Apr

22

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.”

http://cnsnews.com/news/article/64297

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.

Apr

13

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. 

Mar

27

On April 12th, 2009 a Beech King Air 200, N55DW with one pilot and four passengers aboard departed Marco Island, FL for Jackson, MS. Shortly after takeoff a voice came on the Miami Center frequency and stated "I've gotta declare an emergency, my pilot's unconscious. I need help up here." and then "My pilot's deceased…I need help". The passenger, Doug White was sitting in the right seat to get a good view. His wife and two daughters were in the back. Luckily, Doug was a private pilot, but with low time (little experience) and no experience in a twin engine or turboprop aircraft of this complexity. The aircraft was in a 2000 ft. per minute climb as directed by the autopilot, but Doug was unsure of how to stop it.

Very quickly, air traffic controllers at Miami Center grabbed a fellow controller, Lisa Grimm, from another area who had some flight experience, brought her down to the sector and got her talking to Doug while the controller working the sector, Nate Henkels, intervened now and then to fire off instructions to the many aircraft he was also working. At the same time, controller Jessica Anays coordinated furiously with the surrounding sectors to get traffic rerouted out of and around their sector. Lisa succeeded in convincing Doug to disengage the auto-pilot and hand fly the King Air. "Alright" Doug said, "I disengaged it. I'm flyin' the airplane by hand." She calmed him down and together they managed to get him descending and turning and headed for Fort Meyers International Airport. "How you doin up there?" she querried. "oh, we're havin' a hoot" came the reply in Doug's thick southern drawl.

At Fort Meyers Approach Control, controller Brian Norton was on his way out the door to go home when his supervisor came running out to grab him and bring him back because of his pilot experience. Controller Dan Favino called a pilot friend of his in Danbury, CT, Kari Sorenson, who had experience in this type of aircraft and the two of them relayed instructions on configuring the King Air to Brian who passed them on to Doug. Doug succeeded in landing the aircraft safely and in an audibly shaken voice said "We're down buddy, thank you". Controller Carey Meadows then relayed instructions to Doug and assisted him in getting the engines shut down.

Doug left this event last easter and continued his aviation education and added a commercial IFR multi-engine rating to his pilots license. He was then seen several times flying the same aircraft (N559DW) back and forth to Haiti delivering aid after the earthquakes there. It was my incredible privilege to be present in Orlando this Tuesday when these controllers were honored by our union, the National Air Traffic Controllers Association (NATCA). The Archie League Medal of Safety Awards, named after Archie League, the first U.S. air traffic controller, are bestowed by NATCA upon controllers for service that results in saving lives from dangerous situations. At this years ceremony, these controllers recieved Archie Awards as well as a Presidents Award for service above and beyond the call of duty.

I strongly encourage people to watch the last video on this page titled "NATCA President's Award / Doug White Presentation "where pilot Doug White joins the controllers on stage and speaks movingly about his experience that day. Hearing him speak was truly inspiring, there were several hundred people in the room and not a dry eye in the house. He made us laugh and cry at the same time as he expounded upon the individual initiative and teamwork that crystallized in minutes and saved his life and those of his family. I have never been so proud in all my life. There is a condensed version of the incident itself as it unfolded on the same page two blocks up titled "Southern Region - Lisa Grimm (and etc.)" where you can hear the radio transmissions of Doug and the controllers with text of their conversations. The video players on this page are a little difficult to manipulate, but if you can grab the slider and forward the Presidents Award video to start at 6:00 or so you will begin at the best part.

photograph of a Beech King Air 200 Instrument Panel

audio only

YouTube video of RADAR overlay with full audio (38 minutes), the aircraft N559DW is the white block of data.

Feb

17

I cannot count the number of times my trading was going along really well, then all of the sudden, wham… all my profits were erased in one fell swoop, one bad trade. In retrospect, I got arrogant, and decided, because of my invulnerability, to assume extra risk which became my undoing.

Despite many decades of trading, I still occasionally get a b**ch-slap from the mistress of the market when I get excessively confident. In my own case, this seems to happen when I have many trades on and all are solidly in the black, or I've had a real good run. I get a sense of invulnerability, hubris, and that's my own personal kryptonite. At least I can recognize this flaw, and it hasn't reared its ugly head in a few months. Usually when my normal balance between my offensive and defensive game goes out of whack is when I get killed. Now I have a system in place that identifies when I'm about ready to go on tilt. The system hasn't kicked in yet, so maybe I'm learning something.

When I was coming up, an old grain trader told me that "Hope" is for losers. I used to get stuck in a position, and hope it would come back, and it usually would not. In fact, my friends saw me hoping for an improvement and were fading me all the way down. It took awhile, but I learned that hope won't bring the market to your favor, but hope will make you go bankrupt. Finding people full of hope can be a gold mine for you, provided you play it right. Seeing a person "Hope" for his position to improve enables another person to get additional clarity on what the market is going to do….at least in my case…..but I like fading losers. The converse is that I don't mind or take it personally when people fade me when I'm wrong.

Luck is just wrong. I don't believe in luck, and if it were to exist it would be a zero sum game. Is a person who wins the lottery lucky, or is he just part of the statistical distribution? I like to think of luck as an offspring of statistics and probabilities. There is a probability for every possible occurrence in the universe, and things just happen without any mysticism involved..Some gamblers like to have lucky rabbit's feet, or other talismans. I like to sit in position to those guys in table games. Some guys like to brag about their lucky streaks and I listen carefully. I like to observe their streak, and at some point, start to fade them, a little at first before I really press. Sometimes this works, sometimes I get my butt handed to me on a silver platter, it depends.

My favorite are the superstitious, as they believe that some mystic power controls their destiny. Evidence of any kind of lucky charm raises my curiosity and I try to observe that person for any fade clue. It's tough enough to pull money out of the markets. The emotions of hubris, hope, and luck make it near impossible to make money. These emotions are akin to having a horse player bet the his idea of an overlay, only to lose, and hear the lament, "Boy, I wish there were just one more furlong." In horses, as in the market, and life, there is not one more furlong and do-overs aren't allowed.

Kim Zussman replies:

How about this definition of luck: 

From Merriam-Webster:

1 a : a force that brings good fortune or adversity b : the events or circumstances that operate for or against an individual

2 : favoring chance

3. Favorable or unfavorable outcome which was not caused by skill, effort, or actions taken.

I purposely left out "ability", since some large fraction of ability is genetic, and one can only obtain good parents by luck.

Janice Dorn writes:

Self attribution bias applied to trading posits that traders attribute good results to skill and bad results to bad luck. This is a common bias that underlies the inability of many to admit they made a mistake.

Rudolf Hauser writes:

Kim's definition of luck is a good one but I disagree when he writes "I don't believe in luck, and if it were to exist it would be a zero sum game." There is no question that ability, persistence, preparation and work in general are needed to take advantage of opportunity, but luck also plays a part. So much of what we do involves interaction with other people and some depends on being in the right place at the right time. The geologist or anthropologist who is traveling somewhere and happens to notice some clues that will lead to a significant discovery is the beneficiary of both his or her skill and good the good fortune of being alert (not luck –or is it if you were just doing something else at that time and so missed what you otherwise would have notice so you had bad luck) and the luck of being in the right place at a time they had the experience to take advantage of the opportunity.

Or what about the person who takes a job in a local company that just has a product about to take off and ends up making a super salary and seeing the stock he purchased in the company rise and make him rich whereas if he had done the same in another town with the same skills and hard work doing much less well because the people running the company in and industry with no such product line and whom he had never meet were bad managers and ran the company into the ground? Sure he or she did not have perfect foresight and the ability to evaluate the thousands of people one interact with and predict how will interact with them over a lifetime–but then who does?

There is no question in my mind that a person who does not fully apply themselves is not likely to be able to take advantage of what good fortune of opportunity presents itself but there is also no question that luck plays a major part in life. And it's not just genetic– if you were born in a country in perpetual war and poverty your changes of a good life are much less than if you were born in the U.S.A. Or what about the Jewish children born in the 1930's in Germany or central Europe rather than the U.S.A. or being born in either place in the 1960's? Was that there bad luck or a failure of keen judgment and hard work on their part if they died in Hitler's gas chamber? What about the person who contracts a disease and dies from it when a cure would have been available had he gotten the disease a decade later? Was that something he or she could have prevented or just bad luck?

Kim Zussman adds:

I know a guy who is a retired contractor/developer, who "came from Germany with $20 in his pocket" and is now very wealthy. He developed a number of commercial and residential properties.

Why so successful?

1. He happened to like to work outdoors, was good with building, and good at commanding laborers
2. Was born charming
3. Was lucky to have lived through three decades of atypically high appreciation in real estate

Had any of the above three been missing, especially #3, he would not been as successful — maybe even a failure. I call that luck.

You can say the same about stock bulls in the 90s, oils and railroads in the past — all kinds of bull markets and bubbles, without which the great moguls and flops would not be. Not to mention war heroes who survived to tell the story, as opposed to those who took equal action but were silenced.

Economic society is pretty much zero sum over short periods, if you add all the give and take together.

Russ Sears writes:

Much of what we call luck is really the skill, effort and actions taken by others and given to us by the generosity of those most successful.

This would include living in a free country.

Further, much of this skill, is willingness to take actions and give effort where the difference between success and failure often hinges on the smallest thread. A thread so small, that even the most skilled, those putting the most effort can not be assured that any fruit will be borne. But one where the skill lies only in putting the edge in their favor.

This would include parenting and trading.

Finally, much of what looks like incredible luck is compounding of these skills over time and history.

However, to anecdotal throw a wrench into the "no such thing as luck" I have a relative by marriage, that won 2 lotteries. One a $4.3 million jackpot in MO state lottery, by entering one ticket a week. The other a half million Reader Digest sweep-stake, by answering the junk mailer. But she would like to remain anonymous.

The untold story however, is how the money tore apart her family. Luck or curse, I leave it to the reader.

Jim Sogi writes:

Chinese proverb

Good Luck Bad Luck!

There is a Chinese story of a farmer who used an old horse to till his fields. One day, the horse escaped into the hills and when the farmer's neighbors sympathized with the old man over his bad luck, the farmer replied, "Bad luck? Good luck? Who knows?" A week later, the horse returned with a herd of horses from the hills and this time the neighbors congratulated the farmer on his good luck. His reply was, "Good luck? Bad luck? Who knows?"

Then, when the farmer's son was attempting to tame one of the wild horses, he fell off its back and broke his leg. Everyone thought this very bad luck. Not the farmer, whose only reaction was, "Bad luck? Good luck? Who knows?"

Some weeks later, the army marched into the village and conscripted every able-bodied youth they found there. When they saw the farmer's son with his broken leg, they let him off. Now was that good luck or bad luck?

Who knows?
 

Feb

10

I sympathize with this view.

Donald Morris, writing in June of 1993: "If all of the Greek islands were merged with the mainland, it would be about the size of Alabama; there are 10 million Greeks - and perhaps another 4 million living throughout the world who still think of themselves as Greek. They are, thanks to their history, magnificent patriots and nationalists - and abominable citizens, who deeply mistrust every government they've ever had. Essentially they are fierce individualists, who mistrust not so much whatever government happens to be in power as the very idea of government. The have almost no sense of civic responsibility - Pericles complained about this at length - and History has never given them much of a chance to work out a stable system of government. Democracy, yes (the Greeks invented it!), but stability, no."

Stefan Jovanovich comments:

Mr. Morris is stretching the truth a bit about Pericles. These are the words about democracy that Thucydides puts in Pericles' mouth: "Our constitution does not copy the laws of neighboring states; we are rather a pattern to others than imitators ourselves. Its administration favors the many instead of the few; this is why it is called a democracy. If we look to the laws, they afford equal justice to all in their private differences; if no social standing, advancement in public life falls to reputation for capacity, class considerations not being allowed to interfere with merit; nor again does poverty bar the way, if a man is able to serve the state, he is not hindered by the obscurity of his condition. The freedom which we enjoy in our government extends also to our ordinary life. There, far from exercising a jealous surveillance over each other, we do not feel called upon to be angry with our neighbor for doing what he likes, or even to indulge in those injurious looks which cannot fail to be offensive, although they inflict no positive penalty. But all this ease in our private relations does not make us lawless as citizens. Against this fear is our chief safeguard, teaching us to obey the magistrates and the laws, particularly such as regard the protection of the injured, whether they are actually on the statute book, or belong to that code which, although unwritten, yet cannot be broken without acknowledged disgrace." Those are hardly criticisms of democracy. Neither are these (from Isocrates): "For those who directed the state in the time of Solon and Cleisthenes did not establish a polity which in name merely was hailed as the most impartial and the mildest of governments, while in practice showing itself the opposite to those who lived under it, nor one which trained the citizens in such fashion that they looked upon insolence as democracy, lawlessness as liberty, impudence of speech as equality, and license to do what they pleased as happiness, but rather a polity which detested and punished such men and by so doing made all the citizens better and wiser.""…and preferring rather that which rewards and punishes every man according to his deserts, they governed the city on this principle, not filling the offices by lot from all the citizens, but selecting the best and the ablest for each function of the state; for they believed that the rest of the people would reflect the character of those who were placed in charge of their affairs.""Furthermore they considered that this way of appointing magistrates was also more democratic than the casting of lots, since under the plan of election by lot chance would decide the issue and the partisans of oligarchy would often get the offices; whereas under the plan of selecting the worthiest men, the people would have in their hands the power to choose those who were most attached to the existing constitution.""The reason why this plan was agreeable to the majority and why they did not fight over the offices was because they had been schooled to be industrious and frugal, and not to neglect their own possessions and conspire against the possessions of others, and not to repair their own fortunes out of the public funds, but rather to help out the commonwealth, should the need arise, from their private resources, and not to know more accurately the incomes derived from the public offices than those which accrued to them from their own estates." Mr. Morris has confused the historical figure with the historian. Thucydides had very good reasons to dislike "the people"; they had exiled him from Athens for his having a case of the "slows" (see McClellan, George) in coming to relief of Amphipolis. Blaming the Greeks for having "almost no sense of civic responsibility" - i.e. trust in civil servants - is a bit like blaming Israelis for worrying about the peaceful intentions of Muslims. For all but 150 years of the 2300 since the death of Pericles the Greek peninsula has been under the rule of an autocratic government that was not Greek. As with Jews in the Diaspora Greeks learned the hard way to save their sense of civic responsibility for their clans and their religion. In that regard, they have been a model of stability; their Orthodox Christianity has the oldest unbroken lineage of ecclesiastical authority of any of the world's religions. Mr. Morris also gilds over the worst part of Greek history, which does go back to Pericles and Isocrates and, indeed, the Iliad. Factions have been all too ready to slaughter other Greeks, in the name of patriotism and nation-hood. It is that aspect of Greek history that our Constitution Founders were wary of seeing America repeat. Washington warned against "faction", not against democracy. He wanted the citizens to mistrust all parties and all exercise of government authority that was not essential for the preservation of liberty.

 

Jan

21

Gouverneur MorrisI am reading Theodore Roosevelt's biography of Gouverneur Morris; the book is proof, if one needed any, that Roosevelt was a true Renaissance man, even if his politics were almost as lunatic as Morgan feared.

Morris was not only the actual author of our Federal Constitution but also the greatest political observer among the Founding Fathers. At a time when Jefferson, Thomas Paine and others were celebrating the Revolution of 1789, Morris was deeply saddened by what he saw first-hand in Paris; and he urged President Washington to avoid favoring the Revolutionary government against the British.

But, if Morris thought the French Revolution was destined to failure and folly, he never lost his appreciation for France. Neither should we. It is footless for any of us, at this late date, to continue to take the Band of Brothers version of the Normandy campaign as an accurate military history. The Free French, along with the Poles and the Canadians (whose contributions are also conveniently forgotten) did more of the actual ground fighting in the Falaise Pocket than Americans did; and they paid a terrible price for it. General Leclerc , who understood and practiced tank warfare better than Patton did, was a brave enough man to understand that the Vietnamese wanted the same freedoms that Americans had fought for in their own revolution and that "anti-Communism" could not, by itself, be sufficient justification for the continuation of direct colonial rule. But for his untimely death (much like our own General Abrams' being struck down by cancer), it is likely that the Indo-Chinese wars would not have happened as they did.

P.S. It is also worth noting that the people of Normandy have never once complained about the thousands of civilians who were killed by largely indiscriminate high level bombing by the American Air Force before, during and after the D-Day landings. Instead, they thank us every year for what our soldiers, sailors and airmen did to liberate their country. Perhaps it is time we thanked them as well.

Chris Tucker writes:

Rallyn and I spent our honeymoon in France and loved every minute of it. Of that, a week in Provence, stayed in Gourdes and had delightful wines from a small local vineyard called La Canorgue in Bonnieux. Decided to go hunt them down, beautiful, beautiful drive, found them, sign on gate says "Back in ten minutes". We wait, proprietor arrives in a few, takes us into her little shop and is just lovely. We buy a bunch of bottles to take home and enjoy a splendid day roving around the countryside, visiting the market in Aix-en-Provence and the lavender at the Cistercian Abbey at Sénanque. Also Avignon, the Pont du Gard. Amazing, history fills every square inch, beautiful country, beautiful architecture, beautiful people that know how to enjoy life.

Flash forward a few years. We are at home watching "A Good Year" and slowly it dawns on me that I've been to the vineyard in the film. Château La Canorgue is the vineyard, just as I remembered it. Wonderful. The film isn't awful either, although the trading scenes in the beginning leave quite a bit to be desired. Crowe's character is a heavy hitter in London. Albert Finney is spectacular.

Dec

20

INVICTUS - Clint Eastwood knows what he doing as an actor, as dozens of worthy efforts have shown over the years. More impressive, right now: He sure knows his way around a two-shot and a script as director. INVICTUS demonstrates that he is not rosk-averse, either. Under the guise of a sports metaphor using the non-American sport of rugby, Eastwood fashions a suggestive reason for the Mandela mandate success in South Africa. It's the involving, even intense, recounting of South Africa's sea change under Nelson Mandela (Morgan Freeman) through the prism of the Springboks’ clamber up against superior teams. Before Mandela’s leadership puppeteering, the ‘Boks were the Chicago Cubs and Boston White Sox of their venue in Pretoria. This is an uncommonly winning case study in leadership, perhaps a bit lyrical and almost too pristine, still deeply affecting. After his release from 28 years in prison, and entirely absent his murderous evil-wife Winnie, Mandela takes office in 1994. The enmity between the blacks and whites is so entrenched that even the national team, the Springboks, are a det4ested stand-in for apartheid and hate. Mandela romances the leader of the rugby nationals, the Springboks, in the person of Matt Damon, now newly blond, fully hirsute, and buff from his recent film, THE INFORMANT, and seeks to turn a symbol of separation into a sturdy flag of hope. There is no better embodiment of Mandela than the wonderful Freeman - who long sought to play this climactic role. He is by this film’s lights more a saint than Gandhi or Moses could be; he is thoughtful to the meek and the least of his people, kind enough to notice the new haircut of his starchy aide de camp. He is humble to all, ever mindful of his recent incarceration. INVICTUS captures the nuances of his political deftness, but captures also the ready inspiration, as well as the ruggedness and tumble of hardball rugby. Eastwood's extraordinary; every camera angle, every lighting cue, every response of the little child straining to hear the crucial game inside the stadium is spot-perfect. Brief strong language, some ardent South African accent, but, in 132 minutes, a rousing sports clarion to unification and full-out masculine teamwork. Winning. Uplifting. A great film in the evening of Eastwood.

The Lovely Bones - Though it is debuting in the holiday period, and though Alice Sebold’s book sold well for many a month, THE LOVELY BONES, directed by Peter Jackson, is a mishmash that ill suits the festive period. Even with Stanley Tucci as the signature creep perv, Mark Wahlberg as the murdered girl’s caring father, and Rachel Weisz as the (too-young) mother of 14-year-old Saoirse Ronan, what is the entertainment in a murdered teenager looking back on her life from beyond? Really. Visionary as was the astounding LORD OF THE RINGS triptych, this is erotomania is a toughie for goo-goo fantasyland. The dreamscapes and Gee-whiz heaven scenes are intriguing clinically, but so what? You get a toothache from the taffy of the afterlife the heroine traverses. It runs counter to the ugliness of the real story, one that is considerably darker and uglier than the Robin Williams-heavenly Crayola afterlife we are tossed into repeatedly to soften the story. An able cast chronicling the slain character's journey from sweetheart schoolgirl to shattered dead soul stuck in a zone between here and there is relieved only by the hard-drinkin’, heavy-druggin’. profane-funny sloth of Susan Sarandon’s hilarious grandma. Maybe too mature for kids, and not enough fun for adults, the film, notwithstanding Jackson’s pyrotechnics and imagination-stealing stunts, is stuck in its own disturbing netherworld between literature and violence, worthy viewing or DVD afterthought. Even popcorn cannot redeem the unavoidable sleaze of the subject matter, no matter who stars as parents and kinfolk.

Crazy Heart - One of the best pictures this year, bar none (even the over-hyped, grim and deeply upsetting PRECIOUS, nominated for all those Golden Globes, oh my) is CRAZY HEART, starring the almost triumphal Jeff Bridges (looking by the minute more like Kristofferson than does Kris himself!) and a beautifully cast Maggie Gyllenhaal. Coddling his own ego loss as a once mythic singer and country superstud, er, star, Bridges plays a down and out country singer who plays the bars and bowling alleys that will have him. He picks up the women who remember when he was the best, and he does one-night stands too rubbery to remember names. He’s sloshed on and offstage, drugged up for whatever he can get hold of. Gyllenhaal and her decency almost light the spark that gets Bridges into shape. Colin Farrell does a sexy turn as a younger, soberer version of the talented guitarman, absent the golden touch of lyricism his mentor still retains. Bridges is not to be outdone for a brilliant performance, immersing himself unself-consciously in a role that is catnip to a real actor’s actor. Magic music, Bridges singing a fair piece through the film. A story arc that vectors in real, with a finale that registers as truer than the usual Hollyweird treacle. You can see this one twice.

BAD LIEUTENANT: PORTS OF CALL NEW ORLEANS - Talk about climate change. For his shimmy down the greased ladder of self-indulgence and loss, Bridges reminds one what Nicholas Cage tries to evoke in BAD LIEUTENANT: PORTS OF CALL NEW ORLEANS, a mess of a remake (No! Is NOT a remake, says director Werner Herzog. But he is nicht gerecht. Wrong. The first one, BAD LIEUTENANT [1992], was only 17 years ago, starring the unforgettable [often buck-nekkid] Harvey Keitel as the corrupt cop beyond redemption. Too soon to do that over again). It’s good to see the honky tonk Big Easy after Katrina, maybe, and Eva Mendes as Cage’s floozy with heart and pretensions to the better life is quite the eyeful. But whoa. Cage as a damaged, pharmaceutical-addicted drunken lout in a shaky Southern drawl; iguanas and lizards littering the screen; boozy broads and bad brothers-in-law. Headache time, Herzog. A sometime Olympian director, Werner can be immortalized here for whacked-out death dances and brawling phantasmagorias. He lets slip the reins of realistic films about real people doing real things. If you are a fan, by all means. But don’t say you were not warned.

Dec

17

A Terrible Splendor by Marshall Jon Fisher.

Picture the all-seeing eye looking down on the crucial third match of the 1937 Davis Cup with the two best players of the world, Don Budge and Baron Gottfried Von Cramm playing, with the greatest of all time, Bill Tilden, in the stands rooting for his beloved German student, along with Barbara Hutton the Woolworth heiress, deeply in love with Gottfried and showing it at every shot as her second husband gets more and more furious, as Europe prepares for war, Germany recovering from hyperinflation, homosexuals and Jews gradually being stripped of their property and lives, and fighting for their lives on and off the court. It's two all in sets, extra games, and Von Cramm has volleyed a sharp angle 10 feet wide to Budge's weak forehand on the Wimbledon grass with the Queen's interlocutor in the royal box trying to restrain his enthusiasm for the German royal's victory, and stock market volume is way down because they're all following the match on the radio with Al Laney from The Tribune broadcasting.

"Take a rest," Tilden had told his very good friend. "I can't," Von Cramm answered. "I'm fighting for my life." As the players walked to the court, Von Cramm had been called back to take a call from the Führer. "We're counting on you to win… or else." Men of homosexuality, like Von Cramm, in those days were being sent to concentration camps and Cramm had been outed by the SS already. In addition his mother was half Jewish and Jews had been forbidden to practice any profession, including finance, as well as having their businesses and money confiscated. (However, they apparently were able to take out 7% of their money upon proper application). Thus Von Cramm really meant it that he was playing for his life.

That's the backdrop for this entertaining and well researched book by a man who loves tennis but doesn't play the game, and weaves the story of the match into the backdrop of the culture of tennis, arts, and economics during the 1930s. Along the way, we learn the true story of Von Cramm's gentlemanly behavior with the linesmen (he liked to thank them for their vigilance in calling his foot faults, and never corrected a linesman, and always called the ball down on himself). The sexual preferences and vices of all the Davis Cup players of the era. "Budge apparently was often three sheets to the wind, but Tilden never drank. "I'll have a Tilden" was the way the French ordered water in those days. The tragic story of all their deaths, the nitty gritty of the home economics of all the players (Tilden was always broke even though he was the highest paid athlete of his day — he insisted, like me, on picking up all checks), and many anecdotes about the tennis players of that era. Very entertaining and revealing. (Part 1).

Charles Pennington adds:

Here is a video of the Don Budge backhand.

This particular backhand looks "flat" to me — not too much topspin.

I think that the reason that the topspin backhand was considered so difficult a few decades ago is that most everyone used a grip that was too "open". It was too much of a wrist-balancing act to keep avoid netting or skying the ball.

Last night I was watching a 1980 US Open Borg-McEnroe match on the Tennis Channel. McEnroe's backhand was very unsteady. Usually he hit weak slices. It is amazing that he could hit topspin at all, since he used the same grip for both backhand and forehand.

Pedja Zdravkovic comments:

Tennis has evolved since that time and the modern day rackets allow you to play with a lot more topspin. However for a recreational player nowadays, it is maybe wise to flatten out the stroke since there is less effort in the shot and strain on the body. But in order to do that you need to have a feel for the ball. It is much more complicated to play with an open grip. Spin is what gives less of a margin for error and also creates bigger problems for the opponent. McEnroe had the best hands in tennis. When I watched him play last year out at the Long Island Tennis club it was amazing. He is able to control each ball and put it within six inches of the line 90% of the time.

Oct

30

D KrallThe delightfully breathy Diana Krall is currently performing on her "Quiet Nights" album tour. We saw her perform last night at the Royal Albert Hall here in London.

En route to the venue, as we slid through the sparkling, fall evening lights of London, it occurred to me that jazz is a perfect musical accompaniment to speculate to — rich in subtleties, full of improvisation, balancing the emotional within the logical, frequently changing rhythms, timbre and metre — all those familiar elements are there. Last night, Ms. Krall repeatedly demonstrated her mastery of the form in a thoroughly authentic and slick two hour set.

I've seen a lot of artists and genres perform at the Royal Albert — everything from choristers, to the Proms to hip-hop star Jay Z. From those experiences, I've found the Royal Albert really shines when there is an impressive wall of noise emanating from the stage, so, in this case, I wasn't sure how the subtleties of jazz would work out. Would those little nuances be engulfed by the high ceilings? Would those critical rasps be lost to any others but those in the front row? As it turned out, I had nothing to fear.

Ms. Krall used the venue to great advantage, taking the audience from up-beat tracks like "I Love Being Here With You" and "Let's Fall in Love" to the deeply heartfelt "A Case of You" with equal facility. Indeed, in the case of the latter track, it was sung with such soulfulness I was left wondering how many tears Ms. Krall must have cried when she first heard it, or sat at the keys to make her own interpretation of it.

All this was complemented by the fact that she played with a small, intimate trio, rather than bringing along her usual Clayton/Hamilton backing orchestra. Each of the supporting artists was given ample opportunity to showcase his talent, and each made the most of the opportunity in front of an appreciative crowd.

The "Quiet Nights" album is meant as a love letter to Krall's husband, Elvis Costello, and her performance really reflected that intention. It was soulful at times, joyful at others and always intimate. This was heightened with lively anecdotes about her family, her influences, her children and her life, appropriately interspersed with each track. She is now touring throughout Europe and Australia and I would highly recommend attending to anyone who is a fan of the genre.

Y BrownWhile Diana Krall was outstanding, the highlight of the evening for me was YolanDa Brown, a young UK saxophonist. Ms. Brown played the warm up act, but really stole the show. Though a little bit nervous at first, her stage presence was brilliant and interactive — both with her supporting trio and the stiff UK audience. She launched into a performance of great virtuosity and individuality that was frequently mixed with vivid, scene-setting stories and personal comments on her interpretation and influences. Combined with our bottle of champagne, excellent stage mood-lighting and an intimate set list, we found ourselves very much under the spell of her efforts. Ms. Brown's performance was deliciously "off the shoulder", and I am sure her music inspired many in the audience to purchase her work for future romantic assignations.

The greatest compliment I might pay to Ms. Brown is that she made my wife and me feel like we were the only people in the room. In a packed Royal Albert Hall. She was that good. Get along if you can, but buy one of the albums irrespective. I certainly will enjoy listening to it during those late night, red-eye trading sessions where I needs to keep my cool.

Oct

16

A book every speculator should read: The Farming Game by Bryan Jones, 1995.

Think Green Acres [an old U.S. television show] meets Louis L'Amour, Mark Twain, and Will Rogers. Full of wisdom and insight into the human condition in general and economics in particular.

Vincent Andres add:

A great today story: Buffalo for the Broken Heart, by Dan O'Brien, 2001.

This story resonates very strongly with my own views of life. There is a place in it for macroeconomics, microeconomics, entrepreneurial spirit, regulation (bad and good) and so many good (so many forgotten!) things. Understanding things on our own, and not through traditions, mythology or advertising. Understanding that errors, even if they are old, even if they are widely spread, even if they are deeply supported, are however errors. Thanks to Dan O'Brien for this deep story, thanks for his frankness.

Review by C.C.Bucholz

Amazon.com Review:

"Some 20 years ago, Dan O'Brien, intoxicated by the Black Hills region of South Dakota, purchased the Broken Heart Ranch and began running cattle on more than a thousand acres. Though the decision ultimately cost him his marriage and, at times, his peace of mind, he feels a connection to the land and the lifestyle that continues to justify the decision. When necessary, he has even worked as an endangered-species biologist or English teacher in order to support his ranching habit. His engaging book, Buffalo for the Broken Heart, details both the rebirth of his ranch as well as himself.

"Desperate to rediscover purpose" in his life and disillusioned with working like a serf for the bank while supporting cows–those lumbering, small-brained icons of the plains that O'Brien describes as "a sort of reverse beast of burden. I was carrying them!"–he made a snap decision one day in January 1998 to take in 13 orphaned buffalo calves from a fellow rancher. Later, after much soul searching and contemplation of both practical and emotional matters, he decided to jump headlong into buffalo ranching. He expected differences between the two animals, of course, but was pleasantly surprised by the buffalo's self-sufficiency. Since buffalo are native to the plains, they are much gentler on the land and are able to find most of their own food and water. Plus, their meat is healthier than beef (and delicious to boot), and buffalo do not need the heavy doses of antibiotics, steroids, and hormones that cattle require–a process O'Brien likens to "locking children in a room with ice cream and potato chips and treating the health problems that result with expensive medicine."

O'Brien is a splendid storyteller, and his narrative is a skillful weave of the history of the buffalo on the Great Plains, colorful portraits of fellow ranchers, descriptions of the plains' rugged beauty, and a clear-eyed account of the harsh realities of ranching in this unforgiving landscape." — Shawn Carkonen

Jun

28

V NOne concept that ties together many important drivers of market movement is incentives. What are the reasons for investors to own stocks as opposed to any other use of their money or time? Certainly the spectrum of prospective returns and the risks is important. The returns are influenced by such things as the amount that you will keep after paying the fees and "services" involved. Such services have been increased substantially with the increases in the new bills, thereby reducing incentives. This has a compounding effect in the future, making the ratio of wealth that one could hope to achieve say in 10 years from investments considerably lower than the increase in short term and long term rates. For example, 100 growing at 10% for 21 years will grow to 740 but 100 growing at 8% for 21 years will grow to 503. Thus, a 20% reduction in the after service return will lead to a 32% reduction in wealth.

