Prom king and queen1. It is absurd to contemplate the ¼% movements in the S&P these days within a two minute period and to realize without looking at the news or having any outside contact that one can predict exactly what it was. A man was spotted at an airport in a polyester suit with a briefcase labeled S&P, Moody's, or Fitch depending on how South the airport was and the extent of the move.

2. A very interesting article in the Economist of Feb 2010 says that "the market makes the manners." The gist was that during the height of the economy tailspin everyone was nicer. A merger specialist says that when he went to tout a deal to a bank CEO, the bank CEO in the past would have his secretary usher him out after five minutes as he walked past 50 of his competitors. Now he says he gets an hour interview, the bank CEO tells him what the strategy is, and then walks him out to his car. Similarly with venture capital firms taking a few hours to tell management consultant how they see things. What is the economic explanation for this? The Freakonomics explanation? Or the Landsburgian explanation? And what is the market significance of this? How can it be used in romance and money-making?

Alston Mabry comments:

One thinks of the difference between the girl who has ten boys asking her to the prom, and the girl who has only one. Maybe there is an optimal number of suitors to maximize humility and minimize bitterness — say, two.

But the idea of manners, and the recent televised Capitol prom to which the former partners were invited (and surely there will be more dances this season), brings to mind Tullock and his insights about productive versus unproductive competition. How much greater is the aggregate cost than the illusory benefit?

Tyler Cowen suggests: 

More "marketing" because companies are more desperate for new business.

Also, high unemployment means that higher IQ people are in lower-tier service jobs and higher IQ people are in general more cooperative.



Inigo v. WestleyThe Princess Bride Swordfight Scene shows a gentlemen's prelude, and how concealed ambidexterity can be a secret weapon, but can also backfire.

You will see Inigo Montoya very chivalrously allowing the Dread Pirate Roberts, aka Westley, to catch his breath after scaling a sheer cliff wall before beginning their swordfight.

Then as concealed ambidexterity is applied and revealed by both fencers one after another, the tables turn and turn yet again. But really the chivalrous Spaniard's eventual loss was sealed the moment he allowed Westley to clamber up over the cliff edge.

Chivalry, malevolence or (unjustified) pride in one's abilities?

Chris Tucker adds:

"The Princess Bride" is a movie that Aubrey simply must see. I love this movie; so do my kids. We find ourselves quoting Inigo at work frequently. "I do notta suppose you coulda speed things up?" or "I'm going to do him left-handed" or "You know what a hurry we're in!" or "It's the only way I can be satisfied" or "Inconceivable!" or "You keep on using that word. I do notta think it means what you think it means." Mandy Patinkin is priceless!

Bill Rafter adds:

"Never try to outwit a Sicilian," and "Do I have to get a new giant?"

Russ Sears writes:

My high school aged daughter tells me it is quoted all the time around her clique. Quoting it is the inside joke/ litmus test for those with verbal IQ versus those clueless.



will-o-the-wsipAside from all the games named after the frigid weather in Scotland where the only thing to do in the winter was drink and play checkers — the Ayrshire Lassie et. al. — there is a game named after another common situation: the Will of the Wisp. How often do we see a market move which is beautiful but can't be acted upon? A move in Japan where the bid and ask is one or two minis a side, or a move on a holiday in Europe when the US isn't open. Or a move in one market that — had your own market been open — you could have aced. What other will of the wisps are there in markets and life besides the checker game where it looks like you have a win, but it's really a loss, forgetting about the romantic situations for a moment.

Ken Drees elaborates:

From Wikipedia:

The will-o'-the-wisp can be found in numerous folk tales around the United Kingdom, and is often a malicious character in the stories. In Welsh folklore, it is said that the light is 'fairy fire' held in the hand of a pwca (compare Puck), a small goblin-like fairy that mischievously leads lone travelers off the beaten path at night. As the traveller follows the pwca through the marsh or bog, the fire is extinguished, leaving the man lost. The pwca is said to be one of the Tylwyth Teg, or fairy family. In Wales the light predicts a funeral that will take place soon in the locality.

Wirt Sikes in his book British Goblins mentions a Welsh tale about pwca. A peasant traveling home at dusk spots a bright light traveling along ahead of him. Looking closer, he sees that the light is a lantern held by a "dusky little figure", which he follows for several miles. All of a sudden he finds himself standing on the edge of a vast chasm with a roaring torrent of water rushing below him. At that precise moment the lantern-carrier leaps across the gap, lifts the light high over its head, lets out a malicious laugh and blows out the light, leaving the poor peasant a long way from home, standing in pitch darkness at the edge of a precipice. This is a fairly common cautionary tale concerning the phenomenon; however, the Ignis Fatuus was not always considered dangerous.

There are some tales told about the will-o'-the-wisp being guardians of treasure, much like the Irish leprechaun leading those brave enough to follow them to sure riches. Other stories tell of travelers getting lost in the woodland and coming upon a will-o'-the-wisp, and depending on how they treated the will-o'-the-wisp, the spirit would either get them lost further in the woods or guide them out. Also related, the Pixy-light from Devon and Cornwall is most often associated with the Pixie who often has "pixie-led" travelers away from the safe and reliable route, and into the bogs with glowing lights. "Like Poltergeist they can generate uncanny sounds. They were less serious than their German Weisse Frauen kin, frequently blowing out candles on unsuspecting courting couples or producing obscene kissing sounds, which were always misinterpreted by parents." Pixy-Light was also associated with "lambent light" which the "Old Norse" might have seen guarding their tombs.

In Cornish folklore, Pixy-Light also has associations with the Colt Pixy. "A colt pixie is a pixie that has taken the shape of a horse and enjoys playing tricks such as neighing at the other horses to lead them astray". It may well be said that the wild colt pixy would sometimes bedevil regular horses on a ride and cause them to lead their human masters into a predicament or hazard, and might have yielded the pixy - horse name variation.

In Guernsey, the light is known as the faeu boulanger (rolling fire), and is believed to be a lost soul. On being confronted with the spectre, tradition prescribes two remedies. The first is to turn one's cap or coat inside out. This has the effect of stopping the faeu boulanger in its tracks. The other solution is to stick a knife into the ground, blade up. The faeu, in an attempt to kill itself, will attack the blade.

Easan Katir comments:

Similarly, the Tibetan Book of the Dead warns against following the dully-glowing lessers lights beguiling the in-transit soul to fall to the lower bardos. Rather, seek the clear white light to the heavenly lokas and beyond.

Coincidentally, Darby O'Gill and the Little People aired on the movie channel yesterday, featuring a very young Sean Connery, thematically followed, as one would almost predict, by The Gnome Mobile, featuring a perennially-old Walter Brennan, and the usual Disney stable of supporting roles. One observed a striking resemblance of the GS CEO with a gnome, that same sly impish grin.



 How often does it occur in martial arts like the battle of King Arthur and King Pellinore that one combatant lets the other up for a breather out of chivalry or malevolence and then loses the battle as the other side takes the opportunity to turn the tables. What is the market analogy of this and can it be quantified before noon?

Ralph Vince comments:

Hmmm, letting your opponent up… constitutes a new fight altogether… and as I always say, "In any fight– anything can happen." (Not that I've ever been in a fight — I've just heard in passing…)

You can never be sure of anything, and all the planning and training in the world go out the window the moment it's on.

And scale doesn't matter — be it on the individual level (remember that bum who knocked out Lennox Lewis some years back, with just one lucky, little pop) or on the scale of nations (Iraq should have been a cakewalk, right?).

It's a new fight, and in any fight anything can happen — which is why fights should be avoided. There are those fights that will find their way to me that I won't be able to avoid, so I don't need to look for fights, and, if unavoidable, always take them very seriously.

Ralph Vince is the author of The Leverage Space Trading Model, Wiley, 2009

Art Cooper writes:

Mr. Sogi once recounted a personal experience of this: He represented the plaintiff in a lawsuit to recover money owed to it by the defendant. Just before the case was to be heard, defendant's attorney asked Mr. Sogi for a minute to use the restroom. Mr. Sogi obliged. (What reasonable person could refuse?) Defendant's attorney used the "bathroom break" to walk down the hall of the Courthouse and file for bankruptcy, thereby insulating his client against plaintiff's claim.

Sri Viswanath comments:

Jake LaMotta vs. Sugar Ray RobinsonA nice analogy for us sports fans… The Colts' undefeated season (would have been the first since the '73 Miami Dolphins) was "donated" as the coach benched starters much to their dismay against one the arguably worst teams and 'succeeded' in collecting a loss. This 'success' was later repeated a few weeks later in the Superbowl.

Also in pugalism, something I know a bit about as an amateur, often playing possum was a great success of Sugar Ray Robinson in his later career and many younger opponents eased up on the old man, who later took his payments with additional compounded interest. A similar thing happened in the amateur olympics in boxing in Beijing and most famously in pro football when a team removes its starters to rest its players and then proceeds to loose on a 'miraculous comeback.'

Another fake chivalry was observed yesterday at downtown building. A young man getting out of elevator made a huge gesture for a shapely young woman coming out of the elevator to proceed first. After you, my dear…But then as the woman proceeds out, the chivalrous young suitor goes in for the kill and checks out her assets and proceeds to make jokes with friends. The female turns around a then lands the knockout punch with a slap to the face and a 'how dare you'….. a lil lagniappe from the new south. female victorious again.

Max Greene replies:

I don't believe the patriots example quite fits what you were going for in the realm of chivalry. The pats were resting starters so that they would win it all, not out of courtesy or kindness. They were doing that as a strategy to win it all, not to succeed in losing that game. Often football players (injury risks) rest the big players before the playoffs because failure to protect a big player in an irrelevant game could cost a coach his job or the team their chances in the playoffs. Like the ropadope, this is a strategy tailored specifically for the situation to win (like a poison pawn). Mercy is not often found in football or the market.

The best sport to look for tradition and codes of the older guard (chivarly, honor, respect) was, is, and always will be baseball. The few examples I can think of off the top of my head in other sports and its not easy are in basketball it is customary to stop dunking and shooting 3's when up by a lot in someone else's house. That's courtesy, but on top of that the bench players usually enter the game or the starters go into cruise control (holding the ball long into the shot clock and not being as aggresive on offense or defense). So instead of driving the stake through, they leave the window open, as many great playoff games have shown, the opposing team can come back and win and have.

The 2nd example I can think of is when a great hitter is at the plate, and the opposing pitcher has the dignity and honor to go after him and "attack the zone" instead of simply throwing him garbage and hoping he swings. If the hitter's team were down and men on base, pitching to pujols could let them back in it. But not ever giving him pitches to hit is not dignified in the eyes of many.

The 3rd is when a hitter is down in the count maybe 0-2 (0 balls and 2 strikes). The pitcher may decide to throw 3 straight balls and see if he will chase or can do the honorable thing and continue to attack the zone the same as he would if the count were even. Often pitchers who do the honorable thing can get hurt badly by not stomping on the throat when they had the chance. The simplest analogy would be individual sports like tennis or boxing. Since it does not take a team decision to be chivalrous. I know all too well the pitfalls of not attacking an opponent when he's down (hence my notorious rep for coming like a mad bull from behind but losing even some of the biggest leads).

Thomas Brittain remarks:

Don’t be nice and testify in front of Congress. They will only card-stack all of the information available and try to make you look like a fool.

Victor Niederhoffer replies:

I may be excessively naïve but relative to the hearings, it seems more like the situation where a judge is definitely going to rule against you but he leans over backward to give you every benefit of the doubt in the trial so your appeal will not get to first base. The Dershowitz thing where he is asked to sit as the head of all the committees that are going to choose the establishment for the chairmanship so they can't say there was anti "scholarship" involved. The Zacharian thing "your own man says you were out." After giving the colleagues a few centi centis they are called in, "I'm going to have to give you a drubbing in public. Hope you don't mind. Otherwise we're both going to have egg on face." But I have no experience on this and certainly think this a very appropriate function of the legislative branch and related helpful executive entities.



As another benign FOMC day passes, the spread between Fed funds and 10 year Treasury stays at 350 basis points. I would propose that on average the spread is around 150 bp and probably where it should be now given the inflation cycle. So that extra 200 bp, multiplied times all the money market funds, demand deposits and cash, gets seamlessly and efficiently transferred to the deserving parties. While one branch of government puts on a side show, another takes care of important issues.



The young man wakes up, sings, "Those Magnificent Men in Their Flying Machines , They go uppity up up, they go downdity down down."

Were Orville and Wilbur in it?

"Orville was, but he didn't win because he had to help a German. Those Frenchies always know where they're going."



Freedom of Speech by Norman RockwellMy brother Stan and I went to many different schools. I was the 'new kid' at 12 different schools, my brother a few more. Plus as preacher’s kids, whose father was always trying to help new or struggling rural churches, we went to countless different churches. Both of us were scrawny and lanky, dressed as only devoted fundamentalist Baptist parents dressed their kids in the 70’s; all the bullies came out to be our welcoming committee. But they had to go through my big brother first.

In the tradition of big brothers, he was the only one that could beat me up. What none of these bullies knew until it was too late: Stan had seen this all before. Stan may have been tall and skinny but he was a brawler. Those that were not as spontaneously ingenious in the heat of the battle, may say he did not fight fair. But Stan after surprising his attackers by his swiftness, skill, cunning and fierceness, always gave them a second chance and let them up.

One of his memorable fights, Stan let the Head Deacon’s kid go after breaking his fingers in response to being attacked behind the Church. The next service the Deacon's kid brought his fat friend twice Stan’s size and cornered him in a Sunday School room. Stan broke the Deacon’s kid’s nose with a chair, then cracked a few ribs and kneed him in the groin. The fat kid seeing the results quickly left. Stan would always go after the leader and before the followers could pile on, he would in seconds show there was hell to pay.

Perhaps it was part chivalry, or perhaps he felt sorry for them falling for the baited ambush. After all these were not the truly dangerous hardened criminal inner-city street thugs. These were small town rural farmer kids, bullies that only thought they were tough (this was before small towns become havens for poverty, drug infested and hide outs for small time gangs).

But he told me a couple times afterwards that the second fight is when the real battle began. He knew the bullies could not walk away even for their own good. They would not admit defeat to a skinny outsider, until real damage was done. It was only the second battle that would win their respect. It was only then would they accept him. Stan would often make friends with those bullies early on, or sometimes they simply accepted a stand-off. Hurting them, once, no matter how bad, would escalate the battles. It was only if you could increase the cost by several order in magnitude in the second battle would there be lasting peace.

My big brother was respected by these kids and I never really had to deal with the harassment. No peer pressure to smoke or do drugs, because Stan let them know I was off limits.

This toughness may have helped him survive when we did finally move to the big city, Kansas City, MO. But it may have also given him too much access to  real trouble. But this is a different story.



Vis a vis the recent downgrade of Spain, the proverb of the day is "put a former unfreeman on a horse, and he will gallop."

Vince Fulco writes:

Reminds me of a story I heard recently whereby lawyers are working with clients to obtain rock bottom reappraisals in exchange for 75% of the first year's property tax savings. 



One pronounces that there was a 10% move from a previous high in EuroStoxx 50, and thus proclaims if I were a charlatan that we are entering "a correction" or "a bear market". Perhaps one of the other 200 markets is below its high also.



 It is chilly as we step out onto the front lawn. The sky is a bit dark and the clouds skirting by overhead carry a hint of menace. And it is snowing. But the flakes are large and pink. There is a constant stream of them fluttering in the breeze as they drop from the blossoms of the big cherry tree that overhangs the driveway. There is a thick carpet of pink fluff covering the grass and blowing in swirls down the street.

The kids and I don helmets and mount our bicycles for a trek around the neighborhood. The wind bites as it cuts right through my normally cozy sweatshirt. As we climb a small hill I look over my shoulder and notice my son has stopped and is looking down at something on the pavement. It's a squirrel that has been struck by a car and luckily is thoroughly dead. My son looks down with curiosity and obvious empathy for the poor creatures plight. "Dad!" my daughter shouts, "Can we cut it open? I wanna see its brains!", this last with a bit more glee than I care to see in such a situation. "Don't touch it" I say, "you can get very sick". "Can I run it over?" she asks. "I already did by accident" my son moans. I drag them away and we zoom down the incline with the chill wind at our backs. We round a couple of turns and begin the climb up the tiny but steep hill with the big cherry tree on top that signals our yard ahead. Again I look back to see how my son is managing and I see that he is off his bike and crying loudly. I dash back and ask him how he has hurt himself, "What happened? Are you okay?". He is inconsolable, sobbing and squealing, tears pouring down his face, his chest heaving. "What is it Jack?". "Its not me", he moans between sobs. "Its because of the squirrel". Mom rushes out the front door to console him. We stand together for a moment amidst the swirling cherry blossom snow.

We get inside, I wrap both hands around a hot mug of tea and we sit at the kitchen table. "I really wanted to see its brains!" my daughter squeals with obvious delight and a wicked smile. "I think when I grow up I'll be a doctor 'cause then I can do a surgery and see someone's brains!" My poor son sits with his face in his hands, still gasping a bit and trying to catch his breath, mom hovering over him to see how she can help.

As he regains his composure I am struck by how completely different they are. And how much like their dad.

Scott Brooks writes:

Great story, Chris!

One of the great pleasures we have had on the Brooks Farms is to dissect the animals we've harvested. I know this squirrel was not killed by you guys, but getting a plastic bag and dissecting the squirrel could have very well put your son at ease. Get some surgical gloves or plastic gloves from the local drug store or big box store and make it a learning experience.

Use it as an opportunity to explain to your kids anatomy, the science of life and how the animal kingdom operates. I explained to my children how the death of an animal is no tragedy and is just part of the whole cycle of life in this world.

I should write more about that someday soon to add clarity to that somewhat vague last sentence, but it's 4:23 am and I have to wake the kids up shortly so we can go out turkey hunting and partake of the many life lessons that are involved in hunting, harvesting, dressing eating and "recycling" of the wild game that are on our farm.



 Something I found on my way to looking for something else:

"We haven't yet seen full-blown panic in Th**land, but the situation (and the Th** Capital Fund's NAV) is well worth monitoring if you'relooking for a contrarian investment in a solid emerging market."



Indiana JonesSimilar to the markets that over time work on similar plot lines and themes, one of Hollywood's classic formulas for success is to make a movie that has plot lines that were popular and well regarded in previously released very successful films:

"Days of Thunder", starring Tom Cruise, was essentially the same film as another Tom Cruise blockbuster, "Top Gun". Same theme, just change fighter aircraft for race cars. Why didn't they just name Thunder as "Top Car"?

"Cinderella Man", starring Russell Crowe, is essentially the same film as "Rocky", starring Sly Stallone.

"The Curious Case of Benjamin Button"–perhaps that movie could have been called, "The Curious Case of Forest Gump".

Avatar takes it over the top. Last night I came up with an algorithm for the film: Star Wars + Dances with Wolves + Last of the Mohicans + Terminator + Shrek + Indiana Jones #4 = The biggest grossing film of all time.

Gibbons Burke comments:

Thus it was ever so…

PIXAR used the story of Kurosawa's Seven Samurai for A Bug's Life. Kurosawa did the same thing with Shakespeare plots for many of his movies, eg. Throne of Blood=Macbeth, RAN=King Lear. Shakespeare did the same thing with older stories, (Hamlet is one) which are now mostly forgotten, so thoroughly did the bard eclipse their work.



A few years ago I started noticing, the Chair terming the TA-25 as the pilot fish many a times. Does this new high there indicate something in today's times? How would one study such a thought methodically?



 Last summer I had to take down a large Birch tree that had died from infestation of Bronze Birch Borers. The tree overhung the site where I was preparing to build a shed and I decided to remove it first to prevent damaging my new creation.

Upon climbing the tree in preparation for its removal I found myself reflecting on trading metaphors. There are tremendous risks in being high in a tree with a powerful chainsaw.

