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Assume Nothing; Question Everything; Verify All

  
  Uncategorized
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“The market can remain irrational longer than you can remain solvent.”
–Not John Maynard Keynes

I am reading a pretty good book by an industry expert that (like so many others) is a semi-autobiographical mix of business and personal history. The introduction to the book is a broad, throat-clearing exercise, outside of their expertise.

And I begin to notice a few errors.

Little things at first: dates, market levels, valuations. The narrative history about the GFC. It jars. I got a sense a publisher/editor type scanned the book and declared “This needs an intro.” Thus, a section gets written without the same love as the main (more interesting) story. As far as I can tell, the heart of the book (which is outside my area of expertise) is error-free. But these small misstatements are revealing about the industry: Publishers have morphed into mere copy shops, shadows of their former selves, no longer bothering with editing, fact-checking, etc. They have become glorified, spell-checking, xerox machines.

The errors are about things within my area(s) of expertise. It gnaws at me. So much so that when I come to the famous Lord Keynes quote above within the context of this throwaway chapter, it bothers me. This forces me to question whether it too is wrong.

Full disclosure: I have used that quote too many times to count. Mostly verbally, sometimes on social media, occasionally in print. Never once was I self-motivated to see if it was truly written by Keynes.1 My assumption was that it was Keynes, simply because every utterance of his has been poured over and annotated since the day they were made.

We have all used that line because it is a brilliant insight into the madness of markets, a reveal of human psychology, and the ugly reality that you can be right and still lose money. Of course it was by Keynes! Who else is wise enough could to utter such pithy insight about the human condition as manifest in capital markets?

Despite everyone knowing this was John Maynard Keynes, I wanted to confirm these were really his  words. I cannot say why it felt wrong to me, it just did. Read enough media, books, news, etc. and your Spidey-sense will tingle about these things. (more…)

Links -Read and Update yourself

  
Education, LINKS
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  • That’s enough ‘kicking ass’, Mr President: Barack Obama’s attacks on BP may play well at home, but they are damaging millions of British people (London Times)
  • Banks with state debt ignore not-if-but-when default (Bloomberg)
  • As reported, Caja Madrid, Bancaja start moves to form Spain top savings bank, as BBVA says Spain may need €50 billion of capital to infuse into insolvent banks (Bloomberg)
  • BP weighs cutting dividend (WSJ)
  • Kerviel co-worker says SocGen should have known about trades (Bloomberg)
  • Waiting for inflation? It’s already here (Minyanville)
  • Enough with the economic recovery. It’s time to pay up (WaPo)
  • Irked CDO investors now targetting Merrill (WSJ)
  • Lehman emails that say “stupid” didn’t stay “just between us” (Bloomberg)
  • US firms holding record piles of cash underscoring worries about sustainability of financial recovery (WSJ)
  • Hungary PM says to issue second economic action plan in H2 (Reuters)
  • The bearish forecasters who rose to fame in the market crash of 2008 have, for the most part, not surrendered their pessimism. Their moment could be coming back around (BusinessWeek)
  • Risk/reward from current levels (Green Faucet)
  • The beginning of the end for Wall Street (RCM)
  • Daily humor from disgraced car czar Steve Rattner at the only venue desperate enough for clicks to still have him: How Wall Street stokes populist fury (MSN)

Defination -RUMOR

  
  Education
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Rumors have always been the fuel of financial markets. The modern Wall Street saying “Buy on the rumor, sell on the news” would not have been surprising to any Dutch trader in the 17th century. As Joseph de la Vega wrote in Confusion de Confusiones, his book about the Amsterdam Stock Exchange, in 1688:

The expectation of an event creates a much deeper impression upon the exchange than the event itself. When large dividends or rich imports are expected, shares will rise in price; but if the expectation becomes a reality, the shares often fall; for the joy over the favorable development and the jubilation over a lucky chance have abated in the meantime.

