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Most Cover Versions Are Shit……This One Is Not

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You May Have A Poor Person’s Mindset And Not Know It

Have you ever noticed that the poorest, most miserable people you know tend to be buyers of lottery tickets? C’mon lucky numbers 3, 10, 16, 22, 4, 50.

I’m sure there’s a smart-sounding statistic somewhere lodged in a research report by some well-meaning PhD student who had to get funding from the So-And-So Foundation to prove his or her point, but I digress.

The correlation is common enough that I’ll assume you know what I mean.

Big dreamers tend to be the ones who never seem to be able to get their dreams off the ground.

People who view themselves as great lovers tend to be the ones left at the altars.

And the most educated people in the world tend to be the dumbest ones in the room. Not always, but way often.

“But Ms. Hwangbo, whatever your last name is, what on God’s green earth does this have to do with money?” you may be asking. It would be a fair question.

After all, you are reading this article because you’re pissed that someone may be raining on your grand financial plans, right? I applaud you for seeking the truth, despite this fact. It’s a great quality. In fact, valuing truth no matter what may be one of life’s most useful qualities ever.

The big problem is this. We try too hard with our money.

More here – Medium

Where Do Returns Come From?

With the market making a valiant effort to push past 6,000 points I have been pondering where the gains in the market have come from over the past few years. In the past I have looked at the distribution of returns across groups of shares simply from the perspective of demonstrating that within a universe of instruments the majority of returns come from a few entities. Naturally the same is true for trading systems – a few trades each year provide the bulk of the returns. This feature of trading is one of the hardest for new traders to adapt to since they assume that trading is like other jobs where you are rewarded at the same rate for the same amount of effort.

I thought about broadening my horizon to look at the balance of returns that occurs between price movement and dividends across a given market since this data is reasonably easy to obtain and therefore manipulate.  I took a look at the difference between the All Ordinaries index and the All Ordinaries TR index.  As a simple raw observation the All Ordinaries hit its nadir post the GFC on 13/03/09 when its low hit 3090.80, its last full weekly close was on 21/04/17 when it closed at 5885.60 – this is gain of 90.42%. The All Ordinaries TR had a low of 20,858.64 on 6/3/09, since then it has climbed to 55,605.18 – a gain of 166.58%. There is a substantial difference between the long term rate of return of the two indices. Unfortunately, this differential is often seized upon and used by the buy and hold brigade to offer the mantra of simply investing for dividends but I don’t think that is what the data is showing. What the data shows is the naturally higher rate of compounded return from simply folding back dividends into the equation. It doesn’t offer sufficient evidence to support the line of investing simply for the sake of dividends. If it does offer anything it gives a glimpse into the usefulness of a sensible index ETF strategy.

I wanted to take a deeper look at the differential between the weekly returns from the two indices to see if it told me anything deeper about the relationship between the two and the actual stage of the market. The graph below demonstrates the differential between the two dating back to 1996.


As you can see the data is fairly noisy but there are one two points that you can generate from it. There is a distinct scalloping in the data in the early part of the century, my interpretation of this is that this is a natural function of a market running hard. In fast moving markets the majority of index gains come from the generation of dividends. As you move beyond the GFC you can see an expansion in the differential – dividends as a source of internal return have become more important. This is to be expected in lacklustre markets. My feeling is that the downward pulses that you see post the GFC are in part due to price attempting to recover but also are a function of the cyclical nature of dividends.

Whilst interesting I am not certain it tells us anything we didn’t already know. However, when I was preparing this I did have a recollection of an analysis I used to do by hand before the age of boundless and often needless information began to distract me. In the past I used to had chart the All Ordinaries dividend ratio and use it as a measure of market energy and I though ti should be easy enough to see if some clever clogs had done the work for me. And courtesy of two seconds on Google I found someone had. The chart below is from Market Index a group that provide and absolute plethora of markets statistics.

Yield All Ords

As you can see it presents a similar but much clearer picture of the ebbs and flows of the actual dividend yield of the All Ordinaries. As can be seen when price is running strongly the relative impact of dividends decreases – that is the overall yield drops. When markets are doing poorly the average dividend climbs as price collapses. I will leave it to each individual to see if this sort of information adds anything to the veracity of their macro trading decisions.