Another aspect of incentives is the rules of the game. When certain groups of cronies are favored with amounts injected, with economic values substantially greater than their market values at the time of injection, it puts the non-cronies playing the game in the position that people who play sports are in when the referees are against them. That works for a game or two, but when extended, most athletes will stop playing the game, and prospective athletes will look for another area of endeavor. One would think that all the redistributions, all the tremendous rises in value of the new banks would have a similar effect on the current and future participants who are not in that favored position with respect to the referees.

Another group affected deeply by incentives is owners of businesses. What are the reasons to go into business, to start a business, as opposed to working in a secure job where firing hardly ever happens, and the amounts allocated to it are ever increasing as opposed to taking the risks of becoming an entrepreneur? According to Amity Shlaes, this lack of incentives caused the depression to last 15 years rather than two or three. My own experience with the owners of businesses started during that period confirms this in spades.

A small change in expectations in matters such as the propsective after returns, the rules of the game, and the security of alternate occupations versus entreprenurial activities has a great effect on the ultimate choices as to where and when prospective investors place their funds.

Jun

13

TeaI've been in New York a few weeks now, and find that I miss a few things that I took for granted in the South. Sweet tea is high on my list of things that I need and good BBQ is another necessity of life that hasn't been fulfilled lately. In fact, I've been boring my friends with my complaints about the lack of fine Southern cuisine and sweet tea. Last night, a couple of us decided to satisfy my sweet tea and BBQ jones all in one fell swoop and ended up at Daisy May's on 623 11th Ave at the corner of 46th. Looking at their web site and getting many recommendations from locals and readers of my blog, we went over there, and I have to tell you that I had great anticipation. Their menu looks like a BBQ junkie's nirvana, and their advertised 32 oz mason jar of sweet tea looked very promising. We took a taxi over to Daisy May's, waited in a long line and ordered 2 racks of sticky ribs, sides of cole slaw, mashed potatoes with red eye gravy, baked peaches, collard greens, mac and cheese, creamed spinach, an order of pulled pork, and of course, the 32 oz of sweet tea. The line moved quite fast, service was good, and we had our food in a manner of minutes. When our food arrived, we were profoundly disappointed with the ribs. Although quite meaty, they were not tender, quite dry, and felt like they had been held in a warming oven for hours. They also only gave 6 small ribs for a portion which was a minor disappointment. The sauce didn't adhere to the ribs very well, had no carmelization, and a pecular granular quality, which suggested that they were applied in a last minute rush job. The taste of the sauce was billed as being sweet, but we could not detect any real sweetness, however, the sauce tasted like a mouthful of wet spice I will give them kudos for the side dishes which were quite good, although the red eye gravy wasn't real red eye gravy because real red eye gravy has either coffee or Dr. Pepper as an ingredient, and this had neither.. The sweet tea was OK, but nothing spectacular, missing a key ingredient…..ice. They also put some kind of mint leaf for flavoring in the tea, which is something no self respecting Southerner would do.

The fact that Daisy May's was standing room only, suggests that a place like Woody's, Slim's, or Sonny's BBQ would make millions of dollars in Manhattan.

The quest for the best BBQ in Manhattan needs to continue, and further scientific study is needed.

As a sidebar, in the South, one can smell a good BBQ joint for blocks, and I've noticed no such smells in New York. Is excessive government environmental regulation responsible for the dearth of BBQ places in and around Manhattan.

To me, an ideal BBQ place would have the best BBQ, good sides, a variety of sauces, and a juke box playing country music non-stop.

Marion Dreyfus says:

Apologies on behalf of NYC, Jeff.

We foodies know Daisy May's is not that good, as no locals with foodie smarts go there. (The people in the queue must have been from the suburbs or tourists altogether hunting the same elusive nirvana you seek.)

Up in Harlem you can find BBQ (not sure about the sweet tea)–but I have been to only a very few of the bars there in the company of people in the know.

A Southern (but peripatetic) professor of the art of barbeque says:

Blue SmokeThe gentleman asks for good barbecue in NYC. It’s absurd to recommend Damon’s and Famous Dave’s [as Dailyspec contributor Steve Leslie did]. Damon’s has no presence in NYC and only a minor presence in the south. It is a bland midwestern place where people go to watch football on widescreen tvs. Famous Dave’s is the Olive Garden/Red Lobster of barbecue. They have a location now near Times Square, but even NYers are barbecue-savvy enough to know to stay away.

It’s also deeply offensive to dis both Woody’s and Sonny’s. Yes, they’re chains, but they have fantastic barbecue at ridiculously cheap prices. It’s a shame that the economy has forced Sonny’s to retrench and cut back on their number of locations. The dis also has no relevance because, again, the gentleman was asking about barbecue in NYC, where Sonny’s and Woody’s have no presence.

The places to go for BBQ in NYC are:

Blue Smoke – pricey and often crowded, maybe a little too glam for ‘cue, but very good (116 E 27th St)

Hill Country (30 W 26th St)

Dinosaur – Out of the way, up in Harlem and near the West Side highway (646 W 131st St), but very good and very cheap

RUB (”Righteous Urban Barbecue”) – in Chelsea (208 W 23d)

Jun

12

AFGHAN STAR
A film by Havana Marking
Review by marion d.s. dreyfus

"A fantastic documentary about a talent competition in a country where you would never dream such a thing is possible." - Oprah Winfrey, May 2009

Winner of the Directing and the Audience Awards at Sundance Film Festival (2009 World Documentary Competition).

In Afghanistan, under the Taliban, you risk your life to fly a kite, let alone indulge in singing or dancing. Fun is pretty much outlawed. But after 30 years of war and five devastating years of Taliban domestic terror, pop culture is beginning to inch back-since 2005, millions of Afghanis are tuning in to Tolo TV 's wildly popular American Idol-style series "AFGHAN STAR."

Like its Western counterparts, people compete for cash prizes (and the sibling tow-along, record deals). Surprisingly, the contest is open to everyone across the torn and rugged country, no matter gender, ethnicity or age. The 'out tribes' and out of favor Islamic sects get a chance to compete, and 2,000 people audition, including three unimaginably brave women. When viewers vote for their faves via cell phone, it is for many their first encounter with the democratic process.

Winner of the Directing and Audience Awards at Sundance's 2009 World Documentary competition, Havana Marking's timely and poignant film follows the hairpin stories of four finalists-two men, two women-as they hazard everything to become the nation's favorite performer. For the women competing, especially, their independence and temerity has fierce consequences that ricochet far beyond the contest in the film. Observing the Afghani people's relationship to its emergent pop culture, "AFGHAN STAR" is an unexpected window into a country's tenuous, ongoing struggle for modernity. What Americans consider frivolous entertainment is nothing short of revolutionary-and deeply human-in this troubled shard of the world.

This is Director Havana Marking's first feature documentary; she earlier directed "The Crippendales" (2007)- a 30-minute film about the first troupe of disabled strippers, which won the UK Channel 4 scheme for New Talent. In 2005 she made "The Great Relativity Show," a series of animated shorts that explained the Theory of Relativity; these won the Pirelli Science award. Before 2005, as a TV producer, she worked on some of the most successful UK programs and films: The F Word, Michael Palin: Himalaya, River Cottage, No Going Back, War On Terra - What Would Jesus Drive? Havana is a respected journalist with articles printed in the Guardian and Observer. Redstart Media is her own production company. UK/Afghanistan . 87 minutes.

marion d s dreyfus 20©09

Jun

12

Most sports games are fought to win early and decisively, given a choice. This painfully obvious comment alludes to the fact that the middle game and end game can thereby be played with less risk for the winning side. However, this must be measured against the opening winners desire to play all out throughout, just with less overextension, not merely maintaining the advantage. Don't let up on your capacity or talent. Some games and teams will require a full force stance, depending on the point lead and in order to play well. What I suggest is not to rest on a gain. I only suggest to reconfigure the risk/reward ratio. Otherwise, playing a completely defensive strategy will destroy the advantage. Further, risk/reward can allow a highly aggressive stance and be defensive by inducing your opponent to expend more than usual amounts of energy and exasperation trying to defend offputting attacks. Inducing is aggressive. These attacks will accompany random, not constant defensive moves on the aggressor's part, allowing just enough of a hedge and freeing up energy from an overly or hardened defensive posture to a game of overall nimbleness, less probabilistic and freeing up energy to explode at will. Thus, the risk/reward ratio is not all about chasing points, but allows for a game whereby opposing points can be thwarted. This alleviates the need and obvious static (stasis?) energy of a defense only strategy, thereby giving the opponent one's game plan.

Entice your opponent to play your game: To play drunken martial arts, which requires enticing your opponent to engage on your terms, running out the clock, angering your opponent, retreating or advancing to entice your opponent to your strengths, or limiting your opponent's moves, , while maintaining full force and adaptability in maintaining a defensive posture also come to mind. (Ali trained to take many a pounding to train for an otherwise superior Foreman in '74 or whatever). One's tactics are freed from having to score. Let the opponent, out of sorts and off their game score for you, in which you make easier points, thus conserving one's energy. The corollary, making one's opponent pay big to even get a point or taking a hit is very offensive. But these are only for the very proficient. These tactics under an overall strategy require or expect the deemed defense having to move, not always true in stocks. (Though Buffet said one can swing when one wants; 4 balls will not get you to first in the stockmarket). An exceptional opponent will not take the bait, but circumstances can force their hand. These thoughts touch on defense as offense. We all know the opposite axiom. As one aside, I'd like to see the drunken martial opponent, and this takes on many variations, in boxing, fencing, racing and war, in which the opponent is enticed to overexthend themselves to the winner's advantage, not move in such a fashion into the opponent's traps. Others may have specific games in mind. I am having the problem of analogizing a specific game; a discrete event compared to the market moves over a term. However, the market moves comprise many a game.

Some of what I consider the more continuous sports are soccer, lacrosse, basketball, hockey, fencing, boxing and tennis, in which one can morph from an aggressive stance, to a defensive one on the fly. Of course, this applies to all sports on a limited degree, like baseball and football where a meeting is called prior to a play. I like the former because the action is more often in play than other games, and therefore the strategy and tactics can be applied with more facilty in real time, of course given prior strategizing. Maybe it's like a free form jazz requiring excellent individual talent that understands the other players, compared to an orchestra with a conductor playing 30 second songs cumulatively. Both comprise professionals. We know the market does both as well.

This writing has suggested employing defensive offense, for example keeping the accent on making high percentage shots that tire your opponent mentally and physically. Do not take undue risks in shooting (offense)and upgrade one's focus on preventing the rival from scoring (defense), rather than setting up your next shot. An advantage within or from a game is anticipating further moves or a later game. This allows for other strategies/tactics to surprise, accumulate to disorient, and induce the opponent to weaken lines in order to defend against all possible attacks. Continuing the earlier discrete game, the early winner can devote more resources to defending the perceived advantage with the above considerations in mind. In fact, the simplistic notion of games is not to take undue risks (this assumes a lifetime of understanding) once victory is achieved, while of course playing all out under revised risk/reward calculations. To confuse things, a good winner will continue to play all out, as that is their best game for cadence and alertness. As a warning, many have lost sitting on a win, confusing defense with merely running out the clock. Resting can beckon atrophy, thereby inviting ineptness.

Another is offensive defense. A penny saved is a penny earned. I would submit that a penny saved costs less than a penny earned oftentimes. Drive to the utmost, but how many feet or seconds does another pit stop cost? Can it be skipped with good preparation and execution being the same car, or is it better to plan for a stop in order to have your best car on the track? A lot of movement in life, like mechanics, etc., has exponential costs, like a rocket liftoff compared to cruising, and the same for other bursts requiring torque, like moving onto the beltway. Make your opponent use torque that require more energy and force pit stops that cost time.

Unlike the stock market, in discrete games, a 2 point win is equivalent to a 50 point win. Can we say that if the 2 point wins accumulate, they will become 50 points and be, just a little little bit easier, to come by?

Defensive offense and offensive defense: do they exits, does it matter, is it semantics? It was just a way to make a point and hint that things occur simultaneously.

In sum, winning big early, frees up an added dimension of facileness, controlling time and moves of your opponent, while increasing one's own efforts to thrive and grow toward an increasing advantage. Maybe all games should be played this way throughout, but an early advantage seems to change the risk/reward analysis. The predators are able to employ this. A good follow up would be to depict what the purported prey would do to become the eventual winner. —Maybe the same? but they seem to have less reward in creating a win from behind by just maintaining the stasis. Advisors often suggest that increased risk is not the answer, until Hail Mary time - at least in a discrete game.

Allan Millhone looks at it from the Checkers perspective:

I am packing and getting ready to head to Grove City, Pa. for a yearly tournament there. There will be plenty of stiff competition with our Three-Move Restriction World's Champion and other top Masters. In tournaments my eyes scan the board akin to surfing and try to find a safe line of play. Like a good wave to ride safely to the King row (water's edge at the beach) . The surface of the Checker board at times can be very smooth as you coast towards an easy draw . Other times the ride is bumpy and can be quite turbulent as your opponent( like the waves) can force you off into uncharted waters. The Market trader needs to be wary and look ahead at all times for ever changing Market conditions much like the waves for the Surfer endlessly shift back and forth. The Checker board starts out even for both sides with twelve pieces each, but soon after the calm subsides and the waters of the board begin to swell . The Surfer tries to Master the wave as the Market trader tries to tame the Market Mistress and gain the upper hand.

Tommy Wiswell said: "Look twice before you move."

Steve Ellison writes:

In many competitive endeavors, simply making fewer mistakes wins many games. Mistakes I have made in the markets include:

- Failing to be aware of changes in trading hours

- Using a limit order to try to save a few dollars when I really did want to enter the trade regardless

- Failing to be fully prepared (with orders placed in advance when feasible) for any events that might set up a favorable trading opportunity

- Entering a trade without knowing exactly what I would do if price moved up, down, or sideways

- Deviating from my trading plan

- Using too much leverage

Roy Longstreet wrote in 1967 in Viewpoints of a Commodity Trader:

Did you watch the Packers whip Kansas City in the Super Bowl? I did and was much impressed by the professional way in which they performed. They did not beat themselves by making mistakes.

A professional makes fewer mistakes than others. That is why he is a professional. He may not have more ability than another but he is superior because he has trained himself not to make mistakes.

I was particularly impressed in watching the Packers throughout the season as they seldom were penalized for infraction of the rules.

On Mr. Longstreet's last point, the Detroit Red Wings have similarly avoided penalties in the Stanley Cup finals. Conversely, the Pittsburgh Penguins, who have probably by now surpassed the aging Red Wings in talent, took a string of penalties in the fifth game after the Red Wings took an early lead. As a result, the Red Wings scored three power play goals and put the game out of reach.

Allen Gillespie adds:

Hawks v Supersonics game I went to years ago - 67-66 after three with only Peyton hustling - Steve Smith scores 33 in the 4th running around like a maniac.  Also, in soccer, most goals are scored very early or very late in a half.

Relationship between time and goal scoring in soccer games-Analysis of three World Cups
 
Soccer goals and non-guassian distributions

Nigel Davies comments:

Here's another view from a mistake specialist (both my own and other peoples'):

The mistakes we make tend to crystallise around different deeply rooted thinking patterns and attitudes but then change their form when people notice them and try to something about them.

An example might be that of a trader 'taking profits too early', vowing to do something about this and then taking them 'too late'. He could be 'correcting his mistake' but failing to address the real issue of making arbitrary decisions rather than operating according to a tested plan.

Normally you have to go very deep to ferret out the cause of error and then, assuming someone is willing to go there, it's unlikely they'll actually be able to do something about it. But success can come when the number of good moves outweigh the bad, so for those with an innate 49-51 split have hope…

George Parkanyi says:

Making mistakes is not one you can generalize like that. Mistakes are how we learn. If you are not making mistakes you are probably aren't stretching yourself enough. Mistakes also come in all shapes and sizes — some are disastrous, some are benign.

Recovering from, or leveraging mistakes — now there's something.

May

2

Here is a fascinating read on how to beat a 20% vig from Contingencies magazine. To whet your appetite:

"By the time he succumbed to pulmonary embolism in January 2008 at the age of 62 Woods and his pioneering partners in computerized horse betting had transformed the nature of the sport in one major world market and spawned and industry that is still lengthening its stride around the globe. According to his obituary in The Australian, Wood’s fortune was estimated at $670 million at the time of his death."

Michele Pezzutti comments:

Quoted from Contingencies magazine: “The only way to develop a consistent long-term winning system is to either have the unbelievable luck of making the right guesses on enough races or to know something the rest of the public doesn’t.”

One of the thing I liked most about this story is that the information is actually out there for everybody, there aren’t people who have a competitive advantage on information availability. Alan Woods has built a competitive advantage over the public starting from the same knowledge base, which was under everybody’s eyes but unseen by most.

But how sustainable is this? If I liked horse betting, I wouldn’t bet anymore after knowing that a lot of people have a competitive advantage over me. You could argue that this is true also for financial markets (maybe even worse, as information might not be really available to everybody). That’s correct, but a bet is a single shot– either you lose or win. In financial markets, duration of a bet is generally unlimited (provided that your capital allows it or a company does not go bankrupt) and positions can become profitable also after being potentially a loss. Moreover, if a company generates value, every investor will benefit from that.

Craig Mee writes:

I was speaking to a mate about this guy, his reply:

"It’s a sad story actually. I read about this bloke in last year or the year before Business Review Week Australia's Rich 200. He had sent a letter to the BRW asking for inclusion in the Rich 200. The BRW naturally thought it odd someone would want their wealth on display and also thought it odd they had never heard of the guy before. In his letter he professed to be worth about AUD700mio and said he could prove it with a list of assets all around the world. He said he was waiting to be in the top 10 before applying but unfortunately things were taking a turn for the worst as he had been diagnosed with cancer. He died six weeks after he sent the letter.

A guy who chased a dream and succeeded………regardless of the end…….he had a cracker life."

Apr

9

A very good exercise for increasing one's mental capabilities is to learn how to read people accurately. Reading people and sizing them up is essential in every walk of life, and one who can make a good read has a built in edge in everything. I like to do a lot of people watching, constantly making a read, and have found the exercise to be very stimulating and illuminating. One starts a read by looking at a person's outward appearance, dress, the condition of their shoes, hands, and what kind of haircut they have.

Moving along, one notices things like posture, gestures, and facial expressions. Do they have a smile, a twinkle in their eye, or do they have dour personalities? Do they speak softly, or loud? Are they well spoken or not? What kind of affectations do they have? I like to observe exactly what people are doing, and the body motions they use, comparing the data to past observations of other people.

People readers get an added bonus is when a person is interacting with another, or in a group. Interactions between two or more people can give volumes of information regarding things like temper, character, and and general mental state. Subtle, nonverbal clues can let you know if the person is a dominant person or a follower, information which can prove to be valuable.

A good reader can tell you the socioeconomic status of the man by sight, can tell you if he has kids, and get a good estimate of what his spouse is like. An experienced reader can make a good estimate of one's income, marital status, level of either happiness or desperation.

The best place to start learning how to make a read is by going to a mall and watching the men sitting by while waiting for their wives who are shopping Practice on men at the mall allows you to size them up, and then check the accuracy of your observations when the wife shows up. This allows one to hone their skills in reading people.

I attempt to read people as a mental exercise, everywhere I go from a restaurant to an airport. Recently, I was at a very nice restaurant and startled my companion with the accuracy of my reads of the various patrons. I learned to read people from too many hours at the poker tables and the wheat pit. In today's electronic markets, reading people might not be as important, but the same thought process and mind set is a very valuable tool in the arsenal of the speculator. Incidentally, some of the best readers are car salesmen, and people in retail.

Reading skills can be learned, although it takes great self discipline and an open mind. Beginning readers will get things wrong but as their skill level increases, their accuracy will approach 80% or more. Learning to read people is a very fun exercise, and will develop critical thinking skills that will ennoble your mind.

Steve Ellison writes:

Paul Ekman has studied the movements of every facial muscle and what thoughts these movements convey…here he is as described by Malcolm Gladwell in a wonderful article.

Ekman recalls the first time he saw Bill Clinton, during the 1992 Democratic primaries. "I was watching his facial expressions, and I said to my wife, 'This is Peck's Bad Boy,' " Ekman says. "This is a guy who wants to be caught with his hand in the cookie jar, and have us love him for it anyway. There was this expression that's one of his favorites. It's that hand-in-the-cookie-jar, love-me-Mommy-because-I'm-a-rascal look. It's A.U. twelve, fifteen, seventeen, and twenty-four, with an eye roll." Ekman paused, then reconstructed that particular sequence of expressions on his face. He contracted his zygomatic major, A.U. twelve, in a classic smile, then tugged the corners of his lips down with his triangularis, A.U. fifteen. He flexed the mentalis, A.U. seventeen, which raises the chin, slightly pressed his lips together in A.U. twenty-four, and finally rolled his eyes–and it was as if Slick Willie himself were suddenly in the room. 

Jordan Low comments:

It is interesting how we can get different views over different topics from books. Almost similar to how movies come in pairs — Deep Impact and Armageddon, for example. In Gladwell's book The Tipping Point, the NYC crime rate decrease from a host of factors that tipped the scale contrasts with Freakonomics explanation of legalization of abortion lagged 16 or so years. In What Every Body Is Saying by Navarro, he claims that facial movements are the least accurate. The most accurate body part is the feet and as we move up, the conscious brain can fake responses.

Sushil Kedia adds:

Desmond Morris. I urge everyone interested in the subject of watching, understanding non verbal behavior, deception & an endless array of related subjects to search this name on google. He is a maestro at this social science.

For over two decades I have been searching to obtain his lost title Ape Watching. One of my most revered teachers during my school days had shown me his copy and it was etched deeply in my mind. Resplendent pictures of apes capturing tell-tale nuances. Each picture therein is a unique shade of primal emotions. Just a glimpse through this tome, a flip across the hundreds of pictures taken by Morris was breathtaking. Based on a twenty year old memory, I reccomend you grab howsoever old and tattered a copy of this particular title if you see it. Amazon, google books, many other usual hunting pots in cyberia for books do not even mention it. Wonder if someone who has a serious interest in behavior studies has ensured that this title just vanishes. His numerous other works are fascinating as well, but Ape Watching would stand above any other book on any other subject I have ever seen. 

Feb

14

ShillerRobert Shiller updated his long series on real house prices (1890-Q3 2008). For today's exercise, using this data, I made the attached graph which currently shows reversal of about half the gain from 1997-2006.

Believers in over-reactions to the downside and history repeating might worry based on what happened in the past. There was a smaller bubble which peaked in 1894 at 124, and declined irregularly until bottoming at 66 in 1921 (47% decline over 27 years).

Surviving optimists might take heart from the 60% increase that occurred 1942-1947, which pulled back again but remained stable for decades.

David Riffer writes:

The thing that jumps out at me from this long term Shiller graph is that real house prices were roughly the same in 1988 as they were 100 years earlier. This cuts very deeply against the grain of conventional wisdom, but it is consistent with the seminal study by Piet M. A. Eichholtz that examined prices between 1628 and 1973 on the Herengracht in Amsterdam.

Feb

3

We have all heard of PTSS, but a well known response to trauma is substantial growth or PTGS. Those that espouse Post Traumatic Growth syndrome, believe great growth happens in the majority of the cases. But like the spectacular fall colors, which people drive by without noticing, it is too predictably common. It was only more recently that people started realizing that studying this growth may help more people achieve this growth and those that achieved some growth to grow more.

My layman’s thoughts on studying this may be more applicable to trading. This article and this excerpt from a book will explain the phenomenon better than I could. After reading the testimony of my younger brother, an MIT grad, on why and how he built a multimillion dollar charity, I realized that what we had gone through in childhood was pretty traumatic. I found myself asking a question that my Uncle asked me at my Grandmother’s funeral, “Why are Andrew and you overachievers?” And while there really is no one answer, I would have to say part of it would be our growth after trauma. If I gave you the details, you might think I'd blame someone, or that I'd blamed everyone. But I've learned that blame is a path to destruction and others owning you. But I also won't give you the details because they can't be really explained– unless you've lived them you don't understand them. You don't see how close a call the choice between, the blame and victim-hood; or forgiveness and empowerment; really was. This, I believe, could have some deep negative implications for the current crisis.

Clearly poverty had its hand in my families trauma. My Dad was smart and impressive enough to get jobs but he could not maintain them. We moved from small town to small town until we made a fateful move into Kansas City Missouri. Here eventually my Dad was to land a solid job at the US Post Office. Coming from humble small town background, my parents were incredibly naive about the “big city”. Like Scott will tell you about St. Louis, the other big city in Missouri, Kansas City was a rough town, getting rougher as it rusted in the late 70 and 80s. My parents moved us in a tough part of town. I learned to avoid people, but my younger brothers would find abuse and trouble by the beginning of elementary school. Several of the ones that were loyal to each other would end up spending time in prison. A few like him learned to grow after leaving home.

There is some controversy over PTGS. We know that stress can make you stronger. There are those that would say that this is just a scalable factor of strength through the recovery process. But I would disagree in 4 significant ways. First, there is something about facing a total loss that makes you appreciate the little things in life. The hug of a child, a cool drink of water, the sun on your back and the wink from your spouse all gain their place amongst the size of your balance sheet and your position of power. It may be you discover your childhood ideals again. It may be you see the failure of the dinosaurs to adapt. It may be that you discover that David can beat Goliath. It may be those giants are recognized as only one niche strategy. It may be that the flowers grow back first before the trees. Facing trauma can give you new assumptions, new goals and new insights into where you fit in the world. Seeing the trauma of Wall Street's great minds, great organizers and great leaders, I can't help but wonder how many IBMs, Googles, or Walmarts will soon be birthed. And how the small will be favored over the large bureaucracy. Second, trauma often is a lesson in the strength of avoiding panic. The “miracle on the Hudson” seems to confirm. It is also a lesson in what constitutes a crisis. Trauma survivors can have a difficult time believing what others are willing to fret and worry and run around in a panic over. Losses rarely mean there is no hope. Third, they realize there is great gain in the effort. Some of the most entrepreneurial friends I know are soldiers. They are not afraid of failure. They are deeply afraid of not trying or of giving-up. They have seen those that lost, lose it all. However if soldiers tried, if they kept the faith, they did not fail and will not lose the war. 

For the last 4 years I have run the Memorial Marathon in Oklahoma City. From this I’ve seen how giving your best effort is a form of bereavement, to honor those innocent lives taken. You live your best, as you are living for them also. The fourth reason is the impossible becomes possible. The deep philosophical questions are asked, in times of crisis and the answer is often “all things are possible.” Some will see it in a vision; some will feel it in a near death out of body experience, some have felt or heard God’s answer to a prayer. Others like the POW's or Holocaust survivors have been given the strength to carry on. What was once a limit, an impenetrable wall, is seen as the “sword in the stone”, waiting for the right person to try. I’ve learned from the Kenyans I’ve raced against, the impossible is only achieved by those that don’t know it is impossible. But this is not the naive, magical mysticism of "the J#sus wants you to be rich", televangelist nor the 70 virgins suicide murderers. This is the reality of herculean strength coming from heroic effort. It is a deep belief in themselves, and the responsibility that ensue as it is a faith of God. The path down madness will always seem clear, but the path to life and growth can come from billions of unseen spontaneous generated seeds.

Jan

12

Grandmaster Davies raises a good point in his post "The secret of the hand count."  Indeed, much of the major eastern consciousness lies towards cultivating such a state; but he may be surprised at quite a few western sources which may parallel. In the spirit of the theme raised, rather than superfluous explication, a more cogent understanding may be reached by placing hand over mouth and to just point and let ancient words speak for themselves.

“The pivot of Tao passes through the center where all affirmations and denials converge. He who grasps the pivot is at the stillpoint from which all movements and oppositions can be seen in their right relationship… Abandoning all thought of imposing a limit or taking sides, he rests in direct intuition.” [Chuang Tzu on wu-wei/non-being]

“Prince Wen Hui’s cook was cutting up an ox. . . . The ox fell apart with a whisper. The bright cleaver murmured like a gentle wind. Rhythm! Timing! Like a sacred dance. . . . Prince Wen Hui: Good work! Your method is faultless! The cook: Method? What I follow is Tao beyond all methods! When I first began to cut up oxen I would see before me the whole ox all in one mass. After three years I no longer saw this mass. I saw the distinctions. But now I see nothing with the eye. My whole being apprehends. My senses are idle. The spirit free to work without plan follows its own instinct guided by natural line, by the secret opening, the hidden space, my cleaver finds its own way… Then I withdraw the blade, I stand still and let the joy of the work sink in. I clean the blade and put it away. Prince Wen Hui: This is it! My cook has shown me how I ought to live my own life!” [to apprehend with your whole being - this version is Thomas Merton’s paraphrase]

“The purpose of fish traps is to catch fish. When the fish are caught, the traps are forgotten. The purpose of rabbit snares is to catch rabbits. When the rabbits are caught, the snares are forgotten. The purpose of words is to convey ideas. When the ideas are grasped, the words are forgotten.

Where is the man who has forgotten all words? He is the one I would like to speak with.” [on letting go of technique/words/language]

“A good traveler has no fixed plans and is not intent upon arriving. A good artist lets his intuition lead him wherever it wants. A wise man has freed himself of concepts and keeps his mind open to what is.” [Lao Tzu]

“The body is a Bodhi tree, the mind a standing mirror bright. At all times polish it diligently, and let no dust alight.” [Shen Hsiu - Head disciple of the 5th Patriarch of Chán Buddhism]

“Bodhi is no tree, nor the mind a standing mirror bright. Since all is originally empty, where does the dust alight?” [Hui Neng - temple laborer and later 6th Patriarch of Chán Buddhism, in reply to Shen Hsiu’s stanza above]

Cultivating samadhi (non dualistic discernment) towards allowing prajna (wisdom) to surface; to penetrate the veil of maya (illusion), achieve moksa (liberation) and reach atman (true self) - as in the Indian Vedanta.

Grandmaster Davies rightly speaks of the difficulty in finding Western sources which describes the same, but there have been western thought which shows some faint parallels, and which may be useful for further examination:

-Kant’s theory of imagination through which objective experience and subjective interpretation interacts dynamically in a limit process to arrive at perception.
-Schopenhauer’s sufficient reason.
-William James’s mysticism.
-Husserl performing phenomenological reduction in order to apprehend pure cognition.
-Heidegger’s existential Dasein - “being-in-the-world”.
-Jungian archetypes and potential actualizations.
-Emerson’s and Thoreau’s transcendentalism.
-Thomas Merton’s interior contemplation.

And perhaps, more recently and surprisingly applicable to varied fields, including trading –Timothy Gallwey’s Self 1 and Self 2 in his cult classic, The Inner Game of Tennis.

Jan

10

What Is?

Life is …
Love is …
Happiness is…
Success is …
Marriage is …
Parenting is …
Family is …
Friendship is …
Teaching is …
Knowledge is …
Wisdom is …
Art is …
Living is …
Hope is …
Compassion is …
God is …
Truth is … Religion is …

There will be myriad of answers to all of life big “is-es”. They are all, what you make them. And living will make you answer them like it or not. Make sure the answers you give deeply suit your nature. Watch those around you. Study those giants of before. Examine how great men, men you admire, answered these questions. Wonder how they lived their lives, and how it suited their nature. Learn how they looked deep within themselves and persisted for the long term. Also watch those that faltered. Ponder why they failed. View the shallow, short sighted answers they gave. Decide if they were true to themselves. If you do this, you will know yourself. If you done this … people, those that matter to you, will want to learn from you how you answered these questions.

Jan

7

I started out writing a review of American Pop, a 1981 movie, but was at a loss for words. This animated tale of four generations of a Jewish American family set to the popular music of the day just defies description. A heart rendering story line set to the best popular music America has to offer is just about all I can say to describe this wonderful movie. The creator, Ralph Bakshi, managed to seamlessly weave the popular music of the day into a storyline that tells a story about every family that emigrated to this great country. It combines triumph, tragedy, hope and despair all set to an amazing musical sound track.

Starting out with a traditional Aneinu in Russia, progressing through ragtime music, to the music of the 1930s and the big bands of the 40s, it continues through the music of Brubeck in the 50s, the 60s music of Hendrix, The Doors, and Big Brother and the Holding Company. The movie artfully segues into the late 1970s with the music of Lou Reed and the first elements of the punk scene. Since the movie is about a family and it's complex relationship with music, this is a must see for everyone. Very few movies in my life have affected me as deeply as American Pop. Although the premise of the movie is very straightforward, it is a very complex piece with numerous twists and turns, and layers upon layers just waiting to be peeled back. Much of the movie is sad, depicting the struggle of a Jewish American family trying to survive in America. Without giving out a spoiler, the movie has a triumphant ending. Here's a link to the trailer.

