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When There Is Blood In the Streets

In the way of that selective perception works, shortly after having written a piece on the Art of War the following article popped into my feed – When There is Blood in the Streets which contains the following opening paragraph.

There is a famous quote by the 18th century banker Baron Rothschild:

The time to buy is when there’s blood in the streets.

Rothschild made a lot of money in the panic that followed the Battle of Waterloo using this exact motto. However, his advice is far easier said than done. I’ve noticed this problem within the personal finance/investing community that seems to suggest that a few common rules can solve almost all of your financial problems. The issue is that it is far easier to memorize a simple catch phrase that looks good retrospectively, than to act on the same advice in the moment. I will expand on this point later, but first…some data.

There are two points I want to make about only the opening paragraph since it sets the tone for the rest of the article. The first is a factual point – one of the things I urge all traders to be is a market historian. My urging to head down this road is simple – no one makes an original mistake. All the mistakes you have made and will make have been made by everyone else (including me) who have participated in markets. No one is Robinson Crusoe. Being a student of the history of markets brings this simple fact into sharp relief, in addition to this you get a powerful sense that whilst the technology of our markets has changed dramatically even in the last 30 years the basic underlying principles have not. So you get a sense of how simple but not easy trading is, you also understand your point in the timeline of trading history.

 The original story  regarding Nathan Rothschild and the battle of Waterloo goes something like this. The Rothschild family at the time of the Battle of Waterloo were the prime banking dynasty in England and it is said that the victory over Napoleon brought them a massive windfall. This windfall came about due the speed at which Rothschild was able to obtain news of the victory at Waterloo. It is said his agents boarded a boat at Ostend in Belgium and headed to England. When Rothschild received word of Napoleons defeat he initially went to Parliament to inform them but they were still in the grip of panic because of news had reached them of an earlier  Allied defeat at Quatre Bras. They made a leap of logic and assumed that this earlier defeat has translated into Napoleon being victorious at Waterloo. Rothschild is then said to have headed to the Stock Exchange and began to dump what were known as Consols – a form of bank annuity. This lead to a panic in Consols as other traders thought Rothschild knew something definitive about an Allied defeat, as they crashed news of the Allied victory arrived but in the moments before that Rothschild entered the market and bought all that he could. It is said he made millions of pounds in that moment.

It reads like a wonderful story of a robber Baron taking advantage of better intelligence and acting with steely resolve whilst others around him panicked.  There is only one problem, it most likely is not true. The original story is thought to first appeared in an anti-Semitic publication in about 1846 and over the years has been embellished to further this cause. Unfortunately this story has taken on the life of a zombie story that is impossible to kill as it is repeated over and over again. Any fortune Rothschild made as this time is most likely due to contracts he had with the British Government to supply Wellingtons army with cash. The English lack the international infrastructure necessary to perform this task but Rothschild had been able to build up an effective international distribution network.

The second point that I take issue with is the use of the metaphor of buying when there is blood in the street. Whilst this sounds all wonderfully macho and gung ho it is actually a bit of a wankfest and is a very poor metaphor for trading. When you generate metaphors you build a filter through which you see the world and this filter dictates your emotional response to events. If you see all events in terms of a binary conflict where blood is being spilled then your brain is going to latch onto this and give you the appropriate emotional response for this idea. Emotion is the enemy of the trader because it overrides the logical decision making essential to successful trading. It is tempting to view yourself as a balls out speculator taking on the market but this is a somewhat primitive Neanderthal approach. Trading is more akin to surfing than war. Surfers have no idea when the next wave will arrive, nor do they know the size of the wave they will catch. Some will be large and spectacular but most will be small. Sometimes you can go all day without catching a wave but that is the nature of surfing and this is not a problem because you know there will always be another wave.

Is the world really better than ever?

