Portfolio Performance for Jan 2008

I would like to have done a better job at my first portfolio performance post. But, I'm afraid I've been extremely busy at my day job. So, please be patient. My hope for future performance posts is to include much more information about the returns and portfolio breakdown.



One of the difficult items I've found in preparing for posting of portfolio performance is the lack of good tools. I've tried quite a few products the past few months and was about to give up hope until I found Icarra. Sweet product. One of the hardest things to create is a simple product. So many developers miss the mark...the tendency is to focus on the bells and whistles. Icarra hits the mark with it's great charts, sector breakdowns, and ease of trade entry.

This is a good segway into developing a portfolio. As an investor, you have unlimited choices. Question to ask yourself...do you focus on the bells and whistles? Or do you hunker down and keep your choices simple...your strategy simple. If you find yourself changing your portfolio on every market downturn just because you feel like you should be doing something...then maybe it's time to refocus. Are you really improving your portfolio returns? Or just keeping yourself busy?

Now, back to portfolio performance. There are some things to note. I have not entered my actual entry prices into Icarra. Just too much data to sift thru in order to accomplish that. Instead, I have entered all the positions as if I bought them on the last day of 2007 (12/31/2007). From this point forward I will enter all sells, new buys, dividends, interest, etc. into Icarra. But, keep in mind...all performance is based on the clean slate of 2008.

Below is the breakdown of sectors in the portfolio. This is one area that I found some differences in the chart and the actual breakdown in Icarra. But, useful nonetheless. I'll contact Icarra to find the reason for the difference and post in the next performance release.



You can see, I now have a very large cash position in the portfolio. I don't like this, I have to admit. This will cause the portfolio to lag should the market gain back momentum. But, this is the normal process of the system. During market downturns like we've had...the trailing stops are hit and the bugs in the portfolio are killed. Then we have the waiting game for new signals. The goal, of course, is to be 100% invested in the market...that is what generates our returns. But, all seasons have their winters...and this is where we bundle up and wait for the ice to melt.

Another area I want to point out in the sector breakdown is the lack of consistency in the sector weightings. My goal is to have a better balance in the sector weightings. These sector weightings cannot always be controlled due to the nature of the system's signals. Some sectors may be very cold and other sectors can be very hot. Based on the weightings above, the services sector was pretty hot for 2007....and have held up relatively well in the portfolio during our bug killing in the recent market downturn.

Finally, I want to review the monthly returns of the portfolio...



Pretty large differential between the portfolio's monthly returns and the S&P 500's. The system is more volatile than the market and as result drawdowns and gains are larger. This is par for the course with trend following systems in general. It takes a lot of patience to trade a trend following system. Especially, a long-term trend following system. But, I truly believe, that's where the returns are in the long-term.

Can this be improved? Possibly. There are ideas I have yet to test that could trim the portfolio's volatility. And hopefully, I'll get a chance to test these ideas in the months to come.

If you have any questions or would like to see other aspects of the portfolio...drop me a line.

Later trades,

MT

This post is for information and entertainment purposes only. Under no circumstances does this information represent a recommendation to buy or sell securities or any other type of investment instruments.

Quote of the Week - 01/16/2008

The last spike of the transcontinental Railroad is driven at Promontory, Utah in 1869.

"Look at a stone cutter hammering away at his rock, perhaps a hundred times without as much as a crack showing in it. Yet at the hundred-and-first blow it will split in two, and I know it was not the last blow that did it, but all that had gone before." -- Jacob A. Riis

MT

Quote of the Week - 01/06/2008

"Risk is trying to control something you are powerless over." -- Eric Clapton

Hope your first week of the new year was a good one. I've spent a bit of time planning out the new year (talk about your risk). One of the first items on the agenda is a visit back to Texas to see the family. In addition, some changes will come to the blog.

My testing platform development is coming to an end and I should have more time to research and discuss portfolio ideas/strategies. So, each month I plan to review my personal portfolio composition: returns, drawdowns, sector breakdowns, you get the picture. The first few postings will be a bit raw...but hopefully over time they will improve as will the returns.

