Archives of “January 22, 2019” day

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Thoughts on Human Nature and Speculation – Humphrey B. Neil

  
  Education
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The chapter entitled, “More Thoughts on Human Nature and Speculation”, includes some classic thinking on aspects of human psychology which prevent us from operating profitably in the markets. A passage from Neil on the dangers of greed follows this line of thought:

“…I have watched traders in brokers’ offices with deep interest, and have tried to learn the traits that crippled their profits. The desire to “make a killing”—greed—has impressed me particularly.

Perhaps this desire to squeeze the last point out of a trade is the most difficult to fight against. It is also the most dangerous. How often has it happened in your own case that you have entered a commitment with a conservatively set goal, which your judgment has told you was reasonable, only to throw over your resolutions when your stock has reached that point, because you thought “there were four more points in the move?”

The irony of it is that seemingly nine times out of ten (I know, for it has happened with me) the stock does not reach your hoped-for objective; then—to add humiliation to lost profits—it goes against you for another number of points; and, like as not, you end up with no profit at all, or a loss.

Maybe it would help you if I told you what I have done to keep me in my traces: I have opened a simple set of books, just as if I were operating with money belonging to someone else. I have set down what would be considered a fair return on speculative capital, and have opened an account for losses as well as for gains, knowing that the real secret of speculative success lies in taking losses quickly when I think my judgment has been wrong.

When a commitment is earning fair profits, and is acting as I had judged it should act, I let my profits run. But, so soon as I think that my opinion has been erroneous, I endeavor to get out quickly and not to allow my greed to force me to hold for those ephemeral, hoped-for points. Nor do I allow my pride to prevent an admission of error. I had rather, by far, accept the fact that I have been wrong than accept large losses…”

This looks like worthwhile study material, so read on and don’t mind the fact that most of the references date back to 1930. Time honored wisdom is the best, and sound practices are applicable in any age.

Recommendations

  
Analysis, Education
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Books:

I highly recommend “Dark Pools” which is about how we’ve come to the point where trades are measured in picoseconds (a trillionth of a second) in order to remain competitive. Sounds boring, but it’s written in the same style as a Michael Lewis book and if you ever wanted to know how a guy with lizards running around in his server room helped narrow the average holding period for a stock from two years to twenty seconds, well this is the book for you.

I also read “Savages” and it’s prequel (probably not worth reading). This was before I knew Oliver Stone was doing the movie. A cross between Weeds and No Country For Old Men – really very entertaining fiction.

Other books I enjoyed the last six months: Ready Player One, Deer Hunting with Jesus, This Book Will Save Your Life, The George Martin series, Open City (about NYC), 1Q84, Horns: A Novel, The Fear Index, 11/22/63, Smonk, & The Digital Plague. (more…)

When does trading become gambling?

  
Analysis, Education, Life
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There is a very thin line. I maintain that most traders ARE gamblers. They use markets as a substitute for a casino. Here are some of the sign posts that you have crossed the line.

1. IF you enter trades without a clear trading plan, you just might be a gambler.

2. IF you trade just to be trading, you just might be a gambler.

3. IF your bored and enter a trade, you just might be a gambler.

4. IF you look at potential profit before assessing potential loses, you just might be a gambler.

5. IF you have no impulse control, you just might be a gambler.

6. IF you have no methodology, you just might be a gambler.

7. IF you rely on others for your trading decisions, you just might be a gambler.

8. IF you do not take full responsibility for your trading outcomes, you just might be a gambler.

9. IF you increase your risk due to losses, you just might be a gambler.

10. IF you do not use stop losses or do not adhere to them, you just might be a gambler.

And my all time favorite

11. IF you get an adrenaline rush when your entering trades, you just might be a gambler.

Life and Markets

  
  Education
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LIFEANDMARKETRespect is the first casualty in lost love.

Four industries dominate the economy: hope, escape, protection, and convenience.

Success is the point at which talent and skill meet opportunity.

The aim of all trading education: to encourage trading.

The printing press democratized the acquisition of knowledge; the computer has democratized its dissemination.

Date markets before deciding to marry them.

Anatomy of a bad trade: Hope, then despair.

