The competitive side of me says push on and make more money (make hay while the sun is shining). Don't change the model (assuming your model works) and press on.     -Scott Brooks

A point Jon Krakauer wrote about in Into Thin Air is that mountain climbers need to haul ass when the weather is good since they have to expect bad weather rolling in at some point and they won't be able to move. In my experience, good markets are infrequent and that's the time to trade with full effort. When the opportunities dry up, it's best to hunker down and spend the day surfing the internet or taking a vacation.

I've seen many traders ease up when the goings good and then be in a desperate position to trade when the market is quiet. Being wrong in both situations always leads to an early exit in the business.

Ryan Maelhorn comments: 

Suppose it is February 1st, which it almost is, and suppose that already, your fund is up 20%.  This is amazing for any given month, and pretty good for the YTD as well.  I don't know what 20% sounds like to everyone here but that is double the drift of the market as a whole, so I will assume for this writing that ending the year up 20% is seen as a pretty good year.  This being the case, how long should one go without making a trade?  Should the fund close up shop for the rest of the year?

How does one measure time as risk?  At some point, it becomes illogical not to make another trade.  We can think of this on the maximum scale — the length of our lives, and realize that if we never make another trade for the rest of our lives, nor any investments, our money would start to be riddled away by various expenses, taxes, and inflation.  What are the concerning factors such as having a good year early, the possible closing of the fund next year and the desire to try for a record year, etc.? What is a good formula to value time as risk?  How many hours of non-involvement in the market should one percentage of our total capital buy?

Russell Sears offers: 

Don't invite me to Vegas … I can't take it, too nerve racking. Everything within me rebels the longer I stay, knowing that the house will grind me down. Every loss hurts twice, once the wallet, second the mind.

However, stocks are different. You have the edge. You are the house and time is on your side.

At the start of 2006, I believe I counted the average return when the economy is not in a recession, and when it is in a recession. The bottom line is that unless you expect a recession, stocks are the place to be. If 2007 gives the average return of no recession, which I think is likely, the S&P would be at 1602, which is very close to what Markman predicted in his MSN money column.

Russell Sears adds: 

At the start of 2006, I believe, I counted the average return when the economy is not in a recession, and when it is in a recession.

This is an excercise that I believe a reader should do by hand, at least I found it a learning experience.

Alan Millhone comments:

My father began building spec homes in 1955 and he always did remodeling and insurance repairs. I began working with his crew when I was 13 during the summers and he always expected more out of me than his regular crew of carpenters. I have had new employees who were amazed that I could tell them how long it should take to move a dump load of gravel or sand by wheelbarrow or how long it takes to tar coat a basement wall and then install a French drainage system around the perimeter of a home. I do have years of experience in construction and I mostly learned from the ground up, and have been around several good contractors over the years and have always listened to what they expounded on 'tricks of the trade.' Owning and renting apartments is another 'niche' in the market that is not for the faint of heart! Most think all you have to do is collect the rent … However, you have maintenance of units, renters who will not pay, and you have to legally evict them. You need to be a little bit of a handyman if you own units, so it is not for everyone. Also, you have to know when to raise rents. I was asked once by a fellow who owns a lot of rentals if I knew the best time to raise rents. He told me at Christmas time! … People cannot afford to move then. Yes, a bit cold harded, but many renters will not give you any breaks. The best time to raise rent is when a unit becomes empty. I always scout around the area and get a feel of what other apartment owners are charging. I would not mind building a few new units, but material prices are currently too high to make the numbers work.

Now in return for my treatise on renting, I expect the spec. list to help educate me a little on investing.

Victor Niederhoffer responds:

You seem to do very well in real estate. For someone who knows the field, I imagine real estate is as good as stocks. Jim Lorie once told me that the main difference between the returns of stocks and real estate was that you could get a very good return from stocks through index funds without knowing anything about it, but in real estate to get that return, you had to know a lot about it.

James Sogi adds:

It's up 20%.

How can one maximize gains? Say if it's up but it does not want to liquidate, could a trailing stop on a portion give a synthetic option? We've discussed them and they are inefficient, but path dependency prevails, so they might have function. Another way to think about the question is say you are up 2% on a trade on your margin, do you liquidate with the idea of buying back lower? Let's assume your risk factor has gone up. Do you lighten up? I think our conclusion last time was to adjust leverage in a market with drift to protect gains. That seems to be the answer to catching further gains, but reducing risk ala. Gardiner Principal: be small when wrong and large when right. The corollary of which is to adjust leverage to the probabilities thereof.




I know this is not a political website, but let me make a prediction about something that will have dramatic consequences, economic and otherwise: Bush (or more precisely the U.S.) will succeed in Iraq, in the sense that within a year the situation there will be significantly calmer that it is today, to the point that it will be hard to argue that it's not a relative success, whatever the definition. I've been following the conflict very closely in minute detail for at least a year based on all available public information. For the first time I believe the U.S. has reached critical mass, based on the latest military, local political, and economic trends and very recent achievements by the U.S. military on the ground. Also the tactics have finally been improved to an acceptable level. With all Democrats of importance heavily and very publicly invested in the notion that to continue there is unequivocal madness, and that some form of "phased redeployment" is the only way to go, and a general consensus of people sympathetic to the cause that anything that Bush will do is too little too late, the political (and economic) implications are enormous.

Gary Rogan follows up:

First some evidence:

(a) There was a recent major win in one of the two troublesome provinces outside of Baghdad. This was a major operation involving mostly Iraqi troops with American support that demonstrated the ability to properly cooperate on the battlefield in a mixed Suni-Shia province. [Read IA, CF shut down terrorist group ‘The Council’]

(b) As the Jan. 28 entry (and many others) from this trusted blog of a Baghdad resident demonstrates that the intent of the surge is having an effect already. It's worth reading many other entries to realize how much more positive the situation in Baghdad is than is reported in mainstream media.

(c) It's worth reading this journal from an independent correspondent who went to Al-Anbar and Musul (the latest) to learn about the optimism of American troops and exciting levels of cooperation between the Iraqi Army and American soldiers.

It's worth noting that there's been a dramatic and unexplained surge of police recruitment in the worst cities of the Anbar province, such as Faludja nad Ramadi, as evidenced in the journal and a U.S. military press release, which can be found further down in this post.

(d) Read about the dramatic surge of the Iraqi dinar after the Nov. American election.

It is likely that the violence in October was in a large part designed to influence the American election.

(e) It's worth reading the opinions on this Iraqi scholar about the turnaround in Baghdad and many other things in different articles.

(f) Read about the U.S. military opinion about operations and overall changes in the Anbar province.

There are other press releases attesting to the dramatic turnaround in the number of tribes supportive/neutral to the Coalition that used to be opposed.

(g) Read about the fairly dramatic transfers to the Iraqi forces of the local military theater control.

This and many other pieces of evidence show that outside of Baghdad (and to some degree even there, although it's much more problematic in the mixed Sunni-Shia areas), the Iraqi forces with American Air and logistics support can maintain security.

As to other things that shape my opinion where I won't provide links:

-Recent visits by many other bloggers/independent journalists to Iraq that indicate the level of optimism of the troops and cooperation between the Iraqi forces and the U.S.

-Recent changes in rules of engagement targeting Iranian agents that used to be caught and released. Much greater understanding of the role of Iranians in supplying both Shia (their natural allies) and Baathist and Sunni religious extremists due to the recent raids in Irbil and Baghdad.

-Indications to other classified changes to the rules of engagement that will make it easier for American forces to fight.

-Selection of a very intelligent general (Petraeus) to lead the fight in Iraq. Although not everyone likes him, he has made achievements in Mosul, he has a penchant for self-promotion, and his intelligence is admired by most people. He did achieve many good things in Mosul and has just personally written the U.S. anti-insurgency manual. He has a Ph. D. in International Relations, which is no cureall, obviously, but it's some indication that he can think more broadly than a typical military man.

-Selection of Admiral Fox for the Central command. The admiral has proven to be very good in the Pacific in fighting the war on terror.

-Various articles and press-releases indicate that the economic growth in Iraq has become at the top of the Middle East category, perhaps the fastest.

In summary, the anti-American forces are being worn down by continuous decimation, the economy is improving, the Iraqi military forces are able to function and they do not continuously turn on their American masters. The sectarian violence has started to subside, although very slowly. In fact, the previous sectarian violence has worked somewhat to separate the warring fractions. Most areas of Iraq are dominated by one sect or another and are not subject to sectarian violence. Concerning the extent to which the violence is occurring, it was triggered by a determined enemy campaign terminating in the destruction of the Golden Mosque of Samarra a year ago. This didn't happen by accident, which means it's not "natural." The Kurdish areas are achieving incredible economic success and are not violent. They also create a permanent stable platform for the U.S.

Gary Rogan further adds:

As it's becoming clear to the party of defeat that the war may in fact be won if the current course of event is left unaltered and that the whole Iraq Surrender Group effort was just a head fake, a dilemma has arisen: now that it has been publicly stated that the war is lost, can that loss be left to chance? The consequences of an "inadvertent" win would be so catastrophic to the radical agenda that the resounding answer is "no." The epic, but all in the family struggle between the "Pant Suite" and the "Rock Star" must take the back seat to the important business of running out the clock before the game is over. The experts on constitutional law have been lined up to state that it's possible. "Their own man" from Nebraska has been found for the bi-partisan illusion, new exciting scatalogical slogans have been given to the hoi polloi to chant on the barricades, and Barbarella came out of retirement. Unlike the sixties, the time frame is six months. Let the games begin.

Stefan Jovanovich comments:

I agree with Charles that we chose the easiest country (along with Afghanistan) with which to tangle. However, given the forces used and the constraints of politics, Iraq and Afghanistan were probably the only countries that we could have attacked. As targets, they shared the advantage of having secure staging areas for air cover - the bases in the Gulf and Diego Garcia - and compliant neutrals/allies on the enemy's border - Kuwait and Pakistan. The primary mistake in the pre-war planning for Iraq was the presumption that Turkey would be equally compliant. Their refusal to allow any supply or transit through their territory gave the Baathists an open evacuation route to Syria. We can guess what escaped to Syria in the first two months of the war, but I doubt that even the Pentagon really knows the full extent of what was evacuated. The Israelis probably know, but by now it is in no one's domestic political interest for the truth to come out. The Administration would have to concede that it made a true blunder, and the Democratic Congress might have to listen to testimony that "yes, there really was some nasty stuff that Saddam had locked away."

North Korea did not offer as comparatively easy a target four years ago. Given the political situation in South Korea and Japan in 2003, it is inconceivable that their governments would allow us to stage an invasion of North Korea or even air strikes from our bases on their territories. I doubt they would even allow us to take Congressman Murtha's suggestion and use Okinawa as a destination for our 9,000 mile retreat from Baghdad.

It is equally hopeless to assume that Russia would have allowed us to stage an invasion of Iran from the north in 2003. With U.S. forces' present control of Iraq, an invasion of Iran from the west, beginning probably from Sulaymaniyah, would certainly be feasible. However, four years ago, without control of Iraq, the only available invasion routes would have been from the South, from the Indian Ocean, from the East, or from either Afghanistan or Pakistan. None of those seem like a particularly attractive proposition, given the historical precedents and political realities on the ground. To invade from the south would even now be particularly foolhardy. Alexander's one military defeat was in his return from India through Southern coastal Persia; he lost nearly the same percentage of his initial force as Napoleon did in the march back from Moscow.



I have to admit it here and now. I like White Castle burgers. I even buy them frozen and microwave them. How many parsecs does it take to walk one of those off?

Clive comments:

You would have to walk 160 miles to purge that one Big Mac from your body!

I'm in big trouble then. I eat those things at least three times a week by the bag full. In fact just today I bought two of them and six double cheese burgers. I can't explain why, but whenever I eat those, no matter what my P&L looks like, life is good. My dogs are fans too!

Jack Tierney adds: 

This is a painful thread for those of us consigned to a life of tofu and bean sprouts. But we put on a brave face and tell ourselves our path is not only straight but virtuous, that baseball is an allegory for life, that the market climbs a wall of worry, and that inverted yield curves are non-events.

However, if this thread continues, may you be visited by the Conductor of Cardiac Events.



I once drove Milton Friedman from San Francisco to the Hoover Institute while he talked to my dad about his book Free To Choose. (Being dad's unofficial chauffeur for things he wanted keep secret - principally his visits to the hospital and meetings with, as yet, unsigned authors - was my penance for being the black sheep elder son.) Like any sensible author, Friedman spent most of the time talking about royalties, but I do remember a brief exchange on the subject of money. Since the subject of money supply was one of the book's themes, shouldn't there be a glossary or some definition of what it was? It could be put in the back, said dad. Friedman's response was to laugh. That would, he said, make the appendix ten times the size of the book.

C. Kin adds:

Central bank forecasting Published: January 30 2007 11:47 | Last updated: January 30 2007 20:57

Milton Friedman, in one of his final interviews, suggested that monetary policy should be run by a computer. Since the future is uncertain, any interest rate mechanism will make wrong decisions. But humans add another flaw. Monetary policy requires managing expectations of future inflation and interest rates. Policymakers must be able to communicate effectively. Ben Bernanke's initial difficulties and the Bank of England's current woes reflect this challenge. The problem is not policymakers' views but rather that few can understand what those views actually are.

Sweden's Riksbank, the world's oldest central bank, has just joined a small group of institutions with a no-nonsense solution: policymakers publish a forecast of where they expect to set interest rates in the future. This is not as radical as it sounds. If they are competent, they should have a view. And it forms another step towards transparency. Europe's central banks once made inflation forecasts on the assumption of constant interest rates - a pretty silly premise. Now the European Central Bank and BoE assume a more realistic market yield curve. But they expend an inordinate amount of energy hinting at how plausible they believe that curve is. Far better just to say, explicitly, what they think.

Why do most central bankers see forecasts as the last taboo? Partly, self interest - they would frequently be revealed as being wrong. Yet there are two credible objections. First, while financial markets are grown up enough to understand forecasts are uncertain, the general public might not be. Second, making explicit numerical rate forecasts by committee is difficult. Pioneering New Zealand, Norway and Sweden in effect have either a single dominant decision maker or small groups of bank insiders. The ECB's 19 rate-setters and the BoE's nine look unwieldy by comparison. Reformers can forget the Federal Reserve. It is not so long ago that a congressman told Alan Greenspan that he finally understood what the chairman had been saying. "I must have misspoken," was Mr Greenspan's famous reply.

Copyright The Financial Times Limited 2007

Rudolf Hauser adds:

The most important problem with central bank discretion is not the lack of transparency, although that certainly does not help, but rather, it's that central bankers might take actions that make the problems worse rather than better. The problem with a computer program is that it has to make some static assumption about some key variables that might in effect change over time. However, it is possible for a perceptive central banker to anticipate those changes and adjust central bank policy accordingly. It might be much less costly to adjust monetary policy than to force the market to adjust to a predetermined monetary policy.

Forgetting the many specific ways of implementation, there are basically two guides to monetary policy. One is to target high-powered money (the monetary base or in other words the sum of reserves held at the central bank and currency) or a definition of money selected that the Fed could reasonably control through the use of the monetary base adjustments. There are a number of problems here, including changes in the demand for money, the fact that other financial instruments aside from the chosen definition of money are quasi-money and could substitute for the chosen definition (which could itself be fully money - such as an IRA savings deposit), and effectively controlling that definition just by manipulating the monetary base. The other approach is to target the interest rate for high-powered money (the Fed funds rate) or some other interest rate relative to an equilibrium real interest rate. The main problem here is determining what that real equilibrium interest rate is, which includes being able to determine the market's inflation expectations included in the nominal interest rate. The advantage is that changes in the demand for money might not present a problem, and that real equilibrium rate might change over time with shifts in the savings/investment balance and changes in time preference of consumption. Discretionary central bank policy has often just focused on perceptions of the economic outlook and attempted to react to those forecasts by changing interest rates or other targets to moderate the impact of undesired directions in inflation or unemployment. Given that stable prices should be a central bank's key objective in its monetary policy, inflation targeting is a third alternative, with adjustments to interest rate, or money supply targets to be used more directly. Although standard assumption can be made for the demand for money (income velocity) and for the real equilibrium interest rate, setting up an automatic computer program for a policy aimed at inflation is more difficult. It need not be the case if one has a market forecast of future inflation based on an efficient market for inflation-indexed securities to plug into a program that then specifies what adjustments should me made to the more direct targets.

When one has an astute central banker such as Alan Greenspan, discretionary policy might work better. The more stable the environment, the more effective a computer program might be. I favored Friedman's computer approach of targeting M2 until the turbulent times of the 1990s when there appeared to have been significant changes in the demand for money. Until that time, monetary growth had been extremely stable under the Greenspan Fed. After that, monetary growth accelerated to accommodate increases in the demand for money related to various financial crises, etc. Relying on an arbitrary computer program might not have been as effective. In the past, discretionary policy often made economic performance much worse, as was particularly the case in the depression of the 1930s and inflation of the 1970s. Focus on recent performance often created a worse pattern of boom and bust. The Fed has learned something from those past mistakes, so it is possible that those mistakes are less likely to be repeated in the future. But one never knows, and reacting to new circumstances is not the same as avoiding exact repeats of past mistakes. Also, as new people come to the positions, those past lessons might not be as well remembered as they should be. At this point, I am reluctant to rely on a computer program, but I realize that relying on discretionary policies also has considerable risks. What should be the case is that a stable price environment with either no inflation or a predictable minimum rate of inflation should be the standard by which the Fed is judged.



A Note from the President: 

The Chair proposes that I stick my neck out. I'm accepting only because the august company that comprises the List prevents many of us from letting it "all hang out." That's unfortunate since I believe the List has members whose forecasts might prove very insightful. However, I'm not one of them. In fact, I've been so wrong so often that one of my forecasts, if viewed as the babblings of a hoodoo, might provide a fortune to those who fade my conjectures. With that in mind, I offer an early apology for any prediction that may prove accurate.

First, in a recent post I revealed that I was over weighted in natural resources. This is an affliction that dates back many years and must be accepted with the same understanding one extends to his fellows for their inexplicable preference for blondes or redheads. So with one exception, which I'll get to a little later, we'll skip that category.

My favorite "chemical" is extremely abundant, slightly acidic, and is as essential as oxygen. It is water. I don't like it for just next year, but for the next thirty. Investor owned water stocks are few in number. Herewith are nine: AWR, WTR, CWT, CWCO, SBS, MSEX, SWWC, SZE, and UU. From here, it's a game of pick-and-choose; however, over the past year, three foreign companies (SBS, SZE, UU) have cumulatively crushed their American counterparts. However, until last year, American water companies carried the highest valuations as measured by P/E or P/B. Although the group gets little mention, American water utility stocks have outperformed other asset classes for the past 12 years. (Actually, it's been longer, but I can't find my reference.)

As most are aware, only a small percentage of the earth's water is drinkable (potable). And unlike other commodities, there is no substitute, nor is it likely more will be discovered. I have followed the desalination industry since 1974, and though much has been promised, little has been delivered (although CWCO seems to be doing very well). I believe more successes will eventually be achieved, but timing is iffy. (There's a lesson here for those who believe our energy problems will be solved shortly.)

Water infrastructure worldwide is pathetic. And it will take hundreds of billions (probably trillions) of dollars to set it right. Those who provide pipes, pumps, membranes, meters, etc. can benefit substantially. Because water is so essential to those who pump, process, and/or sell, it would seem inevitably profitable, although not necessarily. A number of years ago, I invested in one of the foreign companies listed above. They specialized in taking over municipal water works and rebuilding the systems. As required, they went in and began repairs to the system, improved efficiency, and cut down on costs (partially by eliminating public employees).

However, their investments were substantial and as agreed in the initial contracts, they sought to recover their expenses through increased charges. Every city and hamlet in this nation has a Utility Watchdog Group - their main job is to bitch about every utility increase ever put forward, regardless of its legitimacy. But, with water, the problem is especially acute. We can drive less, dress warmer indoors in winter, put up with higher indoor temperatures during the summer, shut off the gas to the decorative lighting fixtures, or move in with our in-laws. We cannot cut back much on our water consumption. So, when that price goes up, there is more than the usual complaining. If the price goes up several years in a row, the outcry cannot be ignored. As a result, the same city councils that brought in the outside company now attempt to control, freeze, or roll-back prices - even though they had no contractual power to do so.

But governments, as was just demonstrated when congress successfully demanded that legitimate contracts with the oil companies be rewritten, can do almost anything they choose. As a result, this company backed out of deals with several American cities because they could not and would not operate in the red. Running a for-profit water system in an American city should be a no-brainer money-maker - and in many cases, it is. But when the real crunch comes, when water prices, of necessity, skyrocket, it is imperative to be aware of the Cowardly American Politician who will abrogate any contract if it assures his or her continuation in office.

The group with the most to offer and with the least vulnerability to political duplicity are those companies that supply pipes, valves, pumps, meters, etc. that will become essential purchases in the immediate future. Although there are several large caps that have become involved in these areas, their exposure remains relatively small in relation to the size of their overall operation. However, there are a number of companies which could perform nicely: LAYN, NWPX, TS, GRC, LNN, HYFXF, WTS, TTI, and KELGF.

(An approach to supplying water that to date hasn't been too successful but hasn't received much attention, is the use of machines that pull potable water out of air. These machines, depending on size, can produce anywhere from two liters up per day. If the area's climate meets certain humidity minimums, the systems will work. However, I've been reluctant to even attempt a speculation as it seems something this important would have received much more coverage by this time. I'm not sure if this is a performance or a marketing issue.)

A second area that appears fruitful (but which revolts just about everyone) is coal. I doubt, despite current talk, that America will ever again go nuclear. (And even if I'm proven wrong tomorrow, the first new plant wouldn't be up and running until 2015). And the movers and shakers (that phrase, by the way, is from a very nice poem, We Are the Music Makers) have determined that we will cut back on gasoline (i.e, oil) consumption. The cuts envisioned are Lilliputian and one of the proposed substitutes, corn-based ethanol, is an excellent example of why a government should never be allowed to determine efficiency.

The recent news stories on the escalating price of tacos and the Mexican government's reaction to it, is the first bell in the death knell of corn-based ethanol. The next bell will be an American one when prices of pork and chicken begin to rise because we've determined it's more important to feed our cars than the livestock our consumers count on for protein.

Yes, perhaps we can expand corn growing acreage (at the expense of soy beans, but only with the use of more fertilizers, pesticides, and herbicides) and satisfy both demands - at least until the weather, a capricious demon, decides otherwise. Additionally, the very best estimate I've seen to date on daily ethanol production (assuming the current 116 plants and the 79 under construction are all up and running) totals 718,000 barrels. That's 3.5% of our daily requirement. If we all decided to never exceed 60 mph, we would save that much. (Interesting fact: the amount of grain it takes to produce 25 gallons of gas could feed one person for an entire year.)

It doesn't appear that either the Congress or the states are in the mood to approve drilling in the Rockies, in Alaska, or offshore in any of our sanctified coastlines. Russia and China are moving quickly and decisively in striking long-term deals with foreign oil producers. India is beginning to search for deals. Europe appears content to whine over Putin's insensitivity while hoping his tenure is followed by a kinder, gentler former KGB operative. Our oil companies aren't doing much more than being kicked out of Russia and Venezuela.

But we still will need a fuel and we will need it in abundance and we will need it from a dependable source. Coal is the only alternative. And it need not be the dirty, filthy stuff that used to be poured down the basement shoot when I was a kid. Germany developed the Fischer-Tropsch method for synthesizing a hydrocarbon like coal into a much cleaner burning liquid. We have several companies (mostly small ones, but I understand GE is testing the waters) who are currently using the process with our largest coal producers.

The process works. The question to be answered is at what level (of acceptable carbon output) will the bar be set. There exist influential groups who feel no level (of coal emissions) is acceptable. I doubt that they'll prevail. But should they, you can be sure that when Americans begin shivering too much in winter and sweating too much in summer, they'll be rolled flatter than a nickel beer. As with the Fischer-Tropsch companies, I'm not going to name any candidates as they're not that numerous and my omissions would be indicative of my holdings. (By the way, I do not own any of those stocks whose symbols I have listed.)

Those are my two primary targets. Water shouldn't be a surprise; it's been a great idea for a long time. Coal is something else; to some it may seem like buying into pornography. For those, I suggest searching the geothermal field, though initially expensive, the systems work (in both summer and winter), and can be installed almost anyplace where several deep holes can be drilled.

I became president of the old duck hunters courtesy of Gordon MacQuarie's great stories. It's appropriate then that I end with a Macquarie story (notice the difference in spelling.) My son will be 42 next month and has been a confirmed bachelor. Just two weekends ago I received an email from him (he's lived in Japan for six years) announcing his marriage this coming July in Honolulu. Now I felt I was pretty well set in making whatever minor financial arrangements I could for my children and theirs. (Lord knows we're leaving them with enough debts.) This adds a new dimension and one that requires real long-term thinking.

For those in the same boat, check out MIC, The Macquarie Infrastructure Fund (there are a group of Macquarie Funds and you may find one more appropriate). This fund has been buying up (or getting long-term - 75 year - leases) on tollroads, airport parking lots, commercial heating and cooling outfits, and energy service providers. If it's something that's an absolute public necessity, Macquarie owns or holds a long term lease on it. It pays a great dividend, but I'm told, reading their financial statement, it will give you the yips.

I now yield the field for at least a year.

The President further adds:

Scott asks a good question and, frankly, I don't know how to answer it. But I believe we have reached a point where we have to admit that governments and their offspring are poorly run. And though the threat of government interference is always real, the current state of government, especially at the state level, could actually prove beneficial.

For example, Macquarie and another outfit leased the Indiana Skyway for 75 years for $3.85 billion. It's estimated the companies will recoup their investment in 17 years and make an additional $21 billion over the remaining 58 years.

There has been talk of Daley also leasing the Illinois Tollways. Two days ago, Illinois announced it was leasing its lottery for $10 billion. These will be huge income generators for years. Likewise, Tennessee and several other states sold their future cash flow from the Tobacco settlement for discounted sums so that they could balance their annual budgets for two years. The buyers will reap nice returns for years.

Many states, and Illinois is one of the biggest offenders, have contributed little or nothing to their states' employee retirement funds over the past six years. Their only outs are raising income taxes (not going to happen) or selling off their hugest cash generating properties - for lengthy terms and at substantial discounts.

Our state governments, like our federal government, have been badly run, and finding additional revenue streams is getting harder and harder. In each case, though, the lessee has made sure the state has kept a financial interest in the asset; this seems a smart move as it might discourage the governments from taking draconian actions in moments of remorse.

For selected firms, then, governments may be providing great investment opportunities. We may be in the early days of an entirely new asset class; especially for those with long term investment horizons.

Jaime Klein adds: 

Currently, the only cost effective technology to extract drinking water from air humidity is cloud seeding. It is routinely done in Israel (and other places) and causes about a 10% increase in rainfall (amounting to about 800 million cubic meters per year). Since only about 15% of the rainfall is actually used (in agricultural irrigation, tapwater, etc.) artificial cloud seeding produces some 120 million cubic meters/year.

As Henry's insightful note shows, the production of fresh water is a question of energy. All the oceans are full of water so there is no scarcity of raw material. And all the water is being recycled in nature so it will never "end." In Israel, we are producing 200 million cubic meters/year of fresh water by desalination for an average cost of 0.65 U.S. dollar per cubic meter (the consumer pays an average of 1 $US/cubic meter). The desalination industry was established by the State and operates under 20 year-long contracts, selling all its production to the State at a fixed price. There are no free markets in water, not here nor everywhere, since conduction and distribution is a natural monopoly.

In my opinion (shared by Treasury's wonderkids), Israel doesn't need that expensive water, and the desalination industry was established in a moment of national panic caused by a two-year long drought.

By the way, water demand can easily be reduced by increasing its price. The curve is quite inelastic since water costs so little. In fact, even in Israel where domestic water is very expensive, the water company's bill is less than 1% household income. Wastewater removal and treatment may cost an additional 1%. I don't think anybody will make fast profits in the water industry in the coming years.

Henry Gifford offers: 

The question was raised about how much energy it takes to run a machine that takes water out of the air. I will show some counting on the question, and let others reach their own conclusions about why they are not popular.