Dec

28

PonziI'll suggest that empathy does exist, but that sympathy does not. I'll concede that $50 billion is a substantial sum and that Madoff is a bad, bad man. However, I am personally aware of individuals who will argue that they collectively lost substantially more with the dot.com bust up; and, further, that some of the sleazes involved in the never-ending promotion of those equities were as culpable as BM yet suffered either no or minor consequences.

Those burned earlier certainly can empathize with the more recent victims, but find sympathy difficult to muster when the common reply to their plight was "We're sorry, but it should have been obvious that the market was in a bubble."

Additionally, Ponzi schemes and other swindles far more frequently target the farmers, pharmacists, and farriers of my region than the doctors, lawyers, and Indian chiefs of New England. When it occurs here, it's generally revealed on the 10 o'clock news with some thirty-something Yankee-import filing a 3-minute report concluding with the inevitable finger-wagging "if it sounds too good to be true, it probably is." While never stated, the implication is clear: "these rednecks will never learn."

However, when we have a Madoff event, we no longer have a "Ponzi scheme." We have a "Very Sophisticated Ponzi Scheme." Again, it is never stated, but the clear implication is "no one but the very, very clever and very, very bad can gull the Masters of the Universe." And news coverage goes well beyond 3 minutes with "specials" running 30-60 minutes; calls for congressional hearings are de rigueur; and presidents (past, present, and future) chime in with words of concern and promises of action. You will not hear a single "if it sounds too good…etc."

Apparently it is bad form to give the finger-wagging lecture to the victims of a "very sophisticated" Ponzi scheme. Likewise, it must be bad form to voice general sympathy or call for congressional hearings when the great unwashed take their first financial bath at the "stay-the-course" urgings of those always optimistic brokerage houses (RIP).

In general, then, it seems to me that the apparent lack of sympathy stems from an unavoidable perception that there is greater concern being shown the wealthy in this, their most perilous moment. And while suicide is a most terrible thing, I would wager there are millions of poor schlepps who were similarly wiped out, yet still go to work every day facing the new reality that they'll never retire…and, indeed, might live the rest of their lives in poverty.

Millions of others, myself included, wonder if the whole story has been told. We don't worry that $50 billion sounds too high. We're concerned it may be too low, that there are other Madoffs out there - that our pension funds may be the next to be listed as insolvent. If we have learned anything in the last decade it is that there are a substantial number of dishonest, unsavory characters populating the financial industry. Worse, rather than being the brightest, some of these individuals are almost criminally stupid - however, many are aware of this short-coming and to cover for it, invest our funds with someone really smart - like Bernie Madoff.

Very sophisticated, indeed.

Nov

13

"Slumdog Millionaire"

Directed by Danny Boyle Review: marion d s dreyfus

Starring Dev Patel, Freida Pinto, Madhur Mittal, Anil Kapoor, Irfan Khan

Primed to like it by a colleague last week, I was still caught by surprise by the energy of the "Slumdog" early scenes. The bite of poverty, and the aerial view of the vast Bombay sea of corrugated tin roofs with their endless mucky, interdependent, tangled lives. Begging for rupees yields to diverse plucky polarities in their different lives, eventually leading to nobility.

One recognizes the techniques employed by the armies of the midget mendicants in Nepal, India, Algeria, Morocco, Tunisia, Oceania, North Africa and similar venues where parents are scarce through no fault of their own. You mumble a blessing for the plenty surrounding us, our siblings, our children, our extended families.

The gritty humor and pragmatism shown in the brothers' young-mature existence, in parallel with the nearly surreal unspooling of the rough life they liver without self-consciousness–their rags were their only clothing; their barefoot state just as common; their beautiful mother's shocking and unwarranted death at the brutal beating of rampaging religious fanatics is atypical for a Western film–she is too young, too lovely, too careworn and too protective of her sons to die so brutally, with no commemoration other than her fleeing sons, Salim (Madhur Mittal) and Jamal. She is seen for a few moments, then forever gone. But everything about these young boys' lives is that old schoolyard worldview: unfair. The film utilizes the framing device of a program that is a simulacrum of the same program here, "Who Wants to Be a Millionaire," which still excites citizens of many countries where the concept of 'millionaire' still resonates. We enter the film as Jamal (Dev Patel) is going through his stepped paces as contestant, escalating the financial ladder. All of India is riven by his climb.

As the film showcased its load of emotional Bombay flashbacks as to how Jamal managed to correctly answer so many diverse questions in the run-up to the jackpot, he is in police custody as a suspect of cheating on the popular game show. I particularly appreciated the protagonist's solemn face and unbroken acting; he gave no hint that he was other than reliving the chaotic and miserable life of the harijan. He sweated out the answers based on his hard-scrabble life. Other actors are equally powerful, and Latika (Frieda Pinto) is beyond gorgeous as the childhood playmate he thought he had forever abandoned to begging or worse. The tough-cookie NYC reviewer audience, usually hard as week-old baguettes, sat enthralled by the hypnotic mix of scenery, charm, motion, dialogue and lushness with soft-focus flashbacks that spent out the minutes of this affecting narrative.

As the story harks back to memes of well-crafted literary fictions favored by Charles Dickens, it touched on some of the derring-do and tension of the "Bourne" trilogy, and the signature elegiac moments of many genre films. What swiftly turned the wonderment to broad beams of delight, however, was the wonderful credits featuring all hands at a Piccadilly Circus-like train depot, and what looks to be the entire population of Mumbai in ecstatic limb-flinging, knee-hoisting, syncopated Bollywood costume-and-motion extravaganzas so beloved on the repeating loops at any of the treacly Indian restaurants in the curry-and-poori alleys of your favorite big town. (In addition to seeing the vast sea of slum corrugated roofs of Mumbai, you get to see the Taj with Raj, too.)

The miraculous thing is, the precarious hand-to-mouth living of the young Jamal and Salim are caustically accurate today, with maybe more chai Wallah (tea-service servant) and computer thrown in than polishing of shoes and reedy singing to gullible tourists. This dingy-scrubbed two hours transports you back 50 years, and magics you, smiling radiantly, into the big shouldered, all-business Bombay today.

Little scatology, no sex, just a deeply felt, panoramic movie movie you can settle into and come out ready to discuss. A spicy tandoori chicken dish of a film: Some hot places, some vegetables, a surprising lumpo here or there, but a hypnotic experience after all's said and done. You feel delight for hours after you leave the theater, and the woes of the Dow are subsumed to the elations of "Slumdog."

Oct

19

pic"W." shows him to be a man of principle and caring, though a bit hijinks-committed as a stripling, OK–but now deeply faithful–surprising from a man like director Oliver Stone, maker of big, entertaining films about significant people, but often not reliable histories of the eponymous films created.

Another guilty pleasure, in a way, these Oliver Stone films:

as works of art, they are above-average entertainment, although don’t mistake them for documentaries. “JFK,” for instance, was a terrific movie, but anyone who bases his or her understanding of the assassination on Stone's movie will be severely misinformed. Likewise, the darker biopic, “Nixon,” which while very involving was not the valentine to the former president that “W.” appears to be. Stone is not Michael Moore. Watching this enjoyable though not heavily ground-breaking Texas through White house trawl, I feel Stone disappoints the Bush Derangement syndrome avatars, and went out of his way not to do the kind of over-the-top ‘coverage’ that Moore certainly shaves his name into.

One has to wonder at the timing of the release. Since the election is so close, surely he meant to piggyback on the possible frisson factor of getting the goods on the sitting president as he enjoys his last months in the nation’s Capitol. But since one emerges from the film liking this George more than one went in with, and it certainly does not affirm any of the distortions that have been bruited about the reasons for our entry into the Iraqi and Afghani military enterprises, one again is put to the question: Why make the movie?

The casting of many of the strategic roles is itself a hoot, and you see how deliciously Richard Dreyfuss (not my namesake) licks his chops at being the brilliant though carefully cloaked Dick Cheney. Likewise, Scott Glenn does one of his few wrong turns in the industry with his obdurate, snarky Don Rumsfeld. Condoleezza Rice is done a disservice, it seems to this reviewer, by the usually lovely Thandie Newton; she is nasal, whiny, servile, and wound even tighter than the original, but she comes off , as written here, as an insignificant twerpy entity nipping at the heels of the President. Elizabeth Banks does a gorgeous Laura, and I too fell in love with her (she’s lovely, supportive, kind, literate, kind of what the ideal wife should be in the best of all bests). Barbara Bush is brought to vivid life by a tough Ellen Burstyn, matched by Bush 41, reserved, careful and patrician, as evoked by the dependable player of presidents and senators, James Cromwell.

The image of Truman Capote dithering beatifically over the proceedings was distracting, because someone (mistakenly) cast Toby Jones in the role of ‘the Architect,” Karl Rove. Jones is a good actor, and he bears a surface resemblance on some level to Rove, but he just played diminutive gay scribe Truman Capote, and he still looks too much like him in the mind’s recent imprint. Rove has a different valence than Jones and this impression was erroneous. Jeffrey Wright bore the necessary gravitas for Colin Powell.

The film intercuts the past and present, omitting the campaigning process for Bush 43, omitting various crises, but showing the various Cabinet trials and Middle East challenges, showing the younger Bush through his Yale-Harvard years, as a good ol’ fratboy with a huge round of friends, his oil days, highly telegenic Americana and keggers…but also as the baseball team owner, and as the successful campaign manager for his father’s huge 1988 trouncing of Dukakis.

Overwhelming experience as the film unspooled: surprise: If Stone wanted us to dislike or distrust the man, we don’t. Instead, we watch a strongly principled man who means well, is devout (too-long absent Stacy Keach inhabits his pastor-evangelist, Earl Hudd, with delicate unctuousness and presence), loves his country, his deft and delightful wife, and his daily 3-mile runs.

Drudge carried a small item from Jeb Bush, right after the former Florida governor saw the film, that called the spine of the film, George’s strident Oedipal rivalry with their dad, “Hooey.” But the film can be enjoyed for its own sake, if one can put aside cherished misconceptions and petty rage. For the unhysterical, this is a not-unpleasurable viewing experience. If you’re fair (it probably won’t cure Bush Derangement Syndrome, unfortunately), you’ll enjoy this well-crafted biopic.

Will it have any impact on the election? TBD.

Sep

13

Greg RehmkeI wrote earlier (April 1) to argue that the increase in oil prices over the last few years was providing a vast stimulation both to further oil exploration and development, and to expand effective (i.e. private sector) research and development of alternative energy and electric cars.

I asked then how far oil prices would fall as new energy supplies came on-stream and Americans purchased smaller cars and reduced their driving. Of course oil prices continued up since that April 1 post ("How Low Will Oil Prices Go? "). My frustration then was with the media's continued calls for government to intervene, and reporter's lack of understanding or appreciation of markets. New York Times reporters seem always surprised when automobile use declines in response to higher gas prices. And reporters usually claim oil prices have fallen only because world economies are in recession or teetering on the edge. (For many reporters, recession fears will end only when a democrat is again confidently pushing and pulling the levers of executive power.)

I was in error, in April, in assuming that consumers around the world were paying higher prices for oil, as they were in the US. If $3 and $4 a gallon oil was significantly reducing driving in the very rich US, it should have had a larger impact in poor countries. But of course governments in China, India, Indonesia, Russia and elsewhere have even less faith in markets. Price controls and subsidies there insulated their population from higher oil prices. Distorting or blocking price signals prevents recalculation of transportation resources. Transporters keep driving older inefficient (and heavily-polluting) vehicles instead of trading up to cleaner, higher mileage vehicles. Subsidized gas and heavy taxes on new cars are a source of air pollution in Cairo that is 10 to 100 times acceptable standards. Removing taxes on new cars and allowing fuel prices to rise would help clean the air at minimal net cost. (And if state governments in the US would suspend sales taxes on new and used cars, consumers at all income levels would quickly trade up to cleaner, more fuel-efficient cars.)

Without price signals, industries in poor countries can't tell which are creating wealth and which are actually reducing the value of inputs. To claim that industry and transportation in developing countries are too poor to adjust to higher prices is to ignore reality. People and governments in these countries are too poor to burn oil and dollars wastefully though gasoline subsidies. Market reforms and economic progress over the last ten years in India and China provide exactly the flexibility needed to adjust to higher oil prices. If Chinese bureaucrats had not been so fixated on stockpiling diesel for the Olympics, and keeping prices fixed to avoid protests while in the world spotlight, the recent oil and diesel run-up would not have been so severe.

Economic progress over the last ten years has been the fastest for the most people in the history of the world, thanks mostly to expanded economic freedom and investment in India and China. And what's past is prelude: the pace and scope of world economic progress will accelerate and expand over the next ten years. Technology has cleared the path, and international information and investment flows will widen it.

I have mentioned before Michael Cox’s metaphor of four men dropped in a jungle, but only one has a machete. Who gets out first? The surprise answer is that they all emerge at about the same time. The man with the machete clears the path, and the others, once they find it, sprint along to catch up. Everyday people in England, Western Europe, the U.S. and Japan, cleared the path with thousands of agricultural, banking, and industrial innovations over the last few centuries. And now everyday people in China, India and Eastern Europe are putting in long days both to deploy long-available world technologies in their once isolated lands, and to create valuable goods and services for businesses and consumers in already-wealthy countries.

This a good thing. Billions in India and China are earning money (and saving much of it) producing goods and services for others. Both parties in all voluntary trades benefit. Astonishingly, this progress is being achieved against hostile, incompetent, and corrupt governance impeding investors, workers, and entrepreneurs in China, India, Europe, and South American (and, of course, in the U.S.).

A recent Book Forum at the Cato Institute featured the 2008 book “India: The Emerging Giant.” Both the author, Arvind Panagariya, and Cato commentator Swaminathan Aiyar, emphasized that India’s progress was in the face of India’s trademark government corruption, incompetence, and deeply interventionist regulations. Both speakers emphasized the good news for developing countries in the information age: if India can achieve sustained 7, 8 and 9% economic growth with its current government, well, any other poor country can too. More good news: the recent Indian government shake-up may bring more market reforms and partial privatization of Indian electricity, airlines, and other state-owned enterprises.

India prospers through expanded international trade and investment only as it creates wealth for its trading and investment partners. This means wealth is also created on the other side of those trades in the United States, Europe, China, and Japan. Over the coming years hundreds of millions more in India, as in China, will train and work hard to provide goods and services to Americans and Europeans and will purchase high-quality goods and services produced in America and Europe. And trade doesn't just expand. It deepens and grows more complex. Call center and software consulting teams intertwine advanced and entry-level services across continents, for example, and evolve unexpected divisions of labor and comparative advantages.

Indian government universities graduate 30,000 Indian engineers each year, but private colleges in India are graduating 400,000 engineers a year and expanding rapidly. “From 1990 to 2003 the number of engineering colleges alone [in India] rose from 337 to more than 1,200 (of which almost 1,000 are in the private sector)” –WENR

Informal private schools are also expanding rapidly across India, providing inexpensive and high quality private education for poor children—by far the largest work force in the world (one of ever four new workers in the world over the coming years will be in India). James Tooley’s research found over 300 “informal” unregulated private schools in just one slum area in part of the Old City in Hyderabad.

My first draft of this essay was written on July 15, and the day's headlines claimed a “plunge” of oil prices to $139 a barrel. This seemed a joke. A real plunge would take oil below $100 a barrel, which is still way high. Decades of federal government regulations restricting oil exploration and drilling, restricting the building of new refineries and new coal-fired and nuclear energy, have long restricted energy supplies in the US. And governments around the world mismanage monopoly oil exploration and development.

Price controls keep gasoline subsidized in many countries, so price increases don’t slow demand. Governments eventually allow prices to rise slightly and then have widespread protests. Government interventions overseas have turned citizens there into energy cripples, dependent upon the state, just as interventions in retirement savings here has turned most Americans into financial cripples, dependent on bankrupt Social Security and Medicare.

Government mismanagement of production in Mexico, Nigeria, Iran, Iraq, Venezuela, Libya and Russia limit incentives to boost oil production. People respond to incentives, and if those in government and with monopoly oil companies don’t benefit from expanded exploration, drilling, and production, they will instead focus their attention on activities that provide tangible personal gains.

Speculating on oil, food, and other commodity prices on the side has been one particularly enriching activity enjoyed by government officials in China, India, Indonesia, Africa, and South America. Just as Congressmen and Fannie Mae executives have taken advantage of “special” loans and donations, so local government officials around the world have tried their hand speculating with the commodity purchases they control. Chinese officials put in charge of making sure their district has enough iron and copper ore, diesel fuel, and rice, have purchased extra quantities to warehouse against possible shortages (they say) and price increases (they hope). Teapot Dome scandals may be waiting to be uncovered around the world. If governments are responsible for providing rice to “their” people, you can count on eventual rice shortages, along with ongoing spoilage, theft, and corruption. (See “Rice Hoarding Pressures Supplies" from May WSJ).

We can expect these public/private speculators to be wiped out as commodity prices crash on further fears that financial institutions and economies are faltering, and as new oil and natural gas supplies come to market. The silver lining in this financial cloud: governments faced with massive losses might be willing to strip government agencies of the power to play with commodity and finance fire. Maybe the U.S. government will give up backstopping home-loans as it faces absorbing a few trillion dollars in bad debts.

The great, great news is that people around the world will prosper, along with their financial institutions, as energy, food, and commodities move to more open markets directed by transparent and private firms. As governments get out of the way, supply-side and demand-side innovation and entrepreneurship will quickly boost production and drive commodity prices down, as free-markets have over the last few thousand years.

Sep

12

V NThere are universal principles that apply to success in all endeavors. I took 10 for cricket by Micoach adapted from The Path to Athletic Power by Boyd Eply who apparently is a famous power coach.

1. Ground based activities. You play most games on the ground so your exercises should be on the ground. Yes, and the way to test a system is to apply it in the real world, not on paper. You must go back at least x years and see what it would have been like at that time.

2. Multiple joint activities. You use all the joints, in coordination. Squats do also, but a leg extension just requires the legs to move. You need to see how your tests and market activities work in the real world when you have multiple positions not just one at a time.

3. Three dimensional movements. Weights train you on three planes but the wire machines train on only two, "with the weights and pulleys taking the strain." In the world of markets, you are embedded in life. The family comes in. Food must be eaten. And sometimes you must leave the screen and take breaks. The announcements don't come when you expect them. Take this into account.

4. Train explosively. Speed comes from how quickly your muscles work. Work with sprints "and Pliometrics" not slow strength or sprints. Do vary your market positions according to the odds and expectations.

5. Progressive overload. Keep increasing the reps.

6. Periodisation. Take account of different time periods and days.

7. Split routine. Do weights on some days and flex on others giving your body a chance to recover. How about commodities at the end of the week and stocks in the beginning and grains over the weekend.

8. Hard easy system. Take it hard some times and easy other times or you'll burn out. Try skipping trading some days and spending time at the gardens.

9. Train specifically. Make it as close to real things as possible. No long runs unless you're a distance runner. Please don't paper trade only and do take account of margins and slippage and your broker front running you.

10. Interval training. Long periods of rest and then an explosion "just like you get when batting, bowling or fielding." The whole game hinges on what you do during seconds. Be prepared and never let down your guard. 

I'd be interested in how readers think the ideas of cricket and power training of Eply and Hinchliffe are related to or different from universal principles applicable to markets.

Martin Lindkvist replies:

Martin LTo gain power, muscle fibers need to be damaged which then leads to the cells repairing themselves, overcompensating, creating new growth and more power. Likewise, you cannot have profits without allowing for drawdowns.

Using many different exercises allows for the muscles to be trained from many angles creating more strength also in the power movements without overtraining in those few specific movements. Using many different/diversified signals/systems allows for more profit compared to overleveraging just a few main signals.

When you train with heavy weights, do use a spotter that can help you get the most of the exercise as well as making sure that you don't hurt yourself, or use a power rack. In markets when leveraged, consider utilising a risk manager for the same function, catastrophic stop loss, etc.

When you have had a while off, start out easy with lighter weights, or fewer contracts.

Sep

1

Any thoughts on the paper "The Two-Year Effect" by Graham Bornholt ?

This paper identifies a puzzling form of predictability in U.S. stock market portfolios. For the value weighted market index, those years that follow a low return two years earlier have an average return 11.6% higher than those years that follow a high return two years earlier. The difference in returns is economically and statistically significant.

Vic and Laurel reply:

Let us say it does not come as a complete surprise; the strong negative correlation between the current year return and the return two years back is mentioned in our book Practical Speculation on pages 210-211. See in particular Table 9.2 on Page 211,
9.2

We invite the submission of relevant analyses.

Kim Zussman follows up:

Using SP500 (w/o dividends) I checked Dec-Dec returns 1950-07 for years coming 2 years after down years (the year after the year after a down year). Comparing these with all yearly returns for the series showed them to be higher, but the difference is not statistically significant:

Phil McDonnell expresses skepticism:

One way to test for a two year negative correlation is to calculate a correlation coefficient with a lag of 24 months. For S&P adjusted [monthly] returns from 1950 to 2005 we get the following correlations at the various monthly lags from 18 months to 33 months:

Dr Phil autocorr table

Note that the correlation at 24 months is actually +1.55% which does not support the idea of a negative correlation at two years. However overall most of the monthly correlations are negative in the 18 month to 33 month range. Another indication of how weak any effect may be is that none of the correlations rise to the level of 5% significance. Given that there are 16 chances we might expect that at least one would be significant by chance alone.

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

Alex Castaldo replies:

I thought we were discussing yearly returns, not monthly. You lost me somewhere.

Jul

18

LitchfieldYears ago I knew well a doctor who lived up in Litchfield County CT. It's surely one of the more picturesque areas in that part of the country, but since the general store was the social center of the town, not the easiest place around for a young (read: randy) woman such as she to stalk her prospective prey.

So she would troll the New York Magazine personals, arrange her NYC assignations, then invariably seek sanctuary in my Westside apartment when those evenings' proceedings would go awry. Apparently false advertising runs rampant in that game.

Not one to be easily dissuaded, she modified her tactics a bit by trading up to the presumably more princely personals found in The New York Review of Books. Of which, the Wikipedia profile pretty much says it all: "…Esquire has called it 'the premier literary-intellectual magazine in the English language." And, "…what Tom Wolfe has called 'the chief theoretical organ of radical chic'."

It's got lit cred.

According to the lady doc, though, its personals also had some of the most pedantic poseurs ever to slither down Riverside Drive. Turns out there is some sort of cluster of them up there in Morningside Heigths. Check out some of these cats. The self-descriptions read like the composite of a singles scene sociopath:

"…Contributes to the community, sits on boards…Very creative, but sadly no green thumb—buys plants and apologizes to them…Cambridge-based scholar, slim, pretty, fit, interested in tennis, travel, stargazing…thinks deeply, politically liberal…Interested in social change…Actively enjoys trekking in Nepal, tapas in Barcelona, snuggling at home, The Economist, Mozart sonatas…seeks arts-loving, progressive travel companion for Rockport, Napa, Machu Picchu, Paris…Especially interested in food, engaged in political action…Passionate brunette—long legs, slender good figure, classic features very Ava Gardner-esque, with irreverent and intellectual twist…Embraces life’s possibilities, insatiably curious about the world, calm, unafraid of fun, projects a whimsical, articulate sweetness…Willing, attuned, gives the moment her all. Drawn to history (European, Japanese, Russian), gestures of simple caring…Described as having depths…Without cliches…"

Alas, the lovely lass is married now — though not to the London metals trader I introduced her to. But back in the day (mid-80s-mid-90s), the office she worked at outside of New Haven was quite a well-stocked pond. Unless it was a total anomaly, it was where I learned that female doctors tend to be equally as forthright in their dealings with guys as they were straightforward in their studies. Nothing elliptical there on either count.

Jun

28

Ayn RandFinally I could invest the time to start reading Atlas Shrugged. I have chosen the word invest advisedly here; I have finished reading Part I and decided to take a pause at the end of page 312.

Bearing fully in mind the introduction by Leonard Peikoff that begins by stating that Ayn Rand held that art is a “re-creation of reality according to an artist’s metaphysical value judgments”, it strikes me very hard to seek your opinion if really in the America of the last century there indeed were characters such as Jim Taggart, Orren Boyle and the sort of hoi polloi that has been described continuously in these 312 pages. I have no doubt that there were a lot of Dagny Taggarts, Hank Reardens, Ellis Wyatts who helped (re)build modern America further, but it beats me if really there was a time when the over-riding thought and action of the day was being shaped by Jim Taggart and Orren Boyle types as well. What do you think? Has the author erred in stretching the shadows far longer to produce the effect or was there really an America like that also?

Alex Castaldo attempts a reply:

You are not the first non-US reader of Ayn Rand to be puzzled by this question. As a foreign-born American I was surprised that her books were set in the US when you could easily come up with better examples of government/business connivance from other countries. Americans can consider themselves lucky that they are better off in this respect than some others. Indeed I have often asked myself where is the Italian Ayn Rand who would speak up about how some of Italy's wealthiest people have made their fortune largely through political connections and improper operations, and explain the difference between this and true entrepreneurship. Sadly he/she does not seem to exist (possibly for lack of readers).

Part of the answer may be that Ayn Rand was most familiar with Russia and the US, so of course she chose to write about these countries. Also, she was concerned about trends and developments rather than the immediate situation; the US in her books is perhaps the model of what could happen to any country if the disturbing developments she saw around her were to continue. Her books are, among other things, a plea for the US to retain (and improve) its traditional values and not adopt those of the then ruling class in Soviet Russia.

Jun

4

It is surprising to note that the Sage of Nebraska has not been tarred with the same brush as many of the other financial companies that they regularly buy things from at deeply marked up prices.

I also note that oil is at its first N day low in a month, and this has had interesting predictive correlates with other markets in the past.

May

22

Economics is in a far earlier stage of evolution than physics. Unfortunately, it is often poisoned by political wishful thinking, just as medieval science was poisoned by religious doctrine. Taxation is an important example. The interactions among the myriad participants in a tax system are as impossible to unravel as are those of the molecules in a gas. D. Ranson in WSJ.

 "Medieval science" (sic) was not "poisoned by church doctrine". It existed because of church doctrine and because of church money. Galileo got in trouble not for his science but for deciding that he should tell the Pope what Catholic theology should be.

It is true that the "interactions among the myriad participants in a tax system are … impossible to unravel", but it has nothing to do with physics. Physicists have reached the point where they have sufficient understanding of "the molecules in a gas" that they can model the origins of the universe itself from the cosmic egg that awful Papist Georges LeMaitre hypothesized in the 1930s. It is, to me, one of the delicious ironies of the history of science and religion that Einstein found LeMaitre idea so deeply offensive to his theology of physics that he refused to even consider the idea of the Big Bang. It is a measure of LeMaitre's greatness that when Pius XII decided to do a Galileo and use LeMaitre's science as justification for the Pope's theology, LeMaitre wrote to him and told him ever so politely to cut it out, that physics could not and should not be used to address our questions for God.

Neither should physics (or biology, for that matter) be used to address the questions of economics. As a study of people and what they do with their money and things, economics can only hope to match history as a discipline; it can never "evolve" into a predictive science because human beings are, as Mises reminds us, far more fickle than any of the wave/particle uncertainty. Molecules are easy; the human comedy is hard.

May

14

Turmoil in Nigeria adds to oil uncertainty, but behind the scenes the big oil question keeping prices up seems to be Ghawar. This one massive Saudi oil field produces five million barrels a day, 60% of Saudi production and 7% of world oil production (more than all U.S. wells combined, says the WSJ). Matt Simmons and other peak oil advocates claim this 20 by 175 mile field is in significant decline. The secretive Saudis won't say, but a recent Sanford Bernstein study cites satellite data to claim Ghawar is okay. "Junk science!" says Matt Simmons of the satellite data. Saudi mismanagement of Ghawar in the past–perhaps when oil prices were very low–may be causing severe problems today (NYT 2004 article). Many new wells are now being drilled, but with steeply higher prices, that is to be expected.

With so many oil "experts" issuing reports on oil development and production around the world, it is hard to tell whether new oil finds and production will over-balance declining production in old wells, turmoil in countries like Nigeria, and industrial and transportation expansion in China, India, Mexico, Brazil, and Eastern Europe.

Delta Airlines faced similar problems some years ago researching airline data on seat availability. How could Delta determine when competitors were selling lots of seat on particular routes? What data could they trust regarding ticket sales for future flights? The answer came from economist F.A. Hayek. Prices reveal information about supply and demand and a Delta executive well-versed in Hayek realized he could judge competitor's seat availability by watching changing prices. As ticket prices rose for a particular route and flight, that meant the seats were filling up.

Similarly, though oil experts don't have perfect or even partial data on the Ghawar field, recent rising prices might reveal the reality of serious problems. Saudi Aramco may be secretive regarding Saudi oil production, but hundreds of oil field workers and consultants have detailed information. It is unlikely that the best information about Ghawar will come from satellite observations 22,000 miles out when hundreds of oil field workers and petroleum engineers are right on top of Ghawar wrestling daily with production issues. Is there a pathway for their inside knowledge and information to reach oil market and influence prices?

The key problem, as a recent Forbes article ("Give Oil a Future") notes, is the lack of long-term futures market in oil. If major oil companies could lock in even $50 a barrel for oil over 20 years, they would pour funds into developing many more fields than are now active.

Perhaps the Strategic Petroleum Reserve could provide this service. The Federal government should privatize the reserve, selling up to 500 million barrels (leaving far more in the reserve than has ever drawn down in crises, according to recent NYT op-ed). Income from oil sales could be set aside to guarantee purchase of 500 million barrels at $50. That would allow companies to lock in that minimum price now.

Of course the Federal Government has a poor track record speculating in commodities. For example, in the 1980s, the the Dept. of Agriculture had millions of pounds of cheese stuffed in Kansas City area caves (an expensive Strategic Cheese Reserve). ["In the limestone caves and above-ground storage space of the Kansas City area is the largest single share of the nation's dairy surplus. According to the Department of Agriculture, the area stores about 25 percent of the country's 473 million pounds of surplus butter and about 20 percent of its 876 million pounds of surplus cheese." NYT, July 1983.]

[Forbes offers a nifty chart of nominal and real oil prices from 1868 to the present here. Of course the prices are misleading as they are not adjusted for true cost (hours of average labor per barrel), or for much increased automotive miles per gallon of gas/barrel of oil.]

So, is the high price of oil a distillation of hundreds of experts thousands of investors, and millions of consumers, or are market prices distorted by fear and wishful thinking? A problem is that everybody except one group enjoys high oil prices. Environmentalists cheer as people buy fewer SUVs and drive less. Urban transit folks like it as more ride their mismanaged mass transit. National Defense people welcome high prices that improve "energy security" by leading to billions invested in traditional and alternative energy production in the U.S. And the energy industry and energy investors are happy with higher prices and profits.

The only group not gaining are everyday consumers who pay more and have to cut back other expenses and adjust their travel plans to cope with high prices.

May

13

Nicaragua lacks first-world eases and is constantly bowing to the golden rule of travel that the less money spent the more adventures. This is the poorest Central America country, from the Caribbean swamp up the volcanic spine and down to the Pacific white sands, where I want to introduce you to the people I rubbed elbows with.

No one runs after a bus in Nicaragua. There will always be another one. A traveler with a map need have no fixed plan if he thinks quickly. The bus terminals in the towns I frequent are usually dirt lots turned steamy mud if it rains. Dozens of buses and mini-vans await like crouched animals, and the choice, while munching a sandwich, often boils down to selecting the driver and passengers. I board early, drop my pack onto a front seat for the reservation, and leave for a drink as the bus fills for departure. When it's stuffed out the windows, the dogs are shooed and the gladdest moment begins- a start into a strange land.

Often across this watery nation the buses link with park-and-ride horsemen and ferries. In boondocks Rama, after weeks of brown faces and Spanish, I step down from the bus onto a tug for a chug along the Rio Escondido to Bluefields on the Caribbean. Sun and wind in the face sitting on the bow, over my shoulder floats, "Oh no, not another Gringo!".

I swivel and behold a huge graying cowboy under the broadest brim extending the biggest hand on the planet. I rise but he withdraws the hand. In one swift motion he pulls first from the right boot and throws a shadowy knife, then from the left boot, one from each shoulder, both sides of the waist, and finally the breast for a total of seven invisible blades. I reply, "The peculiar thing is that each barely nicked my skin", which is accurate had they been real. He guffaws, pumps my hand, and states, "My friends call me Lucky; I have no enemies."

