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  • Email Of the Week

    Traditionally email of the week is a catalogue of the idiocy of people attempting to make some headway in trading and this week was no exception with two excellent contenders. Early in the week we had some one who was trying to convince us that she was a conservative long term investor and she sought… Read more…

  • Money Giveth, Money Taketh Away.

    This study has been siting in my inbox for quite sometime and I finally got around to reading it – the abstract below gives a very good summary of the findings. This study provides the first evidence that money impairs people’s ability to savor everyday positive emotions and experiences. In a sample of working adults,… Read more…

  • Subconscious Bias

    One of the difficulties of living in a world that is flooded with narratives is that they have an insidious way of seeping into your subconscious. This infiltration is unknown until you need to make a decision. The chart below is of QAN and upon cursory inspection it shows a relentless bearishness surrounding the stock… Read more…

  • Hedge Fund Capital Hits Record $2.82 trillion

    I have to admit the psychology behind the sort of decision to invest in a hedge fund that admits to grossly under performing every benchmark intrigues me and does show that Kahneman and Tversky were on the money when they said that money induced glitchy thinking and caused us to depart dramatically from the basic… Read more…

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Email Of the Week

Traditionally email of the week is a catalogue of the idiocy of people attempting to make some headway in trading and this week was no exception with two excellent contenders. Early in the week we had some one who was trying to convince us that she was a conservative long term investor and she sought to manifest this strategy by selling puts under the S&P500. Let me know how that works out for you. Our second contender was a peanut who said and I am paraphrasing here that he was a losing trader, could not follow a trading plan and he had losses that were much larger than his wins but he did have fund managers lining up to give him vast sums of money because they liked his method. I am calling bullshit on this one.

However, our winner is actually a sensible piece whose email touches on a number of problems that traders have particularly when winning positions move against them.

I wanted to ask you have you ever had a stock get slammed and stop you out only for it to then retreat and make back all the loses of the session? This happened to me today with SRX and its left me a little stunned. 
Ordinarily i wouldn’t worry about it and just take the next trade but this position was in my investment portfolio for a longer term growth play and given they are about to go into phase 3 trials in Jan 2015 for their SIRFLOX technology for treating liver cancer im tempted to buy back in if it bounces. 
I was long and strong and got stopped out at 23.78 only for it to then bounce back from its low of 23.41 making up all its losses to close only 2.7% lower after being 11% lower during the day. Have you ever had this happen to you? What does it mean when the stock does this? Is it just some a case of some late comers helping the price recover or something else? The chart action looks terrible – big fat candles to the downside with increasing volume and lower lows and lower highs so my head tells me to wait but i know when this stock turns it runs hard  real quick so the temptation to buy back in is very real especially given the trials are around the corner.
Welcome your thoughts.

I had forgotten all about this stock  before seeing this email – it falls well outside my tradable universe price range so I had to look it up and check out what was happening.

Screen Shot 2014-12-18 at 10.09.49 am

On the chart above I have dropped 52 weeks highs and volume just to get a sense of the stock. My observation is of a stock that has trended very strongly for the past year with numerous breakouts followed by dropping out of bed in the past week. In responding to the email I thought it better to break it down into pasts and respond to each of those.

I wanted to ask you have you ever had a stock get slammed and stop you out only for it to then retreat and make back all the loses of the session? This happened to me today with SRX and its left me a little stunned. 

The quick answer is yes – it is unfortunately part of the game and it is normal to be somewhat dazed by this if you have not experienced it before .Price action is to my way of thinking unpredictable and small changes in sentiment or narrative can cause interesting responses that can become self fulfilling. However when viewed over the long term you can see that the stock has doubled in a time when the local market has gone nowhere so its performance has been stellar. It should be expected that at sometime the stock will simply falter. one of the issues that we face is that when we have a stock perform so well we become conditioned to this as being normal and we anchor ourselves both to the new higher prices but more importantly to its relative performance. We expect this to become the new normal and if the stock has doubled then shy should it not double again. We have to take a step back and ponder whether this is a logical perception to have of a stock or do we fall back on basic probability and understand that this is an outlier and that outliers can snap back very quickly.

Ordinarily I wouldn’t worry about it and just take the next trade but this position was in my investment portfolio for a longer term growth play and given they are about to go into phase 3 trials in Jan 2015 for their SIRFLOX technology for treating liver cancer im tempted to buy back in if it bounces. 

The first response here is the correct response – dont worry about it whether a stock is in your long term portfolio or not the same rules apply. The definition of your portfolio does not change the perception of basic rules – if it has broken your rules then it goes. There is an interesting question here – why is there selling in a stock from weeks before going into phase three trial. (For those not familiar with the terminology of trials Phase three refers to a clinical study done with a large study population. It compares the intervention to a control group and pays particular attention to adverse outcomes from the intervention)

From my perspective this is an example of an emotional narrative taking over – the stock has been good to me so far but why has it let me down now. We become attached to people, we do not become attached to stocks since they are the ultimate disposable item. We owe them no loyalty no matter how good you think they might be. the worry here is also that confirmation bias is creeping into the decision making. The price action reasons for deserting the stock were obviously  compelling looking for reasons as to why you should act/feel differently is sign of a blind spot.

