I’m still on my “blog lite” gig, so today I’m going to borrow shamelessly from the wisdom of Raymond M. Smullyan’s This Book Needs No Title: A Budget of Living Paradoxes (Prentice-Hall, 1980). Smullyan is a ninety-year-old mathematician, concert pianist, logician, Taoist philosopher, and magician who, when he wrote this book, was a professor of philosophy and mathematics at Indiana University.
In his short essay “Four Types of Life” Smullyan illustrates his point by looking at musicians, but it should be evident that the essay is equally applicable to traders. Like much of what Smullyan writes, it shifts the ground out from under us just enough to make us rethink some basic premises.
Type 1 is the person who complains that he is not “getting anywhere.” “He says that he does not learn fast enough, that his fingers are very bad that day, that his memory is poor, that he is not ‘with the music,’ that things are too ‘mechanical,’ that he does not practice enough, that he doesn’t have enough ‘self-discipline’ to force himself to go through all the gruesome, boring, painful details, that he knows that discipline and self-denial are necessary for the ‘perfection of an art,’ but that he doesn’t have enough of these qualities, etc. And so he complains and gripes and complains and gripes, but through all this restless uneasiness, he progresses anyhow and eventually becomes a first-rate musician.” (p. 82)
Type 2 is the opposite. He plays “for hours and hours a day, he is in a state of complete ecstasy, he just enjoys himself . . . , he does not distinguish between ‘playing’ and ‘practicing,’ he has no conscious idea of ‘improving,’ he does not ‘try to play well,’ he has no idea whether he is playing well or playing badly, and he couldn’t care less.” (p. 82) As a result he never progresses in a way commensurate with his talents; he never becomes first rate.
Type 3, who combines the negative qualities of the first two types, is the only real loser. He grumbles but also gets nowhere. After a few years he will probably give up his music altogether.
Type 4 combines the advantages of the first two types. He enjoys himself for hours and hours a day; he “has an enormous love of beauty and pursues it relentlessly. He may have a great critical faculty, but entirely on an unconscious level. He may, for example, play a particular passage over and over again, but he does not think of it as ‘practicing’ or ‘learning.’ He does indeed sift and sort, but he does not know that he is ‘sifting and sorting.’ He is much like a dog who is offered a dish containing a mixture of good foods and bad foods. He spits out the bad foods and eats up the good foods. The doggie does not complain nor criticize the bad foods; he is far too busy enjoying himself hunting out the good foods.” (p. 84)
Smullyan continues, and let me once again share his own words: “The behavior of this type often fools other people completely. People hearing him practicing may say: ‘This fellow is amazing! He has so much patience! He spends hours and hours on details! He has so much self-discipline! He does not balk at performing irksome tasks. He is obviously highly self-critical, and that’s why he improves! . . . He schools himself, he disciplines himself, he overcomes obstacles, and that’s why he succeeds.’ . . . Yes, that’s what people say of him, but they are totally wrong! In reality, this man no more ‘evaluates himself’ than the doggie selecting the good foods evaluates his own performance as a ‘food selector.’ . . . [O]ur artist is not trying to improve himself, but rather is automatically selecting those ways of playing which produce the most beautiful results. Of course, our fourth type ultimately becomes a first-rate musician just like our first type, but what a difference of approach! The first type has the ambition of becoming a ‘great food selector,’ whereas the fourth type simply loves good food.” (p. 85)
I think that Smullyan’s point is profound, maybe even the holy grail. Then again, I’m a music lover, a sucker for dogs, and a sometime epicure, so maybe I’ve just been seduced.
Next week I’ll be back to my usual fare, nothing so potentially seismic.