When one gets very high in the branches of a tree one finds it is critical to take the effects of the prevailing wind into account before doing anything. The wind can determine which part of the tree to remove first and where to drop the debris.

I think about safety first and at all times during the operation. I wear a climbing harness and attach myself to the trunk of the tree in two places with two separate lines. I pay close attention to where I place my feet and hands.

Familiarize yourself with the tree. Is it recently dead or has it been for some time? Can it be climbed safely or should it be taken down from below or from a cherry picker? A recently green tree will support large weights on a one inch diameter branch, a dry or rotten tree will do no such thing. Can you drop branches safely or are you too close to the house? Sometimes each piece has to be secured prior to cutting and lowered carefully with a line.

Use a ladder to get into the tree. Tie the ladder off to the tree in a way that prevents it from wobbling or rotating. In markets, sometimes one must stand on others shoulders to get oneself in place.

Have the necessary tools with you before you climb. It is time and energy consuming to have to go back for them. And not having the proper tool can induce you to use the wrong one rather than go all the way down and back to do it right.

Be familiar with your tools and know how to use them and care for them. Powerful tools, like leverage, allow you to do big jobs quickly but they bring powerful risks. It is amazing the number of ways a chainsaw can ruin your day. Chainsaws can bounce back out of the cut right at you so it is important to keep your face and body off to one side when cutting. Chains can break and fly back as well and fly or wrap in entirely unexpected directions. Be aware of the damage that your tools can do to you, not just the tree. Pay attention to them and treat them with the respect they deserve. Try to make allowances for the unpredicted. I've seen a chain fly off the saw and become entangled around the large branch it just removed and very nearly pull the user out of the tree.

Secure heavy tools to you or to the tree with a line strong enough to hoist them but light enough to part if the tool becomes ensnared in falling debris.

Never start using a heavy power tool until you have secure footing. I usually rest my weight into the harness and let my lifelines support me, using my feet to keep me stable.

Take your time. Being rushed will get you hurt.

Never bite off more than you can chew. When removing large portions of the tree with a single cut, they can behave in unpredictable ways, such as twisting or bouncing the tree or grabbing your lifeline and pulling it down with them. Once a very heavy piece begins to fall, there is absolutely nothing you can do to stop it.

Never extend your reach beyond what is comfortable. Using a tool at more than arms length puts you in a position that prevents you from reacting quickly if something goes wrong. It puts undue stress on you and the tool. It removes whatever leverage you have on the tool. It also prevents you from "feeling" properly through the tool. When using a power tool you receive signals about the material you are cutting and the nature of the stresses on that material. You can always tell when a branch is about to go if you are listening carefully to the tool. That feedback is denegrated by reaching too far or by using only one hand.

Several years ago a friend was cutting off a tremendous horizontal limb from a large oak. He was on a ladder extended to its maximum height and leaned up against the limb. The ladder was resting on the limb between the trunk and the cut and as the limb came off, this stub end jumped up and the ladder fell away beneath it. My friend tossed the saw and grabbed the three foot thick trunk and tried to hold on but slid down and finally fell off, shattering his femur and tearing up his chest and the insides of his arms. Had he and the ladder been secured to the tree he probably would not have fallen.

What have I missed?

Scott Brooks adds:

Hunting is considered by many to be a dangerous activity, what with a bunch of guys running around with shotguns or rifles. However, there are very few actual injuries from shooting accidents. The main cause of accidents are not the inanimate objects that send forth projectiles, but another inanimate object…tree stands.

Every year, people who feel that they are immune from the laws of gravity climb into stands and sit or stand waiting for their prey to wander by. And every year there are people who are stunned to find out that the laws of gravity are much more brutal and punishing than they thought.

There are only two types of tree stand hunters: Those that have fallen and those that haven't fallen yet. No matter how much you think you'll be able to hang on, or how adept your dexterity, you simply can't react fast enough to ward off an accident or mechanical failure.

I can personally attest to the feeling of bile rising in my throat from the fear of lost balance while perched 15 up in the air…and that was when I was wearing a safety strap.

I have a standing rule on my land. If you climb up into a tree stand, you must not only wear a safety strap, but it must be the first thing you put on when you get into the stand, and the last thing you take off when you climb down. I have asked (told) people to leave my farm because I caught them up in a tree without a safety strap.

So why even climb a tree stand if it has that much risk? It's about risk vs. return. I love the return I get from arrowing a nice buck. Same is true with trading. I love it when I get a great return for my clients. But the reality is that it's important to wear a safety strap when trading. Just as I profited in my poker playing days by taking a slow grind it out approach (never going all in), I do the same with trading. I'm satisfied with the inferior returns of a non-leveraged portfolio. My theory is that the more you leverage, the higher you're climbing and the thinner your safety strap gets.

All of my bad losses and sleepless nights have come from leveraging or taking too much risk.

That's why I'm a pretty boring guy these days.

Jim Sogi comments:

Professional tree trimmers all use a belay.  Mountain climbers also belay themselves for protection or to 'hedge' their position in case of a fall.

Ken Drees writes:

Never lend your chainsaw to someone who doesn't use them much. As in don't give stock advice to people or just give them advice that is general in nature–this saves on friends. Always remember torque and twist. If you don't read and predict how the cut will behave, rethink it. I have seen trees twist and pull the wrong direction, seen limbs bind back on the saw and have trees fall off course because of hidden dead spots. Be ready for the twist of the market as it takes your trade and bends it slightly the wrong way. Once I saw a dead tree being taken down by a friend. This large straight tree as it was falling broke apart into 3 huge sections. The trunk part closest to the ground went the right way and the other two in tangents like a V. Market wise–don't mess around with a junk-trade–its just not worth it and you can get hurt. And lastly don't drink beer before operating a chainsaw, nor chop wood with only shorts on, or put your hot saw down in a pile of dead leaves.

Pitt T. Maner III adds:

 Ok, this is a little bit like what I have been doing the past 2 years–namely Health and Safety oversight for pipeline and tank construction workers… guess who the least favorite person on the jobsite is?

There are probably better business analogies than below but here it goes (this is the short list! and not complete by any means, OSHA website would be a good resource):

1. I would have a health and safety plan in place with contact numbers and how to get to the hospital. Is there a written plan of action for each step of the process with the risks involved and the ways to mitigate the risk. (Investment plan)

2. Use a "buddy system". Have a friend nearby that can help you in case of an emergency. Have a 1st Aid Kit and someone Red Cross trained in 1st Aid and CPR. (Mentors and advice of others)

3. Survey the tree to make sure there are no hazards you have missed. Electrical lines. Red ants. Poisonous plants. etc. Ask yourself what is the worse thing that could happen (What could go wrong with your investment? What could come back to bite you?)

4. Inspect your equipment. Is your climbing harness worn anywhere? Are the lanyards of the proper length? (Guys have died or hurt themselves badly by not having the proper length on the lanyard, yeah they had their fall protection on it just didn't stop them in time from hitting the ground). Is the ladder rated for your weight? Do you have a GFCI if you are using an electric chan saw? Do you have cut resistant gloves? Do you have on hearing and eye protection? Level D OSHA clothes?

5. If it is hot or cold you need to take a break. Drink water. If you get tired you are more likely to make a mistake. (Take regular breaks from the computer screen)

6. Do you have enough light? Night time operations are doubly dangerous for workers. You need visibility. (Transparency in your investments)

7. Have you set up for disposing of the branches and such. You don't want the city to fine you unnecessarily for yard trash. (Tax consequences)

8. Wouldn't it be cheaper given the risks to have a professional service do it? (ETFs/mutual funds vs. individual management)

9. Are you sure the tree won't fall on someone else's property or their fence? (What are the liability issues?)

10. If I do get hurt what will the effects be to my family and others? Do I have the skills, knowledge, and physical abilities necessary to do the job right and do I understand the risks? Am I in a good state of mind and able to stay calm and not get angry if something doesn't work out right? Do I have a fear of heights?

We always carry a card around in the wallet for safety reference and it sort of boils down to 3 steps: 1) Assess; 2) Analyze; and then 3) Act.

It sounds like overkill but an effective safety "culture" within companies has been shown to dramatically reduce injuries, deaths and all sorts of economic and emotional costs. And it is a good idea to teach everyone at home how to stay safe too. If you do not have a sense of vulnerability then you are susceptible to hurting yourself or others around you.

Russ Sears comments:

In the last four years I took down three cedar trees that were dying. Here are a few things I did that were missing from the lists above.

1. Limit the access to the area. Shut down the drive-way, no extra people or kids allowed etc. Tree cutting is not a spectator sport. The trading room is sacred. No extra people or kids. Never show off.

2. Notify the neighbors when near their property. Likewise no kids. They let me know if they would be outside etc. I worked around their schedule. When working with others money, its all about them, not you.

3. Call the buried cable hot-line to have it marked before. Know the hidden risks and try to avoid them.

4. Have lots of rope. Extra rope tied to the tree and other trees can help prevent the tree from going the wrong way onto the house. Controlled slack on a large trade is a must.

5. Keep the area clean, limbs dragged away as they are cut. You never know when you may need that exit.

6. Rent what you do not have, but get the right size saw above all. It may cost more, but do it right.

7. Have patience. Take it in small pieces. It is only impressive in the vast woods when it all comes down at once. In your yard it will only be damage. Know your size. And do not try to meet a schedule. Pay that extra day's rent, Leave the stump up till next weekend. Do not try to swing for the fences to meet some arbitrary goal. 

Vincent Andres writes:

All valuable advice in this tree thread! Not to say it's missing, but I often add an iron chain as a line (with mountain climbing equipment).

Among dangerous things a falling tree is able to do, having the foliage act like a spring is a rather vicious one. The tree falls nicely with its big round green foliage, everything seems OK, but the green foliage is slowly compressed/crushed (for 2 or 3 seconds) and then the compressed unbroken foliage uncompresses and moves the 3 ton trunk in whichever direction. If you're in the way you're killed without even noticing it. (Certainly a market analogy here!)Folded branches are also a very classic cause of injures.

Many things can happen when cutting trees– unexpected things, so as a general rule, better be largely too cautious then slightly too incautious. Even if other people do not understand, you are in the tree with the chainsaw, not them.



Logo of American and Foreign Power CompanyHow does a company like DuPont have a book of 5 bucks a share when it's been earning 2.00 a share for 100 years? Part of it is that it pays dividends of 85% of earnings. The kind of stock my grandfather would have recommended for me along with American & Foreign Power. Couldn't go wrong with that 10% dividend — until they were nationalized. That corporation was another of his favorites besides Union.

Rocky Humbert comments:

DuPont has been a poster child for the Modigliani-Miller theorem. They've been increasing leverage and buying back stock for years, which — depending on the price paid — can cause a perverse and self-reinforcing decline in book value. And even with a low book value, about 61% of their shareholder equity is goodwill. But their ROE looks very sweet at 25+%.

Ironically, DuPont was originally a dynamite manufacturer. Dynamite funded the Nobel Prize. Modigliani-Miller won the Nobel prize in 1985. So the circle is unbroken. 

Yishen Kuik writes:

A more extreme example is Colgate Palmolive, which at one time had negative book value. The shareholder's equity portion is still a negative number, and the persistent accumulation of retained earnings has since brought book value back to positive. It still probably has some fantastic price to book ratio.

Rocky Humbert adds:

The following stocks all have market caps over $1 Billion and negative book values:


The significance of this phenomenon is left as an exercise for the reader.

Sushil Kedia comments:

Historical Accounting leaves disproportionate under-priced assets due to inflation on the books making book-value appear to be very small in comparison to earnings, for very old and profitable companies that distribute large dividends.

For younger companies in fortune businesses such as exploration, new molecule discovery etc. anticipations of a breakthrough can have large market caps and low hard assets.

Franchise businesses, including those that thrive on brands such as Colgate, customer loyalty concepts etc. will have a very large proportion of assets that are intangible and never appear on the books of accounts making book values very small.

Companies that have dominantly assets with large depreciation rates allowed too will have lower than average b/p price ratios.

Companies that have taken over larger companies would have a lot of ethereal assets termed as "goodwill" making low b/p ratios again.

Phil McDonnell writes:

I note that Colgate has a return on equity of 90% according to Yahoo data. Big Blue reported today. They currently have a respectable 77% ROE. They are paying an increased dividend and buying back stock. To me it is interesting that the large stable companies that are doing this also have fairly large goodwill entries, as Sushil noted. For example Colgate has about $2B in goodwill on the books. Usually this means they paid too much for an acquisition. Too much means they paid more than the book value of the assets acquired. But in the case of stock buyback if the company buys its own stock at market, which is higher than its book value per share then presumably that shortfall is recorded as goodwill. If the stock rises or has risen in the past then that may mean there is hidden asset value on the books in some sense.

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

Steve Ellison observes:

I am looking at Oracle's 10K. Oracle used $3960 million of cash in 2009 to repurchase shares. On the statement of stockholders' equity, Oracle reduced common stock by $550 million and reduced retained earnings by $3410 million. Thus the effect of share repurchases was to reduce stockholders' equity, but this effect was more than offset by the increase in stockholders' equity from net income of $5,593 million. 

Sushil Kedia comments:

If Inflation Accounting seminars held by so many august Accounting Bodies all over the world in the last two decades could not decipher how it could really be done, assume for a moment at some point it will be done correctly.

But then the book-keepers that produce the inflation estimates and keep revising them invariably all over the globe (I guess all gummints are at least alike on this parameter whether they be Capitalists or Communists) are also just book-keepers.

So, this one conundrum will never be solved.

In recent decades there have been some high-brow management consultancy firms that are peddling ideas of Brand Valuation. But then if a company could own a brand worth a Billion Dollars and make only continuous losses their ability and talent at producing so much red is eventually leaving a value on the table of that Brand at just a risk adjusted present value aggregate of these losses as a negative number only. Brand Valuation as an Accountancy tool has no place in the Accounting World, save for nice trips to Bermuda for such conferences.

Replacement Cost Theories have been used and rather mis-used to pamper the valuations of cash-loss generating companies on an idea that it would cost so much to build this same factory today at the extreme end of bull-runs.

Then they say Cash is King. But the King everywhere in this Universe has been only trashing cash ever since it was invented. So, we go back to the beginning of this note. All roads lead to Rome, in the world of Fundamentals.

So what Fundamentals are we talking about at any point and under any framework?

At least the price followers, even if prices are manipulable and get manipulated every now and then are having a far simpler illusion of suffering from knowledge and the best part is this manipulation keeps coming regularly, tick by tick. The follower of price action recognizes if there is an incentive to an economic activity, it is happening already. So, irrespective of whether prices are manipulated or they are not, the stimulus to any system of taking decisions is consistent.

The Fundamental Manipulations are erratic, supposed to be non-existent until an Enron comes by every now and then while they are happening throughout erratically and then with an endless battery of ideal world assumptions the whole Art of Fundamental Analysis has such elegant and consistent formulae for everything. The quantitative screens in each and every idea in the universe of fundamentals is so self-sufficing and yet this form of art never could get known to be any variation of Quantitative Finance.

I am not against Fundamentals at all, but just wish my elegantly consistent brothers and sisters in this art form acknowledge the fool's paradise they are keeping building.



A young Bill Gates posing for a teen magazineLike great music in movies.

They say a great movie soundtrack is one that contributes much to the movie but isn't noticed apart from the movie.
I would like to offer a word of thanks to whoever finds the wonderful pictures to accompany posts on DailySpeculations. The pictures always seem to make the posts better, but they don't intrude. Instead they somehow add meaning, insight, and depth to posts. DailySpeculations pictures are usually striking and thought-provoking, yet they somehow don't distract. And when the pictures change for a post, it usually suggests a new perspective.

I just want to say thanks to the entrepreneur at work here.

Maybe too we could inquire if there are lessons to be learned from the quiet value pictures and design add. Is there prediction value in noticing which firms figure out how to produce attractive products? Dell, HP, and Microsoft are usually overshadowed by the ultra-beautiful design and graphics of Apple. But those involved in the early days of personal computers remember that Microsoft software was always professionally designed and usually more attractive than competitors' products. Was this a clue that could have tipped off early investors?

Amazon's webpages were always attractive as well as functional. Target stores are well-designed compared to competitors like K-Mart. Starbucks stores and products were always well-designed. Not everything well-made is beautiful of course. Subarus seem well-made and functional but avoid looking too elegant.

In the investment world, what can we learn from the design and images in Annual Reports? When they are too pretty, is that a sign firms are hiding mediocre results in fancy packages? But DailySpeculations pictures aren't always beautiful, instead they always seem appropriate and meaningful.

Are there investment signals to be found from Annual Reports with attractive and relevant pictures, compared to those and those whose pictures may be fancy but somehow don't fit? What about company websites? If a company's President and staff don't notice or care what their website looks like, is that a sign of mismanagement elsewhere in the firm? Could a team of graphic designers give us investment advice from reviewing Annual Report pictures and company website design? They would know when pictures are too professional and expensive and unnecessary for websites and reports.

Virginia Postrel's book The Substance of Style sports an elegant and interesting cover. Should investors be concerned about too much style with company products? The elegant design of Apple products seems matched by the value inside, at least as measured by Apple's steadily climbing stock value.

In any case, three cheers for those who take the time to find the right pictures for DailySpeculations posts…



One of the most fascinating characters from our early MSN Money articles was Mark F. Kessenich, Jr., the bond trader.  We interviewed him in November 2000 when he was already suffering from Lou Gehrig's Disease; he passed away on March 20, 2001.  For those interested ten years later, here is a link to our original article "A Trader Triumphs as His Era Ends."

Suffering through the health care system can be almost worse than the disease, and patients with MDA/ALS (Lou Gehrig's disease) have a rough time. Patients need help to breathe, eat, move around, communicate and cope. Families need counseling and practical help. Mark Kessenich saw the need for a multidisciplinary approach. Insurance companies didn't pay for it. So Mark raised a $3 million endowment to establish a center at the University of Miami that would provide that care. Mark's son, Paul, tells me that the Kessenich Family MDA/ALS Center continues, supported by the annual Kess ALS Cup Golf Tournament. To make a donation or learn more about the golf tournament and the center's work, visit the university's Kessenich Family MDA/ALS Center Web site . Vic and I were very inspired by Mark's bravery, and he makes life worth living for many for years to come.



Martha StewartOne of my daughters is not very experienced at handling money, so my wife suggested that she buy some stocks to put her foot in the water. She chose company names she knew and liked like Netflix and Martha Stewart and American Apparel. "A young person's portfolio," her broker said. On average they are up 25% in the last two months.

In looking at her portfolio, I made a Baconian mistake. I said Martha Stewart is losing money on every sale and the sales are down. Don't buy it. It couldn't be good. My wife said, "She has to learn. Let her do it it." That one's up 40% or so. I am reminded of the time Collab and I were in our first six months of writing. Five of my daughters or siblings came to me over a weekend with requests to start or fund an Internet company. As I said at the time, "if so many people are coming to me, down on my luck and fortune, why imagine what the supply and backlog must be among the real players. It's about to burst." One has similar thoughts about my daughter's good fortune.

Sushil Kedia adds his two cents:

netflixMy two cents:

1) In the beginning we always call them lucky only. Too little data to conclude yet. Commonsense becomes more and more uncommon as each of us goes onto accumulate experience and other tools. Let her have her way. Let her find her own victories and lessons.

2) When my daughter would begin trading in some years, I would go short or long against her positions on a paper trading system I will maintain quietly and separately. Once her positions are closed by her, I would share my paper-trading risk management system with her to see where the deviations are. I would let her learn from my mistakes and wins against her rhythm, without pulling her away from her own. 

Michael Cohn shares:

american apparel"The Junk Rally & Quants: guru Matt Rothman says both quant and fundamental metrics continue to struggle in the 'junk' rally as Valuation remains 'largely irrelevant'. His models continue to show that stocks with variables such as the high short interest, weak b/s, highest beta, continue to significantly outperform. So how long can the junk rally go? The current low quality rally started March '09 is among the longest such rally on record, but, the underperformance of 'Quality' stocks is still only now a 'moderate' (9%) versus (10-18%) u/p of similar periods since the 1950s."

