Archives of “January 7, 2019” day

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Soros, fallibility, reflexivity, and the importance of adapting

  
Analysis, Education

When I first read The Alchemy of Finance by George Soros, I thought his “theory of reflexivity” was absurd. It seemed to be an ex post facto explanation for his investment success. Now, having spent more time in the financial markets, I believe he was correct in his observations. We live in a world in which the markets do not stand still.

It is important to recognize that the idea of reflexivity does not stand on its own. As Soros states:

“The two principles [fallibility and reflexivity] are tied together like Siamese twins, but fallibility is the firstborn: without fallibility there would be no reflexivity.”

What does Soros mean by fallibility?

“My conceptual framework is built on two relatively simple propositions. The first is that in situations that have thinking participants, the participants’ views of the world never perfectly correspond to the actual state of affairs. People can gain knowledge of individual facts, but when it comes to formulating theories or forming an overall view, their perspective is bound to be either biased or inconsistent or both. That is the principle of fallibility.”

Soros lays out the argument that behavioral economists would be making for the next three decades: We humans are not perfectly rational decision makers. Instead, we are prone to all manner of information gathering and analytical biases.

Where things get interesting is when these biases have an effect on the markets. Not only will markets do some really strange things, like produce the dot-com bubble, but these beliefs change our behaviors forever. (more…)

Thoughts from Legendary Investors

  
  Education
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On Waiting…..

Wait for the fat pitch. – Warren Buffett: comparing investing to a baseball game where you can wait endlessly for the perfect pitch before you swing.

I only go to work on the days that make sense to go to work…And I really do something on that day. But you go to work and you do something every day and you don’t realize when it’s a special day. – George Soros talking to Byron Wien

His first conclusion was that he won when all the factors were in his favor, when he was patient and waited for all the ducks to line up in a row. – from Jesse Livermore, Worlds Greatest Stock Trader

Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed. …Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.- Gerald Loeb

You make money on wall street by being very selective and being patient, waiting for those opportunities that are irresistible, where the percentages are very heavily in your favor.- Seth Glickenhaus

Unless, however, we see a very high probability of at least 10 percent pretax returns (which translate to 6 percent to 7 percent after corporate tax), we will sit on the sidelines. With short-term money returning less than 1 percent after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.- Warren Buffett

Many equity investors feel compelled to remain 100% invested in equities at all times. Bond investors are often similarly constrained.  We strongly believe that this mentality leads to pursuit of relative rather than absolute investment returns, a direction we certainly want to avoid…A smaller pool of funds seeking to avoid meaningful declines in market value at every point in time and seeking more aggressive return objectives cannot afford to be fully invested in the absence of attractive opportunities. – Seth Klarman

On Mistakes….

…if anything, I make as many mistakes as the next guy. But where I do think that I excel is in recognizing my mistakes, you see. And that is the secret to my success. The key insight that I have reached is recognition of the inherent fallibility of human thought. –George Soros

The only way you get a real education in the market is to invest cash, track your trade, and study your mistakes! – Jesse Livermore

On Psychology… (more…)

Courage and Trading

  
  Education
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According to Plutarch, “Courage stands halfway between cowardice and rashness…” Clearly, we don’t want to be reckless; and clearly, we don’t want to be hesitant and timid. What we need is a balance. As we go about our trading moderating our greed and our fear to a combination of healthy desire and clear minded caution, we use courage to go forward.

Courage doesn’t mean closing your eyes, holding your nose, and jumping into the deep end. It does mean moving forward with clean and clear perception as well as steadfastness of purpose.

You don’t need courage if you’re totally confident and unafraid. Courage, according to John Wayne, is being scared to death and saddling up anyway. Because people tend to fear the unknown, and the unknown is all that is certain about any given trade, we need to employ courage. Since trading is always new, since anything can happen and it often does, since the wildness lies in wait, we need to overcome uncertainty and fear so that we can appropriately enter, exit, and remain in trades. (more…)

Successful Traders are Having 3 Things

  
  Education
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1)  Resilience – Successful traders take risk.  Successful traders are sometimes wrong.  Successful traders take hits.  Successful traders learn from the hits, get up, and move on.  They are resilient.  They succeed, as Churchill observes, by moving from failure to failure with enthusiasm.
2)  Selectivity – Successful traders have clear criteria for what makes good trade ideas.  They also have separate criteria for what turns good ideas into good trades.  They don’t watch everything, and they certainly don’t trade everything.  They wait for good ideas to become good trades.
3)  Calling – Successful traders have an uncanny sense that this is what they’re meant to be doing.  It’s not a job, and it’s not a career for them.  It’s a calling.  That’s the only thing that can keep people searching and re-searching, banging away for good ideas and good trades.  And it’s the only thing that enables them to gain the immersive pattern recognition experience that separates them from average traders.
To be sure, there are other success ingredients, from discipline to creativity.  What I see among the traders listed above, as well as those I work with, is an unusual combination of these three factors.  It’s a pleasure and a true education to study successful people.  There is much more to success than avoiding failure.

40 Great Quotes of Ed Seykota (Must Read )

  
  Education
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Ed Seykota, first featured in the book  Market Wizards has one of the best records of all time for any trader. Ed Seykota’s returns on capital compares to those achieved by Warren Buffett, George Soros or William J. O’Neil. He is among the trading gods with no doubt. What does he find important in trading success? Mr. Seykota has a keen focus on trader psychology above all other trading dynamics. Seykota’s website Trading Tribe spends more time advising it’s readers on proper trading  psychology than anything else. Most traders are not concerned with their own psychology and instead focus on entries and exits, with trading systems and making money, not their mind and emotions. This is generally their undoing. The longer you trade and the bigger your account grows the more I see the crucial importance of mindset in the trader’s success or failure. When a losing streak sets in the trader finds out what his underlying issues are and how he handles losing is the key to his long term success. The traders ego management determines his success as much as his trading system and risk management. An an ego can cause you to let losers run and bet far too much on any one trade. An unchecked ego can destroy your account. The market is a terrible place to learn about internal issues by losing money. Here are some quotes that changed how I thought about trading early on and have kept me on the right path to consistent profits. (more…)

Pearls of Wisdom From King of Sugar

  
  Education
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Kerry Group Chairman Robert Kuok is pictured at a ground breaking ceremony for the Shangri-La Asia Ltd.'s new hotel in Guangzhou, China Thursday, February 26, 2004. The other men are unidentified. Photographer: Grischa Rueschendorf/BloombRobert Kuok, the billionaire Malaysian entrepreneur, maybe better known as the man behind the Shangri-La Asia hotel group, but in the commodities world, he is nicknamed the “King of Sugar”.

The 91-year old tycoon and uncle of Wilmar co-founder and chief executive Kuok Khoon Hong, still watches the sugar market daily, and trades the commodity so he can pay for his bottles of Petrus 1989, one of the world’s rarest and most expensive wines.

Mr Kuok rarely gives interviews, but he shared his trading philosophy with Jonathan Kingsman, founder of Kingsman sugar consultancy and occasional Financial Times commentator, for his recently published book The Sugar Casino .

Here are some of his pearls of wisdom:

Always take profits promptly

“Not knowing when to take a profit is the Achilles heel for a trader. Take profits! Don’t wait. If you have a profit you have to take it. If you wait it will be your downfall.”

The sugar market is prone to over supply

“In the sugar market, there is always over production. There is no point hoarding sugar. There is always a bumper crop coming up.” (more…)

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