B the end of last year, anyone who had been paying even passing attention to the news headlines was highly likely to conclude that everything was terrible, and that the only attitude that made sense was one of profound pessimism – tempered, perhaps, by cynical humour, on the principle that if the world is going to hell in a handbasket, one may as well try to enjoy the ride. Naturally, Brexit and the election of Donald Trump loomed largest for many. But you didn’t need to be a remainer or a critic of Trump’s to feel depressed by the carnage in Syria; by the deaths of thousands of migrants in the Mediterranean; by North Korean missile tests, the spread of the zika virus, or terror attacks in Nice, Belgium, Florida, Pakistan and elsewhere – nor by the spectre of catastrophic climate change, lurking behind everything else. (And all that’s before even considering the string of deaths of beloved celebrities that seemed like a calculated attempt, on 2016’s part, to rub salt in the wound: in the space of a few months, David Bowie, Leonard Cohen, Prince, Muhammad Ali, Carrie Fisher and George Michael, to name only a handful, were all gone.) And few of the headlines so far in 2017 – Grenfell tower, the Manchester and London attacks, Brexit chaos, and 24/7 Trump – provide any reason to take a sunnier view. 

So What Does This Mean?

In my junk folder I have for the past upteen decades been getting random charts by a group called Chart of the Day. Surprisingly, I dont get them everyday – so the implication that you get a chart everyday that is interesting is perhaps a little bit of an oversell. This morning I go the following piece of wisdom –

c2

This chart as the title suggests looks at the S&P 500 PE ratio back to the turn of the century. Putting aside the obvious gaping methodological flaws such as the S&P500 was only started in 1957 I do always find these sorts of things interesting. Markets and their history should be a topic of investigation for every trader, simply because there is nothing new. Bubbles and crashes have been a feature of markets since they began and the driving force behind such things has always been the capriciousness of market participants. Curious as to what our own market looked like I dug up some data from the folks at Market Index and plotted the local PE ratio against the All Ords to see what I could see.

Capture

On the chart above I dropped a series of vertical lines – the three black ones denote a time when valuations according to the markets PE ratio could be considered extreme, the red one is the GFC. Pundits who look at valuation models work on the notion that markets or their component equities have a fair valuation and deviations from this point indicate that something is either overvalued or undervalued. Decisions are then made upon this interpretations. The first black line is easy to identify – its the 1987 crash.  The second one took me a little while to remember until I remembered the tail end of the 1991/2 recession combined with the banks nearly sending themselves under after property bit the dust.  The third black line is the tech wreck, The question when looking at any methodology is what value does it add to your decision making.  This is an important question since our decision making is bounded by the time we have to make the decision, the amount of information we have and our cognitive ability. None of these components can be infinite so our decision making is always somewhat half arsed. However, we need to add to this the notion of decision fatigue. It is estimated that during an average day we make anywhere between 20,000 and 25, 000 conscious and unconscious decisions and each of these decisions extracts a toll. Decision making is not a free ride, everything has a cost. Therefore efficiency of decision making is of paramount importance. If you have to force a decision then you are merely adding to your own mental loading without achieving anything.

As to whether the chart above tells me anything I dont already now about market extremes is doubtful As to whether it adds anything to my overall view of the world and approach to trading I am certain it doesn’t. But your mileage may vary.

Trend Following Is Dead…blah.. blah.. blah…

Before I head off to Fiji for a week I was cleaning out an image archive I keep when I came across this chart of Poseidon from the 1960’s.

Screen Shot 2014-06-17 at 9.53.56 pm

Source: Reserve Bank of Australia

Despite what people say nothing ever changes…..

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

What moved share prices in the nineteenth-century London stock market?

Abstract

Using a new weekly blue-chip index, this article investigates the causes of stock price movements on the London market between 1823 and 1870. We find that economic fundamentals explain about 15 per cent of weekly and 34 per cent of monthly variation in share prices. Contemporary press reporting from the London Stock Exchange is used to ascertain what market participants thought was causing the largest movements on the market. The vast majority of large movements were attributed by the press to geopolitical, monetary, railway-sector, and financial-crisis news. Investigating the stock price changes on an independent list of events reaffirms these findings, suggesting that the most important specific events that moved markets were wars involving European powers.

More here – The Economic History Review

Before and After Chuck Berry

Chuck Berry himself would be the first to admit he didn’t invent rock ’n’ roll, but he came to define it in a series of iconic singles made between 1955 and 1959.

Mr. Berry wrote almost all his hits himself, and he drew from the music he loved — from the blues and boogie to country and Calypso. The result was a hybrid sound that, in 1955, was just beginning to be called “rock ’n’ roll.”

Here, an audio guide to just a few of his revolutionary songs: what came before, and what came after. Listen to the sound of rock ’n’ roll being made.

More here – The New York Times

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