March 29, 2010

Losers 2.0


Pretty pathetic NYT article on modern (as opposed to ancient, i.e. late 90s) day traders. It seems journalists get off on portraying day traders as clueless, dim-witted losers and this article is no exception.

The traders' lingo is ridiculed as "teenage haiku", the point that they face daunting odds when it comes to making money day in, day out is belabored throughout. Some rather creative insults are hurled at day traders in general:
As a job, “day trader” registers in roughly the same way as “disco ball manufacturer” or “Brooklyn farmer.” You know that someone has to be making disco balls and that maybe there are still a few plots of arable land in Brooklyn.
and at the day traders featured in the article in particular (they look like "members of a mellow Southern California rock bank that split up 15 years ago").

Some of this is obviously right on the money, especially the part about algorithmic trading wreaking havoc on overly simplistic day trading strategies. As a matter of fact, the way one of the traders reacts to a "robo trader" supposedly screwing up his trade:

That was nothing but an algorithm boogie. Goddang it. Drives me crazy. My analogy is that whole sector is doing great and they find one weak animal in a herd and they’ll attack it.

cracked me up because it sounds like an updated version of what I used to hear on the trading floor every second of every trading day in the late 90s: "it's the f**king specialist!". Which goes to show there's always somebody (or something) out to eat your lunch.

At the risk of adding some more tired clichés and teenage haikus, day trading is indeed a "tough gig". It has always been and will always be a very difficult way to make a living. It can be emotionally taxing if not downright heartwrenching, and when it's easy, it's never easy for long. It is also intellectually stimulating, almost never gets boring and can be quite rewarding emotionally and financially. Only a gullible journalist out for a facile article ridiculing what is, in my admittedly biased opinion, a noble profession could pretend first to believe day trading to be an easy endeavor then pretend to discover how much harder than it looks it really is.

March 17, 2010

We Still Don't Know What Causes Depressions


That's basically the crux of Robert Shiller's recent article titled A Crisis of Understanding.

Maybe it's not so much that we don't know the cause of economic depressions as that there are so many potential culprits. Each of which could be, if not THE cause, at least the main cause but could also just be a peripheral phenomenon. The causes given for the Great Depression were:
[M]isguided government interference with markets, high income and capital gains taxes, mistaken monetary policy, pressures towards high wages, monopoly, overstocked inventories, uncertainty caused by the reorganization plan for the Supreme Court, rearmament in Europe and fear of war, government encouragement of labor disputes, a savings glut because of population shrinkage, the passing of the frontier, and easy credit before the depression.
Many of these explanations could be recycled for the Great Recession and the following could be added:
[U]nprecedented real-estate bubbles, a global savings glut, international trade imbalances, exotic financial contracts, sub-prime mortgages, unregulated over-the-counter markets, rating agencies’ errors, compromised real-estate appraisals, and complacency about counterparty risk.

March 3, 2010

Question for Brett Steenbarger


Brett Steenbarger of the always excellent TraderFeed blog is holding a webinar and is asking for suggestions as far as the topics folks might be interested in having him tackle. So by all means go here and add your question(s) to the comments section. My long-winded question is:
Brett, I would really like to know your opinion on the specialist vs. generalist divide.
Are most of the successful traders you know extremely specialized, i.e. trade only one product, one time-frame, and beyond that, one system or even one direction or one time of the day?
Or is it the case that the most successful traders can play several partitions and adapt their trading to the market conditions?

March 2, 2010

The Berkshire Annual Letter


Even though Warren Buffett has come to personify fundamental analysis and I'm more of a technical analysis kind of guy, how can one not go gaga over this kind of fundamental analysis (emphasis mine)?
Long ago, Charlie [Munger] laid out his strongest ambition: “All I want to know is where I’m going to die, so I’ll never go there.” That bit of wisdom was inspired by Jacobi, the great Prussian mathematician, who counseled “Invert, always invert” as an aid to solving difficult problems. (I can report as well that this inversion approach works on a less lofty level: Sing a country song in reverse, and you will quickly recover your car, house and wife.)
[...]
Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their
products may be. In the past, it required no brilliance for people to foresee the fabulous growth
that awaited such industries as autos (in 1910), aircraft (in 1930) and television sets (in 1950). But
the future then also included competitive dynamics that would decimate almost all of the
companies entering those industries. Even the survivors tended to come away bleeding.

Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean
we can judge what its profit margins and returns on capital will be as a host of competitors battle
for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to
come seems reasonably predictable. Even then, we will make plenty of mistakes.

We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback
position at Berkshire. Instead, we will always arrange our affairs so that any requirements for cash
we may conceivably have will be dwarfed by our own liquidity. Moreover, that liquidity will be
constantly refreshed by a gusher of earnings from our many and diverse businesses.

When the financial system went into cardiac arrest in September 2008, Berkshire was a supplier
of liquidity and capital to the system, not a supplicant. At the very peak of the crisis, we poured
$15.5 billion into a business world that could otherwise look only to the federal government for
help. Of that, $9 billion went to bolster capital at three highly-regarded and previously-secure
American businesses that needed – without delay – our tangible vote of confidence. [...]
The $20 billion-plus of cash equivalent
assets that we customarily hold is earning a pittance at present. But we sleep well.