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…”



W. C. Fields said “never give a sucker an even break,” but this sucker got one, and I have to share it. Late this past November I started trading futures for the first time. However the futures datafeed I was getting was still in delayed mode. So the first couple of rounds I placed, I was watching old data stream by (I did think it was strange how my positions were acting with regard other market activities) and it wasn’t until I place an S&P market order and got filled 1.5 points better that I called to find out about the data, and got it live. So dumb luck fell my way. Embarrassing and comical.



My youngest got Disney Princesses version of Monopoly. After about 10 games, I finally asked why she choose Mulan every game.

“Cinderella’ and Pocahontas’ Daddies made them princesses. Mulan was a warrior and she earned it herself.”



Recently Vic suggested that gaps which fill (like PFE) might carry predictive information, for example, liquid names which drop and fill might say something different about the coming week than when they don’t fill, or trend lower. Conversely, an up (or down) recent market might predict what happens to gapping stocks.

Today AAPL gapped -5% on a stock options inquiry, which filled completely by the close, (my limit order wasn’t filled …).

I don’t yet have much capacity with individual stocks, but this looks interesting.



The two belonged to almost the same generation, and both witnessed the 1929 crash first hand. One became wiser and prospered as a result, and the other committed suicide.

I always considered Livermore the ultimate mythical figure in markets, and not Benjamin Graham. If I had one criticism of Practical Speculation, it would be the exclusion of Livermore as the man who decimated the most ill founded wisdom about markets. I contribute that to the fact that his method was simple enough for the high school drop out to understand and apply, as well as to his colorful lifestyle and womanizing.

Livermore’s work can be summarized in very few words. Buy when stocks are going up and always buy at market, and do the opposite with down trending stocks. It is mind boggling how any logical person can believe that such an easy to follow system would make money over the long term.

I believe I had the same copy of How to Trade in Stocks that Victor has, and actually went out of my way to program the formula in red and blue at the back of the book into a simple computer program, before I realized that what he calls natural reactions of six dollars and more, according to the formula, mean that you should sit through decreases that will wipe out any margin you could have. He neglected to use percentage points, so according to him a six dollar reaction on a hundred dollar stock should be dealt with the same way as on a four hundred dollar stock.

In brief it is totally inapplicable in this day and age where computers execute millions and millions of dollars worth of trades at the click of a mouse, and where even arbitrage opportunities became obsolete in consequence. Its applicability to today’s markets is questionable even if you are sensible enough to change the numbers into percentages and apply it to the thousands of stocks that are under the hundred dollar mark. I even question its applicability at the turn of the last century when it was believed that Livermore prospered just by using this simple formula.

Yet, seemingly very smart people idealize Livermore, but probably more for his life style — his Yachts, his mistresses, his cigars and his mansions.

I ended up selling the book to The C.E.O. of a brokerage firm for a few thousand dollars, it is a thin book of under 100 pages. Like Ben Green (not Ben Graham) I felt I made a very good trade given the useless content of the book, but left the new owner with the impression that he got a steal out of this little boy who probably does not even know who Livermore is.

Ben Green advises that you should never show anxiety to sell to the buyer. I dare say that unlike Livermore he would have never bought stocks at market.

Green also put a very high price on his horses to test the knowledge of the buyer. While Green’s techniques could be useful in today’s markets, some twists are appropriate if not necessary, as buyers now have more choices, and again at the click of a mouse can find out the prices of a product at a hundred different suppliers around the globe.

In fact today, sellers do the opposite and fake urgency and anxiety to sell a product, just to get the buyers foot in the door. Everything Must Go, be it due to bankruptcy, a new season’s merchandise, renovations, etc … Once the buyer gets into the store to take advantage of the seller’s urgency however, he/she finds out that the seller used Green’s second technique of setting the price too high to test the buyer’s real knowledge of a bargain.

GM. Nigel Davies responds:

My reading of Livermore is different.

