and our family can grow substantially on a yearly basis. This is the greater good and the greatest goal.

Theories and anecdotal comments and worthless and useless. The proof is in the financial pudding.

So finally, I say to Mr. Hutton assuming he exists, in the words of Arnold Schwarzenegger, "You have been erased."



 I will be reading/performing my poetry next Saturday, 21 April, at the Soldiers' and Sailors' Club at 37th & Lexington Avenue, for the NY Poetry Forum, from 2 pm to 5:30 pm.

There will be a lecture before the reading, "What is Behind the Brodsky Nobel Prize?" by Professor George Katznelson, and then four featured poets. (Among them, me.)

Afterwards, there will be a Mozart duet: Sonata for Violin and Piano, performed by Mark Fiedler, pianist, and David Grunberg, violinist.

Cost for the event, $4. All are cordially invited.

Steve Leslie adds:

Prof. Dreyfus is a most excellent contributor to Daily Spec, with wonderful and worldly insight into affairs and a remarkable and refreshing writing style. An opportunity to partake of an event with her should not be missed. 



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

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

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

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

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

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

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

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

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

J T Holley adds: 

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

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

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

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

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

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

Steve Leslie writes:

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

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

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

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

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

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

Bill Rafter adds: 

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

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

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

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

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

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

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

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

Hey, anyone want to buy my gravity system?

Steve B. adds:

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

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

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

From Henry Gifford:

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



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

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

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

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

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

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



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

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

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

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

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

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

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

Steve Leslie writes: 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ken Smith writes:

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

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

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

Alston summed his view by writing:

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

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

Victor Niederhoffer notes: 

I started out with about 10,000 under management.



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

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

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

Mistake number one:

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

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

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

Mistake number two:

You stay with a hand too long.

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

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

Mistake three:

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

Mistake four:

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

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

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

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

The same with speculating.



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

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

The Top Five Reasons Entrepreneurs Like Hockey

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

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

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

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

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

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

Steve Leslie adds: 

I can think of several other fascinating things about hockey.

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

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

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

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

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

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

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

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

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

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

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

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

George Zachar writes: 

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

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

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

Steve Ellison adds: 

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



My view on James Cramer is to take him strictly as entertainment along with his show Mad Money. His discussions are very topical and he has on occasion gotten himself in hot water with regulators with his off-the-cuff remarks both on his show and his website, The He has also incurred the wrath of regulators for allegations of front running which ultimately led to the demise of his predecessor in this field and CNBC's Mr. Dan Dorfman.

Yet he can be helpful and harmful to a neophyte investor, which appears to be his audience. He is helpful from the perspective he is very animated and theatrical and thus keeps his young audience's attention. Moreover, he gets them interested in stocks, the markets, and investing at a young age. This is a good thing.

However, and this is my opinion, he is harmful because of his very cavalier Lightning Round and his lack of accountability and follow-up. In addition, he offers opinions on many stocks with witty quips and seemingly little analysis. This can be construed as damaging because it gives the impression that investing is a carnival act rather than a very sober and difficult venture. Still, I must say I do like him in small doses.

For stock ideas and market perspective I much prefer Fast Money hosted by Dylan Ratigan on CNBC at 8:00pm eastern time. His original after-hours show was replaced with Mad Money and now he is back with his new show and new format. His guest lists are actual people who make actual money.

For after-hours economic views and market perspective I appreciate Kudlow and Co. for the guest list if nothing more. Here you can get views from Arthur Laffer, Wayne Angell, and others.

As always, these shows should be taken with a grain of salt. Caveat emptor information that is free is usually worth what you pay for it. I am sure there are varied opinions on this but as they say, "That is what makes markets." These opinions happen to be mine.




 Here is one valuable lesson that I gained from a pirate. Call it the Captain Hook principle if you like. It involves understanding how an alligator eats its prey.

I learned this from Vic Sperandeo's book Methods of a Wall Street Master. He mentions this on page fifteen.

"The more the victim struggles the more the alligator gets. Imagine an alligator has you by the leg: it clamps your leg in its mouth and waits while you struggle. If you put one of your arms in the vicinity of its mouth while fighting to get your leg free, it lunges and then has your arm and leg in its clutches. The more you struggle, the more the alligator takes you in.

So if an alligator ever gets you by the leg, remember that your only chance to survive is to sacrifice the leg and drag yourself away. Translated to market terms, the principle is when you know you are wrong, close your position!"

Aron Ralson describes in his book, "Between a Rock and a Hard Place," how he broke his radius and ulna bone in his right arm and then self-amputated his hand at the wrist after being pinned under a rock for 6 days in Utah's Canyonland's National Park.

This illustrates clearly what happens when you are in a bad trade. Be an adult. Don't rationalize. Don't pout, don't freeze, and don't call your mom. Admit you were wrong and sacrifice the hand to save the life. Most important, live to fight another day. Accept your humanity. Look rather at a bad trade as suspension of success.

Vince Lombardi said, "We never lost a game we just ran out of time." And in the timeless words of John Maynard Keynes, "The markets can remain irrational much longer than you can remain solvent."



 I was in Florida in the late 1980s when Bill Seidman and the RTC took over massive amounts of commercial real estate and began to liquidate pristine properties with impunity because investors in limited partnerships were just walking away from their obligations.

Many were hurt — some severely, some permanently — and it ultimately did get resolved. But it took years, and some properties took many, many years. Big developers such as DeBartolo , Trammell Crow, JMB and Balcor took huge hits and some investors lost their entire investments in these packages.I believe one would be well served to go back 15 years and study that time.

It was promulgated by a gigantic change in the tax code that limited deductions from investment property and severly curtailed aggressive accounting and depreciation techniques used by limited partnerships.

It had a trickle down effect on many levels, especially to other areas of residential real estate, from middle America to carriage-trade neighborhoods such as Malibu and Newport Beach, to the pockets of wealth in the South such as Palm Beach and Miami, to the East Coast from New York to Maine.

Those who were well-positioned financially rode out the storm, and those who had available capital snatched up blue chip properties for pennies on the dollar. Those who were not were stampeded.

Citigroup and other major banks traded at historic lows. When Citi was at $12 per share, many analysts suggested they could go bankrupt. Richard Bove at Dean Witter said this was the opportunity of a lifetime to buy Citicorp and was summarily fired for being an outlier in his opinions.

The wise man, who goes into the recent past and studies it in detail, who will stand the best chance of being rewarded.



 The odds of one person's filling out a perfect bracket for the NCAA basketball tournament, i.e., the odds of picking every single game winner correctly is nine quintillion to one.

Another way to view this is that if every person on the planet were to randomly fill out one million sheets the chances would be one in 1000 that a perfect sheet would be found.

The odds of picking the five numbers in the Powerball lottery are one in 3,563,609 but to pick all five numbers and the powerball are one in 146,107,962.

Alston Mabry writes:

If the tournament were a coin-tossing exercises, there would indeed be 2^63 = nine quadrillion outcomes. But can we improve those odds?

Looking at the NCAA Tournament results for 2005 and 2006, 86 of 126 games were won by the higher-seeded team, a 68.3% win rate for the NCAA seeding committee. If the seeding were random, one would expect a win rate of 50% with a 4-5% standard deviation, so the committee's results are inconsistent with randomness.

If you go further and rank the games by the difference in seeding (low seed minus high seed, so that a one seed playing a 16 seed would be a 15-spread game), and then look at the quartiles, you see that the committee is even more successful. The first column is the average difference in seeding between the teams in the quartile, and the second column is the rate at which higher-seeded teams won in that quartile:

seed diff / win rate
12.29 87%
7.79 75%
4.25 69%
1.27 42%

Andy Moe remarks:

 I would suggest that spreads and seedings should be examined closely in the tournament, as there are statistically significant edges that can be of use both at the sportsbook and in an office pool. For the most part, I believe the edges are present because the tournament selection committee is better at seeding the teams than the general public is. Add plenty of "amateur" money chasing favorite schools and you have the perfect recipe for mispricings.

The memes surrounding the tournament are surprisingly similar to those found in the markets. The length of time since a #16 seed beat a #1, the danger of the #5 vs #12 matchups, past greatness of teams, coaching vs players, upset specials, giant-killers, hot hands, the list goes on and on. Thankfully, almost all of this centers on how to pick winners, not how to beat the spread.

So while the rest of America concentrates on filling in brackets, I'll be packing my bags for Vegas. As in the markets, it pays to know when to break out the cane and hobble down to the sportsbook.

From John De Palma:

From the New York Times

"When it comes time to pick a champion in an N.C.A.A. bracket, people tend to cluster around a few of the favorites…. At first glance, this focus on the favorites seems to make perfect sense. History suggests that the top-ranked teams really are more likely than other teams to win the tournament. If you cared only about picking the correct national champion, it would be smart to choose a team like Ohio State or Kansas this year. The problem is that you would have a lot of company. To finish at the top of your pool, which is what matters to most people, you would have to do extraordinarily well in the rest of your bracket … The lesson is basic: As long as everyone else is clustering around a couple of favorites, you hurt your chances by joining them … But pools do make a broader point about human behavior. Frequently, people make decisions without fully taking into account the actions of others. Investors, for instance, may buy stock because they believe a company will do well in coming years, but they fail to consider the possibility that the stock price already reflects that information…"



 Comments about the Uber bear and the groundswell surrounding the impending, inevitable, implosion of the subprime market, which will lead to a recession of diluvial proportions, remind me of several things.

One is that everyone no matter who they are face difficulties in life. It is one of the great illusions that is promulgated especially by publicists and spin-meisters that their clients somehow soar above this and thus live idyllic lives.

Whether it is that Brad and Jennifer have a wonderful marriage when it is suddenly revealed that in fact they are in the midst of a very acrimonious divorce and the stunning actor suddenly and without malice aforethought quickly assumes residence with the collagen lipped adopt-the-world Angelina.

Alternately, that the two presidents for one theme that was so soundly pounded by the oval office inner circle as being wonderful for the country, is followed by a vast right wing conspiracy which is followed by a very revealing Starr report on infidelity and romping in the Map Room.

The world is full of canard, misrepresentation, misdirection, and sleight-of hand, carefully designed to mislead and confuse an eager yet gullible and naive public. Those at the forefront who wish to obfuscate rather than educate, and to further their own agenda rather than yours carefully craft this methodology.

That such a collective consciousness can buy into the old tried and true maxims, however incorrect, time and time again, and who forget that in the words of P.T. Barnum, "There is a sucker born every minute," and, "A fool and his money should have never gotten together in the first place." Also, "If after 20 minutes at a poker table you can't identify the pigeon, it is because it is probably you." And that is why you were invited to the party in the first place.

That in the end the cards are stacked against you so why bother in the first place.

That shadenfreude is ubiquitous and worth what you pay for it.

These are the things I think about.

Yet I am also reminded when I hear of those who constantly denigrate the opportunities in the greatest of all countries in the world, and for that matter in the history of mankind, that opportunities abound everywhere and that one can also rise above the maelstrom of despair and struggle and survive and fight and can achieve great things if they keep their shoulder to the wheel. That if it were done before it can be done again. That it is not different this time because people are not different.

Finally, I ponder the words of perhaps the greatest president this country has ever had the pleasure of having been led by and one of the greatest men and leaders in the history of modern civilization:

"It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat."

Theodore Roosevelt "Citizenship in a Republic," Speech at the Sorbonne, Paris, April 23, 1910



 One of the reasons humans are still competitive with computers in chess is that we are aware of patterns that don't compute. Take, for example, nature of pawn structure. One can count individual pawn weaknesses but it's very hard to find an algorithm by which the harmony between pieces and pawns can be assessed. The human mind, however, is quite capable of this.

Might it not be the same with markets, that there are patterns which can't be effectively coded and others which can? As a very simple exercise one might try to count the number of waves that tend to accompany a decline from highs or see whether an n or u formation is being created. Seems to me that it's very, very difficult to do this with numbers; but the human eye is reasonably adept.

The problem of course is that without a clear computable definition of what one is looking for there will be too much that is open to "interpretation," so the results could hardly be relied up. So what is the solution?

I've been thinking about a possible way round this but please excuse me if it is scientifically unsound. What about having generic patterns that contain multiple computable definitions? For example one might have major categories like "panic" or "breakout," but then multiple and detailed definitions of what these are, just to be sure that the computer will recognize them but not for something else. Then when it comes to the stats the generic categories are tested rather than the details.

Just a thought.

Vincent Andres adds:

Another example: it's very easy and fast for a human eye to detect if points are aligned; it's quite a long calculus for a computer.

"So what is the solution?"

This is a deep question. One answer is to stop reasoning/computing with "crisp" sets. With crisp boundaries you have indeed threshold effects that make the reasoning/computing discontinuous and unstable. One way of doing that is using "fuzzy" sets. With fuzzy sets, set limits are no more crisp, but continuous. So working on them is more stable and more continuous. Nice applications are for instance in control.

Fuzzy sets are an interesting tool when it comes to trying to represent knowledge and work with it.

It's not a miraculous tool. Yes it is (or was) a buzzword. You can do the best and the worse with it. And it was done and it is done. Like with neural nets, genetic algorithms, etc, etc. Like with statistics, probability theory, etc. But it's a nice (and very mathematical) topic.

From Steve Leslie:

I like your analogy to visual patterns that don't compute. There are similar parallels in poker.