Wednesday, March 31, 2010
Tuesday, March 30, 2010
Practice as preparation for performance
We all recognize the importance of practice in acquiring skills. But, as I noted briefly in yesterday’s post, Clawson and Newburg in Powered by Feel add a dimension to practice that is sometimes overlooked. Practice that is merely working on a skill does not prepare people to perform in the real world. “They taught their minds and bodies to perform a skill over and over again. Yet they did not prepare themselves to do those same skills under pressure, when it mattered. The variation and energy isn’t there. They may even become bored.” (pp. 65-66)
I doubt that any trader could claim a record that matches the UConn women’s basketball team—75 consecutive double-digit wins. Trading the markets and playing basketball are, after all, very different games. Nonetheless, the trader can still learn from such a staggeringly successful basketball team. For one thing, although the UConn women’s basketball team practiced patterns until they executed them flawlessly and conditioned their bodies to go longer and harder than their opponents did, their preparation for performance wasn’t just more of the same. Among other things, their coach confronted them with stressful scenarios—two minutes to go and down ten, how do you win? He invented pressure situations even as the competition wilted. If it’s too easy to beat the competition, then beat the game. At every turn he would up the ante, making his players reach deeper into themselves to find something that would improve their performance against teams both weak and strong, conventional and unconventional.
The practice sessions of this team are the antithesis of the route to mediocrity that Clawson and Newburg describe. First of all, if a person doesn’t love what he’s doing he is destined for mediocrity; all the practice in the world won’t prepare him to be a top performer. He’ll just be going through the motions. As Clawson puts it, “Working without feel tends to create working without doing work and a loss of energy.” (p. 207) Second, and somewhat akin to the first, to avoid ending up with a mediocre performance record practice must include a very specific “feel good” component. The positive feeling that a person acquires in practice serves as a grounding for him when he becomes a performer; it’s a feeling the performer can revisit when he is under pressure. As Newburg writes, “World-class performers prepare to live their dream, to feel the way they wanted to feel when it mattered most by feeling it when it seemed to matter least.” (p. 65)
I doubt that any trader could claim a record that matches the UConn women’s basketball team—75 consecutive double-digit wins. Trading the markets and playing basketball are, after all, very different games. Nonetheless, the trader can still learn from such a staggeringly successful basketball team. For one thing, although the UConn women’s basketball team practiced patterns until they executed them flawlessly and conditioned their bodies to go longer and harder than their opponents did, their preparation for performance wasn’t just more of the same. Among other things, their coach confronted them with stressful scenarios—two minutes to go and down ten, how do you win? He invented pressure situations even as the competition wilted. If it’s too easy to beat the competition, then beat the game. At every turn he would up the ante, making his players reach deeper into themselves to find something that would improve their performance against teams both weak and strong, conventional and unconventional.
The practice sessions of this team are the antithesis of the route to mediocrity that Clawson and Newburg describe. First of all, if a person doesn’t love what he’s doing he is destined for mediocrity; all the practice in the world won’t prepare him to be a top performer. He’ll just be going through the motions. As Clawson puts it, “Working without feel tends to create working without doing work and a loss of energy.” (p. 207) Second, and somewhat akin to the first, to avoid ending up with a mediocre performance record practice must include a very specific “feel good” component. The positive feeling that a person acquires in practice serves as a grounding for him when he becomes a performer; it’s a feeling the performer can revisit when he is under pressure. As Newburg writes, “World-class performers prepare to live their dream, to feel the way they wanted to feel when it mattered most by feeling it when it seemed to matter least.” (p. 65)
Monday, March 29, 2010
How do you want to feel?
For the last couple of days I have been feeling heavy, as if I’m carrying too much weight (and I am decidedly not). I have also been sluggish and unfocused. Three investing books sit on my desk begging to be read and reviewed, but I don’t have the energy to do them justice. I suspect it’s just spring fever; this is not the first time that the advent of spring has brought on these annoyingly enervating symptoms. Rather than plow through books that require concentration I’ve decided to go “blog lite” this week and write two posts based on the book Powered by Feel: How Individuals, Teams and Companies Excel (World Scientific Publishing, 2009) by James G. S. Clawson and Douglas S. Newburg.
“How do you want to feel?” is the focal question of the book. It’s a strange question to try to answer, especially since the authors rule out such clichés as happy, awesome, and in the zone. They suggest that one way to go about finding an answer is to reflect on those times when you felt flow: how did it feel? Start with some nouns and adjectives, then refine your first draft. The answer Clawson came up with was “light, unhurried, and engaged”; Newburg’s was “elegance, as powerful as it is simple.” For an Olympic swimmer it was “easy speed”; for an academic “buoyant, connected mastery.”