This seems to be a widespread issue according to Barclays.

Ken Drees adds:

Always jump on beginner's luck if you can.



Cormorant fishing1. An important point from Galton's The Art of Travel:

Cormorants in China fish during the winter from October to May, working from 10am to 5pm, at which hour their dinner is given to them. A straw tie is put around their necks to keep them from swallowing. When a fish is captured, an oar is held out for the fish to step upon. (However, it requires caution to train a cormorant because the bird has a habit when angry of striking with the beak at the instructor's eye, with an astonishing rapid and sure strike.

Moving back to the concept of the selfish price, might the same be said of very direct day trading systems systems for capturing market prey with the price acting as the cormorant?

2. What is the miner's canary for the market? Might one suggest that one forgo looking at silver, the scholarly market, the Parisian trends, the emerging performance, the moves in the ted spread and the Fed model, but turn to the cormorants. Note that they worked from 9 to 5 in 1861 a good 70 years before the 8 hour work week became standard, and their prediction record for the stock market might be as good as the woebegone reveler that Nock found in the Wigwam the day of the election never getting through the end of Marching Through Georgia.

Ken Drees writes:

 One of my favorite books read to me as a child was about a Chinese duck trained to fish for an Asian man/boy who was a little free with his stick if the duck was tardy on his way to the fishing grounds, The pictures were very interesting and delightful, showing the entire fishing scenes from olden days. I would recommend this book for Aubrey.

It's amazing how the post about cormorants triggered this memory. I remember seeing the metal rings around the necks of the birds in my mind. 



Francis GaltonOne of the more fascinating vignettes in The Art of Travel is "how to load men and cattle so as to obtain the greatest amount of labour". If they carry a light weight they can go great distances, but if they carry too heavy a weight, they can go no distance at all. What's the optimum load so as to obtain the greatest useful effort?

The answer according to Galton is simple and has wide applicability. "It is equally true for men, animals or machines and wholly independent of the way in which power is supplied."

(Carrying or drawing, rowing, or winding with a tread mill) let b be the maximum load a person can hold without moving at all. Let d be the maximum distance he could travel if unloaded. L the optimum load is 4/9 of b. And the distance he can travel OP with that optimum load is 1/3 of d.

For example, if he is brought to a standstill with a load of 270 pounds, and can walk 33 miles without any weight, the optimum weight to carry is 120 pounds and he would be able to carry it 11 miles. To find the maximum load a person can hold without moving an intermediate equation for any L and OP can be used. l d x d = b ( d- op) ( d - op) can be used. For example, if a man is able to walk 10 miles with a load of 130 pounds and 33 miles when he carries nothing, the the standstill weight will be 267.

This problem and situation has wide applicability to life and markets. For example, when considering an investment, the margin might substitute for L the standstill load and r the return for the distance he could travel if carrying no load. The problem also seems to cover the amount of vig one can take on. Or the selling price relative to the cost for a manufacturing process. How could this equation be made useful in a world of randomness, and what applicability to markets and life do you find? This is just one of a hundred ingenious and suggestive passages that I am finding in The Art of Travel that set the mind spinning.

Sushil Kedia comments:

 During my Post-graduation days when I used to take a 4 hour long journey each side from the Institute to my home-town every weekend by train, I rummaged much on this thought.

A huge army of porters in their red and white uniforms at each of the railway platforms would seem to be gliding effortlessly ahead with loads that seemed always Herculean. Is it sheer practice, raw muscle power or a specific skill I wondered for many of these journeys.

Then an idea struck why the larger bags are being stretched along the back and the porters invariably lean forward or why would they be hanging a largish bag on one arm while holding a bunch of three heavy bags atop their skull?

Center of Gravity is what their acquired skill could adjust well. The amount of friction and the pressure on the muscles is a function of the gravitational pull of the load being borne.

I am trying hinting that indeed with skill and practice, the amount of Optimal Load can change across the cross section of similar other variables.

In life, I received a counsel from an uncle in later years, that the weight of relationships is managed only by adjusting the center of gravity and not by acquiring a handle or level of strength greater than others involved.

Similarly in markets, the expanse of risk in your different holdings when balanced appropriately to align the center of gravity through the body of your finances will let you achieve a greater productive leverage.



San Felipe Beach in BajaThe hard-hit Baja economy daily takes me to the dumps so that I fulfill a childhood dream to live in a junkyard. It is a three-mile thick, 10-mile long ring around San Felipe that is Shangri-La with distinct subcultures.

"There was no competition three years ago before Mexico followed USA into collapse," a walking scavenger lamented a week ago. Most pickers hike with a pointed stick and flour sack for little treasures: clothes, recyclable cans, and toys. They are the dregs of the dump caste. Better push wheelbarrows or bicycles with saddlebags to stuff with cardboard, fishnets, tarps and rope to construct huts that dot the landscape till the next windstorm. The upper crust drive beat-up pickups with a picnic packing family to cull furniture, metals ($.20/kg), and tires as they go. I'm one of a class on a ’03 125hp Yamaha Breeze ATV to range the archives to pick shorts, joggers and jackets, baskets to carry them in, and discarded pineapple rinds from Pinacolata beach vendors to ferment wine.

The dump is also Mother Nature’s barrel. I saw a Great Blue Heron defend his great stack of 2' filleted fish. Walking backwards, I was a step from a 3' western diamondback rattler searching rats. One afternoon, a mew cut the silence and three little kittens tumbled out of a packing crate. In ensuing days I brought them milk and a first meal of tuna, until they disappeared. I sat hypnotized on a couch at four vultures pecking a dead dog's testicles.

I could do terrible things to people who dump unwanted things by the roadside. And today, I sat down for one reason or another and was stung on the buttock by a scorpion. I looked at the 2'' green critter hanging by the tail, he nailed me a second time, and dropped to the ground with legs kicking at the sky. I don't need good food, I don't enjoy flashy cars, I don't parade nice clothes, and I don’t care if I live in a dump. Rubbish! This is the most fun I’ve had in months, and the best dressed I've been.

Craig Mee comments:

 I think of trading when reading the following. (No doubt Bo would have a few things to add)

An excerpt from Vagabonding by Rolf Potts:

For the first time vagabonder, of course, preparation is a down right necessity — if for no other reason to familiarize yourself with the fundamental routines of travel, to learn what wonders and challengers await, and to assuage the fears that inevitable accompany any life-changing new pursuits.The key to preparation is to strike a balance between knowing what is out there and being optimistically ignorant. The gift of the information age, after all, is knowing your options — not your destiny — and those people who plan their travels with the idea of eliminating all uncertainty and unpredictability are missing out on the whole point of leaving home in the first place." *"The goal of preparation, then , is not knowing exactly where youll go but being confident nonetheless that you'll get there. This means that your attitude will be more important than your itinerary, and that the simple willingness to improvise is more vital , in the long run, than research. After all, your very first day on the road — in making travel immediate and real- could very well revolutionize every idea you ever gleamed in the library."

"As John Steinbeck wrote in Travels with Charley, "once a journey is designed, equipped, and put in process, a new factor enters and takes over. A trip, a safari, and exporation, is an entity… no two are alike. And all plans, safeguards, policing and coercion are fruitless. We find that after years of struggle we do not take a trip a trip takes us."



ava gardnerOne is amazed by the similarities between the market and the femme fatale. Especially when you continue to chase the market with expectations of a reversal that never comes.

The more you chase it, the more parabolically it goes up. No matter how you count or look at indicators and candles, it simply goes up. When you finally give up, that is when the market surprises you once more with a sudden reversal and drop of prices.

In same way, you chase the femme fatale and that keeps you hooked and brings you near self destruction and obsession. When you finally give up exhausted and frustrated, she gets back at you once again. Looking for her prey…



The currently available data for M2, a slightly broad definition of money supply, show continued restrictive behavior. That restriction may be caused by the Fed, or it may simply be a lack of willingness of banks to lend. Regardless, the outcome means that inflation is not a risk in the foreseeable future. If anything the risk is for deflation if this continues.

Dr. Rafter is President of Mathematical Investment Decisions, a quantitative research consultancy



 One is astonished at how far the subject of position sizing has come since Robert Bacon in 1940 when he suggested 2% of your money on each bet, then a buck on the races so you could lose 50 in a row before going under.

How about an approach where position size was a variable that you put in your statistical return and reward space to start with, then examine the distribution of returns with various positions sizes and determine how your utility fits in with the distribution.

For example, today a 20 day high of 230, indeed a 1½ year high. What is the distribution of the six such?  Max 4.8, min -5, moves to relevant endpoint 2, 5, 2, 2, 1, 5, -2, 3. No trade from Bacon. Wait for overlay. Pittsburgh Phil in the background.

Phil McDonnell writes:

The hard truth, to me, is that it is all position sizing. –Ralph Vince

I agree with this only up to a point. In order to have a winning strategy one must have an edge in a statistical sense. You cannot win with a losing system. One needs both a winning system with an edge and a solid money management system. Neither one alone is sufficient.

After one finds a winning system then you must also have a money management system that does not expose you to ruinous losses. If you graph the expected amount of money you make at various position sizes for any winning system you will find that it looks like a mountain. The peak of the mountain occurs at precisely the positions size Ralph calls optimal f. But if you also look at a chart of risk (stdev) you find it is a monotoncally rising function of position size. Thus as you continue past the optimal f point you are giving back return but still increasing risk. It is the worst of both worlds. If you go far enough past it you can actually wind up losing money even with an overall winning system. That is why I prefer to call the optimal f point the point of maximal investment return.

kahneman receiving nobel prizeWith respect to Vic's comment about utility, there is much merit to this approach. None of us truly knows our utility function and if you believe Kahneman and Tversky it is probably irrational anyway. So then the next best thing is to construct a rational function mathematically from some logical first principles. The three most obvious choices are Sharpe ratio, log, and my favorite is log log Sharpe ratio. Except for the simple log function, one invariably finds that using these utility functions one chooses a point on the mountain graph somewhat to the left of the optimal f peak. So in that sense optimal f is really only 'optimal' for the case of maximizing compounded portfolio return but is sub-optimal and dangerously past the optimal point for maximizing any utility which explicitly takes risk into account.

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

Ralph Vince adds:

I agree with most of what you say here. Like the old Frenchman used to say, "Most people don't know what makes them tick; they only know that they tick."

Most people do not really know what they are in the markets for — and I think there are very many different and good reasons for being in the markets aside from mere growth maximization. But most don't know what they are here for.

I think until someone can answer that they're probably better off not being in this arena. But I no longer think one needs a winning strategy, and I beg to differ with the notion that you must have a positive expectation (and, this too further indicates that timing and selection are subordinate to sizing). Ultimately, you are in this for a finite number of holding periods or trades (call this T) , and given that you have control over your quantity, you seek to come out at T (or before, if you have achieved the objective of your criteria) with the objective of your criteria.

Again, and I will use this for illustration of the idea — if I could do a full martingale on my capital, and I had unlimited capital, and my goal was to accumulate, say, X……

I could then do a full martingale on a losing system, and when X was achieved (or at necessarily time T) leave the game.

I know for years I too bought into the idea that you have to have a winning system. But I am seeing guys who have specified their criteria well, and are getting astounding results, and are trading approaches that are, at best, feeble. 

Ralph Vince is the author of The Leverage Space Trading Model, Wiley, 2009

Phil McDonnell replies:

I would love to see an example of a system that had a negative expectation but could somehow be turned into a positive expectation through money management. The martingale example is a system that exchanges a high probability of winning a small amount for the small probability of losing a large amount.

Examples of such 'systems' with skewed distributions would include:

  1. Selling out of the money options.
  2. Setting a profit target of $1 with a stop of a $10 loss.

Until I see one I shall remain skeptical that one can reliably expect to profit from a losing system simply through money management.

Rocky Humbert:

As a philosophical matter, I question whether a system can truly have a negative expectation. Because if you take a system that supposedly has a negative expectation and simply do the exact opposite, you should have a system with a positive expectation. I am skeptical that any market participant believes that his approach has a negative expectation.

If you have ever tried to play checkers to lose (instead of win), you'll see just how difficult this can be.

(Note that I am excluding transaction costs from this discussion. But there should be no a priori (efficient market) reason to believe that always buying out of the money options should have a better result than always selling out of the money options– unless there is a systematic mispricing.)

Steve Ellison comments:

crapsAny casino game is a system with a negative expectation for the player (except a blackjack card counter). In craps, one can bet against the shooter, but the expectation is still negative. The only way to take the other side is to be the house. 

George Parkanyi writes:

In my REAP system (Relational Equity Allocation Program), I made the position size a function of the relative separation ( % move of X minus the %move of Y determined the % of position X to sell to fund the purchase of position Y) between two securities made over time. You can re-allocate based on a specific net separation (e.g. 30%) or re-allocate at specific time periods come what may. This has a positive expectation over long periods, because there is dollar-cost averaging dynamic involved - a more aggressive version because fewer shares are sold of the relatively higher security, and more shares bought of the relatively lower security, and the wider the separation the larger the re-allocation size. The compounding over time depends on the volatility (and therefore degree of divergence and funds transfer) between the matched securities.

Trade sizing can also be used for money management in trend following. The simple principle of scaling into a position as it rises keeps your risk relatively low on initial entry, and there is a cushion of profit to fund the risk of subsequent higher-up scaling purchases. Here again, you can optimize by how high you go before adding, and what tranche sizes you add at each level. The trade-off is that you limit your profit potential by scaling, but your stop-outs are cheaper, and waiting to add provides confirmation of the trend.

I currently am using a 40-30-30 scaling sequence, using a specific setup pattern rather than a fixed % rise (e.g. 0%, 10%, 20%). You could use a relatively wide stop on the first tranche, or really keep your costs down and use a very tight stop that allows several inexpensive stop-outs before you "latch". The latter is a better way to go I think if you are trading breakouts and strength patterns. A good break-out doesn't look back, so your tight stop doesn't factor in. If you have to stop out 3 to 4 times before you catch it, you can still keep your misfire costs low.

Rocky Humbert:

Fair point. I was referring to the financial markets (and not casinos,) but you can indeed buy and hold the shares of publicly traded casino companies and you are taking the other (positive expected) side.

Turning a system upside down highlights an additional phenomenon: path dependency can determine whether one is a trading "genius" or "moron."

Nigel Davies comments:

Fascinating discussion.

If I might offer my two cents I've found that in my field there are an immense number of practical difficulties in bringing a nice piece of theory to the board. From my amateur perspective I see many issues with regards to the subject under discussion:

a) A maximum loss size implies that you have a clearly defined exit point, i.e you are trading with stops of some kind and these can nonetheless leave you a winning system.

b) Assuming you have your exit point, how realistic is it that this will be achieved (slippage etc).

c) Does assigning all trades the same position size represent maximum efficiency? I suggest that some are much better than others and should therefore be weighted more heavily.

I'm sure that readers of this site can think of many more issues such as these. This in turn makes me wonder about the utility of trying to apply very precise mathematics to practical and very messy issues. Surely it should come with a good sized dollop of common sense and flexibility in which good lab experiments are regarded as mission statements rather than straight jacket rules.

Of course doing this is an art in itself which will extends into all sorts of psychological nuances. If anyone is unable to do this they should be looking to work on themselves rather than 'the system'. Discovering the reasons why people can't operate effectively under pressure is very valuable, both in the markets and in life.

Craig Mee responds:

Fair call, Nigel, though the one thing I would have to agree about on the surface but disagree on is "I suggest that some are much better than others and should therefore be weighted more heavily."

It had been my humble experience that the trades I thought were crackers ended up as duds, and those I thought were tradable, but just above the criteria, turned out to be 4-10 baggers. Setting the same cash risk, at the start was imperative across the board.

Nigel Davies writes:

 Well, yes, that can be a tricky one. But if one's assessment of bullitude/bearitude is unreliable vis a vis degree, what makes you so sure that they're not completely the wrong way round!? It could be that 'sure thing' trades lower one's vigilance in which case we're back to the human factor. Anyhow, now I'm more awake I can think of some other flies in the ointment in this position sizing debate. What about:

a) The good part time trader with a day job who wants to build up capital. Perhaps he should he push the boat out more at first so as to get a big enough account to go professional.

b) The improving trader; shouldn't he trade small size whilst learning?

c) The successful professional trader who wants to protect capital. Shouldn't he gradually reduce size rather than have his entire wealth and livelihood on the line.

Don't get me wrong, I think that an understanding of position size risks is essential. But there's a lot more to this than just numbers.



an illustration of momentumTo what extent is there momentum in the surprise of quarterly earnings reports and is it reflected in similar moves in individual stocks or stock markets?

Steve Ellison writes:

I studied the impact of earnings by comparing the movements of the S&P 500 during the second half of the first month of each calendar quarter, when the market receives much new information about earnings, with the subsequent 2½-month period in which there is much less earnings news. For 2003 through 2009, I found a negative correlation with a t stat of -2.18. Interestingly, when I repeated the same test with 1990s data, I got a positive correlation with a t stat of +2.11 — changing cycles, again.

Philip J. McDonnell comments:

I would conjecture the Sarbanes Oxley Act of 2002 may be the line of demarcation between positive and negative correlation.



It always interesting observing price action between instruments and then weighing up the need to trade on these observations.

Watching for example $/¥ get smoked the other other day as the share markets got hosed, with the argument being there will be unwind of the carry on any sustained selloff. As the world equities bounced back, two days of rallying in $/¥ followed, though what was interesting was as the U.S equity futures suffered in Asia Thursday, were we going to see any significant selling? It appeared not, with the market holding up relatively well.

What happened to the correlation? And is this a sign that there would be further follow through buying? Should we gear up when we notice these medium term broken relationships across markets? What it does show is traders suffering, the market still caught short, and that there will be a need to unwind these positions, should there be any reason to do do. The squeeze just keeps squeezing. After this the market could be just as prone to establish contraction as further expansion, unless fundamentals provide a new catalyst for a move.



Time once again to see what % gain needed to get to even after X% loss:

           % gain needed
% loss      back to even
-10       11
-15       18
-20       25
-25       33
-30       43
-35       54
-40       67
-45       82
-50       100
-55       122
-60       150
-65       186
-70       233
-75       300
-80       400
-85       567
-90       900
-95       1900
-100     Robert Mugabe



 Please tolerate the mumbo as a brief preamble: While using a number of standard TA tools, including the TD indicators on intraday trading I have found my discretionary triggers shift down to a lower time interval whenever there are larger price moves beginning to happen vis-a-vis the recent few days price amplitudes/movements.

In simpler words, I have been finding it profitable to visualize that the speed of the market or the internal time of the market starts moving faster than the clock time when larger moves are happening. The counting of number of price bars with a high higher than X bars ago or number of price bars closing lower than Y bars ago etc. works better on smaller clock time frames in faster moving markets.

In the past, concepts as equivolume charts have been dissected under the quantitative spatulas here.

Wonder, if some of you better endowed quantitative minds will explore and play with equi-move charts kind of ideas which could begin with some measures of a type of volatility calculation such as the Mean Absolute Deviation over any period of clock time.

There is likely, a set of methods for cooking nice meals. Hope the process of shredding this idea will give some more clues on how to get there.



"Took me about 9 years to complete it from a kit, of which about a year was getting the d!!! FAA bureaucrats to sign the Air Worthiness Certificate," said Bill. "I shudder to think of the same kind of people now running our health care!"



