The American Psychological Association put out a press release:

Swedish Studies Show That We Can Spot Snakes In The Grass Faster Than Harmless Objects

WASHINGTON – It’s long been thought that the common phobias of snakes and spiders are reminders of homo sapiens’ primal past. Now new studies suggest that human perception evolved to accurately and efficiently spot these environmental threats. The research appears in the September issue of the Journal of Experimental Psychology: General, published by the American Psychological Association (APA).

(more…)

This excerpt regarding shark attacks paints a useful picture for traders and entrepreneurs alike:

Bite & Spit: These attacks are characterized by a forceful initial strike, often lifting the prey and shark clean out of the water. The prey is then released and the shark moves away, leaving the animal to bleed to death. This was considered to allow the prey to die whilst preventing injury to the shark from a wounded animal. This method of attack…was based on bite wounds observed on surviving pinnipeds and accounts of White sharks leaving the prey after an initial incapacitating attack.

Logic, reason, discipline – forget it. I just read this and my entire world view shifted instantly:

Hi! I’m Jason Hommel. Let me tell you how you can make money, by investing in silver and silver stocks! I’ll tell you why silver prices must keep going up (probably far higher than $25-$50/oz.) due to the shortage of silver! Many silver stocks can rise 5 to 10 times as fast as silver! Many natural resource stocks have already risen by 1000% and more, and other stocks can do that too! How will you know which silver stocks to buy? Get on my email list!

There are literally millions of plausible reasons why energy has been dropping in price. Does it really matter why? When you look at the charts of Crude Oil, Natural Gas and Heating Oil – why would it matter why these markets have gone straight down as long as you were short and able to profit?

Feedback in tonight:

Michael, one of the sectors i follow over at our hedge fund … is the energy sector. Wanted to mention some observations that I have. Now that you pointed out to me to observe trends in all aspects of life, I have done so, and sort of clarified a few things.

Trend 3: Oil and nat gas prices. both are heading down and are dumbfounding the “experts”. Economics 101 tells you that the price of a good or service (or commodity) will head to the marginal cost of supply, which in the case of oil, is about $42/barrel. No one mentions this on CNBC or any of the other talking heads stations. and, because of so many mutual funds, pension funds and hedge funds, have made their numbers on the energy stocks. Amaranth and Mother Rock will not be the only cucarachas to see the light of day. We’ll certainly will have another fund(s) blow up and probably a big pension fund or money mgr have huge down ticks in performance as a result.

I see your view, but from a trend following perspective, a follow the price perspective, I would argue that you are providing elaborate fundamental views. You COULD just make your decisions off price movement alone…and forget the fundamental analysis and predictions.

An interesting press release:

David Harding

A new Professorship designed to help improve people’s understanding of the mathematics of risk is being established at the University of Cambridge.

The new Winton Professor of the Public Understanding of Risk will seek to help individuals, institutions and government refine their decisions in risky situations.

Risk is a factor in all human activity and different people react to risks in very different ways. Questions requiring a scientific ability to assess the chances of something happening – or not happening – arise all the time. Here are some examples:

• Following the poisoning of the Russian ex-spy Alexander Litvinenko, traces of polonium-210 were found at various locations in London that he had visited. Statistically, how probable is it that someone who visited the same locations at a later stage would contract radiation poisoning?

• A recent study of transfusion patients given blood contaminated with the human form of mad cow disease has indicated that the 24 still alive are at “substantial” risk of contracting vCJD. What are the risks of contracting vCJD via a blood transfusion? How do they compare to the risks of getting the same condition by eating meat?

• An apparently healthy woman is judged to be at risk of breast cancer and is advised to undergo mastectomy. Should she do so?

• A person has to cross a main road to reach the shops. Should (s)he walk straight across the road, or use an available footbridge instead?

• How sensible would it be for me to invest in the stock market today? Might delaying improve my prospects greatly?

• A 29-year-old man decides to marry his girlfriend of three years. What is the chance that he will meet a more suitable partner at a later stage?

As these examples show, risks need to be considered in both the most ordinary of situations, and in high-pressure environments. Risk assessment is often based on analysis of data, but there is always a danger that statistics can be abused. Expert evidence in courts has been subjected to close scrutiny in recent high-profile cases such as the prosecution in the USA of OJ Simpson, and the cases of SIDS (sudden infant death syndrome) in the UK.

“The way to confront risk is via mathematics and statistics,” Professor Geoffrey Grimmett, head of the Department of Pure Mathematics and Mathematical Statistics, said. “This new Professorship will enable Cambridge to play an important role in clarifying the understanding of risk in many fields of human endeavour. It will strengthen our ability to reach out beyond Cambridge to government and the public alike.”