What’s wrong with the “in the zone” answer in addition to being trite and “not enough to be useful”? Newburg suggests that people sometimes use the concept of the zone “to pressure themselves, to judge themselves when they cannot get into it. Then they wonder why they are not getting into it.” (p. 183) Of course, “easy speed” might be as difficult to accomplish as being in the zone; indeed, the former might be viewed as a more concrete version of the latter. On the other hand, we might argue that “in the zone” is a binary concept; we’re either in the zone or out of the zone. “Easy speed,” by contrast, admits of degrees; sometimes speed is a little easier, sometimes a little harder.
At any event, the proper kinds of phrases stress process over results. For instance, the swimmer is not describing how he feels standing on the medal stand but how he feels in the water when he is competing. The academic is describing how he feels in the classroom engaging with students.
It is not sufficient for people to describe how they want to feel; they have to nurture that feeling. This sometimes entails unlearning bad habits and acquiring new ones, as we all know not an easy undertaking. It definitely involves practice and, Newburg argues, “practice in an environment that increases their ability to feel how they want to feel and do what they want to do.” Do they practice to music? Do they practice alone? What does their practice environment look like? Their practice should be accompanied by, indeed infused with, the kinds of feelings they want to have. “This type of practice leads to preparation because it develops the skill to feel the way they want to feel when they perform. This is more than simply the muscle memory of repetition.” (p. 184)
(to be continued)
“How do you want to feel?” is the focal question of the book. It’s a strange question to try to answer, especially since the authors rule out such clichés as happy, awesome, and in the zone. They suggest that one way to go about finding an answer is to reflect on those times when you felt flow: how did it feel? Start with some nouns and adjectives, then refine your first draft. The answer Clawson came up with was “light, unhurried, and engaged”; Newburg’s was “elegance, as powerful as it is simple.” For an Olympic swimmer it was “easy speed”; for an academic “buoyant, connected mastery.”
What’s wrong with the “in the zone” answer in addition to being trite and “not enough to be useful”? Newburg suggests that people sometimes use the concept of the zone “to pressure themselves, to judge themselves when they cannot get into it. Then they wonder why they are not getting into it.” (p. 183) Of course, “easy speed” might be as difficult to accomplish as being in the zone; indeed, the former might be viewed as a more concrete version of the latter. On the other hand, we might argue that “in the zone” is a binary concept; we’re either in the zone or out of the zone. “Easy speed,” by contrast, admits of degrees; sometimes speed is a little easier, sometimes a little harder.
At any event, the proper kinds of phrases stress process over results. For instance, the swimmer is not describing how he feels standing on the medal stand but how he feels in the water when he is competing. The academic is describing how he feels in the classroom engaging with students.
It is not sufficient for people to describe how they want to feel; they have to nurture that feeling. This sometimes entails unlearning bad habits and acquiring new ones, as we all know not an easy undertaking. It definitely involves practice and, Newburg argues, “practice in an environment that increases their ability to feel how they want to feel and do what they want to do.” Do they practice to music? Do they practice alone? What does their practice environment look like? Their practice should be accompanied by, indeed infused with, the kinds of feelings they want to have. “This type of practice leads to preparation because it develops the skill to feel the way they want to feel when they perform. This is more than simply the muscle memory of repetition.” (p. 184)
(to be continued)
Friday, March 26, 2010
Frishberg, Investing without Borders
Daniel Frishberg is the founder of the Texas-based BizRadio Network where he broadcasts a daily two-hour program “The Money Man Report.” He is also a partner in a private equity fund and is the chief investment strategist for a management company. Investing without Borders: How 6 Billion Investors Can Find Profits in the Global Economy (Wiley, 2010) is his second book.
The book is not really about global investing although it starts off that way and comments on global investing do appear throughout the book. Rather, it’s a chatty hodgepodge of macroeconomic reflections (and predictions), the seemingly mandatory criticism of financial planners and stockbrokers, bond strategies, contrarian thinking, snippets from radio interviews, money management, investor psychology, and the occasional stock pick. Sometimes he writes for the rank novice, at other times for the professional or quasi-professional. For instance, he spends pages explaining the basics of bonds for the uninitiated; he also extols the virtues of structured notes. With respect to the latter, he says that he “can sometimes negotiate a deal with investment banks like Barclays Bank and Goldman Sachs” but that the individual investor without a few million to invest at a time can pick up the leftovers from a deal done by an institutional investor like the author. He admits that “you have to know what you’re doing, and you have to read THE FINE PRINT, because sometimes the way these notes are structured can be very deceptive.” (p. 34)
For the rest of this post I’m going to take off my critic’s hat and instead focus on two topics that interest me: intuitive trading and stop losses.
