Quote of The Week

"In these times, when so much is written about the "money supply" and when some observers assert that an abundance of money will forestall a slump, it is interesting to note this comment by Senator Burton: "...paradoxical as it may seem, the starting point for crises and depressions may be found in abundance rather than in scarcity, whether of money or capital." -- Humphrey B. Neill in his book, The Art of Contrary Thinking, which was first printed in 1954.

True words of wisdom by the great Vermont Ruminator. In seeing all the wasted words spent on the yield curve conundrum this past week...I figured I'd waste a few more...

"The reason the contrarian needs to be aware of history, in this regard, is because changes in trend occur before the masses are consciously observant of the fact. Also, because when socio-political conditions seem to revolve and repeat, the average person (of brief memory) is unaware of the "cycle" and is likely to think that a "new" condition has developed." -- Humphrey B. Neil

So, what's that leave us with? Well, possibly we need to analyze the current trend in the markets. For a few years, the markets seems to have priced in a good sound economy. Do you believe the next year will see more of the same? Or will markets need to price in a little risk with that cup of joe?

Happy New Year everyone! I hope all have enjoyed their holidays. And gained focus on the tasks at hand for the new year. This year will be filled with many new events for yours truly. Found out last week that we're having a boy! Yeah! We are excited but our daughter is a little bummed. She was hoping for a little sister. But, once we told her that a little brother wouldn't play with her girl toys...she quickly warmed up to the idea of having a brother. Kids are funny that way. If only we as adults could be so adaptable.

P.S. This weekend I watched one of my favorite movies...Open Range with Robert Duvall, Kevin Costner, and Annette Bening. If you haven't seen it...you're missing out...Bucketmouth! :)

Later Trades,

MT

More Food for Thought

Thought these two posts were linkworthy...

Bill Cara shares his Rules for Successful Trading. Read here. My favorite rule? Rule #9: Take risks, not chances.

My wife and I were talking about the difference between Donald Trump and Warren Buffett last night. And it was just funny that I then find this post by the Daily Dose of Optimism on Trump's Rise to Wealth. Read here.

Just what were my wife and I discussing in regard to Trump and Buffett? Well, we were just making the case that Trump has a tougher row to hoe in staying rich because his wealth depends upon his lavish lifestyle. He has to project an image of a rich billionaire in order to keep his billionaire status. Buffett known for his value-conscious investments and lifestyle has a wider margin in his billionaire status. In other words, he can be cheap and still retain his status.

Gotta go...time to make cookies for Santa and Rudolph.

MT

Food for Thought

"Things should be made as simple as possible, but not any simpler." -- Albert Einstein

Diversification is Balderdash? Here.

This time it's different? First the New Economy and now the Inverted Yield Curve?. Here.

Baby Sitters, Protectionism, Starbucks, Export Bans, and the Bubble? Now that's my kind of economist. Read here.

Two great articles posted recently by Dan over at the The Art of Streetplay. Read Model Building Thoughts here. And Indexing the Answer here. He mentions a quote that "Stock picking is a very complicated process." I agree with that quote but with an addition..."Stock picking is a very complicated process because it is so simple."

Reminds me of programming projects I've worked on. Wanna know what the hardest projects were? Not the ones that seemed so complicated to understand at first that there was no way it could be done. Those ended up being fairly easy to design and implement. The simple little buggers are the ones that ended up causing the most problems. Time clock-in/clock-out systems for instance are very simple...yet very complex. I have spent more hours on time systems than I've ever spent on designing and implementing the merge of a sysplex into a 24-hour window. Y2K...very simple...yet very complex. Payroll...cut a person a check...how hard is that? Simple...yet complex.

Are simple things turned into complex things because of people? Or are simple things complex because the multitude of variables effect on the simplest of things? And people just happen to be one of those variables? Too deep for me.

I just know the more I study the market the less I end up knowing. A very humbling experience. So, I find myself over the years sticking more and more to the simple stuff which takes me into very complex directions. The vicious cycle of simple to complex to simple...never ends.

Happy Holidays!

