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  • A Tale Of Two Markets

    In one of those wonderful dualisms that seem to accompany markets as prices go up people start calling for them to fall. The media of late has been awash with reports from various poorly performing fund managers as to why the market is about to crash.I understand the medias fascination with these voices – negativity… Read more…

  • Can You Do It?

    I was chatting to Jim Armstrong a mate of mine who teaches combatives/self defence and he is probably the best teacher of this sort of thing that I have come across in all my decades of knocking about the martial arts. The discussion turned to the notion being preemptive (language) – that is hitting someone first. Unfortunately,… Read more…

  • Motivation Monday

    Who thought this sort of stuff was only for little bastards…..    

  • Charts Of Interest 27/02/2015

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A Tale Of Two Markets

In one of those wonderful dualisms that seem to accompany markets as prices go up people start calling for them to fall. The media of late has been awash with reports from various poorly performing fund managers as to why the market is about to crash.I understand the medias fascination with these voices – negativity is a key media selling tool and is for many their natural default state. The truth is that no one knows and that is the hardest thing for professionals to admit – that they do not know. The future trajectory of markets is completely unknown – the only thing that is certain is that markets will rise and fall and the speed and depth of these movements will at times surprise all of us. What is interesting is that those who make predictions fail to learn from their mistakes – they are what Philip Tetlock would call hedgehogs. Hedgehogs in this context are traditionally bombastic, opinionated, unable to learn from past failures and most disturbingly generally wrong. However, they make good fodder for the media. If we were to look for a traditional hedgehog the Swiss commentator Marc Faber would fit the bill. Faber has been calling for a market crash for years only to see the market march higher and higher . Unable to adapt his thinking he continues to call for a crash of between 20% and 30% every year. Such calls make good headlines but do little for investors.

Domestically our market has been moribund for several years post the GFC and of late has shown signs of life. We are not far from our old pre GFC high as can be seen from the chart below.

All Ordinaries

There is still a little way to go before we erase all the losses we suffered but simply because a market has gone up does not mean it will automatically go down. Markets do not in any way have to be balanced in their tone – they are not a tide which goes in a certain distance and must go out a certain distance. Consider the chart below of the Nikkei which has been in a long term bear market for a generation.

Nikkei

It does not naturally follow that just because the Nikkei has been broadly tracking down for almost 30 years that it must go up. However, if we apply the logic of many of the local commentators who are currently calling for a correction then by extension the Japanese market should have automatically risen after its collapse in 1988. However, that did not occur because markets are not robotic nor do they response to the over hyped emotional outpourings of value based fund mangers who must be caught in an awful tension when markets rise. On the one had they want their asset prices to go up but they also dont want the overall market to go too far because it brings into sharp repose their inability to their job.

The absolute truth is that no one actually knows what markets will do until after they have done it. Prediction is a terrible folly and you simply end up looking stupid.

Can You Do It?

I was chatting to Jim Armstrong a mate of mine who teaches combatives/self defence and he is probably the best teacher of this sort of thing that I have come across in all my decades of knocking about the martial arts. The discussion turned to the notion being preemptive (language) – that is hitting someone first. Unfortunately, the majority of classical or traditional martial arts teach their students a variation of this rubbish.

Sadly, it doesn’t work – you simply end up on your backside nursing broken nose or worse. This is why in real self defence the idea of being preemptive comes into play. It is also extremely hard for any right thinking person to do, no one wants to hit someone else first. Quite correctly the thought of doing so is abhorrent to many, but it may be a necessary tactic. Despite it being a necessary ( I would say essential) skill many people simply cannot do it. As such they need to be taught ways to ride out the first hit which is difficult but not impossible and takes a very good instructor to get you to that point.

This raises the question of can you do it and the idea of asking yourself hard questions permeates everything we do. Too often though we avoid the hard questions.

For traders the hard question is can you do it. Leave aside the notion of sitting analysing markets, drawing on charts, devising trading systems and all the other clutter that seems to infect the trading psyche. The most immediate question is can you place a trade and then sit there and watch it go wrong and can you do this repeatedly not for a period of a few days but for years. It has been my observation that most cannot, be it as a result of the short term nature of the world we live having infected the thinking of most. Or simply, that humans cannot stick to anything for any period of time. I have a theory that most fitness and diet plans are based around 12 weeks because that is as long as we can conceive of as a forward plan. We may have inherited this part of our psychology from our ancestors because 12 weeks is about he length of a season – to them it would have been a natural cycle. A natural beginning and end. To us it has become a measure of time that we must race against. If I am not super fit, lean, ripped or able to bench press a truck then I have failed.