From Peter Huber:

None of the computer models predicts that CO2 alone can deliver much warming for a long time to come. What the models predict instead is that a small amount of CO2-induced warming will lead to a slight increase in the amount of water vapor in the air, which will then cause much sharper warming because water is a much more powerful greenhouse gas. But more water in the air means more clouds—water aerosols—which, depending on their shape and altitude, may either warm things further (by reflecting more outbound heat back to earth) or cool things down (by reflecting more inbound heat back into outer space). To get things right, the computer must also correctly model the heat-reflecting capabilities of all the other aerosols, ice, tundra, and forests, and the carbon-sinking capabilities of all the life, soil, land, and water on the planet. And correctly model how every predicted change in climate might subtly change all those factors. Any mistake made in what’s predicted for 2020 will amplify the error in what’s predicted for 2030, and so on. Predictive models of all but very simple, stable systems amplify their own mistakes.

Pitt T. Maner III comments:

Anyone who has tried to play the following computer model game has a feel for the complexity and unintended consequences of manipulating single parameters. I always ended up with an ocean -dominated, Neptune-like world populated by intelligent fishes or a burned up planet hotter than Hades.

Are there any new sim games that are useful training tools for market participants? I remember Capitalism was an early business simulation game.

Being able to play with environmental models or business models and observe the effects of changing parameters would seem to be a good educational tool for many these days and an aid toward deeper understanding.



Many of you have heard me rail about the misapplication of the Kelly Criterion in trading, having witnessed firsthand how many funds are misapplying it. A typical conversation starts out with my being asked what someone should do when his allocation, as given by the Kelly Criterion, "…is greater than 100%." Repeatedly I have made the argument that the Kelly Criterion is not Optimal f, and that people conflate the two. A paper on my web site finally articulates that. Scroll about halfway down the page, in the "Related" section is a link to my paper "Optimal f and the Kelly Criterion."

Max Dama comments:

I really like your exploration of the leverage curve and I'm glad I have someone to talk to about these things. Sometimes I feel that public debate is too sharp, but it's not meant to be that way.

A few things worth noting:

1) (p5) You said, "Since the Kelly Criterion, (1,1a,1b[r=0]), requires percentage returns as input, whereas the more general Optimal f solution requires raw data points." Kelly can be similarly calculated based on raw data, as I showed in a note on my blog post Practical Kelly Betting II.

2) (p13) f is not bounded to the left by the Kelly Criterion. For example in the case of an even bet on a biased coin with probability of heads p, Kelly's f=2p-1<=0 for p<.5, as we intuitively expect — basically short the game if possible.

3) Bounding Optimal-f between [0,1] is simply a change of units. I wouldn't say that one or the other is better. Both have very good arguments in their favor. It's good to be aware of the merits of both. Perhaps both should be given on any fund prospectus.

4) What I don't like about your W, i.e. max loss, is that it is hard to specify. An example is in trading GOOG: The maximum you could lose is 100%, right? since it's equity and if the company goes bankrupt you potentially get nothing. You might argue to base it on historical data, but that's bad too — let's say it's one week since GOOG's IPO. Then your historical data are useless. The point is that W doesn't help, and only adds another hard to specify number into the objective function. The beauty of Kelly is that it crystallizes the essence of risk and leverage so you can see their exact interplay.

In general I would like to see more unification, rather than divisiveness. This is merely a semantic difference of course, but to move the field of risk management forward, it would be nice if the three big factions - Leverage Space, Markowitz, Kelly — could pool resources and ideas.

Max Dama blogs as Max Dama on Automated Trading

Ralph Vince replies:

These issues are addressed in the paper.

I wrote it because I was seeing the possible future damage that was likely to befall people and funds due to the misapplication of the conflated notion of the Kelly Criterion and the Optimal f notion. The values returned by the two are not the same, except in what I refer to in the paper as the "special case." It is only in the special case that the Kelly Criterion solution equals what is the optimal fraction of a stake to risk. In all other cases, it yields a greater number (with no upper bound), representing a leverage factor, and that leverage factor is the same value as the optimal fraction to wager only in the special case. This is the problem that spawned the paper as I repeatedly saw people and funds who were way over-leveraged (where there is never any benefit, only the assuming of potential future danger) because they were unaware of what the Kelly Criterion was an answer to (a leverage factor as opposed to the optimal fraction to wager).

And I find this misguided concept pervasive in the industry as well as academia. Kelly himself refers to it as the optimal fraction, but it is not. Rather, in the "special case," it is a value equal to the optimal fraction (and in all other cases, if someone thinks that are using the optimal fraction, based on the Kelly Criterion solution, they are dangerously over-leveraged beyond what is the optimal fraction).

(Incidentally, if anyone on the list is not aware of Max's blog, it is perhaps the most interesting and meaty reading out there and you're missing something terrific if you don't visit it. And Max, get back to posting on it!)

And this now addresses the notion of "more unification rather than divisiveness which you bring up." Yes, the two can be used interchangeably, and the formulas for converting between the two are provided in the paper. But why would I want to do that?

The answer provided in the objective function of the Kelly Criterion solution is the expected value of the sum of the logs of my returns (this is a meaningless value). The objective function of the Optimal f is the multiple I make on my stake on each play. This value clearly does have a certain, useful meaning. Secondly, there are many virtues to having a number bound between 0 and 1 as opposed to a value which I would have to convert to get to between 0 an 1 (these issues too, addressed in the paper, i.e. the singularity, which, if you start to examine a very bright mind as yours will find tremendous real-world benefits to this, which we won't go into right here, but I just know you will see it and fly with it), as well as allowing a combining of the assets comprising these bound values together.

(You might think I am railing against these things, but the enthusiasm to this end is, hopefully, the fuel to elicit critical examination of these existent concepts. This critical examination was clearly missing or I would not have encountered so many people and funds which were mistakenly over-levered as they were.) Divisiveness, in this aspect, is my responsibility(!) How you perceive these things — how they fit together in your mind and what you do — is your prerogative entirely. I am trying to foster your critical thinking on these aspects. Having met you, it is precisely those (far-too-rare) younger guys like yourself I am trying to stir, and the ultimate unification of these ideas will be the product of your good minds. The older fellows — we won't be here long enough to give a rat's butt what they think!

Lastly (and you mentioned Markowitz), and you have heard me rail that unlike an LSP/Optimal f -based portfolio, it does not address leverage directly. And I say that because the latter has Variance embedded (negatively) in its return aspect, rather than juxtaposed to it. Recall the Pythagorean relationship between the geometric mean, arithmetic mean, and standard deviation in the holding period returns and this becomes evident.

And when I do this, and introduce a risk metric other than variance to juxtapose it to, I find I have optimal allocations which are not on the efficient frontier of a mean-variance configured portfolio (as in the chart which follows this posting, which you have seen, for two 2-1 coin toss games played simultaneously. The mean variance portfolio, which would lie upon the diagonal line — and would, in fact, find the optimal portfolio upon it –does not when a risk metric like drawdown is imposed).

The unification of these ideas is up to guys like you. I'm just an old guy standing on the bus, stepping on people's toes. (That's my job here!) I AM trying to get you stirred and thinking on these things (and I can be, and frequently am, wrong on some of these things and other things too). From where I stand, to have guys like you thinking, critically, on all of this, and putting it together (and sharing your thoughts on it all as you do!) is infinitely better than watching people walking into the paths of loaded guns because of the very ignorance surrounding these matters that precipitated this paper.

BTW — The sun is just peeking through here, it's birdland out there. The dark, spooky Buckeye Trail is calling me, and I am going on a long, slow, indulgent slog — a sabbatical from the world for the better part of today. What could be better than that?

Steve Ellison writes: 

As a math enthusiast, I love the Optimal f formula. I have been using, it since I started trading in 2006. My biggest challenge as a practitioner has been changing cycles, i.e., the edge I thought I had based on the historical data did not continue going forward. No doubt my lack of proficiency was to blame, but several such experiences have made me more conservative about position sizing. I want a fudge factor to allow for the possibility that I might be completely wrong. At one point, I explicitly included a fudge factor in the Optimal f calculation itself, by for example adding the 22% drop in the S&P 500 on October 19, 1987 as an extra result if I was evaluating a one-day trade. Doing that sometimes turned the entire profit expectation negative, and the Optimal f calculation would quite sensibly not recommend any position size greater than zero.

I have also noticed that if I include stops as part of a trading strategy, the worst result is approximately bounded by the positioning of the stops. In such cases the Optimal f calculation sometimes seems to indicate I should use leverage. The Optimal f is between 0 and 1, but the position amount per contract is less than the dollar amount of one contract, so I would be trading on margin. If, for example, I have a worst loss of 2%, Optimal f may suggest an f$ unit of 6%, which I could interpret as 3x leverage if I understand correctly.

Ralph Vince comments:

Interesting post — but as for the bounding of f values, it turns out they are not between 0 and 1, but rather, between 0 and the sum of the probabilities of winning holding periods.

Thus (and this is where I am hoping Max and his good mind and find something new to augment what they are learning and work with in new ways I have never though of) the notion that everything is terrible sensitive to W isn't quite so (W, in fact, determines where the peak is in that window between 0 and the sum of the probabilities of winning holding periods.). Further, W is innately embedded in the Kelly Criterion calculation as well as you are working with returns (returns based on what? Well, traditionally, on the value of the underlying (times -1), or, in gambling W=-1. But, sensitivity to W isn't the biggest problem (in my humble opinion — I could be wrong, again, I throw this stuff out because I have been working with it). The biggest sensitivity is to:

the sum of the probabilities of winning holding periods (and, if holding periods are trades, assuming you are trading only 1 component, then it would be the percentage, say, of winning trades). That is what determines the upper bound.

But, in discussions with Larry Williams, because he wants weapons that won't jam when you pull them out, he wanted to know what a quick-n-dirty way to determine the Optimal f in the future would be (this really is a vital question, because what you make is predicated to where you are on the curve of f(0..1). And it turns out we can minimize the damage caused by missing the peak in the future (because we don't know where it will be) by using a value in the middle of the window, in other words, by using an f value of the sum of the probabilities of winning holding periods divided by 2.

And this is amazingly simple. And if you are right about the the sum of the probabilities of winning holding periods in the future, you have minimized the price you pay in the future by not being at the optimal f (and, you may well be at it. At worse, you will miss it by the sum of the probabilities of winning holding periods / 2 ).

And so the criticism of W in the equation really becomes not so problematic as what the the sum of the probabilities of winning holding periods will be. And if you can nail that, you've essentially predicted (as close as I can) what the optimal f in the future will be.

Ralph Vince comments:


Ouch! I was just coming back here as I really don't feel right not answering your questions — so I'll try here now.

You wrote: "[regarding the application of optimal F]…If you want to be in this game and do it mathematically correctly, expect to be nailed for equity retracements of from 30% to 95%." You go on to write, "Most brokerage firms will not even look at a CTA who has historically had a 30% drawdown, nor will they promote a futures pool or fund that has had such a drawdown."

Pretty much, though I think risk tolerances, at least for commodity funds, has gotten better. Earlier in the decade many soverign wealth funds sat through drawdowns of around 50%…..and what happened after that, in energy, the dollar, precious metals, etc., is history.

1) I have never seen a market professional recover from a 95% drawdown (without raising new capital) or a individual recover (without putting fresh capital into his account).

I personally know of two individuals who have. The mathematics of achieving such a recovery are improbable. I disagree entirely. It may seem emotionally improbable, but certainly not mathematically.

If one should "expect" to be nailed for such an outcome, please explain why optimal F approach is more than just a theoretical/mathematical construct…i.e. it's too dangerous to be used in real life? (I ask this with the greatest of respect.)

I think it's too dangerous for anyone who is NOT seeking growth optimality. And growth optimality may NOT be the criteria most funds operate upon. In fact, it's not the criteria most individuals operate upon, although I must say I see some younger guys nowadays who, understand the mathematics and the swings involved, are implementing this. Again, it's only germane if growth optimality is the criteria. HOWEVER, the framework it provides allows us to seek OTHER criteria aside from growth optimality. I have met a couple of individuals who are using this to achieve other criteria with astonishing results.

That is, if one takes the Optimal F, and then cuts the position size back by XX% (as Steve below suggested), does that harm the intellectual integrity of its application?

I don't think it harms things, but to position oneself at a different point on the curve or N+ 1 dimensional surface (where N = number of components) simply to mitigate risk, and picks this point as a mere fraction of the optimal fraction, is doing themselves a disservice. There are other viable points, significant points to be at rather than the optimal point (again, in pursuit of different criteria) but notions like the so-called "Half Kelly," etc. are silly and based in not understanding the dynamics of the curve.2) If your answer to #1 is that there is nothing inherently wrong with a 95% draw down, what sort of long term (compounded) returns do you think a
manager should achieve if he is taking that sort of risk/volatility?

Let me say this. It depends on the individuals criteria. Now, some might argue that this is appropriate for young investors (perhaps, but first, in my humble opinion, only after loading up on whole life insurance with all they can) There is a lot more to the dynamics of this stuff, Rocky, than I can describe here (Frankly, I give 2-day courses in this stuff, and always fear that it is NOT enough time to cover all I want to cover!).

3) Can you explain how optimal-F addresses market volatility at the time a trade is entered; or changes in market volatility subsequent to the trade entry?

Is the largest expected loss, the worst-case scenario you envision over the time horizon you plan to trade, affected by the volatility? Volatility doesn't alter what the optimal fraction to wager is — it CAN alter, however, what that translates to in terms of position size. 



 Aubrey sold lemonade in the heart of Wall Steet today and made a 40% on his cost which the collab put at 50 cents a cup. His selling techniques included doing a dance after each sale and hawking loudly "lemonade for sale." As Millhone would say, "I don't believe that the economy has bottomed yet" as the decline did not affect sentiment on Wall Street. Nor were competitors offended by his competition with them at the 75 cents selling price. As the bearish Barron's columnist would say, "There are still pockets of exuberance out there and until they're completely stamped out, we have not seen the lows."

John Tierney responds:

Here's another opportunity for Aubrey to pick up a little extra spare change:

(CNSNews.com) – President Obama's Environmental Protection Agency is encouraging the public to create video advertisements that explain why federal regulations are "important to everyone."

The EPA is managing the contest, part of the government’s eRulemaking program, on behalf of the entire government.

As explained in the EPA press release announcing the contest, the purpose of the videos will be to remind the public that federal regulation touches “almost every aspect” of their lives and to promote how important those regulations are.

“The contest will highlight the significance of federal regulations and help the public understand the rule making process. Federal agencies develop and issue hundreds of rules and regulations every year to implement statutes written by Congress. Almost every aspect of an individual’s life is touched by federal regulations, but many do not understand how rules are made or how they can get involved in the process.”

“Regulations have the power of law. Breaking them can result in fines and even jail time. Regulations outnumber Congressional statutes. For every statute passed by Congress and signed into law by the President, federal agencies create about 10 regulations, each of which have the force of law.”


Steve Ellison comments:

In my town in which home prices have dropped 60%, and an estimated 70% of mortgages are underwater, my wife thinks it is a good time to buy. She is finding that houses are selling quickly, and she cannot delay if she wants to visit a house she likes before it is sold. There are plenty of Millhonian signs, such as the notice of foreclosure taped to the front door of one house we drove by (when we called the agent, we found the house had already been sold), but the market is working as textbooks say it should: when prices decrease, demand increases.

I suspect there is a cognitive bias regarding change. It is very easy to notice the negative or threatening aspects of any change and who the losers might be, since we tend to think in terms of the status quo. However, it is much harder to spot the opportunities and who will benefit from the change. There are people in my town who did not go deeply into debt and still have jobs who can now afford much nicer houses.

Donald Sull, in his book The Upside of Turbulence, recounted that a business school class was assigned a project to advise Lakshmi Mittal about his steel company. The students nearly unanimously recommended that Mittal exit the steel business because severe disruptions in the industry were destroying profitability for nearly everybody. In the context of the assignment, the students had every reason to know that the main disruptive force in the industry was Mittal himself, and his company was prospering mightily. Somehow, the students could not see any benefits of industry upheaval, even when advising the chief beneficiary.



 My name is Ralph Vince, and I am grateful to be a new contributor to this site. My main interest is in allocations — relative position sizings and how to amend that through changes in time/equity. I have written a few books and papers on this. I am not employed in the markets, a conscious decision I made so as to maintain my autonomy. It has its benefits and rewards. I do trade full time, though I no longer put in the orders myself — so most days I am not watching the minute by minute, and often don't even know what positions I have on. This isn't to say I am disengaged, rather, it is to say that my strategy is not predicated on any given trade or day, but rather, their accumulation. This is what has worked for me.



Lex Luthor a.k.a The ThiefThe lineage of One's study about the types of people who disseminate their views about markets appears to originate with "Relevant Query" and is developed in "Connected Person" and elaborated by "People Who Disseminate" then spawning ideas such as those in "Vanishing and Present Types" and "The Cooler" and "Animals and Their Market Applications" and "The Bookie." I look back to one's questions as they first appear: "What are the many types of people who disseminate their views about the market? What are the major categories that I am missing or what is a better way to classify and make this useful?"

No doubt, there is a book to be done on the subject. That said…

This list is presented in order of published appearance. A caveat: "many fall into more than one category and mobile via age and wealth changes."

Enough said, so here we go…

The Connected Person, who makes you feel without saying it that she/he is or will be connected to the very lynch pin of policy at the Interior or some such.

Tout, who has position and wants you in for his/her favor.

Sponsor, who advertises or sponsors programs that treat him/her well.

Would-be-manager without funds impresses with his/her knowledge/ideas for you to join.

Old lion
, who is not virile but still fights younger from replacing him/her in power/ romance.

, who hates everything modern and wants all back to old days before tech.

Spankist, a beauty but aggrieved to give spanking unless things in order her/his way; observed to be everywhere and influence growing among spankisto and spankista's.

, who is always contrary, never reads papers or travels, and feels market is wrong.

Hole-In-Shoes, who only drinks coke and eats hamburgers, never pays a fee more than 10%.

Sanctimonious, who pretends to be honest while blind to any firm dishonesty/misdoing.

, who manipulates numbers retrospectively to allure investors.

Mystic, who looks at stars and bent keys.

Old Timer, who is guided by iron castings reports and freight car loadings and newsprint figures [sample]: all as timeless methods (non retro) with healthy respect for knowledge.

Fund Manager, who is quoted as "good buy" on stock that he/she sold bulk of before recall.

Jack of All Trades
, who explains every rise and decline due to (un)certainty about earnings and rates and other well chosen factors. Always welcome on TV because of his versatility.

Chronic Bear, who since 1966 written bearish columns with signs of optimism persisting.

Humanitarian, who finds world as selfish with only solution to be redistribution or service for poor.

The Mark, who in hushed tone, glazed eyes, reveals privileged information so as to be rich.

The Friend
, who can see "the tells" tells and tells deaf ears to exit before pocket emptied.

Permabull type likes market anywhere, anytime, well coiffed, strong BUY to partner.

Foreign Funder, who likes exotic as better value with more room for catch-up valuations.

Eminent Bank of Sweden Prize Laureates, who are trotted out by others to do the thinking.

Walter Mittyist, who is market hobbyist with secret hopes: a market philanderer.

Split-Level Dwellers, who favor inheritance taxes as the absolute "down home"

Go-Pound-Sterling types…

Delusional-Vengefulites, who are too full of themselves to see beauty of system they seek to destroy.

Boorish Loud-Mouthed Bellower of Blab, who mastered costumes and adorn picks equally garishly.

Echoing Silence of Financial Pressers
, who never explain major market move until after.

Small Echoing Would-Be-Manager, who remains silent due to fear of publicly humiliation and reverse engineer techniques she/he developed in long years of lonely silence.

Nock's Prophet of The Remnant, who with absolute assurance, has no need to advertise and makes own way without adventitious aids.

The Whodoos, the jinxes…

The Joe Bfstlks of the world…

The Ralph Kramdens, who, despite good intentions, are just plain unlucky, thus dangerous to associate with.

Poseurs, who in empty suits may be the French equivalent of "Big hat no cattle" in Texas.

Abstaining Cooks, who never eat their own meals or go in on their own stock recommendations.