The Final Clarke and Dawe


Trading In Uncertain Times

The problem of trading in uncertain times crept up on the Mentor Program Alumni forum and I have been thinking about my answer. The original answer I gave is shown below –

I think one of the things you need to be able to do is to define what is uncertainty. If you opt for volatility as a proxy for uncertainty then you see something quite interesting. The VIX which is known as the fear index and should reflect uncertainty is actually at sitting somewhere near its long term average, indicating that the players who make up this index don’t actually see any uncertainty and are not asking for an increase in the risk premium they demand. Te same is true if you look at the historic volatility in the Dow which is also sitting at a 9 year low.
From my perspective is the issue is not uncertainty in markets but uncertainty in decision making that is brought about by listening to external sources. If you switched off the news and all the associated commentary and simply looked at markets what would they tell you?

What has caused me to think further about this overnight is the notion of what actually is the uncertainty that is being referred to. Is it a true physical uncertainty or a psychological perception brought on by exposure to the narratives of others. I had a look at Wikipedia for a more formal definition of uncertainty and it gave the following –

Uncertainty is a situation which involves imperfect and/or unknown information. However, “uncertainty is an unintelligible expression without a straightforward description”.[1] It arises in subtly different ways in a number of fields, including insurance, philosophy, physics, statistics, economics, finance, psychology, sociology, engineering, metrology, and information science. It applies to predictions of future events, to physical measurements that are already made, or to the unknown. Uncertainty arises in partially observable and/or stochastic environments, as well as due to ignorance and/or indolence.[2]

You will notice that the definition holds at its core the uncertainty inherent in predicting future events. In fact the science of probability is based around trying to deal with the fact that the universe is an uncertain place. However, uncertainty is the default setting in trading – the outcome of all trades is unknown until they are closed. It is this uncertainty that gives us the potential to be profitable, investments that have known or certain outcomes have no risk premium attached as such they offer little in the way of return (think bank deposit). This definition is therefore of little use in unpacking the notion of  a change in traders uncertainty quotient. Granted we can respond to changes in volatility and we have tools to measure this but this is a reasonably common occurrence in trading and there are strategies that can be put in place to deal with this. In fact very basic position sizing and volatility based stops self correct to deal with this sort of problem.

So I am drawn back to the idea that what actually changes is the tone and intensity of the narratives that people surround themselves with. This ever increasing crescendo of noise is bound to take an effect on peoples psyche particularity at present when the world appears to be spinning out of control. However, notice I used the expression appears, I used this term because appearances and reality are not the same thing. What brings some equilibrium back to the noise of others is as always context, the markets tell a completely different story. Whilst the breathless gibbering that is the media may consider the present to be the most troubled time in history and need to shout about it at every opportunity neither that markets nor history itself would agree.

This is the most salient point for traders with regards to what is considered uncertainty. Uncertainty is the environment within which we operate as a broad observation but beyond that it is actually the markets themselves that define what is actually uncertainty and they can do this by readily accessible metrics. When volatility and in turn risk premiums increase then we can say that uncertainty has increased. However, even here people try inject their own primitive narrative into events as the VIX which is a widely known measure of volatility is referred to as the fear index when it is nothing of the sort. However, this is the natural human desire for drama, we all have a friend or relative who is addicted to drama and those in the news media, particularly the financial arena and prime diva’s. So if you find yourself believing that uncertainty has increased but markets dont agree then you will need to do something about what leaks into your brain.


The Purpose Of Life Is Not Happiness: It’s Usefulness

Let’s just accept that. Most people love to analyze why people are not happy or don’t live fulfilling lives. I don’t necessarily care about the why.

I care more about how we can change.

Just a few short years ago, I did everything to chase happiness.

  • You buy something, and you think that makes you happy.
  • You hook up with people, and think that makes you happy.
  • You get a well-paying job you don’t like, and think that makes you happy.
  • You go on holiday, and you think that makes you happy.

But at the end of the day, you’re lying in your bed (alone or next to your spouse), and you think: “What’s next in this endless pursuit of happiness?”

Well, I can tell you what’s next: You, chasing something random that you believe makes you happy.

It’s all a façade. A hoax. A story that’s been made up.

More here – Medium

Jesse And The Quake

At eight o’clock in the morning of Wednesday April 18th 1906, Jesse Livermore was sound asleep in his New York hotel room after arriving back late from Palm Beach the previous evening.

3000 miles away, across the country in California, it was five o’clock in the morning and the city of San Francisco slept contentedly. Barely two minutes later, the earth shook and all 410,000 citizens were awoken as the San Andreas Fault suddenly ruptured. There were two quakes. The initial quake was hardly noticeable but, 20 seconds later, the earth tremored for 42 seconds at force eight, just about as bad as it gets. It shattered the surface of the earth for a length of 296 miles across California. At its epicentre, the ground moved 28 feet.

More here – The Reformed Broker

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