In the 1990s the Marines Leadership and Combat Development School was teaching standard business school decision-making techniques. In very tense combat situations, however, the men fell short. The head of the program talked with a psychologist who was studying firemen who have no time for rational analysis before making a decision. He then decided to bring a group of his men to the NYMEX trading pits because they “reminded him of a war room during combat.” To no one’s surprise, the Marines were decimated by the floor traders. The surprise came a month later when the floor traders went to Quantico to play war games against the Marines and “wiped the Marines out.” The traders were “just better gut thinkers. They were practiced at quickly evaluating risks, and they were willing to act decisively on imperfect and contradictory information.” (p. 68) Successful traders and investors, Frishberg contends, just get it. “The point here is,” he continues, “you can’t rely on any favorite technique except getting as much experience and information into your unconscious and learning to let that beautiful computer inside you do its job.” (p. 69)
As readers of this blog know, I have a love-hate relationship with initial stops; see my post “The case against stop losses” and the comments on it. Frishberg has his own take, distinguishing between two sets of entry criteria. If the entry is pattern-based, the trader must have a system of tight stops. If, however, “you’re investing your money with courage and commitment, helping people around the world get what they want, and you love the company at $20 a share, don’t you love it more at $17? . . . So how can you reconcile the strategy of applying tight stop-losses with a commitment to live your life with courage and conviction?” (p. 139) In this case Frishberg suggests splitting the money allocated to the trade into thirds. He commits the first third when he thinks we’ve reached “maximum fear and negativity.” If the stock continues to fall, he will commit the second third. And if the stock starts to turn up, he’ll add the final third. Of course, if the overarching thesis behind the trade falters, it’s time for a major reassessment.
The strategy of doubling down on a losing position has both advocates and critics and I’m not going to take sides here except to say that it’s definitely not my style. I would just comment that if an investor can’t reconcile the strategy of applying tight stop-losses with a commitment to live his life with courage and conviction (and note that this does not entail doubling down) the same should hold for the trader. It’s just that a trader can change his convictions much more quickly
The book is not really about global investing although it starts off that way and comments on global investing do appear throughout the book. Rather, it’s a chatty hodgepodge of macroeconomic reflections (and predictions), the seemingly mandatory criticism of financial planners and stockbrokers, bond strategies, contrarian thinking, snippets from radio interviews, money management, investor psychology, and the occasional stock pick. Sometimes he writes for the rank novice, at other times for the professional or quasi-professional. For instance, he spends pages explaining the basics of bonds for the uninitiated; he also extols the virtues of structured notes. With respect to the latter, he says that he “can sometimes negotiate a deal with investment banks like Barclays Bank and Goldman Sachs” but that the individual investor without a few million to invest at a time can pick up the leftovers from a deal done by an institutional investor like the author. He admits that “you have to know what you’re doing, and you have to read THE FINE PRINT, because sometimes the way these notes are structured can be very deceptive.” (p. 34)
For the rest of this post I’m going to take off my critic’s hat and instead focus on two topics that interest me: intuitive trading and stop losses.
In the 1990s the Marines Leadership and Combat Development School was teaching standard business school decision-making techniques. In very tense combat situations, however, the men fell short. The head of the program talked with a psychologist who was studying firemen who have no time for rational analysis before making a decision. He then decided to bring a group of his men to the NYMEX trading pits because they “reminded him of a war room during combat.” To no one’s surprise, the Marines were decimated by the floor traders. The surprise came a month later when the floor traders went to Quantico to play war games against the Marines and “wiped the Marines out.” The traders were “just better gut thinkers. They were practiced at quickly evaluating risks, and they were willing to act decisively on imperfect and contradictory information.” (p. 68) Successful traders and investors, Frishberg contends, just get it. “The point here is,” he continues, “you can’t rely on any favorite technique except getting as much experience and information into your unconscious and learning to let that beautiful computer inside you do its job.” (p. 69)
As readers of this blog know, I have a love-hate relationship with initial stops; see my post “The case against stop losses” and the comments on it. Frishberg has his own take, distinguishing between two sets of entry criteria. If the entry is pattern-based, the trader must have a system of tight stops. If, however, “you’re investing your money with courage and commitment, helping people around the world get what they want, and you love the company at $20 a share, don’t you love it more at $17? . . . So how can you reconcile the strategy of applying tight stop-losses with a commitment to live your life with courage and conviction?” (p. 139) In this case Frishberg suggests splitting the money allocated to the trade into thirds. He commits the first third when he thinks we’ve reached “maximum fear and negativity.” If the stock continues to fall, he will commit the second third. And if the stock starts to turn up, he’ll add the final third. Of course, if the overarching thesis behind the trade falters, it’s time for a major reassessment.