Starting with the same 25 gallons of ethanol, which was described as being made from a year's worth of food:

84,100 BTU/Gal x 25 - 2,102,500 BTU / 3.41 = 616,568 WattHours of energy in the ethanol

Assuming current USA electricity grid efficiency of 33% (Source: Electric Power Research Institute), that can be converted to 203,467 WattHours of electricity.

An off-the-shelf dehumidifier (Grainger part # 5BB55, info below) takes 30 pints of water out of air per day, and uses (115 Volts x 5.3 Amps) 609 Watts to run. Therefore the 25 gallons of ethanol could perhaps run it for (203,467/609) 334 hours, yielding (334 x 30) 10,000 gallons of water. Probably the machine is rated under ideal conditions (high humidity, low temperature), and therefore the machine can only produce a small fraction of that under more realistic conditions - 500 or 1,000 gallons of water from 25 gallons of ethanol?

A test could be done by putting a bucket under the drip from a window air conditioner or a dehumidifier, and measuring how long it takes to fill the bucket, and then comparing how much electricity the machine uses.

Dehumidifier, 30 Pints Residential Dehumidifier, Capacity 30 Pints in 24 Hours, 115 Volts, 60 Hz, 5.3 Amps, Fan CFM 181, Humidity Range 20 to 80 % RH, Ambient Temp Range 64 to 95, Fan Speeds 1, Bucket Capacity 17.2 Pt, Height 22 7/8 In, Width 15 3/8 In, Depth 12 2/3 In, Impact Resistant Thermoplastic Cabinet, Color White, Includes Four Casters, Removable Front-Loaded Bucket, Hose Connection For Continuous Drain Operation, Filter

Henry Gifford further adds:

I understand that there are no free markets in water here, but disagree that the reason is that conduction and distribution are natural monopolies. There is no free market for corn, apartments, car rentals, health insurance, or many other things here for which there are multiple players competing for the same customer.

New York City's water is of higher quality than the bottled water in most places (usually just municipal water run through a filter), yet it "sells" for only $1.25/cubic meter, which hardly covers the cost of repairing the pipes. Indeed it is still "too cheap to the meter" - many customers still have no meters. As said below, use can hardly go down when the price is too low.

Catching and storing and cleaning and drinking/using rainwater runoff from roofs has been routine in the Caribbean for generations, and is increasingly done in the U.S. Southwest, and would be more popular if subsidized water and electricity (for pumping) were not available.

Jaime Klein responds:

(1) The domiciliary water supply market is a natural monopoly not because of regulation or subsidies, but because the customer has no alternative supplier. All attempts to introduce competition have failed. Even so, the price is dirt cheap.

(2) Rainfall catching water supply systems are fantastically expensive and dangerous to your health. If the price paid for one cubic meter of drinking water from a municipal system is, say, one $US, then the cost of the equipment to catch rainfall, to store, to purify and to pump it (investment + M&O) is, comparatively, astronomical, and averages $15 per cubic meter. As a conversation piece or environmental toy, it may be worth it, but please don't drink the water. Rainwater is not pure, it carries atmospheric particles and poisonous gases. Water from the first rains of the season are highly contaminated and toxic. Even urban tree foliage suffers. The water has to be stored, which is another potential source of contamination. The water has to be purified, possibly by addition of a chemical or by reverse osmosis. It has to be tested before consumption. This is a highly professional area, certainly not for amateurs.

In Israel, the Ministry of Health discourages home rainfall catchment systems, and in practice forbids it. There are strict water testing programs (every two weeks, samples are to be taken by licensed samplers and sent to licensed laboratories) and the water has to meet quality standards (zero coli count, pH, etc.). None of the traditional rainfall catchment systems (and there are many in Israel) are able to supply water of drinking quality and are de facto forbidden. It is not that the Ministry has inspectors searching for home systems to close them down, but no permits have ever been granted.

Henry Gifford comments: 

Imagine you were running a government in a desert area as described below. Thousands of your subjects would know the history of the people who lived for thousands of years in houses without modern heating or cooling and who used thermal mass to even out the diurnal heating/cooling load. Some would know that with modern windows and a few centimeters of foam on the outside of the thermal mass, modern standards of comfort can be achieved easily. Abundant solar energy could make hot water for showering and electricity. This would leave people able to live entirely "off the grid" except for one thing: safe drinking water.

Having people depend on a centralized water system would be good for the government, especially in an area where governments have a history of organizing wars for control of land with abundant water resources. Therefore I find it unsurprising that a government in an arid area tells people rainwater is unhealthy, and cannot be made healthy. Governments in other areas, such as the Caribbean and Texas, tell people the opposite.

Henry Gifford adds:

 I apologize sincerely about your "concerns for Israel", which you describe as the "mass immigration" of "potential husbands" to Wall Street here in New York. The street is only a few blocks long, yet is big enough to drain the pool of potential husbands from many countries. A proportionally sized financial center in Israel would be far less than one block long, which might leave some of your four beautiful, talented daughters in the same predicament as many beautiful, talented US women: stuck choosing from millions of single men who do not work on Wall Street.



Speaker 1: How is the market treating you?

Speaker 2: Not as badly as usual, but we've still got a long way to recover.

Speaker 1: No, really. I'm hoping things are good with you and you are giving them the usual drubbing.

Speaker 2: The market's been drubbing me much too much lately.

Speaker 1: That's not easy to believe. We are surviving, but we need much improvement.

Speaker 2: That's much more than I could say for most of last year.

Speaker 1: But time favors the optimist.

Speaker 2: It's path dependent regrettably.

Speaker 1: But the path is a long one.

Speaker 2: I wish it didn't have all those pitfalls.

Speaker 1: You have always been very resilient after a fall.

Speaker 2: The problem is that I can't let it happen more than once. They only forgive you once and I am always on the brink. If you only knew what I have gone through.

Speaker 1: I heard you're at the top again.

Speaker 2: I wish that were true. We're so attenuated that any figures like that
would be meaningless.

Speaker 1: I just want to say that Hakeem and I are very grateful to you for all you taught us while we were at your shop.

Speaker 2: You're the one that can teach me. I would much rather make it the way your shop does, following the big waves, and knowing that just one profit will cover all the short term.

Speaker 1: It hasn't been clear sailing for us either.

Speaker 2: The only one that can grind is the house. Regrettably, I try to grind against the house.

Speaker 1: Well look, I was hoping that things were going well and that you weren't concerned about all the months that have gone by without a decline.

Speaker 2: I am very concerned. At my age, I can't afford to give back the wherewithal for my seven tuitions. There hasn't been a decline of more than 2% for the longest period in history.

Speaker 1: We would be happy to buy you dinner and just catch up.

Speaker 2: I'd like that very much as soon as things quiet down and the risk is a bit lower.



Let's be clear that the Sharpe ratio is an extremely flawed measure. It makes perfect sense only in a purely efficient market. Otherwise, there can be plenty of ways to generate a good Sharpe ratio without really adding any value.

Take, for example, investing in timber or other forms of private equity (or like all the side pockets that hedge fund managers are doing these days) and then only marking the investments to market once per quarter. Voila! You can assign near zero volatility to your investments and get a great Sharpe ratio that you put in your powerpoint presentation.



Since 1980, it has only been three years since we have not seen a year (as of '06) where there has been a significant sept. - dec. clear out of longs (using a variety of available weekly trend change indicators). These years are '03, '96 and '93. Of these years, the Dow finished relatively flat for one of them, which was in '93, and the bid for the other two were in '96 and '03.

In particular in '96, after the market had three relatively strong years, it still posted strong gains in '97 without a sept. - dec. sell off.

In all three years, however, the April hoodoo's came through the following year before recovering, maybe not a significantly strong sample, but maybe of interest nevertheless.

As the chair suggests, it may be a case where as the volume attracts volume, strength attracts strength.

J.T. Holley comments: 

So remember, as good as counting is, it ain't gonna change what happens tomorrow. So protect your stack (your portfolio) and never lose your stake (all your net worth and ability to invest). No odds are worth losing everything. You gotta live to play another day. -Sb

There are 52 cards in a deck with four suits.

66 stocks make up the Dow Composite with Industrials, Transports, and Utilities (3 suits). Playing Dow Theory is like playing the classic 21 cards a piece "War," meaning totally random and no strategy involved unless you're a cheater.

If you really want to step back and take in the big picture, there are 3000 stocks (operating or not) roughly on the NYSE and 2000 stocks on the NASDAQ NMS. This is what makes up the deck we call the Willshire 5000. That's it. All you have to do is know how many players are sitting down at the table like American, Fidelity, Vanguard with billion dollar portfolios, and then remember that it's like blackjack with ten decks. Most of the big guys don't take positions with numbers around five's and three's. This means that there is maybe 0.55% or 0.33% of a mutual fund that has 300 stocks in its coffers with one or two reserved for cash. I'm sure if you'd like to do the work, you could form enough hypotheses and tests to come up with something fruitful. I mean it's only 5000 stocks right?

Victor Niederhoffer adds:

These days, there is talk about it's having been 978 days from the last 10% decline, how the maximum is just 1050 et al, and ha ha, the day of reckoning is coming, and things like the decline in oil prices are going to cause the Fed to join the doomsday camp and knock the stock market down by raising rates because things are so good with energy prices going down that they have to act et al. Thus, no matter which way energy goes, it's bad for inflation. There are many statistical errors with the above reasoning that go far beyond the always suspect former Tennessee research outfit that was bearish all through the 90's because stocks were above book value the way they were in the 1929 era. It's a good statistical exercise that we all might profit from considering that it involves conditional expectations and predictions given a certain extreme range of an independent variable without knowing the form of the distribution itself. For others, the statement might better be bruited about among the 150 reasons to be bearish and to go against the drift among the good colleagues of the weekly financial columnist and his fellow performers. For those who would like to shed some light on the line of reasoning itself, what's required is a bit of counting. What is the life expectancy and the expectation given that you have reached a certain number of days without an x% move? Books on survival statistics are a great help here with our favorite being The Statistical Analysis of Failure Time Data by John Kalbfleish (Wiley Series). Not knowing the secrets of Rebecca, pi, or key level analysis, one has counted such expectations. The good news here is that like the crocodile or the oak tree, or Chorus Line, or Shakespeare himself, the longer a stock market goes without a big decline, the greater the expectation of going further once a threshold is reached.

J.T. Holley offers: 

Instead of utilizing survival statistics to attempt to predict the non-randomness of a -1% day or worse, how about looking at the frequency of the 2% up days that are hopefully gaining? We took a long spell of oct. '03 to june of '06 some 682 days in between the last time. Then the latest run is 156 days without one. It's always eyeopening to see how in the trenches, the smaller (quarters or thirds) up days on a histogram are winning the war in the quarterly battles of the war called drift.



The force of mortality is how your probability of death increases as you age. Actuaries often deal with the first differential equation of the probability of death as you age.

Within your first years, about ten, your probability of death decreases and then it starts increasing in your teens. After about your mid 20's, your probability of death increases more slowly, but at a nearly constant rate. This compounding of decay starts taking a visible toll in probabilities near the latter 50's, forming a curve. Then by the 70's, there is a steep, almost linear slope continuing on into the 80's … Well your chances of making it past the 80's are slim.

Reading between the lines, you can see all the sad causes of ruin: the developing stage that tragically never makes it to maturity, the high flying youth with a secret death wish, the one in a million lighting strike from being at the wrong place at the wrong time, and finally the simple decay of age. Surely the speculator could sympathize and learn from studying this force.

This force of mortality fits closely to a cubic equation of age. The coefficient of the cubic term (the constant multiplied by age to the third power) is small and does not reveal itself until age to the third power is large. The square term never really affects the outcome much, leaving the curve level through most of the early adult years. The turbulence of youth is captured by the constant and first term.

It would seem reasonable that much of the wisdom, anxiety and even depression that often accompany old age stems from the understanding that only comes from life experience and first hand observation of this function of ruin. Once you comprehend the importance of this ruin function, you can see its effects and influences in major issues of human life, the individual, companies and governments, which are the three major forces of the economy.

Such a function with time's effect can drive small flaws or weaknesses into a major chance of total ruin. This insight alone tends to cause paranoia, anxiety and depression, seeing many likewise aged friends succumbing to this force.

However, perhaps the wisdom is drawn from the insight of the myriad of ways nature handles these ruinous forces. The individual spirit does not accept that he is ill conceived. Millions make the self sacrifice to feed, cloth and shelter their families and give them that extra something that lets them know they are special. They live with integrity and pass on, letting others know it's ok that they take over, and that our spirit will have meaning as long as those we love thrive.

The company, government or individual that allows itself to be reinvented periodically can continue a long line.

The question is what are the signs of a company handling the hand-off to the next generation successfully?

Such are the thoughts of a two hour Sunday morning run.



The exercise of counting something by hand always teaches much more than can be learned by allowing a computer to do the work, and, even with a computer, I always like to enumerate the observations in order to go over them one by one.I believe that this type of attention to detail is what everyone should do when they are trying to improve or win at anything.

The same type of counting that one uses in cards, to count the number of aces and picture cards that have already been played in a game, is what I was doing last night to look at large daily moves in the S&P. Where have all the big moves gone?

In the following study I defined a large move as a daily percentage change of one or more either way, in S&P futures.

Number of large moves by period:

Jan. - June '03 — 51

June - Dec. '03 — 24

Dec. '03 - June '04 — 24

June - Dec. '04 — 21

Dec. '04 - June '05 — 17

June - Dec. '05 — 13

Dec. '05 - June '06 — 15

June - Dec. '06 — 09

There were an average of eight and a half large daily moves a month in the first half of 2003, and then four a month through to December 2004. There were three a month from the beginning of 2005 to the middle of 2006, and one and a half per month in last six months of 2006. Finally, January and February 2007 have two and one large moves respectively.
During the four years I looked at there were 91 large declines and 85 large rises. With the market going up about two percent a month, the small changes tended to be rises, and the big changes were skewed positively overall.

There was a tendency in the most recent years for the big declines to cluster. The expected number of big declines per month since 2005 has been one and a quarter. If the big declines were independent, the probability of finding one month with four of such is 0.01, and the probability of finding one month with five of such was 0.002 Despite this there were two months with five declines and one month with four.

There was a tendency for the months that had a higher number of large declines to also have a higher number of rises . Starting with 2004 there were four months with four or more large declines, and during these months the average number of large rises was two and a half, versus the regular average of one and a quarter. Such a difference has a twelve percent probability of arising through chance factors alone.

Except for the first six months of my study, when there were seven or more large changes in per month, there was no evidence for serial correlation of the data, with the only three months with a high number of large changes recently being April 2005, and May and June 2006. The former was preceded by a very normal month with just 3 large daily changes.

There have only been three declines of one percent or more since November month end, which occurred on December 12th, January 3rd, and January 25th. Each of these declines was exactly 1.17%, amounting to exactly 16.90 points down. During this two month period since November end, there have been no occasions where there has been a rise of one percent of more.

Since July 2006, there has not been a single month with more than two large day moves, and such a period has only occurred twice before in recent history.

Such are the regularities that emerge from a simple hand and eye study, and one has doubtless missed many more.

Craig Mee quotes an article from the WSJ: 

Is an End in Sight for the Dow's Long Run?

By many yardsticks, stocks are getting stretched. Perhaps the most convincing argument: It has been 978 trading days since the Dow Jones Industrial Average has seen a 10% decline from a high, the second longest such run on record, says Ned Davis Research. The Dow has gone 135 trading days without a 2% decline, the longest stretch since 1958.

The Fed's pause in rate increases last summer helped propel the latest leg of the advance. Why the market has risen for more than four straight years is less clear. A stable economy has clearly contributed, and other factors also seem to be helping.

A big reason for the gains: a strong run of corporate profits. Another key is low interest rates. Since October 2002, when the rally started, the yield on 10-year Treasury notes has averaged 4.3%, well below the daily average of 7.1% since 1962.

But there's reason to wonder whether these drivers might falter. In the latest round of earnings reports, roughly three times more companies in the S&P 500 have issued cautious guidance than on average, says Thomson Financial. Meantime, the yield on the 10-year note is creeping close to 5%. Last spring, when the yield on the 10-year note topped 5%, the Dow gradually fell 8% over two months.

If earnings waver, or if long-term rates keep rising, the Dow's long run could end.



I have, for many years, been a fan of Ayn Rand, the author of The Fountainhead and Atlas Shrugged, so I am pleased that my Junto meeting this Thursday, Feb. 1, will be a celebration of Miss Rand's 102nd birthday. Many people who worked with her or attended her lectures in New York will be there to talk. It's at the General Society Library, 20 West 44th St. in Manhattan, and will begin promptly at 7 pm. Admission is free and open to the public. I hope many of our Daily Spec readers will be able to attend, and say hello to me.



Daily declines/advances bigger than 1% in SPY (close-close) were checked from 1/04 - present. Counting number of trading days between such moves, regressed wait time (days) vs. date:

Regression Analysis: wait versus Date

The regression equation is wait = - 252 + 0.00675 Date

Predictor      Coef     SE Coef     T       P
Constant   -252.41   84.57    -2.98  0.004
Date          0.0067   0.0022    3.07  0.003

S = 7.11891   R-Sq = 8.1%   R-Sq(adj) = 7.2

i.e., the wait time between big dates has increased in the period, which is consistent with (and correlates with, not shown) decline in standard deviation (volatility) in the period.

Here are the big dates:

Date            big     wait
01/25/07   -0.012   37
11/29/06   0.010    2
11/27/06   -0.014   14
11/06/06   0.011    23
10/04/06   0.012    35
08/15/06   0.012    16
07/24/06   0.018    3
07/19/06   0.014    4
07/13/06   -0.016   1
07/12/06   -0.011   8
06/29/06   0.020    10
06/15/06   0.021    2
06/13/06   -0.012   1
06/12/06   -0.011   5
06/05/06   -0.015   3
05/31/06   0.011    1
05/30/06   -0.018   2
05/25/06   0.012    6
05/17/06   -0.019   3
05/12/06   -0.013   1
05/11/06   -0.012   17
04/18/06   0.016    6
04/07/06   -0.010   18
03/14/06   0.010    19
02/14/06   0.011    8
02/02/06   -0.012   9
01/20/06   -0.018   12
01/03/06   0.018    4
12/27/05   -0.010   17
12/01/05   0.010    20
11/02/05   0.010    3
10/28/05   0.014    1
10/27/05   -0.011   3
10/24/05   0.015    2
10/20/05   -0.018   1
10/19/05   0.017    1
10/18/05   -0.011   2
10/14/05   0.011    7
10/05/05   -0.013   1
10/04/05   -0.011   20
09/06/05   0.012    3
08/31/05   0.013    11
08/16/05   -0.013   27
07/08/05   0.011    10
06/23/05   -0.014   25
05/18/05   0.010    4
05/12/05   -0.011   2
05/10/05   -0.010   7
04/29/05   0.014    1
04/28/05   -0.013   5
04/21/05   0.019    1
04/20/05   -0.014   3
04/15/05   -0.014   1
04/14/05   -0.013   1
04/13/05   -0.012   3
04/08/05   -0.010   7
03/30/05   0.014    5
03/22/05   -0.010   9
03/09/05   -0.011   3
03/04/05   0.012    8
02/22/05   -0.015   11
02/04/05   0.011    12
01/19/05   -0.010   1
01/18/05   0.010    9
01/04/05   -0.012   23
12/01/04   0.011    7
11/19/04   -0.011   11
11/04/04   0.014    1
11/03/04   0.013    5
10/27/04   0.012    1
10/26/04   0.015    2
10/22/04   -0.011   11
10/07/04   -0.011   4
10/01/04   0.017    7
09/22/04   -0.013   13
09/02/04   0.011    11
08/18/04   0.010    2
08/16/04   0.010    2
08/12/04   -0.011   2
08/10/04   0.013    2
08/06/04   -0.014   1
08/05/04   -0.016   11
07/21/04   -0.018   1
07/20/04   0.013    12
07/01/04   -0.014   17
06/07/04   0.015    8
05/25/04   0.014    11
05/10/04   -0.010   1
05/07/04   -0.016   4
05/03/04   0.011    3
04/28/04   -0.013   4
04/22/04   0.014    2
04/20/04   -0.017   5
04/13/04   -0.014   10
03/29/04   0.014    2
03/25/04   0.013    3
03/22/04   -0.013   1
03/19/04   -0.014   2
03/17/04   0.011    2
03/15/04   -0.012   1
03/12/04   0.013    1
03/11/04   -0.013   1
03/10/04   -0.017   2
03/08/04   -0.012   17
02/11/04   0.011    3
02/06/04   0.011    7
01/28/04   -0.011   1
01/27/04   -0.010   1
01/26/04   0.013    14



Volatility is life and stability is rigor mortis. The only time markets are without volatility is when they are dead or administered. Free markets were created to break the stranglehold of price fixing in markets controlled by oligopolies, monopolies, and government. When Chicago created futures markets, each market shifted one by one from being administered to becoming efficient, cum volatility.



Once upon a time, my dear son, there existed a place called the stock exchange. It used to be the place where people of all sorts, rich for the most, would gather to buy and sell almost everything they had, from shares to live cattle and from bonds to financial instruments. It was clear from the beginning that you didn't need to own something to sell it. In other words, a magic place where richness could be created out of a dime was there to live and prosper. As you can imagine, the investors and speculators started to investigate how this wonderful place worked. They invented all kinds of studies and analyses, ranging from numerical to astrological. Some of them actually worked, or did they really? Some brokers knew what to expect from the market because of the noise the jobbers made when running on the wooden floor, rushing to the pits to get their orders filled. Others looked at charts and were sure to find an answer to their quest for money and power. The chartists, as they were called, used funny words and often gave more credit to their studies than they deserved. But sure enough, at times, they would strike it rich, not understanding their strategies were worthless; little did they know of the existence of the Mistress, the mysterious lady that comes when the data are no use and fear and hope dominate speculators' minds. She is patient indeed. The Mistress is capable of hiding behind your profits, and then jumping out from the dark corners of your brain, ready to take away from you what you have, by luck, taken from her. Beware my son. Always ask yourself if it's you or her doing the work, as I often find myself cornered and incapable of moving a muscle, not understanding any longer where the borderline was. As I'm talking to you, the stock exchanges don't exist any longer. It's a world of beeps and flashing lights on your flat screens; no more foot noise from the running jobbers, and no more buy and sell tickets flying in and on the pits at the end of the trading days; yet, you can still make a more than honest living out of this crazy job. But remember to look at yourself in the mirror in the morning: at times, you will see the Lady laughing at you. When that happens, just rush to your terminal and close your positions, even at loss, or the Mistress will not stop her scorning until you are totally and helplessly broke.

Adrea Ravano adds: 

Concerning my recent post: I'm happy it stirred a good debate. I didn't know, that my idea was being discussed on a national Italian newspaper(Corriere della Sera). This morning's financial section carries a very interesting article by professor Matteo Motterlini of the San Raffaele University. The article (published this morning, Feb. 5, 2007) talks about a recent study published by a group of researchers at Yale University, titled, How basic are behavioral biases? Evidence from Capuchin monkey trading behavior.

The study confirms for animals what behavioral studies have shown for human beings, that to offset a loss of 1 you must have a profit 2.5 times as big. In other words the perception of your pain is greater than that of your pleasure. Interesting.



With all the movement of the EURO/USD getting bashed about by scheduled events, round numbers are frequent resting points. Right now we are at 1.29. Coincidently it is 1:29 A.M. Monday New York time. The European traders will be waking up soon and they have their own brand of fake out maneuvers, usually beginning around 2:30 EST., and within a couple of hours, their true intentions become known.

There are lull times in-between global market opens and announcements. During these times, there is drift. It can be scary as the drift moves in-between the round numbers, but gravity is often predictable. The scary part is when the drift becomes significant and time elapses into a fundamental zone.

For instance, a drift approaching 1.2925 could mean that we have a new resting point and our gravity to 1.29 is no longer as likely. Anything under 12 pips is not as significant. However, I hate going short at 12 above my root note and then have time bring me into a fundamental zone before the gravity occurs, so I have to look at the speed of the drift. Slow drift is the hardest to read. Rapid drift can give insights. Change ups in drift speed call for sophisticated timing. I find that it's better to wait a couple beats for a rhythm to be established. However, that rhythm can be hard to count on for any period of time, which brings me to the psychological fake out mode. When this occurs, it is best not to be caught in the switches and stick to my original assumptions.

My cousin just gave me his S-PLUS CD. I want to develop calculations for this drift speed as it is relative to the resting points at exactly this time of day. I am a Jr. programmer and am just now learning to count. I would be grateful for any ideas along these lines. It is now 2:11 and no drift at all, so there is no reason for me to open a position until they wake up across the pond. I am going to start by collecting data for an excel spread sheet with columns for one minute time and euro price. Oh wait, 1.2909 at 2:34. Too close to market open to risk it, my drift window has closed.



There are numerous colleagues on this website who are experts in the sciences including the new member, Uncle Bob, who specializes in polymer chemistry. I felt the least I could do to welcome him was to come up with a grand synthesis of chemistry and markets including work on an atomic theory of company structure, bonds between companies, reactions to various events in the market, conservation laws, new materials constructed from nano engineering, the spin of stocks and markets around various nuclei, a periodic table of companies with families related to their debt equity structure etc.

 With seven kids and 85 dependents, and a business always prone to foundering in stormy seas, I thought I might have to limit the scope, and I did by looking at the new insights from chemistry. I found that one cool area is the development of new materials from studies of the reaction of materials at super cool temperatures. Scoles and Toennies and other scientists at the Plexus Institute discovered new and valuable properties of molecules by embedding them in drops of helium at a temperature of minus 459 Fahrenheit. They say that molecules behave like they're in a frictionless world like the behavior of a person who can move easily through a crowd by hopping over everybody else. That's just the thing I figured. I'd like to find some stocks with that property, so perhaps the thing is to study stocks in a super cool environment.

I started by taking all super cool moves of more than 1.5% down in 2006 in the S&P averages. I noted that in 2006 there were just three such changes down 1.7 to 1.9% on 1/20/06 and 5/20/06 and 1.9% on 5/17/06. I will not delve into the point that there has not been a single move of more than 1.5% since 7/20/06 except to say that there is always hope for the Sornprecalebethans, and the longer such a move hasn't occurred, the more hopeful they are without testing that one is due. This meme is percolating through the mainstream media, of course highlighted by the financial weekly, at this moment.

The gist of my studies is that the companies they had there had a very high correlation between the performance of companies during the super cool days of 2006 and the rest of the year. For example, the six DJI companies that performed the best during the three super cool days were MCD, MO, DD, PG, UTX, and HPQ . They showed an average gain of 20% during the last seven months of the year with an average rank of 9th best out of 30. Among the six companies with the worst performance during the three super cool days, namely AA, BA,CAT,INTC,WMT, JPM, the average performance was up 2% with an average rank of 23 out of 30. Such differences in average ranks and means are highly significant.

I will post the full data when the heat of the moment is less. There are many extensions within 2006 to performance in other time periods and to performances at different temperatures, especially super hot days, like 1/03/06, 6/29/06, 7/13/06, and 7/20/06, each of these four being up from 1.5 to 2.9%, and other groups of stocks besides the Dji, and in other years. I note that there was no consistency in the rankings of the 30 Dji companies during the three super cool days. They varied all over the maps, with the standard sum of ranks' tests showing complete randomness. It was only when the sum of the ranks over the three bad days was considered and which was related to the performance during the last seven months, that the highly significant positive correlation emerged.

Thus, we conclude that in helium, at -459 Fahrenheit or in the stock market, stocks show their true properties. If they are very good at hopping over their neighbors during these times, why then, they continue to do so. If they are lethargic at super cool, they will continue to do so when the going gets much better.

We note that Uncle Bob seems to have a benevolent effect on the communities he goes into.

Scott Brooks comments:

I have always felt that one of the true tests of a stock's strength (or whatever investment you choose) is how they perform in a down or super cooled market.

 I've always seen stocks like a school of fish…swimming around together in sectors (or regions or asset classes…whatever you prefer). I like to watch what happens when the market(s) pull back (super cool) and see which sector/regions/asset classes hold up the best.

