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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.

How to Lose $3 Million in 1 Second

Losing money is one of the loneliest feelings. It was Oct 22nd, 2008. Lehman Brothers, the investment bank, had filed for bankruptcy the month before. The markets were panicking. A thousand people surrounded me, almost all of us slouched in our seats, staring at computer screens. I had eight, all flashing prices of assets that I couldn’t touch, but, oh, I could feel.

I myself was waiting for one price to flash, an interest rate in Brazil. I had bet that rates would lower over time, from 15.10% to 14.50% or so. The size of my bet was 20,000 USD for every one hundredth of a percent (or 20k per basis point). A move from 15.10% to 15.00% would make me 200,000 USD. A move to 15.20% would lose me the same amount.

I sat with a knot in my stomach, nervously chewing a swizzle stick, waiting for the markets to open in Brazil at 7 am. I jotted down worst-case scenarios, and then turned them into doodles. The default of Lehman had unleashed market hell. I closed my eyes. You could hear the markets, a trading floor filled with murmurs and sighs, the cumulative sounds of disappointment.

The Brazilian rate was a tiny yellow box on one of my screens. I had been in the office since 4 am, waiting, trying to extrapolate from other prices, from other assets how much money I would lose (or make). The price the following day had closed at 15.90%.

This day all assets, stocks, bonds, commodities, interest rates, everything, were trading in two distinct camps, going opposite ways. Most prices were falling, dramatically. A full-on Guppy Suck: Prices were spiraling lower like dead fish flushed down a toilet. Money was going into a few lucky assets, safe havens they were called, things considered having no market risk. Short maturity US bonds. Cash. The correlation between assets was approaching one or negative one.

My Brazilian rate started trading. It blinked 17.40%, 1.50% wider than the prior day. I was out 3 million dollars, and I had no chance to trade. No chance to get out at 15.50% or 16.00%. The market had gapped. I got up, shot a bird at my screen, punched it, and then walked to the bathroom.

More here – Scientific American

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.

Our world outsmarts us

When mulling over possible reasons for the alarming nastiness associated with the recent presidential election in the United States, I am reminded of my grade-school bully. Handsome, often charming, superbly athletic, the bully (let’s call him Mike) would frequently, usually without clear provocation, kick, punch and shove other classmates. Fortunately, for reasons not apparent at that time, he never bothered me.

Fast-forward 20 years. After his long-time girlfriend left him for another man, Mike stalked and stabbed to death the new boyfriend. Shortly following his murder conviction and incarceration, I ran into Mike’s father, who spontaneously blurted out: ‘Did you know that Mike had severe dyslexia?’

As soon as his father spoke, I recalled Mike’s great difficulty reading aloud in class. As he stumbled over simple words, the other kids fidgeted, snickered and rolled their eyes. In return, they got bullied. I can still sense my classmates’ fear of Mike even as I cringe at the knowledge that, in our collective ignorance, we were at least partially responsible for his outbursts. What if we had understood that Mike’s classroom performance was a neurological handicap and not a sign of general stupidity, laziness or whatever other pejoratives of cognition we threw at him? Would our acceptance of his disability have changed the arc of Mike’s life? Of ours?

Since running into his father, I’ve often wondered if Mike’s outbursts and bullying behaviour might offer an insight into the seeming association between anger, extremism and a widespread blatant disregard for solid facts and real expertise. I’m not dismissing obvious psychological explanations such as ideological and confirmatory biases and overriding self-interests, or suggesting that a particular human behaviour can be reduced to a single or specific cause. But Mike’s story suggests an additional, more basic dynamic. What if, as a species, the vast majority of us have a profoundly challenging collective difficulty with mathematics and science analogous to Mike’s dyslexia?

Whether contemplating the pros and cons of climate change; the role of evolution; the risks versus benefits of vaccines, cancer screening, proper nutrition, genetic engineering; trickle-down versus bottom-up economic policies; or how to improve local traffic, we must be comfortable with a variety of statistical and scientific methodologies, complex risk-reward and probability calculations – not to mention an intuitive grasp of the difference between fact, theory and opinion. Even moral decisions, such as whether or not to sacrifice one life to save five (as in the classic trolley-car experiment), boil down to often opaque calculations of the relative value of the individual versus the group.

More here – Aeon

Would You Take The $10M


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