MT

Quote of the Week

"Listen to what the market is saying about others; not what others are saying about the market." -- Richard Wyckoff

Nice quote. Don't listen to all the yick yack from others. Listen to the market. If the world is falling apart...is gold rallying? If we're going to have a rough 2006...how are the tech stocks doing? If gold and techs are both on the rise; what's Mr. Market trying to tell us? Hmmm...

While you're chewing on that...check out the two articles below.

The CEO of Raytheon, William Swanson, shares his management lessons...here. My favorite rules? Rule 30: Short them to the ground.

Bloomberg asks "What is Your Total Return?"...here. I have to admit...I asked myself one of the same questions mentioned in the article just a month or so ago. "Are you doing what makes you feel most alive? Does what you do add or subtract from your overall goals and happiness?" Careful about asking yourself this...life changes can occur.

Later Trades,

MT

Millionaire Next Door?

"Seeds are a lot like dollars. You can eat the seeds or sow them. But when you would see what seeds turned into...ten-foot-high corn...you don't want to waste them. Consume them or plant them. I always get a kick out of watching things grow." -- quote from Millionaire Next Door

Every so often I pull a book down from my library and skim through the pages just seeing what catches my eye. This morning I pulled down The Millionaire Next Door by Thomas J. Stanley and William D. Danko. This book uncovers some interesting statistics regarding millionaires in America. Here's just a few...

Self-employed people make up less than 20% of the workers in America but account for two-thirds of the millionaires.

About half of the millionaire's wives do not work outside the home. The number-one occupation for those wives who do work is teacher.

About 80% of millionaires are first-generation affluent.

Have more than 6 1/2 times the level of wealth of their nonmillionaire neighbors, but, these nonmillionaire neighbors outnumber us better than 3 to 1.

How to determine if you're wealthy? Multiply your age times your gross annual income and divide that figure by 10. This figure is what your net worth should be. For example, if your gross annual income is $70,000 and age is 34...then you're net worth should be $238,000. If your well under that figure...you're an UAW (under accumulator of wealth). If well over that figure...a PAW (prodigious accumulator of wealth).

The reason why I enjoyed this book so much when I bought it 3 or 4 years ago is because of its contrarian tale. Millionaires aren't the figures you have conjured up in your mind that live lavishly, spend furiously, and never worry about money. They're the people you overlook in a crowded room. The tightwads...driving used non-descript cars, working in dull industries, and loving every minute of it.

In fact, one of the few I do know is a welder in the backwoods of East Texas. Had him weld a car part for me a few times. Owned a pet raccoon, several dogs, and cats. Lives in an 80 year-old home with no central air/heat. Wife is a stay-at-home mom. He's around 40 years of age. How do you imagine a welder in a very small town struck it rich? He has sucked every last drop of opportunity from his land and welding business. Created a parking lot for overnight truckers where he receives money for parking as well as working on their rigs. Sells ad space on his high-traffic (for East Texas) road signs. The list goes on. And let's face it...he lives extremely frugal. The words tightwad have been mentioned several times when his name is brought up.

Another millionaire I know started out as a commercial fisherman on the lake. Ran trot-lines for catfish. Did fairly well in a barely break-even business. Then began an auto-repair business. Something thousands of mechanics have done. But, this one through extremely frugal living has turned it into one heck of a profitable business. And unbeknownst to many, has turned the land behind his shop into a very lucrative Pecan farm. Again, sucking the blood out of every last drop in his assets and being frugal with the returns have turned this local genius into a millionaire.

I'll leave you with one of my favorite stories of all time in regard to millionaires. It's one I have told over and over to many of my friends and coworkers. And best of all...it's from the Millionaire Next Door Book...

The first time we interviewed a group of people worth at least $10 million (decamillionaires), the session turned out differently than we had planned. To make sure our decamillionaire respondents felt comfortable during the interview, we rented a posh penthouse on Manhattan's fashionable East Side. We also hired two gourmet food designers. They put together a menu of four pates and three kinds of caviar. To accompany this, the designers suggested a case of high-quality 1970 Bordeaux plus a case of a "wonderful" 1973 cabernet sauvignon.

