Category: Psychology

Nobel Laureate Explains Intuition

May 08, 2008

A reminder that never goes out of style.

Oil Speculation; No Kidding

May 07, 2008

Did they just figure out markets rarely ever match the pure fundamentals?

The Politics of Happiness

An interesting piece from the Freakonomics blog.

China Leaves Small Investors Behind on Road To Capitalism

May 03, 2008

From the Washington Post:

By Ariana Eunjung Cha
Washington Post Foreign Service
Saturday, May 3, 2008; A01

SHANGHAI -- When emergency workers found Wang sprawled unconscious after having downed two bags of insecticide, he was still clutching the PDA he had been using to check stock prices.

Like a number of other small investors in China, Wang had bet -- and lost -- his life savings, about $15,000, on the Chinese stock market. The propaganda office and doctors at the hospital where he was treated said the 36-year-old factory worker had been preparing to get married and that he had hoped to use the money to buy an apartment for his fiancee.

Wang's attempted suicide and those of other investors are a heartbreaking consequence of China's great experiment in capitalism.

In February, Li, a 25-year-old engineer, jumped from the seventh floor of the building where he worked in the city of Chengdu. His company said he had lost a huge amount on the stock market. On March 30, a 39-year-old former ice cream shop owner, also named Li, leapt to his death from his apartment building in the inland province of Shandong after losing a third of the $4,500 he had invested.

As China's stock markets crashed over the past six months, the Communist government reacted in a way most consumer investors like Wang did not anticipate: It watched from the sidelines. It wasn't until last week, after the Shanghai benchmark index's fall to a symbolic milestone, below 50 percent of its peak in October, that Beijing finally stepped in.

Its announcements that it would slash a tax on stock transactions and control volatility by requiring some big block trades to take place off the regular stock market pushed the market up 14 percent. It has fallen again since then, however.

But given that the Chinese government has the power and money to do much more, some say the fact that its help arrived so late and is so limited means it is sending a message to shareholders that they should no longer expect a government bailout in such situations.

The former shop owner's sister, Li Chunyan, 34, said she understands that those who lost everything have only themselves to blame for risking so much. But because the stock market is "damaging common people's lives this much, there should be policies" to help them. She said even the U.S. government is doing more to help its investors: "I heard about the U.S. lowering interest rates to save the market," she said. "Well, different countries are different."

In online bulletin board postings, small-time retail investors -- who, unlike in U.S. markets, make up the vast majority of those who hold money in China's exchanges -- have vented their anger at the government. "China's stock market is piled up with investors' tears and blood," wrote one shareholder.

Institutional investors, fund managers and analysts who follow the Chinese stock markets are less sympathetic, saying that the suffering of consumers who lost money is a necessary step on the road to capitalism.

"You lose money, you jump out the window, too bad. It's your problem," said Vincent Chan, head of China research for Credit Suisse. "For any market to grow, this is something the government should realize: At the end of the day it's the investors who bear the responsibility of the investment, not other people."

The nosedive of the Shanghai stock market and its sister exchange in the southern city of Shenzhen has been humbling for Chinese investors who had once believed the only direction share prices could go was up.

Analysts say they were overdue for a correction. Despite the fact that the earnings of many companies were weak and corruption was rampant, the Shanghai composite index quadrupled in value from 2002 to 2007.

Briefly in November, PetroChina became the world's first $1 trillion company by some measures of its market value. But by the end of April, shares of PetroChina had plummeted to below its IPO price for the first time.

Andy Xie, a former chief economist for Morgan Stanley Asia Pacific and now an independent analyst, said the challenge for the Chinese public is that "generally speaking, retail investors bought stocks at a high point. They listened to their relatives, friends and heard propaganda.

"When the stocks fall, they are unwilling to sell off and they sit there waiting for the government to save the markets," he said. "This is not rational."

Psychologists across the country say that in recent months they have seen more patients seeking treatment for addiction to gambling.

Li Ning, director of the Psychological Rehabilitation Department at the No. 102 People's Liberation Army Hospital in Changzhou, said that investing in the stock market should be different from gambling but that many "speculate on stocks with a gambling mentality."

He said some patients he has treated are emotionally unstable when it comes to the stock market.

"They cannot stop thinking of recovering their losses," Li said. "They throw all their money into the stock market and stay without rest in front of the computer reading. They hope they can find some positive news or policy but in vain."

Investors like Wang who came in at or close to the market's peak in October have been hit the hardest.

Wang, who had worked in factories in the southern manufacturing city of Dongguan for more than a decade, began investing in the stock market in September. For the first few weeks, it seemed like luck was on his side, and by October the Shanghai composite index had jumped 14.5 percent. The next month, it began its descent. Whatever stock Wang bought, it seemed, began to crash until, by the end of February, his holdings were valued at almost nothing.

Li Huafu, a doctor who treated Wang at the Wujing Zongdui Hospital in Guangdong province, described him as being in shock: "He was very silent, didn't speak much to others."

Li said Wang, who could not be reached for comment, returned with his mother and brother to their hometown in Shandong province. Phone numbers for Wang that were listed in hospital records had been disconnected.

Some investors like Ma Guocheng, 26 and an officer worker, say they have learned their lessons from the recent stock market plunge. In April and May 2007, Ma invested some 270,000 yuan -- about $38,600 at today's exchange rate -- in stocks. By November, those shares were valued at 440,000. He thought about selling, but then he thought they would climb even higher. Now his holdings are worth 50,000, about $7,000.

"I was greedy," Ma admitted. As a consequence, "I lost more than 80 percent of my total investment."

Researchers Wu Meng and Crissie Ding contributed to this report.

Bubble Talk

May 02, 2008

I came across a nice piece of writing from Harpers about "bubbles". An excerpt:

"I will use the familiar term “bubble” as a shorthand, but note that it confuses cause with effect. A better, if ungainly, descriptor would be “asset-price hyperinflation”—the huge spike in asset prices that results from a perverse self-reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away."

The Grim Reaper

April 30, 2008

Whack!

Embrace Failure

April 27, 2008

Consider: "Like public speaking, failure is not inherently bad. We’re conditioned to avoid it, but there are plenty of reasons to change our perspective. Here are nine advantages to failing."

Character Counts

April 21, 2008

I had a conversation today with a trader featured in my first book. The subject that came up? Character. We both shared stories and anecdotes about the importance of character for those people who find true success. We also talked about a known "name" in the Wall Street world who has achieved very little success primarily due to a lack of character. The concept runs deep. You can't fake it in the long run and it is the true dividing line between winning and losing.

Don't Jump Yet

April 15, 2008

Read.

Copper Trend

March 31, 2008

This article reminds of the 1990-1992 real estate down turn. I had a relative back then who owned commercial property. They showed up one morning to find the building stripped of all copper guttering and down spouts.

For Americans, a Bit of the Swagger Is Gone

March 29, 2008

Read.

From Start, Rodriguez Worked to Be the Best

March 27, 2008

Practice and more practice.

Excessive Emails Are A Mental Illness

March 25, 2008

Uh oh. Does this mean we are all nuts?

Art of the Start

March 23, 2008

A nice overview from the owner of the Dallas Mavericks: dos and don't dos on startups.

Radio Fun

March 20, 2008

Here is an interview (MP3) from the other day where it is easy to see that the trend/systematic message is not readily accepted. Trying to get people to move away from only worrying about "today" is not easy. I don't think the female host of this show was on board with my message.

Study Finds Alarming Rise in Narcissism, Self-centeredness in 'Generation Me'

March 18, 2008

From the AP:

NEW YORK - Today's college students are more narcissistic and self-centered than their predecessors, according to a comprehensive new study by five psychologists who worry that the trend could be harmful to personal relationships and American society.

Continue reading Study Finds Alarming Rise in Narcissism, Self-centeredness in 'Generation Me' »

MF Global?

March 17, 2008

Almost every commodity market there is fell out of bed today at about the same time MF Global began its 65% share price plunge. Who will email along to me the real story of another firm and or hedge fund who also met their demise today?

