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Its Not My Fault…But Then Its Never My Fault

Whilst sitting at my local this afternoon enjoy a cuppa and a Kit Kat I spied someone reading a piece about a company called SurfStich which to be honest I had never head of as it doesn’t sit within my universe of tradeable stocks. To save you the trouble of reading the article I can summarise it quick quickly. SurfStich lists in 2014, the listing is a bit lacklustre but price recovers from the $1 listing price to hit a high of $2.13. Stock then dies in the arse and shareholders crack the sad’s and want to sue the company. I have dropped a chart of the price action  below.

Capture

On the chart I have plotted the listing price of $1.00 and as you can see the stock spent a good year above the listing price before beginning its precipitous fall from grace. I can guarantee you that when the stock price passed through $2.00 the investors who are now suing the company considered themselves to be absolute geniuses and when the stock began to fall those who ran the company were apparently complete dickheads for letting it happen. Here is a news flash for investors who operate on this sort of deflection of personal responsibility – you are responsible for your own actions and all the consequences that flow from them. You had ample time to exit the stock with a substantial profit but you didn’t – the decision not to was your fault – no one else is to blame.

I understand the notion of personal responsibility is an anathema to a lot of people but if ever there was a cornerstone principle for being successful at anything it is being able to accept your role in the events as they unfold. You cannot consider yourself to be the best investor in the world when price is running your way but then somehow seek to blame the company for your failure to take any form of defensive action when things do not go your way. This just paints you as a childish amateur.

I dont think so

Every so I often I am party to an email from someone who should know better. This particular email was around the topic of returns that could be expected from a novice trader. This email asserted that they were looking at the order of 1,000% pa, which in anyone’s language is a tall order. I can understand how people get these figures in their heads, the internet is awash with people claiming that you can give up your day job and intraday trade FX with $5,000 and live like royalty with no risk. Intriguingly I have once again started receiving spam emails from people claiming that options writing is a no risk cash flow generating strategy.

As such it is easy to see how peoples psyche becomes infected with this sort of nonsense and how with little real world experience they are sucked in.

However I was curious as to what the numbers would look like if you were making 1000% pa so I fired up Excel and let it rip with a starting balance of 1,000.

Capture

I dont even know how to say that last number. Suffice to say that somewhere around the first months of year 7 you are the richest person in the world and by the end of year 10 I think you have all the money.

This Article Won’t Change Your Mind

….The theory of cognitive dissonance—the extreme discomfort of simultaneously holding two thoughts that are in conflict—was developed by the social psychologist Leon Festinger in the 1950s. In a famous study, Festinger and his colleagues embedded themselves with a doomsday prophet named Dorothy Martin and her cult of followers who believed that spacemen called the Guardians were coming to collect them in flying saucers, to save them from a coming flood. Needless to say, no spacemen (and no flood) ever came, but Martin just kept revising her predictions. Sure, the spacemen didn’t show up today, but they were sure to come tomorrow, and so on. The researchers watched with fascination as the believers kept on believing, despite all the evidence that they were wrong.

“A man with a conviction is a hard man to change,” Festinger, Henry Riecken, and Stanley Schacter wrote in When Prophecy Fails, their 1957 book about this study. “Tell him you disagree and he turns away. Show him facts or figures and he questions your sources. Appeal to logic and he fails to see your point … Suppose that he is presented with evidence, unequivocal and undeniable evidence, that his belief is wrong: what will happen? The individual will frequently emerge, not only unshaken, but even more convinced of the truth of his beliefs than ever before.”

More here – The Atlantic

Amazon

I sniped the image below from a piece that charted Amazons remarkable rise. The rest of the chart set can be found here.

AMZN

Source – recode

The reason I was drawn to this chart and not the others in the series is because if touches on a theme that I rabbit on about constantly – the need to adapt and to avoid irrelevancy. What interests me about this is that Walmart has effectively gone nowhere since the turn of the century. Yet despite the obvious power of this metric they have allowed themselves to be effectively marginalised, as no doubt have the majority of other US big retailers. If you understand anything about the demographics of the US you will now that there will always be a portion of society that will shop at institutions such as Walmart but that population will shrink and the dell of the great American Mall is already occurring at a remarkable place as they are displaced by the juggernaut of online shopping.

Such a shift does raise the question as to what could be done by traditional retailers to avert the slide and my guess is that there is nothing that can be done. However, the bigger question and the one that is relevant to everyone is why did they not see the change as it was occurring? What blinds us to the obvious in our own lives? To this I dont really have an answer I have a few guesses and they revolve around the paradox  individuals being so narcissistic that they cannot perceive anything other than themselves ( a function of people who take endless photos of themselves). Or people being so uninvolved in their own lives that time and events merely wash past them.

 But these are only guesses based upon my own observations. These observations are naturally tainted by I own blind spots.

To age better, eat better

You think……

A habitually healthy eater, Frank Hu stocks his refrigerator with fresh fruits and vegetables, fish, and chicken. His pantry holds brown rice, whole grains, and legumes, and his snack cabinet has nuts and seeds. He eats red meat only occasionally, rarely buys white bread, soda, bacon, or other processed meats. He’ll purchase chips and beer, but only now and then, mostly when entertaining friends.

When it comes to eating smartly in ways that can help us keep fit and live longer, Hu knows best.

