Steven Gabriel, M.D. offers a take on Why the Turtles Matter.

More on the Turtles.

Feedback from today:

“All these website gurus are BS. It is rather simple actually. Market is so dynamic. It depends on (1) supply and demand, and (2) manipulation. These 2 are in turn depend on a host of factors, which are dynamic in nature:

The strength of the supply and demand (buyers and sellers) and the market manipulators (who know how to get around the rules) are therefore so dynamic. The strength of buyers for a particular stock should reach a critical mass before the other investor would turn to buyers and sparks a rally. As confidence grows, more and more stocks rally and the broader market turns to a bull market. A critical mass volume of buyers to spark a rally in a stock and the momentum of the rally are also dynamic in nature. Therefore some price of stock moves up and fall back down as a result of not achieving a critical mass. At other times, only a brief rally as the buying momentum fizzles out. While at other times, a surprising rally as buyers continue to buy at higher and higher levels. These price movements more often than not, are guided by market manipulators who buy at lower level and try to ignite a rally and later cash out. If they are successful, they may cash out at 200 or 300% their cost. If they are not that successful, i.e. their attempt to draw buyers is futile than they may cash out at 5% above their cost or at breakeven. They also sometimes even have to cut their losses at minus 5 to 10% if the dynamic of the market unexpectedly moves against them. Note that the word ‘sparks’ in the phrase ‘sparks a rally’ means the movement is not planned and therefore impossible to predict. So the technical ability of the so-called ‘timing the market’ is therefore a bunch of BS. The only way is one has to closely, if not continuously, monitor the stock market and make a calculated guess based on the dynamic of the various factors, most importantly the current investors sentiment. It boils down to a guessing game.”

This reader’s diatribe on the “whys” of the market seems to be a clever explanation for his own inability to profit from his own buying and selling. In his mind he has it “all” figured out, but to all of us observing his words carefully, the disconnect is clear. Once again, people always ask where do the market losers who supply the market winners come from…

Surviving Speculation by Adam Hamilton is food for thought.

I just watched an interview between Bill O’Reilly and Congressman Charlie Rangel. Keeping in mind that the United States of America spends record amounts on entitlements today, O’Reilly said to Rangel (and I paraphrase):

“You can’t help everyone. Some people elect not to compete in a capitalist society no matter how much we spend on entitlements. You can’t make people compete and some people don’t want to compete. That’s the bottom line.”

True.

I regularly receive emails from Innerworth and sometimes they do provide insights to pass along:

“Jake thought that he had it all figured out. He would buy 500 shares of a stock when the price hit 50, and sell when it reached 51. Maybe it wasn’t the most thorough trading plan but it was a plan. When Jake tried to execute the plan, however, the trouble started. The stock opened at 51. Jack waited for it to go down to 50, which it did around noon. He tried to buy it as he had planned, but he got a poor fill. He decided to go with what he had, but the stock price went up and down, between 49 and 50 until the close. Throughout the day, Jake felt frustrated. He couldn’t think straight. He hadn’t anticipated how the price might fluctuate as it did. He was caught off guard, and thrown into a state of anxiety and panic.”

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A good white paper on risk, reward and margin from David Harding and Winton Capital.

This study by Sharon Stoll tackles the subject of a lack of moral reasoning among athletes. Her work, if you ponder for a moment, is relevant to populations well beyond “jocks” however. Take for example my book Trend Following. I have seen legitimate criticism that debates trend following trading. Criticism from the likes of James Altucher attacks trend following on the merits. I disagree with him strongly, but I never question his morality. From others, however, I have seen personal attacks that never address the substance of trend following (or my writings). Interestingly the personal attacks come from those who seem to have the deepest moral flaws.

I have always found that there are immoral individuals who succeed in the short-term in whatever they pursue, but in the long run these people always implode. Stoll’s work is thought provoking.

They have been all the vogue, but many of the new markets opening up will most definitely change what we think of as a market “to trade”. The Wall Street Journal chimes in:

Once, a home was a castle. Now it is looking more like Fort Knox — a pile of money in need of protection. Amid warnings from economists that real-estate values in some parts of the country may drop eventually, there is a nascent movement to offer new investment products designed partly to hedge against falling property prices. The goal: Offer limited protection against the risk of riding real-estate prices back down again after the record run-up in recent years. In recent months, Merrill Lynch & Co. and other investment banks have started offering investment products that will rise in value if a basket of housing- related stocks declines. Already, nearly $400 million of these investments have been sold, according to Daniel Carrigan, vice president for new-product development at the Philadelphia Stock Exchange. The Chicago Mercantile Exchange also is preparing to announce plans to introduce in the second quarter of next year futures contracts based on home prices in each of 10 cities. It will also offer a composite contract covering all 10 cities. That plan follows the introduction last May by HedgeStreet Inc., based in San Mateo, Calif., of financial contracts called Hedgelets that let investors bet on a rise or a fall in home prices in six individual cities.”

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A good introduction/commentary on exchange traded funds from Wharton.

In doing some research I came across the following excerpt. The date of the article has no relevance for my point:

“A key failing of equity managers in 2003 had been their inability to capture the upside when markets bounced. That had happened largely because managers were still licking their wounds from 2002 and an environment that had penalised risk-taking. But managers were not being paid to hold cash; they were paid to put it to work. Getting the risk profile right meant investors understanding how drawdowns happened and being able to distinguish between “good” and “bad” drawdowns. “Style drift is a bad drawdown…Breaching limits is a bad drawdown. But an investment decision that was part of the strategy and went wrong is not a bad drawdown. You need to take on more risk without scaring the hell out of investors.”

The whole concept of style drift is very important. Put simply it means jumping from one trading strategy to the other. Kind of like chasing your tail (if you happened to have a tail).

A good drawdown is one that happens because you expect it. A good trading strategy will have drawdowns from time to time. You can’t avoid them. They are not unexpected. A bad drawdown, on the other hand, is one where the losses pile up as you chase the latest hot manager or hot investment tip. Bad drawdowns stem right from impatience and greed.

Feedback from author of Predict v. Follow:

“Hello Michael, I just wanted to let you know that it was my quote you used. I’m glad to further the discussion on your website since it has helped me greatly. Thought I would take the opportunity to let you know what I thought of your book and comment on it. Your book has caused me to do some soul searching to what kind of trader I want to be, how I will enter markets and how and why I will exit. It forced me to define an approach to trading, to carefully pick markets to trade, and to think how I would choose risk management levels. No book can be all things to all people, but your book forced me to rethink my trading strategy and attempt to trade like a professional trader would trade. By the way, technical charts do serve a great purpose, they are the records of missed markets of most fundamentalist’s and guru technician’s. Why do they miss most markets? p. 140 of your book answers this question (I think the best concept in your book). Thank You.”

Read the new book Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street by William Poundstone.

Review of book at BusinessWeek.

More on the Kelly formula.