A computer can give exact statistics of making a hand and pot odds, etc. It can also calculate tendencies with a player. However poker is a game of imperfect information therefore much is subject to interpretation.

Now then:

Crandall Addington is one of the great poker players of all time and a true character. I saw him on TV 25 years ago playing in the old World Series of Poker with a $10,000 buy in. This was when no limit hold-em was essentially an obscure game and $10,000 was a lot of money. He was wearing a Mink Stetson. This was before PETA for sure.

He said that limit poker is a science but no-limit poker is an art.

Limit or structured poker contrary to popular belief contains little bluffing. Most of the hands are played straightforward. There are many multi-way pots and almost all hands go to a showdown.

No-limit hold-em is entirely different. Statistics and straightforward play will only take you so far. It is much more a game of playing the table and the opponents. A feel for the game, understanding its ebb and flow, and evaluating the dynamics of the players are critical. The best no limit poker players know when to be tight, when to turn aggressive, when to bluff, and when to truly gamble. This is where experience is essential.

Similarities occur in trading stocks and futures.

There are the fundamentalists. People like the Buffett of 20 years ago, who was a protégé of Benjamin Graham. Martin Whitman and others. They can be the value players and the grinders. They see big picture things and exploit opportunities but only when the balances are tilted in their favor.

There are certainly the quants, people like Mr. Symonds who obviously have a created a superior mousetrap. But of course, they are neither talking nor sharing what they have found to be successful. There are some others such as D.E.Shaw. Once again they are extremely secretive and are constantly working on their algorithms that identify patterns. Many of the employees are PhD's in computer sciences, mathematics, and music. They are the equivalent of the Rand Institute. Guys and gals who sit in seclusion and are constantly perfecting their own "black box."

Then there are those who trade on a combination of statistics and feel. They tend to be excellent at the "feel of the game" and reading the opponents. The Chair is one of the best of these. One of the finest traders in the world who worked for one of the great traders in Soros. Robert Prechter has had significant success trading off of Elliot Wave patterns.

Then there are the floor traders. They are very intuitive and great readers of the market. They get the first look at where the orders are being placed and who is placing them. In Education of a Speculator, Victor describes in detail how one of Soros's traders would enter the elevator to the floor and the bids would change. It became a game of the cat and the mouse.

In summary: There are opportunities for each of these to profit from the market. As each of the above have demonstrated in their abilities to make money time and time again. It then boils down to what kind of game are you are in and an understanding the rules.

From Bill Egan:

Plotting the data different ways pays off all the time. I earned a US patent because I examined bi-plots of ~50 variables and saw something interesting. Further investigation showed a sensible relationship to the physical mechanism I was interested in modeling, and I quickly built a model that has worked for eight years now.

I always use bi-plots. Once I have a feel for the data and can throw out some variables, I will color points in bi-plots by a third variable. I use this to highlight known extreme values, events, or odd experimental results. It often reveals useful patterns to the careful eye. Histograms of the distribution, data percentiles (percentile function in Matlab), and empirical cdfs are also handy. Multi-modal distributions are often interesting and show up in a histogram.

Software like SpotFire makes this very easy, and includes ways to size and shape data points by other variables (although it isn't cheap to buy). You can certainly do this sort of thing with a bit of work in R or Matlab or S+.

Another trick of the trade is to compute correlations among your variables. You can almost always remove a variable that is r^2 0.9+ with another variable. This will cut down on the amount visualization you need to do.

Further thought from Nigel Davies:

What if the most subtle and powerful engine for pattern recognition and synthesis is in fact the human brain? In this case shouldn't we be training ourselves rather than our computers?

Probably the search for patterns does this anyway but this would seem to be another benefit of the Chair's recommendation to hand count.



 One of the virtues of my recent vacation was that the market plunge caused me to watch prices every minute of the day while the family was playing. I found the most convenient price feed for me on CNBC which has streaming S&P futures prices and DJ every 30 seconds. The prices are interspersed with an orchestrated mélange of shows, news, and opinions from reporters, hosts, columnists, market mavens, scenes from the floor, self serving comments by investors with positions, mutual fund managers, live coverage of official meetings like the Fed before congress, and guest appearances by politicians.

As I have always eschewed reading any newspapers or watching TV, (Indeed four generations of my family have not owned a TV, and our kids frequently are asked at show and tell to describe what it's like not to have a TV in the house), I thought it might be appropriate for me to give some impressions of the coverage the same way that it might be valuable for a man from Mars to comment on the backdrop of human comings and goings.

My choice of CNBC was apparently fortuitous as this station is recognized as the leader in global business news. Time Warner Media states they reach 88 million households, a survey of financial workers shows that about 90% of them watch it at least once during the day. The profits of the station are about 250 million, and viewership of approximately 500,000 is apparently double from 2 years ago.

Influential people seem to recognize this and during the week that I watched, such luminaries as Hillary Clinton came on for a special message that foreign holdings of US debt should provide a wake up call for US vulnerability. Abbey Cohen gave a very thoughtful bullish prediction for US stocks the day after the crash and Warren Buffett himself was shown repeatedly talking down the US stock market because of its vulnerability to a hard landing, due to the twin deficits. All that was missing as far as I was concerned was an interview with the Palindrome himself stating that he was bearish on the dollar or stocks.

I have a theory that the public is always guided to do the wrong thing so that they will make a contribution to the market infrastructure and provide funds for the massive communication costs, buildings, salaries, brokerage house traders, dealers, hedge funds, and mutual funds that must survive in order for the whole ball of wax to continue. Thus, during the period I watched from Wednesday, February 28 to Saturday, March 3, which was sparked by the 4% decline on Tuesday, Feb 27 and a 5% decline in the market in a five-day week, I was particularly anxious to see how the public would be guided to take a bearish view.

As is well known, after big declines like this, the most successful investors take out their canes and hobble down to the street and buy. This is greeted on average with a 2.5% rise over the next 10 days, and smaller rises each of the next five days, as has been well documented in this space, my books, and the many that have noted the effect by counting independently or who have the ability to count it themselves, or talk to someone who has. I was not disappointed in my belief that much bearish guidance would be given. Indeed, two of my favorite techniques of propaganda pseudo talk were used prominently — namely the mystical perfect lie technique of causing magic to happen and then belittling ones abilities ('that key you lost 10 years ago that I just pulled out of the clouds doesn't count as evidence of my mystical abilities because I wasn't really trying to do it'), and the technique of the quote taken out of context.

The quote out of context was particularly salient on Wednesday as a chronic bear was interviewed about Ben Bernanke's testimony. Bernanke's testimony was the most bullish that I have ever heard from a Fed official. He stated that there was no liquidity crisis, that the economy was destined to improve over the next six months, and that there was no change in the economic data that would warrant a prediction a la Greenspan's 1/3 probability of recession. Yet the chronic bear was able to find one sentence in dozens of pages of testimony that he said showed how bearish the Fed was, in that it said that if the rate of real estate increase did not continue as it has in the past five years, that it was possible the amount of spending might not be buffered as much as it has in the past by this increase in wealth.

Similarly another chronic bear, who was greeted with an "every bear has his day" headline, emphasized that he wasn't really worried about China, which was the proximate cause of the decline on Tuesday morning but all the sub prime lenders were about to evaporate. A very nice climactic punch was thrown by a wild man coming on the stage at about one each day. Jim Cramer screamed that this was an amateur bear raid, that he couldn't really say how bad the subprime was because it would be indiscreet, and that he would have liked to see the Dow fall below 12,000 to really create fear.

The back and forth between the attractive female reporters who tried to hold him down as he screamed about how stupid everyone else was, and how he didn't care about the yen carry trade at all, made for a thrilling and highly romantic tête-à-tête. The excitement was enhanced by a distress call by the attractive other that, to make matters worse, the chronic bull Larry Kudlow was going to be on next, against the chronic bear forensic accountant.

I found watching the orchestrated performance of reaction to the market panic during the time that I listened that I could attribute the movements in the market itself to the content of the messages communicated.

When news of Hillary or Buffett was reported, or Herb Greenberg or other chronic bears spoke their piece, or Maria Bartiromo decried the latest earnings report, the market went down say 10 to 20 Dow points in the next fifteen minutes. When the venerable senior economic analyst, Joe Kernan or a Florida buy and holder, or Abbey Cohen talked, to say that it had all happened before, and in the fullness of time, that the decline wouldn't even be noticed, the market went up some 10 Dow points in the next 15 minutes. It would seem to be possible to profit from such moves by buying and selling during times when the market is on edge based on who is scheduled to talk.

I found the on the scene reports of Michael Santolli, from the floor of the Chicago Merc, very interesting. He managed to provide a good description of what people were saying about what caused the latest move in the market over the previous half hour. He was very good at maintaining a judicious manner in not forecasting anything. Indeed, during the time I watched, there was little attempt by anyone to try to provide a rudder, such as what generally happens after panics.

The consensus seemed to be that the decline had not yet reached 10% and it was likely that it had further to go on the downside before turning up later. Such communiqués go against the theory of rational expectations, which are true to the extent that if we think something is going to go up 10% by the end of the year, we're going to buy now, even if we think there's a chance that there might be some unpredictable bumps along the way. I found Maria Bartiromo a very knowledgeable and serious reporter. Her frowns, pouts, and cover the eyes bangs, seemed to inject a gentle scorn for the men she interviewed, as if she would like to give them a proper beating if only they weren't so foolish.

I understand that during the tech heydays of the 90s she had a much more engaging and cheerleading demeanor and she is to be complimented on this about face. This is also helpful to the market ecology as exactly the opposite would in my mind be more profitable to the viewers. Regardless, for me this added a very fine, exciting ambience when she came on at the beginning and end of each day with her somewhat denigrating, above the fray chastisements of those who would be long during this time of panic.

One of the ironies of my Florida viewing was that just when the market was at its most climactic bearishness, the shows would end, and a local commercial would be shown. The commercials all seemed to highlight the availability for one week only of personal loans without bank statement with an interest rate of 6%.

I found the rate more and more attractive as the market decline continued. The same for the Florida vacation homes available with 10 acres of land for just a $100 deposit. Also ironic was seeing the constant advertisements from someone whose research I find totally wanting, Jeremy Siegel and Michael Steinhardt. Together they plugged an ETF fund that somehow had the right mojo with respect to price earnings ratios. One would have hoped that these dim luminaries would have more dignity than to hawk such an untested concept.

Aside from the knowledge I gained of the rhythm of the markets, with the Worldwide Exchange moving to the squawk box to Morning Call, to Power lunch, to Street Signs, to Closing Bell, Kudlow and Company, then "one man, one visions, one hour." Jim Cramer with the moves in the market during each episode. These were somewhat predictably based on who was scheduled. I found that the main value I gained was realizing that the Dow Index is reported about once every five seconds, and thus, is a much better index to monitor for what just happened, and changes in microscopic inertia than the S&P Index, which is reported every 15 seconds.

Steve Leslie writes:

 I watch CNBC mostly for the entertainment value. I find much of the information they provide glorified fill between commercials although I have to admit that Liz Claman is one heck of a fill between commercials.

That said I do find value in certain aspects of the show. Most notably the premarket opening with Bob Pisani and the effervescent Rick Santelli and guests who are interviewed who actually work on the floor. Without going into detail, I have my favorites for a variety of reasons. I watch some of the aftermarket shows, Kudlow and Company, and Fast Money at 8pm. I like the format and am growing weary of O'Reilly. Yes it can happen.

CNBC dominates this space because there is really no alternative for financial news on cable TV other than Bloomberg TV, which is hard to find in some markets. I get Bloomberg on my cable provider only from 7-9AM and it is buried on the E-Channel.

For those who have a dish Bloomberg has a station available 24 hours a day, one that is much less commercialized than CNBC. My night owl friends tell me that CNBC Europe is a very good show.

Thus what is one to do for financial information when away from the office or grows tired of CNBC?

Bloomberg has a website where you can get Bloomberg TV and Bloomberg radio live on streaming media.

I find a wireless to be a marvelous alt for my home computer. I can go to any bookstore, coffee shop, library or public building or restaurant and pick up a wireless connection. Free

I trade from my PC laptop through Scottrade elite while having coffee in the morning or during meetings at lunch. I do not trade futures but Victor tells me that Laurel likes Interactive Brokers.

Sprint offers a mobile wireless now for around $40
per month down from $59.00. I can have unlimited access to the Internet through
my PC literally anywhere I go in the world.

There is also a service called go to my PC that allows a direct connection to your PC through the internet from a remote location. Thus you can connect from your laptop to your desktop or office computer.

XM Satellite and Sirius radio have simulcast of CNBC and Bloomberg for $12.95 per month. Great for commuting. Plus you get Howard Stern not Howard K. Stern (tongue in cheek)

If carrying a PC is too cumbersome or bulky, a blackberry is the weapon of choice here. One can text message and receive financial information on demand.

On the low end, cell phones now come equipped for stock quotes and other financial information on demand. Now while in transit either by plane, train, automobile, or on vacation, you can get out of the room and go fishing or sit by the pool or go to the theatres or the movies or the craps table, or watch the zanies and crazies on Duval Street in Key West and be in continuous contact with the financial markets anytime and anywhere. It is just a matter of understanding the technology. 

Henry Gifford writes:

I don't claim to know why the information on CNBC is so bad, but perhaps things are much less planned than the big players encouraging the stream of bad information.

