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Wall Street’s Best-Kept Secret

On East 83rd Street there’s a squat brick walk-up that’s a viable contender for the least fancy apartment building on Manhattan’s Upper East Side. But for the past 25 years, Wall Street machers and captains of industry have marched up to its gray-carpeted third floor to learn the secrets of attack and defense from Lev Alburt, a three-time U.S. chess champion and one of the most prominent Soviet defectors of the 1970s. Alburt has long been giving ­patter-filled private lessons to New Yorkers from all walks of life, encouraging, cajoling, and reprimanding men and women as they attempt to learn the so-called game of kings. 

Wall Street has a fairly well-trodden history with games: During off-hours and downtime, games of chance and risk mitigation such as ­backgammon and bridge offer the opportunity for high-level betting, and chess, with its ­corollaries with game theory, occupies a prime position. In 2015 at the Sohn conference, hundreds of finance professionals such as Bill Ackman paid $5,000 to watch Magnus Carlsen, the Norwegian grandmaster, play simultaneously against three people, blindfolded. George Soros is a well-known and aggressive chess player, as is Saba Capital founder Boaz Weinstein, a chess prodigy who reportedly got his start at Goldman Sachs & Co. when an executive at the bank who’d played him competitively set him up at the trading desk.

More here – Bloomberg

This Stanford Professor Has a Theory on Why 2017 Is Filled With Jerks

We are living in a world full of assholes. To be sure: There are no census figures to back this up, no national registry from which to draw statistics, but one need only look at the headlines to see that the asshole population has not only grown in recent years but also spawned some new and rather alarming mutants. I mean, Martin ShkreliTravis KalanickPewDiePie?

“You can make the argument that we are living in Peak Asshole,” says Robert Sutton, a Stanford professor who, as the author of the iconic 2007 book The No Asshole Ruleis perhaps the world’s leading expert on the species. According to Sutton, the problem of “disrespectful, demeaning, and downright mean-spirited behavior” is “worse than ever,” which, while it may be bad news for humanity, is good news for The Asshole Survival Guide, the book Sutton came to New York to promote. And he has a point, citing the recent “fiascoes” at Uber and Fox News as examples of “assholes running wild.” Then, of course, there’s “the degeneration of American political discourse,” as Sutton delicately puts it. We are sitting, on a Monday afternoon in mid-September, in what may arguably be the red-hot center of an Asshole Heat Map, if one existed: the pink, veined lobby at the base of the colossal penis that is Trump Tower.

More here – NY Mag

HAPPINESS IS NOT ENOUGH

Years ago, I knew one of those guys who seemed to always be happy and excited. He was always just that bundle of warm fuzzies. First to give you a hug. Always happy to see you. Complimented you about things that had no business being complimented. We’ll call him ‘Jon.’

Jon was like a dog, one of those rare people whose enthusiasm and unbridled joy is so unceasing that it actually becomes a little irritating at times. “Can you, just like… hate life a little?” I used to think to myself. And no, I wasn’t wearing eyeliner.

Alas, it never happened. And I felt like an asshole for having such thoughts. I was just jealous, I decided. Or maybe worse: a bad person.

But I never felt like a bad person for that long, because Jon was so damn fun and engaging, that you couldn’t help but be lifted up by his spirits. He always wanted to know what was going on in your life. He was always encouraging. He was always happy for you and proud of you, even when you weren’t happy or proud of yourself.

I eventually just decided that Jon was one of those people who had it figured out. One of those people that the shittier parts of life seemed to pass on by. A person who somehow managed to walk between the raindrops. A person who was blessed and knew it and spent his days trying to make others feel just as great as he did.

Then one day, I walked in on him doing lines of coke off the back of a toilet.

What the fuck?

More here – Mark Manson

Four Important Trading Insights

Interesting piece from Dr Brett Steenbarger

…..Here are a few valuable insights I’ve gathered from my recent work with skilled, successful traders:

1)  What you trade is as important as how you trade:  The successful traders are trading instruments that move in meaningful ways and that capture their best ideas.  That means trading instruments that show the right kind of movement, and it means expressing your ideas through positions that offer the best risk/reward.  The successful traders have many ways to capture ideas:  many time frames, many instruments (stocks, futures, options), many markets……

More here – TraderFeed

What The Rich Wont Tell You

Over lunch in a downtown restaurant, Beatrice, a New Yorker in her late 30s, told me about two decisions she and her husband were considering. They were thinking about where to buy a second home and whether their young children should go to private school. Then she made a confession: She took the price tags off her clothes so that her nanny would not see them. “I take the label off our six-dollar bread,” she said.

