A nice piece on trading psychology. An excerpt:

Ervolini says market losses affect the brain in the same way excrement or a foul smell does. We recoil without thinking, as if we’re confronted with a disgusting and possibly harmful physical presence. This reaction stems from our unconscious desire to immediately end the pain. “The experience of losing $1 is three times more emotionally impacting than the experience of winning $1,” Ervolini says. “We learn more intensely when we lose.” Because the pain of loss is so much greater than the joy of gains, which Ervolini says affect the same parts of the brain as sex and certain narcotics, people are more likely to hang onto losing investments as they drop and to sell winners before they should. The joy of riding an investment on the way up isn’t enough to overcome the fear we have of losing money if it turns. If it goes up $3, but then drops $1 from its high before we sell it, we feel pain even though we’re able to sell at a profit. That $2 net gain just isn’t enough.

So people think the government will help them out of an economic disaster? Come on. Consider this President Bush press conference from December 2007, which was less than a year ago, and look at the last few lines:

Q: …I’m a financial advisor here in Fredericksburg [Virginia], and I wanted to ask you what your thoughts are on the market going forward for ’08, and if any of your policies would make any difference?

And the answer:

THE PRESIDENT: No. (Laughter.) I’m not going to answer your question. If I were an investor, I would be looking at the basic fundamentals of the economy. Early on in my presidency, somebody asked me about the stock market, and I thought I was a financial genius, and it was a mistake. (Laughter.) The fundamentals of this nation are strong. One of the interesting developments has been the role of exports in overall GDP growth. When you open up markets for goods and services, and we’re treated fairly, we can compete just about with anybody, anywhere. And exports have been an integral part, at least of the 3rd quarter growth. But far be it for me — I apologize — for not being in the position to answer your question. But I don’t think you want your President opining on whether the Dow Jones is going to — (laughter) — be going up or down.

So if he has NO clue a year ago, along with the rest of Congress, how can they be expected to have a clue today?

There is a guy named Wayne A. who posts and sends emails under an assortment of different names. He generally seems really angry. I do know he is a former Fidelity employee of some sort, so perhaps that is the root of his anger! Nonetheless, he sent in this post the other day:

“So your Trend Following film turned into a movie called Broke: The New American Dream? How quickly trends can change. Well I guess that makes you a trend follower. Who is more obnoxious and has a fatter ass, you or Michael Moore. I wonder which of you goes broke first.”

Wayne. Come on. I am six feet tall and 180 pounds. Clearly I am a tad smaller than Michael Moore… All inane comments aside, it’s not my desire to stop the crazies, but even sometimes the loco ones present an opportunity to clarify and or augment a message. For those wondering about the title of the film (“Broke: The New American Dream”), wondering perhaps like Wayne that the title seems overly “negative” or perhaps is a change from my writings, think again. First, here is an explanation of the film. Second, the title was selected because I believe that it is the new American dream for many to be broke. Meaning, not everyone is broke. Plenty of people are doing well. But if the masses take actions, knowingly or unknowingly, that were not smart or well thought out, their ultimately goal was to be broke. If you take silly actions, actions that other smart people don’t take, even if you tell people that in the middle of taking those silly actions that you really want to do well, I don’t buy it. It’s like Seykota when he said (and I paraphrase) everyone gets what they want. If they did not really want to to be broke they would not have taken the actions they did (i.e. buy and hold, overleveraged real estate, etc.). I am sure some will not get that from the title, but that’s fine, it gives me the opportunity to create discussion and get people to think.

This video talks about the transparency of trend following performance data:

My post here brought in this comment:

Michael: I have been in discussions with [trend following trader] Mulvaney Capital Management since the summer for a company in which I was the C.O.O. The board thought my ideas were too risky and that I tried to hit too many home runs [by hiring Mulvaney]. This particular concern [firm I was with] lost 30 million dollars in September and October. I showed them the Mulvaney performance: 15 million invested in 1999 equated to 71 million today and 30 million over the same period equated to 142 million. After my presentation at a board meeting I returned to my office and was told the next week that I was being eliminated as I was too big a risk taker. My only other investment in my short tenure was with Abraham Trading Co. and the returns equated to nearly positive 12% for the same time period – this was the only positive investment for the org. over that period. So much for my risk taking. Mulvaney is more of a risk oriented firm but they appear smart from a risk management perspective. Great books and web articles. Len

Thanks Len. Great story. Logically it will be difficult for many of these types to keep saying trend following is risky, especially in the face of ‘leveraged long only buy and hold’ approaches that cratered, but then again who said most of Wall Street (what’s left of it) was logical.

A few weeks back a few researchers put out a paper that essentially said trend following is bunk. I commented at the time that one of the authors was at AIG investment products and mockingly said, “next!” Turns out the lead author, Geetesh Bhardwaj, must have taken my criticism to heart, for his academic paper now says he works for Vanguard. Quite a switch in span of two weeks!

Old Screenshot.

New Screenshot.

A few months ago I announced a new seminar, but at the time provided few details. Details of my new seminar can be found here.. Feel free to post comments or questions below in this thread or email directly for more information.

I can’t predict what this means for trading opportunities, but these real estate facts out today are not good:

1.) 45% of recent home sales were sales of foreclosed homes.

2.) 50% of all mortgages recently reworked need to be reworked again.

There is something very peculiar, in fact bizarrely comedic, about the interview running on CNBC between Maria Bartiromo and Price Al-Waleed bin Talal (Citi’s largest shareholder) right now:

A view on success.

From this article comes 2008 performance numbers of some very well known names:

Warren Buffett (Berkshire Hathaway): -43%
Ken Hebner (CMG Focus Fund) -56%
Harry Lange (Fidelity Magellan): -59%
Bill Miller (Legg Mason Value Trust) -50%
Ken Griffin (Citadel): -44%
Carl Icahn (Icahn Enterprises): -81%
T. Boone Pickens: Down $2 billion since July
Kirk Kerkorian: Down $693 million on his Ford shares alone

Many of these men have made fortunes, but it just comes down to what type of trading strategy you want, and how long you have to wait. The next time I hear someone blab about trend following drawdowns, if these numbers don’t knock the silliness out of them, perhaps a right hook will!

I emailed one of the brightest guys I know today. He is easily one of the most connected guys on the planet. Economist, trader, & major player in politics. I asked him his view, not for a trading tip or strategy, but because he does have a vast understanding of how things work:

I know you run in an interesting world…how much worse we getting?

He responded:

No comment in writing.

So I called. The short of it from his fundamental big picture economy perspective?

1. What happens when all of those Circuit Cities are sitting empty? Multiply the effect out across jobs, commercial real estate and their competition, i.e. Can Best Buys of world survive? Now apply this thinking to all retail. How long can you go without a new suit? Think about it. He sees retrenchment on wide scale.

2. He sees us either at 1978 or 1931 and his guess is that we are at 1931.

3. When do stocks stop falling? When one of the big guys, preferably the bull’s poster boy Mr. Buffett, collapses. Buffett going down would be a signal for panic, which would lead to an eventual selling climax. He wasn’t predicting this, it was just his temperature gauge on what needs to happen for pain to subside. He did note Buffett’s derivative exposure.

4. From a trading perspective, this is not insight you can really use unless you see stock markets tumbling another 50% from here, you are a buy and holder, and just want out. He could see 50% more down from here.

Sobering stuff. As I said, these comments are not a trading strategy, or prediction, but just feedback from an associate of mine who has been around the block.