Don't Ask Why

March 08, 2008

An excerpt from A Million Years of Logic, the End of Economics, and the Sociological Future:

What’s the point? It’s this: Economics, as understood for hundreds of years, has played out. The major problems of econ 101 have been solved. We know about supply and demand, marginal utility, choice under uncertainty, and budget constraints. We have a wide variety of tools, ranging from game theory to econometrics, that help us identify these processes in situations ranging from war, to car sales, to dating. We are also seeing how these processes plug into classic macroeconomic issues, such as growth and international trade. However, the market system itself, as indicated by Tim’s concluding chapter, depends on population, innovation, and liberal economic institutions. These, in turn, depend on psychology, group culture, and networks, the domain of sociologists, psychologists, historians, and anthropologists. Economists have shown how the market system processes the inputs, but there’s still much, much more to be said about where the inputs come from. That’s what’s going to be exciting in the decades to come, and I can’t wait to see it.

Trying to figure out where they come from is one option. Trying to profit from them is another.

What Causes Trends

March 06, 2008

An email in this morning:

"...but am basically trying to understand what creates a trend. My point is that deep fundamentals create a trend, as these guys are putting their capital to work. My grandfather ran a family farm in Louisiana for 60 yrs, and would take me to the Cotton Exchange in Memphis to trade cotton. He had a few guys he trusted over the years there. I always recall him asking what abc and xyz (large institutional cotton buyers) were doing every time we were there. I finally asked him why. He said that these guys get 500 calls a week from cotton detectives/analysts all over the U.S. and world, and therefore knew infinitely more about the demand and supply of cotton than he ever could sitting in Winnsboro, Louisiana reading the WSJ. and of course, he always traded along with the big guys. He knew to ride the wave, but the wave in his mind was created by deep fundamental research. Well, don't know if I have a point - maybe just an axiomatic observation that deep fundamental research causes trends. Fair?

I don't know that understanding what causes trends is important to making money from them. As to "what causes?", my best guess is that every link on this page goes a long way toward answering that question.

Free Lunches Come with Strings

March 04, 2008

Human behavior on display in the cafeterias of our schools.

The Advantages of Closing a Few Doors

March 01, 2008

From the New York Times:

"The next time you’re juggling options — which friend to see, which house to buy, which career to pursue — try asking yourself this question: What would Xiang Yu do?"

Why Solitary Workers Can Be Faster Workers

February 28, 2008

An example (article) of something we all have known instinctively, but were probably sometimes embarrassed to admit for lack of "data". I am sure many think they are more productive surrounded by others.

Sitting Tight

February 23, 2008

A perspective on behavioral finance.

Sadness May Encourage More Extravagance

February 13, 2008

There are so many psychological reasons why people behave in whatever way when it comes to their money. Sadness is another.

Craving the High That Risky Trading Can Bring

February 07, 2008

Hmm...

Young Millionaires Are More Diversified Than Old

January 27, 2008

A new study from Northern Trust shows millionaires in their 30s are better diversified across all asset classes than millionaires in their 50s and 60s are.

Inside Dealmakers' Brains

Scientists think the new field of neuroeconomics can explain some business behavior, perhaps even distinguish rational from irrational decisions. Are some people's brains hardwired to run companies or to make deals?

Do As Told

January 26, 2008

I was in the local Micro Center today buying a keyboard. As I made the purchase the young guy at the counter asked me for my email for my $49 purchase. I said "no" bluntly. I then asked him what percentage of people actually give their email. He livened up and said, "Oh last night we were at 71%." How did we as a society become so easily manipulated? What are the larger ramifications?

Food for Psych Thought

January 25, 2008

Just how representative are the people who volunteer for psychology experiments? Interesting.

Beg, Whine, Cry

January 23, 2008

I am not really sure what to make of this. Sure, the cute, try to be funny part is clear, but at the end of the day no one gets ahead regardless of their circumstance by begging and whining.

Does This Mean Things Are Bad?

January 21, 2008

This passage caught my eye and sarcasm:

That means the FTSE 100 has now fallen by around 10 per cent in the last 10 days, by around 15 per cent over the last month and is well on the way to being off 20 per cent since its most recent high of 6754 in July - before the world's banking system was sent spiraling. It is also the worst start to the year for the stock market since records began in 1936. "I smell the acrid stench of fear and uncertainty," said markets commentator David Buik of BGC Partners. European markets also tumbled.

Why People Believe Weird Things About Money

January 17, 2008

This is such a sad commentary on what we know about money!

Putting a Price on Happiness

January 14, 2008

A regular reader sent in this article on a study: Believing in an item’s worth makes us cheery - for a short time.

If the News Is So Important Why Do We Not Believe It?

January 12, 2008

From a news release:

FAIRFIELD, Conn. -- A Sacred Heart University Poll found significantly declining percentages of Americans saying they believe all or most of media news reporting. In the current national poll, just 19.6% of those surveyed could say they believe all or most news media reporting. This is down from 27.4% in 2003. Just under one-quarter, 23.9%, in 2007 said they believe little or none of reporting while 55.3% suggested they believe some media news reporting.

Read all.

Bubbles Are Tough to Predict

January 05, 2008

Shrewd buying helped Jose Mugrabi build the world's largest private stash of Andy Warhol's art. And his tale is one that all investors should read.

The Secret to Raising Smart Kids Should Not Be A Secret

January 04, 2008

Hint: Don't tell your kids that they are. More than three decades of research shows that a focus on effort - not on intelligence or ability - is key to success in school and in life. More.

Malcolm Gladwell: What We Can Learn From Spaghetti Sauce

December 29, 2007

Malcolm Gladwell is an interesting guy.

Success & Motivation

December 27, 2007

From Mark Cuban comes reinforcement for entrepreneurs.

"So You Think that Money is the Root of All Evil?"

December 24, 2007

The other day I was forwarded a rant that included this excerpt:

"I drove a Porsche 911 Cabriolet, flew a Beechcraft Baron 58P, lived in a house on the lake in Tahoe that recently was listed for $10 million, had two boats on the lake and a 50 foot yacht in the Caribbean when I was 23 years old. Money, my friends, means nothing."

I could not disagree more with that last desperate sentence. A speech (read) that backs my contention more eloquently than I could ever state myself. The best excerpt from that speech?

"Let me give you a tip on a clue to men's characters: the man who damns money has obtained it dishonorably; the man who respects it has earned it. "Run for your life from any man who tells you that money is evil. That sentence is the leper's bell of an approaching looter. So long as men live together on earth and need means to deal with one another--their only substitute, if they abandon money, is the muzzle of a gun.

The Fountainhead: Howard Roark Speech

As I reflect on the year that was 2007 I am reminded of wisdom from years back:

As you consider that great excerpt from "The Fountainhead" consider another character from the same book - "Ellsworth Toohey":

Ellsworth Toohey seeks power to control men and does so under the auspices of "humanitarianism" and a false sense of selflessness. Toohey destroys greatness by exalting mediocrity. He lives to empty souls and fill that void with his own power. Through encouraging sacrifice, removing some form of a man's desire, he hopes to be there to collect on that sacrifice, as he says on p. 666 "When there's service, there's someone being served." He is the 'benevolent dictator' bent on making men subservient so he can control their destiny and "well- being", effectively promoting the slave/master relationship that he extols as having existed throughout mankind (this is also noted by Roark in his courtroom speech at the end of the book). Toohey's target in this conquest is man's mind, and he sets out to muddle it by pitting men against men and establishing a sense of doubt in their being. He plots to destroy their ability to judge on their own, inciting them to think first of everything and everyone but themselves.

Second Life

December 15, 2007

if it is possible to have a second life, is it possible for a second life to have a second life? Is that where we are headed?

Making Good Decisions? Not Always Fast

December 09, 2007

The teenage brain, Laurence Steinberg says, is like a car with a good accelerator but a weak brake. With powerful impulses under poor control, the likely result is a crash. That said, does that mean we give the punk who shot and killed Washington Redskin player Sean Taylor a break because he was 17?

Sex, Math and Scientific Achievement

Why do men dominate the fields of science, engineering and mathematics? Read.

Fountainhead Inspiration

December 05, 2007

It's been a few years since I read it, but a friend reminded me of Ayn Rand's classic "The Fountainhead" the other day. He kept talking of the character Ellsworth Toohey and making the connection to current day society. Sadly, some people no matter what want a "Toohey" in their life.

Impulse Control

November 10, 2007

Got impulse control? Will we as humans ever graduate?

Except in One Career, Our Brains Seem Built for Optimism

Except attorneys where "pessimism is considered prudence", our brains are mostly optimistic. A nice read in the WSJ.