Then, I like to drill down into those s/r/ac and see which individual issues held up the best. I've always used very simple calculations in this process…not enough to call myself a counter…but a form of counting nonetheless.

It's like watching the Discovery Channel and doing a special on undersea creatures…you watch a school of fish and they all seem to move in synchronicity with each other…just like stocks in the same s/r/ac do.

Most people are transfixed by what appears to be the almost coordinated movement of these fish … like they have one mind. I remember discussing this phenomena back in college and how the professor discussed this coordinated movement and what it meant. I can't remember much of what he said about it to tell you the truth, I wasn't really listening. I wasn't interested in the "group," I was interested in the outliers…those fish that didn't move with the group (next time you watch a school of fish, pay close attention and you'll notice the outliers).

I remembered this lesson once I got into this business and have tried to apply it to investing methods.

I have achieved success over the years using this methodology.

Now that I've been turned on to counting, I am applying the scientific method of counting, the significance of these and other theories.

I'm sure that there is a chemical correlation here…heck, one of my undergraduate degrees is in chemistry…but my other undergraduate degree is in biology…and as I'm sure my Uncle Bob can confirm, it's probably wise that I stick to biology and not delve into chemistry … I may have gotten an "A" in both Organic Chemistry ll and Organic Chemistry ll Lab…but I owe those grades to Uncle Bob…that's a story for another day!



Here is a very interesting study by TradingMarkets on consecutive up days and down days in individual stocks.

Philip J. McDonnell comments: 

Some concerns:

They state that mean 1-day, 2-day and 1-week moves are their "benchmarks," but they never again refer to the 1-day and 2-day moves, which makes one at least a little suspicious about data snooping. It's better to say something like, "We looked at 1-day and 2-day moves, but there weren't any significant differences."

Speaking of significance, they don't provide standard deviations for their benchmarks or counts for total stocks in the x-day up/down groups, so one cannot calculate the significance of the sub-groups' deviations from the means of the overall group. The means of the sub-groups look interesting and convincing, but one would want to know that the differences are not created by a small number of highly volatile outliers.

And that brings up a broader issue: Are the benchmarks appropriate at all? TradingMarkets states:

We looked at over seven million trades from 1/1/95 to 6/30/06. The table below shows the average percentage gain/loss for all stocks during our test period over a 1-day, 2-day, and 1-week (5-days) period.

Of what relevance is this average 5-day move for these seven million trades? This is neither a cap-weighted nor an equal-weighted index, or any reproducible ex-ante yardstick, but just an artifact of their database, conflating the performance of all types of companies in all sorts of market conditions and creating an "average."

To paraphrase, TradingMarkets is saying that the stocks that went down five straight days in week[zero] did better in week[+1] than the overall "average" 5-day move. So what? The question needs to be: If stock XYZ went down five straight days in week[zero], and then went up in week[+1], how did this up move compare to some other benchmark for week[+1]?

It's easy to imagine that the sub-groups in the study select out highly-volatile stocks that are subject to wide swings in value and strings of up and down days. It might be more fruitful to compare these stocks to their own history, to determine whether multi-day moves are predictive for that individual stock. One might find differences between highly volatile stocks and relatively sedate stocks.



This afternoon, I started teaching Sam about board games, starting with noughts and crosses. What was particularly interesting was the problem of how to play as badly as possible so that Junior would get a taste for winning. I worked out that I should aim for the squares a2, b1, b3 and c2 on the 3×3 matrix, and above all avoid the center square (b2). And these thoughts led me towards what is probably the optimal strategy if one is trying to win, i.e. going for b2 immediately. OK, the game will be a draw, but this maximizes the number of losing possibilities for the opponent. And the same strategy is the best way to play chess, and I'm sure checkers too.

Anyway, this line of reasoning got me wondering whether the best strategies in other games (e.g. chess, checkers and markets) might be worked out by first considering the worst things to do. My top losing strategies for chess and markets are the following:


a) Getting into areas one doesn't understand

b) Violating the laws of Steinitz (e.g. trying to 'win' from inferior positions or playing on the wrong side of the board)

c) Burning bridges


a) Making commitments based on hearsay

b) Shorting markets with drift

c) Applying too much leverage

Besides the clear analogy between the a's, b's and c's in both lists, what really struck me about this was that weak players violate all of them whereas the best players will only transgress b and c, and this will be to pursue exceptional returns in markets or finishing in the top five or so in a 200 player tournament.

My conclusion from these ruminations is that it's not that hard to play a sound game, but the demands required to play an exceptional game probably increase exponentially the higher one raises the bar. It reminded me of a piece that Rashid Ziatdinov, an interesting and original chess thinker, sent me some years back.

Agzamov's style was to win by making no mistakes; he was determined to make no errors. This puts titanic pressure on opponents. He played similarly to how a computer plays now: no "great plans," but no tactical mistakes. This strategy was successful against many of Agzamov's powerful opponents.

Tal-Agzamov is one of George's best games. Look how the great Tal missed d4! (but not George!). Black won the exchange but not the game. The next step was to force Tal to make another mistake, to make him tired; this sounds dishonorable, but its not, its an honorable stratagem. George repeated the position many times and finally, when the real battle began, Tal made another mistake (Bd5) induced not from time-trouble, but from fatigue.

Alan Millhone adds: 

I knew Marion Tinsley well 30 years ago. He played chess when he began college and switched over to checkers. He will be known as the greatest checker player who ever lived. He played the best move that he knew (always) and was patient to wait until an opportunity arose. When playing 3-Move, he disliked the easy openings and would ask for a draw, hoping to draw a more difficult opening from the ballot of cards. When two equal opponents play checkers, they are supposed to end in a draw. Ron 'Suki' King will play out about any seeking to win. He has a high record for won games because of his pursuit of wins.

I have the book on Chinook and the annotated games Marion played against Chinook. I doubt if he would stand a chance today with the new expanded opening book and end game databases on checker programs. The computer computes too quickly and never gets tired!

I know little of the stock market (will learn a lot from being on the spec list, but I know a lot about losing in checkers. I found out years ago that to play better, you have to play better opponents. I left the game in 1970 and did not return until 1999. In 2000, I entered my fist nationals and played in the majors. From then on, I moved myself into the Masters and continued to play there. I don't have the time necessary to master the openings, so I drift into trouble early at times with those more learned than I am. Now to chess:

a) I readily get into areas I don't know due to my lack of knowledge. Lack of knowledge (research), I am sure, will hurt you in the market as well.

b) Tommie Wiswell admonished to "keep the draw in sight." This, I am sure, applies to the market on knowing when to 'fold' on a particular stock and move on to the next 'trade' (game).

c) To me, burning bridges in a board game is getting too developed (exposed) and then having no 'back up' or way out. In the market, you buy and buy a stock when it is time to unload.

Does your thoughts on Agzamov have anything to do with game theory ? Our World Champion, Alexander Moiseyev, has his own set of 'golden rules' for the game of checkers. His fine book, Sixth, pays homage to how he plays and to his own theories on the game of checkers.

Tinsley played 'safe' until an opportunity presented itself. Those before him like Long, Hellman, and Case also were all safe players until they could secure an 'edge' due to their opponent overplaying their position or simply making a blunder.

Nigel Davies comments:

Thanks for the interesting thoughts. Despite not playing checkers, I can see there are a lot of parallels. I wonder if anyone has attempted a generalized theory of game playing. My debate with the Israeli professor betrayed the fact that I don't think 'game theory' has any relevance to a practical struggle, and those more academically inclined than myself were able to add flesh to the bones of my argument by pointing out the oversimplified assumptions. Lasker wrote an encyclopedia of card games that was very interesting, as is Lasker's Manual of Chess. But I have only seen a copy of the former in Copenhagen's Library - I don't believe it was ever reprinted.

Ziyatdinov is a mathematician as well as a Grand Master strength in chess, and his thoughts will reflect this to a large extent. But as far as I know, they bear no relation to anything devised by game theorists. They are his own and are quite original. He maintains for example that a player should learn some 300 positions perfectly as explained in his book, GM Ram. As a player, he is also highly original, playing old fashioned openings without any particular theoretical knowledge, but showing great practical strength in the later stages. He marches to a different beat.

The area of 'knowledge' and 'understanding' is much more complex than I portrayed with my one-liner. For example, I think that many players, even professionals, find themselves playing without a perfect understanding of what they are doing. There is just so much to every field when you start to get deeply into these things. I have been struggling myself to juggle too many obligations (actually I think my chess has been getting weaker ever since my peak around 1993-97) and have concluded that trying to master more than one field is already way too much for ordinary mortals. So the problem players in unprofitable areas face is how to find the time. Many only get to devote themselves when their minds aren't quite as mentally sharp (not to mention reduced stamina). One of the good things about Communism was that they allowed their game players to maintain amateur status by giving them jobs, but all they had to do was collect their paychecks!



True learning comes from taking a new fact and conjoining it or juxtaposing it with something you already know. Some very good market research ideas come from diverse science fields such as chemistry and cosmology. Many of those ideas are counterintuitive at first inspection. "Accepted" market literature is replete with statements that cannot be proven false. At least reading about proofs in science gives one the general background to reject some of the bogus statements about the markets. A very good place to start is NewScientist magazine as a quick source for new scientific developments. Many of their articles are available free on their website.



 How beautiful are comets and ellipses.

Last May, the gravity of the 1300 for the S&P appeared to cause such comet-like swings. It reminded me of the orbits of the comet swinging around the foci of two suns. Once it topped out at 1325 on May 5th and 9th.

To see this latest orbit, start with May 9th and make the time axis five months out to October 9th by subtracting one trading day for each day after 10/9 the S&P away.

Of course there are many problems with this visual view. One was that the S&P bottomed on June 13 at 1223. It did not swing below 1200 before making the current run above 1400.

Let us hope that making it 40+ points above the gravity of 1400 is not another such swing.



A few weeks back, Spec Dean posted a link to some nice BBQ reviews. That got me thinking about travel plans, and then it made me want to make myself a little map of BBQ festivals and competitions and what not. Then that kind of grew as I did more research, and it expanded beyond BBQ at times, and it's still a work in progress, but it may provide some use and inspiration to others wanting to hit the BBQ trail in 2007.

Alan Millhone comments:

In my state of Ohio, I don't know of any barbecue gatherings. Let me know if Ohio is added to your excellent map. I noticed recently along route 33 from my home to Columbus a new barbecue restaurant at an exit for Logan, Ohio. It has been built with a green metal roof. I also noticed a large stack of wood ricked up at the back of the restaurant. My daughter for some years lived in Charlotte, N.C. and I visited "Smokey Bones" and "Sonny's Pit Barbecue" on a couple of occasions. Your map is excellent and I enjoyed looking at it. I saw a segment on TV a few days ago interviewing the creator of "KC Masterpiece" barbecue sauce (# 1 in America) and he now has a restaurant to serve up ribs, etc. coated with his secret recipe sauce — only in America.

Russ Herrold adds:

In my state of Ohio, I don't know of any barbecue gatherings.

There is the annual Jazz and Ribfest at Columbus along the Scioto River.

Finalists over the years based in Columbus include: City BBQ (started at a location in the 2000 block of W. Henderson Rd.) is my personal favorite and it's in an easy driving distance. Others include: the Damon's chain (started here by some folks who also ran a local financial recovery collections firm); the locally started Hoggy's chain (their third location at the corner of Fifth and Grandview Ave. is about 1/2 mile from my office); and the Knotty Pine (one location on West Third, near Ashland), which was a long time favorite, but as noted in a review:

The Knotty Pine originally opened in 1935, and was taken over by new ownership five years ago.

The change was not for the better as they lost their fire for barbecue.

One of my children lives in Memphis (ask for Eric at Bar-B-Q Shop), but he is married to a St. Louisian, and there are regular wet vs. dry rub debates.

The location down on Rt. 33 near Logan is just one of many in southeastern Ohio — go down Fairfield Co. Rd. 86, and a couple others are waiting to be sampled.

Charles Pennington offers:

I lived in Columbus for 12 years, so I wanted to chime in on a few barbecue topics covered by Russ Herold.

City BBQ on Henderson Road is a wonderful place. I stalked the restaurant before it opened, rejoicing that good barbecue might be arriving. I thought I was their first customer, but the owner, Rick Malir, denies it. I went through long streaks of eating there almost every day, either for lunch or dinner. I like the chicken, but really the brisket is probably what they do most distinctly. Credit me for their offering of green beans and Brunswick stew. I lobbied for these intensely. They also have good macaroni and cheese.

Damon's is a chain, and I don't think it's as good as the best non-chains, but still it's very good, and much better than the option of eating something that's not barbecue.

Hoggy's is also good, but not as much to my taste as City or even Damon's. It places more of an emphasis on a mustard-based sauce that isn't to my liking. Often it's a little too loud in there too. The barbecue restaurant should be more like a sanctuary for contemplation in my opinion.

Some recommended Columbus non-barbecue restaurants, if you must: La Chateleine on Lane Avenue (ask to meet Gigi as part of the experience, and listen to the sounds of Salvatore Adamo, Gigi's favorite, in the background), Katzinger's deli (I prefer it over New York delis.), Schmidt's Sausage Haus, the Gyro Shoppe.

A note on New York barbecue: Really the best in New York is Dinosaur Barbecue, which is way west of Harlem (646 W. 131st St. New York, NY 10027). It has very, very good food and surprisingly low prices for Manhattan. Before I got reading glasses, I once misread the check as $83, and started to fill in a tip and sign the Visa receipt, until my dining companion alerted me that the bill was actually $33. $83 seemed very plausible for the amount of food we had eaten and also taking into consideration the Manhattan location. However, this place is not really a sanctuary — it's a bit boisterous. It's a spinoff of the original location at Syracuse University, a loud campus hangout.

Scott Brooks adds:

On the theme of BBQ, I would like to throw into the mix a small midwestern BBQ chain of restaurants, Bandana's Bar-B-Q. I know we usually don't go for the chain stores, but I believe this one is unique

It started locally in St. Louis and became so popular that they began to expand. They are now in several cities throughout Missouri and Illinois.

They serve BBQ as part of a lunch or dinner platter and you can get either at any time of the day. I always get the lunch pork platter. It is more than adequate to fill you up … I usually can't eat it all. The lunch platter comes with a lot of BBQ, two side dishes, and two big pieces of garlic bread. With the dinner plates, you get a third side dish.

The food is consistently good at all stores. They smoke the meat and let you add sauces to your taste (which is what I prefer). All their sauces are good, however, I prefer to mix a few sauces together as follows:

About eight parts "Sweet and Smokey" sauce with one part each of "Spicy" sauce and "Hot" sauce, ending up with a tasty sweet mixture that has just a little bite to it.

The original sauce that they are famous for is mustard based and has a unique flavor … but I'm not fond of that one (although many people are).

I like to go eat at the Bandana's in Columbia MO, where they know my name, or the one in Arnold MO (a suburb of St. Louis) right at highways 55 and 141 where my best friend's wife is a server. I always sit in her section … she is a great server. If there were a spec list for servers, she would be the Chairman … she's that good!

If you get a chance to eat at the Bandana's at 55 and 141 in St. Louis, ask to sit in Sharon C.'s section. Tell her Scott sent you!



The most persistent fiction about the war in Viet-Nam is that "our military leaders had their hands tied behind their backs." The reality is quite different. Our military leaders wanted to have their options limited in Viet-Nam. They chose the tactics, the weapons and the objectives and were happy to allow the political leaders to take the heat for the subsequent failures. The Air Force generals wanted to spend their money on missiles, the Navy on submarines and the Army on anything technical that would get it a larger share of the military-industrial pie. The actual soldiers did the best they could, but the draftees were not trained and the sergeants and career officers pulled every string possible to get their tickets punched and rotated home. I suspect that Senator Hagel's nearly incoherent rage against the present war in Iraq and the military in general is based on his understandable resentment at the way the U.S. treated his brother and him and so many other draftees. My own training as a volunteer in the Navy was much better but terribly spotty. The damage control training at the Philadelphia naval base was first-rate; to this day I can talk to civilian and military firefighters and understand what they are doing based solely on what the Navy taught me. On the other hand, the lessons in amphibious tactics consisted of watching films from WW II, including lessons on how not to catch a venereal disease. Apart from his good character and extraordinary personal courage, Creighton Abrams deserves to be honored for putting an end to all this crap and beginning the restoration of the U.S. combat forces. What is going on in Iraq has a great deal to do with Abrams' legacy but it has almost nothing to do with what happened in Viet-Nam before 1970.

I disagree about keeping out the press. Let the press spend as much time as they want with the troops in the field and at the bases, but shut down the luxury accommodations in the Green Zone. I have only one continuing resentment from my time in Viet-Nam and that is watching all the "experts" from the press holding down mahogany ridge at the Hotel Caravelle and talking absolute nonsense about places they had never been to. It is the reason I cannot take Thomas Ricks seriously; he is the current generation's REMF know-it-all.

As for the cost of the "war," it is less than the increased revenues to the treasury from the capital gains tax cut. Nearly half of what is treated in the Pentagon's accounts as "war" cost is upgrading of the equipment based on the battlefield and tactical lessons of the war. The war in Iraq is no more expensive as a part of the national budget than the Marines' excursions in China and Central America and the Caribbean in the 1920s.

I urge Roger Arnold to spend some time with the current Marines. I think he would be disabused of the notion that the Corps has gone soft. What it has done is learn that its soldiers have to be tough and smart. That is the reason they have embraced Colonel Boyd as their hero, even though he was an Air Force pilot. For the same reason, they are not embarrassed to have women in their ranks and they no longer tolerate physical abuse from their DIs. Sledge's memoirs make this point very well. The "Old Breed" never tolerated frat boy bullying; and there is no reason for the Corps to expect anything less from its current Marines.



 There are 441 operational nuclear power reactors around the world today, with the IAEA reporting that 130 new nuclear power plants are either being built or are in the planning stages. These are conservative estimates, with the actual number of new plants likely to be much higher. [Read more here]

As you might expect, the above site gives a very bullish view on uranium. On the other hand, it is almost impossible to find a bearish article. However, the availability of uranium properties with legitimate producing possibilities is very limited. Even then, a new uranium discovery (or even an established but unbuilt operation), usually takes about ten years to get into production. From what I've read, permitting it can be lengthy and expensive; one forward looking company spent nuclear's "dark years" acquiring already licensed properties … its price is up about 40% over the past year but about 3500% over the past five years.

It's not unusual to find untested companies whose stocks have already experienced runs of 1000-2000%. Even CCJ, the class of the field, has run up something like 700% over the last five years.

If you want to stick with the picks-and-shovels aspect of investing, find out whose got the contracts to build the new plants and who refines the raw product into usable material.

– Jack Tierney

C. Kin comments:

I recall from my early days in the business (early '90s actually) that there were a large number of dormant penny stocks left over from a prolific bubble in uranium shares in the '40s and '50s. Perhaps the chair could direct us to a historic reference on the topic, which was presumably as frenzied and irrational as the dotcom craze. I remember hearing stories about companies whose shares would take flight on rumors that they were about to develop an atomic train/boat/airplane and nuclear-powered consumer products.

Such companies today may very well (if they still exist) herd mountain goats and supervise moose pastures.

I'd love to read up on the topic (from someone other than Doug Casey).



 When ecologists write about animals such as the badger, they should include in their thoughts some idea of the animals place in the community to which it belongs, just as if they had said "There goes the Vicar".

Since Elton sharpened the concept of niches all the way back in 1927, much work has been done on the theory of how niches develop. One idea that has much support in this area is that if a niche exists in nature then it will be filled. If an extinction occurs, then either the niche has closed, or the remaining species will expand to fill it. In an isolated environment like the Galapagos Islands there are finches with different shapes and sizes of beaks that are all able to compete better in certain weather and certain predator situations — each has their specific niche. These finches expand and speciate to fill every possible combination of environment, the same way the vicar will always find a place to ply his trade, be it among cannibals or the aesthetes. At any one time I am always looking for niches in markets that are not filled.

Take the market open. Many orders have piled up from overseas, and from overnight wires and instructions. There are the market makers who must take the other side of these trades and according to published data have the highest rates of return imaginable on their trades. In partial recognition of this, many exchanges have rules that give the public the same single price that the market makers realize on the opening. Other electronic exchanges have complex algorithms based on the panoply of limit and market orders that attempt to create the maximum number of contracts tradeable based on bids at equal to or higher, or offers equal to or lower.

There would seem to be many bargains to be had at the open which somehow take adantage of these profitable trades by those higher up in the feeding chain. Alternately, for those of a quantitative bent, a close study of the rules of the opening algorithms would seem to allow the possibility of some immediate high profit trades. The niche would seem to have many resources for nourishment in it as the moves between transactions on the open are very lumpy, especially on the electronic exchanges.

Indications of likely opening prices are made in individual stocks and electronic exchanges, and this adds to the opportunities for nest building. There must be finch like traders who just specialize here. How could this be tested? One proposes that the most popular individual stocks for daytrading would be candidates for a niche filler. What might be the sharpest way of making a living here?What other niches are as yet unfilled where a proper environment and adequate nourishment for the speculator is available?



The president has been reluctant to say much as he finds himself (once again) taking a side of the trade that the Chair finds disadvantageous. Specifically, it's a portfolio (it has been alleged) way overweight in natural resources. I dislike recording how these positions have turned out or how I believe they will do in the near or distant future.

Not for nothing do I have a file labeled "Dumb Posts," which seeks to track rash assessments made by various members (myself included). I have had opportunities to dredge these up when developments have proved them most embarrassing, but have over-ridden my animal spirits as I see no profit in it.

But as I check my portfolio against that of my wife (for whom I invest), I find that Marty Whitman was correct when he postulated that "I make more money just sitting on my ass." Her account has done marvelously well, but with infrequent trades throughout the year. Positions I long ago exited remain in her account with triple digit gains. On the one hand, I'm embarrassed by my lack of discipline, but on the other hand, I still have my tenacity in believing in my original assessment.

So, many mallards for her with the 20 gauge single shot. Far fewer for myself with a 12 gauge pump.

– Jack Tierney 

Scott Brooks comments: 

I never think how easy it is to kill a deer, just like I never think of how easy it is to make money in the markets. It simply isn't.

Sure, if I sit in the deer stand long enough, I will kill a deer … all I've got to do is sit long enough through all kinds of weather … bad conditions, good conditions and everything in between. The long term positive drift of the deer will eventually bring enough deer within range and I'll get enough shots so that eventually, I'll get a deer.

The same is true of the markets. Jack wrote a wonderful piece today and referenced his wife who has more of a buy and hold strategy … letting the long term positive drift of the market bring her positive returns.

There are some that just need to be satisfied with simply achieving investment success by sitting in the long term positive drift of the market … heck most money managers don't beat the market … why … because it's hard … really, really, hard!

You have to set your goals, set your standards, and be realistic about what you are capable of achieving. Always strive to push yourself, but don't try to achieve more than your capable of. I was a good high jumper in college, but I was never going to jump higher than 6' 8". That was the best I could do … and it wasn't good enough at that level … so I gave up high jumping and concentrated on my studies.

Did I fail? No! As a matter of fact, I never felt that I failed at that endeavor, rather I believed that I had succeeded greatly … I jumped much higher than I ever thought I could.

Most hunters are satisfied that they have shot a deer. I revel in their success! I love it when they get their deer! I take pleasure in their pleasure. Even though I take pleasure in others financial success, I don't judge my success by their standards. I set my own standards and work to achieve them.

When I feel like I'm getting in a slump, I force myself to fight through it. I have several things that I do to get through these phases.

I force myself to assess what I've been doing. Invariably, I'll find that I've gotten lazy about the "little stuff." For instance, in deer hunting, I can do all the macro work in the world on my farm. I can plant all kinds of food plots. I can hang stands on heavily used travel corridors, and practice with the bow until I'm dead nuts on for any shot up to 50 yards. I can then think about how I'm gonna go out and kill that big buck.

But all of that won't matter if I haven't paid attention to the smallest details … for instance, I refer you to my recent post on camouflage and the importance of scent control … maybe I forgot to take the neck strap off my binoculars and wash them in scent free soap in the wash machine. I know that sounds pretty trivial, but if I'm gonna kill that big buck (beat the markets), I have to pay attention to this kind of little seemingly insignificant detail.

I've taken what I've learned on the Daily Spec and applied it to my investment philosophy. I've always been a technical analyst. I love charts. I still love to look at them. But now I test them empirically by counting.

But, to be honest with you, I don't like counting that much. Sure, I can do it … but I don't like it. So I hired a quant to do the calculations on the hypotheses that I developed to improve my trading systems. Most of my hypotheses turn out to be a load of hooey … but every once in a while, I come up with something that improves my view of the systems.

As I become a better counter (yes, even though I don't like it, I force myself to learn it, do it, and get better at it), my mind is opened up to new possibilities that I otherwise would have likely never seen.

I also have a belief system. No, I'm not talking about religion … I'm talking about believing in myself and what I'm capable of doing. A long time ago, I read Napoleon Hill's book, Think and Grow Rich, and took it to heart when he said,

The dominant thought you hold in your mind will manifest itself in your life in some form of outward reality!

I've never forgotten that.

I've experienced the power of that belief in my life recently. A few months ago, I took into consideration the stock in my life and where I was at in the world and then compared that to where I believed I should be based on my skills, drive, and intellect … and I found myself coming up short.

I didn't like that. Not at all. So I planted the seed in my mind to look for opportunity, to look for the world to deliver me the opportunities that I was looking for … ok, so the world doesn't really knock on my door and say, "Delivery for Mr. Brooks." But I am surrounded by opportunities … all around me … and I have to tune my mind properly to be able to see them. I have to be in the right state of mind, otherwise, I simply won't see the opportunities that abound around me.

Eventually, my mind sees the opportunities, filters them, and arranges them in a fashion that makes sense, and Viola, I clearly see what I'd been missing before.

So it starts with a belief in yourself … an unbending belief that you will succeed and get what you want. Then it comes down to a meticulous attention to detail, and notice that nowhere did I think it was going to be easy!

There are other steps, but I think that's a good start.

Kim Zussman adds: 

'All wives are buy and hold cause if you wanna hold 'em, ya gotta … never mind.

Specs are familiar with friends and family who know next to nothing about markets, but due to a combination of luck and inaction, wind up beating your pants off (in certain periods). Jack mentioned stocks his wife held which he had regrettably sold below current prices.

Of course anyone looking at sells occurring in '01-'02 in most cases can kick themselves now. However one recalls a similar sport undertaken as a balm in 2002 when looking at sells from '00-'01 and noting how much lower they became since settling.

The knife cuts both ways (though upward trend makes one side sharper), and perhaps analysis of closed regrets contains some predictive value.

Sam Humbert comments:

friends and family who know next to nothing about markets, but due to combination of luck and inaction … 

One of my 'thoughts in the shower' recently was: why is "inaction" so lionized in discussions of stockholdings? A standard financial press trope is "oldster who has a cache of stocks from 1950 now worth $x million," as if it's a tremendous triumph of skill/willpower/perspicacity to throw some stocks into the oubliette.

It clearly requires no skill/willpower to hold "stuff" in general. I have an old pair of skis in the basement — last used them 15 years ago, and with the warm Vermont winters nowadays I may never use them again. They'll be in my basement till whenever (if ever) I get around to eBaying them.

So what's the big deal about inaction? The cause for pride?



 There are a few travel books that really make me wish I was immortal so I could travel and see even more of the infinite experiences this vast world offers. Here's my top three:

National Geographic Atlas of the World, Eighth Edition
It's simply the best and most expansive atlas out there. If I were banished to a desert island, this would be the book I'd take with me.

The Travel Book, A Journey Through Every Country in the World, published by Lonely Planet
This book consists of two page spreads, which provide wonderful insight into the culture and highlights of each country and territory, replete with big, beautiful photos.

The Cities Book: A Journey Through The Best Cities In The World, published by Lonely Planet
It's very similar to "The Travel Book," but the focus turns to the top 200 cities around the globe. I don't necessarily agree with the order they are listed in, but the list is comprehensive enough.