Later Trades,

MT

Quote of the Week - 01/01/2008

"I sometimes meet people who say, I'm going to be this and I'm going to be that. You feel kind of bad for them because they're limiting themselves. It's different from having an enthusiasm for something and seeing where life takes you. I feel lucky to never have planned to go into what I did. I always said, "All I want to do is make things, whether it's drawing or writing." If I'd said, "I'm going to be a director," it probably wouldn't have happened." -- Tim Burton

Tim's quote is a great one to start the new year. Focus on what you enjoy and let life handle the details.

Happy New Year!

MT

Quote of the Week - 12/26/2007

"Pick a mountain in life to climb and don't stop til' you reach the top. When you reach the top...be lookin' for the next mountain to climb." -- Life philosophy of Helen Taylor

My Mom died 6 years ago today. I lost track of the times I heard from her, "climb that mountain", when life turned difficult. And the many times I responded, "I'm tired of climbing."

Never would have thought her mountain mantra would have such an impact in my life. That recalling those nagging words would continue to push me forward in life. Even after she's gone.

Still an inspiration, after all these years.

Thanks, Mom.

Mike

Merry Christmas - 2007

The picture above is from December 2006. Our first snow in Missouri. There is a bit of snow on the ground today...but quickly melting. We may have more snow tomorrow.

Hope everyone is having a great Christmas. I've spent my time drinking coffee my daughter gave me and putting together all the presents for the kids. Next step is grilling some nice tenderloins wrapped in bacon. No thoughts about the markets or programming. Just kicking back and enjoying the day.

Oh, and very thankful for the great gift a friend of mine gave me last year. I've never owned a cordless drill before. A friend of mine felt sorry for me and gave me a full set of Dewalt cordless power tools. All these years I've been cussing at putting toys together...until now. Wow, what a difference Dewalt makes. Thanks, buddy!

MT

Quote of the Week - 12/17/2007

"Do what you gotta do so you can do what you want to do"
-- Denzel Washington

MT

To Design or Code?

"The one who does the work decides." -- KDE principle

Jeff Atwood over at the Coding Horror blog discusses a fascinating problem in software development. Doers and talkers. Designers and coders.

I believe all developers need to have a bit of both in their toolbox. Mainly, because the first design is most always changed due to scope creep (failure to see all the pieces to the puzzle). If you spend all your time talking about that first design...you never get to coding. And if you can't get to the coding...you'll fail to find those missing puzzle pieces. And fail to deliver a prototype for the customers to evaluate.

Designers, this means getting your hands dirty in order to create something to improve. Developing systems is an iterative process. Design, code, design, code. And yes, even code, design, code, design. The ultimate goal is to refine the process until you and your customers are satisfied. Whatever it takes. And yes, that means moving to the coding stage even when the optimal design has yet to reveal itself. It's really a Kaizen process. Small accomplished improvements to the initial design pays dividends to all.

Coders, this means before plunging forward hacking away at the problem...ask for feedback of your idea and possible alternatives to the problem. It's important to starting coding down the right path. One that encompasses as much information of the problem as possible. This means you'll need to bring some information to the design table yourself. Perhaps a bit of discovery coding must take place to figure out what elements are involved and possible problems or bottlenecks in your proposed solution. This also helps in keeping the design discussion focused.

So, how does this apply to investing? Well, how many investors/traders do you know that invest without a plan? Without a design? An overriding investment philosophy? Just plunge ahead into the market?

These type of investors would be well served by stepping back a bit and design their investment model. Then ask for feedback of their proposed design. It's okay to perform some discovery trading first. Determining how the market handles your ideas. But, gather what you need and then design. Then invest with the goal of continually refining your design.

What about investors/traders who are afraid of the market? Have not found an investment model that is perfect? And refuse to step a toe in the market waters until they feel 100% comfortable in their design? Problem with this thinking is knowledge requires experience. And nothing is ever 100%...especially in the market. So, create your investment manifesto and then try it out. You can't improve upon something that isn't there to improve. And you can't design a successful investment strategy if you don't have market experience.

