I’m not sure how I missed the online education revolution, but apparently it’s happening, for free, while I’m busy drinking beer. I hate it when that happens…
I think it’s pretty obvious that finance, going forward, is going to be about quantitative skills and computers. Really that’s been partially true for 15 years at least, and it’s certainly not getting any less true. Consider: Continue reading
The internet is in love with Warren Buffett, and for good reason. He’s been a very successful businessman, and his firms (first Buffett Partners (BPL), then Berkshire Hathaway(BRK)) have handily beaten the market for over 50 years. That’s a solid resume, and there’s plenty to learn about how he did it.
What’s unfortunate about this internet man crush is that the object of affection is a fake person. The Buffett the internet loves bears only a passing resemblance to the real story. This is too bad, because the real story is far more interesting than the myth. This is especially true if you’re a speculator as opposed to an investor, because the Buffett fortune is actually built on a bedrock of speculation.
Here are a few aspects of the real story that usually get left out: Continue reading
(part 1, part 2, part 3, part 4)
Last time we determined that beta neutral spreads are the perfect instrument to use in our speculative portfolio. Now we need to decide which spreads. Sadly, that’s as open ended a question as “Which stock should I buy?”. What I’m going to share with you here is a technique I’ve developed that seems to give good returns on relatively low risk. Continue reading
One of my goals on this site is to foster literate, respectful and informed discussion on trading. There’s a lot of reasons for this. First off, it’s somewhat draining providing info in a vacuum without learning new things myself. Second, in order to be a good trader you’re almost certainly going to need perspectives other than mine. Continue reading
Here’s a lesson that I’m consistently forced to re-learn: volatility and range matter. A lot. This is something which keeps coming up in my trading, and perhaps it represents a mental defect on my part that I can’t internalize it. Hopefully you can do better. Continue reading
( part 1, part 2. part 3)
Before continuing, you need to have a solid grasp of alpha and beta – otherwise the rest of this article will make no sense.
Back in part three, we developed a method for trading the S&P 500 for use in the long term speculative account. In other words, we’ve figured out how to trade beta. That’s good, but one of the goals of this speculation method is to limit beta exposure to +- 20% of the account value. The purpose of this limit is to mitigate account damage in unexpected crash situations (when long) or boom situations (when short). Since I’ve allocated 20% of the portfolio to beta trend following (which could thus produce betas between +-20%), ideally everything else in the portfolio should have a beta of zero. That’s a difficult requirement for stocks, however, because they essentially all have a positive beta, and in most cases that beta constitutes at least half of the stock’s movement. What we need is something that acts like a stock, but with no beta component. Continue reading
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
An arbitrage is a trade that produces near risk-free and near guaranteed profits. In general, independent and retail traders are not successful as arbitrageurs. We’ll get into the reasons why in a bit. But it’s still important to understand how arbitrages work, because they’re a fundamental part of the structure of the market. Each arbitrage defines an equation, for lack of a better word, of how the prices of various instruments should be related to each other and to interest rates. Some of these relationships are trivial to understand, but others are far from obvious. Continue reading
Before we continue with the speculative alternatives to investment series, I need to introduce some mathematical concepts. Yeah, yeah. You’ve got a hangover and barely eked out a C- in calculus. But stick with me.
Two key tools of quantitative finance are:
- combining financial instruments together
- slicing a single financial instrument up into smaller pieces to understand how it behaves
It’s pretty easy to understand how you combine instruments – the easiest way is to make an index. You take a bunch of instruments (say, stocks) that are somehow similar and average their price. Typically you weight the average by a size metric like market cap. Voila – an index. This is a big data approach to understanding the movement of the market.
It’s a little less clear how you take one instrument and slice it up. Turns out there’s slightly beefier math involved – Pearson correlation, linear models and linear regression in this particular case. It’s OK if you skipped that class – there are plenty of tools to help us get through the math. Continue reading
You don’t have to spend very much time poking around the financial side of the internet before you run into an internet economist. You probably know the guy (and it’s usually a guy). He’s very eager to point out that:
- The US is running a massive federal budget deficit, and as a result has accumulated an even more massive national debt.
- The US will eventually be unable to pay that debt via taxation, and will thus have to print money to pay it.
- This printing of money will cause massive inflation eventually turning to Weimar Republic style hyperinflation.
- If you want to protect your assets in this environment, you should buy gold because gold is real (as opposed to fiat) money that can’t be printed. So while everyone else is being inflated away, you’ll be safe and secure.
You’ll see a few variations on this argument. For example, the advanced internet economist might suggest to you that holding gold is not enough – it must be physical gold in your personal possession (as opposed to gold in someone else’s vault, gold futures, gold miner stocks, or a gold ETF). The reasoning here is that physical gold in your possession presumably can’t be easily confiscated or otherwise regulated by the government. Either that, or the internet is full of would-be Scrooge McDucks.
Now, don’t get me wrong. McDuck aside this argument is chocked full of indisputable facts and sound economic reasoning. It seems like it ought to be right. There’s only one problem: 1985 just called, and they want their bullet points back. Continue reading