Quote of the Week - Losing

"It turns out that it is much easier to make money when you are wrong most of the time. If your trades are losers most of the time, that shows that you are not trying to predict the future. For this reason, you no longer care about the outcome of any particular trade since you expect that trade to lose money. When you expect a trade to lose money, you also realize that the outcome of a particular trade does not indicate anything about your intelligence. Simply put, to win you need to free yourself and your thinking of outcome bias. It does not matter what happens with any particular trade."

-- Curtis Faith in Way of the Turtle --

MT

Quote of the Week - Explore, Arrive, and Know

We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.

-- T.S. Eliot

MT

Brick by Brick, Dr. Steenbarger

Read Dr. Steenbarger's article on A Mechanical Strategy That Has Produced Consistent Stock Market Profits. Awesome! Just awesome!

Wish I would have read it before I posted my Quote of the Week this week. Cause it illustrates my points about Buy and Hold better than my scatterbrained comments ever could. Some great tidbits from Steenbarger's posting...

"Buy and hold over the course of a 25 year investment career has never lost money going back to the start of my historical data in 1901."

"How many in-and-out traders, over the course of a 25-year career, can achieve such consistency and returns? How many actively managed funds can boast of such a record?"

"...an investor needs to tune out the many, many "sky is falling" jeremiads that were issued over those years, as market commentators became convinced that market meltdowns were in the offing. Consider the fact that, for the career investor, those cries of doom have never been vindicated. Never."

And finally...

"If we were to trade in and out of careers every time we became fearful of our current career progress or every time another career looked better, we'd wind up with a lifetime of unfulfilled promise."

Later Trades,

mt

Quote of the Week

"Brick by brick my citizens, brick by brick" -- Emperor Hadrian of Rome

I haven't posted much in awhile. Mainly because the more I learn the less I know. The less I feel I can share. The less certain I feel about things. The study of the market is a strange bird. So different than anything else I've dug into.

Investing is like programming yet you're switching languages, tools, platforms, users, business rules, etc. every week, day, hour, or even minute.

Just when you feel comfortable about your knowledge...your experience...the market changes on you. So, you're left with a few options. You can...

1) Pontificate. Throw lack of knowledge to the wind and show off that big chip on your shoulder. Pontificate at will as to what the market will and won't do. If your wrong...then so what? Pontificate a little more...and a little louder. Don't stray from your point of view. You are a contrarian after all. Take solice in that.

2) Daytrade. Since the market changes so fast and so often...embrace it. Change with it. You gain a lot of experience this way...no doubt about it. Always expanding, learning...and never getting comfortable. Those are the keys to success with this option. Note: Swing traders fall into this category as well. In fact, you'll find most daytraders have swingtraded and swingtraders have daytraded. All depends upon the speed in which the market is changing and the speed in which the person is comfortable with the changes. :-)

3) Invest for the long haul. Forego all the hip hopping around of the market. Buy and sit on your hands. Yes, I said that right. Cast that chip off your shoulder. Your grasp or lack-of on the ever changing cycles. Give up the notion that working harder equals greater returns. And most importantly, give up the ever incessant discussion as to why the market is top-heavy...bottomed...or bubblicious. Realize that your returns are generated from the market...not from you. Ouch! How's that for an ego buster.

If you haven't figured it out...I've chosen all 3 options at one time or another. But, for the past year I've stuck with option 3 - Buy and Hold (with a trailing stop). And I won't lie to you...it's lonely. Tough. Aggravating. For a workaholic like myself...it has been especially difficult to let the market generate my returns. But, the method is working. Brick by brick.

So, sorry for the lack of posts. Besides not having much to say about the market...I have been busy with completing my backtesting platform project. And for the most part, it's complete. The cool thing is I'm now able to test at the portfolio level all systems and allocations across thousands of stocks (20,000+). In fact, here are 3 things I've learned from this project that is market-related:

1) Important to test your ideas on the market without cash constraints. Because using cash limits your trades. And you need to see the impact of all trades in order to judge whether your idea is worthy of attention. Boot-strap simulations prove helpful here as well.

