- Debt is cheap.
- Debt is plentiful.
- There is the egregious use of debt.
- A new marginal (and sizeable) buyer of an asset class appears.
- After a sustained advance in an asset class’s price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a long boom in value lies ahead.
- The distance of valuations from earnings is directly proportional to the degree of bubbliness.
- The newer the valuation methodology in vogue the greater the degree of bubbliness.
- Bad valuation methodologies drive out good valuation methodologies.
- When everyone thinks central bankers, money managers, corporate managers, politicians or any other group are the smartest guys in the room, you are in a bubble.
- Rapid growth of a new financial product that is not understood. (e.g., derivatives, what Warren Buffett termed “financial weapons of mass destruction”).
Archives of “economics” tag
rssPaul Tudor Jones :12 Quotes (Must Read Every Day )
- “Always think of your entry point as last night’s close.”
- “I will keep cutting my position size down as I have losing trades. When I am trading poorly, I keep reducing my position size. That way, I will be trading my smallest position size when my trading is worst.”
- “Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.”
- “Markets trend only about 15 percent of the time; the rest of the time they move sideways.”
12 Trading Mantras from Trading Legend Mark Douglas
Fill the “profit gap” with the right things…
In his books and seminars, Mark Douglas often refers to something he calls the “profit gap”. What he is talking about is basically the difference or “gap” between the potential profit you could achieve if you had just followed your trading method and what your actual bottom line results are.
Traders often begin trading a method with very high hopes. They want to produce an income they can rely on and get consistent results from their trading. However, this is only possible if you are trading an effective method with discipline and consistency, which most people simply do not do and as a result, they experience the profit gap that Mark refers to.
The key point that Mr. Douglas makes about this profit gap is that traders typically try to fill the gap by learning more about the market, changing methods, spending more time in front of their computers etc. However, what they really need to learn is more about themselves and how they interact with the market. Essentially, they need to acquire the “proper mental skills” to trade their method as they should and to get the most out of it, in order to properly fill the profit gap.
Winning and being a winning trader are two different things…
Anyone, and I literally mean anyone, even a 5-year-old child, can find themselves in a winning trade. It does not require any special skill to get lucky on any particular trade and hit a winner. All you have to do is open your trading platform and push a few buttons and if you get lucky, you can make a lot of money in a short amount of time.
As a result of the above, it’s natural for a trader who has not yet developed his or her trading skills to take the leap from “it’s easy to win” to “it can’t be that much harder to make a living from this”.
This is how many traders’ careers get started. Needless to say, it is also how they get on the path to losing a whole lot of money just as fast or even faster than they made it.
A winning trader has the mental skills to realize, understand and utilize the FACT that any particular trade he or she takes has basically a random outcome. That is to say, they cannot possibly know the outcome of that trade until it is over. The winning trader knows this and they also know that they must trade in-line with this belief over a large series of trades and ignore all the temptations and feelings that get kicked up on each trade they take. They are able to do this because they keep their eyes on the bigger picture. That bigger picture is the fact that IF they execute their method flawlessly, over and over, over a long enough period of time / series of trades, they will come out profitable.
Thus, do not mistake a winning trade for you being a winning trader, yet. A very easy trap to fall into. (more…)
Citi forecasts Greek devastation, unstoppable debt spirals in Italy and Portugal
If Citigroup is right, the slight rebound in Europe over the summer will not be enough to stop Club Med going from bad to worse, with a string of soft defaults/restructurings.
I pass their latest forecasts on to readers. I do not endorse them.
Italy will bounce along in near-permanent recession with growth of 0.1pc in 2014, zero in 2015, and 0.2pc in 2016. The debt will punch above 140pc of GDP, beyond the point of no return for a country with no economic growth or sovereign currency.
“We do not expect the public debt ratio will enter a downtrend in coming years, and we suspect that some form of debt restructuring (maturity lengthening and/or coupon reductions) may be likely eventually,” said the bank.
Portugal is in an even worse state, with growth of: 0.6pc, 0.0pc, 1.0pc, over the next three years, with debt hitting 149pc of GDP by 2015, and unemployment rising again to 18.3pc:
Given the fiscal tightening still to come, ongoing private deleveraging and ensuing poor nominal GDP growth prospects, doubts still exist about the sustainability of the Portuguese public debt in our view.”
A second full bail-out programme remains a clear risk in the event of market sentiment deteriorating. In any case, we think a Greek-style public debt restructuring unlikely in the near future, but a restructuring of some government contingent liabilities is still possible. (more…)
Speculation, Trading, and Bubbles-by José A. Scheinkman (Book Review )
To pay tribute to one of its most famous graduates, Kenneth J. Arrow, Columbia University launched an annual lecture series dealing with topics to which Arrow made significant contributions—and there were many. Speculation, Trading, and Bubbles stems from the third lecture in the series given by José A. Scheinkman, with adapted transcripts of commentary by Patrick Bolton, Sanford J. Grossman, and Arrow himself. I’m going to confine myself here to a few excerpts that encapsulate some of the lecture’s key points, ignoring the often perceptive commentary.