Later trades,

MT

Breakthrough Programming

“The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.” -- George Bernard Shaw

Scott over at the scottberkun.com blog links to an amazing paper on Managing for Breakthroughs in Productivity. The article discusses how breakthroughs occur...and don't occur. My favorite quote...

For breakthroughs to occur, people must be given a chance to do work than can not be proven: ambition and risk are necessary for breakthroughs. If individuals are not trusted to take risks, breakthroughs are unlikely.

Spot on! Programming and risk goes hand in hand. As do programming and ambition.

To be an effective programmer you must have the ambition to automate tasks...all tasks. That's your job. If you spend your time manually putting widgets together...then you're not really programming.

And in order to automate tasks...a programmer has to take risks. Cause you are programming something that has never been done by a computer before. At least that computer. And most likely, never been programmed by you before.

MT

Programming Culture

Hat tip to Howard Lindzon for sharing this post...Software Engineering Tips for Startups

Alex's tips for startups is one of the best posts I've read in a long time on building a programming culture. I realize the focus is on tech startups. But, I believe his points are applicable to all companies with programming departments.

Some of my favorite quotes...

So the first tip is to always have a strong technical co-founder. Someone who shares or invents the business along with others, but also has the technical feet on the ground. Someone who can make sure the business is mapped onto technology correctly.

Avoid hiring managers...What you need are experienced technical people who love coding. These are going to be natural mentors for your younger engineers. Mentors and not managers.

Coding becomes sculpting. Starting with a shapeless form you continuously refine the code to satisfy the business requirements and make sure that the system is designed and implemented correctly.

And probably my favorite in regard to hiring programmers...

...candidates need to demonstrate love for simple and elegant code.

Simple and elegant code = Simple and elegant company.

I would also like to add one more trait to look for in programmers. Willingness to share knowledge. Evidence of this sharing trait in the interview and in past performance.

For example, all programmers develop tools to make their jobs easier. But, do they develop those tools for themselves only? Or for others to use as well? We all know...developing anything for others to use is the harder path to follow. But, without knowledge transfer, the wheel will be re-invented...again, again, and again.

Have a great weekend,

MT

Quote of the Week - 11/28/2007

"The Things to do are: the things that need doing, that you see need to be done, and that no one else seems to see need to be done. Then you will conceive your own way of doing that which needs to be done — that no one else has told you to do or how to do it. This will bring out the real you that often gets buried inside a character that has acquired a superficial array of behaviors induced or imposed by others on the individual." -- Bucky Fuller

Great quote. What do you see that needs to be done? And more importantly...what are you doing about it? But, a precaution...doing what needs to be done that hasn't been done by others prompts others to stall/halt the doing. Do you have what it takes to overcome the others in order to get the doing done?

MT

Quote of the Week - 11/10/2007

"Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius -- and a lot of courage -- to move in the opposite direction." -- Albert Einstein

Something to think about when developing systems.

MT

Backtesting Issues

I'm in the process of validating some investment ideas and thought I'd share some of the hidden biases that occur when comparing systems against each other and the market in general. I should know...these issues have bit me numerous times over my past 7 years of system testing. Maybe the testing methods below will help you as they have helped me.

Failure to Trade All Signals

• Every signal received from your idea should be tested. Which means taking trades for a stock you already own. If your idea is to buy 20-day highs and you receive your first signal for YHOO on 10/15/2007...you buy it. If you receive another signal on 10/16/2007 for YHOO...guess what? You buy it. Despite already owning the stock. Failure to do so means your filtering the idea. This is okay if you already know the idea is valid...but if so...then why are you testing in the first place?

• A big obstacle in taking all signals is money. First test the idea without money constraints. Money should not limit your trades. In fact, when testing...the only limit on your trades should be the idea.