Other honorable mentions:

1001 Natural Wonders: You Must See Before You Die
This is a beautiful book, and it is great to pull ideas from.

1,000 Places to See Before You Die: A Traveler's Life List
Most of the listings are accompanied by upscale options, but I've found it to be a good resource and then I do it with cheaper methods.

The Concise Dictionary of World Place-Names
A good quick reference that sated my curiosity about how towns like Rotorua were named.

Two conversations I remember with fellow travelers in Brazil on different occasions always push me into taking a trip when I'm undecided. Sitting around with other twenty somethings, one guy mentioned, "ya know, if we're lucky, we'll only be able to live, what, another 50 years?" The other conversation arose when I discussed taking a lot of time off with a former technology executive who's been traveling for seven years straight, and to this someone mentioned, "you can always make more money, but you can never make more time."

In addition to the portrait of Sir Richard F. Burton that hangs in the place of honor in my apartment, I also draw inspiration from books such as A Sense of the World, which is the story of a blind man who traveled extensively throughout the world in the 19th century.

To close, I found the excerpt of an Alexander Pope poem that an author included in a book about Burton, which is also appropriate to describe many on the list,

With pleasure too refined to please,
With too much spirit to be e'er at ease,
With too much quickness ever to be taught,
With too much thinking to have common thought, You purchase pain with all that joy can give, And die of nothing but a rage to live …



What a terrible title for such a good book, but what else could you call it, I suppose.

Felix Dennis is a wealthy publisher and an unlikely poet whose book is a highly enjoyable read on what it takes to 'make it.' I respect his admonishing that most people won't make it, and that in order to get there you must take big risks, step on a few toes, but also remember to treat it as a game.

His writing style is fluid, sincere and self deprecating. He comes across as a no nonsense type willing to share insightful stories about his experiences in business & life.

I would recommend this to any spec. It probably won't change your life, but it is worthy of whiling away a few hours on.

Amazon: How to Get Rich, by Felix Dennis.

Sunday Times Review: This is a three page blurb by the author who gives a flavor of the book.

If you want to be rich, first stop being so frightened. [Read more here]

Incidentally, he also shares a few stories about his excess, reckoning he spent around $100m on living the high life over the years. This reminds me of the George Best quote on what he did with all of his money over the years:

well, I spent a lot on birds and booze and fast cars. The rest I just squandered.

Unlike G.B., Dennis was smart enough to know when to call it a day.



By Jay Gillette, Network World, 01/24/07

HONOLULU - For the second year running, no U.S. city has made the list of the
world's top Intelligent Communities of 2007, as selected by global think tank
Intelligent Community Forum. The ICF met and announced this list as part of the
29th annual Pacific Telecommunications Council (PTC) conference here in Hawaii
last week.

The ICF selects the Intelligent Community list based on how advanced the
communities are in deploying broadband, building a knowledge-based workforce,
combining government and private-sector "digital inclusion," fostering
innovation and marketing economic development.

 As announced by ICF chairman John Jung, the intelligent city finalists are:

 * Dundee, Scotland, United Kingdom
 * Gangnam District, Seoul, South Korea
 * Issy-les-Moulineaux, France
 * Ottawa-Gatineau, Ontario-Quebec, Canada
 * Sunderland, Tyne & Wear, United Kingdom
 * Tallinn, Estonia
 * Waterloo, Ontario, Canada [Read more here

Alan Millhone comments: 

Is that report telling us something about a possible problem with our entire educational system in the USA ? Everything in this country revolves around sports and the money it generates. It would be a dream to see chess and checkers taught in our schools at an early level. Bob Pike of Chula Vista, CA teaches a two week checker program in the local schools in his area. He can prove that a class taking his two week program will perform better on tests during the year than a class that does not take his program.

The current World 3-Move Style Checker Champion, Mr. Alexander Moiseyev, came over from Russia in the early 90's. He told me that in Russia, at a very early age, his parents put him in a special school to learn checkers and chess and was taught to record his games, use a clock and other academics in the second grade.

I will make a bet that the winning cities still use some form of discipline in their schools. In my school years, almost every teacher had a paddle under their desk or a belt, and I still respect every teacher I had even if they were still living today.

Stefan Jovanovich adds: 

Benet developed "intelligence" testing to identify those relatively few people whose cognitive faculties were impaired. He saw it as a diagnostic tool for confirming other symptoms of physical brain damage, Down syndrome and other mental impairments. He considered Stanford's use of the testing methodology to rank all people's intelligence as a gross misuse of his methodology. My dad made a sizable personal fortune from being an executive and shareholder in a company that was the largest for-profit publisher of standardized tests in the world. He knew what every cramming coach since Samuel Johnson has known; if you have a willing student and you teach to the test, you can change someone's scores. Just before he died, we had a brief discussion of what the effect of the No Child Left Behind Act would be. His answer was "some teachers will cheat on the scoring and within a decade everyone will be teaching to the test." The well-to-do and their children seem to agree. Why else would they pay for Kaplan, Princeton Review, etc.? For the SAT, LSAT and GRE, if a student puts in four to six good months of steady cramming, someone with an "average" IQ can produce well above average scores. The extraordinary literacy of Americans in the period before the Civil War (compare the Grade Levels of the State of Union addresses of Andrew Jackson with that of the most recent of his populist Democratic successors) was the product of the same kind of instruction. Students were crammed in reading and writing in a daily grind. After only a few years of study, they knew the language thoroughly.

There is no logical reason why compulsory American education cannot be limited to the span of Lincoln's formal education - four to five calendar years - and the curriculum "dumbed down" (sic) to nothing more than reading, writing and arithmetic. That would be a sufficient tool set for people to be able to go on in life and learn to become plumbers or lawyers or GrandMasters by their own means. Politically, this is an impossible dream, of course. We can rely on the private market to provide us with food and shelter and images for the walls of our caves, but the state must be guaranteed in its monopoly over the teaching of young children. Who says America has no official religion?



In the spirit of the Chair's effort to develop a taxonomy of market deception, I would like to offer a nuance.

Today's U.S. debt markets have sold off, despite weakish data, on vague reports of "a consultant" publishing a note claiming there's a risk that next week's FOMC statement will take note of economic strength.

Without cluttering up the list denoting just how silly/obvious this is, I suggest any rigorous categorization of market deception include "degree of ambiguity" as a parameter.



 On November 20, 1820 the whaling ship Essex was rammed twice and sunk by a sperm whale, an incident which inspired the conclusion of Melville's "Moby Dick." The crew of twenty men salvaged what food and equipment they could as the ship sank, and set out with three whale boats in an attempt to reach the coast of South America. (They were aware that the Marquesas Islands were much closer, but chose not to go there for fear of cannibals). They reached Henderson Island a month later, but found only a meager water source and not enough forage to sustain them all. Three men chose to remain there, the rest of the crew sailed on. When the food supply ran out, they subsisted on the corpses of their dead shipmates and one man (a relative of the Captain) was chosen by lot to be shot and eaten. Pitcairn Island, with food, water, and friendly inhabitants, was only a few days sail from Henderson Island, but the Essex crew were unaware of its existence. In February 1821 two of the whale boats were picked up near the coast of S. America. The crew members on Henderson Island were rescued in April 1821. In total eight men survived. Owen Chase, the first mate of the Essex, published his memoirs soon afterward and Herman Melville is known to have had a copy. Chase's memoir, as well as that of Thomas Nickerson, the cabin boy, may be found along with other primary sources relating to the Essex in the book "The loss of the ship Essex sunk by a whale".

Victor Niedehoffer adds:

I have commissioned a painting of the Essex — the painting has particular significance as described in Practical Speculations.

After his ordeal with the Essex, the captain immediately received a second commission and promptly grounded the new ship on ice. He refused to be rescued on the grounds that he'd be considered a hoodoo from then on. I have regularly used that second disaster as a sales prop, the way my daughter Galt uses her baby Magnolia in her movie meetings — "I can't afford to let it happen again as they'll consider me a hoodoo, look at my responsibilities." And in my case "if I fail a second time I won't be able to support my seven kids and 45 dependents, and I can't get a job as a squash pro because the hard ball game I played is obsolete." That was always good for some deep sagacious nods among my prospects, as it seemed to them a very good reflection of my concern for risk.

Pitt T. Maner III writes:

I remember seeing a small exhibit on the Essex at the Nantucket Whaling Museum several years ago. It is really quite amazing to see how important and profitable the whaling industry was in the early 1800s.

If you type the term "Essex" into the Nantucket Historical Society's multi-media search engine you should see some interesting items (photos, sketches, ship logs, etc.) on the subject.



 I asked the doctor, "how did evolution create vision?" His quick reply was that because of predators, individuals must be able to detect them for their survival, and thus vision developed.

Well that's quite a story. But what is behind the intelligence that creates the marvelous, intricate organ like the eyeball which coordinates perception with neurons in the brain? It is really startling to think about my vision.

David Wren-Hardin comments:

Vision almost certainly didn't arise from an attempt to spot predators, but rather as the development of a phototaxic behavior. Remember, light = energy, and if you're the sort of organism that can convert energy to light, or if you eat the plants and algae that do, then you need a way to find the light. The arms-race in vision probably began when predators on these organisms used their photoreceptors to find areas that were likely to contain their prey. Now there is pressure on the preyed-upon to evolve ways of using their photoreceptors to spot predators first.

Once you have one photoreceptor, building an eye is a snap. Nature loves adding extra features to organisms, whether it's extra segments, limbs or other peripherals. Pick up a bunch of random cats, for example, and you are assured of finding a few with non-standard numbers of digits. Once an animal has a grid of photoreceptors, it can now map visual space, and build all sorts of cool edge and looming detectors very easily.

Uncomfortably for the Intelligent Design crowd, the mammalian eye is a lousy design. The wires that carry the signal from the photoreceptors run across the surface of the eye, and leave it in a cable that forms a blind-spot in the receptive field. This would be like an engineer at Sony who decided the best way to build an LCD TV is to have each wire for each pixel run across the front of the TV. In addition, the retina is composed of many layers of cells, and the actual receptors are buried under these layers; the light has to go through them to get to the rods and cones. The octopus, however, did it differently, with its photoreceptors in front, and the outputs running out the back. So either there were a couple of intelligent designers running around, or there were trial versions, and we got the short end of the stick.



Here is the data for the cases when prior 20 week returns were greater than +10%:

Date          stdev   hi chg   hi nxt
11/22/82   0.037   0.239   0.177
08/04/80   0.019   0.208   0.105
02/09/87   0.015   0.204   0.093
03/23/98   0.024   0.181   -0.030
04/11/83   0.016   0.177   0.039
04/29/91   0.021   0.165   0.019
12/28/98   0.032   0.157   0.082
01/27/97   0.016   0.155   0.143
08/11/03   0.016   0.147   0.119
05/30/89   0.015   0.147   0.066
06/16/97   0.023   0.143   0.032
07/17/95   0.011   0.140   0.115
07/10/00   0.039   0.132   -0.129
05/05/86   0.023   0.128   -0.024
12/29/03   0.015   0.119   -0.013
12/04/95   0.009   0.115   0.058
04/04/88   0.033   0.113   -0.036
12/22/80   0.026   0.105   -0.032
12/16/85   0.014   0.102   0.128

Note that currently we are at the end of a 20 week gain of 10.9%, which had a weekly standard deviation of 0.009 (tied for low in 1995).

Alex Castaldo comments:

Overlapping returns are correlated, and therefore the normal statistical procedures that we use with independent variables are not applicable, and will give misleading results. Either we switch to non-overlapping periods or we have to make adjustments for overlap (which is tricky).

The example that Prof. Andrew Lo likes to give is the computation of 20-year returns from monthly CRSP data.

Here is an example of a flawed study: First we calculate the stock market return from January-1926 to December-1945 (20 years). It is a very nice positive number, about 8% I believe. Then we calculate February-1926 to January-1946, and so forth until January-1987 to December-2006. A total of 62 twenty year (overlapping) periods are examined. If only two of these periods have negative returns (hypothetically), then we conclude: the probability of losing money when you invest for 20 years is 2/62.

This result is completely bogus due to overlap. We have not really tested 62 independent periods, so the use of 62 in the denominator is not valid. The periods used are highly overlapping; for example January-1926 to December-1945 and February-1926 to January-1946 are almost the same. They differ only by the dropping of January-1926 and the addition of January-1946. The returns differ by a few percentage points at most. In some sense, the second period is not telling us much that we don't already know from the first; the reason we like independent variables is that each brings us the same amount of new information.

A more correct approach is to note that the period from January-1926 to the present contains only about 4.05 nonoverlapping twenty year periods. We could then look at how many of these are positive or negative. (Of course the strength of any conclusions drawn from four observations will not be very high).

Scott Brooks adds: 

This conversation reminds me of tracking deer when bowhunting. When I arrow a deer, it will usually expire in less than thirty seconds, almost always within five to ten seconds. However, in that ten seconds, it can run a long way and disappear into the brush.

Sometimes the blood trail is obvious, other times it's not.

When I'm on the trail of a non-obvious blood trail, I have to employ different methods of looking for the deer. To make a long story short, I slowly walk down what I think is the trail, taking one step and stopping. I then look around 360 degrees … searching very slowly, breaking my surroundings up into mental grids, and scanning those grids carefully.

Then, before I take another step, I squat down so that my line of sight is about three feet off the ground, and then I repeat the 360 degree scan, mental grids and all.

After that, I get down on my hands and knees and carefully scan the area as close the ground as I can, especially looking ahead in the area where I'm about to step (when I move forward on the trail) to make sure there isn't the slightest bit of sign that could lead me to the deer (that I would have otherwise destroyed with my boot if I took my next step forward).

I then step forward and repeat the process.

The point I'm trying to make is this: Isn't what Kim Zussman did just one way of looking at the "landscape" of the market? His calculations of non-overlapping time frames were the equivalent of looking at one grid of the "market landscape," and looking from an upright point of view.

The professor then suggested non-overlapping periods. In my mind's eye, I see that as squatting down and looking at the same market landscape, but from a different view … and from that view, we see the same landscape but in a whole different way.

Both methodologies would seem to have value. Just as in tracking a deer, I may see "what I'm missing" or the "key piece of data." For instance:

a slight hoof indention in the ground - extra volume,

a drop of blood - over selling on fear of some nebulous announcement or rumor (see George Zachar's post, Deception of Taxonomy Notation)

a bent branch - a large money manager is trying to build/unload a position in stealth mode … without alerting the market

a pool of blood where the deer laid down (meaning that you didn't get as good a shot as you thought and you pushed the deer out of it's bed by tracking it too soon … mark that spot, backtrack carefully out of the woods and don't come back for at least three hours) - A bad announcement caused a stock to be driven down. The bloodied stock found support, but then continued to move down (maybe it's time to wait for this buy … no bottom feeding today … come back tomorrow and take a look).

a bunch of crows and buzzards in the area - time to go in and see if you can at least salvage the antlers … and then let the scavengers pick the bones clean. Even though I didn't get the meat, the trophy antlers will look good on the wall - Too late for a profit, unless your a scavenger … however, maybe you can find some talent within that company (every company has some talent). Watch where they go and see if there is a VC or an IPO opportunity!

That's why looking at the market from different angles in a meticulous, orderly and objective manner is so important. What works for deer hunting also works for investing/trading/advising!



It is hard for me to believe that on a day like today in Japan where the Nikkei opens up 1% and then closes the morning session down a bit on the day that it somehow isn't a pilot fish for what's going to happen elsewhere, but the tests that I have made on this in my day do not bear me out.

It is good to keep a record of the prices that you buy and sell various markets and individual stocks at and when you're a recurring buyer or seller, it is good never to buy at a price higher than your previous buy or sell at a price lower than your previous sell. Of course this must be tested.

Many of the great music melodies like the ode to joy which I am playing on my new bass; because the cello was too difficult for me due to my tennis grip, have very few intervals on average between the consecutive notes. At a dinner with Uncle Roy, I challenged him to come up with the market lesson from that and he said that rises that come with few jumps are more persistent then those that are jumpy. This of course must be tested.

The VIX at 9.89 appears to be at least a 26 year low. How conditions have changed from the fearful days of last spring when Chair Bernanke sent his Governors out to counter the Rumpole like romantic aftermath (which now has cropped up again at Citi and leads one to think this could be a good theme for an opera )? Many ask me if based on their misinterpretation of Prac Spec I am still waiting for it to go above 0.30 to become bullish again, and I was in a similar situation in the 1960's when I waited for AMEX volume to go above 30% of NYSE volume to become bullish. 

As an afterthought, why is it that whenever the sun comes out on an otherwise miserable day, and weather really improves, that the market improves also. I like to play tennis outdoors on soft courts during the trading day (still in mid January, even with the snow) and one of my colleagues will often shout to me from the trading room "stay out there, the market loves it while you're out."



 In my band, the big joke is that the talent I lack as a guitar player, I make up for in equipment. Anyway, while listening to DVDs of famous guitar heroes on advanced techniques, the guitar master, Eric Johnson said the following about chords: "Don't look at chords as rigid patterns, rather try to think of them as hidden melodies." The idea of structuring the chords as a fixed system, so to speak, takes away some of the creativity and spontaneity. Rather, use the chords to add 7ths, 9ths, 11ths, augmented 4ths, invert them, move them around the keyboard, and use substitute chords. Often for example, a B minor will sound the same as an E6 and so on. From these substitutions and passing phrases, melodies which are hidden in the structure of the chord emerge to the ear. There are far more advanced musicians here such as Flam, Klosek, Glazier and the new spec, Todd Tracy, so I will defer to them on this. But the idea is that market patterns should not be viewed as rigid patterns, but rather as hidden melodies. As the day trades out, the variety of bars is endless and new. Rather than lock into fixed systems, it is good to see the hidden melodies in the market music, let them play out, and hopefully get in tune and be able to play along without being totally out of time, and out of tune. Figure out the market's scales and chords, and like Maria in the Sound of Music, once you know the notes to sing, you can sing almost anything. Ear training helps the musician hear what key is being played, what chords, and what scales without looking at sheet music, and only by listening. Market training, by watching it everyday, seems to help the training of the eye as well.

Todd Tracy comments:

I agree with Jim. There is no telling if a model shift has occurred without hindsight. Certain musicians or markets players might have tendencies and regularly use familiar notes to bridge the music into another scale. The Euro cruising past 1.30 could be the root note for a new song or just a suspended 4th of the 1.2950. However, there is always that moment when the mistress has to decide whether she's staying in G major or going for D major. There is no d flat in G major, so if you hear that note, the change has occurred.

Scott Brooks adds: 

As someone who has made a living for years with TA and pattern recognition, I can relate to this. Since I've added quantitative analysis to my management processes, I've been able to empirically test my prior pattern recognition skills.

What's interesting to me is that I've been able to better fine tune patterns by testing them, and now, I see them in a whole new way. I see things that I wouldn't have seen before. I'm a very visual person and the charts really help me!

As I've said before, my charts are just a visual representation of my calculations.

Some people find it helpful to look at blue prints. Some people like to look at what the finished building will look like. Regardless, quantitative analysis is required to create whatever visual image you prefer.



Recalling that SPY weeks in bear market of '00-'03 did not reverse nor continue significantly (correlation insignificant), but bull '03-'07 did reverse (significant negative correlation), what made this happen? This question was analyzed by isolating responses following up and down weeks in both markets:

BEAR    0.39         0.148      -0.13         0.017
BULL   -0.03         0.001      -0.05         0.003

The bull market showed slight reversal after both up and down weeks, the same direction of which combined to form a significant negative correlation.

Paradoxically, the bear market had a positive correlation after up weeks (up followed up), and moderate reversal of down weeks. The combination made the overall correlation insignificant.

So at least on a week-to-week basis, bear markets trend positively after up weeks and bull markets tend to reverse both up and down weeks (like eels swimming up a river).



 Inspired by euphemism, misinformation, pseudospeak, and Delphic utterances in the market, I have decided to read through every scientific article on forecasting in the stock market available on the academic database JSTOR. I am reading them in a Galtonian or non-parametric Siegel vol. test fashion, in which I read the oldest first, then the two newest, and then the remaining two oldest, etc.. The first was Money Supply and Stock Prices, A Probabilistic Approach by Manak C. Gupta, from the Journal of Financial and Quantitative Analysis, Jan. 1974. It's obviously out of date and recent updates by the Fed and others have shown there is no relation in recent years. That's de rigeur for almost all studies I have read. What they use is out of date, and they usually stop right before the relation is ready to stop. For example, if they're bullish, they stop in 1999, and if they're bearish, they stop in 2002. There is never any attempt to update the results or to give timely results and there is no consideration for the principles of ever changing cycles.

What's worse about the Gupta paper is that there's no attempt to even consider the statistical significance of the results. In addition, in his methods of defining the leading indicator, the money supply seems to use perfect knowledge of the two preceding months in both dependent and independent variables. The turning points in money supply are somehow related to turning points in stock prices, without any consideration of the inertia of the money supply series, and the statistical irregularities that a series with macroscopic inertia would impart on the dependent variable. Multiple comparisons with every conceivable back and forward interval are considered. No attempt is made to compare to a random strategy or to a buy and hold a strategy. This is the kind of paper that presumably would not appear in a modern journal and would be superseded by many mathematical niceties that would disguise their defects today.

The second paper considered is On Style Momentum Strategies by Ferdi Aarts and Thorsten Lehnert in Applied Economics Letters, 2005. The idea here is that there is momentum in the stock market, and the question is whether the momentum is within 'styles' of stock (value or growth) or just in  particular stocks themselves. Their research is based on FTSE stocks. Like most authors, they take as a given some work from the 70s or 80s in the U.S. markets, and make no attempt to verify whether the facts have changed or whether there were data errors or retrospection involved.

These authors are well versed in statistical methods, but have no feel for what they are doing. They use the usual table with four back intervals and four forward intervals classified by equal weighting or market cap weighting, and they do this in a comparison of style portfolios classified by price to book value. They then give another 12×8 table where they consider the results of momentum without regard to style. They conclude that book value style doesn't matter, but that regular momentum strategies are better and less risky.

The authors appear to have no concept of multiple comparisons and it's amazing that a referee didn't make them account for it. Out of 192 comparisons of means, one would expect to find twenty or so significant results that would occur by chance anyway. Indeed, none of the results within the years they study are independent, and they overstate the number of independent observations in each entry of the table by a tremendous amount. Furthermore, their results are meaningless and completely consistent with randomness. At least the authors seem to know this last point, as they conclude that:

"it is interesting the average month returns in the Chen and De Bondt studies (the ones that supposedly showed great momentum in the U.S.) are smaller than the few significant returns that we found."

It is a grave disappointment to come across a study like this after studying phenomena like these some 45 years ago myself.

The third study is A Neurofuzzy Model for Stock Market Trading by S.D. Bekiros in Applied Economic Letter, 2007. This is a typical study in which the author posits a method of prediction that's based on recent work in programming and artificial intelligence. In this case, the Neuro Fuzzy models translate the numeric variable into fuzzy linguistic terms, e.g. low high, and each term is assigned by a membership function by if then statements.

The next section of the paper describes the architecture in a way that no one but the author and the people that wrote the program could possible understand. This is done in a description of five layers, with nodes, parameters, piecewise linear interpolating functions, firing strengths, normalizations, weight vectors, singular value decompositions, et al.. It is wrong to scoff at technical language, but I find it hard to believe that more than a handful could possibly unravel the descriptive technique that the author uses and differentiate it from the host of rival neural network and fuzzification programs out there.

I have always found that similarity matrices give exactly the same results, with exactly the same lack of predictivity, as all the neural networks that I have ever experimented with. Finally, empirical results forecasting the Nikkei from 1998-2002 are given and it's hard not to raise an eyebrow when the author says  that:

"additionally for the rrn. the best forecasting ability was derived empirically by a typology which incorporated ten neurons in the hidden layer , and the lags were based on Juun Box statistics, Schwarz information criterions, as well as empirically."

After all the training and fine tuning and parameters, the authors conclude that when the Nikkei went down, their model was better than buy and hold, and that when the Nikkei went up their model gave results that were significantly worse than buy and hold. They came up with approximately 48% correct predictions of direction. I could have told them this would happen before they went through all that trouble. I also could have told them that it's completely improper to divide their sample up into bear and bull periods retrospectively since it's impossible to tell whether it's bull or bear prospectively, and if they do it retrospectively, they're introducing a terrible bias that all the kings' men and fuzzy neural techniques that they used couldn't possibly circumvent. For instance, it is obvious in retrospect that you can find periods, when your model beat buy and holds and when it didn't. The question is whether it will beat it prospectively without retrospective subclassifications.

There is some ad hoc explanation that the authors came up with to justify their random results, and to indicate that

"the profitability of trading models improves substantially in bear markets since they present higher volatility."

Excuse me, that's guaranteed to happen if you select the period that the market went down retrospectively and call them bear markets.

Regretfully, my first three papers reviewed do not give me much encouragement that the field has improved a lot from the time that I plied the seas. My long snooze has so far been awakened by pseudotalk, and euphemisms in prediction and forecasting, that are so prevalent today.

Alston Mabry comments: 

The Chair wrote:

… pseudotalk and euphemisms in prediction and forecasting that are so prevalent today.

One technique that jumps out is the use of wishy-washy language to hedge every statement:

If earnings waver, or if long-term rates keep rising, the Dow's long run could end.

And then again, maybe not.



Notwithstanding Mr. Chavez's anti-American, wildly popular pronunciamientos and Ecuador's newly elected Government's declaration that the country's foreign debt is "immoral," I think there is no risk of non-repayment. Ergo, Latin debt is cheap.


(a) Venezuela and Ecuador are oil exporting countries, and their payment capacity is superb.

(b) They are in no danger of default.

(c) Argentina was a special case. Foreign creditors did not notice that Argentina was not the same rich country of the fifties, but a totally wrecked one, and it had no mineral exports. Since the wrecking took several generations, neither did we Argentinians notice the change.

(d) In Latin America, foreign loans are valued personal emergency resources and have been since the Independence.

(e) The situation of foreign owned companies (or just any private owned company or landowner) is very weak and unsustainable. No one can protect them against expropriation when the mood comes. In my opinion, real estate and stocks are risky and overpriced.

(f) Further antics and heroic positioning by the caudillos are only too expectable. I am old enough to remember Vice President Nixon's visit in Caracas, and how it taught the Latins the joy of spitting on gringos.



It's not everyday you see a Nobel prize winner outright lie to the press, but Joe Stiglitz did just that today.

From a Bloomberg story that crossed the wire this morning:

Lower oil prices mean less inflation pressure, but that doesn't seem to be going on, said Stiglitz of Columbia. The dollar has been subjected to a great amount of exchange-rate volatility, and it's not a good store of value anymore.

We can safely assume the Nobel Laureate and Chairman of Bill Clinton's Council of Economic Advisors *knows* that dollar volatility has been in a steady decline for many months, as is obvious from the attached gif, which shows 26 and 52 week volatility of DXY, the dollar index.

In ecology, we study deception and camouflage. What better disguise is there for someone whose clear purpose is to undermine confidence in the American economy than a highly-credentialed academic?

And in rhetoric, we learn that the classic definition of "demagogue" is someone who knowingly tells lies to people he believes to be fools.

Perhaps during the confirmation hearings at the start of the next Clinton administration, someone will point this out if Dr. Stiglitz's name is submitted.



Stock prices reflect the marginal value of traded stocks — where a stock's sellers and buyers meet. In M.U.L.E., the great Atari game from the 1980s, sellers use joysticks to move their icons down the screen to show the price they are willing to sell for, while buyers move their icons up the screen. When the two icons touch, transactions take place at that price. Either player can move their icon away to stop transactions. But the price for trades reflects only goods traded, not the entire inventory.

Similarly, the price of houses in "booming" or "collapsing" times shouldn't be stretched to value an entire area's housing stock. The market price of homes represents the marginal prices for houses for sale. In Seattle, Miami, Los Angeles, and other cities where demand for houses has been strong, state and local regulations long delay builders' efforts to construct new housing. The limited stock of houses for sale and the artificially restricted stock of homes allowed to be built make up the supply side of the market. In economically more free cities like Wichita and Houston, builders develop and build new homes faster when demand expands.