The strategy of doubling down on a losing position has both advocates and critics and I’m not going to take sides here except to say that it’s definitely not my style. I would just comment that if an investor can’t reconcile the strategy of applying tight stop-losses with a commitment to live his life with courage and conviction (and note that this does not entail doubling down) the same should hold for the trader. It’s just that a trader can change his convictions much more quickly
Thursday, March 25, 2010
Efficient training
Knowledge-Free and Learning-Based Methods in Intelligent Game Playing by Jacek Mandziuk (Springer, 2010) is not a book I intend to read from cover to cover. It explores computational intelligence-based methods (as opposed to AI methods) for playing such games as chess, checkers, backgammon, and Go. What caught my attention was a section entitled “Training with External Opponents.” In this section the author summarizes Susan Epstein’s paper “Toward an Ideal Trainer.”
The most important conclusion of her research is that training with one opponent, whether in self-play or against an expert player, is insufficient. If a player is trained by a single expert, that player will not necessarily be competent when confronting weaker or unconventional opponents. The trainee needs a diversity of trainers. “In order to develop a flexible and ‘intelligent’ player (i.e. the one capable of passing the Turing test in games) it is necessary to confront it with a large range of playing styles and various playing skills.”
She initially tried to improve upon single-opponent training by adding some noise into the decision-making process of the trainer. This strategy brought better results, but “it still does not guarantee that the training is sufficiently universal and that the part of a state space visited by the learner is representative enough to allow efficient play against intelligent, nonconventional opposition.” (p. 126)
Is it valid to extrapolate from the world of CI training when assessing the value of expert trading mentors? In one obvious respect the extrapolation breaks down: computers don’t have biases, they don’t carry psychological baggage, and presumably they all have the same willingness to learn. But if we overlook that “minor” problem, I think there is merit in the claim that a trainee needs a diversity of trainers. Assume that the mentor/trainer is truly skilled at a certain style of trading, that he is also a skilled teacher, and that his style of trading fits the personality of the trainee. Even then, at the end of the day (and I don’t mean that literally) I doubt that a flexible, intelligent trader emerges. The trainee has learned one style of trading; that makes him neither flexible nor intelligent. Indeed, if compared to a sophisticated algorithmic computer program he might seem decidedly unintelligent. When the market throws him a curve ball will he be prepared to deal with it? If the tone of the market starts to shift, will he be flexible enough to go with the flow?
I am not suggesting that the would-be trader spend many thousands of dollars to study under several mentors. With some very good blogs, webinars, and (as always) books available, the trainee can become familiar with a range of styles. Admittedly, this kind of learning suffers from being passive. A web surfer doesn’t have the advantage of a teacher who prods, corrects, and praises. If he needs this interaction he has a range of alternatives, from self-talk to structured chat rooms to full-blown educational programs.
It goes without saying that training needs to be complemented with practice, not only for would-be traders but for would-be game-playing computers as well. Epstein proposed “lesson and practice” learning that consists in “interleaving the periods of training with strong opponents (the lessons) with periods of knowledge consolidation and usage (the practice).” (p. 126)
In the meantime, an interesting exercise for the self-taught trader might be to imagine three or four trainers with very different styles together in the same room, trading the same underlying instrument. Would A be taking the other side of B’s trade? Would C be waiting for two or three setups a day while A was clicking away? Would B scale out while C held a full position to the end? Who would be squeezed and when? What would these trainers be saying to one another, expletives not necessarily deleted, during the course of the day? If you overlaid (and color coded) their trades on a single chart, would you know a little more about market dynamics than you do now?