More here – New York Times

Does Personality Drive Investing Style……Maybe…

Whenever we undertake any task we bring with us not only a set of mechanical skill but also a sense of self that drives those skills and applies them in a way that is based upon the filtering of information through our experience and our personality.

Anyone who has spent any amount of time observing market participants will know that this is also true in markets. In my experience this to date has only been an anecdotal observation – certain people do things in a certain way and stupid people always do things the same way. That is just the way the world works.

However, recent work in Finland has added some meat to these observations with a study titled – Personality Traits and Portfolio Tilts Towards Value and Size, Andrew Conlin and Jouko Miettunen

The abstract offers the following oberservation –

We show that personality traits are related to an investor’s preferences for value versus growth stocks and for small capitalization stocks versus large capitalization stocks. We have detailed personality trait data and official register holdings of stocks for 710 individuals in Finland. The results show that more extravagant individuals tend towards large capitalization growth stocks; more impulsive people tend towards small capitalization growth stocks; more sentimental investors tend towards small capitalization value stocks; and more social investors tend towards small capitalization stocks with a tilt towards value. The results are consistent when looking at the portfolio characteristics across investors, over time, when using aggregate portfolios of investors with similar personality traits, and both widely held and non-widely held stocks.

This requires some unpacking because there are some nuances in the study that are not obvious from the abstract. To perform the study the researchers were able to access the Finnish Central Securities Depository which gave them details of “the number of stocks held, the number of shares owned of each stock, and the value of each position” for each subject in their study. This dataset was then cross referenced with the individuals ’ psychological-testing records, which are contained in the Northern Finland Birth Cohort 1966 data set. Finland clearly has different data protection laws to us.

From this cross matching the authors were able to build a profile of investor types. This profile was drawn from the Temperament and Character Inventory. This test measures four personality traits of which the authors selected two – novelty seeking and reward dependence.

Novelty seeking is defined as “Novelty-seeking measures the degree to which one exhibits active behaviour in response to stimuli and actively seeks pleasure and reward when none is currently on offer.” Novelty seeking has four subscales; exploratory,excitability,impulsiveness, extravagance and disorderliness.

Participants who score highly in this area are easily bored whilst those who have a low score demonstrate patience. This interesting feature of this is that it overlaps in some ways with the pivotal study – An analysis of the profiles and motivations of habitual commodity speculators from 1998. In this study it was found that for the majority of traders being in the action was more important that being profitable. Traders sought out action not profit. One could therefore intuit that such traders would score very highly on the scale of novelty seeking.

The second trait that was investigated was reward dependence which is defined as the way in which one is emotional and responsive to social stimuli. Reward dependence has three subscales; sentimentality, attachment and dependence.Those with a high score in this area are concerned with what others think about them. Whereas those who have a low score are disinterested in the opinions of others.

Drawing from these two basic traits and the scores generated the authors posit three basic investor traits and actions arising from those traits.

1. Extravagent indiduals have a tendency to hold large growth stocks.
2. Impulsive people hold smaller growth stocks.
3. Sentimental social individuals hold smaller value stocks.

From my pwn observations I can partially see through the veil of psycho-babble to see glimpses of the thousands I have seen over the decades but some of it is an interpretative stretch that struggles with the spectrum of personalities and behaviours in markets. I also have concerns over the samples size – the Finnish market is tiny. However, putting that aside a case can be made that those who are impulsive tend to trade smaller cap rubbish – it is part of their poor attention span and get rich quick mentality. I imagine if you surveyed FX traders you would see a lot of novelty seeking, impulsive behaviours. Those who are sentimental and social tend to love a good narrative and smaller value stocks are often accompanied by a good story and such investors want to be part of these story. I do have trouble with the extravagant individuals and their relationship to large cap stocks since my experience has been that such stocks tend to be the focus of those who are the opposite of extravagant. But the survey may be picking up something at a deeper level that my simple anecdotes dont see.

When to let go

One of the qualities that impresses me most about people is their resilience – that ability to hang in the fight for a time long after most would have quit. And then if things have not gone their way to pick themselves up and start again. If we take a broader perspective human history in all its facets is only advanced by such people – those who stick with a situation and by simple dint of personality push through.