Ignorance v. Stupidity

October 31, 2007

An article with gentle reminders sent in by a blog reader.

The Monkeys Have It Figured Out

October 08, 2007

Chimps choose more rationally than humans. Not sure what that means exactly!

What's the most important psychology experiment that's never been done...?

October 06, 2007

This article lists many answers to the question: What's the most important psychology experiment that's never been done...? One I like: Why is learning slow?

Innocents Abroad

From Slate: Why European banks were the big losers in the U.S. subprime meltdown.

Was Harry Potter Inevitable?

October 01, 2007

Michael J. Mauboussin of Legg Mason posits an answer (PDF) to the question of "Was Harry Potter Inevitable?" as he investigates "Cumulative Advantage, Counterfactuals, and the Halo Effect".

Master Class with Nobel Prize Winner

September 29, 2007

A short course in thinking about thinking on Edge.org is worth reading. This might not help with your buys and sells, but it sure adds perspective to the "mind" part of the game.

Hot Head Better?

September 13, 2007

Hot-headed investors are better? Hmm...something seems amiss.

The Top Blew Off..

September 07, 2007

Funny (and relevant) cartoon.

Sheep

August 29, 2007

There could not be a better time than August of 2007 to interview sheep!

Overconfidence

August 26, 2007

An interesting article on overconfidence. It sounds very much like what was written during the summer of 1998 following LTCM.

The Tempest

August 15, 2007

Feedback in from a reader...

Hello Michael,

The recent market turmoil reminds me Shakespeare's plays :

Be not afeard. The isle is full of noises,
Sounds and sweet airs that give delight and hurt not.
Sometimes a thousand twangling instruments
Will hum about mine ears ; and sometime voices
That, if I then had wak'd after long sleep,
Will make me sleep again ; and then, in dreaming,
The clouds methought would open and show riches
Ready to drop upon me, that, when I wak'd,
I cried to dream again.

The Tempest. Act III, scene 2.

The Art of Words

August 13, 2007

I saw this "looking for bright news" headline this morning:

"The Nasdaq is 5.5% off of a 6 1/2 year high."

Or my way to look at it?

"The Nasdaq is still down 49% from it's high nearly 7 1/2 years ago."

Excuses

August 10, 2007

Calm Down

I caught a nice excerpt from a Money Magazine article:

Am I acting on reason or emotion? While at my gym last week, I was watching one of the cable TV financial shows as the market was in the midst of a steep decline. Based on the frenzied rapid-fire report of the correspondent on the trading floor, you could easily get the impression that you'd better quickly dump your stocks before you get caught in a bloodbath. Of course, just weeks before, the same show was so upbeat when the market was hitting new highs that you could have gotten the impression you were an idiot if you didn't take out a home equity loan and plow the proceeds into the market. All of which is to say that you've got to be careful about getting caught up in undue pessimism during bad times and irrational exuberance when things are going swimmingly. It's almost always a mistake to invest in the heat of the moment. Better to step back, calm down a bit, even let a day or two go by and then make sure that you're making a decision that reflects a long-term strategy, not some passing passion.

Forget for a moment "strategy", the author's overall philosophical stance is on target.

Passion

July 25, 2007

Nice bit of motivation...

C.E.O. Libraries Reveal Keys to Success

July 24, 2007

C.E.O. Libraries Reveal Keys to Success.

No Balls, No Babies

July 20, 2007

Mark Cuban gave a great little story recently:

When I was about 23, I was in Vegas playing blackjack for the first time. I was at the $5 table and asked the dealer if I should double down. He told me, 'No balls, no babies.' Sometimes you just have to go for it."

The Business Brain

July 19, 2007

The business brain close up.

High IQ

July 14, 2007

A good read on IQ and success.

Gone Fishing

July 12, 2007

Feedback in about this recent post:

I can't help but think of trend followers as that wise old bear you see in the documentaries sitting on a rock in the middle of a river catching fish. He just sits there and sooner or later a fish swims by and he catches it and eats it. I never see him sitting on the sidelines talking to another bear about "why" the fish swims by, or if one rock is better than another, or even if it's better to sit on the shoreline versus a rock in the middle of the river. He just knows that if he puts out the effort, sooner or later he catches a fish! Which mean is the best? Is the market efficient or not? Is a bubble a bubble or can you quantify the beginning of a trend...oh never mind, I'd rather go fishing!

--David M.
Sugar Hill, GA

Swarm Theory

July 02, 2007

Dave Goodboy sent me this link on swarm theory from National Geographic.

Reason Bran

June 30, 2007

Reason Bran is good for you.

Channeling Your Inner Millionaire

June 23, 2007

A nice little article on channeling your inner millionaire.

9 Full Innings

June 01, 2007

So true. So true.

Lions, Crocodiles and Buffalos

May 30, 2007

Barry Ritholtz writes at his blog:

...this video clip from the South African jungle. It is utterly fascinating -- I can guarantee you've never seen anything like this before. Perhaps there are some lessons in it for life.

He is right, this video of the "wild" is teaching a lesson for many aspects of human life.

We Never See the Future

May 28, 2007

We never see the future.

Innumeracy

John Allen Paulos is his book Innumeracy writes:

Some would-be advisor puts a logo on some fancy stationery and sends out 32,000 letters to potential investors in a stock letter. The letters tell of his company's elaborate computer model, his financial expertise and inside contacts. In 16,000 of these letters he predicts the index will rise, and in the other 16,000 he predicts a decline. No matter whether the index rises or falls, a follow-up letter is sent, but only to the 16,000 people who initially received the correct "prediction." To 8,000 of them, a rise is predicted for the next week; to the other 8,000, a decline. Whatever happens now, 8,000 people will have received two correct predictions. Again, to those 8,000 people only, letters are sent concerning the index's performance the following week: 4,000 predicting a rise; 4,000 a decline. Whatever the outcome, 4,000 people have now received three straight correct predictions. This is iterated a few more times, until 500 people have received six straight correct "predictions." These 500 people are now reminded of this and told that in order to continue to receive this valuable information for the seventh week they must each contribute $500. If they all pay, that's $250,000 for our advisor. If this is done knowingly and with intent to defraud, this is an illegal con game. Yet it's considered acceptable if it's done unknowingly by earnest but ignorant publishers of stock newsletters, or by practitioners of quack medicine, or by television evangelists. There's always enough random success to justify almost anything to someone who wants to believe.

This is a great example showing how unsuspecting (& hopeful) people can be swayed into believing that a guru has magical predictive powers. It happens all the time.

Panicky Sheep? It Appears So

May 25, 2007

An excerpt that for most people will make them "uncomfortable":

Washington—Whether people are making financial decisions in the stock market or worrying about terrorism, they are likely to be influenced by what others think. And, according to a new study in this month's Journal of Personality and Social Psychology, published by the American Psychological Association (APA), repeated exposure to one person's viewpoint can have almost as much influence as exposure to shared opinions from multiple people. This finding shows that hearing an opinion multiple times increases the recipient's sense of familiarity and in some cases gives a listener a false sense that an opinion is more widespread then it actually is.

More (including PDF report)

Not What You Expected

May 21, 2007

From the Freaknomics blog:

A study by University of Toronto assistant professor of organizational behavior Jennifer Berdahl found that, contrary to the conventional belief that a woman’s acting “feminine” in the workplace leads to sexual harassment, just the opposite may be true. Berdahl’s paper concluded that women who “act like men” are more likely to experience harassment, possibly because of the conduct’s use as a tool to reinforce traditional gender roles.

You Don't Have to Be Einstein to Get Rich

May 19, 2007

An article from Selena Maranjian titled You Don't Have to Be Einstein to Get Rich builds off the Turtle experiment even if the author was unaware of the Turtles:

Pop quiz! What factors help determine how wealthy you'll become in life? I initially guessed that education, intelligence, skills, and socioeconomic origin played a role.

Continue reading You Don't Have to Be Einstein to Get Rich »

Avoiding the Hard Part

May 14, 2007

From the 'Card Shark' in Trader Magazine:

I see a lot of players quit a game way too soon. I'm not just talking about leaving the table. More often than not, 'quitting' refers to the way someone plays after getting ahead a certain amount. Up enough to be satisfied, he quits the game by default because he stops taking chances and looks only for the locks.