When reading his two biographies it seemed to me that first and foremost he was an intuitive tape reader. What he was not was an educated man, so his attempts to systemise what he thought he was doing were pretty bad. Those looking for something similarly poorly organised and unscientific should take a look at Nimzowitsch’s My System or Hans Berliner’s The System. The latter in particular would seem to have little excuse as he is a professor of computer science at Carnegie Mellon University.

I would argue that given the size Livermore was trading he must have been rather remarkable to do as well as he did, and this may well be indicative of a substantial market edge, at least in his heyday. And inevitably he got wiped out when he was wrong, a simple case of wild money management.

Larry Williams comments:

I would argue that he was a market manipulator … the Reminiscences [Full PDF] book was not exclusively the life and times of Jesse, it was a composite that first appeared in the Saturday Evening Post.

The real life and times of the man links him to Joe Kennedy and lots of market “campaigns”. His personal life was a disaster — deep depressions, children shooting one another or their mother, I forget which.

His fortunes wane almost the instant the SEC came into power, but it is certainly a well written book that has captured the imagination of traders ever since.



Prior to Spring 2004 I lived in Columbus, OH, and I enjoyed dining often at Katzinger’s deli. My special sandwich was their “#34″, a hot brisket sandwich on rye with Russian dressing and coleslaw. I omitted the coleslaw. This is a great sandwich, and Katzinger’s is a great deli. I’ve been to most of the highly rated delis in Manhattan–Katz’s, Carnegie, and others — and I haven’t found a sandwich that can match this one. The Katzinger’s people told me that they were a knockoff of the Manhattan delis, but in my opinion they outdo their model.

On Dec. 26 I found myself in Ann Arbor, Michigan, and now I don’t know what to think. Zingerman’s deli is incredibly similar to Katzinger’s. Even the #34 sandwich is basically the same thing–hot brisket on rye with coleslaw and Russian dressing. (Katzinger’s actually also has some non-brisket roast beef mixed in.) Furthermore the format of these two delis is exactly the same, as are the signage, fonts, and lettering. Yet apparently there is no business connection between them. Zingerman’s has been around since 1982, and I suspect it’s the original and Katzinger’s the imitator. The imitation though is so profound that I can’t believe there are not lawsuits flying everywhere.

Zingerman’s #34 was outstanding, and I think it had a slight edge over Katzinger’s. Nevertheless they are both fantastic, and it’s one experience that I can’t seem to re-create in Manhattan.



U.S. Hedge Fund Seeks Investigator to Shadow Bosses

Dec. 23 (Bloomberg) — Chapman Capital, a Los Angeles- based hedge fund, is seeking a private investigator to monitor the private lives of company executives, the Financial Times said, citing a job advertisement on a New York Web site. Robert L. Chapman, who runs the fund, is known for writing blunt letters to companies and has warned in the past he would use covert intelligence, the newspaper said. “Understanding what is motivating executives of underperforming companies is a big part of our efforts,'’ the newspaper cited Chapman as saying in an interview.

He could come up with a weekly point system:

Week 28:

-3 Monday golf during work day with drinking buddies
-2 Two-martini lunch Wednesday
-15 Affair during working hours with employee Friday

Week 28 total: -20, Cumulative: -768, Recommendation: Sell short



Recently Vic suggested that gaps which fill (like PFE) might carry predictive information, for example, liquid names which drop and fill might say something different about the coming week than when they don’t fill, or trend lower. Conversely, an up (or down) recent market might predict what happens to gapping stocks.

Today AAPL gapped -5% on a stock options inquiry, which filled completely by the close, (my limit order wasn’t filled …).

I don’t yet have much capacity with individual stocks, but this looks interesting.



I’ve been reading Georgs Soros’s book “The Crisis of Global Capitalism”. I know you worked with him and spent a lot of time with him. I was wondering what he thought of your approach to the markets. In this book he seems to be diametrically opposed to your views. He calls social science a false metaphor and says that we cannot fit the mold of Popper’s model of scientific method to the markets since they are reflexive in nature. Applying the scientific method to my trading added much clarity to my life and career. So I am trying to understand Soros’s thought process. I know nothing of him other than what I have heard of his enormous success.

