December 24, 2007

Poker vs Trading



The best article about trading I've come across in a while is actually not about trading. It's about Poker. I am not a Poker player but some of the things mentioned in the latest Economist's article could very well be said about trading. To wit:
"The object is to control the swings of luck with skill, figuring out how to win the maximum with your luckiest hands and lose the minimum with your unluckiest one".
"Over the long run, a player with a head for calculating odds and a feel for the psychology of the game, such as bluffing, will always overcome an untalented opponent."
"The skill is in the betting. And it is apparent in the fact that you can win without the best hand. More than half of all hands end without the cards being shown, not because one player got lucky but because he managed to persuade the others, given their analysis of the available information and the size of the pot, that it was sensible to fold."

It seems Poker also has its share of skill vs luck controversies:

"Online poker sites have reams of game-by-game data. These could, in theory, be used to show what makes some players better than others, and what defines their skill (bluffing? Shrewd betting based on the rapid calculation of odds? Or both?). Through research in this area has been thin on the ground to date, number-crunchers are starting to rise to the challenge......These efforts may produce fascinating results. Or they might reveal nothing much. Even if the data highlight strong trends, it may still not be clear which are caused by skill and which by luck..."

One thought I've had while reading this is that, if we're ready to accept that good Poker players are more than just lucky and that, whatever the nature of their set of skills, they are more skillful than the other players, why is it so controversial (among a certain set of people) to say that good traders (or investors) are skillful and not lucky only.

December 17, 2007

Abelson bashing continued

It appears I have some competition in the game of Abelson bashing. A letter to the editor from an inspired Barron's reader starts like this:
"In Alan Abelson's soul, it is always 6 a.m. in a one-room apartment with a view of nothing. I can taste the ashes and bitter coffee." and ends like this:
"Abelson isn't a value investor. He is a perma-bear, who will rarely help investors. Unlike stopped clocks, he is never right, but as his calls for recession and apocalypse whine more vociferously, we must remember what he never understands: The market gets less risky as it corrects, and our equity markets and capitalist system though flawed, tend to make us real money over time - especially when Abelson's fear and loathing are in abundance."
I wouldn't be surprised if Abelson himself selected this particular letter out of his weekly stash of hate mail for its poetic qualities.

December 13, 2007

The following comment might be viewed as simplistic but sometimes simplistic is what is needed to drill down the actual meaning behind an overly complex reality:
"We really need to be plain about this: Companies such as Washington Mutual, which announced a $1.6 billion write-down of home-lending-unit losses Monday, essentially took money placed in passbook savings accounts by hard-working, conservative customers -- many of them retirees -- and shoveled it to low-income, Fantasy Island condo flippers. Bankers paid 2% or less to customers they obviously considered suckers and lent it out at 6%-plus to customers they courted. " More not so simplistic but very illuminating comments are to be found in this article by the always bold Jon Markman.

December 9, 2007

Interesting article on Jim Simons and his Renaissance Technologies LLC group of hedge funds.
Mr. Simons is otherwise known as "God" among the quant crowd.
The laws of the financial markets present a special challenge, Simons says. Unlike the laws governing physics or chemistry, they tend to change over time. ``One can predict the course of a comet more easily than one can predict the course of Citigroup's stock,'' he says. ``The attractiveness, of course, is that you can make more money successfully predicting a stock than you can a comet.''

December 7, 2007

Return of the technical

I have noticed in myself a tendency to write about peripheral matters or avoid writing (or thinking) about the market altogether when one of the following three things happen:
1) The market is extremely volatile
2) The market is extremely unpredictable and I feel I have no special insight into what it's going to do next
3) The market is doing the opposite of what I thought it was going to do.
As it happens, all three did occur at one point or another over the last few weeks. I must admit the latest bout of weakness and its vigor took me by surprise and that the eventual rebound (the one that's taking place now) came much later (and at a much lower level) than I expected.
Add to that the fact that I seem to have run out of exciting charts (and my natural laziness) and you have a ready made explanation for my avoidance of technical market analysis. But all things must come to an end and that thankfully includes lack of inspiration so here we go.

The chart above (it is strongly suggested the reader click on the chart to enlarge so as to have the faintest idea what I am talking about) is the most recent daily chart for Microsoft. After its breakout move on 10/26/07, the day after shockingly above-expectations earnings were announced, the stock looked like it was off to the races but it actually came down pretty hard with the rest of the market. However, starting 3 days ago, it did stage a rally that could be the real thing for two reasons:
1) it took place right at the 50-day Simple Moving Average around 32.6
2) and as the 10/26 gap was almost filled (or the window closed in candle-speak).
I could also add the fact that the RSI has formed what looks like a double bottom at around 45, a level that frequently marks the end of a corrective move within a larger bull move.
Granted, volume has been unexceptional at best and that's a cause for concern. Therefore, we would need a decisive close on decent volume above the previous intermediate high (reached on 11/20) above 35 to call with some authority for a resumption of the uptrend.


December 1, 2007

The end of the world as we know it

You know the market is due for a serious bull move when perma-bears like Barron's Alan Abelson, high from the fumes off the recent selloff, think Armageddon is upon us.
He announces in his most recent weekly oeuvre nothing less than the end of the financial world as we know it. Judge for yourself (emphasis mine):
"Pure and simple, we've had three decades of mostly bull markets fed by cheap and abundantly available credit and an insatiable lust for leverage. That's fast coming to what we suspect will be a crashing end."
"Part and parcel of this epochal change will be a purge of the hedge funds, the private-equity operators, the investment banks driven by a casino mentality, who have served as the hallmarks of this gilded age now teetering toward its close. Their numbers and, more importantly, their profits will be drastically reduced."
Quite a terrifying depiction of a financial end-of-days day of reckoning or Abelson's special wet dream.