On the flip side many people seek to "time" when they start trading or any entrepreneurial activity for that matter. What was the old Patton saying about a violently executed plan today being better than a perfect plan next week...

Sleep Deprivation Can Threaten Competent Decision-making

May 08, 2007

An interesting read probably not pondered by many:

Science Daily (link) - Gambling is a risky activity that can potentially result in the loss of a significant amount of money. A study published in the journal SLEEP finds that sleep deprivation can adversely affect a person's decision-making at a gambling table by elevating the expectation of gains and making light of one's losses following risky decisions.

Continue reading Sleep Deprivation Can Threaten Competent Decision-making »

Keep It Simple

May 05, 2007

Sometimes, with all the noise, all the complexity, all the trading rules...simple is where it is at. Jeffrey Strain recently listed 5 ways on Yahoo Finance where patience can help you achieve wealth. Sure, some of it is the standard issue stuff we all should know, but his points are good reminders.

1. It helps forgo instant gratification: Being patient allows you to wait until you have the money to purchase the things that you want. But it's not easy to show patience in a society where instant gratification is advertised as being the norm and credit is easy to obtain. If you aren't patient, however, it means that you will likely use a credit card to pay for things you don't have the money to pay for. This is how people get into credit card debt, which will deteriorate savings and hinder your ability to become wealthy.

2. It helps you save: Part of being able to save 10% of your take-home pay is making sure that you spend your money wisely. Having the patience to wait until a product's price comes down will go a long way toward helping you build wealth. People who have to have the latest gadgets the instant that they appear end up paying a premium. When the technology becomes more mainstream, its price becomes more reasonable. Having the patience to wait before you buy often is the difference between having 10% to invest and not having it.

3. Patience helps avoid "get rich quick" schemes: Whether it is the lottery or some hot stock pick, the urge to try to get rich quick is glorified in the media. The problem is, most people who are rich don't get there the quick way. Most have built their wealth over time. While the media glamorizes the few who do get rich quick, most people who try that route don't end up wealthy.

4. It helps you stay on your wealth-building plan: Wealth doesn't usually appear instantly and doesn't present itself unexpectedly. It usually takes a well-thought-out plan over a long period of time. Taking the time to build a solid plan and then sticking to it will ensure that you have a much greater chance of creating and keeping your wealth than if you try to make your fortune instantly.

5. Patience helps you look long term: Even if you create a solid wealth-building plan, there will still be bumps in the road. When these bumps occur, it's important that you have the patience to stick to your plan instead of panicking. If you end up abandoning your plan at the first sign of trouble, you will likely end up much less wealthy than if you have the patience to stick to your plan the entire time. Stocks fluctuate over short periods of time, but they usually go up over a long period of time. It's important to take a patient, long-term view in wealth creation.

The Fear Is Palpable

April 27, 2007

This article puts "fear" front and center:

All the World's a Bubble
By Brett Arends
http://www.thestreet.com/funds/followmoney/10353243.html

How high will the Dow go? 15,000? 20,000?

How about 36,000?

While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent.

One, unsurprisingly, is legendary value investor Jeremy Grantham -- the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham, chairman of Boston firm Grantham Mayo Van Otterloo, has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.

Everything is in bubble territory, he says.

Everything.

"From Indian antiquities to modern Chinese art," he wrote in a letter to clients this week following a six-week world tour, "from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!"

"Everyone, everywhere is reinforcing one another," he wrote. "Wherever you travel you will hear it confirmed that 'they don't make any more land,' and that 'with these growth rates and low interest rates, equity markets must keep rising,' and 'private equity will continue to drive the markets.' "

As Grantham points out, a bubble needs two things: excellent fundamentals and easy money.

"The mechanism is surprisingly simple," he wrote. "Perfect conditions create very strong 'animal spirits,' reflected statistically in a low risk premium. Widely available cheap credit offers investors the opportunity to act on their optimism."

And it becomes self-sustaining. "The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you."

It's something to think about the next time you hear someone tell you that the stock market will keep rising simply because the world economy is doing so well. That would make sense only if we were paying a constant price for each unit of world GDP, instead of higher and higher prices for one slice of that GDP -- equity.

Grantham concludes that every asset class is expensive today compared with historic averages and compared with the cost of replacing it. By his calculations, the only assets likely to beat inflation by any significant margin if you hold them for the next seven years are managed timber, "high-quality" U.S. stocks, and bonds.

As noted in this column several weeks ago, Grantham's U.S. "high-quality" stocks include Home Depot (HD) , Merck (MRK) , Wal-Mart (WMT) , AT&T (T) , Pfizer (PFE) , Johnson & Johnson (JNJ) , Exxon Mobil (XOM) , UnitedHealth (UNH) , Verizon (VZ) and Lowe's (LOW) .

"The bursting of [this] bubble will be across all countries and all assets, with the probable exception of high-grade bonds," Grantham warned. "Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity."

Ouch.

Grantham sees two big potential catalysts that might turn this bull market into a bear: a surge in inflation, leading to higher interest rates, and a squeeze on profit margins, which are currently running way above long-term averages.

As for timing, he concedes that's impossible to predict. But here's the kicker: Even Grantham thinks you probably need to be bullish right now. The reason? Most bubbles, he notes, go through a short but dramatic "exponential phase" just before they burst. Like Japan in 1989 or the Internet in early 2000.

"My colleagues," wrote Grantham, "suggest that this global bubble has not yet had this phase and perhaps they are right. ... In which case, pessimists or conservatives will take considerably more pain."

The Wisdom of Crowds

April 16, 2007

Michael Mauboussin recently wrote Explaining the Wisdom of Crowds: Applying the Logic of Diversity (PDF).

Turtle Religion

March 28, 2007

One of the more interesting aspects of the Turtles involved the differing religions of those involved in the process. From a relapsed Catholic to Christian to Jewish to a Jehovah's Witness - the Turtles and everyone involved in the process were a melting pot of personalities and beliefs all unified under Dennis' will. Is there any one religion that worked out better? There is no evidence to draw any conclusion there.

Despite

March 27, 2007

I met with an old pro trader yesterday in his NYC office. He runs one of the largest clearing firms on the NYMEX. He has his unique way of doing things and clearly is not a trend follower. That said, his concern about knowing how to take losses properly echoed the wisdom of Wall Street's great trend traders. His most interesting comment was about the word "despite". He loved to see the word. For example, if you see the talking heads saying, "Despite bad news Apple stock went higher", he would view that as an opportunity to go long even more. Conversely, if he saw "despite good news, Apple went lower", he would go short. He wasn't trying to preach fundamentals or "news" reading, but just wanted to pass along his insights from the last 20 years. Sure, it was short and simple wisdom, but then again most good Wall Street wisdom is that way, the hard part as he reminded me is the execution.

A Chart Is a Chart

March 10, 2007

After 2 weeks of Wall Street's press core manically feeding us "news" about crashes, mini-crashes, Greenspan speeches, corrections and every other factoid under the sun, we are left with THIS. Is there anything special on that chart? After 2 weeks of "the world is ending", what is so unique about that month of movement on the Nasdaq? I am sure some data cruncher can find any number of charts that look exactly like that one. My statement doesn't mean that every quant or trend trader cleaned up in the last 2 weeks. The big difference is that trend traders expect loss, expect the unexpected and accept the volatility. The fundamental news driven crowd start with a prediction, then when it all backfires, we see the histrionics of the last 2 weeks.

Market Forces or "Why Explanations"?

March 02, 2007

Feedback from a reader:

According to what I learned in school: aren't assets priced based on market forces? Supply and demand? What I don't understand is, when I read news articles, the market is supposedly experiencing a correction now. What correction? Aren't those assets prices based on people's demand for then? Whatever the price is at any particular moment that is the price that people are willing to pay. How do we determine at any point they are not 'overpriced' and how can anyone do that when prices are constantly changing?

Barry Ritholtz assembled some of the better "whys" to explain the correction:

4 of his top 10 myths of the Great Correction of 2007:

1. Chinese regulators caused the meltdown.
2. It was Greenspan's fault.
3. Blame China's market crash.
4. A Dow Jones Glitch caused the plunge.

More good ones?

Controlling Emotions is Not the Goal of Trading Psychology

February 19, 2007

Controlling Emotions is Not the Goal of Trading Psychology (.doc) by Brett Steenbarger.