The new Winton Professorship has been created in perpetuity in the Statistical Laboratory of Cambridge University, thanks to a £3.3 million donation from The Winton Charitable Foundation. David Harding, a Cambridge alumnus and Managing Director of Winton Capital Management, a London-based hedge fund, is a Trustee of the Foundation.

“My time at Cambridge studying Natural Sciences showed me the importance of accuracy in empirical information and its interpretation,” he said. “This has been a key factor in my career in finance and is highly relevant to our awareness of the risks that affect us in our everyday lives. I am delighted to make a contribution to public debate and policy by helping create this new position at Cambridge.”

Professor Alison Richard, Vice-Chancellor of the University of Cambridge, said: “The Winton Charitable Foundation has been wonderfully generous in its support of the Cambridge 800th Anniversary Campaign. Endowed positions such as the Winton Professorship are of very special value to the University and I look forward to appointing the inaugural holder of this major new post.”

Feedback from a reader about trend follower Ken Tropin (Graham Capital):

I have great respect for Ken Tropin who from my standpoint runs his business using same the philosophies he manages his trades. He takes a small percentage risk on traders and their strategies, cuts his losers, and piles into his winners – trend following techniques can be applied to more than just trading. I will never forget in one of my interviews when he said “I am smart enough to know that I don’t know where the markets are going.”

This podcast brought in this feedback:

“Hi, I am a college student who is a big fan of your podcast. One of the ideas I like the most is this notion of accountability and taking responsibility for one’s one actions. It’s a theme that constantly comes up in your reports. I thought of this theme when I was having breakfast with Roger Porter, a professor at Harvard University and former high-ranking official in economic policymaking in the 1980s and 1990s. We were talking about the bailout of LTCM. We agreed that allowing people to experience the consequences of their actions is a good thing and about the craziness of this notion of being too big to fail. I immediately thought of the many times I have heard the same message in your work. Keep it up in 07!”

Another reader disagreed:

“You are incorrect. The Fed did not bail LCTM out. No US taxpayer money was used. A consortium of 12 banks took control of the fund by investing $3 Billion. It wasn’t even a bail out. All the original principals and their investors of LTCM lost 99% of their equity in the fund. The NY Fed did help organize the bailout because the markets had frozen up under the fear of massive defaults. Go back and read “When Genius Failed” by Lowenstein. This doesn’t invalidate any of the other good points you make regarding LTCM and their badly implemented strategies.”

Nonsense. The supposed defaults should have been allowed. Read.

At Ed Seykota’s web site he was recently asked a question by a reader who was risking 40-50% of his equity on each trade. Ed responded:

Hmmm … you are risking 40-50% of your Equity on one trade. Professional trend traders typically risk around one percent as much as you risk. You can test your system a couple ways.

1. You can back-test it on a computer and notice it goes broke on small whipsaws.
2. You can run it in real-time, as you are doing. When you go broke, your test is complete.

Seykota, in an earlier response to another reader, offered wisdom to those looking for the ‘end’ of trend following:

Unwavering commitment to following a system is essential to making it work. Those who do not keep their commitments seem to generate justifying beliefs, such as the idea that the market’s job is to derail systems. Such beliefs are consistent with the experience of abandoning a system – right before it becomes profitable.

I just came across James B. Stewart’s view for 2007. An excerpt:

This year, the first week’s trading was an indication how much of the conventional wisdom rests on the assumption that the Fed has stopped raising rates, and will likely begin reducing them in 2007. To me, this is the biggest risk for believers in the conventional wisdom. Higher-than-expected rates could slow or reverse the drop in the dollar, dampening returns for foreign investments. The sharp pullback in emerging markets last year was triggered by rising longer-term interest rates in the U.S. and fears this would damp the global expansion. My hunch is that a similar scare will afflict markets at some point this year, which will likely represent a buying opportunity. But longer term, I think the conventional wisdom is right. Sooner or later, the Fed will begin to reduce rates.

Whew. Glad I read that. Now I KNOW what will happen this year! I did love Stewart’s Den of Thieves however.

From the Wall Street Journal:

The New York Stock Exchange plans a pilot program later this year that could bring real-time stock-price data to millions of Internet users. The NYSE Group Inc. unit was expected to file a proposal with the Securities and Exchange Commission today. If the proposal is approved by the federal regulator, NYSE will sell to Web sites for $100,000 a month the ability to publish trade prices on the NYSE with virtually no delay. Web site operators including Google Inc. and General Electric Co.’s CNBC, have both agreed to provide their data to users without charge, if the plan is approved, and NYSE has also held discussions with several other Internet providers such as Yahoo Inc., said people familiar with the matter.

Isn’t the implication that real time quotes for the average “investor” will “help” them? I just found the article odd. On the face of it real time quotes surely sounds great to most people. However, once everyone has real time quotes, does anyone expect that there will be some new class of super successful investors due to speedy quotes alone?

A short video clip from a speech of mine about Amaranth.