So housing prices jumped 20% in Los Angeles, Miami and Washington DC in 2005, and only 5% in Houston, Atlanta, and Dallas. These price increase differences reflect the limits on new houses in growing but regulated regions compared to less-regulated regions. Regulations delaying housing construction also push price swings wider. Major new housing developments come on the market years later, feeding the boom and worsening the inevitable downturn. Prices send signals that would coordinate behavior, with higher prices leading more homeowners to sell and homebuilders to build. But governments dampen and distort these price signals through regulations and taxes.

The House of Oil

Regulations in the oil industry delay development of new oil supplies around the world. While the Chinese economy is blamed for driving demand for oil, it is the Chinese, Russian, Saudi, Iranian, Venezuelan, Nigerian, Angolan, and other governments that mismanage oil operations and development. Expanded economic freedom in China, India and elsewhere boosts oil demand, but new production is constrained by the corruption and incompetence of governments around the world. (The sharp drop in oil prices in the late 1990s also played a role as major oil companies downsized, slowing efforts to restart various exploration projects.)

The U.S. government continues to play its part mixing state intervention with energy entrepreneurship. Among other blunders, state and federal governments restrict oil exploration and development in the near 50% of Western land it controls, as well as coastal waters out to 200 miles, and Alaska.

Government ownership and regulation of oil exploration and development has played a major role in recent oil price increases, along with fast growing demand and the slow ramping up of exploration and development (after the extreme downsizing of the late 1990s). These artificially high prices are pushing vast expansion in oil, tar-sands, and ethanol production. As these new oil and oil-substitutes come on-stream they will probably push prices hard. The high prices are pushing a vast expansion of oil drilling equipment as well (how many companies in China are now manufacturing oil drilling equipment? 50? 100? 500?).

Consider that everyone in the oil industry, from multi-billion dollar corporations to guys with single rigs, just five years ago planned for $15-$20 oil. At $40-$50 a barrel, a whole new range of oil development materializes, along with a wider range of oil substitutes. It used to be official Saudi oil policy to keep oil prices below $25 a barrel to discourage just these production expansions, as well as to discourage wider conservation technologies.

(A recent Economist article on a new cow-dung powered 100 million-gallon-a-year ethanol plant, reports that when the 73 ethanol plants under construction are added to 110 current ethanol refineries, they will supply 11.4 billion gallons a year ("Even in Texas" January 6, 2007. p. 26). Of course federal subsidies fuel these plants, along with cow-dung. Happily for the oil industry, ethanol supplies, though a drain on taxpayers, are unlikely to push down gas prices — it seems producing ethanol consumes as much or more energy as is contained in the final product.)

So like housing price swings in statist cities, oil price gyrations reflect not just shifts in demand but worldwide government control and intervention. The U.S. government responded to high oil prices in the 1970s by both subsidizing and heavily regulating oil shale development in Colorado. Tar sands development in Canada faced less regulation. Maybe new oil shale technologies will find ways around regulations to release shale oil in significant quantities this time. But why risk such investment? The Colorado or federal government could re-regulate, tax, or just ban oil shale as a source of intolerable greenhouse gases, or perhaps for endangering some newly-discovered spotted toad.

Meanwhile, high oil prices encourage infinitely diverse conservation efforts worldwide, many private and effective, others government-sponsored and foolish. For those who lived through the oil crisis and ensuing politicization of energy in the 1970s, it is deja vu all over again.

(Add color for the 200 miles of coastal waters the government now controls. Oil production is allowed only in parts of the Gulf of Mexico.)

Greg Rehmke further adds:

This year I would have purchased some [Apple stock] before Macworld, for the reasons I outline in my earlier article. I think the iLife software fits so well with LCD televisions that the new AppleTV will be popular. I videotaped my nephew's basketball game on Saturday, and we burned a DVD with nifty scene transitions and titles in ten minutes. My sister's family was watching the game an hour later. I think as the level of film clip production develops (above YouTube, but more local or varied than TV and Hollywood), Apple products will be well positioned to encourage creation of content as well as deliver it to big screen TVs. I didn't know much about the iPhone, though that made the big headlines.

Last week, Gabriella Megyesi and I spoke to about 35 homeschoolers near Charlotte, NC (27 students plus some parents). Six or seven of the students had laptops open. Four were white iBooks, two or three were Windows. I read reports that the Macintosh share has risen to 5%, but more important is the age distribution. If Macs have risen much higher among 14-22 year-olds, that would be very interesting.

I think too that as Mac and iPod popularity rises, more people are drawn into the Apple world, and more will watch Macworld for the first time. It is quite a show and will continue to excite investors. The show is streamed on the web beginning at six pm. I don't know how many to watch, but they would enter the market the next day. I think the news from Macworld has a different impact than the jobs' presentation. What other companies get this platform for presenting directly to consumers and investors? It is key to have surprises that have "wow" factors and are newsworthy.

By the way, relating to my oil and housing article, I have bumped into oil people in Wichita and Houston who are busy investing in production of oil drilling equipment in China. I wonder how many (hundreds of) others in various corners of the oil industry have made similar investments. I wonder how much of the world's steel is pouring into the "sure thing" of oil drilling equipment. "Everybody knows" oil is high and will stay high, and oil rigs are out-of-sight expensive. Cheap manufacturing in China is weirdly similar to ethanol plants for farmers. A magic new opportunity to make a killing by pouring capital into the energy industry.



This would make old Colonel Leonard Ayres proud! I caught this article and I thought you would like to read it. A couple things worth noting include the Virginia Company, the progress to immediately start making steel, and the positioning of the furnace near the fork (round number theory with flow and liquidity).



From Impact Phase of the Global Systemic Crisis: Six Aspects of America’s « Very Great Depression »

According to the LEAP/E2020 team, the year 2007 will witness the sliding of the US into the « Very Great Depression », i.e., the rare historical conjunction of a severe economic depression, a strategic collapse and a major political and social internal crisis, at the center of the phase of impact of the global systemic crisis. Housing crisis, financial crisis, economic crisis, trade war, military escalation and political crisis are the six aspects described in GEAB N°11, along the following lines:

1- Negative personal saving rates and declining home prices on a national scale: Two major US economic indicators hit lowest level since the 1930 crisis

2- « Roller coaster » US interest rates in 2007: Up in spring and down in fall

3- The US financial sector has already entered bankruptcy: Today Ownit, Mortgage USA Lenders … tomorrow Ameriquest, Wells Fargo, HSBC Finances?

4- Middle East: To conceal its failure in Iraq, the Bush administration is preparing a Shiite-Sunni intra-Muslim war, while Israel gets ready to launch tactical nuclear weapons on Iran’s nuclear program

5- China and Russia’s move to drive the US out of central Asia and to accelerate the dollar fall

6- Emerging markets, mortgage risk: In 2007, risk is back on financial markets … and it will be a heavy bill after many careless years

Victor Niederhoffer comments:

The boy wonder had to bail out the NYSE and all its luminaries in 1907 from bankruptcy, even going to the extent of ending his bacchanalia on his yacht in Europe to cover his shorts at the urgent request of the bereft blue bloods at the exchange who had previously shunned him on New Street. I believe the decline in 1907 was an order of 70% or so on NYSE from the peak. Since that time, there have been a number of big declines in '07 years including 1987. The Education of a Speculator had a simulation showing that the declines in '07 years were inconsistent with randomness. Of course as mentioned many times, something that is statistically significant has nothing to do with its predictivity. I noted that three of the last four '07 years have been up, and I wouldn't put an iota of weight on such numerology although I would hope that others might be bearish because of such spurious seasonality.



Hunter and hunted or predator-prey relations are pervasive in the animal world. We're accustomed to observing and reading popular summaries and videos of the dynamics and techniques of survival for such pairs as lion & gazelle, wolf & squirrel, fox & lynx, coyote & seal, osprey & smelt, pike & minnow, and spider & fly. Such studies have been extended to romance and health among humans. Predator-prey relations are also common in markets. For example, the relation between market maker & day trader, dealer & ephemeral trader, flexible & inflexible, large trader & small trader, informed & uninformed, vig taker & vig payer.

Many studies in the field are based on the Lotka-Volterra model. This is a set of simultaneous differential equations relating to the rate of growth of the predator and prey populations to each other. A typical set of equations relating rabbit growth to fox growth states that dr/dt = ar-brf and df/dt = ebrf-cf where a is the natural growth rate of the rabbits, c is the death rate of the foxes, b is the death rate of the rabbits whenever they meet a fox and e is the proportional gain in growth that a fox gets from eating a rabbit.

Such equations do capture the main idea that as the rabbit population increases, the foxes gain in number because rabbits are easier to find and eat, and this provides a homeostatic mechanism to stabilize the rabbit population. Similarly, as the rabbit population declines, the number of foxes decreases because they have less food, and this helps increase the rabbit population which in turn tends to increase the fox population. As might be guessed, small changes in the assumptions of the model, such as time delays, lead to widely divergent behavior involving cyclicalities, instabilities and sharp changes in the dynamics that do not correspond to what we observe in most real-life populations.

A similar critique could be made of the two other standard methods of studying predator-prey relations, which are the functional response curve and the optimal foraging theory. The basic regularities there are that the costs and benefits of gaining prey vis a vis future reproductive success determine the extent and energy with which the predator seeks the prey. The key dependent variable is how much the predator eats as a function of the difficulty of converting the prey into food. An increase in the search time, handling time, or consumption time, reduces the predator's desire to eat. Certainly this leads to insights.  The problem here is that all these parameters are subject to estimation, and they are interrelated and subject to different hypotheses as to their function.

A good book for studying these techniques at an elementary level is John Alcock's Animal Behavior, and a good summary of the ecological approach to these dynamics can be found here.

Methods of studying the factors that enable predators to be successful have always been important to me as I, like other numerous individuals not at the top of the food chain, are often prey to much larger predators. I have often wanted to learn how to avoid capture, and even considered the possibility of sometimes turning the table on the predators and bagging them once or twice just to make the game a little more even sided. Thus, when I came across a cover story in Outdoor Life titled "Predators' Deadly Tricks," which describes how hunters go about capturing the most elusive predators in real life such as the coyote, the bobcat, and the mountain lion, I was very attentive and decided that I should try to devise principles from the practical and theoretical literature that might help other prey like me in their incessant battle with those who would devour them. 

  1. Signaling is key.The signals that the prey send out to show that they are not easy to digest prevent the predator from even considering attacking, and this saves much energy for the escape. Colors and scents indicate that the prey contain poisons. Stotting, the jumping behavior of gazelles when about to be chased by a cheetah, indicates that they are very mobile and not worth eating. Indeed the essence of the article is that the best way to attract a predator is with an electronic duplication of the distress call of its enemy. Amazingly, the coyote will often show himself within one minute of hearing the rabbit's call, especially when it's made with a "Foxpro FX5 that has a 200 sound capacity, one gigabyte of memory, recall buttons to switch between sounds, remote control functions, and a 700-yard range. Less than a minute later (after the call), a pair of coyotes charged in and we handily dispatched them." Market prey often indicate that they are ready, willing and able to defend themselves by the placement of limit orders in large size, but cancel if they are near just to prevent the larger predator on the other side from even thinking of going after them. The talk with your counterparts is how much more is available for adding to my line when you well know that one more grain of salt would be enough to topple you over.
  2. Vigilance is essential. The herding animals all find that 100 pairs of eyes with 50 always awake are enough to warn them of danger. Noses are always sniffing, ears are listening, and the antennae are always feeling. Indeed, some ducks can sleep with one eye open so as to never be victimized by a surprise attack. The hunter uses a telescope so that he can always perfectly see the adversary. He never lets the prey's vigilance work to his advantage by approaching stealthily, parking his equipment a mile away from where he's going to hunt, and setting up in a blind with proper camouflage. The prey in the market doesn't leave the market for a moment, as that might be the time that the enemy attacks.He cancels all orders when they don't get filled so that a surprise news announcement that's worth a limit move won't catch him just a few ticks from the last price. He has his computer set to wake him, which buzzes around in his private area so he never sleeps through a dangerous situation or lets the predator devour him totally.
  3. Deception is essential. My goodness, the moth blends in with the bark and orients with the grain of what he's sleeping on. The flies disguise themselves to look like bees, and the octopus can change 100 colors in one second. The spider uses a million deceptive lures to entice the fly into its web. The golden orb weaving spider spins a web that's so enticing that even when a bee breaks free, it will dive right back into it after it has escaped. (I am reminded here of the system player who, after a very bad trade on one side, doubles up on the other side for the next trade.) The chapter on deception in Education of a Speculator details other areas of deception in the world. "Quality camouflage is a must; select the pattern that most closely matches the foliage and landscape." Whatever you do, don't make any news. As a prey trader, I don't even like to type out that I'm thinking of exiting a trade, for fear that a predator might have my screen bugged or that the keystrokes are programmed to signal my intention. I never let the other side know what my stop point is because I know that it will always be hit. If I'm really hurting, I'll try to act 5,000 times stronger than I am, and I won't even begin to reduce my position by one contract for fear that my camouflage will be found out.
  4. Proper equipment is a must. Predators are constantly sharpening their claws and teeth. Prey must always practice escape maneuvers. Over many generations, most prey have adopted advanced techniques of escape that include the full range of methods used by individuals in their cohort from the beginning of time to elude capture, be it poison, scent, or cry. Their bodies are perfectly suited to the escape in size, color, speed and strength. The properly equipped hunter, in addition to his Swaroski binoculars and Foxpro FX5 caller, currently has a Gerber Epoch Pack, a Stoney Point bipod, Cabela coverup pants, and, of course, the obligatory Ruger bullets in a Browning rifle, a Bushnell scope, motion decoys, and a set of shooting stocks.
  5. If all else fails, try the unusual. Be prepared to shout if the predator attacks. The proper equipment for the trader starts with a proper price feed, perhaps one that's within a foot of the source of the prices so as not to lose out by the speed of light that it might take to get to you one-thousandth of a light second away.  Next, one should have a computer that's always set to trading and that isn't interfered with by email. Finally, have an office where no one can distract you from the job of survival with the cares of the world or a bill from the Service.
  6. Never give up. The cries of animals often save them from death. If nothing else, they serve to alert family members. The squirting of poison and the enlargement of the body is a common tactic of the caterpillar, and the gyrations of the weasel in extremis are often enough to ward off death. The hunter is told to scream if a predator attacks him and to have a spare set of guns and knives. As a trader, I try to follow the rules of a good competitor in sports who never gives away the last point of a game if there is still an iota of energy left in his body. There is always someone you can call on to help you fight back. On occasion, I've even asked a'la the Boy Wonder for the other half to help me out in a time of crisis, and so far the trust funds are still intact.
  7. I would recommend studying the literature on predator-prey relations by reading a few good books, following up on some of the hundreds of thousands of citations on the search engines, reading the Outside Magazine article in the December-January double issue and then trying to apply these techniques to make yourself impossible to detect, fruitless to waste energy on, and impossible to digest when caught. If all else fails, fight to the death.

J. Klein adds:

One Predator - One Prey; if it was ever so easy. 

It is more like Many Predators - Many Preys - Many Parasites.  Symbiosis. Competition among different parasites - how to maximize exploitation without killing the organism parasited. How to use a competing predator to one's benefit. Mixed situations: One is a predator and a prey at the same time but to different kind of critters.  How a steady state equilibrium evolves. 

In my opinion, however, we humans have already won nature's battle and rule the ecology to our benefit. We easily see through the animal world's tricks and catch them as we want. But the market is wholly made up by humans, who presumably have all been exposed for generations to nature's tricks and have become resistant to them. Situations like those that nature presents to us are no longer relevant, and we have moved to a higher level. It is a different game here.

Since we are part of the game, it is very difficult to see what is going on and much more how to manage it.  It is said that even the big winners know how they did it and why they succeeded. It seems to me that those winning have more useful memory, are able to calculate more precisely, see the present and the future more clearly, can formulate better plans, and execute more rapidly and precisely. In the market, nature's tricks don't work any more. This is a play of pure and cold intelligence.

Scott Brooks comments:

I've thought about this predator/prey relationship for many, many hours as I was sitting in a deer stand and I have several thoughts on this issue. I'll share some in this post. 

One of the biggest things to recognize in a predator/prey relationship is the opportunity that exists. One of the biggest things that we need to look at is the difference between instinct and reason. Whether prey or predator, if you are instinctual, you are acting out of some deep seeded genetic conditioning that causes you to run when faced with adversity. 

Think about it. If there are seven lions chasing a herd of 200 gazelles and the gazelles had the ability to reason, they would say, "Lets stick together and as a group go over there and trample those seven lions to death." The 200 gazelles would win that battle, and probably over time could condition the instinctual predator lions to leave them alone. The cost of messing with those gazelles is just too high. 

Think of an instinctual predator like a bear. Almost any bear could take a human if they wanted too, especially the bigger varieties like Grizzlies. Humans are simply not equipped to deal with them physically. But for the most part, we've conditioned bears to stay away from and fear us. That's only because we have the capacity to think and reason at a level that the Grizzly doesn't. We've figured out a long time ago that taking some animal gut and stringing it on one bent stick, and then taking another straight stick and putting a sharp tip on it, gave us the advantage. Then along comes names like Remington, Browning, Winchester, Anshultz, Benalli, etc. and the odds are stacked in our favor. 

When I played poker back in the 80's, I looked for certain types of players to be at a table before I would play. They were the prey. They weren't thinkers. They were gamblers. They let the cards fall as they may and "hoped" that things would go their way. But they had no real system or methodology to identify when to hold'em and when to fold'em. Most of them could not name three cards that had been played and subsequently folded (I'm talking seven card stud). So they had no idea what cards were still available to be played or not. I can't even count all the times when I could tell what hand someone was trying to build or bluff me into thinking they had and yet had no idea that the key card was already burned in the deck because someone had folded earlier. I guess I was a counter of sorts even back then. I'm not sure that qualifies me as a counter yet, maybe it just makes me someone who paid attention and kept track of things. 

These "gamblers" were hopeless gazelles at the table. I'm not saying that to be braggadocious. They simply didn't know what they were doing … they were nearly instinctual prey. They "needed" to win. They were always one card away from catching a break. They relied on luck. The reality for these guys was that the only way they could truly win was to quit and stop playing. Otherwise, ruin awaited them all. 

Those are the guys that I played against. I did not play against other good players. If there was more than one other good player at the table, I would find another game. I had nothing to prove by beating another good player. I was there for one reason and one reason only: to win money

For the same reason that lions don't usually attack other lions to eat, I was not interested in paying the price associated with trying to win money from other good players. The cost and risk/reward was just too high. 

To apply this to the markets, it is important to figure out where the instinctual investors are playing and those that don't have a thinking system, and use that to one's advantage. 

What are the masses going to do when "X" event happens? What is their likely "non-thinking" irrational emotion based response ("quick, run, the lions are coming"). 

Unfortunately, as I've said before, the masses left the markets after 2000, 2001, and 2002. They were burned so badly, and fear chased them away from what was very likely the greatest buying opportunity of their lives. It was like gazelles drinking from a stream and some of them getting snatched by an alligator. It seems to me that after a few have been snatched, that's the time to go get their drink … the alligators have enough food to last awhile now … and if nothing else, there is a few less alligators now patrolling the shores for food. The odds of success have gone up for the gazelle … but that's when they leave in fear. 

So I will be that thinking predator. I will only fight battles that I know I can win. My goal is simple. To make money! That's it. I've got no ego in this and no axe to grind. I'm not going to challenge Prof. McDonnell in the world of options, or Prof. Haave in the world of commodities, or George Zachar in the arena of bonds or Vic in the world of index futures. They are simply more skilled and knowledgeable than I am in those arenas. I could be a predator in those worlds, but I would be like the Grizzly bear, and they would be the thinking human up on the ridge 200 yards away pointing a Win, and a 300 Mag at my vitals. That's a battle I can't win. 

But there are things that I'm good, and there are arenas I can battle in. Since I only want to make money, I will only play in the arenas with the best risk/reward ratio for my success, and I will stick to those arenas (but I'll still learn the other arenas … and who knows, I may show up there one day and dip my toe in … but only when I think I'm ready … and then only with a small amount of money to make sure that I'm really ready). 

So, Phil, Gordon, George and Vic, be careful, I may show up in your arena one day … and I'm a good stalker who knows all about how to properly deceive with camouflage …

Tim Humbert comments:

Over Christmas I heard a wonderful recipe for pike:

-preparation: gut and de-scale, rub rock salt and pepper onto flesh, squeeze some lemon juice, insert some herbs into fish, wrap in aluminum foil and cook for 30 minutes

-consumption: throw pike in the bin and eat the foil

Rick Foust adds:

The largest predators (e.g. lions) are much smaller than the largest grazers (e.g. elephants). The largest grazers have much longer life spans than the largest predators despite having inferior camouflage. Certain large houses come to mind.

Small grazing animals (e.g. rabbits) do not survive long despite having excellent camouflage. Their numbers are maintained by fertility (replenishment). New, poorly bankrolled traders come to mind.

Bruno offers:

Professor Sorin Solomon, of the Racah Institute of Physics, has produced some very interesting market models based on Lotka-Volterra. Here is his homepage.

He showed that a generalized Lotka-Volterra model for the market yields a truncated levy distribution for index returns!

See for instance his 1998 paper: "Stochastic Lotka-Volterra systems of competing auto-catalytic agents lead generically to truncated pareto power, wealth distribution, truncated levy distribution of market returns, clustered volatility, booms and crashes."

There are simpler explanations for TLFs, such as a random-walk with time increments that are variable rather than fixed, just like with real-world transactions … but I thought this was topical.

There could be one way to check the above, and that is the impact of random time between transactions. On Euronext, we've got a mechanism for trading very small stocks. It is called "fixing." One could compare behavior of such stocks to behavior of other stocks that trade continuously. One could also check the behavior of stocks that have moved from fixing to continuous trading or the behavior of the whole French market as it moved from all stocks fixing to most stocks continuous in the mid-eighties. There's also a possible comparison between London Gold fixing and NY COMEX.

Todd Tracy comments:

Market Set Ups

While reading Victor and Laurel's article on Predator-Prey Relations, my mind exploded with visuals: foxes hiding in the bushes waiting to pounce, predictive and instinctual reactions to events, finding myself trapped in currency positions, panic driven searches for exit strategies. I realized that I am the prey. I am the new blood that greases the gears. I am the greedy trader who walks into the trap set by smarter, quicker and more thoroughly financed predators. As with much of the information gleaned from Daily Speculations, I found corollaries not just in the markets but also to life.

But wait, I've been here before. Where have I seen these deceptive techniques in use? Spy fiction. Yes, I have read all the Greene's, the Amblers', the LeCarre's, the Clancy's, the Forsyth's, the Flemming's, the Weisman's, the MacLean's, the Harris', the Buckley Jr.'s and a lot of the Ludlum's. The spy, leaving a trail, using cut outs, drops, proprietary tools and the most diabolically elaborate set ups imaginable. Institutionalized deception, deception as a way of life, and tradecraft so efficient as to make the prey oblivious to the fact that they have even been caught.

War is serious business whether or not it be cold, which brings me to the non-fiction. The Secret History of the KGB, the History of the Mossad, the development of the Office of Strategic Services, The Wall Jumper, the techniques of SMERSH, Stalinism, Churchill's autobiographical books and one of the greatest historical accounts on the subject, A Man Called Intrepid by William Stevenson. Control will leave no stone unturned to reveal facts. Control will sacrifice lives to perpetrate false information.

Why should the markets be any different? It's scary to think that once I feel like I'm playing the charts like a marionette, it is I whose strings are being pulled. I am a novice speculator, but my eyes are widening. If only I had Victor's booklist before I read all those novels. All is not lost however because I am learning to tie strings from my life experience to the experience of the markets.



Several days prior to the March 2000 Nasdaq top, I saw a nun driving a late model Bentley on Lancaster Avenue in Villanova, PA. Strange sight to say the least! I saw what appeared to be the same nun in the same Bentley today — Is this foreshadowing the cultural excesses indicative of a short term top or merely coincidental? Time will tell …



 Yes, there are two paths you can go by, but in the long run, there's still time to change the road you're on and it makes me wonder.          –Led Zeppelin's Stairway to Heaven

I've since felt that those lyrics were trading lyrics. What a song that has such sweet convergences and divergences. Many references to the Mistress, and yes, what a capitalistic ending that she's actually "buying" the Stairway.

James Sogi comments:

From a dialogue this weekend:
A: It was nice we met 35 years ago. It was like fate.
Q: What if you had a little GPS unit that told you where in life you were?
A: Well it wouldn't matter because things would be fated and you would go where you would go no matter what.

Well, there is no fate, but there is causation and timing, so the question always arises, "When is the best time to jump in and the best time to jump out of a trade?" Or in navigation, "what is the best course to take and when?"

While reading "Cake Cutting Algorithms" this weekend by Robertson and Welsh, I discovered that there were a few main methods of dividing a cake or object of desire among two or more fairly, which is applicable to markets as well. There is the basic cut and choose. The other is the moving knife. Variations include multiple cuts and choices. The parties yell stop when they feel their fair share has come, but if they wait too long, someone else will yell stop before them, leaving the waiter with less. The net result is to evenly divide the pie based on each person's self interest, but the individual's goal is to get the most cake. There is the trimming variation where one party goes away happy with a piece and the remaining trims up the remains. As in life and in the markets, the question is, when is it not in the abstract, but in competition with others? The path dependency would be simple in isolation, i.e. deciding when to eat dinner by yourself is easy, but with a group of eight is very hard. Try to arrange a meeting with six people.

When is the best time to buy a falling market? If you wait too long, others jump in before you and get a better price. Jump in too soon and you get inspired to write a haiku. When is the best time to sell your holding? If you wait too long, you might lose your profits. If you make too many cuts, then you end up with crumbs not a slice (i.e. vig. eats you up). The approach of the Bayesians takes into account the subjective, which is pertinent. The question on paths still is the following: Is there a sweet spot in each cycle that will maximize the trade? We want to know where the the right spot and the right amount is, but it is always in competition with others. In terms of counting a minimum number of cuts to fairly divide a cake, it takes at least two cuts to divide a cake three ways, and six cuts to divide it five ways. No wonder there are so many trades in a market to determine a price at the end of the day. If you take the situation where unequal portions are to be divided, different considerations are at play since the pieces are not interchangeable. Also, consider taking the benefit of disagreements that sometimes allows for fair division. In the market, if there were no disagreements, there would be no trades! Only the disagreement in value allows a trade to be made. At the moment of the trade, each trader is happy with the transaction. Only subsequent paths will lead to happiness or a haiku or both.

Kim Zussman offers:

Isn't this directly related to regression to the mean?

A student gets 100 on the first exam, but the next three are 80's and 90's, i.e. the first result was "luck" (good day, coincidental study with questions, etc.), but over many trials he approaches his true position in rank. This is discussed often with kids in school to help with setbacks and to point out how long it takes to become truly accomplished.

Life is like that. There is little you can do about who your parents are, where you live, who you meet; there are so many paths. But if you are consistently honest, hard working, and you try to get along, on average and in the long run, you will wind up approximately at the correct level.

Victor Niederhoffer adds:

Occasionally, I think back and forth in my life and everything that happened since is related to that. For example, Gail Niederhoffer, was a very good impersonator and used to call up people when she was nine and pretend she was someone famous. She did this with a reporter four times, and told him that he should investigate those people at NCZ who forecast stock prices with an accountant. Graham loves reading the article. He had traded for the palindrome. After we were introduced, I started trading bonds and currencies and stocks for him, and one of my jobs was to vet quant things there. And one such quant through the palindrome came to my office to discuss his sure thing for options. Ha. The rest of the story … but if Zeck wasn't my tutor at Quincy House, I wouldn't have met Gail at his wedding, nor would I have met Susan nor would any of my subsequent seven been born. It's like that for everyone and for every trade. But for causation, it's a very tricky thing. What's unseen is what would have happened without those forks. If I hadn't ever sent Doc Bo to visit the brothels of the SE Asian country with the PHD from northwestern in key posts, I might be still playing tennis with the Palindrome, and having a home in the Hamptons. Path dependence in markets is a key factor to consider and deserves to be modeled and systematized.