In the field of boiler repair, there is a popular guru who knows little, and provides much misguidance. Equipment manufacturers sometimes provide good information (some people say I made a million dollars with my apparently proprietary system of reading instructions and following them), but it is rarely followed. Thus there is no pressure to improve the quality of information, which is often poor.

One conclusion that fits is to say that the industry is happy to sell boilers to replace the ones destroyed by bad practice, and the service companies are happy to do more frequent repairs. I cannot think of any counting or examining of business relationships that would prove this wrong.

But I think there is another, more correct explanation. The guru told me he cares more about magazine article deadlines than getting the articles right. The articles help sell his books and seminars, so he has an incentive to keep the articles flowing. Service companies don't see the payback in training workers who can then just quit, and don't see any reason to sell skills better than the other companies provide, as consumers can't very well have a "control" to see what would have resulted if they chose another company. In sum, the standards are low, science and counting hardly exist, and most people in the industry don't care enough to learn what they need to know.

Seen another way, picture the Chair trying to get a spot on CNBC, and using Daily Spec sales statistics as a credential. Nobody read it because it didn't tell people what they wanted to hear.



 Here is a list of Murphy's Laws and variations of it that have been compiled on this website. In light of the events of this week I thought it appropriate to send a list of some of the more popular ones and a link for these and other interesting quotations. I think there are many lessons here for the speculator.

Murphy's Laws.

1. If anything can go wrong it will.
2. Nothing is ever as simple as it seems.
3. Everything takes longer than you expect.
4. If there is a possibility of several things going
wrong, the one that will do the most damage will go wrong first.
5. Left to themselves, all things go from bad to worse.
6. If you play with something long enough, you will surely break it.
7. If everything seems to be going well, you have obviously overlooked something.
8. If you see that there are four possible ways in which a procedure can go wrong, and circumvent these, then a fifth way, unprepared for, will promptly develop.
9. Nature always sides with the hidden flaw.
10. Mother Nature is cruel.
11. It is impossible to make anything foolproof, because fools are so ingenious.
12. If a great deal of time has been expended seeking the answer to a problem with the only result being failure, the answer will be immediately obvious to the first unqualified person.
13. If anything just cannot go wrong, it will anyway.

Marlowe Cassetti writes:

When I was at NASA I had the privilege of working with Bill Tindall. He had a sign on his wall that proclaimed, "Better is the Enemy of Good." It was uncanny; whenever bright ideas were supposed to make a spacecraft or software better they usually made things worse.

I recall a scientist/primary investigator was pleading to change the mechanical readout on his flight instrument, to make it easier for the astronauts to record the observed data. The astronaut representative didn't think the change was necessary since the flight crew had trained with it and it wasn't a problem. With great reluctance the Skylab Change Control Board approved this minor modification. When in space, the new readout came loose and fell inside the instrument and rendered it useless. This was a 45-pound package and was carried into space at great expense. Better was the enemy of good, as Murphy would probably agree.



 Living on the East Coast of Florida, I have learned about the phenomenon of rip currents and how to survive one should you encounter it.

A rip current is a strong flow of water returning seaward from the shore. They can occur at any beach with breaking waves, including the world's oceans, seas, and large lakes such as the Great Lakes in the United States and Canada.

Such currents can all be extremely dangerous, dragging swimmers away from the beach and leading to drowning when they attempt to fight the current and become exhausted.

When caught in a rip current, you should not fight it, but rather swim parallel to the shoreline in order to leave it and search for calmer waters where you can return to shore.

Similar events occur when speculators gets caught in a rip market. The natural inclination is to fight back and try to swim back to shore or, in this case, try to get even. They exhaust their capital by overtrading until eventually they drown in their losses.

The correct strategy when faced with a powerful force is to swim alongside the turbulence rather than engage it before re-entering, until you find the proper entry point and things have calmed down. This is taking the path of least resistance and it ultimately leads to a more harmonious and profitable conclusion.



 On a day like today, one is sure to see the deepest darkest side of the financial markets and the financial pundits. And the bulls and bears are going to choose sides, and start to fight things out in the short term.

Being a veteran of more than 25 years of trading stocks and stock indices and living through the events of 1984, 1987, 1991, 1994, 1997, 1998, and 2001, my perspective is this:

One monkey does not close the show. A big decline like today does not lead to an end of the world or a China Syndrome.

It takes time for sanity to return to the markets on such a day as this. This means that the money will need to be sorted out and there will be continued volatility and big swings for the next several weeks.

Financial shows are in a war mode where they will begin to fight over viewership. Consider this akin to sweeps week at the networks. Financial advice will be ubiquitous. Remember, the more public the advice is and the more readily obtained it is the less valuable. The best bet is to not watch television, particularly the financial shows. Especially avoid the cable news shows. They are in the entertainment business not the moneymaking business.

Avoid all or none thinking. Eliminate Schadenfreude from your thinking. Avoid self-pity. As Bill Parcells says, "you are what you are."

Ignore the nattering nabobs of negativism. They are out there to rubber stamp their careers with one lucky call. Do not help them. Their opinions do not count anyway.

This is where all the practice, mental preparation, training, and professionalism become critical. General Patton would say, "This is where all the training pays off."

Be your own man. Make decisions based on your beliefs and your philosophy for better or for worse. If you had a good plan going into today, chances are it will be a good plan going forward.

Don't change tack. Any sailor will tell you to steer the vessel in the wave and head directly for it. As long as you have power, you have control.

Focus on what you have control of. Manage the trade; don't let it manage you.

Vincent Andres writes:

I ask myself, is it so important to identify the precise stimulus that triggered the market? There was probably one. One little shock, maybe, on one little fissure, which was enough. This is because it was applied at the right moment at the right place. But I'm afraid those remarks are of no predictive value. It is impossible to identify all possible little shocks and all possible little fissures. That's looking for a needle in a haystack.

But the market was in a state such that a little shock on a little fissure could propagate, coming from a microscopic, invisible level and emerging at the macroscopic visible level.

Why was the market in this state? Stress, pressure, tension. How to measure when the market is in such a state? I bet that some physicists have some ideas about this question.



 After a tree dies and falls in a forest, there is an opportunity for greater sunlight and nutrients from old decaying matter to nurture new growth in the vacant space. New plants develop in the open space and often grow vigorously. Other plants that grow on the old branches are called epiphytes, generally lichen, algae, mosses, and orchids. Often their growth and stability are amazingly vibrant and fecund. A great example can be seen not in a natural rain forest, where they usually occur, but in the greenhouses of the Bronx Botanical Gardens.

The movement of stocks and markets after a disaster is often similarly vibrant. Take the Israeli market, the Tel Aviv 25, which after moving down to 778 in September 2006, in the aftermath of the war with Lebanon, moved above 1000 for the first time on Monday Feb 19.

As I write at 730 AM EST, the upward march of stocks after the end of a war seems to be a general phenomenon. And one of the first studies that I performed in business was on the buoyancy and above average growth of US stocks after the end of the Vietnam War with particular reference to the surge after World Wars I and II. The sources of that growth appear to be both economic and psychological.

A general study of the markets and individual sectors that grow best after disasters such as bankruptcies, hurricanes, and fires, as well as the much more common artificial disasters and squeezes which are the meat and potatoes of the "locals," would seem to be in order. There is no better way to start this than by reviewing the Wikipedia article on Epiphytes.

From Scott Brooks:

 There is a synergistic rhythm to cycles of life and death, with life being dependent on death for the source of energy, nutrition, and general opportunity. That is why optimism should always rule the day, especially in the face of great adversity.

Hurricanes, fires, tornados, ice storm, and avalanches all change the landscape and create great opportunity for growth, regeneration, and life in general. The same thing could be said of war and man-made calamities. An unfortunate fact of life and human nature is that men do battle and battle creates great adversity, death, mayhem, and destruction. As much as we would all like to have world peace, it is simply not something that is attainable. Therefore, we have to look for the seed of opportunity that lies in the great adversity of that happening (an adversity, that I'd like to point out, is out of the control of anyone one person reading this).

Some of you may take what I'm saying to be harsh or callous or mean spirited. I would submit to you that you need to look at the facts of what I'm saying and then ask yourself "is anything he's saying not the truth?" Also, finding the seed of opportunity does not mean being immoral or unethical.

Was it a mistake for me to invest in the Israeli stock index a few days after Hezbollah attacked last year? I say no. The mistake was when I sold my position after six weeks for only about a 6% gain. I should have held it longer.

We also have to watch out for people that are "Life Bears." These people are always pessimistic. They can always find negative in anything that occurs and turn it into "the sky is falling." I believe that the global warming bunch is a great example of Life Bears. They see global warming as a way to force the rest of us to comply with their vision of negativity by forcing us to give up the one thing that can save us, progress via the Mind of Man. You see, if we follow their prescribed methodologies for solving the problem of global warming, we halt most of the progress that will likely solve the associated problems.

Keep in mind what I've said many times on this list, quoting Napoleon Hill, "the dominant thought that you hold in your mind will manifest itself in your life in some form of outward reality." The global warming crew holds a preponderance of negative thoughts in mind, and they are working fervently to make their view of negativity come true, so they can have the ultimate satisfaction of being able to say, "See, I told you so."

Even if their "solutions" cause more problems, it will still fulfill their vision of negativity, and they will take no responsibility for it. They will simply say, "See, you should have acted sooner and done more of what we said to do."

You see, Life Bears have to ignore facts in order to support their negative view. They look only for white swans and thus proclaim, "See, all swans are white." They ignore history in reference to global warming and cooling. They ignore the facts that state the earth and our sun go through cycles where temperatures and conditions change. Therefore, we need to prepare for those changes by finding the opportunities that are embedded within them.

And what better source of finding the embedded opportunities than the free market! Entrepreneurs using their keen minds and intellects to find a way to create great wealth and prosperity out of adversity. What we need to do is not curb carbon emissions; we need to unleash the Mind of Man. That is our only hope of solving adversities!

But the Life Bears cannot allow this to happen. They cannot allow an environment where the mind of man has the opportunity to roam freely and create solutions. Therefore, Life Bears have to stifle their mortal enemy, the Mind of Man. They stifle it by slowing it down, by creating a yoke like the Kyoto treaty that ties the Mind of Man to the wagon of Life Bears.

They have to tax it. By taking away an ever increasing portion of the wealth created by the Mind of Man, the Life Bears stifle a percentage of further growth (I wonder if the percentage that is stifled is equal to the marginal tax rate?), and on top of that, the Life Bears get funding to pay for the further spread of their poison propaganda. It is interesting to note that Life Bears are wholly and completely dependent on their mortal enemy, capitalism, for the funding of their very existence.

They have to regulate it. Life bears can't completely tax the free enterprise system. That would be the equivalent of a parasite killing its host. Therefore, since Life Bears need the existence of their mortal enemies, the Capitalist, they have to devise some methods of controlling them. So they regulate the Capitalist. Usually the more successful the Capitalist, the more they have to regulate them, as too much success is a black swan, and Life Bears can not allow the existence of a black swan. (Well, at least not the existence of one that they cannot ignore or control enough to deny the fact that it's black.)

So taking this back to Vic's original point of tree's, death, and life…

The death of a tree is no tragedy. Its death will release nutrients and allow sunlight to reach the ground, thus allowing the seeds that may have laid dormant for years to spring to life. New life will spring up all around it; and new life equals new opportunity. The death of a company, although seemingly tragic (Enron, Arthur Anderson, Global Crossing, Adelphia, Worldcom, etc.) is really just an opportunity in disguise.

It is an opportunity to release the nutrients of those involved in the collapse. That is to say the minds of man that had been stuck in a rut working for a steady paycheck and doing their job by in a reflexive, non-creative manner. It will release those employees who thought about going into business for themselves (because they had a great idea of some sort, or maybe just the desire to be free of the shackles of an 8 - 5 job), but feared the loss of a steady paycheck and the unknowns of entrepreneurship. Now they are given that opportunity.

The death of these companies allows new sunlight to get to the ground and new companies that may have laid dormant or been under-utilized to spring up and fill the void. Just like seeds that had no chance of competing against a giant oak tree for sunlight, new entrepreneurs that had no chance of competing against a giant company like Worldcom, now have the opportunity to step up and make a go of it.

But just as hard as the Capitalist is going to work to find "the seed of equal or greater opportunity," the Life Bears are working to undermine them (i.e. Sarbanes Oxley, The Kyoto Accord, etc.).

So Capitalist must be ever diligent and hard working and continue to have a never give up attitude. We must push forward even though we will be fought every step of the way by the Life Bears.

And we must be ever diligent with a simple understanding of 3 things:

First, The Life Bears will never go away. No matter how hard we try, they will always exist. Second, Capitalists have no, absolutely no use for Life Bears. We have no need for them whatsoever. But they will still be there. Therefore, we must find ways to minimize their impact. And we do that by doing what we do: Be capitalists! Finally, the Capitalist can take solace in this one simple fact: Life Bears do not exist without Capitalist. They're like incurable tapeworms. Since we can't get rid of them, we may as well resign ourselves the fact that they are going to act like the parasites that they are and suck a small amount of life out of us. So we may as well go about our business and do the best we can and smile at the fact the parasitic tapeworms like Life Bears are completely and wholly dependent on the largesse of wealth we create!