Thief a la Bernie Madoff or Lex Luthor, who take the shortcut to wealth: brilliant yet totally corrupt.

Blowhard a la Jim Cramer, who "made $100 million" with results not quantifiable.

Former Champion a la Bob Prechter
, Joe Granville, or Stan Weinstein…

Celebrity a la Len Dykstra

Former-Wrestler-Who-Marries-The-Analyst, John Layfield…

The Foreigner, whose suave language skills are so impressive that he/she must know.

Self-Deprecating Genius

Infomercial Guy,
who is ubiquitous.

The Consummate Professional
, who as the active operator prognosticates on everything from currencies to value/growth trends, providing decent performance for years.

Lone Sailor, who keeps going with no one to blame for loses or wins but oneself.

Optimistic College Student, who realizes some stocks will never be this cheap again.

, who has with wine prices outperformed equities.

New Chartist, who believes future wealth is guaranteed by angles and lines on their screen.

Saboteur, who finds fault with every issue in your portfolio.

Blind Gamble, who is neither bullish nor bearish, fully leveraged or not in, thus travels the road between wealth and poverty as driving a car to work. `

Afraid-Of-His-Own-Shadow Commentator
, who measures and comments on every tick, trusts nothing, always on a business news channel or radio program about how to trade.

Conspiracy Theorist, who believes that "the banksters"/HFT traders/dark pool operators/PPT have totally rigged the market because this can't be happening on it's own.

Cloud Commentarist
, who all have related typologies and vanish into the infrastructure or "the market."

, who "thought" counting overcomes asymmetry between all edges that the boys, who made the rules and made the market, had over oneself as the optimistic contrarian.

Guy With A Theory
, who (is me and perhaps a few others, such as those on Tradestation Forum) has no real world (trading) experience, an outsider of the industry, and is dangerous more so to oneself by virtue of knowing a little bit but will not give up.



 I was recently asked by a golfer:

Here's a basic physics question for you. One golfer's clubhead speed is 100mph at impact with the ball and 105mph immediately after. He has an accelerating swing. Another golfer has 100mph clubheadspeed at impact but only 95mph immediately after. He has a decelerating swing. Assuming everything else is constant (type of ball, wind speed, etc), does one drive go farther than the other?

My attempt to answer:

The question is a surprisingly hard one, and I've thought about this kind of question in tennis as well. Here are two extreme scenarios that are easy to understand:

1) If the club (racquet) is much, much, much heavier than the ball (hitting a golf ball with a sledgehammer), then the speed of the club is all that matters.

2) On the other hand, if the club (racquet) is much, much lighter than the ball (hitting a bowling ball with a badminton racquet ), then the speed prior to collision hardly matters, and all that matters is how much you shove through during the actual collision.

In any sports/ bat/ ball/racquet situation, you're always somewhere in between the two extreme scenarios described above because that's the best way to design the bat/racquet/club. (It is analogous to having your car in the right gear for the speed that you're driving.) So there's not any simple answer except that it's somewhere "in between". It's neither 1st gear nor overdrive, but something in between. You need high speed, but also a somewhat "firm foundation". (A quibble — it will be absolutely impossible for the swing to be moving faster immediately after compared to immediately before. [I'm modeling the club-ball collision as essentially instantaneous.] Would require you to apply an infinite torque or force or whatever applied by the golfer to the club.)

Art Cooper comments:

 This seems an obvious application of the basic principle taught to someone learning how to hit a baseball: follow-through on your swing for a better hit. It must be the case that an accelerating swing in baseball, golf, tennis or anything else will impart more force (for a longer movement of the ball), because the moment of contact is longer than instantaneous. 

Sushil Kedia writes:

You have to make an assumption that the movement of the club is following a harmonic motion as in a pendulum. Highest Kinetic Energy at the point of equilibrium and zero at the extremes. Acceleration will have to be negative from equilibrium onwards.

Case 1:

Velocity of the club after impact > velocity of the club before impact: This will be possible only when the point of impact is reached before the point of equilibrium.

Assume mass of the ball is B and the acceleration it achieves on impact is A1. Then the amount of force transferred in this case is B*(A1)^2. Since there is an equal and opposite force it exerts on the club. The net acceleration of the club at the point of impact will be calculated by adjusting the existing harmonic form of the kinetic energy equation MINUS B*(A1)^2.

If this value is 105 mph it only tells us that without knowing the length of the club AND NOT just the effective weight (Center of gravity adjusted leveraged weight for the length of the club) it would be impossible to know at which angle the impact happened.

So either it is not possible for this to happen of there is inadequate data for comparison since you mention everything else is constant.

Case 2:

Velocity of the club after impact < velocity of the club before impact: Without knowing the acceleration of the ball at the point of impact (which can be estimated by estimating the values of friction, time before which the ball stops and the distance traveled) it is not possible to calculate the net force transferred by the club into the ball at the point of impact. EVEN if one assumed that the impact happened after the equilibrium point was reached on the trajectory of the club swing. It is worth mentioning here that the swing of the club would HAVE TO HAVE A NEGATIVE acceleration beyond the point of equilibrium else it is not the point of equilibrium.

So, in both cases 1 and 2 the assumption of everything else is constant is a situation of inadequate data. If however the question is implying that the club hit both the balls at the same angle, then the question is a trick and does not have a solution.

Stefan Jovanovich writes:

 Here is a link to a fascinating site called batspeed.com — the most comprehensive study of the baseball swing on the web.

Charles Pennington comments:

There's no way to solve this problem theoretically–only experimentally–but there is a good theoretical framework to think about it. You model it as a totally elastic head-on collision between a mass M moving with speed V and a mass m (the golf ball) moving with initial speed 0.

In that case, the final speed of the ball is:

v = V*(2M)/(M+m)

and the final speed Vf of the "club" (*) is

Vf = V*(M-m)/(M+m)

(Note that this is always less than V, and could even be negative, e.g. if a golf club hits a bowling ball.)

The problem is, what do we use for M? Do we use the mass of the club? The mass of the golfer who's connected to the club? The mass of the earth, which provides some friction so that the golfer doesn't slide backwards?

There are some simplifying cases:

If M>>m (sledgehammer hits golf ball), you'll see that the equation reduces to v=2V, i.e. the ball will fly off with twice the initial speed of the club.

If M<<m (feather hits golf ball), then the equation reduces to v~(2M/m)V.

The only way to find out the value of M is to do an experiment: get a real golfer, measure his (pre-collision) swing speed and the speed of the ball, and then use these equations to find the golfer's "effective M". A golfer who braces himself more and has a solid stance might have a bigger effective M than a golfer who uses a more floppy, wristy swing–but he also might have a lower V, so his shot might end up with less speed.



 Craig Mee's post noted that emergency room doctors were missing hidden stab wounds, and wondered if traders could learn from studies of such errors. I wonder too if major hidden frauds play a role in major market bubbles? Could major frauds be the hidden stab wounds that distort prices, inflate asset bubbles, and later kill these markets? We know artificial credit expansion makes long-term investments look artificially attractive by pushing down interest rates, which contributes to asset bubbles. But I wonder if major investment frauds also distort markets by creating the illusion of large and safe investment funds like Madoff's providing high and stable returns. Madoff's ever-expanding fraud was feeding false information into investment markets year after year, distorting the expectations of investors as well as influencing operations of major investment funds.

With the ongoing property bubble in China and possible return of a summer oil price bubble, it is interesting to speculate on what major firms in these markets might now be partially or largely fraudulent. How significant a role did major frauds play in past malinvestment manias? China's housing market resembles the U.S. before the crash with obvious real estate bubbles in certain overheated regions and cities. Remember that U.S. newspapers ran many major articles through 2006 and 2007 claiming U.S. real estate prices were in a bubble. People got tired of these articles as they watched prices continue to rise. Many manias and bubbles have their origins in easy money policies that artificially lower interest rates, encouraging too much long-term capital investment. The Chinese government released huge levels of easy credit intended to stimulate Chinese industry out of the 2008 crash. The last crash is often at the root of the next bubble.

Lots of this cheap Chinese government credit flowed into real estate investment and speculation. This easy money gets leveraged by local government officials with various infrastructure dreams, like the Chinese city with no people:(begins at 1:10 into the video clip). How many empty cities and airports of the future are under construction now across China? These capital investments are started on cheap credit, not enough savings will be available to complete them all. For an overview of the various interventions that fed the U.S. housing bubble and 2008 financial crash, see the FEE essay "The House that Uncle Sam Built".

Looking to the past for similar stories, an online essay argues that the British Railway mania of the 1840s was the largest speculative bubble and financial panic. I am reading Andrew Odlyzko's online essay "Collective hallucinations and inefficient markets: The British Railway Mania of the 1840s". I don't know this author, but am enjoying his essays and notes. Odlyzko argues that the railroad mania of the 1830s and the larger railroad mania of the 1840s demonstrate market failures similar to the dot.com and recent real estate bubbles in the U.S. and Europe.

I wonder to what degree major frauds played in fueling these distant and recent bubbles. Market prices can confuse and misguide investors if a significant portion of market prices are distorted by fraudulent schemes. WorldCom and Enron late in the game were both large and established firms whose fraudulently overvalued investments sent signals out to investors and other companies. These price signals and false profits continued to draw capital into a wide range of similar and complementary ventures far past the true market peak.

The Madoff fraud altered expectations for investments in large and well-regarded investment firms. How did other investment firms alter their investment strategies to provide investors competitive returns? To do this they likely took on more risk than they might otherwise in trying to match the trusted steady success of Madoff's funds. Investors who could not or did not invest in Madoff funds would expect similar returns from other established investment firms. Were the expectations created by the fast-growing Madoff funds and its feeder funds enough to distort investment behavior across the U.S., Europe, and Japan?

I don't know how large fraudulent railroad ventures were relative to the non-fraudulant (but vastly overvalued) British railroad ventures of the 1840s. The corruption generated by such frauds is portrayed in the book and BBC miniseries "How We Live Now."

The vast funds poured into fiber-optic cable networks the the late 1990s seem like similar overly optimistic misunderstanding of the possibilities of new technologies. But WorldCom and Enron's apparently massive market value for their fiber optic assets and Enron's trading operations, drew ever more funds into competitive networks and trading operations. Samuel Insull's fraud at Chicago Edison similarly misled investors in the new electric utility industry.

Trains and railroad lines, electric power and power lines, Internet firms and fiber optic lines: each share the same technology profile of major advances in transporting goods, creating vast potential gains for firms that produce and transport. Early railroads reduced transportation costs by some 70%-80%–a drop so dramatic it disrupted industry and forced quick revaluation and reorganization across a wide range of companies. But projections of railroad income would have been off if major frauds claimed much higher returns. In these new technology worlds, changing economic reality already makes valuation and prediction difficult. Which is probably why major frauds are easier to conjure, or to slide into as investment hopes go astray. So these frauds and false profits inflate new visions even further, attracting even more capital to false profit opportunities until apparent returns and risks bring them inline with other industries.

So with oil prices over $80 and major investment firms predicting over $110 by summer, we should look around to see if predictions are grounded on reasonable assumptions about the world economy. What role might environmental frauds (such as were revealed in the climate emails in regard to global warming), play in limiting or threatening oil exploration and production in the U.S. and Canada?

What if a significant percentage of cash released by the Chinese government to stimulate the economy found its way into speculating in and stockpiling oil?

Questions about oil prices arise in part because today's prices are over twice as high as equivalent energy in natural gas. Natural gas fields in Qatar next near will produce over 300,000 barrels a day of clean gasoil next year (in addition to shipping vast amounts of LNG). Some argue the gas-to-liquids technology in this $18 billion venture is too expensive and energy intensive. But if for a few million dollars a small-scale production facility could be developed and installed above a Pennsylvania shale gas field, that would be significant.

The Saudis have something like 2 million barrels a day in extra capacity they can open if they view higher prices hurting the world economy. Oil fields in Iraq are now under development and will add millions more barrels a day of production. Huge oil exploration and development projects are underway around the world, as usual.

The high oil prices of a couple years ago, coupled with the media, government, and green energy wishful thinking that high prices were here to stay, led to hundreds of billions of investment dollars poured into alternative energy technologies. And higher prices led Exxon and others to pour smart money into alternative energy, as well as ramp up traditional exploration and development.

Few fire and brimstone sermons paint Hell as horrific or as certain as the free HD Google Video documentary, Home (www.youtube.com/watch?v=jqxENMKaeCU ). "Scientists tell us that we have 10 years to change the way we live…" claims this hauntingly beautiful and thoroughly misleading documentary.

This beautiful Earth is shown endangered by trade and commerce and threatened most by one black flowing demon, the oil that feeds global agriculture, transportation, factories and homes. Our world is fragile, claims the narrator, and fated to fail catastrophically as the world economy hurtles off a Peak Oil cliff while still pouring CO2 into the atmosphere's heat-trapping blanket.

It is hard not to be moved by these 2 gigabytes of free eco-Ministry (made possible in part by the excess fiber laid down in the late dot.com years, and Google fortunes created by these cheap fiber networks). Over 6.6 million people have watched Home online, absorbing claims like: "Increasingly insatiable desires and profligacy. We know that the end of cheap oil is immanent, but we refuse to believe it." Maybe this meme beamed out to computer and high-def TV screens across the world calls wealthy investors and government officials to pour more millions into green energy promotions, just as the grand speech to investors in "The Way We Live Now" paints the dawn of a new age of railroads, calling men to action: to buy more stock and make great family fortunes with the railroad's rising sun.

Consider too that soon the entire U.S. strategic petroleum reserve will be unnecessary (or more unnecessary). As major oil fields in U.S. lands and waters come onstream, and algae-based fuels ramp up into large scale production, the U.S. won't need these reserves any more than we needed rubber trees to tap during WWII. If President Obama wants to boost his popularity and Democratic chances for the next election, he could begin to release oil from the Strategic Reserve as he announces major biofuel and U.S oil production increases.

So, how can investors and speculators spot anomalies in booming industries that might be signs of major price-distorting fraud?



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

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

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

Ralph Vince writes:


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

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

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

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

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

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

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

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

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

Gibbons Burke replies:

Interesting insight, Ralph.

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

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

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

Ralph Vince replies:

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

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

Chris Cooper writes:

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



Francis GaltonI have been looking through the book The Art of Travel by Francis Galton for all its ingenious ways of prospering and surviving in African travel with a view to the pure enjoyment of a genius at work, (about the greatest in history), as well as all the things that can help us understand where we stand today in the markets; for example, how to cache a treasure in a tree, how to sleep with a gun by your privates, how silver may be used to start life afresh, of course the herd like tendency of oxen and humans, and the difficulty of finding a leader, et. al.

Dylan Distasio shares:

For those interested in checking it out as an ebook, it is available from Project Gutenberg and also as a free download from Amazon for those with a Kindle.



California wineryThis story from Vinography.com paints a very grim picture regarding California's wine industry. Those in the know may want to comment on whether the article is too extreme or spot on.

Alston Mabry writes:

the wine industry has been suffering from the same asset inflation that the housing industry was going through. Shelves full of $40-50 bottles of Kullyfornia reds with nothing to distinguish them at all. Even Ozzie wines were getting expensive, and now with the AUD trying for par, it's even worse. But there are plenty of very drinkable wines in the $10-20 range, especially now that Costco and the like carry wine, so it's easy to downshift one's spending habits in the wine budget. Bad for the folks trying to unload inventory.

Banks would need a winery manager because they would have to make sure the stuff is properly cared for and doesn't spoil.

Having spent years making trips to various wine regions on the left coast, I was also always struck by how trendy it had become to own a winery, especially for newly rich folks from Los Angeles or San Francisco. Money was cheap, so prices just went through the roof. And then they would build these very fancy tasting rooms. Not surprising to see a crash. 



 I saw it mentioned in a newspaper article a few days back that trauma doctors are missing stab wounds, particularly under the armpit and in the groin area, leading to the death of their patient. It got me thinking about market ramifications. Which no doubt I have been guilty of more than once.

It seems the studies concluded the 'error' was human weakness, instead of anything technical i.e "limits in reflection, communication, and "metacognition" skills that allow doctors to detect and correct their errors on the fly".

Well, traders are certainly in the same predicament and need to ask themselves the same questions. What can we do as traders to keep this at bay? Better planning, more discipline, all the usual misdemeanors, or is there something else at play?

Here is an interesting study about it:

Into the big muddy and out again: Error persistence and crisis management in the operating room

The study seeks to understand and reduce fixation error (the process of sticking to a single presumed diagnosis despite mounting cues one is on the wrong track)This study highlights the fact that failures to handle OR crises effectively are related not to weaknesses in technical knowledge but rather to limits in reflection, communication, and "metacognition" skills that allow doctors to detect and correct their errors on the fly. It lends support to the idea that effective crisis management in time-constrained, high-stakes settings requires an integration of single- and double-loop problem-solving modes.



Dan BoyleGreat sports teams have a way of constantly reinventing themselves. Case in point perennial playoff choke-team San Jose Sharks, who last night found a whole new way to lose an important playoff game — fire the puck into your own net 51 seconds into overtime after you've utterly dominated the other team.

Intending ostensibly to clear the puck from the corner to his defense partner behind the net, Dan Boyle of the Sharks instead wired a very nice back-hand shot between goaltender Nabokov's leg and the goalpost to break the 0-0 deadlock and win the game — for the Colorado Avalanche. And it really was a nice shot, which made the whole thing so much more tragic-comic. In one sweeping back-hand, Dan Boyle generated more offence than the miserable 16 shots the Avalanche attack was able to muster for the whole night.

As the dejected Boyle skated past the goal, you could see Nabokov's head tracking him. I can just imagine what he might have said…

"Nice shot, Dan. I was thinking more like the win and a shut-out, but let's not go there. The world needed to see your back-hand just now– and it really was a nice one.

Or … "OK that was a really good shot, Dan. And for sure we should do this again, but how about just you and me - at practice let's say?"Or … "Dan, do you see the irony?"

Or …"So Dan, like what would your plus/minus be in this situation?"

Reminds me of my gas trading of late actually. If there's anything trading-related that would feel like a game-losing own goal in front of 20,000 people, I'd say for sure that would be it…



Flame of the WoodsEvery kid must had been told not to taste the plants and flowers growing outside; but how many of us could resist the sweet nectar from a beautiful flower, whose single drop of heaven-sent cordial is as precious and delicate as morning dew and manna.

I remember as a child, adults warning us especially against the supposedly poisonous Flame of the Woods or Ixora plant, with its bunches of wild-fiery small flowers. But we went ahead anyway.

Pluck a single fully-bloomed flower, and from the bottom of the petals, carefully poke through the base of the petals without severing the stem and puncturing the nectary near the base. If carried out properly, the style, a filament-like string should be exposed. Pull on the delicate style very gently, which should pull the attached stigma at the other end along. When the stigma gets caught at the narrow opening at the nectary, it should release the nectar, forming a single drop of sweet nectar flowing down the style. Lick. Enjoy.



a vanishing typeThere is The New Chartist who believes his future wealth and yours are guaranteed by the angles and size of the lines on his screen. He will tell you about every formation he sees and the technical strength of any stock you own free of charge.

There is The Saboteur, who will find faults with every issue in your portfolio. He will laugh heartily when you tell him what you own. He will call you on the days when your issues are pressed hard by the momentum crowd to tell you, “I told you this was going to happen.” When an issue is up, he will call to tell you to “sell into the strength.” He will always be in a strong move before you (but after the fact) and get out at the top (but after the fact). He is the most dangerous type of market prognosticator, as he comes in the form of peer, friend or mentor.

