Category Archives: Personal Philosophy

Does A Record High Dow Mean My Population Model Of Investment Pricing Is Wrong?

Posted on by
3

If you’ve been following this blog since the beginning, you may know that I take a fairly dim view of investment.  If you haven’t read the linked article, you’ll want to do so before continuing or the rest of this won’t make much sense.

Today’s market news is that the Dow Jones Industrial Average (DJIA) made new record all time highs, eclipsing the previous highs from 2007.  This is, as news goes, only sort of important   The DJIA long ago ceased being particularly relevant when compared to the S&P 500.  The concept of Dow industrials and comparing them to DOW transportation stock to generate market signals (that’s “Dow theory” for the uninformed) has more or less been laid to rest by modern confusion about what constitutes an “industrial” stock.  For example Microsoft is part of the DJIA, but most of their products are licensed bits, not physical things delivered via a truck or rail car.  As a result their delivery won’t trigger business for transportation firms, and the whole point of Dow theory really doesn’t apply.  Given that, the DJIA is now pretty much a joke.  It’s just 30 big US stocks.  None the less, the DJIA lurches on like an unwanted extra in a zombie movie.  And of late, it’s been lurching up.

Contrast the DJIA’s behavior to my theory linked above about investing in the US.  The theory is basically that the supply of investments is proportional to working population  and the demand for investments is proportion to late-career working population.  In other words, the older the work force the more expensive/overpriced investments will be.  My logic was that as the baby boomer demographic (by far the largest in the US) hit retirement in 2000 and on average started to divest assets, asset prices would peak and start to fall in real dollar terms.  So a new high in the DJIA raises the question: am I flat out wrong? Continue reading →

The Difference Between Academic Econometrics and Quantitative Finance

Posted on by
Reply

I’m going to admit something few people know about me: I love arguing on the internet and engaging in sophisticated trolling.   I’m certainly not the only person to feel this way, but I may be one of the few people to openly admit it.  The public perception of online argument is that it’s at best a waste of time, inevitably self demeaning (see right), and at worst horribly antisocial and divisive.  Since the people I argue with are always anonymous and present of their own free will, I really don’t give a shit about the later two points.  But I would suggest that arguing on the internet and broader behavior of the same sort are actually one of the best uses of your time.  Weird, right?  As we’ll see in a second that’s more or less my point. Continue reading →

Get Over It – They Already “Stole” Your Trading Strategy

Posted on by
1

New traders think about strategies in a very peculiar way.  I started thinking about this today because I saw traffic from the following search term:

“is there anything i can do to protect my trading strategy”

Now, you may be wondering what this person wants to protect their strategy from.  Marauding bandits?  But maybe like me you’re not wondering, because you have (or had) the same anxiety.  The possibility that you’ll go to great lengths to discover a wonderful trading strategy, only to have someone else learn about it from you and make all the money.  This third party might learn your strategy because you told them, or more nefariously they might learn it without you knowing.  For example your broker might watch your trades, marvel at your amazing profitability, deduce the underlying strategy, and then duplicate (or even front run) it.

Please, please, please stop worrying about all this. Continue reading →

This Post is Brought to You By The Number 72

Posted on by
2

I’ve been reading and commenting on a lot of finance blogs lately, and as a group they’re beginning to piss me off.  I’m not talking about the recycle your toilet paper folks.  Those guys are unintentionally hilarious.  And I don’t really care one way or the other about the debt bloggers.  Good luck paying that off – seriously, I really do wish you the best.  But I can’t help you with anything more than platitudes and common sense since I’ve never paid off a debt more interesting than a month worth of credit card purchases.  And you can’t help me since I’ve got no debts to pay off.

No, the blogs that are pissing me off today are the ones giving well meaning but poorly though out investment advice. Continue reading →

Sure the Market is Rigged (and a Theorem)

Posted on by
Reply

“I am not superstitious, but I avoid situations in which I continually lose.” -Barry Greenstein, Ace on the River

I led an article with this quote before, but I consider it so key to understanding the markets that I’m going to blatantly re-use it.  The topic I want to discuss is the “rigging” of the markets.  As far as I can tell people have been complaining about rigged markets as long as there have been markets to rig.  The complaining seems to go on at a constant background level, but my perception is that the volume has picked up since the crash of 2008.  The nominal target of the whining changes over time.  In the 80s it was brokers, “boiler rooms”, and program trading.  In 2008/9 is was bailouts and the Plunge Protection Team.  Recently everyone’s bitching about quantitative easing and high frequency trading (HFT).  Five years from now it will be something we haven’t heard of yet.  At every turn the market is rigged.

If you want to succeed as a trader, you absolutely must not participate in this sob fest. Continue reading →

The Courage of the Right Convictions

Posted on by
1

One downside of writing a lot is that sometimes you miss the mark.  I think that happened here: Let’s Find Out.  Not that I was wrong per se, but I failed to capture the idea I was trying to get across.  What I should have written about instead was the relationship between courage, conviction, and success.

I learned from gambling in Las Vegas that the smartest gamblers frequently are not the richest. Most of them have comfortable middle class assets, but very few are millionaires.  Now, you might ask how I know these were the smartest guys at the card table.  But it was easy to tell: they were convinced of incredibly smart things and happy to tell you about it. Continue reading →

Let’s Find Out

Posted on by
1

I want to convince you of something.  It runs contrary to good old fashioned common sense, and yet I believe it’s true.  Consider:

When you encounter an economic opportunity where it’s totally unclear if you have the best of it, frequently the best thing to do is risk some of your money and time and find out.

This could be though of as the anti-business-school method.  Business grads spend plenty of hours figuring out how to analyze a business or opportunity, investigate the competition etc.  That’s great.  But it’s worth a little time to think about what happens if you give up on the B-school method entirely and instead learn about business by doing business.

Ideas like this are of course best illustrated by old gambling stories… Continue reading →

Additive vs. Multiplicative Thinking About Money

Posted on by
Reply

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

Posted on by
1

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 →

In Defense of Technical Trading

Posted on by
Reply

Previously I discussed different divisions within the trading world.  One of those divisions is  between technical traders and fundamentals traders.  I summarized the distinction as:

  • Technical traders base their trading decisions on numeric information about the price and trading volume of one or more securities over time.  This can include addition information like order book/depth of market (DOM) and tick/time and sales tape information about individual trade executions.  Most technical traders use various types of charting and mathematical or visual indicators to make additional sense of this information.  Quantitative (“quant”) traders are a subset of technical traders who put more emphasis on sophisticated mathematics to analyze data.
  • Fundamentals traders base their trades on economic information, usually betting that over the long run certain known economic relationships will hold.  They frequently pay little information to chart studies or previous price and put more emphasis on determining what the price of a security ought to be based on the totality of information about it.

I also mentioned that my personal bias is towards technical trading, although I’ve done both.  That’s not to say there’s anything wrong with trading on fundamentals, but technical trading is much more suited to my temperament and skill set.

I’ve come to realize, based on feedback to this blog, that some people have a dislike or distrust of technical trading.  Once upon a time this position was common on Wall Street as well, exemplified by the mantra “I’ve never met a rich technician.”  Over time, the Street perception has changed, but I still occasionally hear vestiges of the old anti-technical mantra.  Now, I have no interest in telling you how you should trade – what you do with your capital is your own business.  But I do think technical trading has substantial advantages, particularly for small, non-institutional traders.  Here are some of the reasons I prefer it: Continue reading →