Steve Leslie writes:

To follow up on this theme, if one were to look at world plagues one would see similar events and how they set the stage for growth. One third of Europe was destroyed by the black plague that began in Southwest Asia and spread throughout Europe in the 1340s. It is estimated that at least 75 million people were killed by the disease. It was thought to return every generation with varying degrees of intensity up to the 1800s. The cause was a bacterium and it was spread by fleas. It was a horrid disease of acral necrosis which is a blackening of the skin caused by subdural hemorrhages.

Its effect was to profoundly and irrevocably change Europe's social structure. It was a serious blow to the Roman Catholic Church, Europe's predominant religious institution at the time, and resulted in widespread persecution of minorities such as Jews, Muslims, foreigners, beggars, and lepers. The uncertainty of daily survival created a general mood of morbidity influencing people to live for the moment, as illustrated by Giovanni Boccaccio in The Decameron (1353).

Historians postulate that the Great fire of London in 1666 may have ended the plague by killing off the black rats and fleas that infested them and carried the disease to their human counterparts.

The great and concomitant result of the plague:

The great population loss brought economic changes based on increased social mobility, as depopulation further eroded the peasants' already weakened obligations to remain on their traditional holdings. In Western Europe, the sudden scarcity of cheap labor provided an incentive for landlords to compete for peasants with wages and freedoms, an innovation that, some argue, represents the roots of capitalism, and the resulting social upheaval caused the Renaissance and even the Reformation. In many ways the Black Death improved the situation for surviving peasants. In Western Europe, because of the shortage of labor they were in more demand and had more power, and because of the reduced population, there was more fertile land available. However, the benefits would not be fully realized until 1470, nearly 120 years later, when overall population levels finally began to rise again.

On top of all this, the plague's great population reduction brought cheaper land prices, more food for the average peasant, and a relatively large increase in per capita income among the peasantry, if not immediately, in the coming century.



 I was watching On the Money, with Rebecca Quick, last night on MSNBC and toward the end of her segment she remarked that the Dow Industrials, Transports, and Utilities all hit all-time highs yesterday.

This confluence is rarer than one might think, just five occurrences in the past 30 years. Following this event the Dow has gone up four of the five times.

Mike Ott adds:

Also, CNBC has been talking about energy all week because of the CERA Conference in Houston. They are talking about biofuels tomorrow, and will interview one of my board members, Ed Williams. He'll appear live on CNBC at 8:45am Central time tomorrow morning, Friday the 16th, to discuss the effects of the biofuels boom on the rural economy. Tune in or set your VCR if you can!



 We are accustomed to reading short stories like Aces Up, or Inside Straight, where the action somehow relates to the sequence of bidding and uncertainty in various card games. Yes, life often imitates the bluffing, counting, bidding, random elements, path dependence, money management, reading, and choice inherent in a good poker game. And, of course, it will be no surprise to say that in many ways the market is like a poker game, with some of the cards hidden, some showing, and random factors to come.

Indeed, I have a dozen pages in Ed Spec on it (the most worthless in the book in my opinion) mainly because I am not an educated poker player, and all I've done is read books on how much I didn't know when I did play. Another approach to poker is to think of the cards coming into your hand, say on first, second, and third street, etc., in a five card stud hi-lo game with bidding after each card, as similar to the market moves each of the 5 days of the week. When should you bid, call, fold, or cash in?

Cashing in is always possible with the market mistress. Still, like the "doing business" which characterizes many such card games, the opponent may exercise a high price if you fold. Rite now the market has dealt three of a kind, with three down days in a row. Should you hold, raise, or fold? Readers of this humble site will know the Scarnesque, Malmudesque answer already and always have their canes at hand for such a deal.

If you are long, another player has the trips, and if you are short, you're holding them. Other common hands the market might deal you are the four card outside straight, if you're holding to Thursday, for example, and are long a call at 1450 with the options expiry on Friday, and the market now at 1439. Should you draw to that straight or 3 card flush or not?

Indeed, this seems to me a rather fruitful way of looking at things. On first, second, and third street, all the way up, a good card player knows what the correct play is depending on the cards that he is dealt and whether he's playing for low or high. Do market players have similar guidelines as to how to play the hand after sequential cards are dealt to all the players? We can answer such questions for many hands that the player is dealt during the week.

For example, after you've put up a big ante it might make sense to wait around for the big announcement that's going to cause great uncertainty, like the Humphrey Hawkins testimony on Wednesday. Or at least you shouldn't have called in the first place if you weren't ready to stay in, because you knew there would be a big raise after third street that you'd have to meet.

The question emerges as to what is the best way to simulate a 52-card deck with 13 numerical and face cards, and four suits. This will enable you to come up with rules of thumb as to when it pays to go for it based on expectations at various stages.

I would again propose using the five-card high-low as an analogy that, depending on whether you're long, short or straddling, you divide up the cards.

Since I know even less about poker than I know about trees or electronics or most of the other things I write about, besides the defunct game of hard ball squash, I had better leave this as an exercise for the reader. I'm not hubristic enough to give my own solution now knowing that so many better ones will come to the table. Subject to my admission of ignorance, however, if none comes I'll take a crack at it.

Steve Leslie adds:

 There was a time, when hold 'em was not the game of choice in poker rooms around America. In fact, if you were to speak to the old timers, many were totally unfamiliar with the game. It has only recently become a phenomenon, brought on by the technology of the 21st century and the ability to see the players' hole cards. Along with television came the great exposure of the World Series and as a result the game of choice today is no limit tournament style hold 'em.

Although the game is termed the Cadillac of poker, in the 90s the game I played was 7-card stud, or eight or better. I played this game for three years or so and I can honestly say that I consider myself to be one of the best stud players around. It plays into my skills very nicely as it is the most statistical of poker games. It also has the most information available as you get to see most of the cards. Players with have photographic memories and those who can think quickly have a great advantage.

This is a variation of the traditional 7-card stud, where the high hand and the low hand split the pot. In order to win the low hand, however, you have to have five cards out of seven that are no higher than an eight and the best possible hand is A, 2, 3, 4, 5. This is called a wheel. Straights and flushes do not count toward the low hand but they do for the high hand. Therefore, you can win both the low hand and the high hand at the same time.

Other than that 7-card stud, eight or better is very straightforward and there is very little bluffing. The true objective of the game is extreme patience and waiting for a starting hand that gives you the highest probability of success.

Here is the great secret to playing 7-card stud, 8 or better. Start out by playing only toward a low hand with an objective of also filling out your hand and winning both the high and the low. This is called sweeping the pot. In order to be profitable in this game you want to win one big pot an hour and sweeping is the best way to do so.

Therefore, you start out with three cards, two down and one up. The best starting hands are three cards that are in a row and of the same suit. A 3, 4, and 5, of spades for example. This constitutes the first round of betting. After that there will be four rounds remaining and one card at a time will be dealt to you and the last card will be dealt down.

If your first four cards are eight or less, then the likelihood that you will make a low is 80%. If you have four cards to a low after the fifth card is dealt, then your chance of success is 50%. There are two critical decisions that the stud player makes in the game. That is after third street and after fifth street. If by fifth street you don't have four low cards, you give up the hand. If you have four to a low by fifth street, you are committed to seeing it all the way to the end. It is really that simple. Properly played it is just beautiful. Poorly played it is absolutely brutal.

People get into trouble by playing high hands. The worst thing to have happen is to play a high hand only and come in second. This is very expensive, especially if someone makes her low and starts raising the pots as she should. And if the low also makes a high then the high is swimming against the current along the way.

The corollaries to a 5-day trading week are self evident. With respect to stocks, using William O'Neill's approach, your highest probability of success is by selecting stocks that have an eps rating of 80 or better and a Relative Share rating of 80 or better and investing in those. This will be your starting hand of three. If the stocks go down seven percent or more after investing in them, you let them go. This is the same as letting your hand go after 5th street as it just did not fill out as you have would liked.

Now I don't necessarily espouse the theory of the 7% rule, as I deem it as too tight for my tastes. It does not give the story time to play out. I rather have a more flexible stop loss level and do not overplay my hand. That is to say I do not chase cards. I do not commit too much of my capital to any one stock either. And if I feel I have a winning stock with good earnings, good relative strength, and in a good group, then I am willing to play it out to the end. Eventually, it will be recognized for its value. If I have an accommodating market on top of those variables chances increase to where I can get both the high and the low. This is where the great reward comes in. Once again, patience is the key. And having the earnings and the relative strength on you side helps provide the patience.

I hope this illustration is helpful. For a more in-depth discussion of the study of 7-card stud, eight or better see me offline.


Larry Williams writes:

"[R]esearch on strategic behavior in economic games has identified a wide range of situations in which thinking one step ahead of an opponent provides a decisive advantage. Research on behavior in markets shows that failing to think carefully about other participants' likely actions leads to adverse consequences, such as the ‘winner's curse’ (the tendency for auction winners to pay too much)."

From On Making the Right Choice : The Deliberation-Without-Attention Effect, by Ap Dijksterhuis, Maarten W. Bos, Loran F. Nordgren and Rick B. van Baaren Department of Psychology, University of Amsterdam 



 Perhaps another myth:

As prices go higher, new materials are used to substitute: fiber optics; plastic for cars rather than iron and steel; etc.

Global warming (if it exists, which I doubt) seems mostly bearish for most agrarian items. This is because it will mean longer growing seasons and production in areas now too cold, hence larger supply.

Reply from George Zachar:

This should be countable. Has planted acreage spread north? Are grain shipments up on Canada's railways? Is the mix of crops changing in ways consistent with warmer climes at higher latitudes?

Two of my "you're a moron" global warming refutations are the facts that Greenland was under the plow, not ice, 1000 years ago, and there were vineyards north of London several centuries ago.

From Steve Leslie:

For those of you who are interested in global warming and the debate surrounding it, I recommend you read Michael Creighton's State of Fear.

It has plenty of suspense and intrigue as well as discussion of the merits of the scientific studies of global warming. It is very much a scientific novel. 

From Henry Gifford:

My understanding is that it is written by a fine writer who is not a scientist, and I'm not aware of any debate among scientists about what is causing global warming.

I have a copy of the Irish physisict John Tyndall's paper to The Royal Society wherin he identified CO2 as a greenhouse gas, which I understand was where the debate ended, over 150 years ago.

Stefan Jonanovich writes:

No one questions the increase in CO2 emissions as the result of human activity. What many scientists have questioned is, (1) whether CO2 is a significant contributor to the "greenhouse" mechanism as opposed to, for example, water vapor condensation triggered by increased gamma radiation, and (2) whether the recent observations of warming in some (but not all) parts of the globe have other and possibly more significant causes such as increased solar radiation.

These are reasonable questions. What is irrational is the extent to which discussion is being actively repressed even in the scientific community in the name of unanimity. What is shameful is that this global "emergency" has taken precedence over trivial matters like clean water for the million or so children who die every year of diarrhea, and cooking fuels other than wood fires for the millions of women whose lung functions are destroyed.



 There has been entirely too little thought given to the mechanism, pathways and reasons that negative feedback works in markets. Perhaps the main reason is that the feeding web is based on a reasonable stability in what and how much is being eaten and recycled.

The people who consume and redistribute must maintain a ready and stable supply of those who produce. They develop mechanisms to keep everything going. One of them is the specialization and great efficiency in their activities. If markets deviate too much from the areas and levels within which the specialization has developed, then much waste and new effort and mechanisms will be necessary.

Aside from the grind that trend following causes (i.e. the losses in execution), and the negative feedback system of movements in the supply and demand schedules that equilibrate, which Marshall pioneered and are now standard in economics, and the numerous other reasons I've set forth (e.g. the fixed nature of the system and the flexibility to profit from it), this appears to me to be the main reason that trend following doesn't work.

Here are a few interesting articles on the subject:

How Great Traders Make Millions in Up or Down Markets 

Does Trend Following Work On Stocks?

Interviews At RealWorld Trading

Why I Don't Believe in Trends

Briefly Speaking . . . 

Bill Rafter writes: 

Dr. Bruno had posed the idea of beating an index by deleting the worst performers. This is an area in which we have done considerable work. Please note that we do not consider this trend-following. The assets are not charted, just ranked.

Let us imagine an investor who is savvy enough to identify what is strong about an economy and invest in sectors representative of those areas, while avoiding sectors representing the weaker areas of the economy. Note that we are not requiring our investor to be prescient. He does not need to see what will be strong tomorrow, just what is strong and weak now, measured by performance over a recent period.

What is a market sector? The S&P does that work for us, and breaks down the overall market (that is, the S&P 500) into 10 Sectors. They further break it down into 24 Industry Groups, and further still into 60-plus Industries and 140-plus Sub-Industries. The number of the various groups and their constituents changes from time to time as the economy evolves, but essentially the 500 stocks can be grouped in a variety of ways, depending on the degree of focus desired. Some of the groupings are so narrow that only one company represents that group.

Our investor starts out looking at the 10 Sectors and ranks them according to their performance (such as their quarterly rate of change). He then invests in those ranked first through fourth (25 percent in each), and maintains those holdings until the rankings change. How does he do? Not bad, it turns out.

From 1990 through 2006, which encompasses several types of market conditions, the overall market managed an 8 percent compound annual rate of return. Our savvy investor achieved 10.77%. A less savvy investor who had the bad fortune to pick the worst six groups would have earned 7.23%. Those results are below. (Note, for comparison purposes, all results excluded dividends.)