2) Test ideas with cash constraints. You may have an idea that does amazingly well...but just a few trades will wipe your cash out. And if you wipe your cash out...you're wiped out.

3) Carefully optimize your logic. Curtis Faith explained it better than anyone I've read as to how to best optimize your system. Avoiding the top of the curve is the key.

And here are 3 things I've learned from this project that is programming-related:

1) When looking for the fastest way to read and write vast amounts of simple data...avoid the plethora of databases out there. I've tried everything from PostgreSQL, MySQL, SQLite, BDM, SQL Server, KirbyBase, and many more. Nothing and I mean nothing even comes close to plain vanilla CSV files. Nothing! If you can imagine...it's even faster to sequentially read a CSV file to pickup a record by date than to query a db directly for that row.

2) Python is much faster than Ruby when it comes to processing CSV files and not much slower than C.

3) Programming a backtesting platform is not complicated...actually very simple. But, completing this project sure did test me. Why are the simplest things the hardest to program?

Later Trades,

mt

A New Blogger - Curtis Faith

Curtis Faith has a new blog, Way of the Turtle. Check it out. Loved the On Writing a Book post. Great start Curtis!

Also, I urge you to check out Mr. Faith's new book, Way of the Turtle. Good stuff!

Later Trades,

MT

Quote of the Week - (2007-01-11)

"You better know whatcha wanna to do, before somebody knows it for you." -- Charles Farmer in The Astronaut Farmer

Hope everyone is having a great week. Mine's been busy as ever. I hope to catch up on some reading over the weekend. Finish up the book, Trend Trading by Kedrick Brown. Dig in a bit more into the C language. Yes, I said C...the latin of programming languages.

I downloaded the MinGW compiler this week and wrote my first "Hello World" program in C. Then proceeded to open and read a CSV file. Whoa! Stop the bus! Not as simple as R, Ruby, Python, Pascal, and Cobol. Much to learn, much to learn.

Later Trades,

MT

Quote of the Week (2007-01-02)

Shlemiel gets a job as a street painter, painting the dotted lines down the middle of the road. On the first day he takes a can of paint out to the road and finishes 300 yards of the road. "That's pretty good!" says his boss, "you're a fast worker!" and pays him a kopeck.

The next day Shlemiel only gets 150 yards done. "Well, that's not nearly as good as yesterday, but you're still a fast worker. 150 yards is respectable," and pays him a kopeck.

The next day Shlemiel paints 30 yards of the road. "Only 30!" shouts his boss. "That's unacceptable! On the first day you did ten times that much work! What's going on?" "I can't help it," says Shlemiel. "Every day I get farther and farther away from the paint can!" -- Shlemiel the painter algorithm

Ran across this great interview of Joel Spolsky from Salon back in 2004. The dude has some great things to say...

In reference to the various software development methodologies:

There's certainly a lot of faux methodologies, what I often call "big-M" methodologies, extreme programming being a very popular one right now. And even when they're reflecting good ideas or best practices, the real goal of the methodologies is to sell books, not to actually solve anybody's problem. And selling the books is actually just a way to sell consulting engagements that the people who write those books do at high cost; that's their career -- giving speeches to people working for very boring companies on how to do software better.

In reference to creating software that will automatically translate a user's desire into code:

The fundamental problem that you're trying to solve here is that humans think of things in vague, mushy terms. In order to visualize something, they don't have to actually visualize every part of it. Whereas the programmer, in order to actually implement that thing, to create it, needs to have every part specified.

(continued...)

So your brain doesn't actually work the way a computer works. Your brain doesn't assume that there's all this input coming in and then process it. Instead, it just has a variety of senses available to it, and it picks the ones it wants to answer whatever questions it has right now. So you ask questions, and your eye goes and finds out the information it needs. So you're used to thinking that you have the big picture , and you don't.

(continued some more...)

And so what a programmer is doing when they translate a quote unquote spec into quote unquote code, although it seems like a translation process, what they're actually doing is filling in lots and lots of details. And as programmers are wont to do, they're trying to take something, the vague thing that the humans want, and make it very, very specific, which is the kind of thing the computer wants. That's not really a translation; it's more of an interpretation. It's a very hard thing to do.

