Michael Covel: News & Info.

Read: here.

James Simons reminds us all that complication in trading can cause problems:

“Years ago, a colleague came up with an extremely complicated model. Initially, it worked well, but then it began to falter. I said, “Can we understand more about this model? It’s so complicated.” He said, “Oh no, you can’t understand it. I’ve added this and that and put it all together and I’ve maximized here and there and…who knows what it is?” I said, “That is not satisfactory. I know it

Alan Abelson in today’s Barrons takes Jim Cramer to task. Mr. Cramer is now touting a group of 6 “hot” stocks that seem to resemble the dot com bubble stocks of 4 years ago. Cramer has done these lists of hot stocks before as Abelson reminds:

“Here are the fabulous 10 stocks Mr. Cramer touted so grandly on Feb. 29, 2000, their price per share that day and where they are now: 724 Solutions, $1,882 a share then; around $4 a share today. Ariba, $132.25 then; $3 now. Digital Island, $116 then; acquired in September 2001 for $3.40 a share. Exodus Communications, $71.19 then; went belly-up in September 2001. InfoSpace, $1,085 a share then; $40 now. Inktomi, $137 then; acquired by Yahoo! in March 2003 for $1.65 a share. Mercury Interactive, $96 then; $45.50 today. Sonera, $55.80 then; acquired for about $6 a share in March 2003. Verisign, $253 then; $16 today. Veritas Software, $131 then; $27-plus now. In retrospect, a more fitting description of Mr. Cramer’s top 10 picks in February 2000, given their subsequent melancholy fate and the appreciable number that are no longer with us, rather than “The Winners of the New World” would have been, “The Winners of the Next World.”

A very successful trend follower (Ken Tropin of Graham Capital) offered: “In order for a system to be successful, it has to be what I call robust. Robust means that I can test that system in a market I designed it around. Say I’m using it in the treasury bonds, and then if I switch that market and I try that system in the Euro, it still works. And if I change its parameters, it still works. And if I switch it over to corn — something totally different than treasury bonds — it still works. And if I look at some data that was out of sample from what I designed it around, it still works. Then I have something that might be interesting and have a chance of living in the future. Because the nature of data is it changes a little all the time. And so the key to success in systems trading is to have what I call a loose fitting suit. I can’t have a suit that’s so tight and perfectly proportioned to me that if I gain two pounds, it won’t fit the data anymore.”

I doubt trend followers will like the comparison to cockroaches, but Richard Bookstaber of Moore Capital (Louis Bacon’s firm) presents clear insight into the philosophical foundations that allow trend followers to survive all types of conditions: read PDF. The first page (p. 18) is especially insightful if you are attempting to figure out how great traders adapt to current market conditions.

H.G. Wells outlined many moons ago the keys:

“If we want to have an educated citizenship in a modern technological society, we need to teach them three things: reading, writing, and statistical thinking.”

Statistical thinking is the ugly stepchild. To this day it is left out of basic equations of our day to day life. Good directions to explore.

Fox News Host Neil Cavuto presented interesting insight on Warren Buffett:

“And you thought the only economic giant I pick on is Alan Greenspan. Allow me now to add the name of Warren Buffett. I know what you’re going to say: Who is this puffed up, overrated journalist to judge financial gods? Well, I’ll tell you who: A guy who is smart enough to know these guys aren’t that godly, or that smart, or that infallible. Buffett says the dividend tax cut is a big mistake and that since he stands to make at least $300 million off of it, it’s not fair either. Well, maybe not to you, Warren. But I think a whole lot of people might disagree. He dismisses the few hundred or few thousand bucks typical investors will get back. No doubt chump change it

Trend follower Campbell and Co. seems to be exploding with new money to manage. A recent headline offered:

“The [Campbell] Large program added more than $900 million in February alone and more than $2.6 billion in the 12-month period. Assets in the program have more than quadrupled since February 2000 without missing a beat in terms of performance.”

Investors have poured money into trend following money managers in the last few years. The pension funds that manage Middle America’s retirement accounts finally seem to see the need for a buy and hold alternative.

Governments should not rescue bad traders. Kevin Dowd offered great insight on the Long Term Capital Management blowout. Dowd has a certain Ayn Randesque view. I always found it interesting that Alan Greenspan, a supposed Ayn Rand supporter, led the bailout.

Some professional short-term traders have raised some serious money in the last two years. Roy Niederhoffer (brother of Victor) trades short-term trading systems. However, should there be caution? What makes him different in the long run than Long Term Capital Management or Victor Niederhoffer? Are other short term traders also reliant on standard deviation as their measure of risk?