Armed with what we thought would be the ideal menu, we enthusiastically awaited the arrival of our decamillionaire respondents. The first to arrive was someone we nick-named Mr. Bud. Sixty-nine and a first-generation millionaire, Mr. Bud owned several valuable pieces of commercial real estate in New York metropolitan area. He also owned two businesses. You would never have figured out from his appearance that he was worth well over $10 million. His dress was what you might call dull-normal...a well-worn suit and overcoat.

Nevertheless, we wanted to make Mr. Bud feel that we fully understood the food and drink expectations of America's decamillionaires. So after we introduced ourselves, one of us asked, "Mr. Bud, may I pour you a glass of 1970 Bordeaux?"

Mr. Bud looked at us with a puzzled expression on his face and then said: "I drink scotch and two kinds of beer -- free and BUDWEISER!"

We hid our shock as the true meaning of our decamillionaire's message dawned upon us. During the subsequent two-hour interview, the nine decamillionaire respondents shifted constantly in their chairs. Occasionally they glanced at the buffet. But not one touched the pate or drank our vintage wines. We knew they were hungry, but all they ate were gourmet crackers.

When we interview millionaires these days, we offer a spread that is more congruent with their way of life. We provide them with coffee, soft drinks, beer, scotch, and club sandwiches. Of course, we also pay them between $100 and $250 apiece.

What are the three words that profile the affluent? FRUGAL FRUGAL FRUGAL.

Check out the book and more importantly, check out yourself and chosen lifestyle. Are you frugal enough?

Later Trades,

MT

[Edit: Corrected the calculation of "how wealthy you are." I miscalculated ($70,000.00 * 34) / 10. Does not = $280,000.00 but $238,000.00. Sorry for the mistake. ]

S&P 500 Index, Consistency, and Hot Stove Lids?

TraderMike posted a link to an article by Jon Markman titled, "The S&P 500 is a mutual fund - and a bad one." Before I begin my rant...first read the article. Really read it. Such things as:

"One myth that appears to be imploding along with the market is the notion that investors should “passively” buy the market via the S&P 500 Index ($INX) rather than buying individual stocks."

"This is not just a question of one company picking better stocks than the other. It’s a question of a flawed design that rewards sector momentum over common sense. Unlike most index publishers, such as the Nasdaq and Dow Jones, Standard & Poor’s adds and subtracts stocks from its three broad indexes -- the large-cap 500, the Midcap 400 ($MID.X) and the Smallcap 600 ($SML.X) frequently in accordance with a largely subjective list of criteria that includes market capitalization, liquidity and their representation of industrial sectors."

"It’s the latter criteria that got S&P into trouble in 2000 as it tried to keep pace with the explosive 1999 performance of the tech-heavy Nasdaq 100 ($NDX.X). Every month a number-cruncher at S&P adds up the total capitalization of all 9,000 or so stocks traded on U.S. exchanges, and determines the percentage representation of each broad industrial sector, such as technology, health care and capital goods. After technology stocks roared into favor in the late 1990s, S&P found that the market had given an 18% weighting to tech stocks while its index only had a 14% weighting. So the committee considered itself obligated to raise its weighting in tech stocks in short order."

"In 2002, S&P has continued its tradition of adding fast-rising stocks in the most popular industrial sectors to the S&P 500. In time, we will determine whether they were reflecting economic changes or simply the market momentum of regional banks, real-estate investment trusts, insurance and home improvement products. Top adds so far, in order of inclusion, are Plum Creek Timber (PCL), Ace Limited (ACE), Rational Software (RATL), Marshall and Ilsley (MI), First Tennessee National (FTN), American Standard (ASD), BJ Services (BJS), Apollo Group (APOL) and Simon Property Group (SPG)"

Markman posted this article in June 2002.Yes, 2002. Just 4 months before the bottom of the 2000 decline. Now, take a look at those stocks Markman mentioned being added to the index back in 2002.

Every single one of them are up and up pretty good I might add since their inclusion. Oh, sorry...Rational Software was bought by IBM and First Tennessee National by First Horizon...so they didn't go up as much as the others. But, a 100% hit rate isn't too shabby for a bad mutual fund as Markman calls it.

What does this say about Markman's theory on the S&P 500? His all-knowing implications of we'll just see how badly you fail by adding fast-rising stocks in the most popular industrial sectors? Hmmm...

