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”. 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.
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.
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
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
One of the greatest computer programmers of all time grew up near Seattle. He saw an upstart company, Intel, making computers on a chip and was among the first people to see the potential of these so-called microcomputers. He dedicated himself to writing software for the new device and, by one account, “wrote the software that set off the personal computer revolution.”
In the mid 1970s, he founded a company to sell software for micro-computers. In the early history of the company, “the atmosphere was zany,” and “people came to work barefoot, in shorts,” and “anyone in a suit was a visitor.” But the company was soon highly profitable, and by 1981 its operating system had a dominant share of the market for personal computers that used Intel microprocessors.
More here – Fast Company
My view of the mainstream media is not something I tend to hold back on. Anyone who has had anything more than a cursory glance at this blog knows my low opinion of the vast majority of the financial and general media. I have little time or respect for people who did media studies and spent 3 years watching tv to earn a degree. So it was with some trepidation that earlier in the week I attended a media and business workshop. The aim of this workshop was to enable business to get an understanding of how media works and to meet representatives from the legacy media organisations such as print, radio and television. Right there you can see a problem – these are legacy content platforms that are rapidly being displaced by their more nimble and more niche digital competitors. Facebook and other platforms now extend their reach to more individuals than any traditional form of media ever did. Yet despite this development there was no one at the meeting from any of the newer forms of communication.
The day began with a panel Q&A session and the beginning of this session saw each of the participants try and outdo each other as to how early they got up and how much work they did. It was very reminiscent of the wonderful Monty Python sketch called The Four Yorkshiremen . Once the dick contest of the various introductions was out of the way it was on to the Q&A session and most of the questions were fairly innocuous such as how to get in contact with the media, what form should the approach take and how it should be structured. Then Gary Stone of Share Wealth Systems asked a very important question, he questioned as to how much of a show such as the Channel 9 Today show was devoted to serious evergreen issues such as the perennial problem of home ownership and the producer from the show proudly trumpeted that they set aside 3.5 minutes each morning for such issues. In that simple statement the irrelevancy of mainstream media was brilliantly encapsulated. A show that runs for 210 minutes proudly devotes 1.6% of its time to something serious. Granted morning television is aimed at a certain demographic and in my eyes seems to have its content based around generating bogan outrage, what toilet paper third rate celebrities use or general gossip. And I accept that there will always be more stupid people than smart people so they have to have something to watch whilst Rome burns because it is very much a give them games so they are distracted from reality.
I spent the rest of the morning wondering if dinosaurs knew they were on the verge of extinction but more importantly whether any of us know when we are also on the cusp of irrelevancy either in our work, our relationships or even our own lives. If there was an overarching theme of the morning for me it was irrelevancy and how it seems to creep up on not only institutions but also individuals and I began to think of the times when either I had become irrelevant in a given situation or when things had become irrelevant to me. The central thread through all of these events in my own life was that I hadn’t really noticed the drift towards becoming irrelevant. The realisation that you are only tangential or peripheral to a situation comes as a sort of a ha moment but one that comes after the event. It was somewhat akin to everyone else getting the joke whilst you stand there scratching your head going I don’t get it. The only rationale I could come up with for this was that because you are wrap up in events you find it hard to take a more global view of what is occurring, your view of things is obscured by the noise of your own participation
The lesson for me from the morning was to be more mindful of the things that go on around me so that you don’t drift into irrelevancy.
It’s 6 on a Wednesday morning, and Kabir Ahmed has snoozed his alarm one too many times. He steps softly, barefoot, around his small, second-story apartment in Jamaica, Queens, creaking through the green and pink hall.
He is late, but careful not to wake his wife and their three children, or his mother, who will be up in an hour to say prayers and cook breakfast. He puts on his baseball hat, slides his feet into rubber clogs and hurries out without coffee.
Mr. Ahmed, 46, is in the business of chicken and rice. He immigrated from Bangladesh 23 years ago, and is now one of two partners in a halal food cart that sets up on Greenwich Street close to the World Trade Center, all year long, rain or shine. He is also one of more than 10,000 people, most of them immigrants, who make a living selling food on the city’s sidewalks: pork tamales, hot dogs, rolled rice noodles, jerk chicken.
More here – The New York Times
PS: I have to admit I was fascinated by these food trucks when I was in NY last year. All of them seem to be clones of one another in much the style of the one described in the article. However, we came across one not far from our hotel which was not a clone and had a queue outside the front of it no matter what time of day or night you went past it.