Risk-On, Risk-Off

I used the terms risk-on and risk-off in a previous post, and someone was nice enough to comment that they had no idea what I was talking about.  That’s always the downside of using trader jargon, but it’s pretty hard to talk about trading without it so the best alternative is simply for people to point out when I’m being unclear.

Risk-on and risk-off are really a way of describing very broad, medium term market movements. Continue reading

Additive vs. Multiplicative Thinking About Money

If you think way back to grade school, you may remember that you studied addition and subtraction one year, and then a grade or two later studied multiplication and division.  Each pair of arithmetic operators intrinsically go together – they’re opposites of each other (algebraists would say inverses).  What I want to explore today is that each pair of arithmetic operators carries with it a means of thinking about numbers, and thus by extension thinking about money.  These two means of thinking are both useful but they’re surprisingly distinct, and people frequently make the mistake of applying the wrong type of thinking in a given circumstance.  My whole premise here may seem irredeemably nerdy, and it is.  But bear with me anyways – I reckon there’s real insight to be had. Continue reading

Leaving The Middle Class

This is my first new year as part of the financial blogsphere, and the year-end income and balance sheet share-athon took me a little by surprise.  Not that I’m opposed to people sharing information about their finances.  In “real life” it can cause social friction, but I see little harm in it on the internet – any people you offend will disappear silently into the night.  I just didn’t expect it.  I do think such disclosure is overall a good thing – it’s entertaining from a voyeuristic perspective, and it’s educational.  Enter the obvious question: am I going to share my income? Continue reading

Bulls, Bears and the Permanent Versions Thereof

Today’s post is about market bias.  Market bias is a trader’s opinion about the long term direction of the market.  If you’ve been learning what this blog is trying to teach, you first question should be “which market?” because there are many.  While it’s possible to hold a bias about any of them, the most interesting market are the “risk on” markets which are those that are positively correlated to the economy – stocks and commodities mostly.

Biases are traditionally expresses via two terms – “bull” and “bear”.  A bull thinks the market will go up.  A bear thinks it will go down.  The origin of the terms are lost to history but the most plausible explanation I’ve heard relates to the fighting tendencies of the two animals – bulls thrust upwards with their horns, bears claw downward.  What is certain is that the metaphor has stuck, going so far as to create a cottage industry selling tacky bull and bear statues for traders’ offices. Continue reading

Speculation and Investment

If you believe the mainstream media and the politicians they quote, the bulk of financial crisis are caused by “speculators”.  Speculation has come to mean, by some sort of press fiat, “trading we don’t like”.  This is unfortunate, because speculation has an older and more meaningful definition distinct from any implication of financial crisis.  This older idea is important because it describes what profitable traders do and how they make their money.  If you want to make substantial profits through trading, you will be speculating and thus you probably ought to know something about the subject. Continue reading

A Room of Sages and Fools – Deciding Who Decides

Here’s an interesting little brain teaser that has applications to trading, economics, politics and business.

Problem Framework:

There is a decision to be made.  For simplicity, assume there are two choices and one choice is correct and one is wrong.  Assume the labeling of the choices is arbitrary and thus neither is a priori more likely to be correct.  Assume the benefit of a correct decision is the same in magnitude and opposite in sign from the cost of an incorrect decision.

You have a room of N would-be decision makers. Continue reading