Scheinkman offers a formal model of the economic foundations of stock market bubbles in an appendix to his lecture, but he lays out its basic ideas in the lecture proper. The model rests on two fundamental assumptions—“fluctuating heterogeneous beliefs among investors and the existence of an asymmetry between the cost of acquiring an asset and the cost of shorting that same asset. … Heterogeneous beliefs make possible the coexistence of optimists and pessimists in a market. The cost asymmetry between going long and going short on an asset implies that optimists’ views are expressed more fully than pessimists’ views in the market, and thus even when opinions are on average unbiased, prices are biased upwards. Finally, fluctuating beliefs give even the most optimistic the hope that, in the future, an even more optimistic buyer may appear. Thus a buyer would be willing to pay more than the discounted value she attributes to an asset’s future payoffs, because the ownership of the asset gives her the option to resell the asset to a future optimist.” (pp. 15-16)
MRI’s of Succesful Traders
I’ve seen this study making the rounds on several websites now as a type of neuroeconomic confirmation of Buffetological principles…
Perhaps procedure might be slightly useful as a means of seeing physical brain improvement by training– such as that found through meditative practices.
“Traders who buy more aggressively based on NAcc signals earn less. High-earning traders have early warning signals in the anterior insular cortex before prices reach a peak, and sell coincidently with that signal, precipitating the crash. These experiments could help understand other cases in which human groups badly miscompute the value of actions or events.”
The Crash of 1929 -Video
Here is a link to the transcript of this documentary.
Narrator: At sea and on land, everyone seemed to be making money. It was a stampede of buying. And major speculators like John Jacob Rascob whipped up the frenzy. He told readers of The Ladies’ Home Journal that now everyone could be rich. September 2nd, Labor Day. It was the hottest day of the year. The markets were closed and people were at the beach. A reporter checked in with astrologer Evangeline to ask about the future of stock prices. Her answer: the Dow Jones could climb to heaven. The very next day, September 3rd, the stock market hit its all-time high.
Ben Karol, Former Newspaper Delivery Boy: My father and I had an ongoing discussion about the stock market. And I used to say, “Pop, everybody’s getting rich but you. You know, you work so hard and you’re never going to make a nickel. All you do is you keep delivering these newspapers and that’s about it. The guy who’s shining shoes is in the stock market, the grocery clerk is in the stock market, the school teacher’s in the stock market. The teller at the bank is in the stock market. Everybody’s in the stock market. You’re the only one that’s not in the stock market.” And he used to sit and laugh and say, “You’ll see. You’ll see. You’ll see.”
Narrator: On September 5th, economist Roger Babson gave a speech to a group of businessmen. “Sooner or later, a crash is coming and it may be terrific.” He’d been saying the same thing for two years, but now, for some reason, investors were listening. The market took a severe dip. They called it the “Babson Break.” The next day, prices stabilized, but several days later, they began to drift lower. Though investors had no way of knowing it, the collapse had already begun
The Paradox: a surgeon versus a trader (Why 95% Traders Lose Money ? )
“Have you ever met someone who goes to a bookstore on a Friday, buys a book on surgery, read it over the weekend and attempt to go into the operating theater on Monday and start to operate like a real surgeon?”
Every single one of the audience agreed there is a zero chance that this man could perform a successful surgery just by reading a surgery textbook over the weekend.
However, Jack went on to ask the next question,
“Have you ever met someone who goes to a bookstore on a Friday, buys a book on trading, read it over the weekend and attempts to head into the market on Monday and start to trade like he is a professional trader?”
The audience giggled upon Jack’s second question, which probably suggested that this example of a aspiring trader is a common occurence.
The fact, as Jack explained, is that anyone with zero experience in surgery will almost definitely fail in his first duty as a surgeon.
But someone who has zero experience in trading could still potentially make money (sometimes a lot) on his initial trades!
This paradox gives people a general false feeling that trading is and can be very easy for any newbie.
According to Jack, the truth is that in order to be a profitable trader in the long run, you will have to put in effort in honing your trading skills.
The effort will be as much as a trainee surgeon who spend years of his life learning how to become a proficient surgeon.
When a newbie trader’s beginners luck runs out, he will start losing a lot of money, usually much more than the amount he made during his lucky winning streak.
So, if you are a amateur trade and if you want to become a proficient trader over the long run, there is simply no short cut way for you.
You will have to spend years honing your trading skills until you become one of those market wizards.
Walter Thornton tries to sell his car for $100 on the streets of New York City following the 1929 stock market crash
12 Cognitive Biases that Prevent you From Being Rational
Confirmation Bias – The tendency for people to favor information that confirms their beliefs or ideas. Investors and economists often fail to fully appreciate other views due to a narrow minded view of the world often resulting from what they think they already know.
Ingroup bias – the tendency to favor one’s own group. In investing and economics we see this in ideologies and particular strategies. Austrians favor those who believe their own thinking. Chartists dislike value investors. Often times, the strongest economists and investors are the ones who are able to move beyond this ingroup bias and explore the potential that other groups have something positive to contribute.
Gambler’s Fallacy – When an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events. We see this in trading all the time. This is the belief that just because something has occurred in the past that it is more likely to occur in the future. The “trend is your friend” and that sort of thing….
Post-Purchase Rationalization – When one rationalizes past purchases after the fact in an attempt to justify past actions. Investors often learn about how a bad trade turns into an investment when they rationalize their past purchases. If you’ve been in the business for a while you know how destructive this can be. (more…)