A good read (PDF) from Brett Steenbarger. An excerpt:

It is not at all unusual to find that a trader is losing with a trend following approach because he or she is acting out unmet personality needs in the market. One of the best trading strategies one can employ is to find adequate outlets for attention/affection, achievement, self-esteem, emotional well being, and excitement outside of trading. Sometimes traders I talk with try to impress me by explaining that trading is their entire life. They do not realize that their very ‘passion’ and ‘obsession’ with the markets are likely to sabotage them, imposing undue pressures and interference. If you have a trading system and you faithfully execute that system, trading should be reasonably boring and routine. Better to enjoy roller coasters outside of market hours than ride them with your equity curve!

From Chris comes a head scratcher:

“I will be the first to give you a passing grade for putting a face on the trendfollowing methodology. And I follow your site with a great deal of respect for the body of work you produce. I just can’t seem to understand why you seem to get so bent out shape when successful people credit God for their trading success or any success. If you don’t believe in anything but your own greateness, well, I can respect that. But, for those of us who respect your work, and also have an abiding faith in God–please stop attacking our faith.”

I did not know I was attacking Chris’ faith. I do believe attributing trading success to “God” (whatever that means for whoever’s religion) is illogical. Trading success, or any success for that matter, comes from hard work.

Another reader responded:

“Hi Michael-I feel I must come to your defense on this one. I guess I have followed your site for a year or so and to my way of thinking you have never attacked anyone’s faith or lack thereof. I remember sending you my remembrances of my friend xxx and his comments on people who displayed Bibles or worse pictures of Jesus in their offices. If I had to bet ole’ Chris probably has a big picture of Jesus in his office and I for one hope it helps him in his trading. In the Marine Corps we call folks like Chris REMF’S. If you are not familiar with the term I will send you the translation but I bet you know what it stands for!”

It is not my desire to have some big “faith” debate – to each his own. But when it comes to trading success…faith is not a reliable answer.

From the wires:

Oct. 16 (Bloomberg) — Abraham Trading Co., a U.S.-based money manager with $140 million in assets, plans to raise $100 million for a commodity hedge fund. The so-called systematic fund, which started trading Oct. 1, relies on computers to decide when to buy and sell contracts in the energy, metals and agricultural markets, Shaun Jordon, director of marketing, said by phone from Austin, Texas, today. Abraham Trading, which was set up by Salem Abraham in 1988, also runs a managed futures fund which invests in 60 markets, more than half of which are commodities, Jordan said. Futures are contracts for delivery of a security at a specified time in the future at an agreed price. “As a result of client demand, we have decided to offer a fund that trades only the 34 commodity futures markets in our diversified program,” Jordan said.

I do like Alan Sloan of Newsweek. He nails it here:

“There are times when having an English degree comes in handy for looking at the business world. This is one of those times, because the only way to grasp the essence of the Hewlett-Packard and “backdated” stock-options scandals is to speak in plain English instead of using euphemisms that obscure what’s going on. As even non-English majors know, euphemisms—such as “advance to the rear” instead of “retreat”— are words designed to make ugly things sound less ugly. Think of it as putting perfume on a pig….Finally, we have the tried-and-true euphemisms that Wall Street uses to help keep money flowing into investments. When stock prices fall sharply, it’s a “correction,” not a “decline” or a “crash.” If a drop is a correction, were the price rises preceding the drop a “mistake”? Of course not, they were a “rally.” Then there’s “profit taking.” Which is really “selling,” because no one knows if the sellers are taking gains or losses. I could go on, but you get the point. Euphemisms obscure. Plain English enlightens. So whenever anyone drops a market euphemism on you, tell her to stop prettying up pigs.”

A good white paper (PDF) from Dorsey, Wright & Associates, Inc. about Enron – price counts…

Here is a white paper (PDF) from Cambria Capital titled “A Quantitative Approach to Tactical Asset Allocation.” Thanks to Mebane T. Faber for the contribution.

Feedback from an old pro trader from Commodities Corporation:

Hi Michael – A very good friend sent me a questionnaire over the weekend regarding a proposed upcoming “advanced” trading seminar he is putting together for down the road…As I have said before and I will say again while many methods work I have yet to see any one method work for EVERYONE…Anyway at the end of the questionnaire my friend asked for a brief discussion of what I personally thought every successful trader had mastered in becoming successful. To follow is my response in the order I believe of their importance:

In conclusion it is possible to start out risking 1% and end up losing 3% just as it must have been possible to start out risking 20% and end up losing over 60%. They are just numbers!

Jonathan Burton from MarketWatch had a recent article with some good bits of advice:

1. “There’s more good investing information available and there are more qualified professionals giving advice than ever before, yet investors buy and sell impulsively, shoulder too much risk, or put off actions indefinitely. When they do invest, buyers often feel remorse if a decision goes against them in the short run. Sure, we wonder if an investment will do all right in the future, but perhaps more importantly we want to know that we took the right steps now.”

3. “Find an approach that mirrors your way of thinking,” said John Buckingham, editor of the Prudent Speculator, a top-performing stock newsletter. “Most investors end up not really following anybody’s strategy and just cherry-picking ideas they get from variety of sources. What you need to do is stick with it, staying with the strategy. You need five years, if not 10, to prove a strategy works.”

Feedback received the other day:

“Greetings, what will happen with this? I put $100k into each of the top 8 fortune 100 companies and hold for 12 months. What’s your prediction? What will it yield? Thanks.”

I have no idea and nor does anyone else.

An article forwarded in to me:

Arnold’s hedge fund thrives as Amaranth falls
Centaurus gains approach 200% in ’06, but manager has an enemy in Houston
By Alistair Barr, MarketWatch
Oct 5, 2006

SAN FRANCISCO (MarketWatch) – One man’s trash is another man’s treasure. When Amaranth Advisors LLC was losing $6 billion at the hands of its top natural gas trader Brian Hunter last month, rival energy hedge fund manager John Arnold was busy making millions.

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Cole Wilcox of Blackstar Funds LLC added a comment on this post:

Some concepts that no one ever talks about, including the trend following managers themselves is that there is a very fundamental reason such strategies work. Every trade in every market is a risk transfer process. In the stock market, over the long term the risk transfer is almost always from seller to the buyer, in commodities it changes depending on the term structure because of the flip flop of premium or discount from front to back month contracts, which determines if you are getting a positive or negative risk premium or roll return. The buyers of risk in commodities, who can be either long or short depending on the current term structure require a risk premium to continue to participate over the long run. In commodities you have a risk transfer process from the hedger to risk taker or speculator. Hedgers are buying insurance, which requires them to pay for it. The price of this insurance is the “risk premium” which they must pay to the other side of the trade (speculators). On average trend following works because the trend follower is collecting the risk premium from the hedger because they are usually on the other side of the hedgers trade. My point is that insurance is not free, and this premium is a major factor to why trend followers have been successful in the past and in many cases should be expected to be successful in the future. I view trend following as an insurance business, who’s job it is to collect risk premiums from hedgers and manage portfolio risk at the same time as to survive to continue to collect future risk premiums.

Boone Pickens uses fundamentals to make his decisions. He did tell me though, and I paraphrase, “It was hard to buy gas at $2 a gallon, but much easier to buy twice as much when it reached $3 a gallon.”

I am envious of the 50 years of experience that Pickens has in the energy markets to make his decisions. He does, however, make that big money off of big trends. And 2005 saw energy trends out of this world.

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