However, there is a dark side to this and it is the holding the line or clinging to a belief long after it should have become apparent that that they were wrong. We have all known people who have stuck with relationships or jobs long after the point of no return had been reached. And in some cases it undoubtedly not because of their resilience but rather that a change is simply too frightening or they actually lack the resources to take the plunge. But many hang in like a demented barnacle often as if to simply spite themselves – their own ego drives them towards destruction.

This ego driven headlong dive towards self destrution fascinates me because for many years I have been following the fate of John Hussman the manager of Hussman Strategic Fund. Hussman is a former professor of economics and international finance at the Uninversity of Michigan. So in an academic sense he is no fool but as is so often the case smart people use their intellectct to defend their emotional failings.

To begin to understand why I find Hussman an interesting case study we first need to understand the investment approach that this fund adopts. The following is from their prospectus –

The Funds portfolio will typically be invested in common stocks favored by the Hussman Strategic Advisors Inc, the funds investment manager , except for modest cash balances arising in connection withe Funds day to day operations. When market conditions are unfavourable in the view of the investment manager , the fund may use options and index futures , or effect short sales of exchange traded funds (‘ETFS’) to reduce the exposure of the Funds stock portfolio to the impact of general market fluctuations. When market conditions are viewed as favourable, the Fund may use options to increase its exposure to the impact of general market fluctuations.

This all sounds reasonable, it is a basic stock portfolio that at times undertake some form of hedging to reduce the impact of market fluctuations. And this approach found great success during the GFC. As can be seen from the chart below this fund easily outdistanced the S&P500 and the funds under managed grew to US$6.7 billion. Since then the fund has shrunk to approximately $US365M.

Hussman GFC

The reasons for this contraction are instructive and can be found in the funds prospectus. The fund speaks of hedging exposure in unfavourable market conditions. To those of us on the outside this means market downturns as defined by some form of collapse in the trend. This is something that is easily quantifiable and therefore is binary in nature. In my simple world the market is either going up or down. However, Hussman and his management team have a narrative and the narrative is that despite the market going up continually since the GFC all stocks are overvalued. So whilst they may be invested in these stocks they also have in place hedges of equal sizes. Hedging is a drag on performance – it costs money and this cost translates to poor performance. Since the GFC Hussman’s funds have lost on average 2.1% pa whilst the market has gained 2.3%.

Hussman Ten Year

Since the bull market began Hussman has been calling for a slide in the overall market to match that experienced during the Great Depression and he has positioned his fund accordingly. This internally driven narrative is directing the investment strategy which in in turn pushing the fund into the ground.

He has issued a never ending stream of warnings about the market –

November 2010: Bubble, Crash, Bubble, Crash, Bubble…

March 2011: Anatomy of a Bubble.

March 2012: A False Sense of Security.

November 2013: A Textbook Pre-Crash Bubble.

July 2014: Yes, This Is An Equity Bubble.

October 2015: Not The Time To Be Bubble-Tolerant.

October 2016: Sizing Up the Bubble.

March 2017: The Most Broadly Overvalued Moment In Market History.

March 2017: Expect the S&P500 to Underperform Risk-Free T-Bills Over The Coming 10-12 Years.

May 2017: This Time Is Not Different Because This Time Is Always Different.

June 2017: Two Supports Kicked Away Already.

July 2017: Salient Features Of Bull Market Peaks.

August 2017: Imaginary Growth Assumptions and the Steep Adjustment Ahead.

These market calls have an almost plaintive  nature about them, as if he is desperate for the market to agree with him and his thesis. All of this is driven by a desperate need to have the narrative proved correct, once again such a desire is more reflective of ego than common sense. To the astute trader such behaviour is incredibly strange since being wrong is part of being a trader. But so too is the ability to adapt and learn from being wrong, there is resilience and then there is suicidal behaviour that has a very intriguing tone to it. And Hussmans behaviour has a strange tone of self destruction about it.

If there were a cornerstone to trading it would be the ability not only to be resilient when in drawdown but also to accept that we get things wrong. Sometimes there is a flaw in our methodology that we have not seen and that we simply have been lucky up until this point. This does raise the question of when do you know you have entered this spiral of self destruction and to my way of thinking the answer is not that hard. If you have been losing money for the better part of a decade then it is fairly obvious that there is something seriously wrong in your methodology.

 

 

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