I thought it very curious that he hired you and spoke so highly of you yet his philosophy on markets was the complete opposite. Just wondering how that was…

Victor replies:

Mr. Soros’ view of my approach is that it is not valid in any respect and he has eschewed all contact with me for the past nine years. I have found his ideas on tennis balls, and his survival instinct, worthy of emulation.



Inspired by the Christmas spirit, I have in front of me an original copy of How To Trade In Stocks by Jesse Livermore. The jacket reads, “The Livermore Formula for Combining Time Elements and Price with 16 color charts. 133 pp. New York Duel. Sloan Press, First Edition. Special Edition Limited to Five Hundred Copies. Printed on all rag paper. Blue Beveled Buckrum, stamped in silver with the Livermore Market Key. Signed by the author before the first page of text. Exceedingly rare thus. 1940.”

The book is a collection of sage reflections based on the many losses and gains Livermore took, before he lost everything. It also contains 10 pages of rules as to how to record in 18 columns with black and red ink and pencil whether a stock “is in an upward trend or downward trend until a natural reaction occurs with particular reference to Pivotal Points .” And also “…depending on how prices are recorded when the market returns to around those points, you will then be able to form an opinion as to whether the positive trend is going to be resumed in earnest, or whether the movement has ended…” With 35 nebulous rules like this, that seem the work of a madman, it is no wonder that shortly thereafter he committed the final act of suicide, thus sparing his followers from further losing much more money. None of the rules are tested, and no concept of consistencies with randomness, and no attention to the grind that the house takes or the drift of the market. A sad chapter in a sad market life.



This week’s Barron’s plugged GaveKal’s idea of the “platform company”. This is a polite illustration of Bacon’s concept of the public’s being always behind the form, as pointed out by Victor and Laurel. GaveKal has been on this theme for at least three years. I’ve been a subscriber to their services since the late 1990s. GaveKal is smart. I’m talking super smart. They are a small team of French, English and Americans based in Hong Kong and I have met the team a few times. It amazes me how their output is consistently informative, rational and timely. They beat the pants off the big guns on the Street like Steve Roach et al.. It shows how a small team of highly motivated individuals can outperform their much better capitalized peers. There is a lesson in that for all of us. By the way, I highly recommend their book Our Brave New World. The tome is a cage match between market memes and logical quantitative thought. I am in no way associated with the authors, other than being a regular subscriber to their services and do not in any way benefit from increased sales of their book, etc.

Gabriel Ivan replies:

There is no doubt in my mind that Charles Gave is “super smart” but his Barron’s interview is riddled with half-truths, smoke and mirrors, which shows crystal clear he’s got an agenda. Just a few remarks were:

Reading his comments on the “platform companies” I experienced a NASDAQ 2000 deja-vu all over again. Back then, the smart folks that run Legg Mason today, also had a pretty compelling argument on how dotcoms can generate cash flow indefinitely through working capital and low Capex layouts. The “new economy” model, and we know how that story ends. Furthermore, he presents the valid r&d expenses argument, but conveniently forgets to adjust the Motorola capital to cash flow example accordingly.

In the current-account deficit argument he starts by anchoring the reader in the 7% of GDP as being a banana republic level, but then he switches immediately to the net worth comparison where the 1.5% looks better. This jumping around between income statement and balance sheet would make any Shenanigan CFO blush.

Including the volatile stock and bond holdings in the U.S. net worth calculations, (although a favorite shill of the Fed. Reserve), is not comforting if the trade policy is based on it.

He claims most of the U.S. consumption goes towards healthcare and education like it’s a positive thing per se, with no regards to the return on that capital spent. The quality of healthcare and education (esp. undergrad) per $ spent might have been a better read.

The nail in the coffin is the play-down of the real estate problem. It is the true mark of poor salesmen — lying about the obvious. The growth in real estate prices, in other countries says nothing about their affordability, own to rent analysis, etc., nor do the interest rate increases have an effect, when such increases have much lower impact due to central banks’ lower reach onto business cycles, the absence of mortgage markets, etc..


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