Stefan Jovanovich adds:

Morgan, a devout Episcopalian, believed that character was fate and that one's character was shaped by the people one knew and worked with and their characters, and in turn, by the people they knew and worked with. In that regard, he seems to have been like the man who believed that the cosmos rested on the back of a giant turtle. When asked what the turtle stood on, his reply was "It's turtles all the way down." Morgan thought it was character all the way down. His religious belief, IMNSHO, was formed most by the faith of his first wife.



We had a "Sharif" moment this past weekend in the Fort Lowell shootout. It was a tie game of 1-1 in the last minute of the second half, and we were pressing up on the opposing team constantly, yet the ball wasn't going out of bounds such that the other team could substitute … suddenly not one, but two of the opposing team players on their offense, who were nearest to their side of the field right near their coach and completely away from the play and any of our players, were "hurt" and play stopped before we could execute our corner kick. Of course two larger players (including their goalie from the first half of the game) were put in place of the offensive players who came out and ran into the box to defend against the corner kick. Of course only minutes later after the end of the game, the "hurt" players ran through the parent tunnel with no apparent after effects from the "injuries." Nice acting job and it is amazing just how competitive certain coaches/parents/players can get even at U10 level. The reason this worked was that it was so far away from the ball that no one saw anything. I am sure there are market analogies such as news releases intended to take attention away from earnings or vice versa. Although Sid took the line drive kick on her knee, punching it straight at the goal, their goal keeper made a great save and the game ended with a tie. Sunbaked!



Here is a Chicago Fed chart of the historic value of US coins as a percentage of their face value.

Full article here.



 It has been alluded to that during the Tennis Open, when a player is in trouble with injuries, cramps, or dehydration, instead of the opposing player finishing him off (which obviously seems like a great idea) … the match spirals into a seesaw affair. Is this due to the fact that only so many people possess that killer instinct, and people actually feel "sorry" for their opponent? … or does the tempo and hitting of the game change that much that the "fit" opponent loses direction and momentum, and thus finds himself out of sorts?

The parallels to the market, i.e. being able to take advantage of a winning period and putting the foot on the accelerator when able to … or being in a winning position only to observe changes out of left field, effecting normal market cycles, and status quo, are maybe self evident … Do traders go for the kill while maintaining risk parameters when in a good position or has the market mistress blown the minds and the trader's account so that many times before, they are worried where the next serve will land?

O wise humanity, terribly wise humanity! Of thee I sing. How inscrutable is the civilization where men toil and work and worry their hair gray to get a living and forget to play! -Lin Yutang

Victor Niederhoffer comments:

Mr. Mee reminds me of Yvonne Goolagong in that he's such a natural for trading. I only wish I had his ability so that with the hard work I am accustomed to, I could go very far. He writes about the Australian Open and notes that many matches where one side is injured ends up being very close or actually losing to the healthy. Racket sports is the one subject I am truly an expert on so I would like to comment on it. I have often been involved in games where my opponent is injured. One of the National Squash champs of my day had a tendency to faint in the middle of a match, go out cold for half hour and then come back and play much stronger. I knew about this and always redoubled my efforts when the game started, and won because of that. Sports Illustrated had a full page picture memorializing the victory. The market has that same tendency of playing possum, which of course is widespread in the natural world, and is covered in most books on camouflage. Since I'm not an expert I will leave it to one of our naturalists to generalize and model. However, the market of course has encapped this tendency. It frequently pretends to be totally weakened and attenuated. This is a snare and a delusion. The tendency can be quantified in many ways, and were it not for the Minister's ever vigilance, one would do so.

Scott Brooks adds:

In the natural world, it almost always comes down to experience. But before experience can occur, luck comes into play. Here's what I mean.

I have reached a point in hunting where killing a deer is not hard, whereas years ago, it was much more of a challenge. I've written about my first hunting experience and a few experiences thereafter, and the bottom line is that I simply get lucky.

When I'm hunting, I come across game all the time … young inexperienced deer that have never encountered a hunter. Many times, I can tell that they know I'm there … they can just sense something. Since what they sense has never been associated with danger to them, they ignore it. Since I'm not hunting these young inexperienced deer (too easy to kill), I let them go. They live another day because of luck (not because I let them live, but because they got lucky to cross my path and not one of the hunters on my neighbor's property who certainly would have shot them).

When dealing with an older, more experienced animal, it is a whole different ball game (whether buck or doe). These animals have a much higher sense of what danger is. They have learned what to pay attention to. They have almost developed a sixth sense to know when danger is present.

I have watched nice bucks coming into my stand, with the wind in my face (meaning they weren't going to wind me and pick up my scent), and I've been sitting perfectly still and have been completely camouflaged. I know the deer can't hear, see, or smell me, but then he stops. He goes on high alert. It seems as though every nerve in his body is like a highly sensitive radar, searching for whatever it was that alerted him. He may never look at me. He may never cock his ears in my direction … but he knows I'm there. There are a myriad of perfectly logical reasons as to why he senses me. For instance, when I walk in the woods, my pant leg brushes against a small bush, leaving the slightest amount of scent … and the wind (that seemed favorable from where I was sitting) blew that slight amount of scent his way … maybe the smallest number of molecules necessary for his olfactory system to sense it … and that one little molecule triggered a reaction in his brain that said, "Danger!". So he freezes, assesses the situation and slowly, carefully slinks into the brush, moving back the way he came (because there was no danger in that direction), and becomes invisible in a tangle of the wild. He won that battle.

The longer one has been around as a trader, the more likely his sixth sense is more highly developed and attuned to the very subtle nuances of the market … the more likely we are to pick up on the scent of danger … or said another way, because we are more attuned to the scent of danger, we need less molecules of "danger scent" to detect and recognize that danger.

As to camouflage, this is an interesting subject. When I hunt, I am in full camouflage from head to toe. You would think that this is pretty simple … slap on some army greens and go to the woods, but nothing could be further from the truth. Camouflage, proper camouflage is an art … it is literally a detailed process that begins way before going into the woods, continues on the trip out to the woods, all the way through the actual hunt, including the exit.

Simple camouflage is meaningless. Anyone can slap on army greens and go hunting. As a matter of fact, for the most part, the pattern of the camouflage doesn't matter. If I've done my prep work, I could go out into the woods in blue jeans and a shirt with muted colors, such as grey, brown, green, or even blue. As long as I'm sitting very, very still, the deer is not likely to see me. It is my opinion that the color pattern of the camouflage that I'm wearing has less than 20% bearing on the outcome of the hunt (maybe less than 10%).

Deer are basically brown with no real camouflage coloration or patterns, yet they are very hard to see.

On my farm, we keep statistics of deer sightings. Some hunters on my farm simply see more deer than others? Why is that? It is because most hunters are like inexperienced traders. They simply don't know what to look for. You see, most hunters look for "a deer." As a result, when they don't see "a deer" their mind registers nothing … when in reality, there was a deer right in front of them.

When I hunt, I don't look for deer. I look for movement. I look for a glint of sunlight off an antler. I look for a horizontal (the deer's back) in a vertical world (trees, weeds, switch grass, etc.). I look for the flick of a tail. I listen for the slight crunch of a leaf. I study my surroundings, and because of years of experience, I am more likely to figure out where deer will be, or where they will be coming from and/or moving to. Deer don't jump up and say, "here I am."

When you trade, you have to understand that the market never says, "here I am, buy me now" (and if it did, well then it would be too late). You have to look for the nuances in the market. You have to find the "glint of sunlight off the market's antlers" or see market movement, and see it before anyone else (or at least very many people do).

You see, when I go into the woods camouflaged, I am as camouflaged as I know I can be (and hopefully I'll get better over time). I've done my research. I know that scent is the deer's biggest defense, so I will be as scent free as possible. I will wash my clothes in scent free detergent and dry them in a scent free dryer (there is a whole process involved that I won't go into at this time just for this step). I take a scent free shower with scent free soap (what about my towel, was it washed and dried scent free and stored in a scent free plastic bag … another detailed process I'll skip for now).

Getting dressed … I do not want my clothes to touch anything that would give them a scent … and I do not want to sweat either (remember, I'm in my house putting on very warm clothes so sweating can be easy … therefore, I have a system of dressing that will keep me from getting sweaty … again, I'll skip that for now).

What about my breath? That's the biggest scent maker on my body as I have no choice but to breathe. Therefore, I brush my teeth with baking soda and I take four chlorophyll pills everyday (sometimes more) during the whole deer season.

As I go into the woods, I know I'm gonna have to take my time so I don't sweat … but I will perspire, at least a little bit. Therefore, I spray myself down with scent reducing spray.

I know that even though I'm careful, I'll rub against brushes and leaves (it's pitch black in the morning going into the stand and at night coming out … so I will rub against a few). So how do I combat that? I like to find cow patties, the fresher the better, and then I tromp right through them, getting manure all over my boots. Then, using my boots, I rub the manure all over my pant legs to act as a cover scent.

There is far more to this process (I'm even thinking about writing a book on the subject) than I will go into here, but I'll spare you all the details. The key is that I go into the woods prepared. As a result, I see more deer and harvest more big deer.

One must realize that trading/investing/advising is a lot more detailed than just showing up and buying. There are many nuances that one has to learn to recognize. There are many forms of deception that the market mistress employs in order to separate you from your money.

And you have to remember that in the market, not only is the mistress trying to separate you from your money, there are predators everywhere, that are hunting you too.

You must be willing to work hard, study hard and prepare hard, and develop your sixth sense. It takes years of practice, trial and error, a thick skin and a willingness to lose money … to get to the point that you can make money, and make it consistently.

There are many more analogies and correlations to be made. I'll save those for another day … as I said, I could write a book on scent alone … and scent preparation is only a small part of being a great hunter.

Just like _____________________(fill in the blank with whatever "one thing" you want) is only a small part of investing.

GM Nigel Davies offers: 

To the best of my recollection, only Tony Miles was the first to use the injury ploy in chess, with one of his best wins being on a stretcher. In minor form, the same tactic worked for me in St. Vincent 1999 where I was on crutches. It was especially useful that there was much snow and ice around, so I was sliding around looking especially vulnerable. Now in a game not involving legs, this really shouldn't matter, but I'm sure this has an effect on the opponent's primal subconscious. It says 'victim' and he sees red.

You can see a similar effect with the pretty pouting Russian girls sitting at their boards in Washington Square. Female players often seem to try and look vulnerable on purpose. It's also worth noting Stefanova's tendency to wear off the shoulder tops, which alone probably adds some 50 points to her rating.

The other main ruses include getting into time-trouble if your position is bad, though I must say that many people are wise to this one now and know what their opponent is up to. More subtle is the idea that if you are black and have a knight on c6 and want to bring it to d7, ceteris paribus, it's better to go to b8 rather than e5 as optically your position looks much weaker.

Russell Sears offers: 

Basically, the whole point in distance racing is to run your opponents into the ground, and then leave them. You learn to sense your opponents falter by subtle clues. His breathing rhythms change, the turn is not taken as sharp, and the hill is not met.

I once wrote of the poor high school girl that had Indiana's State Cross Country race in the bag, until she looked back and saw she had a big lead with 200 meters left. You saw her pace slow, then her form crumble, and the weight of the race hit her all in a few yards. With 100 meters left, she was staggering and weaving back and forth, and with 50 meters, she was down on the ground.

In the heat of the race, your body is in equilibrium. Once you let up the lactic acids and other poisons hit you, your heart slows. I always try to coach kids by telling them that if you want to hurt less during a race, push yourself harder rather than ease up.

An expert at this was Todd Williams. He would train with 400's at sub 60 second followed by 400's at near 70. In a race against fellow USA guys, he would rip the competition up, as they, knowing he was the one to beat, would try to key off his pace.

But then again I have been in many races where the pace, heat, wind, cold etc. were the real problems, and once one succumbed to the elements, it was like one was finally excusing himself early from a bad dinner party. They all soon follow. The last one standing is often the winner, despite staggering in at the end.

I remember a classic duel between Bob Kennedy and Todd Williams I saw at the Indianapolis US Nationals. Todd was better at the 10,000 meter and Bob at the 5,000 meter. When they met at Bob's hometown at his specialty, they went out running the first six laps of the 12.5 lap 5000 meter in sub 4:00 pace, despite it being in the 90's and the track temperatures in the 100 F. By about 3000 meters, Todd collapsed and Bob continued on and won, but barely hung on at the end.

Basically, if you are not prepared to lead or go into it alone with conviction, they can easily suck you into their vortex, and send you into a death spiral. It matters little if the staggering competitions are real, feigned or imagined.



I haven't found it easy getting to the pitch of Surtees unusual style of play, but maybe I'm making some progress. Moves like 10 … f6 are much more suited to closed positions than those with an open e- and f-file, and I couldn't believe it when he played it. This is not to mention the very strange 9 … Qa4, and though this was probably connected with the missing 10. Qe5 followed by Bd3, the idea just shouldn't have occurred to him in such a position.

But while I'm on my high horse, I must not forget that my own addiction to the modern defense (1 … g6 against everything, every game) also created untold damage to my thinking before I kicked the habit.

The opening, incidentally, is quite interesting with 7.Qe2 being an idea of Zviagintsev that is making its appearance in 'Gambiteer' (currently being typeset). White gets two bishops and open lines for his pawn.

N - Surtees, M [B12] Heywood Quickplay,

1.d4 c6 2.e4 d5 3.f3 e6 4.Nc3 Bb4 5.a3 Bxc3+ 6.bxc3
dxe4 7.Qe2 exf3 8.Nxf3 Qa5 9.Bd2 Qa4 10.Qe5 f6 11.Qg3
g6 12.Bd3 Ne7 13.0-0 Qa5 14.Qh4 0-0 15.Bh6 Rf7 16.Ne5
Nf5 [16…fxe5 17.Qxe7!] 17.Rxf5 exf5 [17…gxf5
18.Qg3+] 18.Bc4 [18.Bc4 fxe5 19.Qf6] 1-0



This article refers back to "Games and Their Theory," by GM Nigel Davies. 

Learning a game like checkers (or chess) is like learning a language: The squares are the letters, a move is a word and a combination is a sentence (actually the patterns are very much handled by the brain and memory like words and proverbs!). A game is like a story, and a tournament is like a collection of stories or like a novel, depending on the style of the player. (That is why a stranger to this game will not understand the two checker players when they talk about a game or a position.)

Just like a language that can be learnt by reading a textbook or by practicing with people that already speak it fluently, you can learn checkers either by reading books or by playing and talking with other players in tournaments or matches.

Both ways can be used and both ways can (and should) be combined.

In Germany, I only had some weak checker players to play with in my former chess club (only one of them was strong enough to reach 1500 + on yahoo), and with only one strong player that was working here in Dortmund (though he was not a master or master candidate either), I had no choice but mainly to stick to the books! It is different, for instance, in the Czech Republic, as their players are much more "players" then "readers," but this is because they have more competitions to enter.

So I guess it depends on your "socialization" as a checker player and your personal preference, and which way you prefer, or how you combine them.



Dr. Gerald Patterson's paper, "Contingency Models for Interstate Wars and for Individual Violence," proposed the key hypothesis that both individual and societal acts of violence can be predicted using a behavioral and statistical approach. Dr. Patterson has studied, quantified and predicted the variables that lead to aggression in individuals. The major issue in state warfare is whether there are models for predicting the behavior of groups that make war. The question is whether behaviorist principles work for the behavior of groups and can they be modeled and quantified. This reviewer proposed the query that behaviorist analysis of groups such as markets provide a workable model.

Take a smaller step first. Take a sports team dynamics. Does the reinforcement of the team win override such individual concerns that a star such as Reggie Bush may have? Will the individual give up his glory for the team win? What are the independent variables and the model. The team should be first, and the unit will be stronger with team considerations over the individuals. What are the variables that predict team wins? The jump to economics is hard because the capitalistic model of Adam Smith is that each individual who acts in his own interest, within limits, will ultimately benefit the society. In the broad markets under the law of large numbers, the large number of market participants and companies tends to the mean. A behavioristic model of markets or societies and war will use each individual and each transaction. The approach to individual stocks differs due to idiosyncratic behavior and small numbers.

A market model to test this is to test whether foreign markets behave differently than US markets due to differences in foreign culture, rules, attitudes, economies, time of day, weather, seasons, cross effects of other large global markets, national policies, interest rates … or do all humans behave similarly worldwide? Do the different currency pairs work differently? My father has noted that in Japan, they tend towards orderliness and everyone does the same thing. Does that cultural tendency create market trends as opposed to the contrariness typical of Americans that is reflected in the US markets? Are there model variables that govern the behavior of global markets that differ from the US? Given that we are at an inflection point in the interest rate cycles and the Austrian cycles, and the Presidential cycles, opportunities might arise in looking at group behavioral models.

Scott Brooks comments:

I have long believed in using demographic models to establish a macro-overview of investing. The study of demographics, as I use them, is to determine, based on births and immigration, what a group of people are likely to do over any given period of time. For instance, we know that in the US on average, people start working at around 20.5 years of age, get married at around 26, have kids at around 28, buy their first starter home at around 32, upgrade to a nice home at around 45, spend the most amount of money between the ages of 45 - 50 (it's 50 - 55 for the more affluent), and dramatically shift their spending as they age to a point where their spending decreases immensely, just to name a few characteristics.

Since young people buy different things than older people, spending patterns will be different over time as certain age groups dominate, or at least have a plurality of the spending for a given economy.

The dominant spending group in the US is the baby boom generation.

Different countries have different spending patterns than the US, which can be attributed, in many ways to demographics, but there are some cultural differences … and I am no expert on cultural differences, so I won't comment on that.

The study of demographics is quite fascinating and can give some key insights into the future.

However, it will only give a macro glimpse. And the unfortunate part of a macro glimpse is that it very rarely helps you make a good return today, i.e. since changes in spending cycles are not like a light switch, switching from "on" to "off" in the blink of an eye … they seem to be much more gradual … happening slowly so you don't notice until it's too late … kind of like the story of "how to boil a frog."

I strongly caution anyone using demographics not to use it as a replacement for micro-economic models. Demographics will not help you make a good return this year, let alone this quarter. For many in this group, making a good return in any given quarter is important and making a good return in a calendar year is absolutely vital!



Read how the Apple iPod index is replacing the BigMac one in Index Trumps the BigMac.



Perusing the eagerly-awaited issue of Electronic Gaming Monthly, I came upon an article about this Japanese game called "Kabu Trader Shun" for the Nintendo DS portable game system.

…an 18-year-old whiz kid with goofy hair, and magical anime-style stock-fixing methods that'd get him 20 years in the federal pen anywhere else.

some weird rich girl challenges him to 'trading duels.'

So just for fun I scanned it: See it here (You might need to zoom in on the image a bit to read the text).

The article mentions another Japanese game (just released in U.S. on 1/16/07) called "Phoenix Wright." This refers to (believe it or not) Phoenix Wright: Ace Attorney, Justice for All.




A Coupe Option settles periodically and resets the strike at the worst of (a) the then spot level, and (b) the original strike set in period one. [Read more here]



Sparked by an article on euphemism in politics, I have been studying the tendency of market participants and commentators to present themselves in a favorable light. The topics I have reviewed include the theories of boasting, euphemisms, biases in self reporting, self evaluation bias (325,000 entries), the superiority complex, the halo effect, and presentation of self in everyday life and deception. Nothing quite fits. However, considering that there are 132,000 entries for "as predicted" stock market on Google, I feel the topic deserves some serious consideration. Lacking theories or quantifications exactly on point, I'll have to take a crack at the subject myself.

 My previous forays into this subject in Education of a Speculator started with the consideration of how the oracle of Delphi was able to maintain its prominent place in Greek life for over 2000 years. I concluded that the key was never to administer a forecast that could be falsified, maintain an impressive site and a mystical ambience, evaluate your forecasts yourself, deceive with the startling forecast when you already know the answer, and mix in Bacchanalia. I gave examples of market people who had adopted these principles and classified them as mystic (the secrets of pi), unappreciated (I stood alone in making the forecast), other worldly persons ("the parking lots are as empty as the ships in the harbor"), mathematicians (the lognormal distribution explains it), the traditionalist (the opera chairman, the palindrome and the abstract mathematician use my methods), the Washingtonian (I met with the Fed chair often), the correlation expert (soybeans traditionally fall before a rally in bonds), the loner (I am on an around the world cruise), and the Insider ("a bullet bid has been made").

I also reported favorably on the late Harry Browne's magnificent analysis of self administered reports. He gives repeated hilarious examples of "as predicted" that actually weren't the way they predicted. He also gives examples of pretended modesty in admitting a gap in accuracy that is designed to make you feel that the forecaster is so much more honest than you or I that he's a model of integrity as well as a genius. (Such a deceptive technique is particularly relevant today as the world's worst forecaster in my opinion, the weekly financial columnist, who has been consistently bearish on stocks 100% of the time while the Dow went up from 800 to 12,500 over 40 years, admitted in his January 22 column that he gave a terrible forecast in saying that oil would go to 70 before 50). "The only thing positive about that prediction was that it didn't take more than a wink for us to be proved wrong." This technique is also detailed in The Perfect Lie of distracting attention from the real deception (i.e. his grotesque record on stocks, while admitting the oil statistics to be wrong).

Such a typology holds up pretty well after 12 years, but I feel it misses the essence of all the "as predicted" ones. For example, it doesn't focus on the multiple prediction, the person who predicts so many things that he has to be correct on one of them. A beautiful example of the same, as it's so compact, would be the person that says "X is the key level" and then boasts about being right if it goes up or down from that level. Also missing is the retrospective forecast, the forecaster that lets you know that he was bullish well after the bull move has started. Another omission is the survival biased forecaster, the person that reports just the fund or stock results that are extant right now, leaving out the results of the funds that have folded, or less insidiously, just the years or the results that were completely unfavorable. Another omission is the academic forecaster (the academic who writes a paper uncovering an anomaly with almost a clarion call for funding contained in the retrospective low priced impacted data presented). Another more subtle fudger is the person who reports their results while the going is good and then hides ostrich-like in the sand when the going is bad. (I have used a variant of this in my own business where I was happy to report while I was making returns sufficient to win awards but stopped when the going got tough. All I can say in my defense is that I figured that if my future results were good, it would create less supply against me and more demand with me. If they were bad, why should I give my adversaries the platform on which to drive in the final nails?)

Here are preliminary suggestions for those who wish to present performance figures without undue boasting and hype:

1. All results should be presented with a view of providing the truth, the whole truth, and nothing but the truth, and should be accompanied by a statement to that effect.
2. Particular care should be made to present the results of programs and funds that are no longer in existence or no longer reported for any reason with which you are associated. For example, one should never report 40% a year returns on the one program or two programs that you still have outstanding if others, invariably involving much higher amounts of money under management, have been eliminated.
3. A complete enumeration of money contributed, money taken out, profits made, commissions taken out, fees taken out, and net to customers should be made by month.
4. A similar enumeration should be made for any funds the manager was associated with that are not included in 3. (for example, the biotech fund or the growth stock fund or the trend following fund in stocks that is no longer in existence)
5. All changes in style of investment, markets invested in, fee schedules and leverage used should be noted with a fair discussion of how this would change results.
6. Third party arrangements of any kind with selling groups or brokers or service providers should be enumerated by year.
7. The independent third party that reported and calculated these results should be noted and addresses should be given and auditors enumerated.

In addition to following the above guidelines where applicable, those who make forecasts should add the following:

8. The exact time and levels of the items being forecasted and what it is you are forecasting and how to measure what is being forecasted.

9. A complete enumeration of all forecasts made over the last five years with the information required in #8.

10. An assessment of the accuracy of the forecasts made in the past, with the bad forecasts as well as the good ones equally featured.

11. A measure of the a priori likelihood of the forecast being true due to chance factors alone, for example, the forecast that oil will be higher in the future would have a 100% a priori chance of being true.

12. The independent party, like Hulbert who has vetted your forecasts or advisories in the past.

13. The amount of self interest the forecaster has in what he's forecasting. For example, whether he has a position in the recommendation, did he front run, and what his policy is in extricating from the forecast with respect to his own positions.

 No matter how carefully one develops a set of guidelines, it will always be possible to violate it in some way even when someone is not overly lax in presenting the truth, the whole truth, and nothing but the truth. As such, a letter from the forecaster describing any problems or gaps that the user might have in using the forecast should accompany the forecasts. For example, was the manager once managing a considerably larger set of assets? Has his organization changed now that he is a mere shadow (what used to be called a ghost in the stock markets of the 19th century) with a much smaller organization? Or have the financial circumstances of the manager changed so that he has an interest in a Hail Mary kind of prediction because he has been so devastated recently or as in the case of the weekly financial columnist, he's been short for so long that if he ever closes his trade, he'll realize a 1500% percent loss or so?

These are just preliminary suggestions. Remember that even with perfect reporting, past results have little or no reason to be predictive of future results because of the problem of ever changing cycles, and ageing as described by Bacon. However, exceptionally bad past results would seem to be somewhat predictive to the extent that they usually result from excessive fees and grind paid to the house.

I would be interested in any augmentations or suggestions that the readers might make here that would improve reporting and predictive methodology so that the users will have a better backdrop for decision making.

Vic further adds:

What he wrote for Mr. Wiz and myself, which he considered his best book, was that "when a master seems to fall into a trap, be doubly careful." This is an extension of what the able Mr. Mee had in mind and I am sure that Mr. Grandmaster Nigel Davies will have a few apt comments on this point.

Vincent Andres comments:

Another omission is the survival biased forecaster, the person that reports just the fund or stock results that are extant right now, leaving out the results of the funds that have folded …

This reminds me of a scene in Groucho Marx's biography (hope not to confound). Groucho was negotiating a contract about an advertisement using his image. The man proposes Groucho $500. Groucho laughs and says no. The man proposes Groucho $5000. Groucho also says no. The man proposes Groucho $15000, and Groucho agrees. Then the man brings out of his pocket a $15000 check, already written.

"By the hell, how did you know I will agree at $15000?" asked Groucho.

Well, I have four pockets said the man. In pocket one a $500 check, pocket two a $5000 check, pocket three a $15000 check, and pocket four a $30000 check.

Aaaaaaaaaaaaaarg! said Groucho.

Sorry for the approximate English and certainly an approximate remembrance.

Hany Saad adds:

While this is a very valuable framework for thought and it definitely will give one a significant edge in markets as well as the proverbial "don't take things at face value," I suggest looking at the other side of the coin, which admittedly is less common but every bit as valuable in solving market puzzles. I am talking here about the money manager who only talks about his losses and how tough it is to manage funds yet one realizes at year end that he outperformed all his peers by a large margin. The money manager who always starts his speeches with "I am a smaller fish than I like to admit" or "what do I know" or "after a very tough year" or my all time favorite, "yes, finally a good one" in response to a congratulation over a trade so outstanding that it can no longer be hidden under the carpet. The money manager whose performance is so mediocre that he was debating retiring in his thirties and only stopped when he realized that this year could be a good year as well … so why not? The lessons are very valuable since this practice keeps the enemy away and prevents envy, or so goes the tale. The only problem with such a practice is that year after year, the adversary starts noticing your bluff, and as he's leaving your office after you utter your usual "yes, finally a good year," you hear him murmur invariably "yeah, right."

It is mind boggling how people learn so quickly that you are laying low, but they hardly ever call your bluff when you practice your shameless grandiose on them a la Ableson.

Gordon Haave offers: 

The most common euphemism that I noticed was the naming of every downturn in almost any asset price as a "correction." One of the reasons that I find it notable is that those who call it a correction invariably are implying that the long term trend is still up. Well, if the future price will be higher, then why is having it go down today "correct" in any manner?

A good example of this would be today's bloomberg story about Rogers saying that the downward movement is just a "correction" and that the price will later go up to $100. If the price is going to $100, then any significant downward movement is not a "correction." Rather, it is a "mistake."

I for one think that oil is going to stay down, but that's not the point. The point is that this idea that anyone who is long can at the same time justify or excuse a downward price movement as being an ok event will still proclaim a long term rise in price.