I think Markman suffers from what most investors including myself suffer from...lack of consistency. That's why you have to admire a guy like Roger Nusbaum over at Random Roger's Big Picture. I've read his blog over a year now and he has stuck to the same investing approach month in and month out. Market does great or market does bad...he's the same. He might suffer from a lack of exciting material to write about at times...but better for that to suffer than his or his client's returns. There's a lot to learn from that approach.

Consistency. How do you become consistent like Roger? How do you get to the point of knowing your investment methodology will work long-term? And then trusting it despite what Mr. Market throws at you?

Maybe this quote will help...

"We should be careful to get out of an experience only the wisdom that is in it — and stop there; lest we be like the cat that sits down on a hot stove lid. She will never sit on a hot stove lid again — and that is well; but also she will never sit down on a cold one anymore." -- Mark Twain

Are we too focused on the hot lids of 1929-1932, 1969-1970, 2000-2002? Does that explain Markman's rant and his ever changing cycles shared with Neiderhoffer?

Have we forsaken consistency for market strategies that avoid those hot stove lids? Buy gold...market looks weak. Inflation rising. Warning, warning, warning Will Robinson. When the lid proves cold...what are we left with?

Or is our focus only on the cold stove lids? Buy the bull...everything looks great. The flowers are blooming and there's not a cloud in the sky. We're in stage 4 of the business cycle and firing on all pistons. Charge! When you burn your tail on the eventual hot lid with too much money on the line...what are you left with?

Maybe we narrow our focus and reduce the duration of our holdings hoping to side-step all lids regardless of hot or cold? Never sitting long enough in one spot even if that means we never sit down at all? Churn.

Perhaps Twain had it right...understand the market is filled with hot and cold lids (stocks). And that's it. Nothing more and nothing less. Focus on the goal at hand...finding a place to sit your money. If the plate is hot...get up and move to the next spot. Never sit long enough on a hot lid (cut your losses) nor put enough weight down on all lids (position sizing) to get burnt badly. Find a place to sit and do what cats do best...sleep (compound).

Goodnight,

MT

Quote of the Week

All who succeed in life get off to a bad start, and pass through many heart-breaking struggles before they "arrive." The turning point in the lives of those who succeed, usually comes at the moment of some crisis, through which they are introduced to their "other selves." -- Napoleon Hill

Later Trades,

MT

Crop Stock Management

Found a great article over at the University of Minnesota's Extension Service that relates to the tree business I referred to in my previous post. There's a section in the article that discusses Crop Tree Management. Here's part of the text:

Crop tree management is very similar to thinning carrots in a garden. If you leave too many carrot seedlings, you end up with many scrawny carrots and few nice ones at the end of the season. It works the same way with trees.

Crop tree management is a technique developed to generate high-value sawlogs. This makes your woodlot more valuable and increases the financial return from your trees. This technique usually does not apply very well to pulpwood production. In crop tree management, as few as five to more than ten trees per acre can be selected as candidate “crop trees.” Crop trees are the best trees in the woodlot. These are the trees that will be kept in the forest to grow in size and value. This does NOT mean that a landowner cuts all of the other trees, but instead means that the crop trees get special treatment that is not given to the others. A crop tree is usually:

• A long-lived and desirable species
• Straight and tall
• Free of obvious disease
• Free of defects, especially large wounds
• In the uppermost canopy layer (in a dominant or co-dominant position)

When selecting crop trees, it is important to note that the tree does not need to be large, just in the upper canopy. Some of the biggest gains in value can come from trees that are 6–10 inches now, but will be 12–14 inches or more at the final sale.

After the candidate trees have been selected, the trees that are directly competing with them are removed. This usually means trying to release the crowns (the top) of the crop trees from competition on three or four sides. After the treatment, the crowns of the crop trees should be separated from adjacent trees by about 15 feet. This will allow the tree to grow with much less competition and to put on much greater volumes of high-value new wood. These few, really good quality trees usually hold most of the value in the stand when cut for sawtimber.

Now, what does that have to do with investing? Hmmm.... Let me convert the above text into what my mind saw:

Crop stock management is very similar to thinning carrots in a garden. If you leave too many carrot seedlings, you end up with many scrawny carrots and few nice ones at the end of the season. It works the same way with stocks.