Tricks to Soften the Pain of Saving

This WSJ article by Jonathan Clements caught my eye:

My check register says my checking-account balance is perilously close to zero. Yet, in truth, there is $4,000 or $5,000 in the account. Sound weird? It is. But let's face it: If we were all completely rational, we wouldn't have any problems managing money -- and we certainly wouldn't have a negative savings rate in the U.S.

Continue reading Tricks to Soften the Pain of Saving »

Mark Cuban on Preparation

February 18, 2007

I found a good excerpt on Mark Cuban's blog. He attended Indiana University when Bob Knight was the basketball coach. Cuban was reflecting on what was the greatest thing learned from the famed basketball coach:

When I was at Indiana you were on 60 Minutes. In your interview you said one single thing that I took to heart. I reminded myself of it while it was in school at Indiana. I reminded myself of it when I failed. I reminded myself of it before any of the many businesses I have started I will continue to remind myself before any of my endeavors going forward. Its also the best advice I've been able to give people of any age who ask me for advice. Its also the characteristic I look for when choosing a partner or hiring...You said, and I'm paraphrasing: "Everyone has got the will to win, its only those with the will to prepare that do win." Words for every athlete and those of us who partake in the Sport of Business to live by.

Trading rules, or a good entrepreneurial plan if pursuing some business idea, are important, but that will to prepare is even more critical.

We Can Spot Snakes In The Grass Faster Than Harmless Objects

January 20, 2007

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).

Continue reading We Can Spot Snakes In The Grass Faster Than Harmless Objects »

Bite & Spit

January 18, 2007

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.

Google Hiring Practices

January 03, 2007

There is an interesting story in the NY Times about Google's hiring practices. An excerpt:

Unfortunately, most of the academic research suggests that the factors Google has put the most weight on — grades and interviews — are not an especially reliable way of hiring good people. “Interviews are a terrible predictor of performance,” said Laszlo Bock, Google’s vice president for people operations. “With traditional hiring methods, we were worried we will overlook some of the best candidates.”

The Turtles were originally screened by primarily intelligence tests and then for a games playing aptitude. As they learned, and as Google is learning now, there is always something else to success than pure IQ. In Google's case it is worth noting that almost every new hire is going to be support staff by the nature of their expansion. It's the core leaders at Google, the core engineers, who made it happen and control all.

The Pyschology of Regret

January 01, 2007

The recent Yahoo! Finance article The Psychology of Regret (PDF) is good food for thought.

Friends for Life

December 27, 2006

Michael Martin sent me Friends for Life: An Emerging Biology of Emotional Healing (PDF). He noted that this may be one reason why Ed Seykota's Tribe is successful.

Selling Hope

December 06, 2006

A Swiss fund of funds manager said to me the other day, "Cosmetic and financial services have much in common. They both sell hope."

I told her I was going to steal her line!

In all seriousness, she has a point for many traders and many trading strategies. However, I am not so sure it applies to trend following since most trend followers talk of their warts and negatives as much as they talk of the real and tangible positives to the philosophy.

Michael Mauboussin NPR Interview

November 29, 2006

An interesting audio interview with Michael Mauboussin on NPR Radio. You will need Real Player.

Study: Money-Happiness Link Is Complex

November 26, 2006

Food for thought:

NEW YORK -- (AP) Does money buy happiness? The connection is complex, he says. But in fact, very rich people rate substantially higher in satisfaction with life than very poor people do, even within wealthy nations, he says. "There is overwhelming evidence that money buys happiness," said economist Andrew Oswald of the University of Warwick in England. The main debate, he said, is how strong the effect is.

Continue reading Study: Money-Happiness Link Is Complex »

Mental Levels

November 23, 2006

Feedback from an old pro trader:

After over 30 years of being involved in the futures markets I have now come to the conclusion that the old cliche about trading being 90% mental is really true. As I have stated before Trend Following may not be everyone's cup of tea either because of emotional or perhaps financial issues, but I can guarantee you one thing-trading AGAINST the trend in any time frame will lead to a very short and painful trading career be it hourly or weekly. I have been listening to some of my old "mental" tapes and here are the "Mental Levels" of trading successfully.

Unconscious Incompetence: You don't know it and you don't know you don't know it.

Conscious Incompetence: You finally figure out you don't know it and are aware there is something you need to learn.

Conscious Competence: You now know it for the most part and frankly this can be a difficult stage for some like me. I knew that I knew it but if you still have to think about it "as in pulling the trigger" on a trade things can still be difficult.

Unconscious Competence: Where I am now I don't even think about "it" I just do "it"! There are no parts of my brain screaming, "Is this really a set up?" or "What if this does not work?” I have found myself in the "flow" and have accepted that losing trades simply put me closer to winning trades. I have also become more humble realizing what I had to go through to get "here" and the funny thing is that I truly feel I have only scratched the surface of what I have yet to know! Have a great trip to the Far East!

What Trading Teaches Us About Life

November 19, 2006

'What Trading Teaches Us About Life' is a good top 10 list from Brett N. Steenbarger, Ph.D.

Trading is a crucible of life: it distills, in a matter of minutes, the basic human challenge: the need to judge, plan, and seek values under conditions of risk and uncertainty. In mastering trading, we necessarily face and master ourselves. Very few arenas of life so immediately reward self-development--and punish its absence. So many life lessons can be culled from trading and the markets:

1) Have a firm stop-loss point for all activities: jobs, relationships, and personal involvements. Successful people are successful because they cut their losing experiences short and ride winning experiences.

2) Diversification works well in life and markets. Multiple, non-correlated sources of fulfillment make it easier to take risks in any one facet of life.

3) In life as in markets, chance truly favors those who are prepared to benefit. Failing to plan truly is planning to fail.

4) Success in trading and life comes from knowing your edge, pressing it when you have the opportunity, and sitting back when that edge is no longer present.

5) Risks and rewards are always proportional. The latter, in life as in markets, requires prudent management of the former.

6) Happiness is the profit we harvest from life. All life's activities should be periodically reviewed for their return on investment.

7) Embrace change: With volatility comes opportunity, as well as danger.

8) All trends and cycles come to an end. Who anticipates the future, profits.

9) The worst decisions, in life and markets, come from extremes: overconfidence and a lack of confidence.

10) A formula for success in life and finance: never hold an investment that you would not be willing to purchase afresh today.

Up in Smoke

November 13, 2006

From Ben Stein:

I'm 61, and have many friends who are roughly the same age. In fact, most of my friends range in age from 50 to around 65. Some of them are far happier and more self-confident than others. Some of them have plans to go places, play golf, take photos of exotic lands. That's some of them. The others are in fear, afraid to leave their houses, afraid to think of growing old -- just plain afraid. I can think of two major differences between the ones who are successful and the ones who are not. The first difference is that the confident group did not disable themselves by drug use or excessive alcohol use. It's an amazing thing, but it's true: The men and women I know who have spent a lot of time smoking pot have, by and large, thrown their lives away in the pursuit of feeling no pain. There are exceptions, but typically they can barely get out of bed, let alone pursue a career aggressively or save in a disciplined way. Basic, long-term sobriety seems to me a precondition for a successful life, and certainly a precondition -- in most cases -- for a life of prudence as far as money is concerned. The man or woman lost in marijuana-induced bliss cannot and will not be able to evaluate investment options and pick the best ones -- it's that simple. One of the many blessings of sobriety is to be able to invest sensibly.

What It Takes to Be Great

October 23, 2006

Regardless of the life endeavor, greatness leaves a trail. What does it take? A good read from CNNMoney.com (PDF) on the subject.

Brett Steenbarger Article

October 20, 2006

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!

Good Advice

October 09, 2006

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."

2. "If you have a procedure, and you follow that procedure, and it doesn't turn out, you feel less regret," said Meir Statman, a finance professor at Santa Clara University who studies investor behavior. "Whereas if you get up one morning, decide to buy, and it doesn't turn out well, you're in a much worse position emotionally."

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."

Loss and Hope

September 25, 2006

Janice Dorn (site) submitted this article:

Pain is what you walk through. Misery is what you sit in. Take an old pair of jeans and cut a hole in one of the front pockets. Now, start pouring sand into that pocket. What happens? Sand runs down your leg and to the ground. What do you do? Keep pouring until the sand is up to your ankles? Your knees? Your waist?