The NY Times last week printed an article about how the Dallas Mavericks have a free-throw coach (Investing in Free Throws Pays Off). It is a good case study in developing an edge. The article also touches upon overconfidence biases and systematic methods of improvement:

The Dallas Mavericks, the N.B.A.'s top team this season, are no strangers to winning ways, but in getting an edge on opponents over the past several years, they have gone beyond sheer talent. The Mavericks have what amounts to a secret weapon in Gary Boren, an investment banker who is the N.B.A.'s lone free-throw coach … Boren begins by filming the players shooting free throws … There are 41 common problems that Boren is looking for in the footage, but he cautions that merely telling a player what he is doing wrong will not help him. He must first deal with the mental barriers that players put up. "They all think they're better shooters than they are," Boren said … "I'm trying to take what they've got - because they've already shot thousands of shots - and tweak their shot in the most important areas that will give them a shot to get better." Even when the player wants to learn, Boren must conquer another barrier. He tells them: "When I look at you, I see two things - a brain and a bunch of muscles - and the good news is the brain is really clicking. But the bad news is your muscles have been taking a siesta. They like it the old way and they're not paying attention to any of this stuff. So when we get down there, they're going to resist." … Despite Boren's success, no other teams have hired a free-throw coach.

In a blog post last year, Mavericks owner, Mark Cuban, wrote something that serves as almost a prologue to this NY Times piece:

When I got to the Mavs, I talked about putting the players in a position to succeed by hiring more coaches. After all, if we have a multimillion dollar investment in a player, it only made sense to me to provide that player with whatever individual instruction that was necessary to make them better. To put them in a position to succeed. [Read more here]

Interestingly, for 12 years, Boren followed around former Mavericks coach/current Warriors coach Don Nelson. One of The Wages of Wins (a Moneyball type book) authors offers statistical support of Don Nelson's coaching performance, at least some of which could presumably be attributed to Gary Boren:

One paper I am currently working on is an examination of NBA coaching. The paper is co-authored with Mike Leeds (Temple) and Mike Mondello (Florida State) and gradually it's nearing completion. Our tentative results thus far indicate that some coaches, although not all, appear to have a positive impact on player performance. One of these coaches is Don Nelson. [Read more here]

The NY Times article on Boren is reminiscent of this excerpt from Michael Lewis' feature on the Texas Tech's Mike Leach:

… Schwartz had an N.F.L. coach's perspective on talent, and from his point of view, the players Leach was using to rack up points and yards were no talent at all. None of them had been identified by N.F.L. scouts or even college recruiters as first-rate material. Coming out of high school, most of them had only one or two offers from midrange schools. Sonny Cumbie hadn't even been offered a scholarship; he was just invited to show up for football practice at Texas Tech. Either the market for quarterbacks was screwy - that is, the schools with the recruiting edge, and N.F.L. scouts, were missing big talent - or (much more likely, in Schwartz's view) Leach was finding new and better ways to extract value from his players. "They weren't scoring all these touchdowns because they had the best players," Schwartz told me recently. "They were doing it because they were smarter. Leach had found a way to make it work." [Read more here]

In a column two years ago, Bloomberg columnist, Mark Gilbert, suggested a financial market parallel to all of this:

The authors reserved their most scathing comments for the way trading rooms are managed. "Trader management is a training-free zone,'' they said. "In a combined 70 years of experience, the authors have never encountered so little management development in sophisticated organizations of vast resource." Banks are happy to leave traders alone provided they are making money. Managers only intervene when a trade has gone sour; post-mortems are held when money is lost, with scant investigation of why some trades are profitable. "The combination of trader autonomy, reliance on bonus and management spans of control generates an environment where managers see themselves as a safety net rather than as creators of value or profit," the professors said. "Put another way, trading environments rely too much on managing outputs." [Read more here]

As an aside, this isn't the first time the NY Times wrote about Mark Cuban's innovative approaches to free throw shooting. In the 2005 NY Times magazine "year in ideas" issue, one of the discussed ideas was as follows:

The key to a successful free-throw defense, Engber argues, is to make a player perceive a 'field of background motion' that tricks his brain into thinking that he himself is moving, thereby throwing off his shooting. In other words, fans should wave their ThunderStix in tandem. Last season, Engber proposed this tactic to the Dallas Mavericks' owner, Mark Cuban, who took him up on the idea. For three games, Cuban had members of the Mavs' Hoop Troop instruct fans to wave their ThunderStix from side to side in unison … [Read more here]

John De Palma further adds:

Providing some indirect color on the difficulty of shooting free throws intermittently after running up and down the court, Jack Schwager's "Stock Market Wizards" quotes psychiatrist Ari Kiev:

There are some common denominators, but different sports require different mental frameworks. For example, in bobsledding, you need to start off with a maximum amount of exertion as you run and push the sled. But as soon as you get into the sled, you have to slow down your adrenaline so that you are calm and centered while steering the sled down the course. A similar transition is required in the biathlon, where the athletes race on cross-country skis, with their heart rate exceeding 120 beats per minute, and then have to stop and focus on shooting a target, with their heartbeat ideally slowing down to 40 beats per minute.



I suggest that learning to play a game (poker, backgammon, chess, checkers or go) might teach far more than studying game theory. The big problem with drawing boards is that there's no opponent, so ideas are never subject to quite the same level of criticism, and they do not have to be quite as relevant to the very serious matter of winning.

Adi Schnytzer comments:

Game theory is not about drawing boards. People do not study game theory to help them in their game playing, believe it or not. They study it in order to understand the process of more perceived importance than board games.

Nigel Davies adds:

Please excuse my ignorance, I am a mere player. So what exactly is 'game theory' good for? And I'm talking a usable practical application that doesn't include getting a salary for teaching it to others. Please be very specific as I am very primitive.

Adi Schnytzer replies:

I recently posted the following note, which will introduce you to game theory and comment on its uses. Since it's written by the masters, it should help you out. There's nothing I can add to their wisdom.

Bob Aumann's Nobel Prize Lecture ("War and Peace") and his piece "On the State of the Art in Game Theory" are both worth reading … He also has a piece called "Consciousness," which is rather nice. These may all be downloaded here … In my view, the least (not non-mathematical) and most intuitive text available is Luce and Raiffa.

Nigel Davies adds:

There is still the problem of practical application which is what I've been going on about from the start.

In 'A Beautiful Mind,' we see that Nash figures that he and his friends should not go for the blonde because they will block each other, and somehow or other this later got him a Nobel Prize. However, it seems that Nash thought up his 'strategy' without any knowledge of the game, and from all indications, he was a virgin at the time. This sums it up - he thought he could win without any knowledge of how the pieces moved.

In a previous discussion, I brought up a similar error by a mathematician who gave a figure on the number of possible chess games. It's obvious to anyone who actually plays and knows the rules that the number has to be infinite. The guy was so arrogant and/or naive that he didn't bother to learn the rules properly before coming up with his number.

Frankly, I have the same problem with Robart Aumann's paper. It's all very well theorizing about peace, but has he actually tried to apply this? I suggest that without knowing the territory, too many assumptions will be wrong.

If it's any consolation, it seems that Lasker had a similar problem with Einstein and the theory of relativity. In Einstein's foreword to Hannak's biography of Lasker, you see that Lasker thought that there was no justification for claiming that the velocity of light in a vacuum would be infinite, unless this had been verified in practice.

This, incidentally, was one of my few moments of agreement with the Elizabethan ghost.

Ross Miller comments:

It is worth noting that the "real" John Nash never did this, just the John Nash invented by a screenwriter who got to write this movie based on his ability to write Batman movie screenplays. The example in the movie is not a Nash equilibrium. In a Nash equilibrium, you do the best you can taking everyone else's actions as given and ignoring responses to your own actions. If everyone else goes for the inferior females, you make a beeline for the superior one in a Nash equilibrium. As stated, this game has no Nash equilibrium if everyone believes that multiple hits on the same target generates no payoff from that target, but a single hit will. Nigel is correct in pointing out that solutions to this game require thinking beyond the game theoretic formalisms.

The best reason for the Nash equilibrium to get a Nobel Prize was that it facilitated the Arrow-Debreu work on a competitive equilibrium. It was because his equilibrium is an intrinsically competitive (and not collusive) concept. The screenwriter is not to be entirely faulted since the book from which the movie was based is full of technical errors and misstatements. Of course, technical correctness does not make for bestsellers and the average moviegoer is never going to understand what Nash did anyway, nor is much of anyone for that matter.

Peter Grieve offers:

My take on game theory (based on long but elementary study) is that:

1. It's not very useful in sequential games like chess, poker, etc. In chess it might help a computer make decisions based on a look ahead tree if the branches have some evaluation number. Game theory can't, of course, actually generate these evaluations, and they are quite important.

2. It's not very useful in games in which anyone has any experience. The simplifying assumptions are too great. Once in a while it could illuminate a connection that would not otherwise be obvious. But as far as selecting a detailed strategy in a real world, complex game, it would be madness to rely on game theory.

Game theory is a lot like the rest of applied mathematics. It's really strong on the simple stuff, things where its many simplifying assumptions are valid. It can act as an initial guide when there is no experience in an area. Occasionally it can suggest something new in known areas (which must then be extensively tested by experience, and often found lacking).

The problems arise when academic folks (who mostly talk to each other) get inflated ideas about the real world strength of their ideas.

An example of a situation where game theory would be valuable is the following. Suppose you where playing a game of Rock-Scissors-Paper with a really smart, vastly superior opponent who knew a lot about your mind. How can you at least break even in this game? Game theory tells us the answer. Roll a die, if it comes up 1-2, choose Rock, if 3-4, Paper, if 5-6, Scissors (roll the die in secret, of course). You can even tell the opponent that you will use this selection method, and it doesn't help him beat you (unless he can guess the way the dice will come up). He can use this same strategy on you, making sure he breaks even, and the game is at equilibrium. This seems intuitively obvious, but what if Rock breaks Scissors wins double? What sort of die should one roll then? Game theory will tell us.

Of course if Nigel reads this, he will immediately think of several possible strategies to bamboozle game theoretically inclined, mammoth brained opponents in Rock-Scissors-Paper. But if he is to win anything, he will have to bluff the opponent out of using the above strategy (perhaps by artfully convincing the opponent that his (Nigel's) mind is "primitive").

During the Cold War, everyone wanted to hire Air Force generals with lots of nuclear war experience, but there were none (General Ripper was long gone). The think tanks used some game theory. Thank goodness we never found out how valuable it was.

Adi Schnytzer comments:

Three points only:
1. Game Theory was used successfully to win a battle in the Pacific during WW2, though I don't have the details on hand.
2. Without game theory, a simple dumb computer would never have beaten the World Chess Champion!
3. Aumann's insights on war are useful, but make sense only to those living somewhere nuts like the Middle East. Those in cocoons who believe that the problem rests in a failure to love their fellow man (read: "Liberal Europe At Large") will never understand.

Nigel Davies adds:

Without game theory, a simple dumb computer would never have beaten the World Chess Champion!

How do you come to the conclusion that 'game theory' should take the credit? Why not Faraday, Edison or Graham Bell? As far as I know, none of the programmers studied game theory, but there were a few chess players on the Deep Blue team. If game theorists are claiming this, then by the same token shouldn't one be able to claim that the big bang was only possible thanks to physics professors? Now that would really be a feather in their cap - they might get two Nobel prizes!

Aumann's insights on war are useful, but make sense only to those living somewhere nuts like the Middle East. Those in cocoons who believe that the problem rests in a failure to love their fellow man (read: "Liberal Europe At Large") will never understand.

Ghengis Khan would probably have sorted the Middle East out in no time - old Ghengis was a good player in his day. OK, I guess you're going to claim that the Mongolian hordes had their own 'game theory' which enabled them to win their battles etc. So the academics can take the credit after all …

Game Theory was used successfully to win a battle in the Pacific during WW2, though I don't have the details on hand.

As should be clear from the above, I think specifics are needed in order to see why game theorists are taking credit for this one and why it's good shooting with one's howitzers, or even luck. And how many battles were lost by the way? Or weren't these retrospectively scored?

Stefan Jovanovich adds: 

There are only two reasons why the Americans had any chance in the Battle of Midway:

(1) Admiral Nimitz trusted his Navy code breakers and their analysis of the limited decryptions they had under Commander Rochefort. By translating messages and studying operational patterns, the code breakers predicted future Japanese operations. Relying on those predictions, Nimitz sent to sea the only three American carriers he had at Pearl Harbor and positioned them on the flank of the predicted Japanese line of attack.

(2) When an American scout plane sighted the Japanese fleet, Admiral Spruance put all of the American planes in the air for an all-out attack. In terms of conventional doctrine at the time, this was a highly suspect move, and its initial results were terrible. The Japanese fleet's air cover fighters and anti-aircraft gunnery annihilated the attacks by the Marine Corps scout bombers, Navy torpedo bombers, and U.S. Army Air Force torpedo-carrying "Marauder" bombers. The Army Air Force "Flying Fortress" high altitude bombers also failed but did not suffer any losses. The next attack by Navy torpedo bombers was literally wiped out; there were no planes and only one pilot survived. Only the last attack - by Navy dive bombers - succeeded.

If "game theory" includes cryptographic analysis, then its contribution to the Pacific War effort was, indeed, invaluable; but it required the willingness of Admiral Spruance to go "all in."

Adi Schnytzer replies: 

Thanks Stefan. No, it wasn't the cryptography I had in mind. According to Careers in Mathematics,

Game theory, a part of operations research, was used to select a strategy for the Battle of Midway, a turning point in the Pacific arena during World War II. The U.S. Navy was on one side of Midway Island, and the Japanese Navy on the other. We calculated our probability of winning in the four cases of our going north of the island or south of it, and the same for the Japanese. Game theory was then used to select the winning strategy.

As I recall, breaking the codes told the U.S. where the Japanese fleet was going, and game theory told them how to place their limited resources optimally. But since this isn't nearly as important as winning a chess game, why are we bothering?



The Pack 720 Pinewood derby took place this morning. We had an outlier in our four times that kept our average 2/100'ds of a second from taking second in the Den. It was amazing to see the Den's times and Pack's times. For the first time in my life, I could 'visualize' distributions as they were taking place both on a macro and micro scale. I attribute the DailySpec and all of its makeup of characters for this wonderful skill!

The Den's times for win, place, and show were as follows:

Total Avg.

1st   11.95   2.9875
2nd  12.03   3.0075
3rd   12.05   3.0125 (Jacob Holley)

Jacob improved from fourth last year to take home a trophy. He's so happy and ecstatic that I had to calm him down. That average included a 3.08 outlier as well with the other times coming in at 2.98, 2.96, 3.03. Lane two of the four lanes made all the difference in everyone's outcomes, being the most difficult lane, and the one that slowed everyone down.

The theory that proved to be a bit confusing for me was the advice I took for granted! The weight distribution of the car either had to be one of three things:

Forward - pulling effect rear - pushing effect middle - balanced

We were told that forward placement of weight added gave a nice pulling effect that was better out of the gate and down the long runway. It actually wasn't though and the rear placement cars pulled ahead on those runways. First and second both had rear placement whereas Jacob's had forward placement.

Aerodynamics plays no part it seems, and weight placement seems to be key.

I'm proud that the boys won the Den award for best average time of 3.12! A bowling/pizza party is the reward. We were the only one to issue an incentive if they won and we took it by a landslide, second being 3.85 seconds.

It was great to see 30 plus kids hugging the rail in anticipation to watch their cars come down the track to the finish line. There were fists pumping and two inch vertical leaps when they won their heats! This was an amazing experience.



GaveKal's Our Brave New World, pace the Chair's critique, is not intended to be a highly detailed image/roadmap of macro issues. I thought of it as the economic equivalent of cubist art.

From Wikipedia:

Analytic Cubists "analyzed" natural forms and reduced the forms into basic geometric parts on the two-dimensional picture plane. Color was almost non-existent (except for grey, blue and ocher) (monochromatic), instead they focused on forms like the cylinder, sphere and the cone to represent the natural world. [Read more here]

The GaveKalers usefully caricatured recent economic trends, displaying them in a thought-provoking manner, albeit one not directly translatable into specific, testable trading strategies.

Frequently Asked Questions in Quantitative Finance by Paul Wilmott is perhaps the most accessible (downright fun) reads I've seen in the field. Folks intimidated by the topic but determined to edge up the learning curve will find reasonably down-to-earth definitions and applications of basic tools like Black-Scholes, various risk metrics, distributions, etc. It is decidedly not for experienced practitioners, but instead for folks who want to stop scratching their heads when confronted with phrases like "gamma surface" or Sortino ratio.




Here is a visual comparison of the S&P vs. S&P total return with a 10% curve thrown in.

Dick Sears comments:

Thank you all very much for helping me find the data for the S&P 500 T.

I'm astonished to discover that what the press has been reporting all these years doesn't include dividends. It's not as if the difference is insignificant. In 2006, the S&P was up 15.79% with and 13.62% without, a difference of more than 200 basis points.

Over the last five years, the difference is more marked (in relative terms), 6.19% per annum vs. 4.32%.

By excluding dividends, the press makes the stock market appear less successful than it is. I'd chalk that up to its anti-business bias if I hadn't discovered how difficult it is to get the return including dividends. S&P does provide it, but not in real time, and probably only once a day and many hours after the market has closed.

For myself, I think I will simply remove the S&P from my GTI website. It doesn't have much meaning for tech stocks anyway.



I saw the article on your site about traders with Asperger’s and forwarded it to my friend, Debbie Hilibrand, who is extremely involved with Autism at Yale. She is curious if you know of any "brilliant traders" with Aperger’s.



From 'The Brother,' adapted by Eamon Morrisey from the writings of Myles Na Gopaleen, and originally staged at the Peacock Theatre, Dublin, in 1974.

The Workmans Friend

When things go wrong and will not come right,
Though you do the best you can,
When life looks black as the hour of night -

When money's tight and hard to get
And your horse has also ran,
When all you have is a heap of debt -

When health is bad and your heart feels strange,
And your face is pale and wan,
When doctors say you need a change,

When food is scarce and your larder bare
And no rashers grease your pan,
When hunger grows as your meals are rare -

In time of trouble and lousey strife,
You have still got a darlint plan
You still can turn to a brighter life -



Reading Sartre's La Nausee, I came across a wonderful "counting" sentence:

"Three o'clock is always too late or too early for anything you want to do." (obviously untested and his opinion)

Is there such a dead time or point in the trading day to which it's more advantageous not to do anything? In the six and a half hours of the NYSE, does there exist a slice of the pie that is such an apex?

Looking at things, it's nine thirty to lunch, then lunch to three o'clock (bond market closing), and three o'clock till closing. Any hypothesis stick out at ya'll? How do you divide the day? What statistical tools should be taken into consideration?

Furthermore, can you break up the week, month, or quarter to find a dead spot that's too late or too early for entry?

Food for thought.

Russ Herrold comments:

Reading Sartre's La Nausee, I came across a wonderful "counting" sentence:

"Three o'clock is always too late or too early for anything you want to do." (obviously untested and his opinion)

Is there such a dead time or point in the trading day to which it's more advantageous not to do anything? In the six and a half hours of the NYSE, does there exist a slice of the pie that is such an apex?

I think of it differently — there are better times for some strategies, as a trader, than others within the pulse of a day.

Any hypothesis stick out at ya'll? How do you divide the day? What statistical tools should be taken into consideration?

Let's go to the track, and lean on a rail for a few days. The horse to watch: An ECBOT future, and only on non-major scheduled news days. The methodology: Counting track conditions with a tally sheet for a month or two. The stopwatch: five minute intervals (I have my computer on a weak tone sound every minute and increasingly stronger ones at the five's and quarter hours to remind me to look up and rate the market when I do this). Observations are in New York time.

Taking the notation of conditions, and doing reduction of the patterns after several days, I find this:

8:30-9:25 'pre-open' light volume, often scalpable, but also with no material liquidity if one ends up on the wrong side of an exogenous event (most of the news issues at 8:30, and so a gapping move play is often available)

9:25-9:30 'at the post' untradeable

9:30-9:50ish 'from the gate' choppy and not overly tradeable until all the underlyings in NY are both open and have finished running the market and are easily reachable overnight resting LMT and STP orders

9:50-11:50 'around the first stretch' trending and mean reversion plays will often emerge (about 1/3 of the time), or if not, range bound movements will grind up a player seeking to trade — a 'three strikes, you're out' approach works well here

11:50-noon, noon-13:00, 13:00-13:30 'on the back stretch,' see 'Feeding Time for Giants' discussed on this list last June (9-Jun-2006: A Cyclopean Workshop, also read more here)

Eminently playable — The chair's comments about mid-day loss of liquidity, and my observations at the time have covered this time frame already (watch the volume)

13:30-15:00 'coming into the far turn,' similar to 9:50-11:50

15:00-15:45 'down to the wire' as people realize the day is drawing to an end, and wind up intra-day or assume overnight positions before the 'rush hour' about to occur

15:45-16:00 'at the finish,' very hard to trade well as liquidity is bleeding off by the second (watch the volume)

16:00-16:15 'back at the paddock,' earnings of an index component will often move the futures, and laggards with resting LMT or STP can be picked off (watch the order book for such plays)

Similar patterns with different time bands exist on the FTSE100 (Z.FUT.LIFFE), the DAX (DAX.FUT.DTB), and the Aussie SPI (SPI.FUT.SNFE), for which I maintain tallies.

Furthermore, can you break up the week, month, or quarter to find a dead spot that's too late or too early for entry?
Well known dead spots are standing aside from using such time based expectation plays in front of major scheduled news; other trading approaches exist in their stead — setting up LMT's on either side of historical gap ranges to enter a post-Fed meeting announcement and to trail up an exit waiting for the peak of irrational exuberance worked well in the last year, but that play has been dead now for a while.



I think Asperger's is a potential plus for traders. It is hypothesized that Bill Gates and Albert Einstein and Sir Isaac Newton may have or had high functioning Asperger's. To me, people with high functioning Asperger's (which is hypothesized to be more of a disorder of "mirror neurons" than the amgdala, read about it here). To me, people with high functioning Aspergers are "goal minded" to a fault. They can accomplish great things because of this singular patriot missile focus, but often have trouble with close motional relationships because of their difficulty empathizing with others. One of the frustrating things for them and the people who love them is that they do not intend to hurt, anger or frustrate others and are often at a loss for why others feel that way. A good book to address this is: Aspergers in Love by Maxine Aston.

Vincent Andres comments: 

About the biology of phobia and fear:

Read Snakes and Spiders Grab Our Attention and Grab It Even Faster If We're Phobic, A Sign That Perception Evolved To Help Us Spot Environmental Threats … Swedish Studies Show That We Can Spot Snakes In The Grass Faster Than Harmless Objects

Read Emotion Drives Attention: Detecting the Snake in the Grass by Arne Ohman, Anders Flykt, and Francisco Esteves

La biologie des phobies - Arne Ohman is a didactic nine page article in French with many clear sketches, and with biblio. and quantitative experiments about fear reaction delays. In short:

1. fear reactions are faster than others,

2. this is due to non-conscious short cuts

Nigel Davies adds:

I've seen an alternative hypothesis that mother nature is doing away with archaic social elements of the mind that were more useful for tribal groupings and shared panic in the face of sabre-tooth tiger attacks (or stock market falls). Asperger's seems to be on the increase worldwide, regardless of culture and with no two sufferers showing identical symptoms. These seem to be more characteristic of genetics and evolution rather than a 'disease.'

Might not the current research and attitudes be flawed through its view of 'normality' being assessed on the basis of what the majority is like? What if Asperger's represented the next step of human evolution, with the supposedly flawed neurology being perfect for the more specialist roles the world demands, and the diminishment of social instincts, thereby breaking down destructive national and ethnic barriers (not to mention the evening out of emotional swings in markets)?

Naturally those who are paid up members of the current status quo would not like the above argument. I suggest they would be likely to bend any evidence to show that they are in fact the perfect humanoids, incapable of improvement …



The book, David Bronstein - Chess Improviser, depicts one of the most interesting battles in chess history - Bronstein's match against Botvinnik for the World Championship. During this match Bronstein was essentially improvising against an opponent known for preparation and systemization. But for losing three drawn endgames, Bronstein might have won 5-2.

Amongst Bronstein's tactics, he constantly changed the battlefield, using a variety of different openings. He also played Botvinnik's favorite openings against him, confronting his opponent with the problem of how to play against himself. It was the archetypal battle between fixed systems and a constantly moving, shapeshifting target.

I think there's also a deeper and more philosophical dimension to this. The improviser embraces the risk and adopts the position that the only certainty is change. Proponents of fixed systems, on the other hand, wish to gain control and remove uncertainty. They want to have a method with which to achieve their goal of power but without any risk. There seems to be a certain megalomania to it all, and this is how the bad guys are usually portrayed in the movies.

In From Russia with Love, the man formulating the SPECTRE plan was a chessplayer called Kronsteen, who in the first scene was pictured winning a game against McAdam. But what's interesting is that this game is in fact a real tournament game that Spassky won against Bronstein. I wonder if this was just because it was a good game or whether Kronsteen was being portrayed as someone who could beat improvisers. As an aside one should note that the director in his wisdom removed the d4 and c5 pawns from the board, which means that Kronsteen's combination doesn't actually work.

When one leaves the confines of the chessboard, there seem to be interesting parallels in life and markets. In markets, fixed systems seem to do much worse than in chess, and I suspect that Bronstein's rapid adaptation is a much more suitable method.



EUR/USD, by Craig Mee

January 18, 2007 | 1 Comment

A quick observation …

Since the start of 1995 through 2006, the opening week of the year in eur/usd has been the extreme (HIGH OR LOW) for the year nine out of 12 years … Will ‘07 follow this suit?

Tom Downing comments:

This looks pretty nonrandom to me notwithstanding the arcsine effect.

Define S as the number of years (out of 12) in which the min or max falls within the first week … In 10,000 simulated 12 year periods, here is the distribution of S when price changes follow a standard normal distribution: (mean 0, standard deviation 1):

S       N        Prob       Odds

0     988     0.0988     10.12
1     2504   0.2504      3.99
2     2984   0.2984      3.35
3     2145   0.2145      4.66
4     951     0.0951     10.52
5     324     0.0324     30.86
6     86       0.0086     116.28
7     16       0.0016     625.00
8     1         0.0001    10000.00
9     1         0.0001    10000.00
10   0         0.0000      NA
11   0         0.0000      NA
12   0         0.0000      NA

In only 1 of the 10000 simulations did at least 9 years of the 12 have a min or max within the first week.

If you assume some sort of drift (for example, since 2002 euro/$ mean = 3.3 pips with standard deviation of 68 pips/day), the probability of having at least one first week min or max increases, but the probability rapidly drops off after S=7:

S       N         Prob      Odds

0     579      0.0579    17.27
1     1814    0.1814     5.51
2     2789    0.2789     3.59
3     2460    0.2460     4.07
4     1473    0.1473     6.79
5     628      0.0628    15.92
6     210      0.0210    47.62
7     44       0.0044     227.27
8      3        0.0003    3333.33
9      0        0.0000      NA
10    0        0.0000      NA
11    0        0.0000      NA
12    0        0.0000      NA

Another approach would be to estimate the probability of observing a first week min or max in any given year (conditional on a price change distribution), and then calculate the probability of having at least 9 successes out of 12 trials under binomial distribution.

Vincent Andres adds: 

EUUS_W.DAT : column = OPEN 02/01/1995-25/12/2006

1995 1.2040  1.2040   1.3422   0.0000
1996 1.2740  1.2250   1.2837   0.0097
1997 1.2400  1.0556   1.2406   0.0006
1998 1.1091  1.0762   1.2085   0.0329
1999 1.1756  1.0098   1.1830   0.0074
2000 1.0133  0.8352   1.0256   0.0123
2001 0.8956  0.8437   0.9472   0.0516
2002 0.9016  0.8613   1.0100   0.0403
2003 1.0225  1.0225   1.2184   0.0000
2004 1.2352  1.1790   1.3444   0.0562
2005 1.3313  1.1709   1.3576   0.0263
2006 1.1854  1.1834   1.3353   0.0020

Read more here.