How can our savvy investor do better? By simply sharpening one's focus, major improvements can be achieved. If instead of ranking the top 4 of10 Sectors, our savvy investor invests in a similar number (say the top 4, 5 or 6) of the 24 Industry Groups, he achieves a 13.12% compoundedannual rate of return over the same period. Note that the same stocks are represented in the 10 Sectors and the 24 Industry Groups. At no time did he have to be prescient.

One thing you will notice from the graphs above is that the equity curves of our savvy and unlucky investors mimic the rises and declines of the market index itself. Being savvy makes money but it does not insulate one from overall bad markets because the Sectors and even the Industry Groups are not significantly diversified from the overall market.

Why not keep going further out and rank all stocks individually? That clearly results in superior returns, but the volume of trading is such that it can only be accomplished effectively in a fund structure - not by the individual. And even ranking thousands of stocks will not insulate an investor from an overall market decline, if he is only invested in equities. The answer of course is diversification.

It is possible to rank debt and alternative investment sectors alongside equities, in the hope of letting their performances dictate what the investor should own. However the debt and commodities markets have different volatilities than the equities markets. Anyone ranking them must make adjustments for their inherent differences. That is, when ranking really diverse assets, one must rank them on a risk-adjusted basis for it to be a true comparison. However if we make those adjustments and rank treasury bonds (debt) against our 24 Industry Groups (equity) we can avoid some of the overall equity declines. We refer to this as a Strategic Overlay:

Adding this Strategic Overlay increases the returns slightly, but more important, diversifies the investor away from some periods of total equity market decline. We are not talking of a policy of running for cover every time the equities markets stall. In the long run, the investor must be in equities.

Invariably in ranking diverse assets such as equities, debt and commodities, our investor will be faced with a decision that he should be completely out of equities. It is likely that will occur during a period of high volatility for equities, but one that has also experienced great returns. Thus, our investor would be abandoning equities when his recent experience would suggest otherwise. And since timing can never be perfect, it is further likely that the equities he abandons will continue to outperform for some period. On an absolute basis, equities may rank best, but on a risk-adjusted basis, they may not. It is not uncommon for investors to ignore risk in such a situation, to their subsequent regret.

Ranking is not without its problems. For example, if you are selecting the top 4 groups of whatever category, there is a fair chance that at some time the assets ranked 4 and 5 will change places back and forth on a daily basis. This "flutter" can be easily solved by providing those who make the cut with a subsequent incumbency advantage. For a newcomer to replace a list member, it then must outrank the current assets on the selected list by the incumbency advantage. This is very similar to the manner in which thermostats work. We have found adding an incumbency advantage to be a profitable improvement without considering transactions costs. When one also considers the reduced transaction costs, the benefits increase even more.

Another important consideration is the "lookback" period. Above we used the example of our savvy investor ranking assets on the basis of their quarterly growth. Not surprisingly, the choice of a lookback period can have an effect on profitability. Since markets tend to fall more abruptly than they rise, lookback periods that perform best during rising markets are markedly different from those that perform best during falling markets. Determining whether a market is rising or falling can be problematic, as it can only be done with certainty in retrospect. However, another key factor influencing the choice of a lookback period is volatility, which can be determined concurrently. Thus an optimal lookback period can be automatically determined based on volatility.

There is certainly no question that a diligent investor can outperform the market. By outperforming the market we mean that he will achieve a greater average rate of return than the market, while limiting the maximum drawdown (or percentage equity decline) to less than that experienced by the market. But the average investor is generally not up to the diligence or persistence required.

In the research work illustrated above, all transactions were executed on the close of the day following a decision being made. Thus the strategy illustrated is certainly executable. Nothing required a forecast; all that was required was for the investor to recognize concurrently which assets have performed well over a recent period. It is not difficult, but requires daily monitoring.

Charles Pennington writes:

Referring to the MathInvestor's plot: :

At first glance it appears that the "Best" have been beating the "Worst" consistently.

In fact, however, all of the outperformance was from 1990 through 1995. From 1996 to present, it was approximately a tie.

Reading from the plot, I see that the "Best" portfolio was at about 2.1 at the start of 1996. It grew to about 5.5 at the end of the chart for a gain of about 160%. Over the same period, the "Worst" grew from 1.3 to 3.2, a gain of about 150%, essentially the same.

So for the past 11 years, this system had negligible outperformance.

One should also consider that the "Best" portfolio benefits in the study from stale pricing, which one could not capture in real trading. Furthermore, dividends were not included in the study. My guess is that the "Worst" portfolio would have had a higher dividend yield.

In order to improve this kind of study, I would recommend:

1.) Use instruments that can actually be traded, rather than S&P sectors, in order to eliminate the stale pricing concern.

2.) Plot the results on a semilog graph. That would have made it clear that all the outperformance happened before 1996.

3.) Finally, include dividends. The reported difference in compound annual returns (10.8% vs 8.0%) would be completely negated if the "Worst" portfolio had a yield 2.8% higher than the "Best".

Bill Rafter replies:

Gentlemen, please! The previously sent illustration of asset ranking is not a proposed "system," but simply an illustration that tilting one's portfolio away from dogs and toward previous performers can have a beneficial effect on the portfolio. The comparison between the 10 Sectors and the 24 Industry Groups illustrates the benefits of focus. That is, (1) don't buy previous dogs, and (2) sharpen your investment focus. Ignore these points and you will be leaving money on the table.

We have done this work with many different assets such as ETFs and even Fidelity funds (which require a 30-day holding period), both of which can be realistically traded. They are successful, but not overwhelmingly so. Strangely, one of the best asset groups to trade in this manner would be proprietarily-traded small-cap funds.

Unfortunately if you try trading those, your broker will disown you. I mention that example only to suggest that some assets truly do have "legs," or "tails" if you prefer. I think their success is attributed to the fact that some prop traders are better than others, and ranking them works. An asset group with which we have had no success is high-yield debt funds. I have no idea why.

A comment from Jerry Parker:

 I wrote an initial comment to you via your website [can be found under the comments link by the title of this post], disputing your point of view, which a friend of mine read, and sent me the following:

I read your comment on Niederhoffer's Daily Spec in response to his arguments against trend following. Personally, I don't think it boils down to intelligence, but rather to ego. Giving up control to an ego-less computer is not an easy task for someone who believes so strongly in the ability of the human mind. I have great respect for his work and his passion for self study, but of course disagree with his thoughts on trend following. On each trade, he is only able to profit if it "trends" in a favorable direction, whether the holding period is 1 minute or 1 year. Call it what you will, but he trades trends all day.

He's right. I was wrong. Trend following is THE enemy of the 'genius'. You and your friends can't even see how stupid your website is. You are blinded by your superior intelligence and arrogance.

Victor Niederhoffer responds:

Thanks much for your contributions to the debate. I will try to improve my understanding of this subject and my performance in the future so as not to be such an easy target for your critiques.

Ronald Weber writes: 

 When you think about it, most players in the financial industry are nothing but trend followers (or momentum-players). This includes analysts, advisors, relationship managers, and most fund or money managers. If there is any doubt, check the EE I function on Bloomberg, or the money flow/price functions of mutual funds.

The main reason may have more to do with career risk and the clients themselves. If you're on the right side while everyone is wrong, you will be rewarded; if you're on the wrong side like most of your peers you will be ok; and if you're wrong while everyone is right then you're in trouble!

In addition, most normal human beings (daily specs not included!) don't like ideas that deviate too much from the consensus. You are considered a total heretic if you try to explain why, for example, there is no link between the weak USD and the twin deficits. This is true, too, if you would have told anyone in 2002 that the Japanese banks will experience a dramatic rebound like the Scandinavian banks in the early '90s, and so on, or if you currently express any doubt on any commodity.

So go with the flow, and give them what they want! It makes life easier for everyone! If you can deal with your conscience of course!

The worse is that you tend to get marginalized when you express doubt on contagious thoughts. You force most people to think. You're the boring party spoiler! It's probably one reason why the most successful money managers or most creative research houses happen to be small organizations.

Jeremy Smith offers:

 Not arguing one way or the other here, but for any market or any stock that is making all time highs (measured for sake of argument in years) do we properly say about such markets and stocks that there is no trend?

Vincent Andres contributes: 

I would distinguish/disambiguate drift and trend.

"Drift": Plentifully discussed here. "Trend": See arcsine, law of series, etc.

In 2D, the French author Jean-Paul Delahaye speaks about "effet rateau" (rake effect), here and here .

Basically, our tendency is to believe that random equals equiprobability everywhere (2D) or random equals equiprobability everytime (1D), and thus that nonequiprobability everywhere/everytime equals non random

In 1D, non equiprobability everytime means that the sequence -1 +1 -1 +1 -1 +1 -1 +1 is in fact the rare and a very non random sequence, while the sequences -1 +1 +1 +1 +1 +1 -1 +1 with a "trend" are in fact the truly random ones. By the way, this arcsine effect does certainly not explain 100% of all the observed trends. There may also be true ones. Mistress would be too simple. True drift may certainly produce some true trends, but certainly far less than believed by many.

Dylan Distasio adds:

 For those who don't believe trend following can be a successful strategy, how would you explain the long-term performance of the No Load Fund X newsletter? Their system consists of a fairly simple relative strength mutual fund (and increasingly ETF) model where funds are held until they weaken enough in relative strength to swap out with new ones.

The results have been audited by Hulbert and consistently outperform the S&P 500 over a relatively long time frame (1980 onwards). I think their results make a trend following approach worth investigating…

Jerry Parker comments again: 

All you are saying is that you're not smart enough to develop a trend following system that works. What do you say about the billions of dollars traded by trend following CTAs and their long term track records?

Steve Leslie writes:

 If the Chair is not smart enough to figure out trend following, what does that bode for the rest of us?

There is a very old yet wise statement: Do not confuse brains with a bull market.

Case in point: prior to 2000 the great tech market run was being fueled by the hysteria surrounding Y2K. Remember that term? It is not around today but it was the cause for the greatest bull market seen in stocks ever. stocks and new issues were being bought with reckless abandon.

New issues were priced overnight and would open 40-50 points higher the next trading day. Money managers had standing orders to buy any new issues. There was no need for dog-and-pony or road shows. It was an absolute classic and chaotic case of extraordinary delusion and crowd madness.
Due diligence was put on hold, or perhaps abandoned. A colleague of mine once owned enough stock in a that had he sold it at a propitious time, he would have had enough money to purchase a small Hatteras yacht. Today, like many contemporary dot.coms, that stock is essentially worthless. It would not buy a Mad magazine.

Corporations once had a virtual open-ended budget to upgrade their hardware and software to prepare for the upcoming potential disaster. This liquidity allowed service companies to cash in by charging exorbitant fees. Quarter to quarter earnings comparisons were beyond belief and companies did not just meet the numbers, they blew by them like rocket ships. What made it so easy to make money was that when one sold a stock, all they had to do was purchase another similar stock that also was accelerating. The thought processes where so limited. Forget value investing; nobody on the planet wanted to talk to those guys. The value managers had to scrape by for years while they saw their redemptions flow into tech, momentum, and micro cap funds. It became a Ponzi scheme, a game of musical chairs. The problem was timing.

The music stopped in March of 2000 when CIO's need for new technology dried up coincident with the free money, and the stock market went into the greatest decline since the great depression. The NASDAQ peaked around 5000. Today it hovers around 2500, roughly half what it was 7 years ago.

It was not as if there were no warning signs. Beginning in late 1999, the tech market began to thin out and leadership became concentrated in a few issues. Chief among the group were Cisco, Oracle, Qwest, and a handful of others. Every tech, momentum, and growth fund had those stocks in their portfolio. This was coincident with the smart money selling into the sectors. The money managers were showing their hands if only one could read between the lines. Their remarks were "these stocks are being priced to perfection." They could not find compelling reasons not to own any of these stocks. And so on and on it went.

After 9/11 markets and industries began to collapse. The travel industry became almost nonexistent. Even Las Vegas went on life support. People absolutely refused to fly. Furthermore, business in and around New York City was in deep peril. This forced the Fed to begin dramatically reducing interest rates to reignite the economy. It worked, as corporations began to refinance their debt and restructure loans, etc.

The coincident effect began to show up in the housing industry. Homeowners refinanced their mortgages (yours truly included) and took equity out of their homes. Home-buyers were thirsty for real estate and bought homes as if they would disappear off the earth. For $2000 one could buy an option on a new construction home that would not be finished for a year. "Flipping" became the term du jour. Buy a home in a hot market such as Florida for nothing down and sell it six months later at a much higher price. Real estate was white hot. Closing on real estate was set back weeks and weeks. Sellers had multiple offers on their homes many times in the same day. This came to a screeching halt recently with the gradual rise in interest rates and the mass overbuilding of homes, and the housing industry has slowed dramatically.

Houses for sale now sit on the blocks for nine months or more. Builders such as Toll, KB, and Centex have commented that this is the worst real estate market they have seen in decades. Expansion plans have all but stopped and individuals are walking away from their deposits rather than be upside down in their new home.

Now we have an ebullient stock market that has gone nearly 1000 days without so much as a 2% correction in a day. The longest such stretch in history. What does this portend? Time will tell. Margin debt is now at near all-time highs and confidence indicators are skewed. Yet we hear about trend followers and momentum traders and their success. I find this more than curious. One thing that they ever fail to mention is that momentum trading and trend following does not work very well in a trendless market. I never heard much about trend followers from June 2000 to October 2002. I am certain that this game of musical chairs will end, or at least be temporarily interrupted.