Continue reading Loss and Hope »

The Hazards of the New Online Collectivism

August 27, 2006

Jaron Lanier recently wrote an essay called The Hazards of the New Online Collectivism. A summary:

"The hive mind is for the most part stupid and boring. Why pay attention to it? The problem is in the way the Wikipedia has come to be regarded and used; how it's been elevated to such importance so quickly. And that is part of the larger pattern of the appeal of a new online collectivism that is nothing less than a resurgence of the idea that the collective is all-wise, that it is desirable to have influence concentrated in a bottleneck that can channel the collective with the most verity and force. This is different from representative democracy, or meritocracy. This idea has had dreadful consequences when thrust upon us from the extreme Right or the extreme Left in various historical periods. The fact that it's now being re-introduced today by prominent technologists and futurists, people who in many cases I know and like, doesn't make it any less dangerous."

I would argue the hive mind in some way or another has always been there. I would also argue that the hive mind is what allows traders like trend followers to profit in the zero sum game.

Robert Kiyosaki - Good Line

August 23, 2006

I caught a good line from Robert Kiyosaki recently:

One of the more financially dysfunctional notions I hear from poor people is that "money doesn't make you happy." I don't know about you, but I'm much happier when I have an abundance of money.

Analysis BS

August 22, 2006

It is rather different running a site like this. Many people expect and frankly want tips. If they don't see tips, they actually question the substance. Go figure. On top of that, others want analysis, whatever that means exactly. Daily comments about what the market did? No, thanks, I would rather watch grass grow or sniff glue.

Every top trader I have met works like hell to develop a philosophy. They convert that market philosophy to rules. Those rules are often then reduced to code a PC can comprehend. After that, they stand back and see if their whole procedure acts as expected. Tell me, if you build a system that gives you an entry and exit, tells you "how much" to bet while along the way adjusting to your current capital and the market volatility - why does there need to be more analysis?

Execution Vs. Strategy

August 08, 2006

From Fast Company an excerpt worth considering:

Execution will always be more important than strategy. Actions speak louder than words. A fair-to-middling strategy exceptionally executed will almost always yield better bottom-line results than a great strategy poorly executed. A great strategy never executed -- and it happens a lot more than any of us would like to admit -- is a lame exercise in futility. [For example] John McKay had a track record as the highly successful coach of the USC Trojans [and had moved on to coach in the NFL]. A sportswriter caught McKay right after a particularly ugly loss:

"Coach McKay... What do you think of your team's execution?"

He responded: "I'm in favor of it."

Just do it was McKay's message. No excuses.

K.I.S.S. of Trading

August 06, 2006

Janice Dorn sent in this piece tonight:

"Emails from traders and investors of every ilk come to me on a daily basis. I am grateful, and urge you to keep them coming, as you inspire me, challenge me and force me to think. Everyone has a different way of being in the world and...as a logical corollary... in the markets. I get charts, graphs, opinions, links to articles, and more opinions. So much lately has been what the Fed will or will not do and how it will affect the precious metals and the dollar. I work hard every day to prevent my head from spinning, keep it attached firmly to the neck area and to attempt to filter out the signal:noise ratio."

Continue reading K.I.S.S. of Trading »

Investmental Illness: A Guide to Getting Well

August 01, 2006

Forget the specific trading advice in this article (PDF), which is circumspect, but concentrate on the psychological aspects - which are universally right. An excerpt:

"An irrational and frequently obnoxious overconfidence in one's own investment prowess, this narcissistic condition is so named because it is far more common among men than women. The ailment has been well-known among women for some time but was first quantified by researchers Brad M. Barber and Terrance Odean. Looking at data from 45,000 different investors between 1991 and 1997, Barber and Odean found that overconfidence in trading ability caused men to trade more often than women -- a lot more. The men in the sample, all told, traded 45 percent more on average than women. As a result, the increased transaction costs and taxes associated with frequent trading shaved 2.45 percentage points off men's total returns every year, compared with just 1.75 percentage points for women. The thing is, men and women look at money in different ways, says Nancy Langdon Jones, a financial planner who practices in Rancho Cucamonga and Claremont, Calif. "For women, money means security. For men, it means power." Matt McGrath, a planner with the Miami area wealth management firm Evensky & Katz, agrees. "Most of our couples seem to fit the stereotype," he says. Men tend to be more aggressive, while women are often more conservative and circumspect -- sometimes to the extent that they separate their accounts completely."

Defining and Measuring Happiness

July 31, 2006

An interesting brief on happiness. An Excerpt:

"Popular writers focus on the causes of happiness, but defining and measuring it is a more basic first step for the advance of a science of happiness."

Why Traders Lose

July 27, 2006

Brett Steenbarger put together a list of "common reasons why traders (and most other human beings!) fall short of being fully intentional":

1. Environmental distractions and boredom cause a lack of focus - All of us have limits to our attention span and these are easily taxed during quiet times in the market;

2. Fatigue and mental overload create a loss of concentration - The demands of watching the screen hour after hour make it difficult to be sharp, creating fatigue effects that are well-known to pilots, car drivers, and soldiers;

3. Overconfidence follows a string of successes - It is common for traders to attribute success to skill and failure to situational, external factors. As a result, a string of even random wins can lead traders to become overconfident and veer from trading plans--especially by trading too frequently and/or trading excessive size;

4. Unwillingness to accept losses - This leads traders to alter their trade plans after trades have gone into the red, turning what were meant to be short-term trades into longer-term holds and transforming trades with small size into large trades by adding to losers;

5. Loss of confidence in one's trading plan/strategy because it has not been adequately tested and battle-tested - It is difficult to tolerate even normal drawdowns unless you have confidence in your methods. This confidence does not come from mere positive self-talk. Rather, it is a function of testing your methods (historically and in real-time) and seeing in your own experience that they truly work;

6. Personality traits that lead to impulsivity and low frustration tolerance in stressful situations - Psychological research suggests that some individuals are more impulsive than others and less conscientious about adhering to plans and intentions. These personality traits often are accompanied by stimulation-seeking and a high degree of risk tolerance: a deadly combination.

7. Situational performance pressures - These include trading slumps and increased personal expenses that change how traders trade and lead them to place P/L ahead of making good trades. By worrying too much about how much money they make, traders can no longer follow markets with a clear head;

8. Trading positions that are excessive for the account size - This is much more common than is usually acknowledged. It creates exaggerated P/L swings and emotional reactions that interfere with cool, calm planful behavior;

9. Not having a clearly defined trading plan/strategy in the first place - Interestingly, many traders do not consider themselves to be discretionary traders, but in fact do not have a firm, explicit set of trading rules that they follow. It is difficult to be consistent with a plan (and to evaluate your consistency), if you don't have the plan clearly laid out;

10. Trading a time frame, style, or market that does not match your talents, skills, risk tolerance, and personality - All too often, traders veer from their plans because those plans are ones that they feel they *should* follow, but that don't truly come naturally to them. These departures from discipline are actually unconscious attempts to trade in a style that is more in tune with the trader's skills and talents.

Source: Brett Steenbarger

The Special Quality of Sports

July 23, 2006

A great excerpt from Yahoo Finance by Jim Citrin:

"Participation in sports and fitness has multiple benefits for people of all ages. For young athletes and girls in particular, organized sports boost self-esteem and motivation, essential ingredients in the development of future leaders. Studies show that young athletes who are happy earn better grades, have fewer problems outside school than non-athlete classmates, have better attendance, and drop out far less frequently. Not that sport is unique to developing these qualities. Other competitive collaborative activities such as the military, theater, dance troupes, or debate teams can build them up as well. But there's something special about the physicality of sports and fitness. Those who exercise regularly know the manifold benefits to keeping active and in shape. A lot of scientific evidence shows that exercise provides a short-term increase in the ability to process data. Exercise has also been shown to reduce depression and anxiety, illnesses that can hamper the functioning of the brain. And over the long term, exercise has been shown to help prevent the mental effects of aging."

I have met many people in my life who were successful, however, the ones who have had sports backgrounds always seem to have something 'extra'.