Crop stock management is a technique developed to generate super stocks. This makes your investment portfolio more valuable and increases the financial return from your stocks. This technique usually does not apply very well to daytrading strategies. In crop stock management, as few as five to more than ten stocks per portfolio can be selected as candidate “crop stocks.” Crop stocks are the best stocks in the portfolio. These are the stocks that will be kept in the portfolio to grow in size and value. This does NOT mean that an investor sells all of the other stocks, but instead means that the crop stocks get special treatment that is not given to the others. A crop stock is usually:

• A long-lived and desirable stock
• Uptrend that is tight and strong
• Free of obvious disease - unprofitable, high debt, etc.
• Free of defects, especially large wounds - facing bankruptcy, lawsuits, etc.
• In the uppermost canopy layer (in a dominant or co-dominant position) - new highs dominate the chart

When selecting crop stocks, it is important to note that the stock does not need to be highly liquid, just in the upper canopy. Some of the biggest gains in value can come from stocks that are thinly followed now, but will be heavily followed by the final sale.

By applying Crop Stock Management to our investment portfolios...perhaps we can grow crop stocks into super stocks .

Later Trades,

MT

Improvements ain't all that!

How's that for a title? Well, that's something I've always ranted and raved on for years and years. My contention has always been...this world we live in is zero-sum. You can't improve anything without taking something away. So, improvement is dependent upon which person you talk to.

Corporate farms have enabled us to consume our milk, eggs, bacon, hamburgers, steaks, etc. all at a price that is easy to stomach since we never have to step foot onto a farm or ranch. Especially considering John F. Kennedy's quote, "The farmer is the only business man who buys at retail, sells at wholesale and pays the freight both ways."

But, this improvement on farming came at a cost...to the cottage farmer. Gene Logsdon brilliantly highlights these costs in his classic book, The Contrary Farmer.

So, what's my point? Not much...just trying to find a nice little segue into the following article I found over on DeepWealth. Read here. It's an extract from Charlie Munger's speech on what technology improvements can do to a company...person...a commodity. Favorite part?

And he knew that the huge productivity increases that would come from a better machine introduced into the production of a commodity product would all go to the benefit of the buyers of the textiles. Nothing was going to stick to our ribs as owners.

That's such an obvious concept - that there are all kinds of wonderful new inventions that give you nothing as owners except the opportunity to spend a lot more money in a business that's still going to be lousy.The money still won't come to you. All of the advantages from great improvements are going to flow through to the customers.

The great part about that statement is just how true it is. I have witnessed this effect time and time again in regard to technological improvements made in business. The crazy part...besides myself?

Most people never hit the conclusion that Buffett came to so quickly. Is it really worth doing if I have to invest all this capital only to keep up? Now, I'm not saying we should halt all progress...Close the mill...so to speak. Just trying to make the point that improving our lives...our businesses...the world, comes at a cost.

High-speed Internet? How's that family you never see?

Great investing tools...clean reliable stock data feeds...real-time scan streamers? How's the hunt for those market inefficiencies coming? And at what cost? Only to keep up?

Nice car? Yeah? How's that 45 minute commute?

Nice house? How's that mortgage?

My dad used to mention how it took him 25 to 30 hits to find oil back in the day...now it takes only 2 or 3. But, the cost is the same if not higher.

So, what to do...what to do? To me, I've always thought you should take into account all costs of the improvement (both real and lost) and figure out if there's a way to break off from the pack and create value in a different area and with that capital from the so-called "improvement".

How does this relate to trading? Hmmm...Let's see...if everyone is focusing on short-term returns and investing more and more capital into trading technologies to generate those returns...then how are you ever going to get ahead? Cause let's admit it...the margins are pretty crummy anyway. Technology is only going to reduce those margins further. So, maybe we need to do as Gene Logsdon suggests and break away from the pack....if everyone is going short-term...go long-term baby! Maybe Buffett said it best...

"Someone's sitting in the shade today because someone planted a tree a long time ago."

Just maybe we need to look into the tree business. That is after all one of the top search hits on this site. :)

Later Trades,

MT

Quote of the Week

This week's quote comes from a great find by The Buffett Blog. An interview with Charlie Munger from Kiplinger.