As always, it is the diligent speculator who will be prepared for the inevitable and capitalize upon this event. Santayana once said, "Those who cannot remember the past are condemned to repeat it."

From "A Student:"

 Capitalism is the most successful economic system in the history of the world. Too often we put technology up as the main driving force behind capitalism. Although it is true that it has much to offer, there is another overlooked hero of capitalism. The cornerstone of capitalism is good marketing.

The trend following (TF) group of fund managers is a perfect example of good marketing. As most know, the group as a whole has managed to amass billions of investor money. The fund operators have managed to become wealthy through high fees. The key to this success is good marketing not performance. It is a tribute to capitalism.

The sports loving fund manger is a perfect example. All of his funds were negative for 2006 and all but one was negative over the last 3 years! So whether one looks at it from a short-term one year stand point or a three year perspective his investors have not made money. Despite this the manager still made money by the truckload during this period. Chalk it up to good marketing, it certainly was not performance.

The secret to this marketing success is intriguing. Normally hedge funds and CTAs cannot solicit investors nor even publicly tout their wares on an Internet site. The TF funds have found a way around this. There may be a web site which openly markets the 'concept' of TF but ostensibly not the funds. On this site the names of the high priests of TF are repeatedly uttered with near religious reverence. Thus this concept site surreptitiously drives the investors to the TF funds.

One of the brilliant marketing tactics used on the site is the continuous repetition of the open question, "Why are they (TF managers) so rich?" The question is offered as a sophist's response to the real world question as to whether TF makes money. The marketing brilliance lies in the fact that there is never a need to provide factual support or performance records. Thus the inconvenient poor performance of the TF funds over the last few years is swept under the carpet.

Also swept under the rug are the performance figures for once-great trend followers who no longer are among the great, i.e., those who didn't survive. Ditto for the non-surviving funds in this or that market from the surviving trend followers.

Another smart technique is how the group drives investor traffic to its concept site. Every few years a hagiographic book is written which idolizes the TF high priests. It ostensibly offers to reveal the hidden secrets of TF.

Yet after reading the book the investor is left with no usable information, merely a constant repetition of the marketing slogan: How come these guys are so rich? Obviously the answer is good marketing but the the book is moot on the subject. Presumably, the books are meant to be helpful and the authors are true believers without a tie-in in mind. But the invisible hand of self-interest often works in mysterious ways.

In the latest incarnation of the TF book the author is presented as an independent researcher and observer. Yet a few days after publication he assumes the role of Director of Marketing for the concept site. Even the least savvy observer must admit that it is extraordinary marketing when one can persuade the prospect to pay $30 to buy a copy of the marketing literature.

Jason Ruspini adds:

 "I attribute much of the success of the selected bigs to being net long leveraged in fixed income and stocks during the relevant periods."

I humbly corroborate this point. If one eliminates long equity, long fixed income (and fx carry) positions, most trend-following returns evaporate.

Metals and energies have helped recently, after years of paying floor traders.

Victor replies:

 I don't agree with all the points above. For example, the beauty of capitalism is not its puffery, but the efficiency of its marketing and distribution system as well as the information and incentives that the prices provide so as to fulfill the pitiless desires of the consumers. Also beautiful is in the mechanism that it provides for those with savings making low returns to invest in the projects of entrepreneurs with much higher returns in fields that are urgently desired by customers.

I have been the butt of abuse and scorn from the trend followers for many years. One such abusive letter apparently sparked the writer's note. Aside from my other limitations, the trend following followers apparently find my refusal to believe in the value of any fixed systems a negative. They also apparently don't like the serial correlation coefficients I periodically report that test the basic tenets of the trend following canon.

I believe that if there are trends, then the standard statistical methods for detecting same, i.e., correlograms, regressions, runs and turning point tests, arima estimates, variance ratio tests, and non-linear extensions of same will show them.

Such tests as I have run do not reveal any systematic departures from randomness. Nor if they did would I believe they were predictive, especially in the light of the principle of ever changing cycles about which I have written extensively.

Doubtless there is a drift in the overall level of stock prices. And certain fund managers who are biased in that direction should certainly be able to capture some of that drift to the extent that the times they are short or out of the market don't override it. However, this is not supportive of trend following in my book.

Similarly, there certainly has been over the last 30 years a strong upward movement in fixed income prices. To the extent that a person was long during this period, especially if on leverage, there is very good reason to believe that they would have made money, especially if they limited their shorts to a moiete.

Many of the criticisms of my views on trend following point to the great big boys who say they follow trends. To the extent that those big boys are not counterbalanced by others bigs who have lost, I attribute much of the success of the selected bigs to being net long leveraged in fixed income and stocks during the relevant periods.

I have no firm belief as to whether such things as trends in individual stocks exist. The statistical problem is too complex for me because of a paucity of independent data points, and the difficulties of maintaining an operational prospective file.

Neither do I have much conviction as to whether trends exist in commodities or foreign exchange. The overall negative returns to the public in such fields seem to be of so vast a magnitude that it would not be a fruitful line of inquiry.

If I found such trends through the normal statistical methods, I would suspect them as a lure of the invisible evil hand to bring in big money to follow trends after a little money has been made by following them, the same way human imposters work in other fields. I believe that such a tendency for trend followers to lose with relatively big money after making with smaller amounts is a feature of all fixed systems. And it's guaranteed to happen by the law of ever-changing cycles.

The main substantive objection to my views that I have found in the past, other than that trend followers know many people who make money following trends (a view which is self-reported and selective and non-systematic, and thus open to some of the objections of those of the letter-writer), is that they themselves follow trends and charts and make much money doing it. What is not seen by these in my views is what they would have made with their natural instincts if they did not use trend following as one of their planks. This is a difficult argument for them to understand or to confirm or deny.

My views on trend following are always open to new evidence, and new ways of looking at the subject. I solicit and will publish all views on this subject in the spirit of free inquiry and mutual education.

 Jeff Sasmor writes:

 Would you really call what FUNDX does trend following? Well, whatever they do works.

I used their system successfully in my retirement accounts and my kids' college UTMA's and am happy enough with it that I dumped about 25% of that money in their company's Mutual Funds which do the same process as the newsletter. The MFs are like an FOF approach. The added expense charges are worth it. IMO, anyway. Their fund universe is quite small compared to the totality of funds that exist, and they create classes of funds based on their measure of risk.

This is what they say is their process. When friends ask me what to buy I tell them to buy the FUNDX mutual fund if their time scale is long. No one has complained yet!

It ain't perfect (And what is? unless your aim is to prove that you're right) but it's better than me fumfering around trying to pick MFs from recommendations in Money Magazine, Forbes, or Morningstar.

I'm really not convinced that what they do is trend following though.

Dylan Distasio Adds:

 For those who don't believe trend following can be a successful strategy, how would you explain the long-term performance of the No Load Fund X newsletter?

Michael Marchese writes: 

In a recent post, Mr. Leslie finished his essay with, "I never heard much about trend followers from June 2000 to October 2002." This link shows the month-to-month performance of 13 trend followers during that period of time. It seems they did OK.

Hanny Saad writes:

 Not only is trend following invalid statistically but, looking at the bigger picture, it has to be invalid logically without even running your unusual tests.

If wealth distribution is to remain in the range of 20 to 80, trend following cannot exist. In other words, if the majority followed the trend (hence the concept of trends), and if trend following is in fact profitable, the majority will become rich and the 20-80 distribution will collapse. This defeats logic and history. That said, there is the well-covered (by the Chair) general market upward drift that should also come as no surprise to the macro thinkers. The increase in the general population, wealth, and the entrepreneurial spirit over the long term will inevitably contribute to the upward drift of the general market indices as is very well demonstrated by the triumphal trio.

While all world markets did well over the last 100 yrs, you notice upon closer examination that the markets that outperformed were the US, Canada, Australia, and New Zealand. The one common denominator that these countries have is that they are all immigration countries. They attract people.

Contrary to what one hears about the negative effects of immigration, and how immigrants cause recessions, the people who leave their homelands looking for a better life generally have quite developed entrepreneurial spirits. As a result, they contribute to the steeper upward curve of the markets of these countries. When immigrants are allowed into these countries, with their life savings, home purchases, land development, saving and borrowing, immigration becomes a rudder against recession, or at least helps with soft landings. Immigration countries have that extra weapon called LAND.

So in brief, no - trends do not exists and can not exist either statistically or logically, with the exception of the forever upward drift of population and general markets with some curves steeper than others, those of the countries with the extra weapon called land and immigration.

A rereading of The Wealth And Poverty Of Nations, by Landes, and the triumph of the optimist may be in order.

Steve Ellison adds:

 So Mr. Parker's real objective was simply to insult the Chair, not to provide any evidence of the merits of trend following that would enlighten us (anecdotes and tautologies that all traders can only profit from favorable trends prove nothing). I too lack the intelligence to develop a trend following system that works. When I test conditions that I naively believe to be indicative of trends, such as crossovers of moving averages, X-day highs and lows, and the direction of the most recent Y percent move, I usually find negative returns going forward.

Bacon summarized his entire book in a single sentence: "Always copper the public play!" My more detailed summary was, "When the public embraces a particular betting strategy, payoffs fall, and incentives (for favored horsemen) to win are diminished."

Trend Following — Cause, from James Sogi: 

Generate a Brownian motion time series with drift in R

WN <-rnorm(1024);RW<-cumsum(WN);DELTAT<-1/252;

MU<-.15*DELTAT;SIG<-.2*sqrt(DELTAT);TIME<-(1:1024)/252 stock<-exp(SIG*RW+MU*TIME) ts.plot(stock)

Run it a few times. Shows lots of trends. Pick one. You might get lucky.

Trend Following v. Buy and Hold, from Yishen Kuik 

The real price of pork bellies and wheat should fall over time as innovation drives down costs of production. Theoretically, however, the nominal price might still show drift if the inflation is high enough to overcome the falling real costs of production.

I've looked at the number of oranges, bacon, and tea a blue collar worker's weekly wages could have purchased in New York in 2000 versus London in the 1700s. All quantities showed a significant increase (i.e., become relatively cheaper), lending support to the idea that real costs of production for most basic foodstuffs fall over time.

Then again, according to Keynes, one should be able to earn a risk premium from speculating in commodity futures by normal backwardation, since one is providing an insurance service to commercial hedgers. So one doesn't necessarily need rising spot prices to earn this premium, according to Keynes.

Not All Deer are Five-Pointers, from Larry Williams

 What's frustrating to me about trading is having a view, as I sometimes do, that a market should be close to a short term sell, yet I have no entry. This betwixt and between is frustrating, wanting to sell but not seeing the precise entry point, and knowing I may miss the entry and then see the market decline.

So I wait. It's hard to learn not to pull the trigger at every deer you see. Not all are five-pointers… and some will be bagged by better hunters than I.

From Gregory van Kipnis:

 Back in the 70s a long-term study was done by the economic consulting firm of Townsend Greenspan (yes, Alan's firm) on a variety of raw material price indexes. It included the Journal of Commerce index, a government index of the geometric mean of raw materials and a few others. The study concluded that despite population growth and rapid industrialization since the Revolutionary War era, that supply, with a lag, kept up with demand, or substitutions (kerosene for whale blubber) would emerge, which net-net led to raw material prices being a zero sum game. Periods of specific commodity price rises were followed by periods of offsetting declining prices. That is, raw materials were not a systematic source of inflation independent of monetary phenomena.

It was important to the study to construct the indexes correctly and broadly, because there were always some commodities that had longer-term rising trends and would bias an index that gave them too much weight. Other commodities went into long-term decline and would get dropped by the commodity exchanges or the popular press. Just as in indexes of fund performance there can be survivor bias, so too with government measures of economic activity and inflation.

However, this is not to say there are no trends at the individual commodity level of detail. Trends are set up by changes in the supply/demand balance. If the supply/demand balance changes for a stock or a commodity, its price will break out. If it is a highly efficient market, the breakout will be swift and leave little opportunity for mechanical methods of exploitation. If it is not an efficient market (for example, you have a lock on information, the new reality is not fully understood, the spread of awareness is slow, or there is heavy disagreement, someone big has to protect a position against an adverse move) the adjustment may be slower to unfold and look like a classic trend. This more often is the case in commodities.

Conversely, if you find a breakout, look for supporting reasons in the supply/demand data before jumping in. But, you need to be fast. In today's more highly efficient markets the problem is best summarized by the paradox: "look before you leap; but he who hesitates is lost!"

Larry Williams adds:

I would posit there is no long-term drift to commodities and thus we have a huge difference in these vehicles.

The commodity index basket guys have a mantra that commodities will go higher - drift - but I can find no evidence that this is anything but a dream, piquant words of promotion that ring true but are not.

I anxiously stand to be corrected.

Marlowe Cassetti writes:

 "Along a similar vein, why would anybody pay Powershares to do this kind of work when the tools to do it yourself are so readily available?"

The simple answer is if someone wishes to prescribe to P&F methodology investing, then an ETF is a convenient investment vehicle.

With that said, this would be an interesting experiment. Will the DWA ETF be another Value Line Mutual Fund that routinely fails to beat the market while their newsletter routinely scores high marks? There are other such examples, such as IBD's William O'Neal's aborted mutual fund that was suppose to beat the market with the fabulous CANSLIM system. We have talked about the great track record of No-Load Fund-X newsletter, and their mutual fund, FUNDX, has done quite well in both up and down markets (an exception to the above mentioned cases).