He blocks out the sun and spins his story between banks of waving grass. Raised on an Arizona cattle ranch, Lucky's father was a career soldier who disallowed his Navy Seal son to go to Viet Nam. So Lucky took his penchant for cutting things first to darts, winning the world championship, and then to wood carving a bedroom set that sold for $300 on a Phoenix street corner and blossomed into a million dollar a year business employing five steadfast Nicaraguans. Three decades passed until a year ago. He lay down in a bed he'd made and told his wife, "Honey, give me a divorce. I crave the old America without the strangling rules. I'm going to Nicaragua and start a cattle ranch!" He bought land near Esteli in the central mountains, cleared it to waist deep grass, bought good stock, and gained a reputation for throwing the best calves in the country. Trouble is, one calf is a month salary on a man's shoulder under a rustler's moon. He patrolled nightly forty fenced acres on horseback with a shotgun, two .45 pistols and seven knives, only to get stung by boot scorpions, lose a horse to a rattler, and gradually lose the rustlers' war to fatigue. He arrived yesterday in Rama for a Last Hurrah, the name of the proposed ranch, carved somewhere along the Caribbean at a remote place that thieves can't discover. "It's easy," he says. "First, find land with tall grass and water, and buy an acre per best cow you can purchase. Inseminate them with the best bull. Watch them eat grass, make love, and make money. Take cold showers for a year, and you're a rich man. Look at this river grass- my Last Hurrah is around the bend!".

Bluefields on the Caribbean swings into view around the river mouth, the tug cautiously pulls alongside her tilting pier posts, groans, ropes heaved, and the thirty Latino passengers bustle to the fore to disembark. However, we hang aft, our interest taken by a dozen staring men like statues plugged onto the wharf. "Whew!" I whistle softly .They resemble apes in rags, with drug glazed eyes as flat as bottomless seas under tremendous brows. Lucky grabs his homestead suitcase in one hand and reaches a big mitt in a pocket, withdraws it to his side- there's the click of a metal switchblade- and hides it up his sleeve. "Adios, Bo!" he grins, and the sly dog lets me walk the gangplank ahead.

The throng of dock trolls parts for the odd couple, and a few steps beyond on a busy main street Lucky, with a suitcase, and I, with a knapsack, depart with a warm handshake. The usual practice is to amble to the seedy part of town for a room, but today I stride to any clue au contraire- a painted shop, well dressed citizen, clock that runs- but find none and feel trapped in a pirate's novel. The wooden two-story buildings along main street look 18th century and the ambling citizens are black or brown, and relatively tall. The matron of my eventual hotel overhanging a reggae disco outweighs me but politely points out after accepting $10 that they room keys were stolen yesterday by the help. I gladly slap my own lock on door #8 and will push the inner bureau against it tonight.

Craving a sunset fish dinner, I pen the hotel name on my thigh and stroll five minutes across town to a cafeteria with a greasy window. Licking fingers and avoiding the leftover eye that's always bothered me, a skeletal Bassett breaks a patron's leash and I give it to him. The waitress spots the dog and shoos it out the door with a broom and the owner screeching after past a line of little beggars pressing noses against the window at the only gringo. To mistakenly tip the first would telegraph the rest, and I would be skin and bones. I rise, walk out and they chase me with outstretched hands and wails for a block until a sympathetic senora points to a darkened lane where I may lose them and, she says, "perhaps your life".

She lowers the finger and vanishes, and out of curious mule-headedness I take that lane where the kids don't follow. Suddenly an arm wraps my shoulders and flexes as I whirl. His free paw grasps my palm in a quasi handshake, yet I grab the wrist and spin from both arms, and we lock eyes. "I want to ask for a dime," he says pitifully, and I feel horrible. "I'm sorry, but I can't help…," I repeat with a stout heart again and again until he fades into the old woodwork of the alley. I find the hotel on swift legs, shower in clothes, lie on the thin bed and count drops off the bureau mirror with the backbeat of reggae looking at myself in wonder at where I am.

The next morning, I discover it's a chancy town even for a stray Gringo like Lucky when we meet on the old wharf for a 7am launch out of town. He will scour the interior away from this gritty port for a ranch, and I… well, we'll see. A hard-nosed girl with a grin and jiggling "Tourist Police" badge slaloms dog piles along the dock to ask for passports. "What did we do?" I cry, but she says it's routine to scrawl gringo names and destinations in a notebook because of the volume of drug flow along the coast.

Lucky boards a skiff to Laguna de Perlas, and I sit watching similar launches spaghetti in and out the port until the Tourist Police nudges me toward the correct one, a 20-passenger "speedboat" with benches and seatbelts. A lady sits next to me refusing to strap the belt until a port guard with a hip stiletto leans over me and affixes it. She screeches lost rights and broken spirits out the harbor, actually buoying, until the 100Hp Johnson motor drowns her out up the river mouth.

The next stop is Granada, an exception to the nationwide shortage of everything soft and nice, except for the night I arrive the electricity goes out. I check by flashlight into a hotel, take a candle with the key, cold shower, and rock on a porch chair convincing myself that when the sun goes down and the power goes out it's time to take to the streets to see who's timid behind shutters. I rise, and walk the starlit streets down to the west shore of Lake Nicaragua looking over a million moonlit wavelets. There you are at another dark tit of a road waiting for something to steer you when footsteps pad, and on a twirl a man materializes like a muse and mutters, "It was three short years ago on this spot that a bad man cut a tourist's throat for no good."

He is slight, fiery eyed with an impish nose. "Relax. I tell stories instead of beg. They are true, and I'm hungry. One tourist had his hands hacked off" I teeter fore and aft on toes in consideration that the most interesting trips you take in life are meeting people halfway. We mosey the cobblestone streets chatting amicably for an hour, with everyone else indoors. Finally, I award him three dollars, thrust my hands in my pockets, and walk alone back to the hotel.

Normally, I alight fresh each night in a pueblo and ask directions to the omnipresent Central Park where the town turns out. Latinos circle the opposite sex past the greens, fountains, church, and this is where I find the cheapest hotels. One rose sweetened evening, floating from a bench, "Pleased to meet you. Welcome to our country. I'm an official tourist guide." I tip my hat. A few steps later, "Pleased to meet you. Welcome to our country. I'm an official tourist guide." The senoritas punctuate it with quiet flushes, having an incapacity to carry on in English. At the third "Pleased to meet you. Welcome to our country. I'm an official tourist guide", a thirties senorita steps under a lamplight and points to a breast name badge, "Nicaragua Official Tourist Guide." She continues in fair English that a nearby tourist college graduates just a few smart girls, and opens a dog-eared Moon guidebook and pages to her photo wearing the shield. "It's true!" I excite, and buy meals at a local eatery. We part, she with leftovers in a bag for her mother, and I reflecting that she isn't poor because she thinks she is not.

One afternoon on a lot, I see a mini-bus window soaped "San Juan del Sur" and find it on a map going to the Pacific. That's a lovely thought after a week on the Caribbean and central mountains. As usual, the bus has no schedule, waits till full, and at last needs just one more body for a vacant seat before the driver will twist the key. It, an elderly gent, sits sipping coffee in the bus station café across the windows from thirty equally complacent passengers. I'm frantic with the possibilities. The driver will miss one fare by leaving early, or may face walk-offs, or the gent will miss the bus if someone enters first, or I may buy the seat. However, the station is slow and so he swallows. In ten minutes he boards and that's business as usual.

Driving a bus is an athletic event on this forgotten road so chuckholed to the Pacific that it should have been left dirt, and a spectator sport. The driver pauses every five minutes to take on or discharge patrons that turns the 50 miles jaunt into a two hour expedition, as his teenage son yells in people, collects fares, sells cokes, and tosses baggage atop the rack. He takes my fare up front promising to return from the rear with change. This is a bus courtesy in the boondocks to chop up an otherwise useless large denomination bill; I tip for the service. Nicaraguans commonly are above the Alzheimer's trick of forgetting the change, but today the youngster doesn't, and before stepping down at the beach I get dad after son for the money, and go for a walk.

San Juan del Sur is an engendering ex-pat trap with cheap hostels around a horseshoe bay, vegetarian cafes, and a dozen language schools. You can sleep in a hammock, learn Spanish, eat yourself healthy at an outdoor market, and drink cheap rum at night mulling the worse ways to go. There's nothing here for a rover, so by quirk three hours after arrival I board the same mini-bus to return. Same hackneyed story, we wait thirty minutes for two passengers to finish tacos across the road before I, owning the probabilities, rally the group to hire cabs. "It's twice as fast, costs 25% more, and leaves now!" I shout like an old-time picketer. Three strikers and I march off the bus into a cab, and that night I wager the son got a spanking.

The cheapest hotel of my life is in central Nicaragua at $.75, the cost of a box of tissue, for an 8"x10" cubicle, squeezed between more like it, with a bare mattress and dangling light bulb. Given thrift and adventure go hand in hand, walk down the hall to the toilet, a smelly fathomless hole, and peril.

Poverty is the father of invention in Nicaragua. I see power lines spanning broken branches jammed in the dirt for miles and sagging under epiphytes, wasps nests and tennis shoes. There are fences of living trees ranging from one-foot saplings planted three feet apart to hundred year old adults at the same gap. And, oh say, the billions of Nicaraguan national flags of baggies flapping on the lines and fences. The song of the nation is, we're too poor for glasses and the mil is exceedingly thin so the plastic blows miles before the sun.

One can ride a bus without getting off and grow old, wise and fat. The houses I see are clapped hybrid wood slats, adobe, cane, concrete, tin, thatched and blankets. At each home the extended family members tie one end of the threads of life and venture out into the village. The adults are driven to poverty until it's so instilled that even a windfall- unless there's a TV- won't alter their mentality. The cold-water savvy children own a delayed gratification that makes them ripe for a prudent education. The first step to this is literacy, the bridge from the hut to anywhere. The second step is convincing the government to teach critical thinking- greeting every moment's situation with a thought instead of passion- so that high school graduates will infiltrate the government. The weak link in this process from poverty to home to school to society to beyond is that en route Latinos forget their silent power of austerity.

A few days beyond this conclusion, on a second-class bus in north-central Nicaragua, I meet the first bona-fide traveler in two months since leaving the USA, a bespectacled Dutch programmer with a nippy sense of humor who's traveled a hundred countries. He's moving light across Central America for six weeks in search of a home away from Holland since he can work anywhere there's internet. The gringos I look for on the road are mavericks who everyone in the world loves, wishes to be, and hopes to accomplish something beyond rebellion. Dutch's outlook is so bright, life seems so good, he is ready for all, so that when he invites me, "Volcano surfing!"

"What on earth ?"  I pipe. He spells out the safety and merits of renting a board to slide down the cone, albeit it will be his first time. I can do nothing but accompany him for two days into the north volcanic country. We step down in historic Leon and immediately up onto the first pickup with surfboards and soaped "Vulcan Negro". One thinks he has surpassed childhood acrophobia until seeing the heights nature shoves in his face.

The truck grinds uphill dirt roads with racing children on horseback for an hour toward a 1,300" active cone. The kids fall behind in exhaust and dust, and farmhouses fade on a black carpet of grit that thickens from inches to feet without a speck of vegetation approaching the base. We park and hike a winding, steep trail through sharp lava carrying the 6’ surfboards that become sails in a stiff wind near the top. There are six of us: half girls, all Europeans, and me. The lighter girls get twirled like pinwheels scant yards from the cone venting sulfur steam where the ground is too hot to touch long. On one side of the cone without lava, the guide bids us to sit on the boards and insists that it's faster to sled than stand. He invented the rudderless boards with a tin skid pad for a speed record of 40mph, and explains how to sit back and steer by leaning, but doesn't demonstrate. We don orange suits for protection from the cinders of the 45-degree quarter-mile slope. This is ridiculous, but " I'm glad that I'm trapped in a clown suit, helmet, goggles, my pride and leaky knees. The guide prompts me, "Show them you aren't a pussy!" (See eruption photograph).  Down!  zoom! white knuckles over black cinders, too fast, tumble and crash, climb on for some fun!

Back in Leon, Dutch and I take $6 rooms at the Dentist Hostel where the owner ushers me first into the office chair for open wide and says she'll crown a cracked tooth for another $110. I demur, and exit for a city tour. I had seen a downtown sign, "Walking Tour $6" and was struck by the novelty. I draw with two others a long-legged guide, a political science major, who asserts in correct English while striding past thousands of bullet holes in buildings and walls that Leon has a long tradition of liberal politics. His father and uncle were tortured supporting the Sandinistas against the federal troops in the 80's and, patting a spreading oak at the town edge, this tree is the symbol of resistance. The war is decades over, but the rebel consciousness remains. Our guide points up at razor wire on the 12' brick wall hemming the school that even so he scaled twice to enter the mix. This town has some of the grandest architecture in the world because it hasn't been restored for the simple reason of a town code forbidding the knocking down or patching of ruins with other than the original material. The cathedral, missing bricks and bullet strewn like an old general, is the largest in Central America, where the guide insists, "The priests pocket some of the donations but the people think it's worth their blessings." Houses appearing from the 18-19th centuries line street after street, except in the affluent section where new homes are built inside old ones. That is, the 3' thick adobe walls of ruins become the shells three inches from the inner walls of luxurious houses. The only graffiti is "Bush the Diablo of Genocide!"that the young guide tries to explain away but chokes on the truth. At the three-hour tour's end, I buy from him "The best map of Nicaragua" and spread it before me like a magic carpet. It shows a network of lanes as thick as spider webs laid over the countryside where I hatch a plan to connect the villages by foot from the Pacific to Caribbean.

For others, Leon is a budding bohemia. In two days, I chatted with the following: A Spokane lady who got in a car wreck, swore off autos and is riding a bicycle alone to Tierra del Fuego until she got waylaid here; A Portlander motorcycle mechanic who refused to rest on an obsession and is motorcycling to Panama's Darien but likewise is stalled here for "the 24-hour action"; An effervescing 70's Berkley graybeard who's built a business over the decades teaching Spanish, Chinese, French and guitar to tourists; Today's newly arrived veteran with a chest full of two wars' medals tottering on a cane and a pretty senorita's arm to the embassy for permanent residence; And the Dutchman declares he shall buy a vacation apartment!

Just before moving into the apartment, a day later, my cohort hurls his Lonely Planet guide to the floor and bellows the Dutch equivalent of, "Horseshit!" This globetrotter of twenty years stomps around it quoting the "lovely primary colors" of our actually dank rooms, and declares that in a six-week informal study through Central America at the suggested hotels and attractions he has repeatedly been told by proprietors that the Lonely Planet teams walk through (if they go at all) and out the cheaper hotels to trade lavish recommendations for freebee rooms and tickets at the posh spots. This parallels my findings of the past eight weeks, and supports a theory, an untold story, that Lonely Planet pioneered as well as recently quashed world budget travel. I imagine the same pivotal decision faced by the guidebook is daily weighed by businesses and individuals finding themselves in this expanding world. Do you adjust your methods and codes to grow quickly with the times, or maintain integrity and advance slowly?

"The globe is an anthill of travelers under backpacks going from one world wonder to the next, sleeping and eating in the same places- as described in the Lonely Planet guidebooks" I opened travel lectures during the 1980's with these words to colleges and outfitting stores. Anyone with a passport and the guidebook could go nearly anyplace with confidence as carefully researched by handpicked pioneer authors. I met one on his knees with fatigue before the Great Wall of China, one lost in malaria in Africa, and one in South America; they got around. (Today, Lonely Planet has 500 staff members and 300 authors.) The books spun details from the wisdom of having been there. It’s safe to say that modern budget travel exists because of Lonely Planet that seeded my early travels and anchored soulful impressions to make their story around the world, in a way, my own. The first full guide, Southeast Asia on a Shoestring was my first trip, and on with the ensuing books to Europe, Australia, New Zealand. Africa, India, South America… for a total of 96 countries. (The publication now has about 700 titles.)

Before leaving Leon, I enter a Cyber Café and learn online that Lonely Planet a few months ago (Sept. 2007) was purchased by BBC. The theory is true: The publication that single-handedly created budget travel has as easily replaced it with tourists who read how to hail a cab to massages. The new breed of traveler works hard and deserves it, but beware that once an organization or individual loses its pioneering spirit, all progress stops. In a flash in the Cyber Café, the solution to the day-to-day use of Lonely Planet strikes: I shall use the guide frankly in reverse to eschew its picks and blaze new trails to its cautions. This will prove delightful.

Should you visit the largest, poorest, least developed country of Central America? A developing nation has two faces, and it's your choice of how to view the experience. The blessings are people in hand-me-down clothes and old-fashioned smiles against a backdrop of untouched natural splendor. The daily thrashings are rice and beans with cold showers. I nearly always felt safe, and the lack of personal possessions makes Nicaraguans among the most generous in the world. I encourage a pilgrimage into poverty somewhere anytime for it's fast lessons. Think that and you determine your destination.

Honduras Immigration is ahead, and the dread line of wolfish officials with their red ink.

May

2

The knowledge contained in textbooks is simply not at all unique. There's no practical or ethical reason to knuckle under to the publishing industry and pay $150-250 per text for knowledge which is readily available for free elsewhere. Many people just copy or download the textbook for free.

Russ Herrold replies:

Hogwash. If so, use those free sources alone. The act of taking steps to obtain and use the publisher's source data confirms that value exists.

It is a denial of reality to assert a right to be the 'free rider' (as the torrent users do by their actions) on the backs of those who do not violate copyright restrictions. To me, it does seem to be an ethical matter, that the torrent users are on the wrong side of. It is certainly wrong as a matter of law.

As a practical matter, starve the publishers of sales, and they will raise prices higher still for legitimate users who cannot in good conscience be using 'stolen property'.

Jeff Sasmor adds:

My wife has worked for two different publishing companies that published college textbooks, and she once told me that one reason that the books are so expensive is because they often don't sell a lot of them due to copying. In years past teachers would copy sections of the books and hand them off to students (or the students would copy the books themselves), and now digital copies make it even easier.

People don't attach much value to the publishing process, they don't want to pay for it, but there is value added. The whole system (like many others) is very messed up.

Adam Robinson predicts:

Perhaps it is time to rethink the viability of textbooks regardless of price. I speak of their pedagogical value here, but in any event they will go the way of encyclopedias, swept aside by collaborative contributions a la Wikipedia. I got through Wharton having purchased only a few textbooks first semester my first year, after that I realized it was cheaper, and more effective to master the material, simply to go to the library and digest the assigned chapters on my own.

Distinguished former intern Chris Hammond recounts:

I'm finishing my PhD in math, and I have recently needed to learn techniques from a different area. I tried to learn everything by reading papers. However, each paper would focus on one aspect of the theory, leaving many questions unanswered. I worked very hard to resolve some issues on my own, not learning until later that it was done in some other paper whose existence I was unaware of. Further complicating things, one of the most important references was in French. I finally stumbled across what seems to be one of the very few textbooks (perhaps the only one) on this subject. Had I found this earlier it would have saved me so much time it makes me sick to think of it. I would have gladly paid a hefty price for it, if it was not available through the library.

Stefan Jovanovich reminisces:

I stopped following the internal fortunes of the publishing business more than 35 years ago when my Dad and I had one of our more spectacular disagreements. My brother Peter is the expert. He worked with my Dad until they lost control of Harcourt Brace Jovanovich and then he worked for McGraw-Hill and Pearson. My few comments about profitability and publishing being a "hits business" come from what I know about the history of the business in America and Europe. The inescapable economic logic of print and press runs has not changed since Gutenberg: you lose your shirt on the first copies and make your fortune on the last ones. That is the reason "free" copying has always been such an attractive proposition for the copier. Before they turned to semiconductors the citizens of Taiwan were masters at book piracy; and, as I noted recently, Thomas Paine went from being a lover of America to something quite different out of bitterness over the lost royalties from all the pirated copies of Common Sense.

What my Dad and I argued about was about "tail fins". My thesis was that publishing was only profitable for the publisher when there was a technological breakthrough that lowered unit costs of production by orders of magnitude - the original letter press, the steam press in the 19th century, the combined revolution in inks and paper-making and machine binding after WW II. The publisher could surf that wave of lower and lower unit costs as long as the public perception of what the fair price for a book or newspaper or magazine was still tied to memories of what prices were before the technological breakthrough. But, when a publisher found himself raising prices instead of lowering them, it was time to admit that the party was over. My Dad thought I was out of my head for saying that, by the time of Nixon's reelection, even the caterers had gone home. He thought the new imagining techniques in printing - particularly the ability to reproduce photographs - were so exciting that they would create a new generation of textbooks. My smart-ass reply was that they were tail fins.

After that time, whenever Dad came out to California and needed to see an author or look at a business opportunity, I was happy to see him and help him out by acting as his on-call chauffeur; but we never talked about his company or its profits again. We did speak briefly about the business one last time, when Robert Maxwell made his takeover attempt. My mother and I thought the wiser and safer course was for him to take the money and run rather than sell PIKs and put the company permanently in hock. That was the last serious conversation we ever had; thereafter, discussions were limited to the state of his health and the chances for the Giants to win another World Series.

Mar

19

The secret to my success is largely due to listening closely to those who are afraid of saying something stupid, but say it anyway, and avoiding those that feign certainty, say it brash and loud,  but are simply cheering on the crowd.  The person afraid that he may be saying something stupid, usually is thinking for himself and has thought things out and cares deeply.

My success with running started when a shy skinny runt of a kid walked onto a college track team without any high school experience, but did it anyway because he knew he had some talent. And had to beg the coach to even let me in practice, only after having a PE teacher vouch for me.

Most of my success in individual stock picking has come from my wife. When she talks about a stock to me I know she has thought about it and feels I am the expert. Hence she has a wonderful screen to weed out only those she is pretty sure are good bets.  If it wasn't for her I would probably stick solely with indexing.

A few of her calls, mostly after studying Value Line: Our first big winner, after studying was GGG in 1996. Next she begged me to ditch HP, now HPQ, after a three-bagger before Carlye came on board. A couple years ago she picked Deere.  She asked me to buy some prime Indiana corn farmland with her Dad — a double risk of feeling stupid.

When she says these things I have learned to pay particular attention.

I will leave unspoken the success I have enjoyed ignoring or shorting a "know it all."

Craig Bowles writes:

Economists such as Alan Greenspan are successful never making a stand, though. I used to work with one of those respected economists and he would never take a stand on anything. Worse, he seemed to get joy when another economist would take a stand and be wrong. He took it as confirmation that remaining neutral is the way to go.

Feb

28

DrinkIn most pursuits it's a bad idea to burn bridges. Trading is an obvious example, if one keeps making all or nothing bets then sooner or later it's going to be nothing. Chess is like this too, the professional way of playing being to avoid leaving one's position so brittle that a failed attack means you are lost. This is why Bent Larsen liked to push his rook's pawns; an advance of this pawn rarely compromises one's position beyond hope.

There are also times that bridge burning can be good, when the bridge leads somewhere to which you never want to return. A good example is in throwing out old clothes after losing weight when retreat is no longer an option. Another is to announce to acquaintances that one is giving up the thing that lies on the other side of the bridge. Take your pick between booze, cigarettes and blondes, the statement makes it harder to go back because of the loss of face. One must, of course, mind losing face for this to work.

And this brings me nicely to the point of this email, I'm about to burn one of my own bridges with an announcement: A wonderful 30 year relationship I've had with (moderate amounts of) alcohol has recently come to an end. And I'm now left wondering why I didn't do this earlier.

Scott Brooks replies:

I've had a similiar experience.
 
When I first got into this business it was recommended that I read Tom Hopkins book "How to Master the Art of Selling". It was a very old-school book on selling (but hey, 20 years ago everything was old-school), but it did have some pretty profound advice that I decided to follow.
 
I'm going from memory here, but what Hopkins basically said was, "Remove all people and all things from your life that don't add value."

Then I made several decisions that I believe had an important impact on my life.

1. I stopped hanging around with a group of friends that were hoodoos
2. I gave up drinking altogether. I was never a heavy drinker, but not giving it up was symbolic to me in that it I believed it seperated me from the vast majority of people
3. I reaffirmed my commitment to not use four-letter words.
 
By far and away, giving up the hoodoo's was the best thing I ever did. But quiting drink and not using four-letter words is a constant reminder to myself (since most around me cuss or drink) that I hold myself to different standards, that are solely my own.
 
Now, I'm certainly not proselytizing my way of life to anyone reading this, nor do I look down on others that make choices that are different than mine.

Steve Leslie writes: 

To Nigel, I say, congratulations on your decision and I hope it has meaning for you beyond the physical benefits you will likely experiences.

The Outlaw Josey Wales said it best, “A man’s gotta know his limitations.”

I applaud Nigel for making a public and personal decision. I emphasize the word personal.

I agree that moderate drinking, consumption of fine food, recreational gambling, enjoying a fine cigar, or trading futures, in most cases is probably not very destructive. When it is a chronic condition when it might become a problem.

Even helping out those in need and advising others can be a noble pursuit.

Many of us are aware when this crosses the line and becomes destructive to our own lives.

For those who might not have the gift of discernment or may be too soft-hearted or gullible, it can be very helpful to have at your disposal an inner circle of advisors. It also is important to distinguish as to whom one includes in this circle. Napoleon Hill in his excellent book “Think and Grow Rich” discusses this in great detail. Others such as Tony Robbins, Zig Ziglar and Jim Rohn have also expounded the validity of such a strategy. It would serve us all well to visit Hill’s book and review his profound wisdom.

Nigel Davies replies:

Steve makes a good point that such decisions are personal. It wasn’t meant as a criticism of other peoples’ choice to drink either moderately or immoderately. In fact one of my all time favourite quotes is by former World Chess Champion Mikhail Tal, who on learning that the Soviet authorities were going to clamp down on vodka drinking exclaimed: “The State against vodka? I’m on the side of vodka!” It was vodka that killed him, by the way, though without the vodka he might not have been able to tolerate life in the USSR.

My purpose in going public was really just to keep myself in line; making a public declaration like this really binds you to the decision. And I made the choice to quit after starting not to feel too good the morning after even moderate consumption. This sudden intolerance could be a result of having taken up Zhan Zhuang (’standing like a tree’) some months back — I’ve been advised by that such practices can produce this kind of effect. Whatever the reason I can say that I now feel better than I have done in years. And it will be a sad day if I ever build a bridge to go back. 

Jeff Watson recounts:

I used to be guilty of not burning bridges, and it cost me dearly.  I got a reputation for being a shoulder to cry on, and found myself inserted into the problems and drama of others.  This took a physical and emotional toll on myself and my family, and I finally had to cry, "No Mas!"  About 15 years ago, I made a concerted effort to to free my life of all of this flotsam and jetsam, and the result of doing so has simplified everything in my life. I got away from negative people, the ones who suck the very lifeblood from your soul.  However, I do like to listen to hoodoos, encouraging them to give their views in great detail.  Hoodoos are great fade indicators, and I look forward to their views  like the Israelites devoured the manna from heaven.  I listen to them with a jaundiced ear, and never allow them to convince me that their views are right.  I learn a lot from them, and consider them a great source of what not to do and what to fade.  I've burned a few bridges in the past by not doing business with friends, not co-signing on loans, and not financing ill prepared business ventures.  Although I've disappointed a few people with my "Scrooge" like approach, life has been better for myself and my family, and that's what really counts.  The only bridge I never burned was that of my favorite charity.  Although it sucks up a lot of time and money, and I would personally be better off distancing myself, whenever they need something, I always answer their siren's call.

Chris James adds:

I used to have a lot of married friends who would often try to drag me into their fights to be on the man’s side or the women’s side. When I was younger I use to bite and take one side or the other only to deeply regret it later after they made up. The one I had sided against was not to pleasant to me for a long time.

This is probably a common experience for a lot of people…

Solved it with a one liner. No couple who hears it has ever bothered me again. “Listen, You guys don’t invite me when you make love so consider me dis-invited when you make trouble!”

Eric Falkenstein cautions:

I think in ridding oneself of people who don’t add value, it is important to take the long view. If you are the kind of person who only deigns to return calls or hang out with people in a position to do you favors, right now, you are all too common. You would be an unreliable friend or colleague, because when adversity hits, you can’t be counted on. Further, there are many behind you that engage in mercenary friendships, so you aren’t needed–a fun replacement who values my friendship for the favors I can bestow him is simple. Such a person would be constantly trying to get into asymmetric relationships, always the lower-status guy trying to get the better of his ‘friend’.

No one likes these people, for obvious reasons. Thus, relationships should be addressed with a long view, in terms of intellectual, business, or social growth. To the extent their interests are base, unenlightened, or self-destructive, you need to avoid them.

Feb

26

FedererOne must experiment on the chess board to unlock its mysteries.

Playing in web-based public forums, it seems as though traditional, run-of-the-mill openings are engrained as routine for almost every player one faces. Of course, the lower rated players (1000s-1200s) often put themselves into precarious positions early in the game, but when watching the higher rated combatants, they generally open the game with standard patterns of play that usually result in traditional exchanges. Black knight for white bishop, queen for queen, and so forth.

Adapting my knowledge of the tennis court, I have recently chosen to combat the higher rated foes I face with uncustomary openings, such as the f-pawn, while playing black. I view such a move as being very similar to a floating, chippy slice backhand crosscourt landing near the service line.

I do not compare myself to the brilliance of Roger Federer on the tennis court, but he uses the tactic often, as do I on the chess board. It generally neutralizes the point at play immediately. Take a look at his use of this shot: Even the strongest of his foes, Djokovic or Nadal, have trouble immeditely taking advantage of the point. They have to move up in the court, either rolling their reply back crosscourt, or up the line. But they have left their right side of the court open to his backhand, or his fierce forehand reply crosscourt into the corner. As they have moved up in their left side of the court, they have to scramble backwards as they have left the deep right portion of their court exposed. Typical Federer response: a winner on his first or following shot.

I am, generally speaking, a contrarian trader. Sure, quiet openings on the chess board can be compared to quiet openings in the market, and vice versa. Experimenting in the market with real money can become a costly exercise, just as experimenting on the chess board can lead to numerous losses. But the point here is that one must never rule out the value of doing something that very few are doing.

Feb

21

In mid-August, 1790 George Washington visited Newport, Rhode Island. According to one of the townspeople, he exhausted the welcoming committee by suggesting that they take a walk to see the town. They set out at 9 AM and did not return until 1 PM, the usual time Washington took for his daily ride or walk.  The warden of the Touro Synagogue (a truly magnificent building that survives to this day) sent the President a formal letter of welcome.

Sir:

Permit the children of the stock of Abraham to approach you with the most cordial affection and esteem for your person and merits - and to join with our fellow citizens in welcoming you to NewPort. With pleasure we reflect on those days - those days of difficulty, and danger, when the God of Israel, who delivered David from the peril of the sword, - shielded Your head in the day of battle: - and we rejoice to think, that the same Spirit, who rested in the Bosom of the greatly beloved Daniel enabling him to preside over the Provinces of the Babylonish Empire, rests and ever will rest, upon you, enabling you to discharge the arduous duties of Chief Magistrate in these States. Deprived as we heretofore have been of the invaluable rights of free Citizens, we now with a deep sense of gratitude to the Almighty disposer of all events behold a Government, erected by the Majesty of the People - a Government, which to bigotry gives no sanction, to persecution no assistance - but generously affording to all Liberty of conscience, and immunities of Citizenship: - deeming every one, of whatever Nation, tongue, or language equal parts of the great governmental Machine: - This so ample and extensive Federal Union whose basis is Philanthropy, Mutual confidence and Public Virtue, we cannot but acknowledge to be the work of the Great God, who ruleth in the Armies of Heaven, and among the Inhabitants of the Earth, doing whatever seemeth him good. For all these Blessings of civil and religious liberty which we enjoy under an equal benign administration, we desire to send up our thanks to the Ancient of Days, the great preserver of Men - beseeching him, that the Angel who conducted our forefathers through the wilderness into the promised Land, may graciously conduct you through all the difficulties and dangers of this mortal life: - And, when, like Joshua full of days and full of honour, you are gathered to your Fathers, may you be admitted into the Heavenly Paradise to partake of the water of life, and the tree of immortality.

Done and Signed by order of the Hebrew Congregation in NewPort, Rhode Island August 17th 1790. Moses Seixas, Warden

Here is Washington's reply:

Gentlemen,

While I receive, with much satisfaction, your Address replete with expressions of affection and esteem; I rejoice in the opportunity of assuring you, that I shall always retain a grateful remembrance of the cordial welcome I experienced in my visit to Newport, from all classes of Citizens.

The reflection on the days of difficulty and danger which are past is rendered the more sweet, from a consciousness that they are succeeded by days of uncommon prosperity and security. If we have wisdom to make the best use of the advantages with which we are now favored, we cannot fail, under the just administration of a good Government, to become a great and happy people.