There is The Blind Gambler. He is neither bullish or bearish. He is in what ever he is in. He has all his chips in behind his bet. If he isn’t fully leveraged, it’s just not worth his time. He travels the road between wealth and poverty the way most of us drive to work. When his hunches work out, the entire world will know. However, his calls should not be taken when his bets go against him…

There is The Afraid-Of-His-Own-Shadow Commentator. Every tick is measured and commented on. Nothing should be trusted. You must wait for a pullback, but maybe the pullbacks aren’t a pullback at all and the end is near. This move can’t continue. This can’t be the bottom. I don’t like how its trading. Someone knows something. It’s too late. It’s too early. While this person has never made any money in the markets, he is always on a business news channel or radio program telling you how to trade.



woman burning stacks of worthless currency in her stove for heat in WeimarThe echoes from the days of Weimar begin to be heard. Respectable "Western" opinion (NYT, WaPo, NBC News, all cosmopolitan Canadian and European media) now blames all the world's intolerance on (1) the Israelis and (2) the one group in America — fundamentalist Christians — who think the Israelis are wise to mistrust their Islamic neighbors. There were two questions on which the varieties of Socialists in Germany in the 1920s — whether Marxist or Nationalist — always agreed: (1) the Christian churches, whether Catholic or Lutheran, needed to be severely restricted in their liberties and opinions and (2) the nation's defeat in the Great War and the financial collapse that followed were entirely the fault of the Jewish bankers in Germany and America.

Russ Sears comments:

Complexity, as in computers to cars, or jet planes can make the world safer, but often in return for that safety comes loss of control. This is why there was a spike in auto deaths after 9/11, people did not want to give up control to air regulators. http://thestatsblog.wordpress.com/2008/01/16/fear-of-flying-after-911-led-to-increase-in-auto-deaths/ This is why third party inspections are so valuable, that even the Government often can add value by running them. However, complexity can make the world more un-safe by adding risks of a chain reactions. Sometimes loss of control, by the individual, make make you safer in some situations, but in total it means there is more risks of a death spiral within the system. This is the argument for the "right to bear arms".

As I have said before to understand what happened you must look first to Model Risks, IMO. Yes, GS and most of the other investment bankers were selling complexity, however, it was not a pure buyers beware situation. As CDO's were only able to be "test driven" by the quasi regulators the rating agencies. It is much more akin to "food" inspection than automobile driving. The buyer only knew he has had food poisoning 24-48 hours after, and even then the true cause is unknown. It appears that GS handed the regulators a good sample stored properly in the freezer, and attested to the purity of the rest of the meat. They knew full well that some had been left out in the heat exposed, and they put that pile together. The rating agencies look stupid for trusting them. The cardinal rule of dealing with regulators, is never to make them look stupid.

Where the over-allocation was, however, was in model risks itself. If the buyers are too blame, it is not because they did not understand the complexity of the deal; but because they did not see that the conquest of model risks had allowed a bubble to develop. A bubble not just in housing but also any engineered financial products and vehicles tied to them including the originator investment banks. The world was blind to model risks, so that is where everybody found the best reward to risks, overwhelming the system.

It is my contention that just as "Standard Oil's" monopoly was not seen as dangerous and in opposition to capitalism itself until 20 years after it was broken up. So too will the "too big to fail" banks find themselves in 20 years.

I do not believe the the big 13 banks see this yet. But in destroying the confidence in "models"; they have destroyed themselves. They themselves are so complex, that they are run by "models" not good management . When the modelers are revealed that they are not as pure as the fallen snow. be it through French rogue trader, AIG's CDS writers or GS CDO cherry picking, it becomes clear that rather than minimally adding efficiency to the system, by being too big to fail, they exponentially add risks to the system by bring nuclear potential to it without a way to "trust but verify". I simply would perfer to see this break-up through market pressure, rather than regulatory. However there is no pity on the guy that makes the king look like a fool.



the coolerWhy is it that when I get a strong feeling that the market should do x, and if not then it will then do an strong inverse of x — the market throws a card called a "cooler"?

A "cooler" in poker is a card that cools off the drawing action of the bettors — for example a deuce that matches no suit after a flop of high cards with multiple drawing chances.

I should really fade every strong feeling I have, or at least temper my emotion and realize that I will most likely be wrong in some new way. Is it right therefore to be robotic and to turn off internals as much as possible?



Eventually even the strongest, most resistant and adaptable species may disappear as well. Hopefully, the Darwinian selection will allow us to sooner or later get rid of a well known species of greedy predatory birds. However, I am afraid that even if that occurred, they would be replaced in the ecosystem by some other species with similar characteristics.



Komodo DragonI just finished watching the series Life on the Discovery Channel. I learned so much it was as if I took a year's course in Biology, and Botany. There were so many lessons applicable to life and the challenges we as humans face each and every day.

I thought it might be interesting to suggest an animal and its application to the market.

For example, I think of the Komodo dragon who will bite a water buffalo and wait patiently for weeks for the deadly venom to take effect. Ultimately the Buffalo succumbs to the poison and is consumed by a ravenous pack of dragons. As a reward for its patience the dragons will not need to worry about their food intake for another 4 weeks or so.

Or a crocodile, one of the oldest creatures on the planet dating back hundreds of millions of years. It has remained essentially the same yet has continued to survive. What is it about a crocodile which has allowed it to thrive while all other contemporary creatures vanished. There are unquestionably hundreds more of examples and I feel this would be a worthwhile exercise.



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

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


Nick White responds:

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

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

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

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

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

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

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

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

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

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

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

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

Source / reference list:

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

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

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

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

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

- Gauch: Scientific Method in Practice, Cambridge.

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

Pitt T. Maner III writes:

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

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

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

Part 1
Part 2

A snippet from the 2nd part of the interview:

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

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

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

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

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

Chris Cooper writes:

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



Lea Michele from GleeA bit like eyeing up a Snickers bar after a tough day in the trenches, the TV comedy/musical Glee seemed to me to be the TV analog of said sweet treat– tempting, but ultimately unfulfilling and potentially leaving you with the regret of having consumed it. I couldn't have been more wrong.

Yes, the premise is sugar coated; cast of Ohio high-school teachers, quirks, odd-balls, princesses, jocks and cheerleaders all get thrown together in various ways to form a glee club. Must overcome various challenges– personal, social and ecological– to achieve their goals. But the execution of this premise is anything but sugar coated; the show plays off its own stereotype and doubles back on itself with plenty of dark, biting humour and enough interesting plot turns to keep the greatest skeptic entertained.

I found the show to have a very positive effect. It's unrelentingly optimistic without being cheesy; the songs are a great mix of old and new, the costuming and direction are bright, dynamic and vibrant, the cast are all very believable and have nailed their role stereotypes perfectly. All this combines to really rub off and put one in a happy, goal-achieving frame of mind.

This is all quite intentional…from the wiki entry:

[Creator, Ryan] Murphy intended the show to be a form of escapism, explaining: "There's so much on the air right now about people with guns, or sci-fi, or lawyers running around. This is a different genre, there's nothing like it on the air at the networks and cable. Everything's so dark in the world right now, that's why Idol worked. It's pure escapism."

The highlight for me is the alluring Lea Michele, cast as lead female Rachel Berry. Michele has been on Broadway (Les Mis) since age 8. Her voice is so strong and so bright you can't help but smile when she sings. Her character is so naively earnest, ambitious and bright (on the treadmill at 6am every day  listening to "break my stride" while visualising her goal of winning a Tony; signing her name and placing a gold star next to it, etc, etc) you can't help but love her despite her occasional lapses into deep conceitedness. She plays a great foil and anti-hero to the pretentious slickness of the princess chearleader types.

Also worth mentioning is the unique Jane Lynch. She, as coach of the school's rival cheer team, sends up with great aplomb the model of the uber-driven, take-themselves-way-too-seriously, high school coach (and their charges). Very enjoyable. Never fails to put a smile on the dial, despite the occasional lapse in plot. Plenty of fun for kids and adults alike. Optimism reigns in Glee and thus makes a great ancillary recommendation to specs of all stripes. The cast albums and tracks from the show are available on iTunes.



 This reminds of "The Night Of The Long Knives" also called Operation Hummingbird. It is interesting how the market was "prepared" for this event that occurs after an impressive up leg. We will see if the event will be able to trigger more volatility. It will say a lot about this market.

Peter Grieve writes:

You've got to love a keg full of musket balls through the stern windows from the forward port side carronade.

Unless the free market you revere is on the receiving end, of course.

Alston Mabry writes:

With financial regulation reform next on the agenda, it's more like Trafalgar: What better way to start a battle than to cross the T on the enemy's biggest ship and rake them with a full broadside?



 I was in Oslo when they started to close the northern Europe air space on Thursday. I decided to take a lift by car from friends to Gothenburg, Sweden at least to get 300 km closer to Milan, Italy. Then I was faced with a dilemma. What is best the best strategy in such an uncertain environment? Wait for flights to go back to normality? Sounds good but how long could it be? Or take a train and travel 24 hours or more? Sounds good as well, but all trains are full now, so the only option is to book a train in some days from now. And what if in the meantime they reopen the airports? Why face a long journey when a plane would be much faster? Or rent a car, provided that they are available, and drive home? That's a long trip, and expensive as well.

It's like being caught in a losing position with limited capital available and having to decide if it is better to close it and accept the loss or hope for the market to go up soon. You cannot wait too long, as you risk losing all your money, but on the other hand it's difficult to sell when you lose.

I have put a stop loss on Tuesday, when I will stop to wait for improvements. Then I will sell and accept the long trip home, provided that it will be feasible. But new (reliable?) forecasts will be provided, and I will change my mind again, as I always do, being unable to fully implement the strategy I decided when I started the trade.

Ken Drees comments:

My father said to me so many times, "he who hesitates is lost". The trading relation lesson is that you first want to doubt the severity of the position going against you. Hoping for the best leads you right into crowd think–things will improve, etc. So here it seems like you at least acted by moving away, but then realized that you are still losing and that losing trades take up capital that can be deployed elsewhere, and losing trades take up time and mental focus and lead to less than perfect mental acuteness. Best to get your arms around the loss and remove it at any cost. 

All these stranded people are like people who have just received pink slips. They just lost their jobs (flights). So should they not take this opportunity to hike the back country, visit that winery, or linger in the cities that they always wished to see, but never had the time to? Some may do so who can afford it, others may not be able to afford to or are not skilled enough to be "re-trained". 

Paolo Pezzutti replies:

I have spent so many days traveling during the past 3 years in so many countries. Most of the times what I have seen is airports, hotels, and conference rooms. Very seldom have I had the opportunity to visit places and understand the culture of the places I have visited. It is like a standardized and artificial reality. For stranded travelers, I think the issue is the lack of choices. You can analyze the options what you want, but practically speaking, in most cases you cannot do anything but wait.

Victor Niederhoffer comments:

Many of us own individual stocks that are stranded, doing nothing while the world spins on its axis. What is appropriate to do in such situations? I would hypothesize that counting would help. Louis L'amour always said that the first moment of a life threatening situation is the best time to act.

Ken Drees replies:

I read once about an older trader, a simple man who simply said that at the end of the day if any one of his trades was "a loser" he would simply "kick it out" of the barn. At first take that seems extreme– or is it? The first time I read that I thought it was too black and white, now it's more of an essential idea for me–the taking of the first loss. Do you like the stock at that price today? Is the stock in a losing position? Would you buy that same stock today–double your position? If the answer is no then its a loser and a candidate for deletion. If every trader on Monday morning got rid of every losing deletion candidate, the force of the positive relief exhaled into the atomsphere would shift the winds over Europe and free the skies for all to get back to work, play, and normalcy. Sell your losers for the tired, the untrainable, the funflighted. 



the matrixRead this article on Random Matrix Theory: the deep law that shapes our reality.

Bill Rafter comments: 

This is a good intro article. I appreciated this part:

But when Bouchaud's team applied Marcenko's and Pastur's mathematics, they got a surprise. They found that only a few of these apparent correlations can be considered real, in the sense that they really stood out from what would be expected by chance alone. Their results show that inflation is predictable only one month in advance. Look ahead two months and the mathematics shows no predictability at all. "Adding more data just doesn't lead to more predictability as some economists would hope," says Bouchaud. 



 Spending a little time in the "Sports Brokerage" industry in my youth, I learned to appreciate the services the bookie provides. He acts like a clearing firm, inserting himself between the trades. He acts like a market maker, pushing the line this way and that in order to keep the order flow even and balanced, yet at a level where it will see maximum trading. He assumes market risk between trades, and has to hold one side before he gets an order on the other side, or has to lay it off. He ensures that you will get paid and assumes the risk that he won't get paid on every bet. A bookie will sometimes provide credit, much like a brokerage firm will. For the amount of vig you pay a bookie, the whole transaction is risk reducing and value adding to you. His reputation depends on an image of fairness and not welshing and it is much safer getting large action down with a bookie than with an acquaintance. With an established bookie, you know you'll get paid on Tuesday or pay on Tuesday depending on the time of year and schedule you establish for the P&C.

Vince Fulco writes:

Said bookie could neither take up a forced collection in the neighborhood to then re-establish his operations nor make intentionally lame or kill a horse he was taking action on without repercussions. Perhaps we're just seeing the pendulum begin its swing hard in the opposite direction.



The fool tarot cardWhat are the many types of people who disseminate their views about the market?

There's the tout, the man who has a position and wants you to get into it so that it will move in his favor. There's the sponsor, the man who advertises or sponsors a program who is always treated well by that program. There's the would be manager, the personage without funds who wishes to impress you with his knowledge and ideas so that you will put money up with him. There's the old lion, the man who no longer is virile and is fighting back any young men who might take his place in the world of power or romance. There's the curmudgeon, the old man who hates everything modern, doesn't own a CD or computer and sees no reason for it, and wants to bring everyone back to the old days without technology. There's the spankist, the woman who's beautiful and always looks like she is so aggrieved with the pubic or her guest that she would have to give him a good spanking unless he puts his things in order. There's the iconoclast, the person who's always contrary and never reads the papers or travels to New York, and always feels the market is wrong.

There's the man with a hole in his shoes who's so down home that he only drinks coke and eats hamburgers and never pays a fee more than 10% of the going rate to the brokers. There's the sanctimonious, the one who pretends to be the most honest person in the world– who won't under any conditions tolerate a blemish in the reputation of his firm even if it costs him a good stake. He's the one who never hears or is briefed about the dishonesty in his troops and finds that any allegations of misdoing in his firm that are brought to his attention never pointed directly in writing to the crime. There's the academic, the man looking for a consultancy who can manipulate numbers especially retrospective files that are very suggestive of alluring profits that a wealthy investor might wish to participate in with him. There's the mystic, the person who looks at the stars and the bent keys. There's the old timer, the person that looks at the iron castings reports and freight car loadings and newsprint figures for guidance as to where the economy is going. There is the fund manager, the man who will always be quoted on a given stock that he owns which he feels is a good buy still but which he sold the bulk of his holdings of in the quarter before the recall.

There's the jack of all trades, the personage who will explain the market going up as due to a good economic report or falling interest rates or who will explain the decline as due to uncertainty about earnings or fears of interest rate rises. There's the chronic bear, the person who never since 1966 has written a column that did not find the weight of evidence highly bearish with signs of excess in many quarters and regrettably some signs of optimism still persisting. There's the humanitarian, the person who believes that the world is very selfish and that the solution is to force everyone into doing good by redistribution or service. This personage also believes that the only good people are the poor and that the purpose of life is to make sure that any pockets of poor are stamped out regardless of how it's taken or from whom. Of course, many of these personages fall into more than one of these categories and they are mobile as their age and wealth changes. What are the major categories that I am missing or what is a better way to classify and make this useful?

John Lamberg comments:

And the mark, who in a hushed tone, glazed eyes, and a glance around the room as if someone was eavesdropping, reveals the privileged information that will make him a rich man. And the friend who, seeing the tells, suggests to deaf ears to exit before his pocket book is emptied… 

Ken Drees writes:

Permabull type–always likes the market anywhere, anytime. Wears high fashion suits, well coiffed–male or female. Strong BUY! spouse/lover/significant other–why didn't you buy that, hun? Why won't you get back into this one, dear. I read about that in the paper–are we in that? Foreign fund guy–always likes an exotic market somewhere over there in that far off place. Always a better value there. Always more room for catch-up to other valuations. 

Nick White writes:

With precious few exceptions, doubtless one can point to many of the most eminent bank of Sweden prize laureates…they most often get trotted out as permission to allow others to do the thinking. 

Kim Zussman adds:

Don't forget the Walter Mittyist.

Market hobbyist with secret hopes to surprise to the upside. Knows a little about a lot, but nothing in depth. He dangerously equipped with the same software and data filtered hourly by everyone in the 100 million Mitty-march.

Known to recognize causal patterns everywhere, convinced they are invisible to others. A market philanderer, he migrates wounded from one instrument to the next, and from one seductive strategy to another. Momentum - reversion - correlation - divergence.

Mitty envies his brother, Admitty, who worked for the city and retired at 50 with 90% pay.



The Connected Person: The personage who makes you feel without saying it that he is or will be connected to the very lynch pin of policy at the interior or some such.

Gibbons Burke writes:

 C. S. Lewis described this man, and those who seek to be similarly connected, in "The Inner Ring" — an address he gave to a graduating assembly at King's College, University of London, in 1944:

In the passage I have just read from Tolstoy, the young second lieutenant Boris Dubretskoi discovers that there exist in the army two different systems or hierarchies. The one is printed in some little red book and anyone can easily read it up. It also remains constant. A general is always superior to a colonel, and a colonel to a captain. The other is not printed anywhere. Nor is it even a formally organised secret society with officers and rules which you would be told after you had been admitted. You are never formally and explicitly admitted by anyone. You discover gradually, in almost indefinable ways, that it exists and that you are outside it; and then later, perhaps, that you are inside it.

There are what correspond to passwords, but they are too spontaneous and informal. A particular slang, the use of particular nicknames, an allusive manner of conversation, are the marks. But it is not so constant. It is not easy, even at a given moment, to say who is inside and who is outside. Some people are obviously in and some are obviously out, but there are always several on the borderline. And if you come back to the same Divisional Headquarters, or Brigade Headquarters, or the same regiment or even the same company, after six weeks' absence, you may find this secondary hierarchy quite altered.

There are no formal admissions or expulsions. People think they are in it after they have in fact been pushed out of it, or before they have been allowed in: this provides great amusement for those who are really inside. It has no fixed name. The only certain rule is that the insiders and outsiders call it by different names. From inside it may be designated, in simple cases, by mere enumeration: it may be called "You and Tony and me." When it is very secure and comparatively stable in membership it calls itself "we." When it has to be expanded to meet a particular emergency it calls itself "all the sensible people at this place." From outside, if you have dispaired of getting into it, you call it "That gang" or "they" or "So-and-so and his set" or "The Caucus" or "The Inner Ring." If you are a candidate for admission you probably don't call it anything. To discuss it with the other outsiders would make you feel outside yourself. And to mention talking to the man who is inside, and who may help you if this present conversation goes well, would be madness.

Badly as I may have described it, I hope you will all have recognised the thing I am describing. Not, of course, that you have been in the Russian Army, or perhaps in any army. But you have met the phenomenon of an Inner Ring. You discovered one in your house at school before the end of the first term. And when you had climbed up to somewhere near it by the end of your second year, perhaps you discovered that within the ring there was a Ring yet more inner, which in its turn was the fringe of the great school Ring to which the house Rings were only satellites. It is even possible that the school ring was almost in touch with a Masters' Ring. You were beginning, in fact, to pierce through the skins of an onion. And here, too, at your University—shall I be wrong in assuming that at this very moment, invisible to me, there are several rings—independent systems or concentric rings—present in this room? And I can assure you that in whatever hospital, inn of court, diocese, school, business, or college you arrive after going down, you will find the Rings—what Tolstoy calls the second or unwritten systems.

and he talks about how to avoid the traps, enslavements, and inhumanities of Inner Rings:

And if in your spare time you consort simply with the people you like, you will again find that you have come unawares to a real inside: that you are indeed snug and safe at the centre of something which, seen from without, would look exactly like an Inner Ring. But the difference is that the secrecy is accidental, and its exclusiveness a by-product, and no one was led thither by the lure of the esoteric: for it is only four or five people who like one another meeting to do things that they like. This is friendship. Aristotle placed it among the virtues. It causes perhaps half of all the happiness in the world, and no Inner Ring can ever have it.