The problem is that trading is not a race but a grind where you do the same thing day in day out and there is no let up from that routine. Likewise, there is no let up in the number of losing trades you will encounter. Granted there are good times when you think you are master of the universe but there are also times when you think that you might just have had your day and will never encounter another winning trade again. The periods of struggle might go on for months or even years. So the question you need to ask yourself is – can you tolerate this or is trading simply a hobby, something you tinker with and pretend to your friends about.

There is no shame in realising that you cannot do it. What you then have to do is to see if there is a framework within which you can operate and achieve some measure of success. But before you move into this phase you must have asked yourself the hard question – can you do it?

Motivation Monday

Who thought this sort of stuff was only for little bastards…..
 


 

Charts Of Interest 27/02/2015

Screen Shot 2015-03-01 at 9.38.32 am Screen Shot 2015-03-01 at 9.38.53 am Screen Shot 2015-03-01 at 9.39.25 am Screen Shot 2015-03-01 at 9.39.42 am Screen Shot 2015-03-01 at 9.39.54 am Screen Shot 2015-03-01 at 9.40.06 am Screen Shot 2015-03-01 at 9.40.17 am Screen Shot 2015-03-01 at 9.40.28 am

Can a Stock-Trader-Turned-Convict Start a New Life?

One day in the middle of 2008, Sakhawat Khan, a Silicon Valley chip engineer, walked into a small house near the back of his two-acre property that his wife, Roomy, a stock trader, used as a home office. Roomy and Sakhawat met when they were electrical-engineering students at Columbia University. After graduating, Sakhawat started inventing, eventually gathering some 30 semiconductor patents to his name. Roomy, who was more outgoing in social situations and more restless in her appetite for risk, was drawn to Wall Street and joined Galleon Group, a New York hedge fund run by the charismatic, bullish trader Raj Rajaratnam. In 1999, she struck out on her own to trade technology stocks. She thrived. Riding the Internet boom, she said, she had amassed a paper fortune of $50 million.

“I am not kidding when I say I had money,” Roomy told me when I met her recently. “I had a lot of money.” In the late 1990s, the Khans moved out of their house in Sunnyvale, Calif., — Roomy called it a “khudd,” a Punjabi word for “hole” — and bought a 9,000-square-foot mansion in Atherton, the wealthiest town in Silicon Valley. They paid $10.5 million, all cash. The house had a pool, a tennis court and more than half a dozen marble fireplaces. They gave lavish parties for their friends and once, on a whim, spent $50,000 on wine.

More here – The New York Times Magazine

Your True Opponent is Yourself

The reality is in competition, we will all compete against somebody who will simply out class us with talent, skill, and athleticism. There is only so much we can do against this external conflict, but the internal aspects of the battles are on us. We can choose to push forward and attack to the best of our ability and potentially pull off the upset and at worst go down swinging or just turtle up and accept our beating. I can relate to my teammate’s experience of giving up during competition. In the finals of Pans as a white belt, I looked up at the clock with 2 minutes left and saw that I was down 9-0. I said to myself “I guess Silver isn’t bad” and went into turtle mode. I basically broke mentally and physically instead of continuing to fight. That is why my teammate’s attitude at NoGi Worlds was so inspiring and refreshing to me. She knew she was down on points, but deep down inside she didn’t quit. Yes, she lost to the better competitor, the external force. Yet, she didn’t beat herself. She exhibit the fighting spirit that personified what it meant to be a competitor and martial artist.

More here – Jiu Jitsu Times

Most Trading Strategies Are not tested Rigorously Enough

Financial research is highly prone to statistical distortion. Academics have the choice of many thousands of stocks, bonds and currencies being traded across dozens of countries, complete with decades’ worth of daily price data. They can backtest thousands of correlations to find a few that appear to offer profitable strategies.

The paper points out that most financial research applies a two-standard-deviation (or “two sigma” in the jargon) test to see if the results are statistically significant. This is not rigorous enough.

One way round this problem is to use “out-of-sample” testing. If you have 20 years of data, then split them in half. If a strategy works in the first half of the data, see if it also does so in the second out-of-sample period. If not, it is probably a fluke.

The problem with out-of-sample testing is that researchers know what happened in the past, and may have designed their strategies accordingly: consciously avoiding bank stocks in 2007 and 2008, for example. In addition, slicing up the data means fewer observations, making it more difficult to discover relationships that are truly statistically significant.

Campbell Harvey, one of the report’s authors, says that the only true out-of-sample approach is to ignore the past and see whether the strategy works in future. But few investors or fund managers have the required patience. They want a winning strategy now, not in five years’ time.

The authors’ conclusions are stark. “Most of the empirical research in finance, whether published in academic journals or put into production as an active trading strategy by an investment manager, is likely false. This implies that half the financial products (promising outperformance) that companies are selling to clients are false.”

More here – The Economist

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