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Trading Intuition

  
  Education
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I’ve heard from many traders that they often take decisions based on instincts. Actually, all non-quants use intuition in some form or another. If you are not using a program that takes all signals that your system produces, how do you decide between several equally good looking trading setups with similar risk to reward? Do you take them all or do you concentrate on only a few? The odds are that you are doing the latter and your ultimate choice for capital allocation is subconscious.

Even though we are defined by our decisions, we are often completely unaware of what’s happening inside our heads during the decision-making process.
Feelings are often an accurate shortcut, a concise expression of decades’ worth of experience.
The process of thinking requires feeling, for feelings are what let us understand all the information that we can’t directly comprehend. Reason without emotion is impotent. (more…)

Quantitative Strategies for Achieving Alpha by Richard Tortoriello -Book Review

  
  Education
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In this book Richard Tortoriello sets out find empirical drivers for stock market returns. This is a new book published last month. The author tests 1200 strategies on stock above 500 million valuation to determine the major fundamental and market based drivers for future stock market returns.After such analysis he presents strategies that consistently outperform the market.

The author tests 7 basic categories of stocks factors:
  1. Profitability
  2. Valuation
  3. Cash flow
  4. Growth
  5. Capital allocation
  6. Price momentum
  7. Red Flags ( risk factors)
 
Detailed quantitative tests  for each of the factors are presented in the book. As the author works for S&P, he has access to the best database on stocks and he presents his findings for multiple factors within each of the above seven categories. The testing shows that the top single factor strategy for achieving excess return is price momentum calculated using 28/16 relative strength. The best strategy using two combined factor for excess return is price momentum plus nearness 52 week high. 
 
This book unlike other quant books is easy to understand and well presented. The biggest advantage of this book is it will give you building blocks to build your trading strategy around things that empirically work in the market. Knowing what works and why it works can help you build better trading models.

25 Must-Read Quotes From Buffett's Letter to Shareholders

  
  Education
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Warren Buffett released his annual letter (PDF file, Adobe Acrobat required) to Berkshire Hathaway (NYSE: BRK-B  ) on Saturday. If you have the time, it’s worth reading the whole thing. If not, here are 25 important quotes.

On value: “The logic is simple: If you are going to be a netbuyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.”

On market moves: “Here a confession is in order: In my early days I, too, rejoiced when the market rose. Then I read Chapter Eight of Ben Graham’s The Intelligent Investor, the chapter dealing with how investors should view fluctuations in stock prices. Immediately the scales fell from my eyes, and low prices became my friend. Picking up that book was one of the luckiest moments in my life.”

On foreclosures: “A largely unnoted fact: Large numbers of people who have ‘lost’ their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost. In these cases, the evicted homeowner was the winner, and the victim was the lender.”

On share buybacks: “The first law of capital allocation — whether the money is slated for acquisitions or share repurchases — is that what is smart at one price is dumb at another.”

On predicting turnarounds: “Last year, I told you that ‘a housing recovery will probably begin within a year or so.’ I was dead wrong.” (more…)

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