For full disclosure I have recently added three of their mutual funds to my portfolio FUNDX, HOTFX, and RELAX. Hey, I'm retired and have better things to do than do-it-yourself mutual fund building. With 35 acres, I have a lot of dead wood to convert into firewood. Did you know that on old, dead juniper tree turns into cast iron that dulls a chain saw in minutes? But it will splinter like glass when whacked with a sledgehammer.

Kim Zussman writes:

…about the great track record of No-Load Fund-X newsletter and their mutual fund FUNDX has done quite well in both up and down markets… (MC)

Curious about FUNDX, checked its daily returns against ETF SPY (essentially large stock benchmark).

Regression Analysis of FUNDX versus SPY since inception, 6/02 (the regression equation is FUNDX = 0.00039 + 0.158 SPY):

Predictor    Coef         SE Coef           T             P
Constant    0.00039    0.000264        1.48        0.14
SPY            0.15780    0.026720        5.91        0.00

S = 0.00901468    R-Sq = 2.9%   R-Sq (adj) = 2.8%

The constant (alpha) is not quite significant, but it is positive, so FUNDX did out-perform SPY. Slope is significant and the coefficient is about 0.16, which means FUNDX was less volatile than SPY.

This is also shown by F-test for variance:

Test for Equal Variances: SPY, FUNDX

F-Test (normal distribution) Test statistic = 1.17, p-value = 0.009 (FUNDX<SPY)

But t-test for difference between daily returns shows no difference:

Two-sample T for SPY vs FUNDX

            N          Mean      St Dev       SE Mean
SPY      1169     0.00041  0.0099       0.00029
FUNDX 1169     0.00045  0.0091       0.00027   T=0.12        

So it looks like FUNDX has been giving slight/insignificant out-performance with significantly less volatility; which makes sense since it is a fund of mutual funds and ETFs.

Even better is Dr Bruno's idea of beating the index by deleting the worst (or few worst) stocks (new additions?).

How about an equal-weighted SP500 (which out-performs when small stocks do), without the worst 50 and double-weighting the best 50.

Call it FUN-EX, in honor of the fun you had with your X that was all mooted in the end.

Alex Castaldo writes:

The results provided by Dr. Zussman are fascinating:

The fund has a Beta of only 0.157, incredibly low for a stock fund (unless they hold a lot of cash). Yet the standard deviation of 0.91468% per day is broadly consistent with stock investing (S&P has a standard deviation of 1%). How can we reconcile this? What would Scholes-Williams, Dimson, and Andy Lo think when they see such a low beta? Must be some kind of bias.

I regressed the FUNDX returns on current and lagged S&P returns a la Dimson (1979) with the following results:

Regression Statistics
Multiple R                0.6816
R Square                 0.4646
Adjusted R Square   0.4627
Standard Error        0.0066
Observations           0.1166

                    df         SS          MS         F            Significance F
Regression       4      0.0444    0.0111   251.89    8.2E-156
Residual      1161      0.0511    4.4E-05
Total           1165      0.0955

                Coefficients  Standard Error  t-Stat        P-value
Intercept  8.17E-05     0.000194           0.4194        0.6749
SPX          0.18122      0.019696           9.2007        1.6E-19
SPX[-1]    0.60257      0.019719         30.5566        6E-151 SPX[-2]    0.08519      0.019692           4.3260        1.648E-05 SPX[-3]    0.04524      0.019656           2.3017        0.0215

Note the following:

(1) All four S&P coefficients are highly significant.

(2) The Dimson Beta is 0.914 (the sum of the 4 SPX coefficients). The mystery of the low beta has been solved.

(3) The evidence of price staleness, price smoothing, non-trading, whatever you want to call it is clear. Prof. Pennington touched on this the other day; an "efficiently priced" asset should not respond to past S&P price moves. Apparently though, FUNDX holds plenty of such assets (or else the prices of FUNDX itself, which I got from Yahoo, are stale).

S. Les writes:

Have to investigate the Fund X phenomenon. And look to see how it has done in last several years since it was post selected as good. Someone has to win a contest, but the beaten favorites are always my a priori choice except when so many others use that as a system the way they do in sports eye at the harness races, in which case waiting for two races or two days seems more apt a priori. VN 

 I went to the Fund X website to read up, and the information is quite sparse. It is a very attenuated website. I called the toll free number and chatted with the person on the other line. Information was OK, but, in my view, I had to ask the proper questions. One has several options here. One is to purchase the service and do the fund switching themselves based on the advice of their experts. The advisory service tracks funds that have the best relative strength performance and makes their recommendations from there,

Another is to purchase one of four funds available. They have varying levels of aggressiveness. Fund 3 appears to be the recommended one.

If one purchases the style 3 one will get a very broad based fund of funds. I went to yahoo to look up the holdings at

Top ten holdings are 47.5% of the portfolio, apparently concentrated in emerging markets and international funds at this time.

In summary, if money were to be placed into the Fund X 3 portfolio, I believe it would be so broad based and diversified that returns would be very watered down. Along with risk you would certainly be getting a lot of funds. You won't set the world on fire with this concept, but you won't get blown up, either.

Larry Williams adds:

My 2002 book, Right Stock at the Right Time, explains such an approach in the Dow 30. The losers were the overvalued stocks in the Dow.It is a simple and elegant idea…forget looking for winners…just don't buy overvalued stocks and you beat the idex.

This notion was developed in 1997, when i began actually doing it, and written about in the book. This approach has continued to outperform the Dow, it is fully revealed.

Craig Cuyler writes:

Larry's comment on right stock right time is correct and can be used to shed a little bit of light on trend following. This argument is at the heart of fundamental indexation, which amongst other points argues that cap weighting systematically over-weights overvalued stocks and under-weights undervalued stocks in a portfolio.

Only 29% of the top 10 stocks outperformed the market average over a 10yr period (1964-2004) according to Research Affiliates (this is another subject). The concept of "right stock right time" might be expressed another way, as "right market right time." The point is that constant analysis needs to take place for insuring investment in the products that are most likely to give one a return.

The big error that the trend followers make, in my mind, is they apply a homogeneous methodology to a number of markets and these are usually the ones that are "hot" at the time that the funds are applied. The system is then left to its own devices and inevitably breaks down. Most funds will be invested at exactly the time when the commodity, currencies, etc., are at their most overvalued.

Some worthwhile questions are: How does one identify a trend? Why is it important that one identifies a trend? How is it that security trends allow me to make money? In what time frame must the trend take place and why? What exactly is a trend and how long must it last to be so labeled?

I think it is important to differentiate between speculation using leverage and investing in equities because, as Vic (and most specs on the list) point out, there is a drift factor in equities which, when using sound valuation principles, can make it easier to identify equities that have a high probability of trending. Trend followers don't wait for a security to be overvalued before taking profits. They wait for the trend to change before then trying to profit from the reversal.

Jeff Sasmor adds:

As a user of both the newsletter and the FUNDX mutual fund I'd like to comment that using the mutual fund removes the emotional component of me reading the newsletter and having to make the buys and sells. Perhaps not an issue for others, but I found myself not really able to follow the recommendations exactly - I tend to have an itchy trigger finger to sell things. This is not surprising since I do mostly short-term and day trades. That's my bias; I'm risk averse. So the mutual fund puts that all on autopilot. It more closely matches the performance of their model portfolio.

I don't know how to comment on the comparisons to Value Line Arithmetic Index (VAY). Does anyone follow that exactly as a portfolio?

My aim is to achieve reasonable returns and not perfection. I assume I don't know what's going to happen and that most likely any market opinion that I have is going to be wrong. Like Mentor of Arisia, I know that complete knowledge requires infinite time. That and beta blockers helps to remove the shame aspect of being wrong. But there's always an emotional component.

As someone who is not a financial professional, but who is asked what to buy by friends and acquaintances who know I trade daily (in my small and parasitical fashion), I have found that this whole subject of investing is opaque to most people. Sort of like how in the early days of computing almost no one knew anything about computers. Those who did were the gatekeepers, the high priests of the temple in a way. Most people nowadays still don't know what goes on inside the computer that they use every day. It's a black box - opaque. They rely on the Geek Squad and other professionals to help them out. It makes sense. Can't really expect most people to take the time to learn the subject or even want to. Should they care whether their SW runs on C++ or Python, or what the internal object-oriented class structure of Microsoft Excel is, or whether the website they are looking at is XHTML compliant? Heck no!

Similarly, most people don't know anything about markets; don't want to learn, don't want to take the time, don't have the interest. And maybe they shouldn't. But they are told they need to invest for retirement. As so-called retail investors they depend on financial consultants, fee-based planners, and such to tell them what to do. Often they get self-serving or become too loaded with fees (spec-listers who provide these services excepted).

So I think that the simple advice that I give, of buying broad-based index ETFs like SPY and IWM and something like FUNDX, while certainly less than perfect, and certainly less profitable than managing your own investments full-time, is really suitable for many people who don't really have the inclination, time, or ability to investigate the significant issues for themselves or sort out the multitudes of conflicting opinions put forth by the financial media.

You may not achieve the theoretical maximum returns (no one does), but you will benefit from the upward drift in prices and your blended costs will be reasonable. And it's better than the cash and CDs that a lot of people still have in their retirement accounts.

BTW: FOMA = Foma are harmless untruths, intended to comfort simple souls.
An example : "Prosperity is just around the corner."

I'm not out to defend FUNDX, I have nothing to do with them. I'm just happy with it. 

Steve Ellison writes: 

One might ask what the purpose of trends is in the market ecosystem. In the old days, trends occurred because information disseminated slowly from insiders to Wall Streeters to the general public, thus ensuring that the public lost more than it had a right to. Memes that capture the public imagination, such as Nasdaq in the 1990s, take years to work through the population, and introduce many opportunities for selling new investment products to the public.

Perhaps some amount of trending is needed from time to time in every market to keep the public interested and tossing chips into the market. I saw this statement at the FX Money Trends website on September 21, 2005: "[T]he head of institutional sales at one of the largest FX dealing rooms in the US … lamented that for the past 2 months trading volume had dried up for his firm dramatically because of the 'lack of trend' and that many 'system traders' had simply shut down to preserve capital."

I saw a similar dynamic recently at a craps table when shooters lost four or five consecutive points, triggering my stop loss so that I quit playing. About half the other players left the table at the same time. "The table's cold," said one.

To test whether a market might trend out of necessity to attract money, I used point and figure methodology with 1% boxes and one-box reversals on the S&P 500 futures. I found five instances in the past 18 months in which four consecutive reversals had occurred and tabulated the next four points after each of these instances (the last of which has only had three subsequent points so far). The results were highly non-predictive.

Starting        Next 4 points
Date      Continuations  Reversals
01/03/06        3            1
05/23/06        1            3
06/29/06        2            2
08/15/06        2            2
01/12/07        1            2
             —–        —–
               9           10

Anthony Tadlock writes:

I had intended to write a post or two on my recent two week trip to Cairo, Aswan, and Alexandria. There is nothing salient to trading but Egypt seems to have more Tourist Police and other guards armed with machine guns than tourists. It is a service economy with very few tourists or middle/upper classes to service. Virtually no westerners walk on the streets of Cairo or Alexandria. I did my best to ignore my investments and had closed all my highly speculative short-term trades before leaving for the trip.

While preparing for taxes I was looking over some of my trades for last year. Absolute worst trade was going long CVS and WAG too soon after WalMart announced $2 generic pricing. I had friends in town and wasn't able to spend my usual time watching and studying the market. I just watched them fall for two days and without looking at a chart, studying historical prices and determining how far they might fall, decided the market was being stupid and went long. Couldn't wait to tell my visitors how "smart" a trader I was and my expected profit. It was fun, until announcement after announcement by WalMart kept causing the stocks to keep falling. The result was panic selling near the bottom, even though I had told myself before the trade that I could happily buy and hold both. Basically, I followed all of Vic's rules on "How to Lose."

Trends: If only following a trend meant being able to draw a straight line or buy a system and buy green and sell red. The trend I wrote about several months ago about more babies being born of affluent parents still seems to be intact. I have recently seen pregnant moms pushing strollers again. Planes to Europe have been at capacity my last two trips and on both trips several crying toddlers made sleep difficult, in both directions. Are people with young children using their home as an ATM to fund a European trip? Are they racking up credit card debt that they can't afford? Depleting their savings? (Oh wait - Americans don't save anything.) If they are, then something fundamental has changed about how humans behave.

From James Sogi:

My daughter the PhD candidate at Berkeley in bio-chem is involved in some mind-boggling work. It's all very confidential, but she tried to explain to me some of her undergrad research in words less than 29 letters long. Molecules have shapes and fit together like keys. The right shape needs to fit in for a lock. Double helices of the DNA strand are a popular example, but it works with different shapes. There is competition to fit the missing piece. They talk to each other somehow. One of her favorite stories as a child was Shel Silverstein's Missing Piece. Maybe that's where her chemical background arose. Silverstein's imagery is how I picture it at my low level. 

Looking at this past few months chart patterns it is impossible not to see the similarity in how the strands might try fit together missing pieces in Wykoffian functionality. The math and methods must be complicated, but might supply some ideas for how the ranges and strands in the market might fit together, and provide some predictive methods along the lines of biochemical probability theory. I'll need some assistance from the bio-chem section of the Spec-list to articulate this better.