Failure to Test the Other Side

• The Trading Digest covers idea reversals in their article on the 50/200 Moving Avererage Crossover system. In essence, any idea should be reversed, tested, and compared with the original idea.

• So, if the idea is selecting 20-day highs...the reverse of that idea is selecting stocks less than or equal to their 20-day highs. But, performing this test presents a problem. There are fewer stocks at their 20-day highs (idea #1) than stocks not at their 20-day highs (idea #2).

• It's unfair to compare 150 trades from idea #1 against 5,000 trades from idea #2. Whose to say randomly selecting 150 trades from the 5,000 trades in the idea #2 sample set wouldn't generate as good if not better results than idea #1?

• And that's just how to solve the problem...boot-strap it. Take those 5,000 trades and randomly select 150 trades. Compare those results against idea #1's sample set of 150. Of course, it wouldn't be wise to select one 150-set sample from 5,000. Take several 150-set samples...compile the results and use that for the comparison.

Remove the Best Trades

• With any system...the Pareto Principle is large and in charge. You'll find only 5% to 10% of the trades generate the majority of the idea's profits. What are the chances you would have missed a few of those trades? Throw money limits into the mix and real world events like vacations and that home remodeling project your wife has been bugging you about...and it's very easy to do. So, remove them from the test sample. Don't let a few trades in the sample play such a large role in the results.

Market Exposure

• When buying presents for your kids...the number one rule is every kid must receive the same number of presents. If you fail here...you will pay. Testing and comparing ideas are a lot like your kids. Give them equal time and exposure.

• Use the same signal starting point for the comparisons. If your testing date range is 01/01/1995 - 12/31/2004 and idea #1 kicks off it's first signal on 05/01/1995 and idea #2 kicks off it's first signal on 02/01/1996...no fair! Idea #1 received a 9 months head start on idea #2. Might not seem like much...but with markets and babies...9 months can make a difference.

• In fact, it usually pays to bucket the trades in similar timeframes. That way you can ensure not only the trades share similar signal start times but also similar bucket sizes. For example, to test 10 years of data...01/01/1995 - 12/31/2004:

Bucket 1 -> 01/01/1995 - 12/31/1996
Bucket 2 -> 01/01/1997 - 12/31/1998
Bucket 3 -> 01/01/1999 - 12/31/2000
Bucket 4 -> 01/01/2001 - 12/31/2002
Bucket 5 -> 01/01/2003 - 12/31/2004

• The buckets 1 - 5 above would be the testing date ranges. After the simulations are complete for each idea and corresponding bucket...verify idea #1's bucket 1 contains roughly the same number of trades as idea #2's bucket 1. If not, then boot-strap the larger bucket size down to the smaller bucket's size. Compare results. And remember, remove the top 5% or so trades from each idea's buckets.

[Clarification: The testing date ranges in the buckets listed above are not the start and end dates for your trades. The date ranges are the start and end dates for your idea. Meaning...all ideas triggered from 01/01/1999 to 12/31/2000 would be in Bucket 3. You would need to track those signals for as long as you stay in them...which may mean all the way to your end date of 12/31/2004. Make sense?

In essence, your overall begin and end dates are 01/01/1995 - 12/31/2004. Then you slice and dice the signals that occurred during that time frame based on entry date into buckets 1 - 5.]

Questions?

• What if the idea consists of several smaller ideas such as selecting stocks at their 20-day high and on that new high experience a 30-day volume surge? In this case, you would need to iterate through the above process twice.

• In the first pass, you'd compare the 20-day high stocks against stocks not at their 20-day high. In the second pass (if the first pass proves fruitful), compare the 20-day high stocks with 30-day volume surges against 20-day high stocks without 30-day volume surges.

As you can see, getting an idea through the validation process is quite an ordeal. Unfortunately for us system traders; very few ideas make it out alive. Thankfully, we don't have to cut those ideas from our sample set.