The figures shown at the right in this painting of the Amsterdam exchange, painted around the time of de la Vega’s book, appear to trading the latest hot rumor:

The Courtyard of the Stock Exchange, by Job Andriaenszoon Berckheyde (ca. 1670-1690), http://www.amsterdammuseum.nl/

 Deliberately spreading false rumors was one of the most effective tactics for profiting on stocks in the 18th century. In his pamphlet “The anatomy of Exchange-Alley,” published in 1719, Daniel Defoe wrote: (more…)

18+1 Trading Rules for Traders

  
  Education
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  1. NEVER, EVER, EVER ADD TO A LOSING POSITION: EVER!: Adding to a losing position eventually leads to ruin, remembering Enron, Long Term Capital Management, Nick Leeson and myriad others.
  2. TRADE LIKE A MERCENARY SOLDIER: As traders/investors we are to fight on the winning side of the trade, not on the side of the trade we may believe to be economically correct. We are pragmatists first, foremost and always.
  3. MENTAL CAPITAL TRUMPS REAL CAPITAL: Capital comes in two forms… mental and real… and defending losing positions diminishes one’s finite and measurable real capital and one’s infinite and immeasurable mental capital accordingly and alway.
  4. WE ARE NOT IN THE BUSINESS OF BUYING LOW AND SELLING HIGH: We are in the business of buying high and selling higher, or of selling low and buying lower. Strength begets strength; weakness more weakness.
  5. IN BULL MARKETS ONE MUST TRY ALWAYS TO BE LONG OR NEUTRAL: The corollary, obviously, is that in bear markets one must try always to be short or neutral. There are exceptions, but they are very, very rare.
  6. “MARKETS CAN REMAIN ILLOGICAL FAR LONGER THAN YOU OR I CAN REMAIN SOLVENT:” So said Lord Keynes many years ago and he was… and is… right, for illogic does often reign, despite what the academics would have us believe.
  7. BUY THAT WHICH SHOWS THE GREATEST STRENGTH; SELL THAT WHICH SHOWS THE GREATEST WEAKNESS: Metaphorically, the wettest paper sacks break most easily and the strongest winds carry ships the farthest,fastest.
  8. THINK LIKE A FUNDAMENTALIST; TRADE LIKE A TECHNICIAN:Be bullish… or bearish… only when the technicals and the fundamentals, as you understand them, run in tandem.
  9. TRADING RUNS IN CYCLES; SOME GOOD, MOST BAD: In the “Good Times” even one’s errors are profitable; in the inevitable “Bad Times” even the most well researched trade shall goes awry. This is the nature of trading; accept it and move on. (more…)

An economist’s XMAS

  
Analysis, Education
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If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three.’ As Winston Churchill noted, economists rarely agree on anything. And the topic of Christmas should be no different. Here is our guide to the macroeconomics of Christmas:

 

Keynesians – place a lot of emphasis on the ‘macro stabilization’ properties of Christmas. Ideally, they would vary the number of Christmases each year according to the state of the economy. This is best summarized by Paul Krugman’s depression paper ‘Wish it could be Christmas every day’, in which he also acknowledges his love of British glam rock. The Keynesians would like to see a larger role for the state, including publically-funded Santas.

Austrians – Believe Christmas is dangerous because it inevitably ends with a nasty January hangover. Also worry about the moral hazard implications of gift-giving and the propensity for overinvestment in Christmas decorations. Reject the idea of ‘public’ holidays, arguing the free market would lead to a better outcome.
Monetarists – Convinced they are the only ones who know how Christmas ‘really works’ and quickly become frustrated with other economists’ lack of understanding. Their thinking can be reduced to a simple identity, though this is vulnerable to shifts in the velocity of Santa’s circulation. Hardcore monetarists believe in the tight control of chocolate coins to prevent the hyper-inflation of waist lines and the hyper-activity of small children. (more…)