 It is interesting that the Daily Spec website today features a photo of Steve Irwin, the deceased legendary "Crocodile Hunter".

That guy put his life on the line every day. I have seen hundreds of instances when he was handling the most dangerous venomous snakes– the various Taipans, the Black Mamba, the Krait. He did it with ease in the simplest and least protective clothing possible– shorts, short sleave shirt, etc. Big you know whats. He would have been a great trader had he applied himself to markets, but perhaps he would have a similar ending in terms of monetary fate. What is interesting however is how he died, and what it was that killed him– a routine swim with a stingray. He looked past the obvious.



Notice how the volcano, the GS charges, earnings season, and all things come at an inappropriate time, just like the big San Francisco Earthquake. What will be interesting is the manner in which the market digests the news and might offer predictive value.



icelandic volcanoVolcanoes appear to shift grain prices when they are Mt. St. Helens-Krakatoa size, or the ash plume and the deposit covers significant amounts of arable land . Some cold weather grains such as barley, rye, and oats like the cooler weather with the tropicals suffering accordingly. The grain market seems to be yawning over this eruption so far. Lack of initial movement in the grain markets over a catalytic events is pretty common, like when the Russians bought most of our crop in 72-73, or when Chernobyl blew up. It took a couple of days for the market to react with Chernobyl, and when it happened, the action and reaction was the most violent ever in the history of the grain trade. The wheat market during Chernobyl was much like an earthquake, with many aftershocks for weeks after, even after the apparent damage was priced into the market. The nearby spreads were like tectonic plates crashing into one another for at least a year after Chernobyl, as late as early 1988 in my opinion.

Chris Tucker adds:

From wiki, why volcanic ash clouds cause flights to be canceled or rerouted:

Volcanic ash jams machinery. This poses a great danger to aircraft flying near ash clouds. There are many instances of damage to jet aircraft as a result of an ash encounter. Engines quit as fuel and water systems become fouled, requiring repair. After the Galunggung, Indonesia volcanic event in 1982, a British Airways Boeing 747 flew through an ash cloud that fouled all 4 engines, stopping them. The plane descended from 36,000 feet (11,000 m) to 12,000 feet (3,700 m) before the crew could manage to restart the engines.[16] In April 2010, many flights across the United Kingdom were cancelled as National Air Traffic Services closed airspace due to the presence of volcanic ash in the upper atmosphere from the eruption of the Icelandic volcano Eyjafjallajökull.[17] As a result of the eruption, significant flight delays also occurred in other parts of Europe.[18]

Victor Niederhoffer comments:

The eruption is canceling flights. Is it good for grains like in the previous 10 centuries?

Pitt T. Maner III writes:

CNBC just reported that this particular volcano erupted about 200 years ago and kept erupting for 2 years (need to verify this).

Past geological performance is no guarantee of future results.

A lot would seem to depend on the volume of ejecta, the particulate size (time aloft), duration of eruption as noted, and carrying currents and other meterological parameters and timing of events during year. So the percentage and total volume of ejecta into the upper atmosphere from the Icelandic volcano as it relates to the 20 or so other active volcanoes would be useful info—so far the volume seems relatively small.

During the time period this volcano last erupted (as Mr. Tucker discussed) it was unseasonably cold in 1822 in the US. Whether that would be related to volcanic activity requires a lot of investigation (and more data) and may not be possible to determine. Its, however, an interesting coincidence.

1) From a 1985 Lakeland Register article in which a researcher went back into old archived National Weather Service records:

"First the West Coast and then the east were hit by cold weather in 1822 and 1828, respectively, the latter frost killing cotton, corn and citrus."

2) And per the New York Times (1879) some people built a shanty in the middle of the Hudson River in the winter of 1822. Prodigious amounts of wood were used to keep warm.

3) Translation of Icelandic obsevations from 1820s. Ash fall resumes in June 1822. 1822 is like last week in Iceland!

The eruption in Eyjafjallajökull began in the evening of Dec. the 19th, 1821. At that time people spotted fire up on the glacier. In the morning they could see a white cloud above the glacier that stretched ever upwards, slowly darkening, ending as a thick plume of ash. As day turned to night, the plume lessened for a while, then grew again, this time with lightning and thunder. From the 21st to the 27th the ash fall was mostly steady, most of the time in a NE-ly wind and the west part of the glacier became black from the ash. Ash fell mainly around Ytri-(Outer-)Eyjafjöll and in Eastern Landeyjar. West of the glacier rumble could be heard and rivers grew greatly in volume. A glacial flood broke forth to the north-west into R. Markarfljót and filled the valley between Langanes and upper Fljótshlíð. [Literal translation would be inner-Fljótshlíð.] Grass meadows of the farms of the farms Eyvindarmúli and Árkvörn flooded, with livestock saved at the last moment. Fragments from the glacier were spread all over down to the sands west of Steinholt and took uo to two years to melt down. The ash fall was reduced greatly with the new year of 1822, but rumbles and crackles continued." Ash fall began again in latest June, mostly under Eyjafjöll. The eruption finally ended in the beginning of year 1823.

Chris Tucker adds:

It seems to me that the last six months have produced an unprecedented (at least in my minute experience) amount of seismic and volcanic activity. Almost as if someone has turned up the burner on the ring of fire. This is a very interesting interactive map of recent seismic activity. I recommend clicking on the "See Large Screen View" button in the upper right corner. I wonder what it might portend. 



In a poor attempt to apply a bit of science to the art, if we look at a few attributes of the past 2-day move on Nasdaq, with the index trading above the 200sma and double closes above Mr.Bollinger's band, we see quite a steady historical north wind. The numbers look back-end loaded, but a repeat of the 17-for-18 up would put the tech index ahead by an average of 6.9%, or 2677, by mid-June. Of course this has nothing whatsoever to do with Friday…

Date             t+5    t+10    t+20    t+30    t+48

01/07/1976     3.2     4.9     9.2    11.3    11.0
11/11/1977     1.3     3.1     2.9     3.0    -0.6
04/14/1978     1.8     3.5     7.3     7.7     8.4
07/08/1980     2.1     3.8     5.5     7.8    15.9
10/08/1982     2.8     9.0    14.1    15.3    13.4
05/13/1985     2.2     1.0     0.8     1.4     6.5
04/17/1986     0.4    -2.1    -1.1     2.6     3.1
01/08/1987     4.0     4.1     7.5    10.5    15.3
07/15/1987    -0.4    -0.0     4.2     5.6     1.6
01/05/1989     0.8     1.9     5.6     5.7     6.0
05/15/1989     1.3     1.8     3.3     2.8     2.2
10/16/1991    -1.1     0.1     2.8    -3.4     1.6
12/31/1991     4.1     7.6     5.1    10.0     6.3
09/06/1995     2.2     2.0    -4.0     0.1     1.4
09/16/1996     1.5     2.8     5.2     1.8     5.4
03/18/2003    -0.7    -3.7    -0.7     4.6    11.1
07/08/2003     0.4    -2.3    -4.2     0.8     5.7
07/11/2005     0.4     1.5     1.4     0.3     1.2
04/15/2010    NaN     NaN     NaN     NaN     NaN

Avg               1.5     2.2     3.6     4.9     6.4

AvgPos           1.9     3.4     5.4     5.4     6.8

AvgNeg         -0.7    -2.0    -2.5    -3.4    -0.6    

PctPos            83.3
 77.8    77.8    94.4    94.4

PctNeg           16.7    22.2    22.2     5.6   5.6

Maximum       4.1     9.0    14.1    15.3    15.9

Minimum       -1.1    -3.7    -4.2    -3.4    -0.6

StdDev          1.5     3.2     4.6     4.8     5.1

ZStat            1.0     0.7     0.8     1.0     1.3

TScore           4.1     2.8     3.3     4.3     5.3



mt, galunggungIt will be interesting to see how much impact the ongoing Icelandic volcanic activity has on regional climates.

The 1822 eruption of Mount Galunggung in Indonesia influenced weather in Northwest England based on the detailed diary of a farmer at that time. So the Icelandic activity around that time may have only contributed to other stronger volcanic events (or solar activity).

Thus significant climate anomalies are found in the 2 years following the Tambora 1815 eruption and to a lesser extent 1 year following another major eruption, Galunggung in 1822. As well as colder and wetter summers, other indicators such as optical phenomena, which are not routinely included in climate records, are recorded. There is no evidence that the diarist was aware of the Tambora and Galunggung eruptions at the time of writing.

The main points
are that "sulphur-rich gases (principally SO2) emitted during an eruption are the most important" and "Once injected to the stratosphere, these can cause the largest perturbation on climate in the form of cooling of the earth's surface as well as providing a nucleus for various chemical reactions that can even lead to the stratospheric ozone depletion."

and Higher latitude volcanic eruptions have their own signature:

High latitude eruptions in the Northern Hemisphere, while also producing global cooling, do not have the same impact on atmospheric dynamics. They weaken the Indian and African summer monsoon, and the effects can be seen in past records of flow in the Nile and Niger Rivers.

and an interesting fact about Benjamin Franklin and volcanoes:

Benjamin Franklin was one of the first to recognize the connections between volcanic eruptions and climate. Shortly after the 1783-1784 Laki eruption, he postulated that the dry fog over much of Europe was likely caused by a volcanic eruption in Iceland, that the winds would have transported the gas and aerosol over much of the Northern Hemisphere, and that the cold winter of 1783-84 was caused by this dry fog. We used the NASA Goddard Institute for Space Studies ModelE climate model to examine the chemical conversion and transport of SO2 gas from the Laki eruption (64.10°N, 17.15°W) and used the resulting aerosol concentrations to model the climate response. Using our calculated aerosol distribution, we conducted a 10-member ensemble simulation with ModelE coupled to a q-flux mixed-layer ocean. The mean of these runs reproduced the extensive radiative cooling (-1 to -3°C) that occurred during the summer of 1783 across much of Asia, Canada, and Alaska and produced a strong dynamical effect in summer as the Laki eruption forces a significant weakening of the African and India monsoon circulations. This is seen in cloud cover and precipitation anomalies and resulted in significant warming (1 to 2°C) from the Sahel of Africa to northern India. This is a very robust result and has been observed after the last 3 large high-latitude volcanic eruptions, Eldgjá (939), Katmai (1912), and Laki, all of which produced large reductions in the flow of the Nile River. In the winter of 1783-1784 our model reproduced the significant negative temperature anomalies over the Northeastern United States, and smaller cooling produced over Europe. That winter was one of the coldest on record over these areas and our model results confirm that Laki could have been partially responsible for these anomalies.



 Is there a regularity relating to the achievement of goals and how best to quantify or navigate to them? The Nasdaq has closed at 2001 before the Intel announcement and the Dow has closed above 11000 at 11019. And now the S&P is at 1197 within a gnat's eye of 12000.

Is there a revulsion when such goals are met similar to what certain partners are supposed to feel after achieving their romantic goals? And how can these goals be differentiated from randomness?



DJIA1. One notes a too smart by half breach of the round today in the DJIA. What fools the g_ds must think the mortals must be.

2. For yet another time, the bonds have suffered a grievous decline before 10 and 30 year auctions, threatened breaching the 4% and 5% levels, and bounced back with alacrity to levels that do not threaten the economy. How many times can history repeat? One is reminded of Crocodile Steve who always said that when he ran the show, the crocs were particularly vicious because they all remembered it was he who caught them. Thus, he never entered the arena at the same spot twice as they waited in ambush for him at the last place.

3. We frequently talk about what fields as disparate as rodeo and radio can teach us about markets, but not as often do we consider what we can learn about life from markets. One has been considering the general question of happiness. What can we learn about it from markets?

Here's a interesting gambit. It is well known that after monthly maximums the variance of the move in the S&P the following day is considerably less, indeed 1/5 as great as the variance after monthly minima, and a mere 40% as great as after normal days. The standard F tests for comparing equality of variances by looking at their ratios, which has a critical value of 1 at the 1% level of significance show that these divergences are quite impossible under randonmess. What does this tell us about human happiness, and yes, what does it tell us about markets, also taking into consideration that the maxes occur twice as frequently as the mins over the past 15 years. 

4. "The Knicks never lead, falling behind 4-0 in a sign of things to come" in losing 118-90 to Portland on March 31. What can we learn from that?

Jeff Watson writes:

Steve IrwinA corollary to point number 4. In 1969, the Chicago Cubs were in first place all season long. At the beginning of September, they had a 84-52 record and were a solid 5 games ahead of the NY Mets. By mid-season, the Cubs were already getting ready for the series, and they even wrote many songs about them.The Cubs choked and lost 17 of their final 23 games while the Mets went on a tear with a 23-7 record, overtaking the Cubs and ultimately finishing 8 games ahead. The Mets ultimately went on to win the World Series, while the Cubs quickly regained their status in the cellar. Still, Chicagoans love the Cubs, win or lose, as there's nothing like a good day at Wrigley eating hot dogs, peanuts, cracker jack, and plenty of beer to wash it down.

Nick White responds:

I immediately think of case studies of Olympians– especially Olympic Champions– as they try to adjust back to normal life, post-Games. It's not an easy transition. Post-competition depression is a real thing and the market being what it is, probably can teach us much about how to handle ourselves after a major peak or trough.

Livestrong gives a good summary of the problem:

Many athletes spend years preparing for a narrow window of opportunity–a college career, the Olympics or professional sports limited to certain ages. Intense preparation, daily practice and adjusting life to meet the sport's needs may dominate an athlete's life. After the particular event, an athlete may lose his sense of purpose and have a hard time reintegrating into a routine that does not focus solely on the sport. An athlete may experience depression if he is unprepared for the transition.

To follow the example you provided, on the day (or weeks) following their victory, Olympic champions are unlikely to go 'round the village, find their competitors from the event they just won, and then challenge them to repeat their world-best performance again…there's consolidation, reflection, relaxation. An entirely appropriate response. Without further stimulus there is rapid atrophy and de-training. There are dozens of studies of the de-training effect. With well-timed, appropriate breaks there will almost certainly be the possibility of greater physiological improvements (see any of the literature following Bompa et al on training macro, meso and micro - cycles).

This sounds remarkably like the behaviour of the market. The sports physiology literature probably has much to teach us about the extrema of markets and the conditions of extension in such situations.

Furthermore, not everyone puts themselves into an intense period of stress and competition that they have been preparing for for a prolonged period of time, yet the market does this reasonably frequently. So, being a collective representation of human emotions and biases, it's probably fair to hypothesize that the manner in which the market responds after minima or maxima is probably a fair aggregate of how we can expect humans to behave on aggregate when experiencing highs or lows in their personal lives. Hence the market can perhaps teach us something and, from that base, we can then perhaps devise strategies to more efficiently handle such periods in our personal lives.

What also of the incidence of disorder when a highly focussed instrument loses its purpose–temporarily or permanently? But, your proposed study begs a question of logic– is it possible for the market to teach its creator something directly? The market doesn't have independent existence from its participants or a character of its own any more than a violin is capable of playing music lest someone pick it up and play it. So is it better to just to review the behavioral literature directly?

Rocky Humbert writes:

The question posed is a variation on the much debated question as to whether stock markets decline faster than they rise. The past 19 months are additional fodder for those (including myself) who believe that they do.

Because the phenomenon of lower volatility at monthly maximums is much less prevalent in commodity futures markets, I posit that the phenomenon is related to the three facts: (1) that the S&P is a "net long" market; (2)fear is a stronger motivator than greed; (3)stop/loss sell stops are more prevalent than take/profit limit orders.

I'm not being facile when I observe that the reason most people own stocks is to make money. Hence after markets are rising for a time, most people sit back, relax, and enjoy the ride. However, when markets are declining, the fear instinct kicks in– and people feel the need to "protect their gains," "stop the bleeding," or the all-too-familiar, "I can't afford to lose any more money."I would additionally observe that markets which go a long time without a correction have more violent corrections. This can be quantified and is consistent with all of the observations above.

I have been an unabashed bull on these pages for the past two years, largely because I believe that the valuation and sentiment at one's entry point are the best determinant of one's long-term return. I am now growing more cautious– and just as I was buying stocks on a scale-to-oblivion in February, 2009, I am starting to sell-long on a scale-to-oblivion now. I am not shorting. Rather I simply observe that the same simple and timeless logic that predicted a 5 year double-digit return during the dark hours, now predicts a low single-digit return over a 5 year time horizon. I wish I knew where the S&P will be in a week, a month, or a year — but any claim of that ability would be pretense.

Ultimately, the markets' lesson of the past 24 months has once again been, "Be greedy when others are fearful, and be fearful when others are greedy."

Sam Marx writes:

I believe one more stock market action occurs that was omitted in paragraph four. That is in a rising market when there is pullback or slight sell off, buyers come in to buy the dips and the market starts its upward climb again.

Fear kicks in when the market continues to dip, maybe around 10% down, and then selling picks up.

Steve Ellison writes:

Many athletes go into sales after their playing days are over. In sales, like athletics, all that matters is performance, and the top salesman makes far more money than the VP of sales. Some sales managers go out of their way to hire athletes because athletes are competitive, disciplined, and focused. 

Jeff Watson adds:

There were a lot of athletically inclined people on the trading floors back in the day. It took an athletic person to handle the rough and tumble of the pits, even the smaller pits. A four hour trading session in the pit would be like a 15 hour shift in any other job. It was absolutely physically and mentally exhausting. 

Rocky Humbert writes:

 One answer might be that miners are lured into a false sense of security when their canaries are singing a cheerful melody– comfortable in the knowledge that the levels of methane, hydrogen sulphide, and carbon dioxide are within acceptable bonds — but over time, becoming increasingly oblivious to the growing risks of mining-induced seismicity and unstable mine stopes– until there is a violent catastrophe.

Likewise, the increasing happiness of market participants in a low-volatility, monotonically rising market are like the miners with their singing canaries– the violence and magnitude of the potential, but unpredictable and unknowable and unnecessary tragedy is directly related to the length of time between tragedies as the institutional memory of previous tragedies fade. The miners are alert after a recent tragedy, but after months/years of traquility, the happiness may mask carelessness.

The recent tragedy is probably still too fresh in the institutional memory to be immediately repeated — but those with excess liquidity were able to profit from the most recent tragedy, and those with excess liquidity will be able to profit from the next tragedy. These men are like spiders — patiently waiting for opportunity that only occurs once every several years.

The wisest man can see the future, he is indeed a happy man.

Victor Niederhoffer comments:

One would adduce inspired by the token liberal rocket scientist that the ratio of variances during the past 3 years has been 9 as opposed to the paltry 5 previously addresses. And his very interesting post brings back many pleasant memories of the meetings of the Royal Society adduced by O'Brian. A certain member when talking about nondescript features of this or that mollusk on the Mauritius was well known to steer the transactions and his talk into a discussion of the nesting y practices of a certain species of bird that I believe liked to test in coal declivities. What does the reduced variance following the bigs have to do with the tendency for declines to be more violent? A talk at the Society might be apt.

Stefan Jovanovich writes:

What miners have been saying is that "yes, setting off explosives will shake the ground" but it does not "cause earthquakes or increase their frequency". The miners - poor fools - have some direct experience with the amount of force it takes to move rock so they find the direct causal association between their cat-scratchings in a litter box and an earthquake a bit laughable. What defeats their sense of humor is the realization that "mining-induced seismicity" is yet another scientific theory whose postulate is close the mine. "Mining induced seismicity" in the sense that blasting = greater probability of earthquakes has not been proven; on the contrary, most of the statistical evidence suggests that this is an affinity fallacy: man-made explosions shake the earth, therefore naturally-occurring earth-shaking is caused by man-made explosions. The quality of science that accepts this fallacy seems to be on a par with the fans of CO2-induced global warming. (What a surprise!)