The Citizens of the United States of America have a right to applaud themselves for having given to mankind examples of an enlarged and liberal policy: a policy worthy of imitation. All possess alike liberty of conscience and immunities of citizenship. It is now no more that toleration is spoken of, as if it was by the indulgence of one class of people, that another enjoyed the exercise of their inherent national gifts. For happily the Government of the United States, which gives to bigotry no sanction, to persecution no assistance requires only that they who live under its protection should demean themselves as good citizens, in giving it on all occasions their effectual support.

It would be inconsistent with the frankness of my character not to avow that I am pleased with your favorable opinion of my Administration, and fervent wishes for my felicity. May the children of the Stock of Abraham, who dwell in this land, continue to merit and enjoy the good will of the other Inhabitants; while every one shall sit in safety under his own vine and fig tree, and there shall be none to make him afraid. May the father of all mercies scatter light and not darkness in our paths, and make us all in our several vocations useful here, and in his own due time and way everlastingly happy.

G. Washington

Jan

30

It's been a long time since I considered what we might learn from basketball . Like most former Knick fans, I was so turned off by the surly and ugly play of Patrick Ewing, including his bumping of teammates when they didn't give him the ball for the crucial shorts, his inability to get a rebound after a shot, and the depth from the basket he shot from , that when he didnt accept my proposal to trade places with "Doc Greenspan", I called it a day.

But I recently tuned in to a few Knick games to see the structure of what makes a team that bad, with their record 14 wins of 44, as if they're that bad you might learn from them in other fields. I found that there is a general air of malaise that surrounds the team. They like to come out to the scorer's table en masse as if for a gang rumble, and q loves to pick fights with people twice his size, the coach likes to bump referees, and if you beat them too bad they threaten you with a locker room brawl, to say nothing of the elbows. This general air of viciousness always leads to losses in basketball or markets.

The Knicks on paper, man for man are a good team. But as Clyde says, they pick the wrong time to take their shots. They fire from 100 feet out when the opposing team is sure to get the rebound, and the game is on the edge. They run around madly trying to find an isolated player from Downtown with no inside game. The movement to high risk trades to bail one out at the close is sure to lose.

There is no rudder to the team. The big men are fighting with each other and the coach. When Curry scores, he doesn't bother to go back to defend. They chew each other out in public with the coach shaming the players, and vice versa. A movement from one market to another, from day trading to long term, from big margin to low margin is sure to cause the same results as the Knicks.

The off court antics of the Knicks show that they are deeply disturbed. They seem to hang on to each other for fear that word about their shortcoming might lead to wholesale losses in litigation say in the harassment front. The fans are admonished to go crazy at the games, but when they berate the coach, they are thrown out. The inability to accept censure and to get feedback from what you're doing wrong is a sure sign of failure.

They use up their energy with fruitless movements and attempts to improvise plays while their opponents conserve theirs while waiting for the tried an true that is part of their game plan.  Indeed, the Knicks seem to have no steady game plan, even to the point of not knowing who they are going to put in the game at any time. When they do score an unusual short, like Balkman's three against Los Angeles, they get so excited they use up all their energy in congratulating themselves. Anyone who talks about their great wins in speculation is like the Knicks and destined to fade like a shooting star.

The woe of the Knicks is typified by their captain. He's a man paid a few hundred thou a game, but after being out for 4/5 of the season, and paid, he's suing for the one game he didnt show up for after a heated converse with the coach where the coach may or may not have told him he didn't care if he showed up or some such. Like Ewing, the captain is an egomaniac, as typified by his remarks to the intern about whether or not she was going to go into the truck, immediately, and his wild shooting from outside with no rhyme or reason to it.

Any team that has a loose cannon like that for a captain who takes shots that are so non-percentage because they disrupt the flow of the whole team, is designed to slip into the nether world.

They have a tendency to fall apart at crucial moments which is typical of a team that has a flimsy foundation. Time and time again, they can bring the game close, but when the other team tried harder near the end, the Knicks fall apart and lose by a few points. The market that can't make it big by near the end of the period is likely to move the other way.

I don't know too much about basketball, never having been good at using the left of the jump, so I would appreciate more erudite analyses of the technical aspects of what's wrong with the Knicks and how it can teach us what not to do

Dec

30

Standing Like a TreeRecently I started to crystalise some, let's say, 'intuitions,' into more conscious thoughts. The bridge between the two was to read quite a few books on Chinese martial arts and the concept of 'Chi' as a kind of life force. Despite a widespread belief in the existance of 'Chi' there is no evidence that such a thing exists. There is, however, some evidence for the health benefits of 'Chi generating exercises'.

To cut a long story short I decided to try it for myself and found classes for Zhan Zhuang. Frankly I was sceptical, as there was no scientific reason for doing so and no means of testing the outcome on my personal sample of one. The only means of judging would be my own senses.

My attendance at these classes naturally caused great hilarity when I told some hard-headed colleages about it. At this point I laid it on thick by explaining that ideally I should stand with my fellow trees in the park and absorb sunlight. Of course I was testing them, sensing their reaction as I built my hypothesis.

What is this hypothesis? Simply stated I suggest that the nature of a scientific education can actually lead to bad thinking, especially if it is pursued to the detriment of non-scientific activities. This is not so much the fault of science as the difficulty humans have in properly applying its methods. The search for a testable hypothesis causes the frustrations that lead to data-mining and failure to falsify hypotheses.

So where do the trees come in? Well, what I've noticed (and I know this is completely untested) since starting Zhan Zhuang is a much greater self-awareness, more energy and a reduction in tension. My chess experience suggests that such effects lead to better thinking, which in turn implies they'd probably lead to better science. The irony here is that many scientists just couldn't bring themselves to do stand like a tree because of the cynicism engendered by their methodology.

Some thoughts:

1) It's better to hire traders who like fresh air.

2) Science has nothing to say on the matter of various ancient practices which 'enhance the senses,' and this is why even really smart guys like Daniel Dennett manage to completely miss the point.

3) If you ever see a tree that tries to stand like a human, get the heck out of there.

Jim Sogi adds:

Studies of the brains of monks who have meditated for 20+ years show structural changes. Practice of breathing, meditation and other techniques manifest in physical changes, changes in alpha brain waves, change in heart and breathe rates. Practice of Kung Fu and other physical martial arts have beneficial health effects, and application to trading as well.

Nigel Davies clarifies:

There are two types of learning involved here. One is learning by 'reason', the other is subconscious 'body learning' of the type involved in Zhan Zhuong. The latter develops things like 'awareness.' My hypothesis is that those who rely on learning by reason alone (and this is the main focus of Daily Spec) are prone to a multitude of errors because they have not developed their 'senses' (or rather other parts of their brain that are not directly associated with reason). I have met such people both on the chessboard and in the trading world, and invariably they talk a good game but are unable to function well within it.

'Descarte's Error' is relevant to this way of thinking, with some brain-damaged individuals discussed therein performing well on 'tests' but failing hopelessly when they were let out onto the street. Substituting 'brain undeveloped' for 'brain damaged' and I suggest that we have a similar effect. Not of course the same level of disaster, but certainly an inability to function at the highest levels of difficult professions.

Marion Dreyfus extends:

The reports of changes recorded in the minds/cerebra of monks are numerous. I wonder if the same can be said of absence of sex? What the monks do is active: They actively calm their minds, and actively bring themselves in concert with their fellow chanters. They breathe synchronously and deeply. They sit in relaxed alignment. These are active conditions.

Is a mere absence of sex in any way equivalent? Not having sex is not a discrete action or series of actions deliberately undertaken. In fact one would argue that a person not enjoying this life-function practice is always on the qui vive to find sex and ameliorate the absence condition. One is always tippy-toeing to locate a prime subject of supply, as it were. But not finding it is not really like co-aligning breathing, balanced postures, deep meditation or efforts at releasing of tensions and earthly concerns. Contrarily, I believe that people who have not had sex for a while still ideate and fantasize and focus on Getting It much of their waking hours, so it is the inverse of monkish contemplation.

Thus I doubt that the two are parallel at all. I therefore doubt that sexlessness alters the brain over time. Except for men. (Who become crazed and completely nuts.) (Or so they would have us distaff siders believe.)

Nov

27

Cold Reading [book]In Practical Speculation, Vic and Laurel identified a number of ways of making deceptive non-verifiable predictions, and described techniques for marketing stock prediction abilities and systems. I came across a good supplement to such methods by Ian Rowland in "Full Facts Book of Cold Reading" (2nd edition, 2001). What is "cold reading"? These are techniques used by magicians and palm readers to deceive their victims, much as many market participants are deceived by the same techniques into believing the practitioner has a method to predict the market. I will try to give some market examples applicable to the current situation from top news sources such as Yahoo Financial, CNN and my own repertoire.

1. Rainbow Ruse- Have one trait and, at times, the opposite. "The bad news out of the financial sector will continue to flow, and on the days that it does, the market will take a hit", said Chris Johnson, chief investment officer at Johnson Research. "But select stocks will outperform the rest of the market", he said, "particularly in technology".

"Robert Loest, portfolio manager at Integrity Funds, said that a late December rally could depend on what the Fed does on Dec. 11." CNN

2. Barnum Statements- General statements that fit most people (combine w/ forking). "I think we're going to have a tremendous amount of volatility and basically stay in a trading range until we get information on first-quarter earnings," said Dan Genter, president at RNC Genter Capital Management." Yahoo

3. Fuzzy Fact- General broad statement likely to be right. "An end of the year run is not necessarily off the table," said Art Hogan, chief market analyst at Jefferies & Co. He said that Wall Street still needs to work its way through a lot on the financial side. Yet, the broad selloff of recent weeks may have primed stocks for a bigger bounce back, particularly in the areas of the market that are unaffected by the credit market mess. "But there's no question of volatility," he said. "It's going to be very bumpy through the end of the year." Yahoo

4. Good Chance Guess- ("I see a blue car" or "a house with number 2 in address") I see the number 1450 in your near future. Me

5. Lucky Guess- Make 2, 3 parts. If hit, then wow; if miss, they'll forget. 1400 is going to be a support area, unless it breaks through. Otherwise, so we are likely to see some resistance at the 1450 area and if broken a run at 1500 again and then possibly new highs.

6. Push Statements- State something wrong and keep pushing it! The subprime scare is pushing stocks down and may spill over into the general economy causing recession and global slowdown.

7. Russian Doll- Statement with many possible layers of meaning; keep working till get hit. Market participants were concerned about Wall Street sold off sharply Monday as concerns about a weakening credit market wiped out investors' enthusiasm about strong retails sales over the holiday weekend. For a brief period today, there was a twinge of optimism that the stock market would be able to score back-to-back gains. Reports of stronger than expected retail traffic over the Thanksgiving holiday contributed to that view. However, it wasn't long before concerns about the financial sector (-4.1%) took hold again and knocked the market down to size. Briefing.com

8. Peter Pan/Pollyanna- Tell them what they want to hear. "After years of living happily beyond their means, Americans are finally facing financial reality. A persistent rise in energy prices will mean bigger heating bills this winter and heftier tabs at the gas pump. Job growth is slowing and wage gains have been anemic. House prices are sliding, diminishing the value of the asset that's the biggest factor in Americans' personal wealth. Even the stock market, which has been resilient for so long in the face of eroding consumer sentiment, has begun pulling back amid signs of deep distress in the financial sector." Fortune

9. Certain Predictions- No time frame. The market is very likely to make new all time highs despite the recent sell offs.

10. Likely Predictions Unlikely Predictions- The abandoned baby pattern seen earlier in November was similar to the pattern that preceded the big August sell offs.

Self-fulfilling- "You will make a new start" The market may see new lows before turning higher and cause uncertainty among traders creating risk.

Vague Prediction. "The market is now looking toward 2008 and a slowdown, and I find it hard to believe that we can have a year-end rally," Mendelsohn added.

But hey, there are some reasons why Wall Street might see a typically upbeat December and an end of the year "Santa Claus" rally. (From Cnn Money) (predict both sides, always right if market up or down)

Unverifiable- The pull back to resistance level provided support for the overnight rally. The Asian traders encouraged by strength in the yen decided to bid up the SP in the night market. Me.

Larry Williams adds:

Larry WilliamsThe biggest part of cold reading is called 'pumping': asking questions that give a clue to the correct answer; it is very effective in allowing someone to think you knew.

Most cold readers rely on a 11 psychological traits from a study done at the University of Michigan, traits we all share, that can be made into specific statements. The cold reader will use the first three on client A, the next three on client B , etc. so they don't hear the same thing.

Here are a few…

There is someone from your past you wish you could talk with again

There are issue with one of your parents (pump comes next, usually boys are with dads) I see a parent with long hair… they reply yes ,my mother (you agree and look very wise) or if they shake their head and the reply is, 'your mother was not the one it was your father.'

my favorite:

growing up there were s-xually awkward times and you still have unsettled areas here.

Word games can be very impressive in the right mouths.

Craig Mee replies:

Thanks Larry… I remember watching a show on this topic many years ago, which opened my insights into these people… and the following day I was an extra on a Gatorade commercial , which went on for hours, at some point I found myself, next to a very attractive young lady, analyzing what could it be that made her sit here at 2am in the morning for some spare cash… (For me no doubt it was to bolster trading capital!)… so I surmised that she must be there for a specific purpose, ie need the extra cash for something special, I then thought OK, lets go with a wedding, and she either needs a new pair of shoes or a new dress. Well at that point I turned to her and said, "who is getting married and what colour are the shoes you are buying!?"… well I struck gold, and she was beside herself… Certainly a great way to start a conversation with the opposite sex as well!

Nov

25

Origin of WealthThe Origin of Wealth by Eric Beinhocker applies insights from chaos theory and evolution to answer big questions relating to how the world of wealth works. It takes the most popular studies from the Santa Fe Institute, pounds some insights from the popular exegeses of evolution such as those of Dawkins and Ridley and extends the work to how to run and finance a company and an economy.

Chapter 1 covers the economic history of the world, the relative stability through thousands of years, and then the explosion the last 200, and how it was created without planning by the principal ingredients of evolution: differentiation, selection, and replication. He notes that no one could understand how to produce and distribute all the material goods of the world, considers this complex, and then suggests that the implications of chaos theory must be used to understand this complexity.

Chapter 2 describes classical economics emphasizing the limitations of its principal assumptions of perfect information, perfect competition, its trajectory to a balance point with Pareto optimality based on insights of Adam Smith relating to the invisible hand and the division of labor, and the concepts of diminishing marginal utility and diminishing marginal productivity of Bentham and Turgot. These ideas, according to Beinhocker, provide a very shaky foundation.

Chapter 3 narrates a meeting of economists and physicists at Santa Fe where the physicists questioned some of the assumptions of classical economists, and contains various anecdotes and partial summaries of data that show the actual world is unpredictable, and discusses the laws of thermodynamics and suggests they have some insights for the dynamic nature of economies.

Chapter 4 discusses the major principles of complexity economics, dynamism, agents, networks, emergence and evolution that Beinhocker says are necessary to understand the actual economy.

Chapters 5, 6, 7, 8, and 9 contain charts that are the output of various games and models, and selected empirical studies from work in the field of dynamic systems, agents, networks, and emergent tendencies that are culled from work at Santa Fe Institute by its contributors and heroes. Included are oscillation charts from the beer game, attendance charts at a favorite Santa Fe bar, diagrams of the number of connections as the nodes in a network increase, price charts from Mandelbrot that show price changes from a random walk that are not exactly identical to the daily prices changes of IBM between 1959 and 1996, and a power law fit to the number of earthquakes in Southern California. 

Chapter 9 compares the process of evolution to a contest for building with Lego blocks, with the good designs winning out over the bad designs, copying of the good designs, good tricks, path dependence, and forced moves. Three dimensional charts of fitness diagrams of Dennett are given to show that jumps from one fitness path to another are easy.

Chapter 10 shows how game theory, prisoner's dilemma games, and the game of life are helpful in understanding the distribution of wealth in an economy. The rest of the book applies these principles to the physical and social technologies, and business plans, that develop these design in the real economy, with particular applications to managing a company and the ideal political system which, according to Beinhocker, is a mixed economy with government choosing the best business plans for evolution to work on.

I found the chapter on business strategy very insightful. It suggests that the ideal business organization is one that combines flexibility with rigidity, gray hairs with young turks, sensitive antennae to follow the market, and ability to swarm on any areas that have temporary profit advantage. It emphasizes the importance of uncertainty, the transitory nature of business advantage, shows that one must be prepared with a wide variety of game plans for success due to the uncertainties and ephemera, gives some excellent examples of companies that were once leaders that fell down the wayside, like the British East India Company , that in the seventeenth century "monopolized trade in four counties, had worldwide interests in all essential commodities, had its own private army and navy, could declare war when it's business interests were threatened, and effectively ruled over a fifth of the world's populations". It went out of business in 1873. It also contains an insightful discussion of how Microsoft and Dell were able to start from virtually zero and become bigger than IBM in a few years by applying these principles. The main point of the physical technology chapter is that an S shaped growth curve naturally follows from evolution but that disruptive technologies can push you off the curve. There is a nice discussion of how the scientific revolution led to the enhanced growth of physical technologies starting with the 18th century. The main point of the social technology chapter is that the heterogeneity of people combined with the division of labor and increasing returns to scale makes transactions between individuals non-zero sum in a market economy. Beinhocker claims that we inherit an inclination to cooperate for mutual gain as well as an urge to compete.

The weakest chapter in the book is the application of these principles to finance. It contains various charts showing that a model of stock market decision making can lead to price distributions that look like real prices in some respects, and has two charts that show how proprietary methods developed by Farmer could retrospectively identify areas that apparently have some visual differences from those that would be generated by random charts. It has some haphazard and undocumented charts of that according to its author Farmer, are different from those that would appear if there were perfect arbitrage between fundamental and technical traders. The results are not predictive and not in any way differentiable from thousands of other equally plausible models, and selected anecdotal charts. It also attempts to apply the complexity principles to show that the work relating the degree of market sensitivity of a company to the cost of capital is flawed and non-descriptive in many cases.

The chapter on politics and policy is one of the weakest chapters that I have ever read in a book. There is a discussion of contrived studies that show that people wont accept 1% as a fair share of a bargain even if they are bettered by it if the other side is getting 99%. From this, he concludes that people need to feel reciprocal equities to be happy. He relates this to some of the original studies that show that corporate formation is based on increasing trust and then calls for government to intervene to create equity and trust. The chapter contains a litany of complaints about the economy as it exists, for example the distribution of wealth, the relation of parents and childrens income. No attention is paid to the work of Herrnstein and Murray in The Bell Curve or Banfield or the numerous follow ups showing the relation between incentives, intelligence, achievement, and the relative contributions of heredity versus environment. Nor is any attention paid to the fairness of redistribution after the fact, or what the impact on incentives of such programs might be. Beinhocker suggests that solution to the form of government is contained in complexity economics and that this shows that institutional structures combined with individual experimentation is the source of wealth. No attention is given to the influence of incentives, or the ability to keep what you produce that is the lynchpin of all the business plans that make up the fitness landscape.

The book is deeply flawed. There is no recognition that the very preliminary and rudimentary results of models based on complexity have much less correspondence to the bulk of economic activity then the models he would replace. Time and time again, he refers to charts that complexity models build up and notes some visual similarity to some aspect of economic activity without comparing the descriptive or predictive accuracy, or relevance of the models to alternative models. The studies of corporate growth that he relies on are not adjusted for survivor bias nor do the studies that show that most firms are not the same as 100 years ago take account of acquisitions or liquidations and the returns therefrom. As mentioned, the work on finance is completely anecdotal and non-predictive and reads almost like a prospectus for funding for the chaos institute rather than an attempt to advance knowledge.

And yet, despite its flaws, I found the ideas of the book very thought provoking. And I learned much from the chapters on management and venture capital where Beinhocker previously worked and writes with considerable insight about, and I enjoyed the wide range of examples that he cites from his wide travels around the world and his intimate acquaintance with the many big companies that he must have consulted for.

I would highly recommend this book to augment one's knowledge of how evolution can be applied to the field of economics.

Oct

19

It is appropriate that the best book on games extant today is totally German in its authorship and first publishing, since Germany is mecca for games, with the average family owning 25 of them. The book "Luck Logic and White Lies" by Jorg Bewersdorff, originally published in Germany but translated into English in its third edition by David Kramer, is a masterpiece, an encyclopedia of strategy and solutions to almost every game under the sun, and a great exercise in logic and decision making, and a guide for how to have fun with your family. The book is divided into three sections, games of chance, games of combinations, and games of strategy. Each chapter in each section starts with a pregnant situation from a typical game from that section, traces the historical development of the game, shows how to play it better, and then contains mathematical excursions on how to solve the game. Games covered in the chance section include lottery, dice, roulette, monopoly, blackjack. Games of combination include Nim, backgammon, Go, dominoes, Mastermind, Concentration. Games covered in the strategy section include rock paper scissors, poker, chess, baccarat. Building blocks covered to help you solve and play games include a study of the normal and Poisson distributions, a primer on expected values, Markov chains, Monte Carlo methods, minimax solutions, linear optimization, the game theory work of Von Neumann and Morgenstern, the geometry of symmetry, the value of experience. All these building blocks are developed naturally and form a foundation for understanding how to play the games properly as well as providing a brush up on techniques that one is accustomed to using in other fields. The book is readily accessible to all who like numbers, but provides many extensions that will challenge even the most competent and advanced thinkers in mathematics. Morgenstern studied games because he felt every decision in life was comparable to one of the chance, combinatorial or strategy games that evolve in the normal course of life. I would recommend traders study games because each game has a natural extension in the trading world. Let's take a simple strategy game formulated by Poe and developed in the rock paper scissors chapter. One player holds the marbles in one hand, and asks the other player whether the number is even or odd. If the guess is wrong, the guesser loses. And if right, the guesser wins. One boy wins all the marbles from everyone in school. He had some principles of guessing. He sees whether his opponent is a simpleton. His amount of cunning is sufficient to make him change his guess based on the opposite of the right answer the previous time. But with a simpleton a degree above the first, he would propose a simple variation. And think that the simple changing is too easy and guess the same the next time. The boy who wins figures out what degree of simpleton he's playing against and wins all the marbles. But isn't this the same situation we play with the market each day. It has a certain pattern that would have led to a great win. And depending upon your estimate of the degree of simpleness of the other players in the game, you figure out the optimal strategy. Strangely, there are ways of playing these games that increase your expecation, especially those that rely on changing strategies based on experience. Similar principles and mathematical excursions that are appropriate for solving combinatorial games, like Nim, where one works out the entire distribution of outcomes as in computing the value of an option, or chance games like monopoly, where one takes account of the changing values of a position based on the liquidity and expectations, are appropriate to every decision a trader makes. One can not recommend this book too highly for the family person and trader.

Bruno Ombreux adds:

BattletechThis brought to mind an American game that was kept alive by a German company after the American shop that created it folded up. A few months ago, it went back under American control, but the Germans kept the flame alive in the interregnum, because the game has lots of fans and good sales in Germany. This game is Battletech.

The game is set in a deeply rich science-fiction universe, with an evolving storyline and a set of characters one gets attached to. It is a board game played on hexed terrain, with miniatures and dice. It is all about manoeuvring to get into favorable positions. But it is different from chess because:

- Luck is important. Dice affect the probabilility of hitting and getting hit, as well as hit locations.

- There is an incredible number of factors to take into account: terrain type (woods, rolling hills, city, etc.), type of forces under control of players (e.g. fast light unit with long range weapons against heavily armored slow unit), enemy skill and psychology.

I feel a game of Battletech is closer to trading than a game of chess or Backgammon!

Because of the absolutely huge number of factors to take into account, one must rely on heuristics and rules-of-thumb, rather than on mechanical probabilistic plays as in Blackjack. In the markets, luck of the draw and the complex interplay of many factors are also prevalent. I feel this is making a case for moving away from rigid rules and even methodology, toward flexible rules-of-thumb. Move the cursor away from the quantitative toward the qualitative. Even though those trading rules-of-thumb are driven by odds as in Battletech, they ought to be vague enough to accomodate the sheer number of influential parameters and to create the conditions for dealing with a wide variety of situations. A example of a good qualitative rule, grounded in numbers yet flexible enough, is Vic and Laurel's principle of buying into panics.

Oct

10

Milton FriedmanWhen he visited the West Coast in the 70s and 80s, I was my Dad's on-call chauffeur. Besides getting the benefit of parental lectures about my dissolute, self-employed ways, I also got to listen to his discussions with authors. One of the conversations that I remember vividly was a discussion with Milton Friedman about his "school voucher" initiative. Dad agreed with Friedman that education should not be a government monopoly, but he urged the Professor not to present his case to the voters in terms of "vouchers." The word had a terrible connotation, he said. It suggested that people were getting education Food Stamps. If Friedman wanted to allow Californians to be free to choose, he should structure it in terms of changing California's Education Code so that parents had the right to send their children to any school they wanted to or to homeschool them. I remember Dad's saying, "If you make it about money, Milton, you will organize your enemies. The parents in the rich suburban districts and the people who have no economic choices about where their kids go to school will both vote against it." They did; and they still do. Vouchers remain a stone political loser, for all of their seeming intellectual merit.

Back then I was still young enough to assume that Professor Friedman would appreciate getting free political advice from someone who had become a multi-millionaire by navigating the shoals and rapids of 50 State Boards of Education, thousands of local school boards, and the recently created Federal Department of Health, Education and Welfare and had made Friedman himself a millionaire from book royalties. Wrong! The Professor lectured Dad about the absolute necessity of vouchers as part of the initiative. If there were no vouchers, then giving people the legal right to find alternate paths would be meaningless. Dad's reply was "Milton, if people have the right to pursue alternatives, they will find the money. Hell, the money will find them." That comment effectively ended the conversation. It left Professor Friedman literally sputtering with incomprehension. He simply could not conceive of the idea that capital would flow to a new and better idea for education — simply because it was a better idea. The Professor was, for all his wisdom, as completely bound by his academic horizons as any of his more liberal colleagues. He assumed that the government had to pay for schooling — one way or another.

Oct

5

The first two bearish economists I've seen said this morning's data "only look strong," and that the deeply obscure metrics (one of the diffusion indicies, for instance) tell a tale of ongoing weakness.

Yeah, a lot of this was unwinding the big miss on Government payrolls last month, but given the amazing noise generated by the August market debacle, it's telling that more than half a million folks chose to enter the workforce in September, and 463,000 of them got jobs.

Oct

3

Had J.R.R. Tolkien applied his talents to Middle America instead of Middle Earth, the result would have been akin to Satan's Bushel, Garet Garrett's 1923 novel, available as a 212 page pdf. Literally beautiful in its language, yet deadly accurate in its particulars, the work is a mystic's perspective on farming and speculation, on death and eternal love. It is worth reading for both its prose and its surprisingly relevant take on markets.

Adam Robinson adds:

FarmingFor those who want to read an uproariously entertaining book on the economics of becoming a farmer, I can't recommend The Farming Game, by Bryan Jones, highly enough.

Imagine Mark Twain giving advice to a city slicker (Green Acres is the place to be) who dreamed of becoming a farmer, and you'll have an idea of the book's appeal. Acute economic sensibility combined with trenchant wisdom.

There are only two copies of this overlooked classic left in stock at Amazon before they reorder (owing to slow sales, alas). You'll thank me later, and I can promise that if you start reading it over a weekend, you won't stop.

David Lamb interjects:

In the book "Satan's Bushel" is found a snippet on page 123 about
the dreaded financial life of a wheat farmer. Here is the quote:

The farmer was one who paid.The farmer certainly paid.
Everyone who touched him made him pay. What he sold he sold on the
buyer's terms. What he bought he bought on the seller's terms. One in
that situation was bound to be exploited.

In essence, the farmer takes the brunt end of the financial side of
the wheat business. My grandfather farmed wheat. He was always
complaining about everyone taking advantage of him; how he never got a
good enough price; how the prices of equipment are too high, etc. I
grew up thinking two things about this industry: One, I wanted no part
of it and, two that farmers were always poor and there was no way
around that.Then a few years later in life I came across the futures
markets wherein I found out about hedging. I am perplexed why more
farmers don't utilize the futures markets to hedge and, therefore,
protect themselves more. I am very naive and ignorant in this field but
I have included some numbers from the Census of Agriculture data that I
would like to understand. The latest year of available data is 2002.

Number of wheat farms: 169,528 Total number of acres: 45,519,976 Total number of bushels: 1,577,005,140

If one CBOT wheat contract is 5,000 bushels then the total number of
possible short contracts given the number of bushels yielded is
315,401.The average weekly COT data, on the short commercial side, for
the whole of 2002 was 59,996 short contracts. If these were held by
farmers, which I think we can assume so, then the number of bushels
being hedged is roughly 300,000,000, or 19%.If this 19% number is even
remotely close, why aren't more farmers using the futures markets?

Alex Ceresian attempts a reply:

Keep in mind that hedging with futures only protects the farmer from a small portion of the risks the farmer faces.

Futures protect against "price risk", the risk from fluctuations in the market price of wheat.

The farmer also faces "quantity risk", that is uncertainty about the
amount of wheat he will be able to produce. You plant X bushels of corn
but because of umpteen different reasons (mistakes on your part, bad
weather in your local area, pests) you only manage to produce Y<X
bushels. Futures don't help with this risk (and you cannot insure either).

Even worse, the two risks interact and complicate things. If you don't
know how many bushels you are going to produce, how many contracts
should you sell (for price hedging purposes) on the CBOT?

Oct

2

LeschetizkyA family member recently asked for my advice on piano lessons for her 3-year-old daughter. I devoted many years to piano studies and teaching, and have performed for most of my life. Specs might find my reply of interest, for children and perhaps even in other matters:

– Right from the start, realize that the most important thing is not what she can play but what sounds are in her mind. The ears are more important than the fingers. You don't "talk down" to her in conversation; don't do it with music, either, by limiting her aural intake to kiddie songs. Let her listen to great music performed by great artists. Have her listen to orchestral music, jazz, opera, choral music -– not just piano. No need to limit the genre of music — have her listen to jazz, classical, rock. But it should be really, really good. James P. Johnson for stride piano, Martha Argerich, Wilhelm Kempf, Vladimir Ashkenazy, Sviatoslav Richter, Arthur Schnabel, Frederick Gulda for classical. Take her to concerts and have her sit close up so she doesn't feel apart from the performers.

– Start by simply letting her experiment on the keyboard. Applaud her efforts. Play with her. Don't let anybody plunk her down on a piano seat and insist that she slog through one of those dreadful kid books. The music in those books is mostly really rotten. Furthermore, it is a very complicated affair to coordinate fingers, brain and ears enough to read a piece of music and perform it.

– The problem with most kiddie books is that they impose a five-finger regimen of "C, D, E, F, G" that is unproductive in building a good technique, as well as physically and mentally constricting. Let her apply the technique outlined in the Leschetizky method. He taught all the great 19th and early 20th-century pianists, and he knew what he was doing. One of his students wrote an excellent book on his technique.
 
– When she starts learning the system of musical notation, don't let anybody start her off with "C, D, E." No, no, no. Do A, B, C, D, E, F, G — like the alphabet. Then teach her the ledger lines: In treble clef, "Every Good Bird Does Fly" and FACE; in bass clef, "Good Birds Do Fly Always: and "All Cows Eat Grass." Let her discover the black notes. Somewhere in this, show her "middle C" – but if you start there, it could easily end there.

– Don't get just any teacher — attend a recital of students, see if they can play, evaluate their poise and the musicality they're able to project. If you can't sit through the playing without being bored or going crazy, why would your daughter benefit?
 
– It's crucial to help her learn an excellent piano technique early on so that she can reach a level of accomplishment that will allow her to enjoy music and get as good as her path allows. A poor technique will lead to an inability to express herself, even serious injury.

– Once she starts learning pieces, by all means make sure that her teacher is devoted to performance. She should have an opportunity to perform once a month in a big-deal recital where she can showcase her achievements to her peers and to you. When I was a girl, my teacher had monthly recitals that would include all his students, from the tiniest to the teen-agers. There would be a little musical dictation, a little talk about the pieces, and always be a big cake afterward. Somehow the excitement of competition, the joy of showing an accomplishment, the interest in observing other kids and the sweetness of the ultimate reward combined to make an atmosphere conducive to learning.

– Obtain the best instrument possible. If she is to develop an ear for sound and a fine technique, the piano must be properly responsive. If her technique is good and yet the instrument makes an ugly sound, she'll never be able to express ideas and to find the beauty of the piano.

– Don't let her become a little circus monkey. Make sure that she gets theory and musical coaching. Make time for her to learn about the lives of the composers and the history of music. Lessons should not be run-throughs of pieces while the teacher beatifically nods.