Wishes, Hopes and Desires

July 17, 2006

Janice Dorn sent in nice feedback:

Without realizing it, people tend to perceive things according to how they want to see them, suggests a new study, soon to be published in the Journal of Personality and Social Psychology. In five separate tests conducted by a graduate student from Cornell, participants regularly labeled an indistinct figure in a way that would lead to their obtaining a taste reward.(in this case fresh-squeezed orange juice as opposed to a lumpy gelatinous veggie smoothie). In other words, when faced with ambiguity, the subjects made the choice which would result in something pleasurable for them. This gives credence to the age-old hypothesis that wishes, hopes and desires actually influence what a person sees. The analogies to trading are clear. We see whatever is happening in light of our expectations of reward, and will use all manner of neural trickery to rationalize "why" something is happening rather than to deal with the reality that it is actually happening. We want the orange juice, and will lie to ourselves about what we are actually seeing, in order to attempt to obtain that reward. Just as we feel uncomfortable in our personal lives when faced with "uncertainty" or not knowing, so do the markets. We want to get the orange juice, and this tends to distort our perceptions and lead to an insidious kind of self-deception. Sigmund Freud said that neurosis was the inability to tolerate ambiguity. Do we bias the outcome of ambiguous situations in favor of hope and away from fear? What do you think?
Janice Dorn, M.D., Ph.D.

What Do You See When You Look in the Mirror?

July 04, 2006

Janice Dorn, M.D., Ph.D (bcoached@cox.net) sent me her most recent article:

"The way we perceive our actions or the consequences of our actions is, often, entwined closely with the way we identify who we are. We traders often define ourselves in terms of our trading...our actions and inactions, our triumphs, our gains and our losses. As a result, it is easy to merge so strongly with a decision that has resulted in unexpected negative consequences that we actually become that decision. The disappointment and shame we feel when we make what we perceive is an error, grows until it becomes a dominant part of our identity. We rationalize our "poor" decisions by labeling ourselves incompetent decision makers, or, in the trading vernacular "idiots." Imagine walking around all day telling everyone that you are an idiot? Why are you doing that? What gain are you getting from that, and what message are you giving to those around you? Your true identity cannot be defined by your choices. Your essence---what makes you a unique human being-- exists independently of your decision-making process. This is one reason why we are able to love someone (and, ideally, ourselves) without condition. We love who they are as a person, and understand that people do not always make choices that are in their best interest or the best interest of others. Nonetheless, we continue to love them. Trading is not about being right or wrong. It is about making money. It's about making more than you lose. All trades contribute to your development and are an integral part of your evolution to trading mastery; yet they are still separate from you as a person. A trade that does not result in its intended outcome (making money) is in no way a reflection of who you are as person. (The same is true for winning trades, and I will have more to say about that at another time). Nonetheless, a trade gone bad (losing money or not cutting your losses short) can have dire effects on your ability to trust yourself. Your self-esteem suffers and this spills over into every aspect of your life. You can avoid becoming your trades by affirming that a "bad trade” was just an experience, that you did not let your losses run, and that the markets will always give you another chance. Every trade is an opportunity to learn, grow and make you a better trader. If you are not learning, you are not growing and your trading ability will stagnate. You will not progress through the four critical phases necessary to achieve trading competence. You are not your trade, but you are RESPONSIBLE for your trade. If it doesn't work, get out, regroup yourself and wait for the next signal. It is fine to analyze after the fact what you did and why you did it. In fact, it is essential to trading success to look at every trade you do, why you did what you did and how you felt at the time you did it. However, be quick about it. Avoid lingering in the past and beating yourself up over the bad trade. Try to analyze, backtest and reflect on the consequences of your decision from a rational rather than an emotional standpoint. Allow your primitive, limbic, rat brain to send emotional signals quickly into the new, rational brain for processing and integration. Accept your rat brain and feel the feelings, but get out of that part of the brain and into the higher learning centers. Strive to understand why you made the choice you did, forgive yourself, and then move forward. In other words, get over yourself as quickly as possible. A perceived mistake becomes a valuable learning experience and is, in essence, a gift from which to learn and grow. You are not a bad person and you are not your trading decisions; you are simply human. Keep going, keep trying, learn from your great trades and your not-so-great ones, and never ever give up!

Feel free to drop Janice a line at her email above. I understand her web site will be up soon.

Two Systems of Reasoning

July 02, 2006

James Montier in a paper a few years back offered two systems of reasoning:

System One/X-system/Reflexive/Intuitive
Holistic
- Affective (what feels good)
- Associative - judgements based on similarity and temporal contiguity
- Rapid parallel processing
- Concrete images
- Slower to change
- Crudely differentiated - broad generalisation
- Crudely integrated - context specific processing
- Experienced passively and preconsciously
- Automatic and effortless
- Self-evidently valid: "Experiencing is believing" or perhaps wishing is believing

System Two/C-system/Reflective
- Analytic
- Logical
- Deductive
- Slow, serial processing
- Abstract images
- Changes with speed of thought
- More highly differentiated
- More high integrated- cross context processing
- Experienced actively and consciously
- Controlled and effortful Require justification via logic and evidence

He explains:

System X is essentially the emotional part of the brain. It is automatic and effortless in the way that it processes information. That is to say, the X-system pre-screens information before we are consciously aware that it even made an impact on our minds. Hence, X-system is effectively the default option. X-system deals with information in an associative way. Its judgements tend to be based on similarity (of appearance) and closeness in time. Because of the way X-system deals with information it can handle vast amounts of data simultaneously. To computer nerds it is a rapid parallel processing unit. In order for the X-system to believe something is valid it may simply need to wish that it were so.

System C is the 'Vulcani' part of the brain. To use it requires deliberate effort. It is logical and deductive in the way in which it handles information. Because it is logical, it can only follow one step at a time, and hence in computing terms it is a slow serial processing unit. In order to convince the C-system that something is true, logical argument and empirical evidence will be required. The table below provides a summary of the main differences between the two systems.

We Have Met the Enemy...and He Is Us

June 29, 2006

In the quest to find interesting information, take a read of Lawrence Speidell's The Human Element...in Individual and Institutional Investing (PDF).

Long-Term Investing in a Short-Term World

June 19, 2006

Michael Mauboussin, Chief Investment Strategist of Legg Mason Capital Management (LMCM), authored this paper titled Long-Term Investing in a Short-Term World (PDF).

Toxic Trading by Janice Dorn

Janice Dorn, M.D., Ph.D. sent me this piece. I like it:

There is a Zen Koan that says: Don't just do something-sit there.

How appropriate for these markets!

The most difficult thing for traders to do is to sit there and wait. Why? Because, we live in a society that is on a total dopamine, hypomanic binge. This is never more clearly manifest than by those who absolutely have to be in the markets at all times, desperately need to be trading and simply cannot wait. They are human do-ings, rather than human be-ings.

Continue reading Toxic Trading by Janice Dorn »

Mean Markets and Lizard Brains

June 05, 2006

Peter Borish had mentioned the book Mean Markets and Lizard Brains: How to Profit from the New Science of Irrationality by Terry Burnham to me some time back. This interview with the author jogged my memory: PDF.

Practice Makes

May 31, 2006

Brett Steenbarger authored this article on practice (PDF). It is a real good piece, except of course trend followers who would not be saying:

"...and their ability to read patterns in noisy market data and act upon them has become lightning quick."

That line is my small quibble! That skill is not needed in trend following.

Promises

May 23, 2006

Ed Seykota was recently asked at his site:

"When you select what looks like a "promising" stock, do you keep pulling the trigger after being stopped out or do you move on to other markets if the first attempt fails? The reason I am asking is because I noticed many stocks will breakout with strength only to fall back, hit my stop, linger a couple months or so and then really take off."

Ed responded:

"A promise is a statement that you will do something in the (non-existing) future. As such, all promises have an inherent design flaw. I don't know of any stocks that make promises. I merely know stocks that meet various mathematical criteria in the now. You might consider having a look at what you mean by a "promising" stock."

Crash Talk

May 15, 2006

An interesting article about crash talk (PDF). You never know when or if everything will really take off, but if markets all go sharply, trend followers will be there.

Steenbarger and Mann on Risk

May 08, 2006

Brett Steenbarger and Adam Mann offer insights into 'How to Manage the Psychological Risks of Trading' (PDF). An excerpt:

"The psychologist Donald Meichenbaum introduced a technique for stress management that he called stress inoculation. He found that exposing people to low levels of an anticipated stressor helped them cope with actual stresses when they occurred. Evaluating your performance--knowing your likely drawdowns, drawups, and flat performances in advance--is a kind of stress inoculation, preparing you for the outcomes you're likely to face even when you trade well. We are well acquainted with how emotions can disrupt trading; less well appreciated is how trading can play with our heads! As in medicine, a little inoculation can go a long way toward preventing major ills."