What has been helpful is to measure earth-movement activity as a predictor of roof-falls using fuzzy logic.

Of course, CO2 is a problem in mines, but it is not a "worry" compared to methane. If the ventilation fails, then people die from the same cause that occurs when they fall into a brewing vat or get stuck, without an oxygen supply, when cleaning out a grain storage bin or cargo hold. It the lack of oxygen kills them, not the CO2. Acidosis is unpleasant but it is not often fatal. The reason they put CO2 in fire extinguishers is that it is the one safest, most non-toxic gas that can be stored and then used under pressure to displace the oxygen supply.



I am wondering if anyone out there is familiar with a trading opportunity called by some, the Goldman Roll. As it has been explained to me, there is a large numbers of long-only commodity funds. As a given contract that they hold long, say oil is coming due to expire they need to sell that one and then roll into a long position in a further out contract. This creates a very definite trend in the spread that can be exploited. Sell the near one short and buy the next one out. As the roll transactions are executed the Far minus the Near spread has a very predictable and smooth rise. It is claimed that this phenomenon has not be widely recognized and thus remains in existence thus far. Any comments out there on this claim would be appreciated.

Dr. Aronson is author of Evidence-Based Technical Analysis, Wiley, 2006

Nick White comments:

Goldman Roll? More like market roll!

This has been around as long as futures have existed and is nothing sinister. However, as some here were actually around when modern exch. traded futures began, I shall defer to them.

You can maybe get some clue as to roll direction by looking at open interest depending on the contract, but it's not always a good guide. Worth bearing in mind that people hold offsetting positions and much also depends on commercials vs specs etc.Also, if it were that easy to make money, it wouldn't exist…

Michael Cohn writes:

There is index money invested in commodity Indices and a plethora of ETFs. For example, USO or UNG. These commodity ETFs hold futures and there is a need to roll the contracts in a somewhat predictable way although there is now more flexibility as to day. This long exposure always has to sell the near and buy the far contracts. It is fairly easy to see the amounts involved…

David Aronson replies:

Goldman Sachs

Yes, I am on the lookout for all of these creatures. But kidding aside for the moment, are you saying that the claim that such an opportunity exists is on par with sightings of Big Foot? i.e., it's nonsense?

Russ Herrold writes:

It is a safe statement that there are and will always be 'unknowable unknowns' out there in the woods, and that the 'Absence of evidence is not evidence of absence' (but rather sometimes, just a statement that we cannot prove a hypothesis with our current tests and tools)

If I had a Bigfoot in my basement that laid gold bars, I would never reveal that secret, and take great pains to keep that 'trade secret'.

If I had engineered a winning strategy, I would certainly consider sowing disinformation and negative results and disinformation, to lead people seeking to reverse engineer my results, down into blind allies.

I think as a careful investigator, all we can say is: We do not know of a public proof that such exist.

By co-incidence, I am wearing a tee shirt today of a Unicorn, feasting on roast leprechaun, and as she takes knife and fork to her meal, the magic rainbows are let out.

Ken Drees adds:

The idea of taking advantage of a robotic function (mindless ETF doing its monthly maintenance) makes sense; once you notice the ripoff, wouldn't a hunter now wait for the fox?

Tom Printon writes:

I used to fill the GS roll in the coffee pit. Locals typically positioned themselves one to two days ahead of GS. When and if profitable was usually good for few tics, but one had to have size on to be worth while. Off the floor trader's vig would be difficult to overcome.

Paolo Pezzutti adds:

This reminds of "The Night Of The Long Knives" also called Operation Hummingbird. It is interesting how the market was "prepared" for this event that occurs after an impressive up leg. We will see if the event will be able to trigger more volatility. It will say a lot about this market.



 With his new story collection Burning Bright, Ron Rash invites his readership into yet another beautiful and haunting work with an economy of words like Hemingway's, with the ability to cut a story as clean as The Grapes of Wrath.

From the mother driving a knitting needle through the heart of a Confederate soldier to the present-day scourge of meth, his stories span the time of struggle, eternal insight, and pain. Captivating, clean, beautiful.



Assuming the majority hold stocks long, happiness is associated with a large rise, and unhappiness with a large decline. Independently of happiness, uncertainty can be thought of as volatility; for example, intra-day range.

SPY 93-present was checked for daily return/happiness as well as range/uncertainty, defined as:

(H-L) / {(H+L)/2}

Uncertain days were defined as those with range >3% (V). Happy days were up >2% (U), and unhappy ones down more than -2% (D).

With these assumptions let's see whether uncertainty presages uncertainty or unhappiness. First, compare returns "r" after high-uncertainty days which were either happy or unhappy:

t-Test: Two-Sample Assuming Unequal Variances

                                      VUr       VDr
Mean                            0.0007  0.0045
Variance                       0.0004  0.0011
Observations                   70         99
Hypothesized Mean Difference    0
df                          165.0000
t Stat                     -0.9313
P(T<=t) one-tail        0.1765

Uncertain days which were either happy or unhappy were both followed by up days on average, though the difference was NS (due to higher variance after down days).

Next see what happens to uncertainty after uncertain days which were either happy or unhappy:

t-Test: Two-Sample Assuming Unequal Variances

                      VUv     VDv
Mean             0.0303  0.0421
Variance        0.0003  0.0007
Observations  70.0       99.0
Hypothesized Mean Difference    0.0
df                      166.0000
t Stat                      -3.6144
P(T<=t) one-tail        0.0002

After uncertain days, uncertainty after happy days (up) was significantly lower than after unhappy days (down).

When uncertainty is high, market participants become more uncertain when they are unhappy.



from the show Deadliest CatchI pulled this off wikipedia, deleted a couple and changed the order as I've had 50% of these gigs, and let me tell you, no way in Hades is any finance gig remotely as demanding as being in combat. You might feel like you're gonna die, you might financially, but physically– no way. Not even in the parking lot of the ballpark. Fear of death is really no big deal when your a kid. Yet the fear of others death due to your mistakes…goodness, soldiers are one thing, but construction– we've all seen guys get maimed or die. Cops and firemen run into buildings while we, the civilians are escaping. But I do find bike courier more fun than stressful, but I am a racer. So a package on time vs. getting run over by the bus or taxi isn't any worse than the semi finals at the grand nationals. Just another lap .Never been a fisherman but that deadliest catch deal crabbing in Alaska. Wow those dudes work. One slip and you're a dead fish. lack


Construction work

Freight Handling (cargo, loading dock, trucks, aircraft, trucks).



Oil Rig Worker.

Bicycle Courrier.

Foundry Worker.





 Here is a useful index of physical commerce in the U.S.

Bill Rafter reviews it:

That is interesting–an index based upon diesel purchases by long-haul trucks. They show you the charts, and to a small extent they are interactive, but there does not seem to be any back data available. If they want any recognition, they should put the data out there so the number crunchers can have a go at it. If it's worthwhile, the number crunchers will make it highly desirable.

It has certain distinct advantages:

It's based on thousands of real free-market transactions and not surveys.

Generally not revised.

Monthly with a two-week lag.

Has the potential to be more frequent with even less lag. Note U.S. treasury tax data is daily with a 1-day lag.

Because it is gathered (and presumably binned) locally, it could be used to track cross-border movements. There's not a whole lot of forex risk between USD, peso and C$, but the near-port area transactions could be of use with overseas forex risk.

Potential problems:

Long-haul truckers are very efficient in their avoidance of expensive diesel, taxes of which are state-based. So there's some potential for distortion.



Johnny DeppI shaved a goatee today out of boredom and the increasing gray hairs. I must have had that facial hair for a few years. Plus, I am going to get new passport photos and wanted to be true to the look.

My 3 kids and wife never noticed. I was just going about the daily business–must have had numerous face to face interactions with the kids. I made a point of kissing my wife 3 times–and never did she notice!! I even told her that I was going to lose the facial hair since Saturday was coming and I was set to take pics. She even said go ahead, she likes my mug either way–(this conversation was a few days ago, not today.)I finally asked her how I looked sans whiskers and she lost it–she said for me to write in to the site because it must translate into markets! She said "I saw what I knew, not what was true".



There were several pundits in the media last week speaking of the decrepitude in the stock market of the period surrounding service-day, but one wonders if they tested that recently…



 Would one of you big fish please buy, sell, or short the markets please? The movement, the ranges are too small. The joke around here is day trader's can't even find a way to lose money much less make. No way can the bookies and mistress allow this to continue. Or maybe they can… I hear in 1994 the markets were too slow to trade. That was before my time, so I have never seen this before. Kinda like 2008. Never saw that before either. Ha.

Vince Fulco adds:

Thought it was a hoot earlier in the week when Interactive Brokers lowered FUTS commissions unilaterally for us small, aspirational specs. When was the last time brokers obliquely sent the message 'please trade'? Just a matter of time till we get a relative vol shock; the ecosystem as laid out in EdSpec requires it.



 An interesting debate over ancient Roman coins is going on. It's collectors vs. archeologists and the renewal of the Memorandum of Understanding with Italy. Looting is not a good thing, but if coins are not found in an archeological-rich setting then it would seem they should be enjoyed and traded. But a lot of damage and loss of history can be done without some regulation in place. And how do you know for sure where they were found or how they were collected?

It's somewhat similar to finding arrowheads or fossils. If antiquities have been removed from their orginal location (particularly a long time ago) and do not have archeological value and/or are not particularly rare then it is nice to be able to collect them. Selling arrowheads and fossils to me though is a gray area–not particularly desirable from the scientist's viewpoint. Knowledgeable amateurs have made, however, significant contributions to paleontology and archeaology.

Here are the two sides of the argument:

1) From part of one archeologist's perspective:

"Since the collectors have whipped up a lot of emails calling for the "internationalist" (free for all) approach to antiquities imports, anyone with an interest in helping preserve the archaeological record will be interested in adding their voice to counter the collectors' nonsense. By all means read the collectors' reasons for opposing import vigilance. they are quite an eye-opener as to what is going on in the US trade of antiquities. Apparently actually having valid export licenses for the antiquities imported from Italy "will add to the cost" of collectible antiquities. That is an astounding pronouncement - it implies that artifacts are currently on open sale by those dealers which are "cheaper" because they were imported but do not have valid export licenses. Astounding."

2) From the Ancient Coin Collector's Guild perspective:

The U.S. State Department has announced a date of May 6-7 for Cultural Property Advisory Committee hearings on the request for renewal of the Memorandum of Understanding with Italy. In practical terms, the U.S. government is about to decide whether antiquities and other forms of cultural property that Italy claims as its heritage ought to be restricted from entry into the U.S. unless accompanied by Italian export permits. There is already such an agreement in place, but ancient coins have been exempted twice before in these renewal requests that cover a 5-year window. We have very good reason to believe that Italy and members of the archaeological community will this time seek to add coins to the list of restricted items. There is a period open for public comment on the issue and the best way to comment is by fax. Don't despair, this is VERY easily done. Simply go to the ACCG web site at  and click on the Fax Wizard link (picture of U.S. Capitol Building) on the left side of the page. It says "Fax Your Legislator" but will indeed send your message to the State Department. You will be guided through a brief and easy to follow process that sends a free fax to the State Department registering your views. Why oppose these import restrictions? Because Roman coins are at the very core of the cultural experience that we all treasure. They have circulated all over the known world in antiquity and since through trade and collector markets. It is impossible to distinguish a Roman coin found in Britain, for example, from exactly the same type, mint, etc found in Italy. Requiring an export permit from Italy on a coin found and legally exported from Britain would not only be impractical, it would not have any legal foundation. Still, any court challenge by an individual is unlikely since the legal costs usually far exceed the value of seized objects. Import restrictions are simply not a viable solution to protecting archaeological sites. They are an idealist panacea that cause far more harm to society than any possible good. Excluding the U.S. collector and trade from the legitimate world market for Roman coins, or unilaterally forcing draconian documentation requirements on Americans, would be grossly prejudicial and would certainly be against the interests of American citizens and their traditional freedoms. We simply MUST oppose any expansion of the MOU with Italy to include coins. We must do so with an absolutely resounding voice. EVERY person reading this has an interest in ancient coins, even if you don't collect Roman coins, and needs to make their view known. The entire hobby is being challenged. There is simply nothing more important to do RIGHT NOW than to take five minutes, go to the ACCG fax wizard and register your concern. Don't wait 'til the 22 April deadline. The ACCG will defend the hobby to the best of its ability, but in the final analysis it is the will of the people that will prevail. Those who speak most loudly and clearly will succeed. DO IT!



 I believe that many (if not most) of life's lessons can only be learned through experience. Yes, one can learn about the dangers of using a chainsaw by observation and some instruction and manage to not hurt oneself, but one doesn't truly understand or know a chainsaw until one has one in ones own hands and feels the wrath of which it is capable up close and personal. There are so many trials that await us for which we come sorely prepared. Lessons about integrity, character, discipline, trust and courage (especially courage, I think) only truly sink in when they have been put to the test. Don't get me wrong, I read constantly about people I would like to emulate, whose lessons I would like to have handed to me more or less gratis. Would that it were so easy. But I have never learned anything truly worth knowing about trading (or being a man, or friend, or lover, or father) that I didn't learn thoroughly until I had a position on and, win or lose, gotten myself into the thick of things.

That is not to say that I haven't learned things from reading. On the contrary, if I thought that were the case I wouldn't be here with you now. I think one of the problems that holds us back as a species is that not only are we constantly learning, but also constantly forgetting important lessons. And the critical ones need to be chiseled away at constantly throughout one's lifetime. With a little help, sometimes you can learn a few of them early, set them deeply in your psyche and keep them with you.

Nick White writes:

Excellent points. I wholeheartedly agree that actual involvement in life is a must, and that theorising about problems is of limited value until you've actually faced them. I would argue that a healthy dose of erudition encourages wide participation in the "right" activities, while (hopefully and presumably) minimising involvement in the "wrong"ones. You're more willing to put yourself in real-world activities because you have some preparation for them and want to test your assumptions. But, then, I'm assuming rationality on our part; my apologies.

This neatly leads us into the realm of probability and expectation: perhaps we can generalise that the more personally harmful an effect might be, the more one should be taught/ learn about the activity through vicarious means (advice, books, etc etc) rather than direct experimentation? I don't think this necessarily involves attempts to understand "tail risk" (which we can't really know anyway); it's a question of expected return (admittedly, we then get down to how each person "values" an outcome, once they've assigned a probability to it). This comes back to my point about the necessity of being a good empiricist / skeptic in order to squeeze the juice out of life. Sum of probability of outcomes * expectation from identified outcomes. Hedge according to the variance. Build in plenty of redundancy for the possibility of unimaginable, outsize risks. It's not perfect, and fraught with difficulties, but it might at least provide a sign post to better results than not doing it.

The other excellent point you raise is how we might better transition and generalise book-smarts / domain-dependent expertise into life as a whole? There have been hundreds of papers on this point (eg, one might be a widely published expert in academic statistics, but fails to apply those skills in the "real world" when given a real-life problem– the expertise doesn't translate, or is non-functional). I think that is where your first point on putting one's learned skills to the test is essential. It helps to consciously apply what's been learned.

In sum: learn about a field or proposed activity as much as possible with your hypothesised utility. If you have even a small chance of doing non-trivial damage vs the expected payoff, then– should you still wish to proceed– learn from a source how you can minimise or avoid the negative payoff to maximise your positive expected return. Perform or non-perform. Report the results. Then try and apply the lessons learned to other fields…I think we have to consciously work harder on this "translation" effort. 



Here's a great article on how the carry of around $1.00 in July 2011 CBOT wheat could cause farmers and elevators to store more wheat, affecting [storage capacity for] corn and beans when the harvest comes in and a possible resulting glut.

Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MOTU.

Michael Ott writes:

Do you have any idea of the amounts of wheat involved? I ask because of all the farmers I know, just one has planted wheat and will hold on to it. Therefore, is this going to be widespread enough to have an impact on markets? Or is it a small factor that won't matter much, given the massive volumes of commodities involved?Granted, I'm in Iowa, which isn't exactly wheat country, so my sample might not be representative.



earth and moonArecibo, located in Puerto Rico has the largest radio telescope in the world. Its primary use is to listen for extra-terrestrial signals among other things. Next week (April 16th-18th), they're mixing things up by firing up the dish in transmit mode on 432 Mhz, aiming it at the moon and giving the small ham operators a shot at doing a little Moon Bounce (Moon bounce, or EME, is where you bounce radio signals off the moon and back to earth and carry on a conversation via the moon).

There should prove to be a pile up of immense proportion as this mission is geared towards giving the little guy a chance to do moon bounce and there will be about 300,000 guys trying to work the station. I won't participate as I've worked plenty of EME in my day and need to give someone else a chance to score this rare chance. Still, for those with police scanners and a decent homemade yagi antenna pointed at the moon, you should hear a helluva conversation in CW with occasional directions in voice SSB. I will listen to the operation but won't feel left out as I already got my fix of extraterrestrial communications, working both the International Space Station and Shuttle for a nice Quinella this week already.

Most people don't realize that there are hams on every shuttle mission, and there are always hams on the International Space Station which makes for some exciting radio work. Too bad that Ham Radio is a dying hobby, but that's a topic for another day.

Jeff Watson, surfer, speculator, poker player and art connoisseur, blogs as MOTU.



Coots MatthewsHellfighters is being shown on TV this morning and it is a 1968 movie with John Wayne based on the exploits of "Red" Adair and the oil well firefighting men nicknamed Boots and Coots.

E.O. "Coots" Matthews died last week so the movie is being shown in his honor this week. My father took me to see the movie as a young boy (no doubt to show me an example of what real life, tough situations, and strong men look like) and I later thought of the company and bought a few shares of WEL when Saddam Hussein started lighting up the oil wells in Kuwait–one of those rare (for me anyway) instances where you buy a stock on (the advantage of) memory or think of how things are connected and make a little money on a trade. There are a still a few companies like that which are good to keep in your portfolio in case certain rare events occur that require very specialized men and equipment.

The obituaries for Mr. Matthews who died at age 86 are very interesting to read. The "can do" attitude and Texas bravado in face of immense challenges is impressive.

From the Houston Chronicle :

In real life, Adair, Matthews and Hansen worked some of the industry’s most notorious blowouts, including a fire in Algeria in 1961 known as the “Devil’s Cigarette Lighter.” Experts thought the fire, which billowed 450 feet in the air, would take years to extinguish. They did the job in just a few weeks. Like soldiers on the battlefield, the three men grew to be like family doing the tough, dangerous work, said Richard Hatteberg, 71, who toiled alongside them and still works for Boots & Coots. The fierce flames and winds of an oil well blaze whip up a roar louder than a jetliner’s engines, he said.

From the NY Times:

Mr. Matthews’s daughter said her father had never denied fear.

“You respect the things you fear,” he would say, “and that respect can save your life.”

But fear was not something Coots Matthews often displayed. His daughter characterized him as a “barroom brawler” and “hell on wheels,” who “too often let his fists do the talking.” It might have owed something to this cantankerous nature that Mr. Adair fired him and Mr. Hansen seven or eight times, before their final dismissal in 1978. For years, the two sent Mr. Adair, who died in 2004, a thank-you note each Dec. 6, the anniversary of their firing. The gratitude was for the chance to start their own business. They both remained good friends with Mr. Adair.


Perhaps Mr. Matthews’s most harrowing experience was when a piece of a crane fell on his leg, pinning him, while a poisonous gas well was spewing, his daughter recalled. Mr. Adair grabbed an ax to whack off Mr. Matthews’s leg. At the last moment, though, Mr. Matthews summoned his strength and jerked his leg free. He later asked Mr. Adair if he would really have done it. Mr. Adair replied, “A one-legged Coots is better than no Coots at all.”

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