“There is no single, fit-for-all diet for everyone,” said Frank Hu of the Harvard T.H. Chan School of Public Health. Kris Snibbe/Harvard Staff Photographer
Hu took over the Department of Nutrition at the Harvard T.H. Chan School of Public Health in January. His eating habits are greatly informed by his research on what constitutes a healthy diet. While he knows they’re not for everyone, he says people can nonetheless move toward eating patterns that both appeal to them and help them stay well.

“There is no single, fit-for-all diet for everyone,” said Hu, a professor of nutrition and epidemiology and a professor of medicine at Harvard Medical School. “People should adopt healthy dietary patterns according to their food and cultural preferences and health conditions. I don’t have a rigid regimen, but I always emphasize healthy components in all my meals.”

And so, according to considerable research, can all those who want to reduce the risk of obesity, diabetes, cardiovascular diseases, and other chronic illnesses, and increase both longevity and quality of life in old age.

More here – Harvard Gazette

It is remarkable how much of the blindingly obvious has become lost to a public that  on the basis of the available evidence seem to be getting dumber and dumber. It is also extraordinary how many of the things I used to take for granted at university as being common sense now get grants to be studied

 

What’s it like to lose £350m?

In 2009, shortly after the global markets had suffered their worst crisis for 90 years, Alexis Stenfors was working as a currency trader for Merrill Lynch in London. With 15 years’ experience, he was good at his job and he prided himself on his ability to read the markets. His view was that the whole financial system was going to go “belly up”. That was what he was betting on.

And boy did he bet. He took increasingly extreme positions and when they failed to return dividends, he covered up losses in his trading books that he estimated to be around $100m (£78m). Then he went on holiday to India. Stenfors didn’t realise it at the time, but it was the end of his career as a trader, and the beginning of his notoriety as a rogue trader. Merrill Lynch later announced that his actions had resulted in the loss of $456m (£356m).

He lost his job, the media left his reputation in tatters and he was banned from the City for five years. Now he has written Barometer of Fear, a book about his experiences. Or rather, he has written a book that touches on his experience, but is rather more concerned with institutional wrongdoing, such as the Libor scandal. It’s a strange confession-cum-critique in which the author still seems unable to explain his own role.

More here – The Guardian

PS: One thing very good traders have is insight into themselves – it sounds as if Stenfors has little or no insight into his own motivations and hence his reasons for blowing himself up.

Would You Take The $10M Part Two

Last week I posted this interview with NBA star LeBron James. James describes how at the age of 18 whilst living in both obscurity and poverty he made the very mature commercial decision to knock back a $10 million contract from Reebok – this contract whilst extraordinarily generous for someone who had never played professional basketball would have put a lock on his earnings for sometime. James now has an estimated net worth of in excess of $500 million. It is estimated that with the endorsement deals he has in place he should be worth around $1 billion by the time his playing career ends. Taking the $10 million would have precluded this sort of financial enrichment.

The question I posed was would you take the $10 million – if you answered or thought yes then the bad news is trading is probably not for you. At best trading will be a diversion for you in a futile attempt to drag yourself away from what Thoreau referred to as the life of quiet desperation. You will like the majority of speculators entertain yourself with trading and you will feel as if you are part of the action but your trading will never amount to much.

This may seem like a very harsh judgement but unfortunately trading is a profession where the ability to delay gratification is paramount to your success. Delaying gratification means that you can hold onto winning positions for longer. Consider the example below which is drawn from the experiences of someone I know.

PDN 1

You spot the breakout from resistance at around $0.05 and the lift in price is confirmed by a lift in volume. So you buy 100,000 at $0.055 and you watch price move very sharply to the $0.12 to $0.13 region and you convince yourself that the stock has topped. After all the candles look very bearish and you have made over twice your initial investment in a short space of time. As they say you cant go broke taking a profit – so you cash out and walk away feeling very pleased with yourself and wondering why people say they find trading difficult. The chart below shows a more interesting picture, on this I have applied a very basic transition stop and asked Metastock just to show me the new 52 week high as they occur.

PDN2

So if we revisit the original trade where 100,000 shares were purchased at around $0.055 and then sold somewhere between $0.12 and $0.13  you have left around $600,000 on the table. All for the sake of being unable to delay the gratification you needed from trading. Traders build all sorts of rationalisations as to why they act in such a manner but in the end they all default back to an inability to wait. This is common to all traders – we all go through the same evolution. Some outgrow it and realise the folly of their ways whereas others carry on blindingly repeating the same mistakes and wondering why the big wins never come.

This issue of delaying gratification and the role it plays in success has long been a subject of interest to psychologist with the most famous  example being the Stanford Marshmallow Experiment. In this 50 year old experiment  children were offered a small reward immediately or a larger reward if they waited 15 minutes. During the 15 minutes the experiment left the room and left the small initial reward in plain sight of the child; the child was told they could eat it if they wanted but if they did they wouldn’t get the larger reward when the experimenter returned. Interestingly what was found was that those children who were able to resist  eating the immediate small reward the moment the experimenter left the room had better educational, health and financial outcomes than those who could not delay eating the reward.

The fundamental issue with trades such as the one above is that they come very rarely in a traders career and if you have a habit of missing them then your career as a trader will never move to the next level. And if you feel bad about the above example dont, because $600,000 is nothing. I have a friend who once left $14,000,000.00 slip through their fingers. Suffice to say he never recovered emotionally or financially.

General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.