I was long and strong and got stopped out at 23.78 only for it to then bounce back from its low of 23.41 making up all its losses to close only 2.7% lower after being 11% lower during the day. Have you ever had this happen to you? What does it mean when the stock does this? Is it just some a case of some late comers helping the price recover or something else?

To be honest I dont think there is anything to read into what has happened. Markets will always behave in the way they behave. trying to find a justification or explanation may make us feel better but it doesnt detract from the reality that we are simply building a story to make ourselves feel better. The important thing is the structure and function of your rules in these situations.

The chart action looks terrible – big fat candles to the downside with increasing volume and lower lows and lower highs so my head tells me to wait but i know when this stock turns it runs hard  real quick so the temptation to buy back in is very real especially given the trials are around the corner.

You are the weakest link in the system – all of us are the weakest links in our trading systems thats why we should not be listened to. The market doesn’t care what you feel or what your perceptions are and you have no way of convincing the market of the veracity of your story/feelings. Rules matter – thoughts and feeling dont.

Money Giveth, Money Taketh Away.

This study has been siting in my inbox for quite sometime and I finally got around to reading it – the abstract below gives a very good summary of the findings.

This study provides the first evidence that money impairs people’s ability to savor everyday positive emotions and experiences. In a sample of working adults, wealthier individuals reported lower savoring ability (the ability to enhance and prolong positive emotional experience). Moreover, the negative impact of wealth on individuals’ ability to savor undermined the positive effects of money on their happiness. We experimentally exposed participants to a reminder of wealth and produced the same deleterious effect on their ability to savor as that produced by actual individual differences in wealth, a result supporting the theory that money has a causal effect on savoring. Moving beyond self-reports, we found that participants exposed to a reminder of wealth spent less time savoring a piece of chocolate and exhibited reduced enjoyment of it compared with participants not exposed to wealth. This article presents evidence supporting the widely held but previously untested belief that having access to the best things in life may actually undercut people’s ability to reap enjoyment from life’s small pleasures.

This goes some way to backing up the apocryphal notion that money cannot buy happiness and that much of our programming around wealth impairs our ability to enjoy smaller pleasures. It is as if the possession of wealth requires that the pursuit of happiness be manifested by grand gestures as opposed to small experiences. However, this does pose the question of how to reconcile wealth and happiness and more importantly how not act in a way that does not sabotage attempts at wealth creation. My guess and this only a guess generated by my own experiences and is based upon a two fold approach. Firstly, buy experiences rather than things. Things can be a pain in the arse particularly if they are made by Italian car manufacturers. Secondly, focus on what wealth can do for others.

Subconscious Bias

One of the difficulties of living in a world that is flooded with narratives is that they have an insidious way of seeping into your subconscious. This infiltration is unknown until you need to make a decision. The chart below is of QAN and upon cursory inspection it shows a relentless bearishness surrounding the stock since 2008 interspersed with periods of modest recovery. The past two years has been a period of broad consolidation. If I were to characterise both the sentiment and reporting around QAN  during this time it could easily be described as depressing.

Screen Shot 2014-12-17 at 5.17.54 am

The chatter around airlines and QAN in particular was who the hell would want to own, run or even work for an airline as both our major domestic carriers engaged in what seemed to be a self immolating race to  oblivion in an attempt to wrest market share from one another. The all pervasive nature of this narrative made it hard to avoid. Anyone looking to take a long position in QAN would have had this in the back of their mind even if the fundamentals of a company played no part in their decision making.

What prompted this piece was a discussion on the MP forum where someone seemed to have struck exactly that problem and it is a problem that resonates with me because I faced exactly the same problem.  My long term equity system is currently long both QAN and AIZ and before taking both trades a little voice inside my head said WTF are you doing airlines are dead and in particular QAN is the deadest of them all. However, I have two mantras that I cling to religiously. The first is that my opinion means nothing – what matters is what the system says and flowing on from this is the belief that I am the weakest link in the chain of command. There is also a perverse effect that I have noticed over the years that says that the trades I am most uncomfortable about are the ones that I really need to take not because their is some magical connection between being uncomfortable and a trade being profitable but rather they have to be taken because they demonstrate that you have sufficient control over yourself to ignore your poorly trained subconscious.

Hedge Fund Capital Hits Record $2.82 trillion

I have to admit the psychology behind the sort of decision to invest in a hedge fund that admits to grossly under performing every benchmark intrigues me and does show that Kahneman and Tversky were on the money when they said that money induced glitchy thinking and caused us to depart dramatically from the basic principles of probability.
 


 

Motivation Monday

Make certain you have your captions on – its the little cc button at the bottom of the player.
 


 

Oil Is Not The First Commodity To Crash In The Post-Crisis Period

Interesting chart and piece by Josh Brown at The Reformed Broker showing that there is nothing special about the collapse in oil.

Screen Shot 2014-12-14 at 3.17.20 pm

Finviz – Year To Date Relative Performance

I was doing a bit of research for the market wrap on Talking Trading and was curious to know what the best performing commodity was so turned to Finviz which has a range of useful free data.

Screen Shot 2014-12-14 at 3.12.35 pm

 

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