The most important conclusion of her research is that training with one opponent, whether in self-play or against an expert player, is insufficient. If a player is trained by a single expert, that player will not necessarily be competent when confronting weaker or unconventional opponents. The trainee needs a diversity of trainers. “In order to develop a flexible and ‘intelligent’ player (i.e. the one capable of passing the Turing test in games) it is necessary to confront it with a large range of playing styles and various playing skills.”
She initially tried to improve upon single-opponent training by adding some noise into the decision-making process of the trainer. This strategy brought better results, but “it still does not guarantee that the training is sufficiently universal and that the part of a state space visited by the learner is representative enough to allow efficient play against intelligent, nonconventional opposition.” (p. 126)
Is it valid to extrapolate from the world of CI training when assessing the value of expert trading mentors? In one obvious respect the extrapolation breaks down: computers don’t have biases, they don’t carry psychological baggage, and presumably they all have the same willingness to learn. But if we overlook that “minor” problem, I think there is merit in the claim that a trainee needs a diversity of trainers. Assume that the mentor/trainer is truly skilled at a certain style of trading, that he is also a skilled teacher, and that his style of trading fits the personality of the trainee. Even then, at the end of the day (and I don’t mean that literally) I doubt that a flexible, intelligent trader emerges. The trainee has learned one style of trading; that makes him neither flexible nor intelligent. Indeed, if compared to a sophisticated algorithmic computer program he might seem decidedly unintelligent. When the market throws him a curve ball will he be prepared to deal with it? If the tone of the market starts to shift, will he be flexible enough to go with the flow?
I am not suggesting that the would-be trader spend many thousands of dollars to study under several mentors. With some very good blogs, webinars, and (as always) books available, the trainee can become familiar with a range of styles. Admittedly, this kind of learning suffers from being passive. A web surfer doesn’t have the advantage of a teacher who prods, corrects, and praises. If he needs this interaction he has a range of alternatives, from self-talk to structured chat rooms to full-blown educational programs.
It goes without saying that training needs to be complemented with practice, not only for would-be traders but for would-be game-playing computers as well. Epstein proposed “lesson and practice” learning that consists in “interleaving the periods of training with strong opponents (the lessons) with periods of knowledge consolidation and usage (the practice).” (p. 126)
In the meantime, an interesting exercise for the self-taught trader might be to imagine three or four trainers with very different styles together in the same room, trading the same underlying instrument. Would A be taking the other side of B’s trade? Would C be waiting for two or three setups a day while A was clicking away? Would B scale out while C held a full position to the end? Who would be squeezed and when? What would these trainers be saying to one another, expletives not necessarily deleted, during the course of the day? If you overlaid (and color coded) their trades on a single chart, would you know a little more about market dynamics than you do now?
Wednesday, March 24, 2010
Henning, The Value and Momentum Trader
Reading Grant Henning’s The Value and Momentum Trader: Dynamic Stock Selection Models to Beat the Market (Wiley, 2010) is like wandering through a botanical garden if you are a plant lover. You adopt a leisurely pace because there are so many things to look at. Most are familiar, but even among them there are some you want to examine more closely.
Henning considers himself a pragmatist, where “pragmatism can lead to appropriate solutions without the distractions of rigorous theoretical accommodation.” (p. 4) A trader doesn’t need to know why a particular trading system works well for him; as long as it works, the search is over. Henning set his own personal bar high: to develop a trading system that would generate earnings in excess of 10% per month. He created his trading profile over time. He would trade only stocks, he would be a swing trader holding positions for anywhere between three days and three months, he would use margin when conditions were extraordinarily favorable, and he would be a long-only trader in bull markets and either be out of the market entirely or be invested in short index funds when the market was “unfavorable.”
The two major tasks facing Henning were to develop a stock screen and to find a way to measure market conditions. He offers the reader the fruits of his labor. First, ideas for creating a hybrid screen that combines fundamental and technical parameters. Fundamental data are used to identify stock value; technical data are timing devices that highlight price momentum. The initial process is rather time-consuming, but once set up it spits out weighted buy and sell recommendations daily with only about an hour’s worth of work each evening.
The momentum screen in and of itself will serve as a barometer of market conditions. For instance, in a weak market few stocks are near their 52-week highs. Henning also considers the VIX and the put/call ratio to be reliable timing indicators.