From Kim Zussman: 

Doing same as Alex Castaldo, using SPY daily change (cl-cl) as independent and FUNDX as dependent gave different resluts:

Regression Analysis: FUNDX versus SPY ret, SPY-1, SPY-2

The regression equation is FUNDX = 0.000383 + 0.188 SPY ret - 0.0502 SPY-1 - 0.0313 SPY-2

Predictor     Coef           SE Coef       T        P
Constant     0.000383    0.00029      1.35    0.179
SPY ret       0.187620    0.03120      6.01    0.000*            SPY-1        -0.050180    0.03136     -1.60   0.110           SPY-2        -0.031250    0.03121     -1.00   0.317 *(contemporaneous)

S = 0.00970927   R-Sq = 3.2%   R-Sq (adj) = 3.0%

Perhaps FUNDX vs a tradeable index is the explanation.




I am not promoting this company and I am not blogging for it.

But I do own a snitzel and see that it is 6.75. Are there any comments as to the phoenix-like rise of the stock from here?

I know that KKR invested 700MM in a convertible bond. I read that this was done to avoid a possible takeover of the company.

Do they have a viable business model now that McNealy has given up the reins?



I had a conversation with a fellow the other day who just came back from a trip to the Beau Rivage in Biloxi, Miss., from a major poker tournament. He lost early in the tournament and was quite disillusioned as to his play. He felt that he played poorly and shared with me his feeling that he needs to go back to the beginning and get some help to improve his chances of success.

I shared with him a comment that I heard on TV the other evening from Mike Sexton, poker host of the WPT and himself a very accomplished poker player. Mike personally has seen every great, near great and former great poker player of the last 25 years play. He said that the goal of a poker player is to play each hand correctly. In a game that provides imperfect and limited information, along with the fact that you have little or no control over the events that happen during a tournament, including the cards you are dealt, that is all you can do. The rest is up to fate.

Daniel Negreanu says that his goal in playing in every tournament that he enters is to not make any mistakes that will cost him the tournament.

I had the honor of hearing John Wooden speak at a seminar some years back. For those who are not familiar with John Wooden, he is the legendary coach of the UCLA Bruins, who won 10 NCAA basketball titles in 12 years and coached such famous athletes as Kareem Abdul Jabaar and Bill Walton. His team once won 88 straight games, and he is one of only three people who are inducted into the basketball Hall of Fame as a player and as a coach.

He mentioned that during his tenure as coach, he never talked to his players about winning and losing, he always stressed the fundamentals of the game and playing to the highest possible level that they could. Their goal was always the same, to work as a team, play as a team, and the rest would take care of itself.

I find in life that the greatest obstacle we have in front of us is often ourselves, and the limitations we place upon us.

In 1968 at The Olympics in Mexico City, Bob Beamon shattered the world long jump record by an unbelievable leap of 29′2 1/2″. This bested the previous mark of 27′4 3/4″ by 21″. It was such an extraordinary achievement that Sports Illustrated analyzed the jump with state-of-the-art illustrations in their follow-up issue. Physicists and scientists who were interviewed were astounded by this and suggested that it was such an amazing and perfect feat, a stupifying confluence of form and fortune, that it might never be approached again. It wasn’t until the 1991 World Championships in Tokyo that Carl Lewis broke the record while leaping over 29′ three times in one day and setting the mark at 29′2 3/4″ wind aided and 29′2 1/4″ unaided. Unfortunately for Lewis that was not even the longest jump of the day. Mike Powell unleashed an unfathomable jump of 29′4 1/2″. A mark that stands until this day.

It was Vince Lombardi legendary coach of the Green Bay Packers who won five NFL Championships in seven years, and who has the Super Bowl trophy named after him who said:

The good Lord gave you a body that can withstand almost anything, it is your mind that you have to convince.



I am a big follower of your writings and philosophical thoughts. I have a question that I have never gotten a good answer to, so I decided to pose it to your brilliant minds!

Are trading gains and losses considered a zero-sum situation? For example, when Amaranth lost $6 billion in less than one week, does that mean that investors on the other side of the trade made $6 billion?

This might be a very simple question but I can’t really seem to figure it out, nor do I get a consistent answer from any of the people that I ask.

Dr. Janice Dorn comments:

I found a paper on The Winners and Losers of The Zero Sum Game, from Larry Harris (author of Trading And Exchanges).

I have always believed that trading futures is a zero sum game. If this is incorrect, please be kind enough clarify, and thank you.

Steve Leslie offers:

Something can only be a zero sum if it is frictionless. There is no perfect machine, they all expend energy of some sort.

In a private transaction I sell you something and you buy it then it is zero sum. 100% of the money transferred hands

Einstein said all matter in the universe remains constant. That is not to say that it does not take intermediate forms.

Although I do not trade futures, the chair and others are the experts there. I believe in his book he mentions that it has the least costs to it. In the world of intangibles it is the “cleanest of transactions” as it eliminates the spreads. Please feel free to correct me if I am wrong. The big boys screw the little guys by manipulating the markets eloquently, described once again by chair, when the Bank of Japan would put in buy programs and sell programs on currencies. My guess is that the Federal Reserve can do same by adding money and taking it out of the system.

Forex has its costs in the form of pips.

In securities of course there is a transaction cost. You pay commissions, and in stocks there is a bid and an ask. Spreads are killers in options. A 2.4 bid and a 2.6 asked is approximately 10%, right there. Tack on handling fees and the math is rough.

Forget real estate, seemingly everybody in the world gets a piece of that action, be it from title searches, broker fees, impact fees, etc.

Also, do not forget taxes! You sell something for a profit and governments, state and Fed. want a piece of the action.

The rules of engagement are against the player from the start. that is why the investor needs to be wary and not overtrade — To control costs and taxes.

Exchanges are like poker games in casinos. For every hand there is a “rake”, for example, in a $100 pot the house may drag $5 of it off the table. Put in a dealer tip of $3 and the player who wins the pot. gets $92 of the $100 that was in play. If no new money is added to the table the game will eventually fold due to lack of funds. It will have all ended in the house’s coffers. In a house game you win a $100 pot you keep the full amount “no rake no toke”. There you have to guard against team play, cheats, and slippage due to betting mistakes.



There are 1001 ways to lose money in the markets. Starting with the deceptions, but continuing with methods of snatching defeat from the jaws of victory. Chair mentioned a number of them in Ed. Spec. and Prac. Spec. including his Uncle Howie’s methods, his Grandfather’s methods, sexulation, hubris, hoodoos, fixed systems, trend following, technical analysis, the propagandists methods, Abelprectorish bearishness, body snatcheritis, everchanging cycles, and trading during times of personal or family events.

There is also Livermore’s most expensive last 1/8th of a point, and the other Livermorean folly of asking the market to buy a coat or a car, making the danger of trading the P&L and not the markets. We should never forget the Expert Professor’s good warning not to confuse luck and skill which was echoed by Professor Diebold’s discussion of alpha and beta. The greatest way to lose money of course, is the weak hand syndrome, whose symptoms strike both on the bailout and on the failure to capitalize on the rise after the fall, which is more of the loss of opportunity variety of losing money. A good number of ways to lose money involve the use of, failure to use, or the over use of leverage or capital. All in all there are 1001 ways to lose money, and I invite you to add to the list.

Vic responds:

One way not to lose as much money as usual is to eschew forums where the agenda is controlled by someone who you are not convinced has the ability to make a profit in real life. Also, do not assume that each day of the week and hour of the day has the same regularities.

Try not to take flyers on other people’s trades as you will become weak, not knowing how convinced they are of their prospects, and will tend to bail out at the worst time.

Do not read books by people with get rich schemes, as if they had one (other than selling books) they would not share it with you. Nor for that matter should you read books talking about how great a personage was in the past. The question is always what is the going forward reason that this method of thinking/methodology should have an edge, not already discounted, in the future.

Do not put on trades where there’s only one way for you to get out at a profit. For example buying at 3:50 p.m. with the idea that you have to close it at 4:00 p.m. because the close looks strong. The same for moves in the first ten minutes.

Be careful about going against near the ends of the day, and the ends of periods, because the strength of the other side increases in proportion to their profits on a trade.

Never be overconfident. You can sink in a moment on a boat, and lose everything with one bad trade in the market. Try not to be overly pessimistic either though, as the market is very resilient, and the infrastructure is designed so that the system can continue and capital can be raised and entrepreneurs will reap returns for their creativity.

Do not ever brag about your trades, or have too big a position relative to the total money flows in and out of your niche, as you will tempt others to run over you. And after a long period of abstinence, when all the moving averages look the worst, that is when you should test whether the expectations and risk reward are in your favor.

Always be flexible and strong in your thinking and money management. Do not have positions where you might expect on average to fluctuate by more than 4% a day on your capital. Stay away from news stories that put you in the same frame of mind as the average public, that lose so much more than they have any right to do. And when you have a big unrealized loss, and the position comes back to break even, test the odds of a continuation as opposed to a reversal.

Do not ever play another persons game. If you are set up to speculate, speculate. if you are set up to grind, grind. Do not make markets or engage in arbitrage where banks and dealers have about a million times the capital availability that you do.

Make sure that your costs suit your occupation. If you are day trading, be sure that your commissions and borrowing costs are in line with your competitors’. If they are much more low cost or quicker than you, how do you really expect to compete with them.

Many of these rules seem like those that Poloinius gave to Laertes … Above all others, remember that the only one that can really grind is the house.

Steve Leslie offers:

I will mention one sure fire way to expose yourself to loss and one to potentially expose yourself to complete financial ruin.

Firstly, the best way to lose money is to focus on your winners and forget about your losers. Mentally we like to watch our winning trades more than our losing ones. The reasons for this have been described in great detail on this list by many.

For example, if you buy a stock and it goes down — not uncommon thinng to have happen. So you have a mental stop of selling half the position when it gets to a 7 percent level. Unfortunately though you do not fulfill your obligation and hold onto the position. Then you notice it is now down 10% and still no action on your part. It continues to grind lower and suck your capital with it. Still no action on your part. and it goes lower. Now you stop looking at it because it has become too painful to watch, so you shift gears to another stock that is going up. This is your excuse. You have now fallen into the trap of avoiding pain and seeking pleasure. So now what do you do? You sell the stock that is going up or has already gone up 20% to offset your unrealized loss. Had you kept to your strategy, you would be out of the loser, booked your loss and now you let your winners run. You have also freed up available capital that can be used for other purposes rather than sit as dead money.

Another way is to own too much of one thing. I always tell clients, friends and anyone else who will or will not listen, not to over expose yourself financially to any one stock, no matter how appealing it is. I don’t care if they claim to have the cure for cancer, don’t own too much of it. I personally believe 10% of an individuals portfolio should be the maximum. I cannot think of any scenario where you want to own more, unless you know more than the general public. Now this is where you get the Bill Gates, Larry Ellison, Paul Allen, Andy Grove Arthur Blank, Sam Walton and others argument that this is how they became fabulously wealthy. My reply is that you ain’t them! The interesting thing about these overnight wonders is that it took years for them to become overnight wonders. 25 years from where Sam Walton opened his first store to his second. Some of them also had more than one bankruptcy in between their successes, so beware the headlines. Paul Allen incidentally used to have a terrible record in investing in companies. I have lost track of what he is doing now.

For every Microsoft and Intel, I will point out Enron, World Com, Calpine, Tyco, Imclone and many many more. The best regulators, analysts and money managers in the world never saw Enron coming. What makes you immune from such an event showing up in your portfolio?

The sand can shift very quickly, especially in stocks that have technical expertise. Two and a half years ago, Biogen Idec was flying high and their stock was at 65. Then they found that several patients with MS who were taking their drug developed a rare form of a brain disease called PML, and the stock dropped from 60 to 35 in two weeks. After an exhaustive study, the drug returned to the market and the stock is now 50. It has yet to recover its price fully.

Peter Lynch said that if you want to find one good stock you need to research 10. If you want to find 10 you need to research 100. Now be realistic. Who is going to research 100 stocks. Who has the time, energy, resources, knowledge. etc to play on this field. Most of us are involved in other things such as running a business, earning a living, running kids to soccer, helping with homework, holding together a fragile marriage, watching the next American Idol …

To take poetic license, I paraphrase Ratzo Rizzo in Midnight Cowboy “You know what you need Joe Buck? You need management. Money management that is.”

Andrew Moe contributes:

As corollary, take care when playing in other people’s markets. Strong runs in energy, then metals has made it look easy to profit from commodities. And with incessant reminders on increasing global demand from all the experts, folks are lining up to add oil, gold and wheat to their portfolios. I can just see old Ben on the floor of the exchange, reluctantly agreeing to sell some of his contracts, “When it’s beans in the teens, I’ll sure look foolish for having sold so low…”



The case for deception in markets is an interesting one, but for several reasons I hypothesize that what we are seeing may be self-deception:

Deception on such a large scale would imply that some kind of collusion is involved by market participants as no one source of participants is large enough to move a liquid market.
Let’s say that last time there was a particular memorable event a related market moved sharply in a particular direction. Those who were stung the previous occasion are likely to liquidate their positions on the basis of ‘once bitten, twice shy’. Thus they move the market in the opposite direction to last time prior to the event in question.


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