The quote?

"If the price of automobiles were going up 40% a year, you'd have a boom in auto stocks. But if you stop to think about it, of the companies that you could have bought in, say, 1911, to hold for a long time, one of the very best stocks would have been Rockefeller's Standard Oil Trust. It became almost all of today's integrated oil companies." -- Charlie Munger

Wow! Munger has given us all something to chew on for awhile. What will fuel the next 100 years?

Later Trades,

MT

Quote of the Week

"When there are no fish in one spot, cast your net in another." -- Chinese Proverb

How many of you get stuck in your trading? Can't seem to make progress? Well, sometimes the fish just aren't there to catch. You can work as hard as you want and still catch nada. The key is to cast that net until you find fish.

What happens when no more fish are caught? You must move on...because the fish already have.

Later Trades,

MT

Taylor Turkey System

Once again it's that time of year...time with family, counting of blessings, stuffing your face...and most of all...the Taylor Turkey System!!! For those unfamiliar with the system you can read the original post here and the follow-up here.

Under the system, you purchase the index on Wednesday (day before Thanksgiving) and sell the Monday after Thanksgiving. How will it perform this year? Ah, should be interesting. Will I invest my hard-earned money? No, probably not. While it's a fun little system showcasing the holiday effect...just too few data points for me. But, with a quick and dirty test on the current Nasdaq 100 stocks...you earn a profit factor of 3.15. Of course, that's not counting commissions and slippage. Still, not too shabby for turkey lurkey day.

Well, gotta get...some more system work to do. Just what kind of stuff am I working on? Hmmm...let's see...it involves a bit of Bill Cara's Value Line Research, Victor Neiderhoffer's Triumph of the Optimist, Michael Covel's Trend Following post, and Ben Bernanke's MO.

I hope all is great with you and yours. Everyone have a wonderful Thanksgiving.

P.S. TraderMike needs to start working on those New Year's Resolutions for 2006! Time is a tickin! Ha ha!

Later Trades,

MT

Quote of the Week - Decision

Analysis of over twenty-five thousand men and women who have experienced failure disclosed the fact that lack of decision was near the head of the list of the thirty-one major causes of failure.

Procrastination, the opposite of decision, is a common enemy which practically every man must conquer.

Analysis of several hundred people who had accumulated fortunes well beyond the million-dollar mark disclosed the fact that every one of them had the habit of reaching decisions promptly, and of changing these decisions slowly, if and when they were changed. People who fail to accumulate money, without exception, have the habit of reaching decisions very slowly, if at all, and of changing these decisions quickly and often.

I believe these quotes are from Think and Grow Rich by Napoleon Hill. But, found them in the MasterMind Forums here.

These quotes are the type that should be read more than once. Allowed to soak in your brain. Stew over. Or as they say where I'm from, "Chew on for awhile."

And one last one from Hill for dessert:

"You must get involved to have an impact. No one is impressed with the won-lost record of the referee."

Later Trades,

MT

Quote of the Week

"Try a thing you haven't done three times.
Once, to get over the fear of doing it.
Twice, to learn how to do it.
And the third time, to figure out whether you like it or not."
-- Robert Evans (creator of Godfather)

Great words of wisdom. Especially for ADD'ers like myself. Easy to get frustrated with something and cross it off your list forever without ever taking the time to find out whether you truly like it or not.

The quote was from Robert Evans. Ever heard of him? I hadn't before I found this quote a few years back. Evans has lived quite an interesting life. Read this interview for some particulars, and don't miss out on how Evans discovers "The Smile"....aka Jack Nicholson.

New Blog Find

Found a very interesting blogger, Arpit Ranka via The Learning Blog's links.

Check out his post on The Reminiscences of an Infant Investor. I quite like his behavioral bent to investing/trading.

Favorite lesson from his post? "Lesson 2: You are not as smart as you think you are."

Ain't it the truth.

The site also has several great quotes sprinkled throughout. Such as this one from Pascal: "Heart has its reasons, that reasons don't understand." Nice!

MT

Serenity Now

oil_rig_net, originally uploaded by TaylorTree.