Later Trades,

MT

Quote of the Week - 10/10/2007

"...the most important quality for a trader to develop is discipline. As you've read, my stubborn ego and impatience prevented me from achieving lasting success and financial security. I hope my story has shown you that any fool can get lucky and quickly make a great deal of money. But, if playing the stock market was always that easy, there would be no need for research and hard work. Considering that all the information you need to be able to profit is available on the Internet, what sets successful traders apart is their ability to wade through all the muck. With regard to your sources, keep an open mind. As my losses demonstrate, if you allow your emotions and ego to control your trading, you are doomed to fail." -- Timothy Sykes from his book, An American Hedge Fund

What great words of advice! Reading Tim's book brought back the memories of what it was like trading in the greatest stock bubble of our time. In fact, I participated in the ISCO trade he mentions in the book. What a ride, indeed!

I look back and realize just how far I've come as a trader and how much further I still have to go. Tim is right...cutting through the muck is a tough chore for any trader/investor. The key to long-lasting success is keeping an open mind, learning from your failures, and working hard...really really hard. Of course, a sprinkle or two of luck never hurts.

Thanks for the book, Tim.

Later Trades,

MT

Recent Links for 09/21/2007

Newbie - converting csv files to arrays in NumPy Great message thread on how to convert csv files to numpy arrays.

Cookbook/InputOutput - Numpy and Scipy File processing examples using numpy, scipy, and matplotlib. How to read/write a numpy array from/to ascii/binary files.

Numpy Example List Examples of Numpy functions such as fromfile(), hsplit(), recarray(), shuffle(), sort(), split(), sqrt(), std(), tofile(), unique(), var(), vsplit(), where(), zeros(), empty(), and many more.

Introducing Plists: An Erlang module for doing list operations in parallel Could you spawn a trading system process for each stock of a given day's trading (a list)? What if you had 20,000 stocks for a given day? Can plists/erlang handle 20,000 processes without hitting memory constraints?

Recent Links for 09/19/2007

130/30 Strategy Backtested Disagree with comparison of 130/30 to non-leveraged benchmark/strategy. Also, the additional longs didn't improve the long portion of the 130/30 returns compared to the long-only strategy returns. Am I missing something?

Recent Links for 09/18/2007

Chapter 22. Struct and Array Modules Overview of the python struct and array modules

Building Skills in Programming Nice python tutorial.

Python Grimoire Nice python cookbook.

Recent Links for 09/17/2007

• One year ago I was a stock market analyst [Part 1]
  Very interesting how he was able to process 9,000 stocks in less than a minute.


• Goldblog - Python - Stock Quote Module
  Interesting python stock quote utility.


• Goldblog - Investment Advice
  Excellent investment advice. Keep it simple.


• NumPy for Numeric/numarray users
  Cheatsheet for NumPy Python users

Recent Links 09/17/2007

Goldblog - Investment Advice

• Excellent investment advice.  Keep it simple...
  
  • 
    There are 2 simple questions you must first answer:
    
    1. What is the time-frame in which you need access to your money? (next week? next year? 10 years? retirement?)
    
    2. How much risk and volatility are you comfortable with?
    
  • 
    The Answer:
    Asset Allocation... not fundamental analysis, not technical analysis, not market
    trending, not tips from brokers and analysts ... but straight up asset
    allocation.
    
    
  
  
  
  
  
  
  
  
   - post by taylortree

Recent Links for 09/15/2007

Links for 2007-09-15 [del.icio.us]

Posted: 16 Sep 2007 12:00 AM CDT

• Practical Common Lisp
  Excellent way to get started with Common Lisp.


• 9 Things You Simply Must Do
  Friend of mine sent me this great post on Dr. Cloud's 9 principles commonly practiced by successful people. My favorites?
  

Principle #2: Pull the Tooth - face your fears...don't put off today what you can do today.


Principle #4: Do Something

• ONLamp.com -- An Introduction to Erlang
  Great coverage of the Erlang language.


• Python Cheat Sheet
  Simple little python cheat sheet.

Recent Links 09/15/2007

Practical Common Lisp

• Great coverage on Common Lisp.
   - post by taylortree

Recent Links 09/06/2007

Quantmod - Quantitative Financial Modelling Framework for R

• Offers R language modules to...
  