Love, once present, never dies. It must be killed. (more…)

Useful Thoughts To Counter Fear

  
  Education
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fear-12– Losses are a simple cost of doing business
– Since you always limit your lose to an amount of your account can withstand, there is nothing to fear.
– You have the courage to do whatever it takes to succeed at trading
– Each Trade is but one of many
– You keep your focus in the present because this is where the action is
– The potential profits are worth the risk
– Trading is about money, it’s not about your survival.
– Trading is only one way in which you can make money.
– You learn and grow stronger with each trading experience
– The future of your trading is bright.

Mark Cuban’s post mortem on Facebook

  
  Education
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His latest take on the facebook IPO is here. His points are in bold.

1. Say goodbye to the individual investor on Wall Street. Mr. Cuban argues that because the media hyped the FB IPO that Wall Street is to blame. OK, I agree the IPO was hyped. But is that Wall Streets fault? Isn’t it the media’s fault? Isn’t it the buyers fault for not doing their due diligence? Didn’t Morgan Stanley spend millions propping up the stock the first day?

No one has long term success by reading any single piece of media, especially without knowing the writers intentions.

Here is a brief explanation on how the market works. If there are more buyers than sellers it goes up or vice versa. Or more important right now, if they have the means to buy.

2. The Valuation Bubble in Silicon Valley is bursting – but not for the reasons you think. The idea of private investment seems great but the execution is far off. The value of any market is liquidity. That has to be one of the important factors when making an investment. You know why futures are gaining popularity and what will eventually lead to their demise? A central market place and the lack thereof. Their spawns will kill the market and liquidity. The less central a market place the more likely the forces within that market are able to take control.

Mark agrees with me on liquidity but my interpretation is that he makes an argument against his point not for it. Didn’t the public market do a much better job at pricing? Didn’t the private market fail more dramatically than the public is this case? (Some one that knows the details better than I, when they went public did private shares get converted 1 to 1? If it did not get converted 1 to 1 let me know and I will gladly change it)

I believe Shark Tank is a great reason why Wall Street will always exist. I do not feel bad for the euntrepreuners and or the Sharks. Each assume the other person will add value. Wall Street assumes the same thing but to more people But as Mr. Cuban already knows, not everyone can win. But would they do better if there were 10 sharks or 100 sharks? Would more companies get funded?

If you allow people to be stupid, they will continue to be stupid. Howard Lindzon wrote a post as well that I disagreed with on the basis of access. They are both a lot more successful than I so I could be wrong. Also both of those guys should know that you are more likely to get screwed privately than publicly. I think this might be changing but it hasn’t yet. Open is not bad, closed is not bad, bad is bad. Liquidity and cash is always king, deeper markets should lead to better pricing. (more…)

Finicky Traders are Good Traders

  
  Education
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In trading focus is crucial. You have to know who you are as a trader and exactly what your method and trading plan is, and you must follow it.  In trading discipline makes money, focus makes money, monster stocks make money, while risk management allows you to keep the money that you have made. You could say you must be finicky  to be a good trader.

Here are the areas to be finicky about:

  1. A good trader is picky about the methodology they decide to trade, they study diligently to see what works  before they begin trading.
  2. Be very picky about the stocks you trade, only trade the very best monster stocks long and only short the absolute biggest junk stocks.
  3. Being picky about your entry point is crucial, stick with your plan, buy only when the odds are in your favor for winning.
  4. You can not just trade any amount of stock, you have to be picky about the quantity of shares you trade and base it on your risk management guidelines.
  5. Be very picky about who you follow on twitter, look for a teacher not a stock picker, beware of big egos. (more…)

Stock options are for..

  
  Education
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  1. …managing risk through controlling shares with less capital.
  2. …putting the odds in your favor.
  3. …making bets on volatility or a price inside a specific time frame.
  4. …insuring a longer term stock holding from major losses.
  5. …replacement of margin.

Stock options are not for…

  1. …gambling.
  2. …going all in on one trade.
  3. …being used if you do not understand them completely.
  4. …selling and taking on unmanageable risks.
  5. …trading with the odds against you.
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