Sam Humbert adds: 

I took a quick look at this as a finger-exercise. Below is R code with some user-tweakable parameters, currently set to roughly mimic Tom's work (though I took a clean-room approach; didn't use Tom's code as a base). The idea, as suggested by Tom, is to find the "probability of observing a first week min or max in any given year," which is "Prop" in this R script, and turns out to be .177 (I'm sure Dr. Phil or others could find a closed-form solution) and plug this into the binomial, thus chopping out an order of magnitude of computing. The results I get are almost exactly Tom's, so either his work is correct (as usual) or he/I made the same mistakes.

Days<- 252 # Biz days in a year
Year<- 12 # Number of years
Week<- 5 # Biz days in a week
Sims<- 10000 # Number of sims
Data<- apply(matrix(rnorm(Days*Sims),Days),2,cumsum)
Prob<- round(diff(pbinom(Year:0,Year,Prop,F)),4); Prob<- c(Prob,1-sum(Prob))
Odds<- round(1/Prob,2)

Days<- 252
Year<- 12
Week<- 5
Sims<- 10000
Data<- apply(matrix(rnorm(Days*Sims),Days),2,cumsum)
Prob<- round(diff(pbinom(Year:0,Year,Prop,F)),4); Prob<-
Odds<- round(1/Prob,2)
     S          Prob      Odds
1      12    0.0000     Inf
2      11    0.0000     Inf
3      10    0.0000     Inf
4      9      0.0000     Inf
5      8      0.0002     5000.00
6      7      0.0016     625.00
7      6      0.0088     113.64
8      5      0.0352     28.41
9      4      0.1023     9.78
10    3      0.2113     4.73
11    2      0.2948     3.39
12    1      0.2492     4.01
13    0      0.0966     10.35



Continuing my study of truncated Levy flights, I have found some paper coming up with the best explanation so far of why variance is necessarily finite. Physically, variance cannot be infinite because there are only a finite number of observations. That's so simple and so grounded in common sense that I am wondering why no one came up with it sooner.

I would like to make another remark. Since, as the Chair and others observed, the market can be quite jumpy in the short term, but converges to normal in the long term, say yearly returns, the central question is: how long before the market converges to normal?

This is somewhat opposite to the Mandelbrotians' worry: how long before a 10-sigma event?

I would be grateful if anyone could point me to good papers about measuring convergence speed.



The drift was blowing on the land,
Blowing with all his might:
He did his very best to make
The index rise and bright –
And this was odd, because
The land was calm as the middle of the night.

The Oil Peakers were whining sulkily,
Because the drift of Dimson
Had got no business to be there
After all the screaming they had done –
'It's very rude of them.' They said,
'To come and spoil the fun!'

The sea was wet as wet could be,
The land was dry as dry.
You could not see a cloud, because
No cloud was in the sky:
No margins' calls were flying overhead –
Because stocks were such a buy.

The Shark and the Pilot Fish
Were swimming close at hand:
They wept like anything to see
Such quantities of dry land:
'If this were only washed away,'
They said, 'it would be so grand.'

'If seven goddesses each with seven heartaches
Wept for a hundred years,
Do you suppose,' the Shark said,
'That they could flood it all with fear?'
'I doubt it,' said the Doomsdayer,
And shed a bitter tear.

'O Californian beach comers come and swim with us!
The Shark did beseech.
'A pleasant dip, a pleasant trip,
Swim with the big boys in the briny sea:
We cannot do with more than four,
To give a fin to each.'

The seasoned salty seaman looked at him,
But never a word he said:
The salty seaman winked his eye,
And shook his heavy head –
Meaning to say he did not choose
To leave the beach house - bed.

Out four newly retired beach dwellers hurried up.
All eager for the trip this morn:
Their wet suits taunt, their snorkels washed,
Their flippers were shabby and torn –
And this was odd, because, you know,
They hadn't ever been worn.

Four other beach dwellers followed them,
And yet another four;
And thick and fast they came at last,
And more, and more, and more –
All swimming in a school in the frothy waves,
Rushing to the next big commodity score.

The Sharks and the Pilot fish
Swam on a mile or so,
And then they rested on the deep bottom
Conveniently low:
And all the little retiree tread water
And waited in a row.

'The time has come,' the Shark said,
'To talk of many things:
Of oil — and gold — and declines –
Of deceits — and captured rings –
And why your estate is bubbling hot –
And whether the feds have wings.'

'But wait a bit,' the beachcombers cried,
'Before we have our chats;
For all of us are in over our heads,
And none of us know a bit of stats!'
'No worry!' said the Pilot fish.
His reply no need to count our facts

'A bit of blood,' the Shark said,
'Is what we chiefly need:
thrashing and splashing besides
Are very good indeed –
Now, if you're ready, beach dwellers dear,
We can begin to feed.'

'But not on us!' the beach lover cried,
Turning a little blue.
'After such kindness, that would be
A dismal thing to do!'
'The water is fine,' the Shark said,
'Do you admire the view?'

'It was so kind of you to come!
And you are very nice!'
The bottom feeder said nothing but
'Give me another slice-
I wish you were not quite so deaf-
I've had to ask you twice!'

'It seems a shame,' the Shark said,
'To play them such a trick.
After we've taught them so much,
And made them swim so quick!'
The Ablefleckson said nothing but
'The last chunk was too thick!'

'I weep for you,' the Shark said:
'I deeply sympathize.'
With sobs and tears he sorted out
Those of the largest size,
Holding his pocket-handkerchief
Before his streaming eyes.

'O commodities,' said the pilot fish,
'You've had a pleasant run!
Shall we be trotting home again?'
But answer came there none –
And this was scarcely odd, because
They'd eaten every one.



George has asked for a "grain maven" to shed some light on the corn/bean situation. I'm no maven at beans/corn … but I'll try and shed some light on the subject … with a ground level perspective … hopefully some of you will find this helpful.

The farmers that sold some of their '07 crop already aren't thinking of this as a carnage … they're pretty happy.

My farmer expects to average 145 bushels/per acre for corn over a four year period. He expects to average 45 bushel/acre for soybeans over the same period of time. At these corn and bean prices, I'd give some serious consideration to selling half of my '07 … a crop that won't even be planted until mid April for corn and May or June for beans.

He should still be able to insure himself to a break even point at that level if there is a crop disaster, i.e. drought, hail, disease, etc., but may want to sell only 25% of his expected '07 crop to be on the safe side.

This is a huge opportunity for farmers that capitalize on this, as long as they are quality farmers who work hard at getting the job done, and furthermore, if the weather cooperates.

There is also a lot of risk associated with this course of action. If there are wide spread crop failures, he'll have to pay dearly to buy back his futures contracts. For a farmer, they want steady stable performance over time. They don't want too much risk. Their lives are fraught with risk … the worst kind of risk, too … risk that they have absolutely no control over … the weather! No matter how good a farmer is and no matter if he does everything right, if it doesn't rain, then he ain't got squat!

Here's a refresher on some of the economics on farming for the list (I've shared these numbers before).

It costs around $125 - $200/acre to plant, grow, harvest and sell corn. The wide range in price is due to many factors … mainly depending on the quality of the land and the quality of the farmer. I believe my farmer has told me that it takes around $145/acre on my place. Then my farmer has to pay me my rent for the land he's farming. That's another $100/acre. His break even is $245/acre. When corn was down around, it's usually $2 - $2.25/bushel, he would have to get around 110 - 120 bushels/acre to break even … well, that's not completely true … the government has a subsidy formula for my land that is called "the basis." This amounts to around $25/acre that the government pays on the land for the "basis subsidy." The farmer gets this money.

Based on the futures prices right now (approximately $4.20/bushel), if my farmer were to sell all his crop at the current prices, and he grew his average expected crop, he would stand to have a stellar year. Based on the expense numbers above and him getting the approximate average price of corn (around $2.10/bushel) he would make about $84.50/acre. Based on the same expense numbers above, and getting $4.20/bushel, he would make around $389/acre … so as you can see, when the price doubles, his profit potential more than doubles!

But it's not realistic to expect that he would make this money. Here's why.

There is no way a prudent farmer is going to sell his entire '07 crop in advance, let alone this far in advance. There is way too much risk. If there is a drought, prices are likely to spike from here and he could be financially destroyed.

If he's smart and he takes the conservative route and only sells part of his crop, and we don't have a drought, then prices will likely moderate and/or fall from here. As a result, he'll sell the remainder of his crop at a lower price.

If someone would like to see the numbers for beans, I'd be glad to do that in a later post.



The much-discussed Yellen speech is a standard-issue overview of Fed dogma … everything from the Phillips Curve to the Taylor Rule … soft landings and glide paths … even pretending the forward energy curve is a market forecast! It's actually a nice overview of "issues" related to what's wrong with the various measures of the economy, and it’s worth reading for those insights, if one is not already constantly immersed therein. 

Read cynically, it is a checklist of readymade excuses for potential errors the Fed might make.



The Tan Book today is like a shrink's ink blot test, where an ambiguous image is used to tease out the mindset of a patient.

A dour bond market is focused on this:

District reports generally described labor market conditions as tightening and cited examples of some businesses having difficulty finding qualified workers. [Read more here]

and not on this:

Overall prices increased moderately. Prices for energy and a number of materials have eased, and competition has kept prices for final goods in check. Atlanta, Chicago, Minneapolis and Kansas City described price pressures as easing or moderating.

We'll shortly see rigorous text analysis of the report, with faux-precise discussion of how bullish or bearish the report is on the economy.

In reality, both the markets and the Fed are looking at the same patterns in the data, and tomorrow's Bernanke testimony before the new Democratic Congress will provide far more information than today's Tan Book.



The Wall Street Journal article earlier this month on sports handicapper, Bob Stoll (The Man Who Shook Up Vegas), has already become a meme, but I want to revisit it and draw a few parallels with other writings on speculation …

From the WSJ article:

Although he makes a living handicapping college and pro football and basketball, Mr. Stoll rarely visits Las Vegas. He's never placed a bet in one of the city's sports books and hasn't attended an NFL game since he was 9. He does not make a habit of watching sports on TV. "Your eyes can only fool you," he says.

From Michael Lewis' "Moneyball" (referencing Oakland A's GM Billy Beane):

Billy hadn't the slightest intention of watching his team make history. It was just another game, he said, and he didn't watch games. "All they provide me with is subjective emotion," he said, "and that can be counterproductive."

From the WSJ article:

Put him in a different setting and he might be running a hedge fund, developing office towers or monitoring the currency markets.

From "Moneyball" (referencing then-A's assistant GM Paul DePodesta):

He was just the sort of person who might have made an easy fortune in finance, but the market for baseball players, in Paul's views, was far more interesting than anything Wall Street offered.

From the WSJ article:

But in 2005, Mr. Stoll noticed that a few minutes after he sent his advice, the lines on those games would shift slightly … While the line moves were flattering at first, they quickly became a problem … The bookmakers had clearly subscribed, he says, and were trying to change the lines before his clients could make bets … The more the point spreads move, the less effective his advice becomes. And when the bookmakers figure him out, his disciples will drift away.

From Education of a Speculator:

These oh-so-fleeting hot hands of market gurus become clarified. An advisor comes up with a successful prediction. For example, Bob Prechter, Elaine Garzarelli, and Mario Gabelli picked the big crash in October 1987. They become prophets. Their followers were flush, and they told their friends about their newfound gurus. But then their fills from following the recommendations of the gurus became a lot worse because they were taking their following with them.

From the WSJ article:

If there's one bedrock law of sports gambling, it's that the people taking bets, the bookmakers, always win. Some of this is due to the haplessness of average bettors, or "squares," who never fail to make dumb wagers. The rest is a matter of design. By taking commissions on bets and using oddsmaking tools like point spreads and bet limits, the world's bookies have engineered the system to their favor.

From "Education of a Speculator":

No one doubts that the public must lose at the races in order to pay for the prize money, stable care, employees, and upkeep of the land, building, and equipment … If they bet like other members of the public, they know they'll lose … Bookie often told me that he had the best job in the world. He was guaranteed a profit on every transaction … If only public speculators would pay as much attention to -what Mark Cramer, my favorite horse racing author, calls - the "gravitational pull of the house take," as horse betters do, the public would have lots more chips.

From the WSJ article:

It's a story Mr. Stoll says he's heard thousands of times from clients who don't look at the long term. Even good bets lose 40% of the time, he says, but some clients don't grasp that. "They think I'm either hot or I'm cold."

From your column on "hot hands":

Most researchers who have studied hot hands conclude the concept is a myth … Yes, a 3-for-3 shooter or batter feels that he has a better chance of hitting the next time up. Yes, when stocks go up three weeks in a row, everyone's bullish, and when they go down three weeks in a row, everyone is bearish. The problem is that card players and dice players feel this, too. After filling in a few flushes, you are "in the zone."

The WSJ article also offers a discussion of the statistical bent of Bob Stoll's approach as well as the immense amount of research necessary to develop an edge.

And in a CNBC interview last Friday, Bob Stoll made some interesting comments that suggested how sentiment distorts betting odds:

When a team is looking as bad as they can possibly look in recent weeks that's probably the time to bet on them actually. The harder a game is to bet the better bet it is usually.



Wedge Capital Management is a long-only value investor that I admire. Their quarterly newsletter (Wedge Watch) sometimes has some interesting tidbits. In this issue, there is a discussion on how the U.S. today might very well be compared to the UK of 1900 … the world's leading global power, stock market, etc. and how that changed over the next 100 years. U.S. growth continued, while the UK got bogged down in two immensely costly wars. The upshot, however, is that despite all this, the UK, too, gave investors 10% per year.

Read Wedge Watch

Stefan Jovanovich comments:

The comparison of the United States at present with the United Kingdom a century ago has been made by a number of very bright people. While I can understand its appeal, I do not see how it fits the known facts with regard to military power. It is simply not true to say that Britain was the world's dominant military power in 1900. The British Navy found itself being challenged in Atlantic waters by both Germany and the United States and in Asian waters by Japan (hence the appeal of Jackie Fisher's battle cruiser building program). On land, the German Army had been acknowledged to be preeminent since the Franco-Prussian War. Much of the appeal of Mahan's sea power thesis was that it offered consolation to Anglo-Saxon readers that the Hun could still be beaten even if its superiority on land could not be challenged. The present situation for the United States is far different. For better or worse, the world has never seen the combined arms military power that the American military now has. If, tomorrow, the United States decided that it wanted to take over and hold the entire Arabian Peninsula's oil reserves, there is no combination of forces on earth that could prevent them from doing so. The Chinese are working hard to build up their army and navy by abandoning conscription and having fewer professionally trained and paid soldiers and sailors; but their air and sealift capacity is still so weak that they cannot seriously threaten to invade Taiwan, let alone travel halfway round the world to challenge the Great Satan. Theoretically, the European armies of NATO represent a countervailing force to America's deciding to make "blood for oil" a reality. The armies of the European countries have 2/3rds of the troop strength of U.S. forces, but only Britain has the ability to send its soldiers to other parts of the world, and that capacity is - at most - 10% of what the United States has. The financial comparison between the U.S. now and Britain in 1900 may be more appropriate, but it should be noted that by then Great Britain was no longer the largest economy in Europe, let alone the world. It had been overtaken by Germany by 1885-90, and both Germany and the U.S. were significantly larger economies when measured by national income. The British market's total equity capitalization may have been 50% larger than the U.S., but it was only 20% larger than Germany's, and a great deal of the London market's valuation was in the shares of Canadian, South African and Asian companies. By 1907 there was sufficient uncertainty about the sovereign's real value that the pressure of claims from the San Francisco Earthquake and Fire on Britain's property and casualty insurers was enough to produce a near-panic in the London gold market while the German market remained largely unaffected.



Venezuelan 2027 bonds are now yielding 1.7% over comparable treasuries. Thus, rational investors would not expect a credit loss of greater than 1.7% per year.

(This is a simplified model in many ways, but close enough for this analysis.)

The credit loss would be the probability of a credit event times the expected loss in a credit event.

(So, for example, a 10% chance of a credit event times a 50% loss if such an event happened would be an expected annual default loss of (.1*.5)=5%)

Any investor in these bonds must expect an annual credit loss of less than 1.7%.

Recently, Argentina "got away with" giving foreign creditors a 66% loss of principal. If Chavez decided to stick it to the dollar bond holders (like he shows every indication of doing to many foreign equity owners), there is no reason to expect that the bondholders would recover more than 33%.

So, we then solve for 1.7% = X * .66 = 2.57% This shows that an investor in these bonds must expect a less than 2.57% chance of Chavez defaulting, or a greater than 33% loss given default.

Given his political sensibilities, thoughts on economics and investors in general, and massive spending plans, would you bet that there is only a 2.57% chance of Chavez defaulting? I wouldn't. I also wouldn't bet on an only 66% loss given default. I wouldn't be surprised if there was an event where the loss given default on these bonds was 100%.

Read Venezuelan Dollar Bonds Rise, Rebounding From Last Week's Drop



The first thing I would like to say is that, of course, I am flattered that Mr Niederhoffer not only took the time to read, but even review the book I wrote back in 2005. I hope he will do the same for my next book, due out in a couple of months!

The second thing is that, unsurprisingly, I do not think that some of the points Mr. Niederhoffer makes are very fair and I thus welcome this opportunity to "set the record straight".Our Brave New World was never a book written for general public distribution. It was self-published and was written as a sort of summary of the more important research reports and research themes we had been developing at our research firm, GaveKal research, since its launch in 1999.

In essence, we wrote it so that new clients of our research service could quickly get "up to speed" on the key ideas and concepts that we had been developing for years (and in much greater detail in our research).

Now, as I am sure Mr Niederhoffer knows all too well, most money managers (the crux of our client base) are inundated with reports to read. Thus, if you want to ensure their attention, reports have to be engaging and to the point. One can not afford to get lost in pages of econometric models_ at least, one can not do if one hopes to make money as an independent research provider!

Now all the themes that we develop in the book are developed further, and in more depth, in our reports (all posted on our website). To be honest, this is the first time that we have ever been criticized for not backing up our assertions with data, charts etc. and I think that, if Mr Niederhoffer did not find his heart's content in the book, maybe he will find it by signing up for our web archive and, better yet, a free trial subscrition to our research?

I also believe that Mr. Niederhoffer's criticism of our views on velocity is not a fair one. Indeed, since 2001, one of our biggest mantras has been that the velocity of money has increased significantly, and that this has had a profound impact on asset prices. We have also spent a lot of time and resources tracking changes in the velocity of money and have built various indicators to do just that.

So in conclusion, I would say that Mr. Niederhoffer's criticism of our book stems probably from a "divergence in goals" as to what the book should be and should do. It sounds like Mr. Niederhoffer was expecting some kind of treaty in econometrics, with pages of mathematical models etc. Meanwhile, we wrote the book as a summary to some of the ideas developed in further depth in other reports.

I am sorry to hear that Mr. Niederhoffer was disappointed and that his expectations weren't met. But to show that we don't hold a grudge, I'll send him the next one free of charge (though I fear that his criticism may be the same the next time around as well!)

Vic responds:

You are well justified in your critique of my review, and there is no need to send me a free copy of your book as I will buy all of your work in the future. I somehow lost the flavor in my review that everything you say about the world I agree with. If you read what I've been writing over the years, our conclusions are identical to yours, and certainly don't have a more rigorous backdrop to them. My reference to Kuhn was that whenever something is very good and revolutionary, first there is disbelief, then hatred, and then the next stage is "my goodness I knew that all along". I didn't make that point very clearly, and you're certainly on the side of the angels.

Despite this, I didn't like your back and forth with Faber because your views seem completely opposed to his, and yet you sought conciliation.

I certainly have much to learn from your group whom I first discovered when one of your readers told us to get this book as "these people are the best, the smartest, and the most insightful." I do agree with this viewpoint, except that I think your investment conclusions have to be sharpened, and that you need to encorporate ever-changing cycles, which is something that I'm sure you take account of in your more timely work.

Feel free to use this as a letter of commendation to you. Somehow my writing didn't get across the point that if only the investment world were to follow your guidance, the rate of wealth creation would be so much greater than it is.

Vic further adds:

 Because their research is related to such important and deep issues as the sources of wealth, the mainsprings of progress, and the creative power of individuals when given proper incentives, it is hard to quantify. With all their faults, they certainly do the best job of putting the weather gage at the back of an investor that I have come across in my 45 years of continuous work in this field. One has a piece of Gorham silver in his collection that shows a mad painter riding a squid, in a squall, with sea monsters attacking him on all fronts, painting a beautiful picture, caressing a magnificent girl, and calming the sea at the same time. It brings to mind Gavekal research. Better yet, from Sound of Music, "how do you catch a cloud and pin it down a fibbertjibbet … a will of the wisp a clown. How do you keep a wave upon the sand? How do you hold a moonbeam in your hand?"

Louis-Vincent Gave replies:

Thanks a lot for the kind, and very flattering words. Now you’ll definitetly get our next book for free! I guess our motto might be what Lord Keynes once said: “I’d rather be approximately right than precisely wrong”. In this fast ever-changing world, that’s probably the best that we can hope for.



The GaveKal research group has an optimistic view of the forces that will affect economies across the world. This is almost the exact opposite view that Steve Roach, the Sage, the Palindrome, and the Elizabethan ghost take. Gavekal build their view on the foundation that globalization, industry de-regulation, technological processes, smaller families, the spread of the internet, low volatility as a result of more stable employment, and the emergence of the platform companies guided by trade and the invisible hand will lead to low inflation, a high profit margin, and an ebullient stock market environment. They make a written case for this in their book Our Brave New World and in two research reports, The Invisible Hand's Impressive Work and Welling @ Weeden Brave New World. I have read all these reports and I feel like one of the doubters described by Thomas Kuhn in The Structure of Scientific Revolution, although every serious student of Austrian Economics, Adam Smith, and Dimson, Marsh and Staunton should know that equity prices are incessantly going up and that Gavekal's view, opposite to that of the Abelprechfaberoachbuffesoros', will lead to great riches anyway.

Despite this, a close reading of the work shows that they build their view from many concepts and buzz words of economics, finance, and business management that are completely untested, and counterbalanced by many more incisive and useful economic theories. Their recommendations as to what to do with their work are fuzzy and are not particularly likely to lead to above average profits. 

Central to their view is that a new kind of company has emerged, which is the platform company. This kind of company consistently increases its profits by concentrating mainly on design and marketing its products. It has no need for outside capital, and it buys all its goods from companies in China and India that do the unprofitable manufacturing and inventorying, and care only about employment. But is any part of this assertion true? Are such companies more prevalent than they were before? Do they make greater returns? Are they better buys than companies in China where there are 3000 ball bearing manufacturers, and 300 automobile manufactures? Do companies that outsource manufacturing, or do service companies, make a higher return than others? Is there an increasing number of such companies and will this lead to higher or lower returns? An extensive list of linked queries and studies with ever-changing answers will determine whether this is a useful concept.

Another pillar of their argument is that we are moving toward perfect competition and perfect information where companies such as Walmart, Carrefour, Ikea, Li and Fung, and the IDS group, are the optimum investment issues and models for others to follow. This will lead to constantly decreasing prices in the bottom end of the market where the masses buy their goods, and higher prices at the top end where the rich are constantly finding it more expensive to be rich/individual. The cost of capital will remain low, prices will continue to drop, and excess capacity will develop.

I find no reason to believe that excess capacity will develop, as decision makers are very knowledgeable and they all wish to increase their wealth and opportunity. Continued above average rates of return on investment are highly transitory, subject to great competition and affected by many shifts in regimes and tastes. I doubt that Chinese manufacturers will constantly realize declining profits, and that platform companies will be able to garner these to any greater extent than the more integrated manufacturing companies that were the standard model in the older days. Such suppositions would again have to be tested. 

One of their favorite points, which many of their conclusions are based on, is a very elementary form of the quantity theory of money; mv1 + mv2 = p1t1 + p2t2 — They believe that one part of the right side of the equation increases, and that the other side will decrease.

In opposition to this belief, velocity is always changing and there is constant substitution between goods, and shifts in demand and supply. To assume knowledge of velocity or to assume its constancy is to conclude that interest rates, and competition and substitution, don't come into play. They conclude that there will be higher rates of inflation for luxury goods, an irresistible rise of real estate, declining volatility, the propriety of taking on more debt, and the chronic tendency to over-capacity. These conclusions are based on a simple model of the quantity theory, related fixed shibboleths about the rigidity of capital, and the continuation of present trends. Here's one of their typical conclusions, which I find no supporting evidence for, except for that it explains some of the movements of markets in 2003-2005.

"As the prices of financial services and luxury goods are driven persistently higher, service producing countries such as Britain, Honk Kong, or the U.S. get richer relative to countries which specialize in manufacturing … The virtual limitless supply of cheap labor and capital in China, and the chronic misallocations of capital ensures that manufactured goods continue to get cheaper." 

One of their 'buzz' subjects is the idea of Schumpeterian Growth versus Ricardian Growth . Schumpeterian Growth is driven by technology and disruption and leads to income disparities, which the lower part of the distribution will accept because of their hopes for the future. Ricardian Growth is driven by efficiency and liquidity, and investment banks have been key to providing this, thereby smoothing out our business cycles. Gavekal believe that politicians have striven too much to provide for the dark, lower side of the disruption, and that's why the U.S. has grown faster than Europe. Does such a typology have any predictive or descriptive value?

The investment conclusions that Gavekal develops in Brave New World are by far their weakest and most naive chapter. However, as they have pointed out to me in their above note, the book was dated 2005, and they constantly change the specifics of their recommendations based on changing applications of their basic principles and framework tailored to current shifts in the international competitive situation, foreign exchange and commodity market trends, and changes in monetary policy. The jury is still out on their ability to fathom the changes in monetary policy better than the next Fed watcher and I would recommend that they pay much more attention to the term structure of interest rates, especially the long term bond rate as a very accurate indicator of inflation. However, unlike the current naysayers who believe that the Fed Funds Rate is all that matters and this is totally in the control of the Fed, I agree with their focus on the old fashioned bond vigilantes as the posse that tells us what, who, and when it's good and bad.

Their first investment conclusion is that to avoid index funds, one should employ reversion to the mean strategies. The second is that one should identify momentum strategies and get in and out at the right time, and the third is that one should employ carry trade strategies by borrowing at low rates and investing at high rates, and:

"hope that the markets remain continuous. Most of the arbitrage type of hedge funds run some kind of carry trade." They conclude that macro type managers "are most likely to perceive the important changes in the investment climate." 

After a thorough immersion in GaveKal, I conclude that they suffer from the use of naive tools of economics, a view that the recent trends of the world will continue, a lack of appreciation of the forces of change and competition for rates of return, and a naiveté about how to invest. And yet, their world view, which is based on the creative and resilient power of capitalism, will lead one to far greater success over the long term than the doomsday view of the Abelprechfabers, which they counter at every turn. Hopefully, they will improve on their models, develop some more rigorous economic tools to support their work, and sharpen the practical investment conclusions that flow from their firm in the future.

James Sogi comments:

… a new kind of company has emerged, which is the platform company. This kind of company consistently increases its profits by concentrating mainly on design and marketing its products. It has no need for outside capital, and it buys all its goods from companies in China and India that do the unprofitable manufacturing and inventorying, and care only about employment. But is any part of this assertion true?

Here is an example. I bought a coffee grinder some time ago. It was a good one, and the distributor replaced the broken canister part last year. But when the main gear broke, this question arose: Is there a coffee grinder repair shop or small appliance repair anywhere in town that does not charge a minimum greater than the cost of buying a new one shipped from China at a price that does not also provide profits for the importer, the distributor, the shipper, the warehouseman and advertiser? After great debate in our house, another question arose: Does not the labor of the grinder in China or India greatly benefit from the opportunity to lift themselves out of subsistence and into the global market, and in two generations soon lead the world?

Gabriel Ivan replies:

Does not the labor of the grinder in China or India greatly benefit from the opportunity to lift themselves out of subsistence and into the global market, and in two generations soon lead the world?

They will certainly benefit (and they ought to), but in order to lead the world, one needs to builds its foundation on more than cheap labor. "The Birth of Plenty" explains the factors of wealth creation better than I can attempt to. (find the 1st chapter free here).

This goes to validate (in my opinion) this 1997 paper, and will have a huge impact on where I'll focus my investment efforts. I would test these regressions across sectors myself, but unfortunately I don't have the tools (prices database).

keep looking »


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