Read Joel's Back to Basics post for more interesting tidbits on Shlemiel the painter algorithm, Pascal strings, and my favorite...XML performance issues. I've developed and supported EDI transaction processing for over 9 years and witnessed first hand the problems Joel discusses with XML. Great stuff!

Happy New Year!

MT

Happy Holidays!

Twas the night before Christmas, when all through the house
Not a creature was stirring, well, except for TaylorTree.

I wish you and your family a wonderful Holiday Season!

MT

Quote of the Week - Know Thyself

Boy: "Do not try and bend the spoon. It is impossible. Instead, only try to realize the truth."

Neo: "What truth?"

Boy: "There is no spoon."

Neo: "There is no spoon?"

Boy: "Then you'll see that it is not the spoon that bends...it is only yourself."

-- from the Matrix (one of my all-time favorite movies)

Hope all is well. I'm as busy as a bee...buzz, buzz, buzz.

Later Trades,

MT

Thread of the Week - Stock Distributions

Eric Crittenden shared an interesting study of stock distributions over at the Trading Blox Forum.

How many of you look at the Annual Compounded Returns graph and immediately think...man, I gotta get me some of those 3,000 plus 10% to 20% returns! If I can just find an edge, a better indicator, profit targets, something to capture them. Work it like a Casino, baby!

How many view the graph and have the 344 100% or more returns catch your eye? Or better yet...stare in amazement at the Terminal Wealth Relative graph and its 2,000 plus returns of 500% or more. Count me in that camp.

This study really confirms what the market is all about. Unlimited gains and limited losses. If you time the market or cap your profits in order to capture and/or protect those small gains...you'll...as Eric says...

"virtually guarantee to participate fully in the left side of the distribution and not in a positive way."

Really after giving this study more thought...it seems after you set yourself up for success via capturing the right side of the distribution...it is then just a matter of managing risk. Right? And not from the sense of your initial risk in the stock via volatility based position sizing. But, from maintaining a certain risk profile throughout the entirety of the trade. As these positions move further in your favor...I would assume their risk profiles could differ greatly from the original risk set forth.

Again, interesting study. Thanks Eric!

Later Trades,

MT

Quote of the Week

Caston glared. "Observation selection effects are totally commonplace. At the supermarket, have you ever noticed how often you find yourself in the longer checkout lane? Why is that? Because those are the lines with the most people in them. Let's say I told you that Mr. Smith, about whom you knew nothing at all, was standing in one of those checkout lines, and you had to predict which one, based only on knowing how many people were in each line."

"There'd be no way to know."

"But inference is about probabilities. And the most probable outcome, obviously, is that he's in the line with the most people in it." Once you step back and consider yourself from an outsider's perspective, it becomes self-evident. The slowest traffic lane is the one with the most cars in it. The laws of probability say that any given driver is most likely to be in that lane. That means you. It's not bad luck or delusion that makes you think the other lanes of traffic are going faster. More often than not, they are going faster."

Great quote from a great book, The Ambler Warning by Robert Ludlum.



If you haven't read it...you should.

The book, while not about investing or the market, contains two fictional characters who fit well with characters in the investment world. One of the characters lives by gut feel alone. Instinct. The other...100% logic, statistics, probabilities, just the facts ma'm. Interesting to see the development of these characters and how they find common ground.

Later Trades,

MT

First Snow!

Received our first Snow of the year and it is wonderful! For a Texas boy who has never been around snow before...I feel like a kid at Christmas. Fun stuff.