– A good piano teacher will include sight-singing and dictation as part of the training.

– Regular practice is key. It should be in a perfectly quiet environment, without distractions. Use a timer. A good teacher will send her home with a list of things to practice, to keep her moving onward. Don't sit with her — discipline is something that must come from her, not you. The discipline of piano playing will unfold into many beautiful qualities and gifts.

– Send her to music camp. A summer sojourn at a music camp is worth years of regular lessons. The chance to be with other musicians, play music together and learn more than usual is an expansive, life-enhancing experience.

– For heaven's sake do not let her think of piano as a career. It's just not possible these days to make a comfortable living as a pianist, if indeed it ever was. Pursuing a music career will ensure decades of financial weakness that could lead to an envious, malcontented existence. If by some misfortune she actually does make a career of it, she will spend two-thirds of her time on the road. Tell her that music is to be enjoyed, that the goal is to be able to play beautiful music both alone and together with other people, that the better she gets the more people will want to hear her. If, despite everything, she wants to become a great musician, then teach her to invest and trade so that she can support herself!
 
Recommended:
The Pleasures and Perils of Raising Young Musicians: A Guide for Parents, by Michelle Siteman (Vic's college girlfriend!) Her son, Benny, is now assistant conductor of the San Francisco orchestra. Michelle is a terrific writer and a smart mom.
 
Leschetizky's Fundamental Principles of Piano Technique by Marie Prentner. The teacher approved this book, written by one of his students.

Laurence Glazier adds:

CzernyI concur with Laurel's recommendation to follow Leschetitsky's teaching methods. He studied under Czerny, who was a pupil of Beethoven. There are still in most major cities pupils of pupils of Leschetitsky. That makes them, musically, great-great-grandchildren of Beethoven. They are worth seeking out.

Some of the Leschetitsky exercises I saw are straight out of ki-aikido, but invented long before. He reputedly had a sign on his door stating "There is no Method." Perhaps he was very responsive to each individual pupil's needs, giving rise over the years to differing accounts of the "Leschetitsky Method."

I spent a valuable hour with one elderly pupil of the great man. We looked at how to play a simple scale in great detail. "Listen to the sound," she said.

The pleasures of music can exceed the benefits of a secure income. Van Gogh was prolific though he sold only one painting. There are different kinds of capital.

With the advent of excellent music notation and playback software, there is an argument for piano lessons to be accompanied at an appropriate age by composition lessons. At this stage there are not many pianist-composers but the new technology suggests there will be many more in the future.

Alston Mabry writes:

I'm reminded of a favorite anecdote, from Charlotte Joko Beck's book Everyday Zen:

Many years ago I was a piano major at Oberlin Conservatory. I was a very good student; not outstanding, but very good. And I very much wanted to study with one teacher who was undoubtedly the best. He'd take ordinary students and turn them into fabulous pianists. Finally I got my chance to study with the teacher.

When I went in for my lesson I found that he taught with two pianos. He didn't even say hello. He just sat down at his piano and played five notes, and then he said, "You do it." I was supposed to play it just the way he played it. I played it - and he said, "No." He played it again, and I played it again. Again he said, "No." Well, we had an hour of that. And each time he said, "No."

In the next three months I played about three measures, perhaps half a minute of music. Now I had thought I was pretty good: I'd played soloist with little symphony orchestras. Yet we did this for three months, and I cried most of those three months. He had all the marks of a real teacher, that tremendous drive and determination to make the student see. That's why he was so good. And at the end of three months, one day, he said, "Good." What had happened? Finally, I had learned to listen. And as he said, if you can hear it, you can play it.

Vitaliy N. Katsenelson remarks:

My 6-year old son is taking piano lessons. His heart is not in it. We try not to push him very hard and encourage his progress. I listen to a lot of classical music, some Oscar Peterson and Queen. My son loves listening to Queen, but my wife is concerned that he should not listen to rock music. My argument is that this is a closest crossover from rock to classical/opera music you can find. Well, she doesn't buy it.

Nigel Davies writes:

F & CI was born into a very musical family and my parents did everything they could to encourage me to play something. They had me on the violin, piano, cornet and clarinet and at school I learned the xylophone and the recorder. They had some early progress as I played the xylophone at one school concert and won a couple of prizes on the recorder at a local music festival. But I would later turn my back on music and turn to chess, which nobody approved of. One day I remember being forced to go out into the sunshine instead of sitting over my board. Of course there was only so much they could do with one small, stubborn boy.

Thinking back, it had something to do with the social dynamics of my family. My sister, a couple of years older than I, was a very good musician, certainly better than I was. On the other hand I was soon beating family members at chess, then family friends and then schoolmates. This had everything to do with early success, this was something in which I could win. I felt special, which provided the encouragement to do it more and be even more special.

Let's fast forward some 35 years. Now I'd really like my 5-year old son to play chess, and it's not because of any frustrated ambitions of my own. There are several compelling reasons: He has the right kind of mind/personality for it, I got a lot from the game myself (education, self-worth and many friends and associates) and it's one of the few things I can teach him with much authority. There's also the thought that if he gets to play chess we can go to tournaments together.

What's my method of encouragement? Well there are lots of chess sets around (both live and on computer screens), not to mention the garden-sized one which adorns my living room floor. And he plays around with it a bit and now knows what the pieces are called. I haven't tried to teach him any moves. The next step is to interest him in a DVD produced by Chessbase called Fritz and Chesster, which is a cartoon that familiarizes kids with chess concepts and moves. I don't have any plans beyond that, my intention being to play it by ear and see if it sparks any interest.

What I would never do is set him up for early competitive failure. Based on my own experience I believe success and self-worth are inextricably linked to the enjoyment of an activity. Music is easier — it's enough to listen to your child play (no matter what level) and pretend to enjoy it. With chess I might have to team with my son against the computer. I'll cross that bridge when we come to it. But I definitely want him to win a few games in his early attempts.

Sep

27

SartreA big part of trading is determining ahead of time where prices will be, for profit. You can use what has transpired as a rudder to achieve this goal, or you can go on the assumption that future events are independent of current events. In the first thought, there is a hint of determinism and fatalism. Every event yet to occur in the future is more or less scripted. In the second case, there is the strictest acceptance of free will, or whatever is yet to happen acts independently of what has happened.

Which is correct? I feel these perspectives coexist in that things at times are predicted with great accuracy but at others times it seems futile. Is time the bridge between fate and free will? Luck either bad/good the conduit? Last night I sat back to take a look at the big picture. Deeply appreciating the tools of counting and the law of ever-changing, these questions popped out.

Phil McDonnell explains:

The ultimate question. Is our fate (and trading success) predetermined or do we have some control over it?

Perhaps a better way to express the problem is through the paradigm of statistical thinking. In statistics the central concept is randomness. Randomness is actually a very deep philosophical issue. It is not the same for all people. Rather randomness depends greatly upon what you know, and different people know different things.

Suppose a company has a great quarter. During the quarter many employees will have a pretty good idea that the quarter is going well. Those at the top such as the CEO and CFO will have a very clear picture. After the end of the quarter the outside auditors may get a good idea as well. Then some time later the earnings report is released to the public and the stock moves unexpectedly. To the outside investor the event seemed random and unpredictable. But clearly someone knew.

The central point is that from the perspective of those who knew of the coming announcement in advance the event was not completely random. From the perspective of those who knew nothing the event was unexpected and seemingly random. Randomness and non-randomness can coexist in different people with different information. So then the best definition of randomness must ultimately be egocentric. What is random to me is that which I do not know and cannot predict.

This concept can be quantified very nicely by various statistical ideas. For example when one performs a regression analysis of something like the Fed Model there is a statistic called the R-squared which embodies the percent of the variance explained by the model. So if the R squared was 30% the model explains 30% of the variance leaving 70% unexplained. If we only use the Fed Model as our predictor then the world is 30% less random than before but 70% is still random to us because our knowledge is limited to that model. A little counting can greatly reduce the randomness in our trading.

David Lamb extends:

Through experiences in my life I have come to understand that when I brainstorm with someone upon an idea or topic it seems as though the sum of our thoughts exceed that of only two persons, as if 1+1=3.

If this is true, is it possible that nothing is really random, given a number of participants that are knowledgeable in a given arena? For instance, if we took the topic of market direction and asked each Daily Spec contributor to give his thoughts on the subject along with providing his reasons why, then produce quantifications with qualifications, could each of our random market movements that we experience be sufficiently squashed?

Aug

13

Ularu, Ayers RockI just spent a few days at Ularu, Ayers Rock, in the middle of Australia.

The reality is it’s a fascinating example of sedimentary layering followed my uplift in terms of geology. The myth is the original land owners say it was built by 'hands' and is sacred.

There are more market myths than reality. One I think is that the markets are pretty much always the same, supply and demand coupled with emotions.

I had a delightful dinner this week with the largest bookmaker in Australia (it's legal here). I asked if I wanted to crunch numbers through a computer to understand winning horses what would be the most important thing to look at?

His reply was oh, so telling. "Right now pace, that means more now than speed ratings".

He went on to explain how things have changed in racing (I thought it was just horses running around the same track as for the last 50 years). to his trained eye it all changes, all the time. Seems the markets and races have lots in common.

Jul

20

About two years ago, Vic and Laurel discussed control charts. I use a similar concept by tracking the drawdowns of various trading strategies. If a strategy is working well, there will be drawdowns, but the drawdown amount will repeatedly return to zero as profits exceed losses. Conversely, if a strategy is losing, the drawdowns will get further and further away from zero. Thus, a drawdown that exceeds a preset threshold or fails to return to zero for an extended number of trades might indicate that the cycle has changed.

Andrew Moe adds:

Improvements to control charts can be made by upgrading the fixed window look-backs to exponential or DSP style windows (see Ehlers, Jurik, et al). Information theorists will find additional gain via the use of fast-responding windows on the entropy. These methods are used to turn various strategies, traders, and funds on and off. I particularly like Mr. Ellison's idea of return to even from the max vis-à-vis survival statistics as traders tend to get paid on making all-time highs, and the distance and journey between tell much about the method.

Vincent Andres writes:

Cycle changes are not directly viewable. Hence we're often trapped.

I believe cycle changes are only viewable in some slightly more indirect universe of parameters. Don't look at prices or first differences of prices.

Cycle changes are of course written in them, but a bit too deeply to be seen just on the surface (price). We must go one (or more) levels downstairs. We have to search/compute indirect/deep parameters from the prices.

Plotting those deeper parameters will of course show deeper things. Just as using a microscope or X-Rays. Some parameters we may consider:

1. Correlations (in many ways)
2. Regression coefficients
3. Lags
4. Price distribution parameters

Scatter-plots may also be of interest. Points clusters may correspond to regimes.

Vic and Laurel recently had an interesting post about ordering/ranking. In a general sense, rank measures can be used in many ways — what's the cluster of the leading horses, and is it changing?

A great part of physics is simply building measurement tools. Then using them. Is market physics so different from other physics?

Adam Robinson explains:

Vincent's insights answer his own query, for the difference is fundamental and ineradicable.

In the physical world, phenomena consist of relations among unvarying "observables", and even at the quantum level, observing those phenomena offer us at worst a position vs. momentum tradeoff. Light quanta might shift a subatomic particle we have in our sights, but they don't usually change the particle.

With markets, once one or more traders observes a phenomenon (e.g., equity markets are rising as the yen falls, whatever — even spurious correlations) they begin to trade/arbitrage away the phenomenon so that it diminishes or even disappears entirely.

Hence ever-changing cycles that vex and humble us.

Jul

11

Despite chess being a game of 'perfect knowledge' (game theorists’ term, not mine) we are nonetheless beset by uncertainty. Even in relatively benign, 'typical' positions, it can be difficult if not impossible to assess outcomes with any accuracy.

But does one need to know, to have deep insights? Here the answer is much more clear, in fact it's a definite 'no'. The players who win tournaments are those who play good moves, not the ones who see very deeply. And as evidence I cite the example of Friedrich Saemisch, inventor of several important opening systems but famous for losing on time.

Interestingly Saemisch's impracticality went beyond the bounds of the chessboard, as illustrated by these stories related by Ludek Pachman:

'Isn't Hitler a fool? He thinks he can win the war with Russians!' Samish said completely aloud. Prague of those days was full of Gestapo and Samisch had to be overheard at least at the next few tables. I asked him to speak quietly. 'You don't agree that Hitler is a fool?' was Samisch unconcerned retort.

"Samish stayed 'afloat' untill the Summer of 1944. Then he let his mouth run off at the closing banquette after the Madrid tournament. Upon his return, Samisch was arrested right at the German border and shipped to a concentration camp. In Apr, 1946 I asked Samish in Switzerland what was his internment like. 'Unglaublich, uberhaupt nichts zu Rauchen!' Samish replied; and immediately added: 'Noch schlimmer ist es, dass ich jetzt volkommen frankelos bin!'…" (Unreliable GM translation: 'Unbelievable, above all nothing to smoke. Even worse is that now I'm completely broke.') 

Gabe Ivan remarks:

Bruce Pandolfini says:

Most people believe that great players strategize by thinking far into the future, by thinking 10 or 15 moves ahead. That's just not true. Chess players look only as far into the future as they need to, and that usually means thinking just a few moves ahead. Thinking too far ahead is a waste of time; the information is uncertain. The situation is ambiguous. Chess is about controlling the situation at hand. You want to determine your own future. You certainly don't want your opponent to determine it for you. For that, you need clarity, not clairvoyance. 

Jul

8

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

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

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

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

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

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

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

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

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

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

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

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

George Criparacos adds:

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

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

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

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

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

Ali Meshkati comments:

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

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

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

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

Janice Dorn adds: 

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

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

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

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

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

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

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

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

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

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

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

Steve Leslie adds:

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

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

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

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

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

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

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

Jun

23

Richard FortmanMr. Richard Fortman is in his early 90s and can be called the Dean of Checkers. I visited his home a couple of years ago and took him and his wife Faye to lunch. He showed me his checker library and ran up some play for me. His books on openings, Basic Checkers, is a mainstay for three-move enthusiasts. Joe Schwartz who won 10 and drew 10 in the recent International Match and was the highest US scorer credits the study of Basic Checkers to his dramatic success. Mr. Fortman below replies to my query on Mr. Matthewson and thought you would enjoy his reply to me.

Hello Alan,

Christy Mathewson was before my time, however, my coach Harland Richards once met him while on a business trip to Boston at the local checker club in the early 20s. He said Christy's profession was baseball and that checkers was just an enjoyable hobby. He liked to entertain his teammates on long train rides to the west coast by playing them blindfolded. That is an art not given to all, as you know. Although Tinsley, Ryan, Banks, and Lieberman were adept, other masters such as Long or Hellman were not. Richards suggested a game but Christy declined (no time) but did autograph a scorecard for him. There is a photo that shown Christy playing Sunset Bell with members of his team as spectators. I was told his board and checker set are in the baseball Hall of Fame. I don’t ever recall seeing a published game that he played. Gassed in WWI, his life was cut short.

Jun

14

I often wonder why the public can be repeatedly misled by forecasts that are consistently wrong, and by forecasters that have no raison d'etre. I believe the underlying reason is that we are brought up to be insecure, and we look to others for the sources and solutions to our problems, rather than looking to ourselves.

Such forecasters as the weekly financial columnist, can be consistently wrong, (he has been bearish every week since the Dow was at 800), and yet be among the most revered and respected forecasters of all. For an answer to this, I turned to Harry Browne's book, Why the Best Laid Investment Plans Go Wrong.

I always start with the Humble Pie with Whipped Cream, on p.43, where Browne points out that the archetypal forecaster looks for anything in his forecast that happens to have the vaguest resemblance to the ultimate outcome, and then tells you in subtle ways that "he told you so" or "it was so clear from this or that indicia."

Browne reviews the yearly self-evaluation of an investment adviser, who might be prone to using levels and ranges as his weapon for misdirection:

He almost always seems to have been around 87% right … He usually cites some examples that turned out to be wrong – "I was a bit too optimistic about the high in gold, I said 450 when it was actually 406." You can see that he's being more than open and honest, and he demonstrates that his talent and even his standards tower far above yours and mine … Any man who's wrong 13% of the time, and who's that close when he's wrong must be a genius … When I check, however, I find that his original forecast was "Gold's high will be between 450 and 500," and this was made when gold was already at 406. So he missed the high by 15% and failed to note that gold actually ended the year at 350, down 15% from his forecast.

For many years, I have believed that there is little correlation between the past record of an adviser or manager and his future success. Too often, adviser get good results with small amounts of money, but the market loves to let you make a small amount of money, just to encourage you to then raise a larger investment to lose.

I believe that the period of 2000-2002, where advisers and managers made money by being hedged or net short, was a period that was particularly detrimental to investors, in that it has led so many of them to stay with those who were relatively successful in this period. These managers and advisors have lost their investors so much more money in the subsequent period, when the markets have doubled, than the amounts they made their investors when they initially began investing.

I try to eschew from forecasts on this self improvement, mutual education, deflation of ballyhoo, forum. For one, I know how fallible I am, and second, I am cognizant of the principles of ever changing cycles, (Robert Bacon.) If we did forecast, many very potent readers might mistakenly believe that what we have to forecast is better or worse than average, and in either case it would be detrimental to all concerned. Also, I would find it hard to make a forecast where I didn't have a position, because I trade often … and if I did have a position, my position could be helped along by my communiqué. Furthermore, when I got out of the position, I would be hard pressed to be so fair and honorable that I would let all of my readers extricate themselves before I did, to my disadvantage.

Of course, if I were an innocuous type, and was prone to forecast without having a position, then I would be subject to making absurd calls, without possible economic feedback, and could possibly be wrong as consistently as the weekly financial columnist, or others of his ilk. I would never know how much damage and harm and loss my forecasts might cause to those poor souls who actually placed any reliance on them.

Harry Browne's book is a treasure trove of insights as to how one can watch out for being misled, and I recommend it highly. I also encourage all of you not to rely unduly on forecasts in the future.

As an afterthought, while considering this question, I couldn't help but notice that the Fake Doctor might do well to refrain from making so many forecasts in future. His former economics forecasting company was not well known for its accuracy, and recently he has been involved in an orgy of forecasts on such things as interest rates, the extent of reserves in the earth, and the likelihood of gains in the Chinese markets.

Browne lists several criteria for evaluating the likelihood of a forecaster to stand out from the crowd, such as talent in the field, and expertise. Other caveats, like the self interest they might have in their forecasts, the ability of those who follow them to extricate safely, and the likelihood that their own expertise in areas like geology, or Asian activities, might not be greater than average, should be considered also.

Riz Din writes:

Judging by the content in much of the media, there certainly seems to be an education of insecurity taking place, well beyond the realms of the financial forecaster. Combined with the tendency to focus on the shorter-term and not to cultivate the big, broad outlook, these are good conditions in which the pessimistic forecaster can flourish. I also wonder whether their is an evolutionary component that plays a role in this game, since the average human is a risk-averse individual.

Regarding the Fake Doctor, in March of 2004, he commented on exchange rate forecasting that,

…despite extensive efforts on the part of analysts, to my knowledge, no model projecting directional movements in exchange rates is significantly superior to tossing a coin. I am aware that of the thousands who try, some are quite successful. So are winners of coin-tossing contests.

He is obviously now paid to have a view, but I wonder whether he really believes it.

Sam Humbert comments:

To all the good arguments for abstention from forecasting, I'd like to add: publicly touting one's views leads to psychological lock-in ('getting married to a position'), because changing one's mind and dumping a losing position will result in a loss of face, in addition to the (perhaps less costly and painful) loss of dollars.

Riz Din adds: 

Adding to Steve's point, the problem of 'lock-in' of public forecasts may be exacerbated by the fact that much time and money is often spent generating a forecast and thesis. From the sell-side, creating a unified thesis across research departments is no small feat, and new data that are coming days and weeks may be judged less on their own merits than on how they can be interpreted to fit with this thesis, i.e., going about things backwards. I'm guessing the ability to turn on a dime is a valuable advantage to the likes of Soros and other nimble macro players.

On a separate note, I recall when I was working in the prediction business. It would be about a month or so before the start of a new financial year when clients would call asking for various forecasts for the year ahead, sometimes even further out. I'm sure many of these folk knew better, but they did it any way. They had spreadsheets to fill in.

It reminds me of story about the general who told his team of weather forecasters, "I appreciate being informed that your forecasts are no better than random, but please keep sending them on, as the army needs your predictions for planning purposes."

Charles Humbert extends:

There are three classes of money managers:

1) If your edge is unreliable, or modest to nonexistent, then your best approach is maximum publicity. If you're good at promotion this may lead to much greater benefits than you will derive purely from money management.

2) If your edge is positive but not spectacular, you should try to manage OPM. In this case a little bragging is part of the game; but it must be done with discretion. The goal is to be credible thus attracting investors and increasing your earnings in direct proportion.

3) In the rare case where your edge is outstanding, shut up and trade. If at all possible trade only your own money. Resist the temptation to make your brilliance visible to all. Always keep in mind the goal, which is to last as long as possible before the competition catches up.

Trading is a cutthroat business. If you make it easier for your opponents you eventually make it harder for yourself. The only reason for making public forecasts is to feed your ego. But those who deserve it most are the least well-served by such promotion. 

Nigel Davies writes: 

One of the tactics that can be used for nobbling a tournament leader is to congratulate him on his fine performance and asking what the secret is. The self-consciousness and commitment induced by a reply can take them out of 'the zone' with a bump. Not that I'd use anything like this myself, it's just something to watch out for if one is in the lead.

I think a similar effect can be at work when players write books. Besides making them a target should they publish anything too valuable, there's a certain inflexibility that can be induced by the 'lock-in' affect of going to print. 

J T Holley contributes:

There needs to be if not already a study of the "Power of Anonymity".

It is the spirit of the AA program and one that Mr. Bill must have suggested or he saw this same powerful principle in its possession.

Having quit smoking numerous times, I know that I tried I didn't lick it until I remained anonymous about my intentions. The minute you tell people they will ask you when you bump into them, "still cravin'?" "want to smoke?" "how you doin'?" Even with their good intentions the first thing you do is start thinking about smoking and it simply fuels the fire. Maybe this is why you shouldn't share speculation positions as well.

Doing a quick count I can think of very few times where I've gone out and said something in the touting category and come across a winner. Yet being the anonymous I have risen to the occasion and accomplished magnificent goals. Card games and betting are the horrible exception because one must always be vocal with intentions and can never be silent.

If you look at the risk/reward of touting vs. non-touting it seems so unaligned to me. Even if you tout and succeed then you still lose it seems. You are disliked, set up to be the "one" to knock down and most of the time left doubting the outcome or feeling a Nietzschean withdrawal. Does touting burn unwarranted energy and power as well?

The anonymous one walks freely and has the power. Think of sports when something great happens and the comment is "who was that guy?" This years Masters is a good example.

I think anonymity has got to be the most powerful principle next to compounding.

Anthony Tadlock remarks:

It seems that forecasters and others with the most bearish and pessimistic outlooks don't actually own any stocks and generally never have.

Steve Wisdom replies:

I especially like these standard tropes from bear newsletters: "We advise you to liquidate all stocks," and "We advise you to take profits on stocks now,"… Begging the question: ‘What stocks? If I believed your newsletter, I'd have sold all my stocks years ago.’

May

27

Last week I attended a project management course called Prince2. It was very interesting, but also challenging. The written exam lasted about three hours. At the end I was exhausted. The questions were difficult and you had to manage your time very well.

English is not my mother tongue and may be this is also why I got so tired. The instructor asked me: "How was it?" I said, "Very difficult. I am not happy". The reply was, "You are never happy. You are a pessimist".

Perfectionism, is often confused with pessimism. In the end he was right from a certain perspective. You do not live well always looking to "the next step" in order to improve your results. Traders must be optimists because they must be confident in their system when they take risks. Optimism does not have to be confused with superficiality - "things will go fine anyway".

The optimist looks at the next market move confident that prices will go in his or her direction. A pessimist will never start trading because the improvement process will continue forever. A pessimist will work out the details and analyze risks thoroughly. A pessimist suffers during trades, projecting reversals and fakes to his positions. A balance should be found.

I think, however, that the approach should become as mechanical as possible to leave out emotions and attitude. A tested approach has to be followed with discipline. A trading methodology should be designed, tested, and applied in a scientific and mechanical way leaving the human factor out of the game. I am not sure how intuitive traders can do. The validity of their approach is not measurable, although their results in the long term are. And there are many successful intuitive traders out there.

From James Lackey:

Perhaps the reason "emotion and attitude" get a bad wrap is they're not measured and tested. In hindsight all bad trades were due to "emotion and attitude." What about the good trades? Are good trades always entered with the so-called proper no emotion and humbleness? Of course the proper way to exit a good trade is with reasonable humility.

Discipline is only good after the desired result. Discipline with bad results is insanity, doing the same thing over and over expecting a different result.

I have seen a few mechanical traders fail. After the fact they might blame their interference for their demise. After pointing out their system wasn't good enough in the first place, they argue that, no it was their lack of so-called discipline for not sticking with a winning system. Yah, right. If the system were winning big the emotional response would be to go out and celebrate or promote for even a greater monetary gain off a bigger stake.

May

23

The latest report from Amnesty International (see the FT report below) provides more grist for my foot-shot theory of human affairs. Can anyone ever make a profit without it being 'exploitiation'?

I thought I'd try to learn more about the field of economic inequality and discovered that Amnesty International evidently subscribes to the 'dependency theory'. But there are three other major types of theory about variations in nations' wealth, plus Richard Lynn's deeply unpopular thesis, which claims it has more to do with national IQs than anything else:

1) Dependency theory: Proposes that the economically developed capitalist nations are responsible for the poverty of the underdeveloped nations because they dominate the world economy, force the rest of the world into economic dependency, and pay low prices for Third World agricultural products and natural resources. This is why we get products labeled 'fair trade' in supermarkets.

2) Climatic theories: These propose that different climates naturally lend themselves to different levels of economic activity.

3) Neoliberal theory: Proposes that the major factor responsible for national differences in economic development is the presence of free markets as opposed to command, socialist, and communist economies.

4) Various psychological theories about motivational factors, such as the Protestant work ethic, have helped northern Europe.

Perhaps several of these theories have an element of truth, but I do find Lynn's hypothesis quite compelling, especially if his IQ/GDP correlation (0.82) is correct. And I can see why it might be rejected without study.

Given the taboo surrounding Lynn's ideas, could they be used for investment purposes? Well maybe. Just go long on a high IQ country that has been held back for reasons that are being reversed. Conversely one might short the hell out of a wealthy country in which the average IQ takes a sudden nosedive.

I started wondering about how someone should set about investing in Mongolia. To my dismay, I discovered that Lynn had already investigated the IQs of Mongolian kids and found them to be 5 lower than Han Chinese living in the same community. I guess it's back to the drawing board.

So it looks like genes are not enough, IQ is probably dependent on factors other than genetic material alone. But perhaps there's still an angle here for investment in companies.

Now I've seen lots of theories about how buying into companies with a good ethic works well (without quantification), but nothing based on IQ. And there are a couple of companies I can think of whose ethics have been criticized but not the brains of their leadership; Google and Microsoft.

Could there be a bias against brains that might be profitably exploited? I suspect that most people would much prefer to invest in dull honesty rather than the too clever by half. But maybe they are wrong.

From the FT's website:

The United Nations must develop international standards that hold big business accountable for its impact on human rights, Amnesty International says in its annual report published on Wednesday.

There is evidence in many parts of the world that people are being tipped into poverty and trapped there by corrupt governments and greedy businesses, Irene Khan, Amnestys secretary general, says in her foreword to the report.

According to Ms. Khan, a growing demand for mining, urban development and tourism projects is putting pressure on land, across Africa, Asia, and Latin America, with entire communities evicted from their homes without compensation or alternative shelter.

She says that weak, impoverished, and often profoundly corrupt states have created a power vacuum into which corporations and the economic actors are moving.

In some of the most resource-rich countries with the poorest populations, big business has used its unbridled power to gain concessions from governments that deprive local people of the benefits of the resources, destroy their livelihoods, displace them from their homes and expose them to environmental degradation.

Africa has long been a victim of the greed of western governments and companies, says Ms Khan, but she singles out China and Chinese businesses for showing little regard for human rights on the continent.

May

17

As bearishness is surfacing in our midst, I thought I better refer to Ken Fisher's latest column in Forbes.

Nigel Davies comments:

There is no doubt that over a long period of time stocks go up. This is not the issue. The problem is that 20% of the time the market is lower five years hence, and 26% of the time two years hence. I also believe that serious housing declines hit stocks.

This has nothing to do with bearish propaganda; these are hard facts. Now there may well be reasons why this is not the case, not least of which is the GaveKal thinking. But I should point out that the GaveKal approach has not been quantified and therefore, unless I'm mistaken, qualifies as 'mumbo'.

But the real issue here is in why any counter-arguments are ignored or shouted down as 'bearish propaganda', even when they are reasonable. Now there is no doubt that bearish propaganda exists, but delusion is not a one-way street.

Ken Fisher's view is untested mumbo, as one can see from the title 'Never Before'. And as I'm quite enjoying playing a bear (albeit one who only ever takes the long side), the obvious answer to this is that if the consumer spending spree comes to an end (because they can no longer use their new found housing wealth as a checking account), earnings yields will shortly be heading south.

Vic mentions:

During the last several years, many chronic bears have submitted original pieces to our site, and if they have a strong point, and argue it well, we are always happy to publish it.

I can't agree with Nigel’s point about some of the two and x year changes being down, as the studies of Fisher and Lorie show that when you look at the distribution of returns by holding periods, that almost all of the seven year returns are up, and an extraordinarily high percentage of them yield returns of more than 15% a year compounded.

These results are completely consistent with those that would be expected from a 10% a year drift with a standard deviation between years of about that much. Many people try to grind against the house in Vegas and we know they all end up broke. To try to grind against a drift like this is sure to end up in the 97% yearly loss that one of the chronic bears (who claims he caught the Feb. 27th debacle) actually experiences. Imagine what the fate of those who actually followed the advice and views of the weekly financial columnist have been — how many times would they have lost 97% in a year while they waited for events like the Oct. 19th, 1987 landslide to occur. How terrible it was that rather than receiving a heads up to cover their shorts and get back in the market, the weekly financial columnist told them that the Oct. 19th, 1987 decline of 25% was just a beginning.

The same is true of the key level boys who state that this or that level, down 5% from the current, is what the pros are watching closely. Are they bullish then or bearish, and what happens to the 10% a year drift against them as they wait for that 'level the pros are watching' to actually occur in the fullness of time?

They will all end up ghosts in Trinity Church, whilst they wait for their key levels, and as it has so often been in the past, my pocket book will always be open to them, whether for a lunch or otherwise.

Hanny Saad offers:

I am one who writes naked puts very frequently and find them very profitable. I am aware of the dangers (or some of the dangers) associated with this practice including specialists gunning for certain active strikes the same way the do with stops, etc., and I sometimes modify the pos. to credit spreads. I even use them instead of limit orders in some cases when I am more aggressive and look for assignment.

Could Vic and Laurel kindly clarify the dangers of this? I am under the impression that writing puts is consistent with the 10%drift and is generally taking a bullish stance to the markets. I am particularly interested in this as I am very active with this strategy and it has been very rewarding in the past, but I hope that the mistress is not hiding behind the curtain to take it all back in one blow. 

Craig Mee adds: 

There was one particularly gifted option trader on the Sydney futures exchange trading floor, who regularly, generated considerable monthly returns trading options, (selling puts, just one of his many strategies) — however each year for many years he would blow up and blow up big, only for a new underwriter to get him back in to trading, (maybe lulled in by his solid monthly record, up until the time it took him out of the game).

Maybe his risk management left a lot to be desired, but as one trader said me after Sept. 11th, for every dollar in the market, you need 10 in the bank (to cover not getting squeezed out of positions and to cover extended and added margin requirements by the clearing houses when volatility goes through the roof).

That one little black swan can kick up some dust.

Gordon Haave comments:

Selling naked puts is not the only strategy where, in essence, you are receiving income in exchange for assuming the risk of very unlikely events. What is great about them is that these events are so rare, that when they happen you (the manager) can shrug them off as a one time event that you have now learned from … and get back in business with new capital.

Chris Cooper responds:

Prof. Haave's words strike me as true. On the other hand, it seems likely that in a market subject to a 10% drift, where that drift is not modeled in the option pricing formulas, there may very well be some positive expectation in selling naked (or semi-naked) puts. Since I have assiduously avoided options in the past because of concerns about liquidity and execution costs, perhaps it is time to reevaluate, but I have several concerns.