You have to like the 'inoculation' connection. Nice 'aha!'

Intentions

May 01, 2006

Ed Seykota offers this comment on intentions at his web site:

"Intention = Result. The thing you state as your intention may not be your real intention. In that case, you intend to not manifest your statement intention as part of a larger (secret) intention. For example, you promise to show up on time and show up late. Your intention may be to gain attention by making people wait for you."

So many people fixate on rules and techniques, but forget "intentions". As you approach your daily life, contemplating how you will find the big score, have you thought about your true intentions? The trading psychology part of the equation is just as important as the quant side of the equation.

Behavioural Finance Resource

April 26, 2006

A very good web resource outling a wide array of Behavioural Finance resources can be found here. Yes, the list is long winded and in some instances very academic, but there are some great pieces of information there. Go spend some time exploring.

Robert Kiyosaki: Outside the Box Thinking

April 15, 2006

I came across this piece of writing from well-known author Robert Kiyosaki:

A few weeks ago, I was at a financial conference giving an investing talk. A hand from the audience shot up as I talked about returns on investments of 50 percent, 1,000 percent, and infinite returns. "That's a load of rubbish," shouted the person attached to the hand waving in the air.

I asked the participant to clarify what he thought was a load of rubbish.

"You can't get such high returns," he replied angrily. "I'm a financial planner, and I've never seen anyone achieve such returns."

"What kind of investments do you recommend for your clients?" I asked.

"I recommend a well-diversified portfolio of cash, stocks, bonds, and mutual funds," he replied indignantly. "That's why I ask you: How can you get such high returns from these investments?"

"Because I don't invest in those investments," was my reply.

Kiyosaki went on to explain some real estate projects where he is making really good returns. The issue isn't what Kiyosaki is making his money in; the issue is the defeatist attitude of that financial advisor waving his hand. The man had no creativity. His only experience or understanding was to accept what the "averages" were giving him in terms of stocks and bonds. Great traders, great entrepreneurs make things happen. They don't just sit around and accept the "average".

Oprah on Wealth

April 12, 2006

From news reports:

Oprah Winfrey is a rich woman - and she's got no problem with that. Speaking in Baltimore on Monday at a fundraiser for Beth Tfiloh Dahan Community School, Winfrey told the audience, "I have lots of things, like all these Manolo Blahniks. I have all that and I think it's great. I'm not one of those people like, 'Well, we must renounce ourselves.' No, I have a closet full of shoes and it's a good thing." Winfrey, 52, who is reportedly worth more than $1 billion, said she doesn't feel guilty about her wealth. "I was coming back from Africa on one of my trips," she said. "I had taken one of my wealthy friends with me. She said, 'Don't you just feel guilty? Don't you just feel terrible?' I said, 'No, I don't. I do not know how me being destitute is going to help them.' Then I said when we got home, 'I'm going home to sleep on my Pratesi sheets right now and I'll feel good about it.'"

This bit on Oprah reminded me of a similar, but much more eloquently worded sentiment here. And yes, there are a good many people who fail in the markets (or any other entrepreneurial endeavor for that matter) just because they think they don't deserve it.

What We Believe but Cannot Prove

March 29, 2006

I am reading a new book titled "What We Believe but Cannot Prove: Today's Leading Thinkers on Science in the Age of Certainty". Definitely pick it up. Quick read, but thought provoking. One description of the book:

"In this informative and often surprising book, more than 100 notable scientists and scholars answer the question, "What do you believe even though you cannot prove it?" The responses range from the thought-provoking to seemingly trivial (or just plain silly). Professor of cosmology and astrophysics Martin Rees, for example, admits that he believes intelligent life is unique to our world (in sharp contrast to many of his fellow contributors). Alun Anderson, senior consultant to New Scientist magazine, believes cockroaches are conscious. Mathematician and science-fiction novelist Rudy Rucker believes in a multiplicity of universes. Susan Blackmore, who has written widely on the subject of consciousness, appears to believe that she doesn't exist. The contributors touch on a broad spectrum of subjects, from religion to science and many points in between. Although some of the responses are arrogant or nitpicky, the majority are thoughtful, honest, and revelatory of the contributors' own intellectual and philosophical biases. And the book certainly gets us thinking about our own deeply held, if entirely unprovable, beliefs."

A Twit

March 24, 2006

I have always thought Michael Kinsley was a twit. His editorial today titled "Why Be A Billionaire?" (PDF) doesn't help his cause. I get the point that Kinsley thinks some people have too much money. But in his zeal to redistribute other people's money, how would he do it exactly? Does the government decide what is too much? Who decides what toys we can buy? The government again? Notice how Kinsley forgets to note that the majority of these people are self-made? This kind of writing is aimed straight at creating class warfare and petty jealousies.

Why Skepticism Is Rare

March 19, 2006

Two white papers from James Montier: 'Why Skepticism Is Rare' (PDF) and 'Applied Behavioural Finance: Insights into Irrational Minds and Markets' (PDF). Both of these obscure PDFs were pulled from Google.

Cat Food Scare Tactic

March 13, 2006

I like Ben Stein. He is a funny guy. But his "all old people will eat cat food scare tactic (PDF)" is short-sighted. An excerpt:

"What will it be like to live in the horrible new dog-eat-dog world, with no one caring whether you live or die -- and have no money? What will it be like on that crowded freeway? You don't want to find out...But be very scared -- and start doing something about it now. Tomorrow is too late. Do it now."

The world has always been dog eat dog. That's life. But being "scared" into doing "something" is not the best plan exactly. There is no need to be scared of the future. The first step is education. The last step is education. Fear for the sake of fear never helps anyone.

Lust for Sex v. Money

March 11, 2006

The lust for sex and money is the same. Listen to interview (MP3) with Stanford Professor from Bloomberg.com.

Behaving Badly

March 07, 2006

From James Montier an excerpt from his "Behaving Badly":

"None of us are immune to behavioural biases. Those who have attended my teach-ins on the subject have had a short test inflicted upon them. This note provides both a copy of the test (for you to try) and an analysis of the results from our sample of 300 fund managers. I will say no more to avoid influencing your answers. But my faith in behavioural finance is stronger than ever!"

Read full paper "Behaving badly" (PDF)

Trading Mentors

February 27, 2006

Brett Steenbarger, at a recent FIA event panel, offered insights regarding trading mentoring. You can listen to the 1 hour long audio presentation here. You will need the free RealPlayer to listen to this audio.

Surrender

February 20, 2006

Can you accept the idea that in order to be successful you must "surrender" to the market? If you can stop worrying about what might happen or what should happen, then you are free to focus on what the market is doing right now. Isn't that where the money is to be made? In the moment of right now?

That Which Cannot Be Said

February 15, 2006

That Which Cannot Be Said (PDF) from Dr. Brett Steenbarger is good reading. An excerpt:

"The role of a good psychologist is to comfort the afflicted and afflict the comfortable. If you're comfortable in bed while your market is in its peak period of opportunity, you shouldn't be comfortable. I told the trader he didn't deserve to succeed for the same reason I'm writing this article: to create a test. I wanted to put a mirror in front of his trading so that he would either close his eyes or squarely face what he saw."

Stress and Babies

February 14, 2006

Some thought provoking research (PDF 1, PDF 2) regarding stress and childbirth. These articles came up in conversation during a meeting I had with one of the Turtles last week. This Turtle has shun the spotlight, but has a very interesting background and most interesting career.

Ken Tower Comment

January 18, 2006

From TheStreet.com today:

"The rally that began this year was so strong that you have to give the bulls the benefit of the doubt and assume the rally could continue. It's still early to get extremely pessimistic, but the bulls should view the overnight selloff as a warning signal. The groundwork is being laid for a move to the bottom of the channel."
Ken Tower, Chief Market Strategist with CyberTrader

I have met Ken. He comes from a technical perspective and we have talked 'trend following' as he has read my book. I know his comment is most likely the quick response to a deadlined reporter, but I have to disagree. Trying to give a historical accounting to one day of market action has no real purpose. One day of market action, unless it is a major market crash, is nothing but noise. There is no concrete way to divine market directions from one day. Yes, perhaps it is a small bone to pick with Ken, but I feel it is an important on