MT

Aquamarine Fund Diary, Buffett, and Owning a Business

You can tell from the volatility breakout in my blog posts...that I have some time on my hands.  :)

Found some great posts by the Aquamarine Fund Diary.  Here's a post on Warren Buffett and the Chicago Graduate School of Business - trip to Omaha.  I really liked the following bullets:

• Associate with people who are better than you. Marry up, employ up,
  work for your heroes. Associations rub off. Tell me your heroes, I’ll
  tell you how you’ll turn out. People in the room (us) have IQ, energy,
  and smarts to burn. No bad results will be due to deficiencies in this
  area.
• Take one hour. Think of the one classmate who you’d like to own 10%
  of for the rest of their life. 10% of all of their future income. What
  do you think about? The person who others admire and want to work with.
  Person who works hard and gives others credit. It’s simple. Select
  those qualities for yourself.
• "Now the fun part” who would you want to short? The guy who turns other people off.

I also liked this interview of Tom Murphy in The Wisdom of Tom Murphy.  In the full interview Murphy  encourages

"people, particularly those who are young but also experienced enough to know what's going on, to try starting a business because the rewards of being your own boss are wonderful."

Okay, readers...if you own your own business...give up the goods on how you came to the realization you wanted to run a business instead of working for whatever company you were working for.  Why did you feel the risk was worth taking?  And what business did you choose...something you were familiar with?  Something new?

And for those working for others...if you have thoughts of running a business someday...what type of business would you like to run?  And why?

MT

Quote of the Week - We're Just Ants!

"If you study an ant colony, you will find it has a life cycle — it’s robust, it’s adaptive. However, if you ask any individual ant what’s going on, they have no clue. They’re working with local information and local interaction. I think there’s a very clear parallel to markets. How do markets get to be efficient? The answer is it’s an interaction among a lot of diverse investors. The aggregation mechanism to bring the information together is the stock exchange, and then what emerges from that is the stock market.

The important takeaway is it’s impossible to understand the market by interviewing individual investors because each investor only has a partial piece of the picture. It’s the aggregation that allows the full picture to emerge. What the ant colonies teach us is that in markets, cause and effect are very difficult to pin down. Sometimes we like to think that the experts on TV or the pundits quoted in the Wall Street Journal know what’s going on. They’re really just ants." -- Michael Mauboussin

The above quote comes from Mauboussin's article, "Guppies, ants, and golf swings: Mental models for investors." This quote really defines the methodology I have adopted in trading. Forget how you feel about the stock. It doesn't matter. Forget how you feel about the market...it doesn't matter. Who cares if we're in a housing bubble, USD is going lower, inflation, deflation, yakkity-yak...don't come back. The only thing that matters is what the market thinks.

The market is really just a glorified voting system. You may believe Google, Starbucks or Milli Vanilli is road kill. But, if the vast majority of participants believe it's the next best thing...then it is. I know, I know...you know better....but you're just one vote...amongst millions of voters. Know matter how strongly you feel about something...it's just a drop in the bucket.

So, why fight it? I ask's ya's!?! Just go with it. Embrace your inner ant.


MT

Happy Thanksgiving!!!

Just want to wish everyone a Safe and Happy Thanksgiving!  This will be our first Thanksgiving in Missouri and we're really looking forward to it.  Plus, it will be our son's first Thanksgiving.

The best part is I have 4 full days of complete rest ahead of me.  Definitely time for catching a movie or two.  And many other things I've put off for far too long.

I leave you with a rather interesting thread over at the Trading Blox Forum on Pre-emptive money management.  Provides food for thought on volatility based position sizing.  Is volatility predictable?  If so, should we adjust our position size to anticipated changes in volatilty?  Since our current position size is based on historical volatility.

This also begs the question as to the use of historical volatility in position sizing.  Is past volatility a good measure of future volatility?  Should we use a shorter time frame for measurement?  Or longer?  Or weight the average?  Seasonality may be a poor choice to predict changes in price but what about changes in volatility?

Is all this getting way to complicated?  Would we instead be better off just randomly choosing a number?  And one more question...when do your best returns occur?  During periods of high volatility?  Or low?  How about your worst returns?

As always, something to explore.