A skewed distribution of gains, such as one receives by selling OTM puts, is undesirable for one trading his own money. The market crashes are so rare that it will take many years to see enough of them to trust that you can model their frequency/amplitude. It is thus easy to fool yourself about the expectation of your model, and it is also easy to get wiped out. By hedging you can transform the fat left-side tail into a better-behaved distribution function. Is this what people do in practice, or do they very often run mostly unhedged, since any hedge costs money?I can imagine various ways to hedge, such as: stop-loss on the naked puts; sell futures; buy further OTM puts; and probably many more creative strategies. These can be dynamic or static. What is the best practice, assuming that you need to have good liquidity and keep your hedging costs at a minimum?

Isn't selling a put a combination of a directional bet on the market plus a bet that volatility will not be rising? If so, then does it make sense to separate the two? Buying futures would be the directional component, and one could sell volatility by selling both calls and puts. Am I seeing this correctly, or is there a better way?Is it better to let your OTM puts expire worthless, or does it make sense to sell them before expiration to free up capital?

What about execution costs? The spreads in options always seem high compared to futures or stocks. Am I looking at this in the wrong way? Does it help to sell puts by entering a limit order on the ask, and adjust it based on delta and the underlying? How is liquidity in these markets, compared to futures?

It has always seemed to me that the derivatives markets are obfuscated by jargon.

Russel Sears comments:

The bears' argument is built on the relatively recent housing boom and its extraordinary recent returns, 2000-2005. It is as if the "old economy" insisted its importance in a post dotcom bubble. The bears' argument boils down to: stock market returns are dependent on housing market returns. This may very well have been case recently. But should we be shocked to find a regime change, just as the housing market slumps? Obviously the 100 year drift in the stock market, cannot always be dependent on a 10% drift in the housing market. This is because the housing market is limited by the income level of the typical buyer.
 

May

15

Hi Laurel,

Given your extensive background in financial journalism I was hoping your could offer insight into an investigative journalism project I've been assigned for a class at UCLA. I'd be grateful to hear your thoughts and wisdom relating to a few questions I have. The questions are followed by my thoughts and experience thus far.

How did you learn to manage the news writing process to not always write about doomsday or sounding alarmist? Are there ways to able to spin a story to appear that you are selling doomsday, but between the lines you are actually speaking truth? Is a story "news" if people don't read it, read it and but don't consider it news, or disregard it because it doesn't coincide with their chosen bias?

I started with the idea of a story on Sharesleuth, a venture funded by Mark Cuban, created to use investigative journalists to dig up corporate dirt, write up a report on the findings, trade on the information, and then release the report. Some consider this unethical and some even mention insider trading. I didn't believe this represented either of these, and because people want negative news, a story on this concept would probably not be interesting to many. Like you and Vic say, people are optimists and want the negative news. They don't want to hear from the Miles and the Beckys of the world.

I paired up with a woman investigating deaths and injuries on amusement park rides. At first I didn't think this was a problem worth paying attention to. And after an hour of research I realized this was the smallest problem of all mankind. She refused to comprehend the numbers. There has not been an increase in deaths since the mid-80s, and the trend has been 1 to 2 deaths a year. I could go no further with this.

Clinical trials seem ripe for investigative journalists to rip. Take, for example, Gerson Lehrman consultants and the doctors leaking info. Then I saw a story written by David Evans of Bloomberg, an in-depth series on his view of the shady dealings of clinical trials and taking advantage of participants. After more research, and a surprise visit to a clinical trial facility here in LA, I knew I couldn't write about this side of the story either. There will be bad companies out there in every industry, but clinical trials are a critically important necessity to the process of bringing drugs to market. I also just read an article documenting (though not tested through the scientific method) the corresponding decreases in trial participants after seeing numerous negative articles in the paper.

I was thinking of doing a number of numerical studies on the percentage of bad clinical trial sites, ones that had been sanctioned, ones with the most consumer complaints, and showing what a minuscule percentage it is. Maybe tie in that it's not the Contract Research Organizations specifying that participants be low-income immigrants, but rather an equation of supply and demand. If these people have no better income alternatives then they chose to go and sign up for a trial for financial benefit. They say how bad the consent forms are. Is that supposed to be unique to this industry? All consent forms are barely readable. They are legalese because if they weren't they would be worthless in a court.

Do you have any suggestions where I could take one of these stories? What perspectives do you find interesting surrounding any of these topics? Thanks so much and any of your thoughts on the subject would be greatly appreciated and thought about deeply.

Thanks again,

Kevin Kirkpatrick

Laurel Kenner replies: 

Dear Kevin,

Your questions are all excellent, and I got a kick out of the dead-end stories, So many editors try to unload such stories on the public by getting hacks to do the work. It takes courage to tell them that there is no story there, but at the end your integrity will earn respect.

I believe you could go far in journalism, but you may run into a lot of grief along the way. Journalism today is in a shameful state.

The important thing is to always seek and tell the truth. Don't worry about hiding your optimism. Don't be afraid to be different. Be bold and be big.

I would be happy to respond in greater detail. I happen to be in L.A. this week, and you would be welcome to join me for breakfast or lunch at Shutters in Santa Monica (Pico Boulevard at the beach) tomorrow, Thursday or Friday.

May

8

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

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

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

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

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

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

Charles Pennington adds: 

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

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

From Alan Millhone:

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

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

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

From Russell Sears:

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

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

Nigel Davies writes: 

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

Steve Leslie adds: 

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

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

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

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

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

From Alfonso Sammassimo:

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

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

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

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

From Stefan Jovanovich:

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

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

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

Rodger Bastien writes:

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

Russell Sears adds: 

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

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

Nigel Davies adds:

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

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

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

Rodger Bastien adds:

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

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

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

Stefan Jovanovich replies:

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

Apr

26

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

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

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

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


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

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

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

Dean Parisian remarks:

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

Apr

24

Predicting random chaos from hindsight — Niall Ferguson [With reference to The Black Swan, by Nassim Taleb]

Why do we insist on drawing causal chains to exceedingly rare calamities after the fact?

IT IS Taleb's assault on traditional historiography that is most relevant here. Since Thucydides, it is true, historians have encouraged us to explain low-probability calamities (like wars) after the fact. Such storytelling helps us to make sense of a random disaster. It also enables us to apportion blame. Generations of historians have toiled in this way to explain the origins of such great calamities as, say, World War I, constructing elegant narrative chains of causes and effects, heaping opprobrium on this or that statesman.

There is something deeply suspect about this procedure, however. It results in what Taleb calls the "retrospective distortion." These causal chains were quite invisible to contemporaries, to whom the outbreak of war came as a bolt from the blue. The point is that there were umpteen Balkan crises before 1914 that didn't lead to Armageddon. Like Cho, the Sarajevo assassin Gavrilo Princip was a black swan –only vastly bigger.

The light of the public really does darken everything. Niall Ferguson, when he was an obscure (i.e. not on TV) historian, wrote a brilliant history of the Rothschild Bank . It is one of the Top 10 histories written since WWII. Now that Ferguson has become a name worthy of the editorial pages of our "important" newspapers, he has become as inadvertently hilarious as the rest of the commentariat. Gavrilo Princip was not a Black Swan but he was a member of the Black Hand (No, not the Mafia, but the Sinn Fein of the Serbs under Austrian rule). "Sarajevo" was immediately preceded by two Balkan Wars in 1912 and 1913, and the Austrian's use of it as a causus belli was hardly an unanticipated event, given their occupation of Bosnia a few years earlier. The Austrians were deeply disappointed when the Serbs agreed to nine of the 10 demands in their ultimatum; the mulishness of my paternal grandfather's countrymen in refusing to allow the Austrian equivalent of the carabinieri to be garrisoned in Belgrade as part of the investigation of Princip's criminal conspiracy was the only sticking point. That was enough to save the Austrians from having to find another excuse to go to war.

Apr

16

In comments earlier this year the Chair wrote, "When will someone explain to Fed. Governors that the stronger the economy, the less likelihood there is of inflation, as there is expansion to absorb the money supply."

Sympathetic to your view, Dallas Fed President Richard Fisher wrote the following in a Wall Street Journal op-ed earlier this month: "… faster output growth dampens inflationary pressures … A new formula emerges from an economic model being developed by the Federal Reserve Bank of Dallas. It reveals something the traditional doctrine misses: Inflation varies inversely with growth not only in the domestic economy but also with growth in other countries…".

Also, one of the Bloomberg top stories last week was about how "Most Americans See Recession in the Next 12 Months." I channeled the Chair in my reply to it. See update 2 to the entry entitled "Expert Testimony" on Donald Luskin's blog.

Apr

12

Just saw "The Lookout." It's "Fargo" without the twang-y Dakotan accent or snowbound meat-grinder. Though it celebrates the Gen X cynicism and party-hearty drug-culture. In the end I enjoyed it, not least because its star is a solid new performer, Joseph Gordon-Levitt, formerly the runt in 3rd Rock from the Sun. Jeff Daniels plays a mysteriously visionary blind cohabite. Isn't it always that way with blind guys in flicks? and the film is a rare entry in good finishing up battered but best in the end.

Here, broody Gordon-Levitt, a face and force to be contended with, is coping with head injury difficulties that have rarely, if ever, been treated before. His confusion and malleability make him a prime target for petty thugs bent on a heist of mom-n-pop local banks. Not autistic, not schizoid, the character he plays has an affliction that few understand, though externally he looks unfazed and unchallenged. His overcoming of the considerable odds against him is compelling. He has a mesmerizing presence, at once innocent yet deeply at war and coiled. Gordon-Levitt is probably, what Adam Sandler wishes he could be in that strange and unfilling current "Reign Over Me."

Along with "Grindhouse" (not reviewed here), Lookout also features what we shall call amputation porn. What is a society saying that gets its rocks off over women with replacement extremities [some with strategic weapons of mass destruction screwed into the available apertures]? Is Heather Mills McCartney setting the stage for a slew of limb-lock oeuvres?

What to say about "Reign Over Me?" Someone must have paid previous reviewers to give this oddity, with its catatonic, rageaholic, stupidaholic Sandler a thumbs up. Don Cheadle, with all his graceful understatement and silken downplaying could not rescue this peculiar indulgence from its formicary plot elements.

Many scenes with Sandler evoke guffaws of disbelief, though the predicament of a man destroyed by the loss of his entire family to the murderers of 9/11 is a valid conceit that still awaits its Boswell. He lacks the necessary gravitas from too many "Waterboy" moments.

"Black Book," Paul Verhoeven's important "Schindler'' offering, is an important contribution to the Holocaust canon, despite a few quibbles with plotline liberties–offers style, noir nudity, authentic-feel sets, spine-tingling suspense, unlikely delicious costumes, authentic-sounding dialogue (Dutch, German, French, English, excellently subtitled, for a welcome change) historical settings, and a few not-likely scenes or predicaments.

Russian sci-fi "Day Watch" (to be released May) is a hipper-than-thou update of a decrepit modern-day Russia pitting Forces of Light vs. Forces of Dark. It is extremely popular in the former USSR, upsetting all box office records. It has a "Minority Report" and "Matrix Unloaded" trick slo-mo and transmogrifications with a bit of in-your-face Tarantino and splashy gore ghosting over all the CGI, amazing cinematographic effects, especially considering the Wal-Marty $4 mm bargain-basement budget. Even more surprising than the plush look of this intriguing futuristic thriller, the credit roll includes, uh, about 3.5 million cast and crew. How such Terry Gilliam-like fancy footwork and eye-popping effects were achieved on so modest a budget is a caution for eager Western filmmakers.

Then, decidedly not recommended is Fassbinder's incomprehensible, s-l-o-w homage to what must be narcoleptic Warholiana. This is interminable filmmaking and overall misogyny, "Katzelmacher" ("Cat-Maker,"1969) (MoMA). A companion left after only 15 minutes. In black and white, of historical if not entertainment value, "Katzel" left me wondering how Fassbinder managed to scrape up funding for further filmic enterprises after this one. It features an abuse of one of his key repertory females every couple of minutes. It is enchanting to see that they don't even react at the oafish louts who perpetrate the casual assaults. An optimist, this reviewer stuck it out, then bemoaned the theft of 88 minutes. Fassbinder did, however, make other and far better films, one of which, "Berlin Alexanderplatz," Parts I - 13 (1979/80) occupies almost the same number of hours as a post doc degree.

Bringing up the rear is the satirical long-suffering "The TV Set." It is a beady stare at the disemboweling compromises necessitated by participating in the TV drama field, whether one is David Chase (Sopranos) or just humiliated journeyman Mike Klein, the congested David Duchovny, playing a non-X-Files, all-too-human scriptwriter. "TV Set" shows in sly, warty close-up how one must sell not only one's soul to become finally green-lighted for the average TV pilot, but lower and higher portions of one's anatomy. Rapacious producers (Sigourney Weaver is particularly hilarious as an acid-reflux-afflicted power-punchy exec) vie with all the hierarchy of self-important crowd and crew in gnawing off chunks of the heart of a production, until it is a freakish smidgen of its original.

"The Hoax," presents Richard Gere as Clifford Irving, the scammer par excellence who persuaded a whole corporation that he had entrée into the forbidden walled city of obsessive Howard Hughes. The experience of this film was one of discomfort. It teetered between empathy for the sham-meister and disbelief that his shamelessness was bought into hook, line, and stinker, by gullible McGraw-Hill.

In the end, I do not think I would go again, though Hope Davis ("American Splendor," "The Secret Lives of Dentists," "Proof") and Alfred Molina ("Chocolate," "Spider-Man 2," "Frida," "Murder on the Orient Express") are heartbreakingly good (as we have come to expect). The normally sexy Gere is, well, smarmy, not fully inhabiting the skin of this slippery individual. One could ask how the hoax could have succeeded in the first place. As one could question why one would make a film about this embarrassing episode in America's ever-bankable nincompoop season.

Apr

5

I spent some time reviewing the DS site and the discussions of deception. I did this after noting that the upcoming featured article on Wikipedia is a piece on one of the most amazing deceptions in the history of chess, "The Turk." Apparently many of its age were drawn in by the fake computer/machine, including Charles Babbage, Fredrick the Great, Catherine the Great, Edgar Allan Poe, Benjamin Franklin, and Napoleon Bonaparte. The ruse was made all the more credible by the construction that allowed the cynic to look through the cabinet and the fact that a Hungarian grandee, Wolfgang von Kempelen, was its creator and sponsor. There were vocal critics, however, the machine continued to attract attention as long as it remained on display in Europe.

The Turk was purchased by Maelzel and brought to America, which allowed Poe to create an account. It is interesting to note the skepticism and fascination in the following passage by Poe:

"What shall we think of a machine which can not only accomplish all this, but actually print off its elaborate results, when obtained, without the slightest intervention of the intellect of man? It will, perhaps, be said, in reply, that a machine such as we have described is altogether above comparison with the Chess-Player of Maelzel. By no means–it is altogether beneath it–that is to say provided we assume (what should never for a moment be assumed) that the Chess-Player is a pure machine, and performs its operations without any immediate human agency. Arithmetical or algebraical calculations are, from their very nature, fixed and determinate. Certain data being given, certain results necessarily and inevitably follow. These results have dependence upon nothing, and are influenced by nothing but the data originally given. And the question to be solved proceeds, or should proceed, to its final determination, by a succession of unerring steps liable to no change, and subject to no modification." 

How many times do market operators take for granted that some function of the market is beyond being gamed, a mere logical extension arising from "certain data" and the ensuing calculation? Might the artifice we see be constructed to allow for examination, but concealing the kernel of deception? Might sponsorship of the esteemed be the final cog that turns the deception to its highest degree?

I saw many of the items at work in the late 90s in the OTC market as large bids or offers were flashed by proprietary traders on Instinet creating the perception that a natural buyer/seller was available in size. The ensuing stampede would generate the desired profit courtesy of the deception. 

Nigel Davies adds: 

A book has been written about the history of the Turk. The idea of human intervention in 'machine' decisions was echoed by Kasparov's 'hand of god' accusations during his match with Deep Blue. But now the focus is on humans receiving machine help, signifying that there's been a turning point during the last decade. 

Victor Niederhoffer adds: 

Turk in its modern incarnation is somewhere on 42nd street with Pillsbury playing inside it and another checker midget champion. I believe I may have played against it in the 42nd street freak shop that Larry Ritter wrote about in some of his NY stories, next to a great former pitcher.

From
Alan Millhone:

Was this the checker playing automaton that was at Eden's old Musee? 'Ajeeb' was another one that appeared for some years at Coney Island and you played against it for a dime a game. Samuel Gonotsky reportedly played inside of 'Ajeeb' for some time as well as other checker players. Pillsbury was a terrific 'blindfold' chess & checker player. Branch Rickey loved checkers as well as Christy Matthewson. You can find a little information on 'Ajeeb' in William T. Call's long out of print Vocabulary of Checkers. The art of playing both games 'blindfolded' is another interesting story.

I quote Mr. Call on page 12 of Vocabulary of Checkers. He describes "automaton" as follows:

A lay figure that apparently plays the game mechanically, the moving arm being operated by- but the ethics of the pastime forbid details, because of the harmless pleasure the public finds in telling how it is probably done. The impassive attendant, when pressed for an explanation, gives rapid vent to something like the following: 'The board is sensitized by that the move you make operates a corresponding change in the power of the piece controlling the square reflecting the correct reply.' Ajeeb, Mazam, Ali, and Akimo are the names of some famous automatons.

Recently Durgin's Single Corner, by E.A. Durgin 1894 was sold on eBay for $13,000.00 becaue this little book belonged to Baseball great Christy Matthewson and he signed his name inside of the book showing that it was his.

Checker's is deep in history and dates back to the Egyptians.

Mar

30

Sometime one doesn't need to count. Here is an example. Once I was considering buying a very illiquid small cap with a huge dividend. I called the CFO and said I was an investor interested in their stock. I asked him why such a dividend? He told me it was a one-off; they were getting rid of cash they didn't need. There was no chance of such a high dividend in the future.

Then I told him his stock was too illiquid anyway. He said they could do something about it. The next morning there were 100,000 shares for sale, instead of the usual 1,000 or 2,000. Needless to say, I never bought this stock. There was no need for counting.

There are plenty of examples like that, but to my knowledge they are always in opaque markets, with few players. I could give similar examples in physical oil or even swaps.

However, when it comes to huge markets like stocks indices, big caps, or WTI (even the oil majors or OPEC don't try to call the price of oil), how can anybody believe that he knows more than the market, that he has an information advantage? In those cases, counting is the only solution.

You could reply that information is not enough; you need to process it. And someone with experience and interest in the markets is able to process information better than the rest of the financial community. This may be true. Still, for the rest of us, with less experience and wits, isn't it safer to do what scientists do when confronted with time series, that is, count?

Besides, nobody can deny the incredible efficiency of the scientific method. Just look at its positive impact on everybody's lives from the Age of Enlightenment. To deprive oneself of such a tool doesn't make sense, even if one is a superior analyst. 

Adi Schnytzer replies:

I'd like to present my critique of counting. I assume that we wish to predict where the market is heading, be it in an hour's or a year's time. Counting — as exemplified by Vic and Laurel — generally involves regressing the returns or prices of stocks on one or, at most, two explanatory variables and testing for significance. Thus, using daily data, we may ask was has happened to the S&P500 over the past few years if, on Groundhog Day, the little beast saw its shadow.

captured British sailors
We may check what happened the next day or daily for the next month or whatever. The problem is that rarely are other explanatory variables added to the regression and this is OK if those missing variables are uncorrelated with shadow viewing. But, if this does tell us about a cold winter remaining, it affects energy prices and these should appear in the regression since the S&P 500 is clearly affected by energy stocks which are known to be related to the weather. But this is not the real problem.

The real problem is that since the variance of stock price returns is relatively large in all models that have ever been built, any exogenous shock can turn ups into downs and vice versa. And it is precisely exogenous shocks (e.g. what will the Iranians do tomorrow, what will Bush do, what will the big boys do?) that counting and its big brother econometrics cannot handle at all! But the world is full of these. How many of the news items in today's newspaper have you predicted?

To be sure, many turn out to be irrelevant, but not all. And once they have happened, it's too late for the model! Now, there are people who evidently know in advance things that are not in the public domain. The Iranians know what they'll do to the sailors tomorrow, but most of us don't.

Suppose they are each given $1 mil in gold and sent home first class tomorrow after seeing the Iran nuclear sites destroyed tonight. One suspects the market might react and counting will have proven utterly useless. Suppose, on the other hand, the Iranian Navy, having proven that it is superior to the Royal Navy, decides to blockade all oil exports from the Gulf. Hmmmm…

Mar

30

The redheaded man (Monte Walsh's boss) chuckled. Later when Monte had finished wiping the table and counter and putting things in place and sweeping up assorted debris, the redheaded man pointed to the three new unused saddles on their racks by the rear wall. "Maybe you could use one of those." (Monte is leaving to join a cattle drive). "Shucks," said Monte, "I can't pay for it." "Don't I know that," said the redheaded man, gruffly, seeming angry. "I ain't dumb. Pay me when you come back through or send it by somebody."

I have been considering the subject of what investors can learn from business. These are preliminary ideas and I would appreciate any augmentations from readers so that I can do justice to this subject and perhaps influence a few youngsters to take this path.

Some thoughts that come quickly to mind:

1. Businesses hire and expand when business is good. When there are more goods, prices tend to come down. Thus, an increase in business, and especially profits, is very good for inflation. Not the reverse, as almost everyone who hasn't been in business thinks.
2. Incentives matter. You have to be rewarded for a task if you're going to perform it well. The incentive that matters to most people is the after-Service income they can spend on their families. Thus, changes in the amount the Service takes are a great influence on business. The reductions in capital gains rates in the 1980s and again in 2003 were a key to vibrant stock markets.
3. Individuals have widely varying talents. The way to elicit them is to show them the goal and then have them use their individual abilities to achieve it. Businesses run from the top down with authoritarian leadership, a la the golf expert from the conglomerate with ever-rising earnings from assets bought hundreds of years ago, are not as successful.
4. Business is amazingly competitive. There are substitutes for every product that a business produces. New entrants wait to rush in at any sign of above average profits. Innovators with new methods of production, and better products, are always in an arms race. When I was trying to sell Tyco Toys to Herb Everts at Consolidated Foods, I remarked that Tyco's model cars were the fastest. He wisely said, 'That's terrible. It won't be long until someone comes up with a faster one." The same is true for processing and production in all fields. The businesses that prosper are those with a complete business operation with proprietary marketing, production and research.
5. It's hard to make a profit on your initial sales. There's too much search cost and marketing cost involved. A company has to make its money from repeat business. That can only come by offering a product at a better quality, price, or delivery. Many mail-order companies lose money for the first 10 years on a customer, but the long tail gives them the edge. The early Internet companies were building up databases and customer lists. It takes time to make a profit. But once they get it, and enjoy repeat business without any marketing cost, they can be golden.
6. Business is a benevolent activity. The customer and the purveyor both gain from each transaction. It builds friendship. When I was young, an insightful businessman told me that more than half my friends when I grew up would be business associates. He was right. The businessman can prosper only if he can voluntarily provide good value to his customers, employees and suppliers. That's why so many businessmen who rise to the top are the finest people you'll ever meet, salt of the earth with nary a bad word for anyone and loyal to a fault to their employees, knowing everyone's name, for example. It's great if you find a business where the employees are really excited about the value of their product. A plan, a purpose, decentralized decision-making, and latitude for the employees to soar create the proper environment for business greatness.
7. The best books I've read on business are Monte Walsh, Atlas Shrugged, and Show Boat. Both Schaeffer and Rand know the subject as well as anyone ever has, and my metal industry friends have told me Rand got everything about the iron and steel business right. Schaeffer is a naturalist and knows his horses and terrain as well as Lamour. I also recommend the Broadway show Jersey Boys as a great business story of struggling to achieve success and wealth in a most challenging and competitive field. Every kid should read these books and see the movies (Fountainhead and We the Living, until Atlas can get by the destroyers) and be ready to travel the path to success in the heroic field of business.

J T Holley adds:

"Letters From A Self-made Merchant To His Son," by Lorimer, was one the Chair recommended earlier on. That book is truly a classic "business" text and one that I appreciate deeply. Not only is it a text that teaches business technique and survival, but it is a book about a father's relationship with his son.

To paraphrase Lorimer, one of my favorite lines is this one: a five-cent shine is as good as a five-dollar lunch. It's amazing how many people will meet you for breakfast, lunch, or dinner if you are buying and not do a lick of business. Not doing so and meeting them in their own environment in a well-dressed manner works ten times better.

That book definitely makes my "must" reads for life, business, and parenthood.

Mar

19

One of the tenets of my life is that I want to be known as the guy with the most losses. I want to be the guy that lost the most. My reason for this is simple: the guy with the most losses is also the guy with the most victories.

As a kid, I figured out that even though I did not like losses, I could learn from them. Therefore, I stopped looking at them as losses. I looked upon them as learning experiences. I figured out early in my life that my viewpoint and the events surrounding it were paramount to my success (or failure).

Therefore, I want to share with you all my viewpoint of the recent robbery of my farm.

Yes, I'm unhappy about what happened, but there's nothing I can do about it. I can only work to prevent it from happening in the future.

But what wisdom can I glean from this "learning experience?"

I thought about this as my buddy Jeff and I were driving home on Friday night from the farm (he volunteered to go up with me and give me a hand). We both were discussing successes and failures in our life. Jeff shared some of his more poignant experiences in his very successful life. He's a dermatologist who specializes in reconstructive surgery usually involving facial cancers of some sort.

What ended up happening in our discussion is that after we talked about our successes and failures, we both began to focus on the good things that came out of them and how our lives were blessed.

I concluded that even though I lost a bunch of stuff, I could have lost a whole lot more. The deputy was stunned that I hadn't been robbed sooner (especially after he saw all the stuff I kept in there) and he thought I was lucky that they didn't get more. He figured that someone or something had scared them off. I also concluded that even though I lost a bunch of stuff, all I lost was "stuff."

You see, the reason I got all of my stuff was because of all the actions I had performed in my life, my actions being my efforts directed towards gaining success. And I concluded that I had done it once and I could do it again.

You see, I already know what it takes to get the job done; therefore, all I have to do is repeat those actions. I know how to do it. I'll do it again. I don't have to invent something new, or figure out some mystery, or solve the problem of how to gain that level of material wealth. I have the knowledge, the skill, and ability.

Years ago, I used to be asked to teach others about little secrets of success. I enjoyed giving these talks. The teacher always learns more than the pupils. It was a great journey of self-discovery and introspection. One thing I used to say at these meetings was, "You could take everything that I have in this world: my home, my business, all my assets, even the clothes on my back. You could then beat me with a baseball bat and toss my naked, bloodied, financially devastated body out into the middle of nowhere and leave me for dead, and I would get it all back. Why? Because I know how to do it.

My purpose for saying this was twofold:

First, because I didn't want anyone listening to me talk to think that anything about their situation was an excuse for failure. And second, because I knew it was true.

Little did I know that in the late 90s I would get a chance to put those words to practice. I experienced a devastating personal crisis that lasted for several years. It cost me my business and I came within hours of losing my home. I nearly lost my mind fighting a battle against an unbeatable foe. I discovered who my friends were. I also discovered who the  weasels and cowards were.

But most important, I discovered that I had the resolve to withstand an experience what was, at the very best, surreal in it's unbelievably. There were times I felt as completely and hopeless lost as ship adrift at sea. There were times that I went days without sleep. At times I doubted everything.

But always, there was that little voice inside my head that said, "Hold fast. You resolved to hold true to your beliefs, now hold on to them."

That voice saved me. That little voice was so deeply imbedded into my core beliefs that this adversity, no matter how dark of a comedy it became, no matter how much it resembled a scene in Alice in Wonderland where the Queen says, "off with their heads," that belief was not going to go away.

You see, I had worked for years to train myself to believe that I was destined for success, that I was destined to have a wonderful, joyful life of meaning. That this situation was merely a learning opportunity for me to gain strength and test my resolve and it would be the launching pad for greater and more meaningful things that were to come.

That was more than a decade ago, and when I look at my life then and where I am today, I know I am a blessed man. I believe that I am better off today than I would have been if I had continued on the path I was on. My business partner at that time turned out to be a complete weasel. You don't ever truly succeed when dealing with weasels. Because of what happened, this partner was revealed to me to be the weasel that he was. I am far better off without him in my life!

I believe that positive thinking and looking at everything that happens to me as a learning experience has served me well. I've said on this list many times that I am far from the smartest spec. To be truthful, if we set up an IQ bell curve for specs, I am confident that I would find myself in the far left tail of that curve. That's OK. I am what I am. I can't change the fact that I don't have abilities that come so naturally to many of my spec friends. But, if you'll recall, I wrote a post in the last few weeks about being a great follower (which I'd like to think I am). You see, I like to surround myself with people who are much smarter than I, and then learn from them.

One of the things that I've discovered since being invited to be a spec is that I had small but important error in my thought processes that has plagued me for years. You see I've always said to myself, "my resolve will overcome your intellect." It didn't matter how smart a person was, I would eventually win because I would never, under circumstances, surrender.

Well, the error was simple, yet important. I may win with my resolve, but if I could add to my intellect on top of that, I would become a force greater than I could ever even imagine. So I made a decision several years ago to increase my knowledge. Lo and behold, seemingly out of nowhere, I was introduced to the spec list and invited to be a participant, and my knowledge has increased exponentially since being honored with membership here!

But what can I give back to all those who have given so much to me? I know what I am on the spec list. I am the student sitting at the feet of the masters fervently trying to take notes and grasp the seeds of wisdom. But still, I have to give back.

I guess the best thing I have to offer is my philosophy of life. That is the philosophy of "never give up," and the philosophy of wanting to be the known as the guy with the most losses. The philosophy of wanting to be the guy who never loses, but has a whole pile of learning experiences.

I guess what I have to offer to my spec friends is an example. If a guy like me can do it, then any of you can, too. And whatever it is that you're doing, you can do more of it and do it better. Because by adding an unbending resolve to your keen intellectual abilities, you will achieve anything you want.

I am grateful for being allowed to be a part of this community. It has blessed my life in incalculable ways.

Oh yeah, and I will get the "stuff" back that was stolen from me by focusing only on my blessings and the positive increase I will experience, the gain I will experience above and beyond what was stolen from me, by performing the activities necessary to achieve what I desire!

Mar

14

I am both an investor and trader. But looking at my results I should probably only be an investor. It is not easy to trade with a full-time job on the side.

As an investor I am 100% long with my stocks. I will stay 100% long no matter what. I can sell a stock, but only if I am able to find a better one to replace it. I am not going to sell because of the overall market. Actually, I could sell if it goes up 130% like Shanghai last year. But I am never going to sell because it has been going down.

Today, my investments are down 2% from 12/31/2006, and down 10% from February intraday peak equity. I don't care the slightest bit. They could go down 30% and I wouldn't care either.

I am not crazy. There is a very good reason for this stubbornness.

I started investing seriously in stocks in 1996. Since then there has been a crisis in 1997, another one in 1998, and one of the biggest bear markets in history in 2000-2002. I was investing with a mix of stock picking, market timing, style timing, and small/big timing. Believe it or not my market timing allowed me to sell at all the intermediate tops in 1997, in 1998, and in March 2000. It allowed me to avoid the bulk of the bear market in 2000-2002. I came back too early in August 2002, sold in September, came back at the exact bottom in March 2003!

With this nearly perfect timing, you would think I have impressive compounded returns. That couldn't be further from the true. At the end in 2005, I did a complete audit of my 10-year record. It was prompted, among other things, by some things I read on the Spec List, mostly from the Chair but not only from him. So thank you guys for your down-to-earth audit-prompting approach.

Results of the 10-year audit:

Market timing resulted in dramatically lower volatility and draw-downs than the market; but who cares? It resulted in only a 2% over-performance compared to the index. In terms of absolute returns, beating the index by only 2% is ridiculous. It is incredible that even though I caught most major tops and bottoms in 10 years, I only over-performed by 2%. Even more sobering is that if I had kept the first 10 stocks I ever bought and never sold them, forgot them and never done anything else, my over-performance would have been 4%.

How could this happen? Well, that's very easy:

First, I caught all the actual tops, but also about 10 of them which never turned out to be tops. The market continued higher and I missed part of the move. Second, even when the top was an actual top and I was flat, it created the problem of knowing when to get back in, which in most cases occurred a bit too late. Third, buying and selling too much is created a lot of friction in the form of commissions. Over 10 years, the amount paid in commissions can be really impressive.