John S. Wasik,Keynes’s Way to Wealth-Book Review

  
  Education
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John Maynard Keynes was not only a renowned economist, he was an investor. He managed his own money as well as that of King’s College, his friends and family, and insurance companies. As John C. Bogle writes in his introduction to the book, “His spectacular success showed not only his passion for making money, but his growing aversion to losing it. As someone who had gained two fortunes through his trading prowess and lost them through his hubris, Keynes is a stellar example of how an investor can learn, fall on his face more than once, and still come out ahead.” (p. xxxiv)

John S. Wasik explores this investing journey in Keynes’s Way to Wealth: Timeless Investment Lessons from the Great Economist(McGraw-Hill, 2014). Let me start with the rewards of the journey: what Keynes did with his wealth. He bought art as well as rare books and manuscripts. The Keynes collection of rare books, bequeathed to King’s College in 1946, is, according to the college’s web site, “especially strong in editions of Hume, Newton and Locke, and in sixteenth and seventeenth century literature. About 1300 books in this collection have been catalogued on the online catalogue. … Keynes’s collection of manuscripts by Newton, Bentham, John Stuart Mill, etc., is housed in the Modern Archive Centre.” A man after my own heart, but with a bigger budget.

Keynes was a speculator. According to his own definition, “The essential characteristic of speculation … is superior knowledge. We do not mean by this the investment’s actual future yield … we mean the expected probability of the yield. The probability depends upon the degree of knowledge in a sense, therefore it’s subjective. If we regard speculation as a reasoned effort to gauge the future from present known data, it may be said to form the reins of all intelligent investing.” (p. 8) (more…)

17 Trading Maxims For Traders

  
  Education
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1  Accept the fact that some days you’re the pigeon, and some days you’re the statue!

2  Always keep your words soft and sweet, just in case you have to eat them.

3  Always read stuff that will make you look good if you die in the middle of it.

4  Drive carefully… It’s not only cars that can be recalled by their Maker.

5  If you can’t be kind, at least have the decency to be vague.

6  If you lend someone $20 and never see that person again, it was probably worth it.

7 It may be that your sole purpose in life is simply to serve as a warning to others.

8  Never buy a car you can’t push.

9  Never put both feet in your mouth at the same time, because then you won’t have a leg to stand on.

10  Since it’s the early worm that gets eaten by the bird, sleep late.

11  The second mouse gets the cheese.

12  When everything’s coming your way, you’re in the wrong lane.

13  Birthdays are good for you. The more you have, the longer you live.

14  You may be only one person in the world, but you may also be the world to one person.

15  Some mistakes are too much fun to make only once.

16  We could learn a lot from crayons. Some are sharp, some are pretty and some are dull. Some have weird names and all are different colors, but they all have to live in the same box.

17  A truly happy person is one who can enjoy the scenery on a detour.

Stephen Hawking: Humanity Won’t Survive Another 1000 Years on Earth

  
Analysis, Education, Video
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 Theoretical physicist Stephen Hawking says that humanity won’t make it through the next 1,000 years unless we find a way to leave Earth.

 “We must continue to go into space for the future of humanity,” Mr. Hawking told an audience at the Sydney Opera House, where he appeared virtually, in holographic form. “I don’t think we will survive another 1,000 years without escaping beyond our fragile planet.”

Hawking was filmed in his office at the University of Cambridge, in the UK, and the footage was sent via San Jose for processing then on to Australia to create his image on stage.

“He’s worried about the future of the human race. You know, he thinks that human beings are, I suppose naturally aggressive,” said Professor John Webb, the director of the lecture series at the University of New South Wales that made Hawkings talk possible.

“That may have been useful at some point in the early history of humanity enabling us to find food and get a partner and things like that, but he thinks that aggression that remains with us today is now the thing that could well end up destroying us.”

“I think he’s put a time on it to make us realise we’ve got to take better control of what we’re doing.”

(more…)

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