Later Trades,

MT

Quote of the Week

"There's a great story about a famous local trader at the Chicago Board of Trade (CBOT).  One day, he was on the floor of the CBOT and a U.S. inflation number came out that was totally unexpected.  Pure pandemonium ensued.  When all the noise died down, he walked out of the pit having made $10 million and said, "By the way, what was the number?" -- humorous story shared by Dr. John Porter in the book, Inside the House of Money

It's official...the new trading system is in production.  A week earlier than the deadline.  Much of the work was done in R.  In fact, a few times in the project, I just don't know what I'd do without the fantastic little language.  Python and Ruby was used as well.  Along with Wealth-Lab.

That's it from my part of the world...where I'm eagerly anticipating my first Missouri snowfall. 

And enjoying the cool vlog, WallStrip.  It's the first stock market show I've seen where the highlighted stocks are chosen from a valid investing concept.  Who'd a thunk it?  Smart!

Later Trades,

MT

Quote of the Week

"Implied volatility is based on historical volatility, but who cares about historicals? They're irrelevant. The point is, things can happen for the first time that aren't in your distribution so they can't be priced. If it's never happened before, how can you hedge yourself? The only way to hedge the unknown is to cut off tail risk completely." -- Jim Leitner from the interview in Inside the House of Money

MT

Quote of the Week

"All these years I had been sustained by an illusion - happiness through victory - and now that illusion was blurred to ashes. I was no happier, no more fulfilled, for all my achievements.

Finally I saw through the clouds. I saw that I had never learned how to enjoy life, only how to achieve. All my life I had been busy seeking happiness, not finding it." -- Dan Millman's character in the Way of the Peaceful Warrior.

MT

Quote of the Week

"In times of change, learners inherit the Earth, while the learned find themselves beautifully equipped to deal with a world that no longer exists." -- Eric Hoffer

Sorry everyone for the lack of posts or response to emails.  I'm trying to meet a November 1st deadline for a new trading system.  And between that and the entire family being sick from a nasty little cold bug...well I haven't been up for much else.

I do appreciate your patience...and hope to get back to the normal routine soon.  In fact, once I push this trading system to production...I plan on taking a nice long break from the trading system turret.  Catch a few breaths before my next run.  Ha ha!

Until then, hop on over to the StockTickr Blog and read Jon Tait's interview.  One of the best interviews yet from StockTickr.  Jon's a smart cookie and shares some great insights into system trading and market behavior.

Later Trades,

MT

Quote of the Week

"Many questions are unanswerable.  Many answers are questionable."  -- from a fortune cookie

Wow, the above quote is so true.  I have dug a little deeper into everything I have worked on the past several years.  Calling into question my beliefs and attitudes towards the market.  I was so wrong.  It all started from a seed that Eric Crittenden planted into my head.  "Sounds like an exercise in curve-fitting", he said, in reference to one of my system ideas.

Then a friend introduced me to the concept of focusing on what you don't like to do and casting it aside in order to free yourself for the things you do like to do.  The butterfly began to flutter...

"It has been said something as small as the flutter of a butterfly's wing can ultimately cause a typhoon halfway around the world." - Chaos Theory

Next, I watched the recent show on Sabermetrics where they discussed Bill James and many of the very cool things brought out in Moneyball.  Flutter, flutter.

Finally, my recent foray into the hazards and pennywinks of developing a trading platform has brought out a very interesting focus to my trading.  What would I like in a platform?  What am I really trying to test?  How is a certain test helpful to my bottom-line?

And all that has helped me to understand what I've been missing.  I've been focusing on the wrong thing!  So much of my time was spent on my next trade.  Kinda like in Sabermetrics where they found too much focus was on RBI's or Homeruns.  Bill James found Outs was where the focus should be. 

And I think in trading...the focus should be on the only fixed rule that I know exists:  If you don't use margin...your losses are limited to 100%.  But, as long you don't cap your profits in any major way...your gains are infinite.  With that in mind, where should your focus be?  And what kind of formulas and tools can we use to measure this new focus?  For example, the smoothness the Sharpe Ratio tries to show becomes something of a throw-away...a tool/formula used to measure the wrong focus in your trading.  Don't understand?  Maybe this will help.  Or maybe not:
http://www.fooledbyrandomness.com/0603_coverstory.pdf

Later Trades,

MT