Well, this might not give the old oil rig workers much serenity now...more like the bad memories, nightly sweats from before. :)

Seriously, this is what you had to climb in on if you wanted to do offshore work in the gulf.

My dad is the 2nd on the right. Picture taken in 1954.

MT

Nassim Taleb Interview

Weird that I checked Taleb's site the other night and found the Notebook. And then noticed I'm ranking #1 on blogsearch.google.com and #2 on Technorati.com for "Nassim Taleb" searches. From Technorati I found a recent interview with Taleb from SmartMoney.com here. Great interview by the way. Here are some of my favorite parts:

Psychologists ran experiments to see how people absorb information. In one experiment they found people who work with racehorses, and asked them to name up to 50 pieces of information they would need [to determine if it was going to be a winner]. They ranked them by order of importance. They took the 10 most important ones out of 50 and looked at the prediction of accuracy to determine if a horse will win a race. Then they took the 20 most important pieces, then the 30. In the end, you had no gain in predictive power beyond the first 10 pieces of information, but a huge gain of overconfidence...

It's the market that creates the indicator, not the indicator that creates the market.

To become Bill Gates you need more luck than skill. But to become a prosperous person, you need more skill than luck.

I believe Warren Buffett has skills, but probably two-thirds of it comes from an environment that helped him.

I am unable to predict markets, but I know it.

The favorite quote being the Bill Gates more luck than skill. I've referenced that type of thinking back in this post on Relativity by Dr. Mike Ott here. I strongly believe that environment makes up at least 2/3 of a person's success. The other 1/3? Ah, that's your edge.

Got Edge?

MT

Random Markets?

Check out the Coin Toss Simulation - Visualizing Randomness from this link. Enter an amount in the Number of coin tosses box and press the "Simulate" button. Go ahead...enter 500000. Hmmm....

MT

Taleb's Notebook

Occasionaly, I peruse Nassim Taleb's site just to get a reality check on my system development activities. Tonight, I noticed Taleb has setup a Notebook that he notes is not quite a blog (funny). Read it here.

Not much happening on the homefront. Busily evaluating a trading idea....while the list of new ones rapidly pile on my desk. Speaking of desk notes...I have to really thank one of the commentors on this blog for recommending EverNote. I was very reluctant at first especially since it involved organizing my thoughts from the scattered scraps of paper and journals to a forum that's neat, tidy, and structured. But, I've really grown to like this little product. I'm slowly but surely beginning to keep everything stored in EverNote and the pile of notes are becoming electronic in form. Kinda cool. At least my wife thinks so. :)

This weekend? Somehow got wrangled into installing ceramic tile in my dad's kitchen. Hows' that for a howdy-do? But, it should be fun and filled with adventure. I'm just afraid the rest of the family will see the results and want more of the same. They'll just have to wait because dad has bigger plans for this computer geek...hardwood flooring!

One last thing...check out the movie Dreamer with Kurt Russell, Dakota Fanning, and Kris Kristofferson. I was really surprised...my wife and I saw it on our date night and I thought it had chick flick written all over it. That might be...still a good heart-warming movie that showcases the struggle of safety and stability against risk and opportunity.

Enjoy your weekend!

MT

Quote of the Week - Einstein

"It's not that I am so smart, it's just that I stay with problems longer." -- Albert Einstein

Boy, Albert, I sure hope you're right. Cause I've been trying to figure out this market for a heck of a long time!

Question is...how long should you stay with the problem versus cutting your losses and moving on to something else? How many other Einstein's have stayed with the problem til' their dying day...never solving the problem?

To test this theory out...

Try picking stocks and setting a profit target of 50% and don't sell until they hit it. Only two possible outcomes to this test: Stock will hit the profit target Or it won't. Time is removed from the equation except for the length of your lifespan. If the profit target is hit...you'll have found an Einstein.

Same Test as above but exit the stock if 50% target is not reached within a year. Same possible outcomes as the prior test but Time is added to the equation.

Are you better for your Sticktoitiveness or for Cutting Losses Short?

P.S. Would be interesting to see how many stocks bought the day of their IPO acheive their profit target and go on to become Einstein's? Would we consider 50% gain worthy of Einstein status? 100%? 300%?

Later Trades,

MT