Based on this I decided to be always 100% long. I am not timing the market, styles, or anything any longer. I still hope to continue beating the market by a couple percent a year from stock-picking (probably more beta than alpha). I don't care if the results are more volatile. This is largely compensated by a huge decrease in workload and worry. Freed time can be dedicated to more useful pursuits, like learning to trade.

Jaime Klein writes:

I have, well, had, two now only one extremely financially talented relatives. The late one, when told I was going into the financial business, laughed rather rudely, I thought. And noting so many of my family members were already in that line of work, he asked me who was going to bring home the bacon. Well, he said, seeing as you're determined, I'd give you this bit of advice: Never buy a stock if in your lifetime you don't see it returning your original investment to you annually in dividends. And if they're any good, they only pay two percent.

Absurdly enough, his own results were so far beyond this as to make this counsel seem the most conservative expectation possible. He was probably 30 years ahead of the sage into Coca Cola, which he obtained by selling Minute Maid to them for stock. He never sold it except to buy the occasional Goya or Renoir, or make a charitable donation to Harvard or MIT.

I was aware of only two other plays: one was a quick flip which his partner told me netted over 100X in less than three years. The other was selling United Fruit, which I imagine he paid near nothing for, to Eli Black, right at the top back in the conglomerate heat of the '60s. I can't remember much about the foolish and ill-fated acquisitor except that he defenestrated himself shortly thereafter, taking his briefcase along with him.

Anyway, it's been my pleasure, while unfortunately lacking in outstanding talent myself, to have met so many ingenious and interesting people in my all too brief 65 years. One of these days I'm hoping I'll learn something from them. But in the meanwhile, it's always fascinating, albeit particularly in the political and religious arenas sometimes quite alarming, to see how clever so many people are.

From Scott Brooks:

Volatility is a terrible measure of risk. There is no risk on the upside of volatility. The goal should be to reduce all down side volatility, thus my patented investment strategy of buy low and sell high (Green List/Red List post from several months ago).

In all seriousness, I am fixated on the discovery of ways to mitigate downside volatility while participating in most of the upside of volatility. But since I'm far from the smartest person on this list and have been told in no uncertain terms that it can't be done, I feel like I'm fighting an uphill battle. Still, who knows, maybe there is a way!

I've never been one to give up just because others say it can't be done. If I listened to others (like my guidance counselors), I'd probably be laying carpet back in Maplewood, going to the corner bar, watching COPS every night, and aspiring only to be the "Maplewoods, King of White Trash."

From Craig Mee:

I accept these results, however…

Plenty of you know a lot more about stocks then I do. But I would like to offer here that a two percent increase in returns and with this, the opportunity to be out of the market in major declines, represents to me some nice sleepy nights.

With a bit of fine-tuning maybe marks can be picked slightly better on entering and exiting longer term positions. But on that black swan event, when something may drive the market into a huge selling spiral, I believe for me at least it may be worth that extra agro.

From Kim Zussman:

Similar but less quantitative self-assessments:

1. At least in US, taxes bite deeply into putative alpha (or masquerading beta) if you trade vs buy and hold.

2. Concur that most effect was lowering volatility. You will get lower volatility with stocks<100%, and pretty much always lower returns. Looking back, you will regret not being 100% stocks, but during the ride you live happier <<100%. Thinking about a big down year as a future possibility feels a lot different than having one.*

3. Besides drift, the reason buy and hold works is that there is too much temptation for the vast majority of people to time the market. It is unnatural not to check your investments, and not to be tempted to act on them. People don't like it when their million $ port becomes worth $800,000, and sell before "losing it all". Then it turns around and people don't like missing up 30% years, and buy back in. The hope-panic-irony cycle makes the market rise over time only for those not riding the emotocycle.

* The abstraction of future pain and foolish willingness to fall in love is nicely summarized by the late Sam Kinnison.

Jack Tierney adds:

I was invited to a dinner party but expected very little. The guests were getting thin on top and hefty through the middle. Our host was dressed in colors that defy the known spectrum and civility was to be shown the greatest horse's rectum. So we mingled and we spoke and mentioned our positions. I mooted that I was all in cash and was swarmed by five physicians. "Perhaps an evil humor attacked him on his flight or maybe he's an infidel who has yet to see the light." Their concern was very real and they needed to be consoled so I admitted that in addition I owned a little gold. Screams and wails followed and the panic gained momentum.

To quell the crowd I shouted, "Wait, I also own argentum." Now that they were fully aware of these judgmental flaws they ripped away my velvet gloves and exposed my hairy paws. They marched me toward the door when the host yelled out to quit, "Why this poor benighted soul has never heard of drift."

So began my lessons and I've brought them to the south, a bearish thought may cross your mind but never cross your mouth.

Abe Dunkelheit adds:

Bruno's post was very interesting. I made exactly the same observation. Market timing lowers volatility but doesn't guarantee any substantial out performance. And yes, one's first ideas tend to be much better researched than all these other in and out decisions. Never to sell them would have turned out the best in my personal case also.

And there seem to be people who don't make any professional impression and live a very retired life who tend to buy and hold and accumulate incredible returns without doing much.

I know about a guy in Switzerland who was retired and did it with wine. He bought all these Chateau Mouton Rothschild wines for USD 500 a bottle 10 years ago and they now go for USD 10,000 at auction because rap stars and Russian mafia are pushing prices up. I only know about this guy because I was one of the sellers. I had bought my bottles for USD 300 and thought a cool 60% gain in less than two years could not be wrong. He had an incredible cellar with all these wines, but his house and car and his whole appearance were very modest.

Another example I know about is a guy who was jobless and lived on social security, but had saved several hundred thousand euros [back then deutschmarks] and invested them through the accounts of his children. He put it all into Deutsche Telecom at the IPO and cashed in a 600% profit during the Internet boom. That was his one and only investment.

Mar

12

Mexican Carlos Slim, world’s 3rd richest person, sits several unattenuated standard deviations above the mean of a very poor nation.

"Diners at Slim's ubiquitous Sanborns restaurants can use Slim's wireless service to connect to Slim's Internet provider and check their holdings through Slim's brokerage, part of Slim's Grupo Financiero Inbursa group. Banking online, they can pay bills to Slim's car insurance company or credit cards for Slim's retail stores, among them Sears Mexico and the Mixup record store chain."

From Hany Saad: 

Here is what I wrote about Slim a few days back in response to Scott Brooks's post about the new Forbes list of billionaires. Slim had the most unusual jump in net worth.

News like this, while interesting to skim through, can be very valuable if analyzed deeply. In fact, they can give you subtle clues on what cycles are about to change (specially if you keep historical data of the list year over year). I certainly try to keep in mind that the data can be flawed especially when it comes to analyzing the net worth of the super wealthy. I will state here the obvious example as an exercise in analyzing humdrum data like the above profitably.

Notice how Carlos Slim, 67, Mexico, $49 billion, telecom, had the highest jump in net worth and is getting uncomfortably close to Buffet? You compare that with a chart of the peso to weed out the possibility of a huge jump in the local currency as the main reason for the increase in net worth. This is not really important in the case of Slim and most of the others since they mostly keep their wealth in US dollars. In fact, Slim doesn't even reside in Mexico. This exercise is, however, useful in the case of others like the Egyptian Naguib Sawiris, whose OTOH is required by law to keep a significant percentage of his "disclosed" net worth in the Egyptian pound.

Some other obvious questions to ask other than the general currency differentials include: What sectors are they involved in? How did the sectors do in general over the period? How did their specific company fare relative to the sector? Did they target new markets? Which ones? How did these new markets do? If all the above is not significantly changed compared to the previous year to warrant the big change in their net worth, then the info can become even more valuable and more digging can be worth your while.

In general, this can be a good exercise in ever-changing cycles, if you keep in mind the importance of incentive and self-interest as the only driving motives. This is how this trader reads the news.

Mar

7

Baja Mexico's most rugged area is the south cape where rears the Sierra de Laguna mountains I have viewed from afar for many years. Three days ago, I started afoot up them from the Pacific Ocean.

The road to my invented trailhead, such as it was, was taken by thumb. I walked an hour before the first battered pickup approached and stopped. I was surprised to land in a rolling grocery store with food crates and the grocer making a weekly round to the mountain ranchos. In short supply myself, I bought five bucks worth of stores until the 35 lb. pack brimmed and I ultimately alighted at last call in Rancho La Aguaje. Ahead, across a stream, rose a mule track into the Sierras.

The track wound steeply for hours through a succession of canyons and cross-streams. Initially, every hour at these crossings, sat little rancho of thatched roofs and dirt floors with small numbers of cows, sheep, and goats hung with clanging bells to locate them, plus the chatter of chickens, dogs and children who emerged to see the walking gringo. They threw me oranges from trees and provided water.

There are a couple ways to take the Sierras. You can attack them with a foreknowledge of what's ahead and gut the rises at speed to reach temporary crests and rest on the descents. Or, you can acquiesce to these powerful mountains and trudge with head bowed like a burro, which is better if you don't know how far the zenith is. This was my case. The route wound steeply up and around many peaks with cascading waters in a strange blend of desert, subtropical and then alpine flora. It was sunny, blue sky and 80 degrees with a trail of sweat on my heels.

The top of the world in southern Baja is a dry sub-tropical meadow where the switch from up to down, curiously today, was marked by a 5'' thick line across the road. It was made only hours before by the biggest diamondback rattlesnake that I had missed. I sat on my pack to study it, and abruptly a man in rags with a long handle axe rushed at me with purpose. There was no escape from this quick, barefoot man and understanding he was a simple rancher protecting his property, I burst in Spanish, 'I walk the mountains alone.' He leaned the axe against his side and extended an empty right hand that I shook with relief. After an explanation of my purpose he declared, "You must meet Pedro, the father of these Sierras, who was born here, his father too, and his grandfather." The farmer threw the axe under an organ-pipe cactus and we started afoot down for a kilometer to Rancho Cieneguita that was the only one on my map atop the mountain.

"Pedro!" shouted my escort at a dirt entry. Two kids came running out a stick house but retreated to a wrecked car to peek wide-eyed through the window at the gringo with a purple windbreaker and orange backpack. Now the dogs and chickens parted for Pedro, a jet-black Indian with shaggy hair and wiry body, who strode up and shook my hand with an index finger arthritically crooked into a trigger.

Soon we hunkered with cups of steaming coffee in the front yard that served as our earth blackboard. With a stick I scratched the earlier snake track and Pedro whistled it was 6-to-7 feet long. Each adult then drew various signs but mine of a sidewinder's truncated crawl took the prize of open mouths that a snake could move sideways to its eyes and 'fly off' the ground.

Pedro was born on this rancho 88 years ago, his son at his side was born here, his two sons at his side the same, and their two sons. The latter two kids eventually left the car to come sit by me with busy hands working as erasers after each person drew in the dirt. No one could read or write but each knew the Sierras well and the family offered to guide me to a cave of petroglyphs by the first Indians centuries ago. The described cavern was 10-feet tall and the drawings about 3-feet high. This was a rare opportunity that tourists pay 50 bucks for that thousands of other tourists have seen, but likely none had viewed these petroglyphs near the Cieneguita Ranch. However, the path to the cave was 3 kilometers in the direction I had come, and I couldn't physically make the trek. Pedro understood having once made the transpenninsular hike, and said that I was the first American to follow him.

As we scratched in the dirt, the kids, eight and ten-years-old, crept closer until each rested a toe on my boots. Soon they inched a brown foot on each boot and I asked them, 'You don't have any fear?' They replied, "No," and that was my cue to rise and leave. I stated a need to press on at sunset and hefted the pack thinking that one day on this spot these great-grandsons of Pedro would tell their sons about the day they stood on the feet of the American walking through the Sierras.

I started down the mountains on a better track now and in five minutes came across a Senora and her little girl pushing to jump start a red pickup with a young husband pounding the steering wheel. Golden now, I took a place aside the girls saying I knew Pedro and we pushed till the engine coughed to life. I continued hiking steeply down, mindful of rattlers and in the dark almost brushed the horns of a black cow. I was relieved minutes later when a dozen other cows with bells round their necks were trapped ahead on the track between the mountain and drop-off and trotted ahead a kilometer, halted until I caught up, and ran ahead again and again to scare off rattlers until the night cooled and the danger vanished.

A puma track had been scratched in the dirt earlier and Pedro had sighed not to worry since there were ample calves and lambs for dinner. Nevertheless, I descended the mountain a distance before cracking a tin of tuna, not to walk in lion country with fish on my breath. As backup, I stuck a disposable camera with flash in my breast pocket to scare any big cat as effectively as a small-caliber bullet.

Midnight and miles down the mountain under starlight, I pulled off the trail and camped with a rock pillow under a waving Socorro cactus. At daybreak, four grunting feral pigs scolded me awake and I packed and followed their tracks down valley soon to be passed by last night's grinning family in the red pickup with two fat cows in the bed for market. Hours later, I reached a sign in the road announcing Los Naranjos (The Orange Trees) Buddhist Retreat. I ambled up their side track to a wire gate with a Spanish Beware the Dog sign and wheeled to persist down the great canyon to the Sea of Cortez.

The valley widened a few hours later and the road flattened toward the transpenninsular highway that runs the length of Baja. The terminus, 38 miles from the Pacific origin here among a handful of butterflies, was nondescript, and I threw out a thumb for a ride to a nearby hot spring shown on my map. I rested, drank from the spring, washed my clothes, and fell into a surprise delirium for a half-day from something foreign in the water. I awoke refreshed and shouldered the pack with relish for the next hike.

Bo Keely adds:

Backpacking a rural road in Baja yesterday, I looked up to see an 8-foot ostrich trotting my direction. I sat on my backpack and the bird walked up and peered into the shudder. I rose and it fled the opposite direction to a grateful pursuing owner who insisted, "be careful, the big bird eats gringos and thank you for saving them in the next town."

Mar

5

I started working as an auditor, at Price Waterhouse, one of the big six, right after my graduation from university. I worked very hard and very long hours. After eighteen months I was managing a very large group and was the youngest manager in the company's history. I was very good with numbers. I studied balance sheets, income statements, and statements of cash flow. I studied hard and learned a lot about companies. I was never satisfied and always thought I could do more. I started a few businesses in my twenties and overall made money. I spent sleepless nights managing people and working to meet deadlines. My businesses grew and I had to leave my auditing career for good.

One day I decided to liquidate everything and emigrate to Canada. The stock market always attracted me. It attracted me initially as the line of least resistance and the easiest way to make money. Boy, was I ever wrong! I read every book about markets from Peter Lynch's to the scoundrel of Omaha's and his womanizing mentor's. I decided I was more interested in the demand and supply curves of the stocks whose balance sheets I am studying more than the demand and supply for heir products.

I didn't know why but it made more sense to me to treat the stocks as the subject of examination, their supply and demand, their temper and their psychology and forget everything else. I felt I was getting closer to the Key to Rebecca, as one large fund manager calls it.

I studied everything about the supply and demand of stocks. I passed the three levels of the CMT in a record time among a zillion other courses. I studied hard and learned a lot. I was living alone and didn't work for a long time. I survived on the capital from the businesses I liquidated. I read every book on technical analysis. I learned about every pattern. I programmed every indicator known to man and developed a system that weighted indicators by their success rate. Even then, unwittingly, I was trying to be scientific. I invested everything I had in the markets and was making more money that I dreamed possible for someone my age. I started living large. I once owned every model of the Rolex watch ever manufactured. No exaggeration. I owned a violin that was auctioned for the equivalent of five years of my audit manager salary without a blink. I still have my tax bills to prove it.

It always worried me that it came so easily. Even then I guess I was smart enough to have my doubts. The more money I made, the more I wanted and the more I worried. I worried that my system might be flawed. The more I worried the more I studied. The more I studied the more I figured that I might not hold the Key to Rebecca.

I had charts everywhere in my bedroom. More quote machines and news feeds than a mid-sized fund operation would need. Financial journals scattered all over my floors. Books everywhere. I was a genius. If you wanted a picture of illusion de grandeur, I was it. I always felt I should enjoy it as best as I could, as it could be taken away from me without a warning.

Every time I surfed the net I worried that my Key to Rebecca wasn't really a secret. People used my indicators everywhere. I felt that everyone knew about them and shared them very generously.

The public newspapers had them. They were all over the free websites. The TV commercials, the financial seminars all had them. They were all over the place. They were haunting me. I couldn't take the uneasiness anymore. How could everyone get rich at the same time? How could everybody be profitable? Why are they sharing? Are they mad? Didn't I study that money is a scarce commodity? Something is wrong.

How could indicators so well known to people, indicators so publicly available, be so profitable? I read and read. I tweaked my indicators so I could be ahead of the public, but only in the sense that I naively used a 47-day moving average instead of the 50 and a 17 instead of the 20 and a different method of crossover. I applied similar naive ideas to all indicators so I would ahead of the public.

I didn't like my game even though it was profitable. I didn't have an edge. Making money doesn't mean you have an edge. But, what's an edge? How do I know I have one? I studied history. I read about wars. I tried to develop a philosophical framework of what edge really is. The more I read, the more I realized that whatever an edge is, I didn't have it.

While I was browsing a bookstore in downtown Toronto, I saw a picture of a barefooted trader with chessboard in front of him. I found out he was also a champion in squash, a sport I took up very seriously at the time. The cover also attracted me, and I started reading the book.

My first reaction was, "wow, this guy knew it all along!" How many traders tell you upfront that they will not unload any secrets on you in the book they are trying to sell you? None. This alone was worth the price of the book for me.

I read the book and Victor unloaded on me a dose of wisdom beyond my brain's ability to digest over a first read. Victor, the counter, knew it all along. Victor mentioned that Jack Barnaby caught him before he learned the game of squash the wrong way. Well, Victor caught me before I learned the game of speculation the wrong way.

Yes, money was scarce. No, popular indicators will not make money over the long run. Yes, cycles change. No, technical analysis and moving averages are not testable or falsifiable. Yes, Victor went through the same stages I went through, as he explains in his encounter with John Magee, the father of technical analysis. Yes, all hope is not lost. I am still young and I can change my game.

I designed trading programs based solely on Victor's wisdom. The wisdom he gave me so freely for the few dollars I paid for his book. Victor made millionaires of, and instilled wisdom into, countless students. Victor, who never bragged about his countless achievements.

Victor answered my first email in 1998. Victor takes the time to send me emails at 2 a.m. to compliment me on a contribution to Daily Spec. A contribution that is often nothing but a recycled and repackaged piece of his own wisdom.

Scott Brooks adds:

We are all truly blessed to have this forum and opportunity to learn. I know I have grown as a manager, a father, a hunter, and as a person because of my affiliation with Daily Spec.

As a manager, I've learned how to look beyond the world of TA and see more than the shadows on the walls of the cave that my charts were.

As a father, I've been able to share with my kids, especially David, many of the life lessons on the site.

As a hunter — yes as a deer and turkey hunter — I've improved greatly because this site has given me an opportunity to write about my hunts and as a result, forced me to look more deeply at what I was doing and at the rationale behind my choices.

And as a person, I have grown from the friendships I've made with other contributors. As a businessman, from the knowledge gained from the great businessmen among them.

I am in a continuous state of awe and excitement at the knowledge of this group — and that this group actually accepts me as part of it! If you all knew where I came from and my journey, you'd understand how amazing it is that someone like me could be here in this group!

I am most grateful for Victor for allowing me in this forum. I am honored to be here. I am honored to call Victor my friend!

Feb

15

There are several things going on down under I thought Daily Spec readers might enjoy hearing about…

The first of course is the incredibly strong performance of the stock market. This is due in part to the fact that all Australians must pitch in part of their earnings to an investment program. It is privately managed, meaning a huge amount of money comes into their market month after month after month and keeps driving prices higher. Also, for the most part, their stocks are undervalued versus other stock markets in the world.

But all is not that well here…

At dinner the other night a friend told me he had a knee operation. I said, "Well that didn't cost anything; that must've been nice." His reply was, "It cost me quite a bit. I had to pay cash because in the publicly supported medical system it would've taken a couple of years to get an appointment." I confirmed that with a jogging buddy today, who said the same thing. There is a fast track for emergencies, for instance if you're in a car wreck. But for any significant discretionary operation you will wait a long time

His wife added that since there is no cost to go to a doctor, the doctors are flooded, as there is no disincentive to seek care.

This was the one that got me: After employing someone for 12 months it is mandatory to give him a one-month vacation. I've never had a one-month vacation in my life. Who would want one? You couldn't work. Nonetheless, when the worker gets that vacation he gets it with pay plus 19%. In other words, he earns 119% of his base salary on his off month. The thinking of the labor union leaders is that the vacation will cost him more money than staying at home. So he is entitled to more.

One of the big issues in the upcoming election will be free dental care. My dentist here doesn't do anything for free. I don't blame him, and we both wonder: who's going to pay for it? Obviously, it will be paid in some form of higher taxation, something politicians here and everywhere seem to enjoy. There is a 40% tax on wine made here, which means I can buy the same bottle of wine cheaper in America.

I could go on and on with other examples of the difficulty of running a business here.

It is a lovely country with great people and great future, but it seems to have been overrun by socialists and labor union leaders, which certainly will have an impact on the economy at some point.

Adi Schnytzer writes: 

And just imagine, there are millions of people all over the world just wishing they could get a visa for Australia. Go figure!

Larry Williams replies:

Sure! Can't get fired for stealing, get a month's paid vacation at 119% of base after 12 months of lounging around, free stuff! Ya, man let's go!

My point is that business people have read Atlas Shrugged and see it taking place here.

Adi Schnytzer adds:

Larry, how many people die for lack of operations, medicines, and doctors in Australia? What is the per capita number in the U.S.? No health system is perfect and no economic system is perfect and, yes, there are some stupid taxes, but how many homeless have you tripped over lately? If you want to compare Australia with the U.S's, the former being too socialistic for some tastes, why not do it properly?

Larry Williams replies:

I see about 100 homeless people here every day. Some are real characters to talk with. Come on a walkabout with me. They are flagrant and stink like heck but are courteous. They are all over here, on every major street. I certainly see more homeless people here than in San Diego, a city very similar to Sydney.

I do not know how many people die for lack of operations, but I suspect it's the same as in the U.S or U.K.

If an employee is caught stealing from you, all you can do is write a letter. It is not until the third time you can fire him.

Virtually every older Aussie I know vents these same complaints. I am just the reporter here!

 

Feb

9

Perhaps another myth:

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

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

Reply from George Zachar:

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

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

From Steve Leslie:

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

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

From Henry Gifford:

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

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

Stefan Jonanovich writes:

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

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

Feb

3

Hubris Threatens Every Leader and Business

In fact, hubris is man's cardinal sin. Consider how the hubris of leaders of state has shaped defining events of past centuries. In 1764 and 1765, British Prime Minister George Grenville overestimated his ability to tax the American colonies, and underestimated the potential for the Americans to revolt, which led to the American Revolution. In 1812, Emperor Napoleon Bonaparte's false confidence in his ability to conquer the Russian heartland led to France's disastrous Russian invasion. And, in 1939, Adolf Hitler had Germany invade Poland.

We're all too aware of how CEO hubris is stamped on business failures, from Parmalat, Swissair, and Vivendi in Europe, to Enron and WorldCom in the United States, to the National Kidney Foundation in Singapore. Very often hubris is the handiwork of egotistical and reckless leaders of business and state. We hear about the downfall of these individuals on almost a daily basis, and you probably have no trouble conjuring your favorite example of an executive whose excessive ego and stubborn pride has resulted in financial and professional disaster.

For now, put that person out of your mind. Because he or she will distract you from the more present and pressing reality: Hubris is so deeply ingrained in our culture that it is a latent force within each of us, whether we are leaders or not. See hubris in the losses that we investors take as we overestimate our ability to make winning deals and trades. Watch hubris in the damage that we do to our health by trying to "play doctor" by diagnosing our own illnesses, and when real doctors join forces with pharmaceutical companies in overestimating the benefits of their treatments. Listen to the hubris of rookie executives who exaggerate how far their inflated grades will carry them — and our business. Many people take false comfort from being 'very confident' that they can retire comfortably even when their actual savings are inadequate.

Hubris helps to explain why leaders make decisions that are bound to fail. Most conspicuously, mergers and acquisitions are at near-record levels, even though seasoned CEOs know that most of those deals fail. Joe Roth, who has run movie production at 20th Century Fox, Disney, and Revolution Studios, notes that movie houses release a disproportionate number of movies in May, especially around Memorial Day in the United States, even though their executives know that there are not enough moviegoers to support that many simultaneous film releases. Leaders who make these deals believe that they are the exceptions who will beat the odds of failure when, on balance, logic dictates that they cannot.

Hubris originates with our need to be highly confident and our propensity for turning that confidence into overconfidence. So long as crystal balls remain elusive, we're going to be wrong on some judgments that matter most, including those that involve at least some leap of faith and trust, such as taking a job, choosing a partner, or investing in a major project. And, if we are going to be wrong by being underconfident or overconfident, we should err on the side of overconfidence — we must be highly confident to win in business and life, even if that makes us more susceptible to overconfidence. Overconfidence is not uncommon nor need it be damaging. We can act with the best intentions and data and still overestimate next year's sales, our promotion and pay prospects, or the returns from our ventures, projects, and investments. The optimism bred by such overestimation can help spur us on to achieve more than we otherwise might have done. Overconfidence, as an integral part of the discovery process, is also instrumental to scientific and economic progress. Picture, for instance, Thomas Edison testing over 10,000 combinations of materials before perfecting the light bulb. Throughout the testing process, Edison remained supremely confident, believing a breakthrough would come earlier than it did. "I have not failed," he said at the time; "I've just found 10,000 ways that won't work." 

The Four Sources of Hubris

In fact, when extraordinary confidence is grounded in the best available data, it is authentic, and a positive force for advancement. It is when our confidence is false, when we are confident for the wrong reasons, that two serious problems arise. First, we are more susceptible to being overconfident than if our confidence were authentic. Second, such overconfidence is more likely to translate into actions and decisions that will damage us and others. Hubris refers to the damaging consequences that arise from the decisions and actions that reflect false confidence and the resulting overconfidence. Having conducted scores of studies and interviews, I have determined that there are four sources of false confidence:

1. Being too full of ourselves. Excessive pride leads to a contrived view of whom we are and an inflated view of our achievements and capabilities, one which often depends on external approval and validation.

2. Getting our own way. Our pride can lead us to tackle single-handedly decisions or actions that could be better addressed by or in conjunction with trusted advisors, or what I call "foils."

3. Kidding ourselves about our situation. We indulge in overconfidence when we fail to see, seek, share, and use full and balanced feedback to gain a more grounded assessment of our situation. We need accurate, pertinent, timely, and clear feedback, whether positive or negative, to ground our knowledge about what's going on around us.

4. Bravely managing tomorrow today. Because we may not know whether we're acting with unhealthful confidence, we need to manage the consequences of our decisions ahead of time. To be courageous is to consider fully the risks and consequences of making and implementing decisions, and then to proceed mindfully. To be brave, however, is to jump in heedlessly, without adequately considering the risks and consequences that will result from your decisions and actions.

Experimenting and probing allow us to see courageously and first hand the consequences of our decisions. By contrast, planning often makes us more confident and brave without increasing our ability to get the job done. False confidence is to hubris what bad cholesterol is to heart disease. Just as the cure for heart disease is to reduce bad cholesterol rather than all cholesterol, the cure for hubris is to fight the sources of false confidence, rather than to reduce confidence altogether.

A fundamental and unheralded challenge for any executive and leader, therefore, is to identify and manage such sources. It is a matter that I've examined as an executive and researcher over the last 20 years, from the time when I first felt and saw hubris as a young investment banker. Based on this research, I have written Ego-Check: Why Executive Hubris Is Wrecking Careers and Companies-And How to Avoid the Trap, to help you learn how to remain highly confident — both personally and professionally — without falling victim to the false confidence that produces overconfident decisions and actions that fuel hubris. This article encapsulates the leadership implications of this research. Please visit me at ego-check.com.

To follow up, a comment from Vic:

I have read the book Ego-Check and find it valuable for all traders. It gives poignant case studies of those who suceeded often for a time, and then failed. It analyzes the main reasons these people failed and provides a checklist of how to prevent it from happening in the future. It is based on his own interviews with business leaders and researchers in the field. In my case, I have implemented a series of planning for the future now, feedback loops, and hallmarks of hubris that hopefully will prevent me from succombing too much again.The subject is particuarly resonant because my father did much scholarly work in the field and I didn't pay enough attention to it in the past — until now. Vic

Nigel Davies adds: 

I wonder if much of what is recognized and diagnosed as 'hubris' might not be explained in other ways. For example:

a) The 'hubristic' act was not much different to previous risks, it's just that the 'hubristee's' luck finally ran out.

b) Too much success in one area caused one particular well to run dry, forcing the 'hubristee' to seek other fields. I think this might be applicable to Steve Irwin. The public (and his producers) just had enough of crocs, so he was forced to seek other fields to maintain his lifestyle.

c) If the 'hubristee' has opponents who can influence the dynamics of the game, perhaps it's a question of time before they adjust to his 'style.' This has been true of a lot of risk taking chess players, for example, Tal once noted something to the effect that his opponents started protecting e6 and f7 very securely. Kramnik similarly discovered that a good way to play against Kasparov was to exchange queens and play equal or inferior endgames against him. And once he'd won, everyone started to notice Kasparov's apparent 'hubris.'

Stefan Jovanovich offers: 

Hitler's invasion of Poland was hardly an act of hubris. At the time, to most Americans and many Europeans, including a plurality of the British and French public, it seemed an arguably justifiable act by Germany to reestablish its 1914 eastern border. To the German public, it was wildly popular, not as an act of aggression but as the rectification of the last remaining crime of Versailles. Elite public opinion in all "Western" countries was far more upset at the Soviet's unprovoked attacks on Latvia, Lithuania and Estonia; those seemed completely unjustified. After all, the Germans had only asked that the Danzig corridor be removed and that East Prussia be reunited with the rest of Germany. If the Poles had not been so stubborn in their refusals, the war need not have happened at all. The difficulties over Czechoslovakia and Austria had been resolved without bloodshed. Why were the Poles being so difficult?

It does not fit Mathew Hayward's construct, but in 1939 Neville Chamberlain was considered to be the European statesman who was acting out of hubris. How could he presume to drag Britain and France into a war with Germany solely because the British had given their word to the Poles that they would defend them? The Poles, for God sake! If that were not bad enough, Chamberlain was committing the Empire to a one-front war. Hitler had avoided the mistake of 1914; his invasion of Poland had led to a Pact with Stalin that secured Germany's Eastern front and guaranteed a reliable supply of oil and grain. As I have noted before, Chamberlain is the poster boy for "appeasement" in the "kill 'em all - tough guys always win" comic book that passes for military-political history these days. (That seems to be the same tome that some list members are reading from when they join the T-shirt sellers on Telegraph Avenue in describing the current situation in America as "Fascism.")

Chamberlain's real crime is that he was "guilty" of recognizing how weak Britain's position was and how limited its options were. Instead of being its allies in this conflict, Italy and Japan would be Britain's enemies; and the Soviet Union would, at best, be neutral. Given their incredible sacrifices of the First World War, the French could not be expected to match their efforts of 1914-1918. In 1938, the British public remained as isolationist as the Americans were. In describing Czechoslovakia as a "far off land," Chamberlain was offering the compromise position between Churchill's bellicosity and the Left in Britain, questioning why even France should be an ally. Chamberlain knew that, without American help, Britain and France could at best hope to stalemate Germany. He also knew that the French would not go to war over the Sudetenland, but they would accept Poland as a casus belli. In measuring his statesmanship against Churchill's, it is useful to remember that Chamberlain, not Churchill, was the Prime Minister who committed Britain to rearmament in the years before Munich. Hayward should have used Churchill instead of Hitler if he wanted an example of CEO arrogance. When the Russo-Finnish War began, Churchill's recommendation to the Cabinet was that the RAF bomb Moscow! That would have been hubris.

Stefan Jovanovich continues:

Hitler's invasion of Poland was hardly an act of hubris. At the time, to most Americans, many Europeans, and a plurality of the British and French public, it seemed a justifiable act by Germany to reestablish its 1914 eastern border. To the German public it was wildly popular, not as an act of aggression but as the rectification of the last remaining crime of Versailles. Elite public opinion in all "Western" countries was far more upset at the Soviet's unprovoked attacks on Latvia, Lithuania and Estonia; those seemed completely unjustified.

Jan

31

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

C. Kin adds:

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

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

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

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

Copyright The Financial Times Limited 2007

Rudolf Hauser adds:

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

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

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

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