Henning’s trading is labor intensive, not designed for the weekend warrior. Screening for potential buy candidates is only the first step. He then monitors these stocks pre-market, seeking out intel. Once the market opens he watches price action and decides whether to enter and, if so, the best entry point and best order method (limit or market). He culls out losers in his portfolio and determines when to take profits on winners. He manages his portfolio both in terms of diversification and proportionality of holdings. And, of course, he keeps records.
Both Henning’s stock screen and his overall trading methodology are hybrids. The screen uses fundamental as well as technical inputs. The methodology combines systematic and discretionary elements. Hybridism is, it seems, Henning’s pragmatic solution. And, unlike Toyota, he doesn’t have to worry about a runaway acceleration in trading revenues.
Henning considers himself a pragmatist, where “pragmatism can lead to appropriate solutions without the distractions of rigorous theoretical accommodation.” (p. 4) A trader doesn’t need to know why a particular trading system works well for him; as long as it works, the search is over. Henning set his own personal bar high: to develop a trading system that would generate earnings in excess of 10% per month. He created his trading profile over time. He would trade only stocks, he would be a swing trader holding positions for anywhere between three days and three months, he would use margin when conditions were extraordinarily favorable, and he would be a long-only trader in bull markets and either be out of the market entirely or be invested in short index funds when the market was “unfavorable.”
The two major tasks facing Henning were to develop a stock screen and to find a way to measure market conditions. He offers the reader the fruits of his labor. First, ideas for creating a hybrid screen that combines fundamental and technical parameters. Fundamental data are used to identify stock value; technical data are timing devices that highlight price momentum. The initial process is rather time-consuming, but once set up it spits out weighted buy and sell recommendations daily with only about an hour’s worth of work each evening.
The momentum screen in and of itself will serve as a barometer of market conditions. For instance, in a weak market few stocks are near their 52-week highs. Henning also considers the VIX and the put/call ratio to be reliable timing indicators.
Henning’s trading is labor intensive, not designed for the weekend warrior. Screening for potential buy candidates is only the first step. He then monitors these stocks pre-market, seeking out intel. Once the market opens he watches price action and decides whether to enter and, if so, the best entry point and best order method (limit or market). He culls out losers in his portfolio and determines when to take profits on winners. He manages his portfolio both in terms of diversification and proportionality of holdings. And, of course, he keeps records.
Both Henning’s stock screen and his overall trading methodology are hybrids. The screen uses fundamental as well as technical inputs. The methodology combines systematic and discretionary elements. Hybridism is, it seems, Henning’s pragmatic solution. And, unlike Toyota, he doesn’t have to worry about a runaway acceleration in trading revenues.
Tuesday, March 23, 2010
Our love of variety
This research by Dan Ariely and a team in Rome is off topic (or at least I hope it is), but fascinating nonetheless: capuchin monkeys, it seems, choose variety for variety’s sake. And so do we: people eat 43% more M&Ms when there are ten colors in the bowl instead of seven. The authors of the study may push the limits of credulity when they suggest that variety-seeking “contributed to the rise of bartering and then abstract money in human society.” But I’m the first to confess that this year when it comes to my vegetable garden I’m one of the most variety-seeking monkeys around. Gone are the green beans that, a hundred quart freezer bags later, I knew I couldn’t eat for at least another twenty years. And after last year’s disastrous growing season I decided it was time rethink the rationale for the garden. Why grow only the ordinary? Of course tomatoes will still with any luck be the premier crop. But in addition to such staples as lettuce and peas I opted to buy some seeds that would stretch both my gardening skills and either reacquaint my palate with some old-time favorites that aren’t so commonplace or, in one case, try something I’ve never eaten in my life. Here are the new additions: celeriac, kohlrabi, radicchio, Kamo eggplant, cardoon, Parisian pickling cucumbers, Belgian endives, broccoli raab, cannellini beans, and chickpeas. I now know why Belgian endives are so expensive; I’ll either have gorgeous salads come wintertime and many hours of work later or a big fat nothing. I really hope the cardoon prospers because I haven’t a clue what it tastes like. This is a clear case of variety for variety’s sake. And I consider exploration into the unknown tremendous fun!
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