  • calculate periodic returns
  • retrieve historic quotes from Yahoo, Google, FRED
  • there's even a tradeModel that looks interesting
  • and well documented.
    
  
  
  - post by taylortree

Recent Links 09/05/2007

Speed up R, Python, and MATLAB - Going Parallel

• Reduce runtime of Python, R, and MATLAB applications by 85%?  Process 10-100X  larger datasets?  With just a few code changes?  Not quite sure how...but something to explore in the future.  Their success story on speeding up MATLAB code for Monte Carlo Analysis looks pretty easy of a code change to me.  Read their blog for further insights into HPC...
  
  • Multicore:  Why all the Hubbub?
  • What is "Productivity" in High Performance Computing?
  
  
   - post by taylortree

Recent Links 09/04/2007

World Beta - Engineering Targeted Returns and Risk: More On The Endowment Style Of Investing  Annotated

• World Beta shares some links covering the endowment investing side of things...
  
  • A link to
    Frontier Capital Management
    - check out their knowledge section for more great papers similar to the ones Faber links to.
  • Faber mentions a great upcoming book covering the twelve top endowment CIO's .
  • from Alpha Magazine...Highbridge Capital Managment shares its office organization - putting traders and developers together.  I've always thought this would be a great idea in any shop.  By putting users and developers together - manual taks can be seen and automation can happen.
    
  
  
   - post by taylortree

Frontier Capital Management

SourceForge.net: tkdiff

• Great little file compare utility.  Graphic front end to the diff program.
  note:  tested this today against a large file/program (well, not that large in my line of work...but I guess to Google's)...couldn't handle it.  But, works great on small files.
   - post by taylortree

Google Mondrian: web-based code review and storage

• Online code review that works like a blog/wiki.  I wonder...is it possible to create a code review system similar to Mondrian within a source management toolset such as subversion?  Seems like most of the backend is there already...would only need to add some front end tools to display the changes being committed and allow comments on those changes.
   - post by taylortree

Recent Links 09/03/2007

ONLamp.com -- Numerical Python Basics

• Numpy basics.
   - post by taylortree

Programming in R

Finding Duplicate Elements in an Array :: Phil! Gregory  Annotated

• Interesting way to find duplicates in an array.  Enjoyed the links on the pigeonhold principle and Floyd's cycle-finding algorithm.
   - post by taylortree

Now, suppose that the array is of length n and only contains positive
integers less than n. We can be sure (by the pigeonhole principle)
that there is at least one duplicate.

So, how do we find the beginning of the cycle? The easiest approach is to
use Floyd's cycle-finding algorithm. It works roughly like this:
Start at the beginning of the sequence. Keep track of two values (call
them a_i and a_j). At
each step of the algorithm, move a_i one step
along the sequence, but move a_j two steps. Stop
when a_i = a_j.

Investor or Gambler?

Tom from InvestorGuide.com sent me an article of his to read regarding the differences between investing and gambling. Tom did a great job in discussing the two terms fairly. Very hard to write an article like that without exposing unknown biases.

I did find a couple of very minor areas where I disagreed with Tom's article. I shared those comments to Tom in an email. But, felt those comments would be helpful to readers of this site. First read Tom's article. Then my comments below...

Tom's article:
There's a big difference between buying a stock after thoroughly researching it and buying a stock by hitting it on a dartboard.

My comments:
Is there really a big difference...in outcome? Sure, the person may feel different about the investment...but based on outcome alone...historical evidence would suggest the odds of success are approximately the same.

Tom's Article:
Gambling - "Any activity in which money is put at risk for the purpose of making a profit, and which is characterized by some or most of the following...no net economic effect results."

My comments:
I would argue that each player in the stock market provides a positive economic effect. The investor provides long-term capital to companies in need of capital. The speculator and gambler provide liquidity. Sure there are negative effects from all players...investors prop up some companies that probably shouldn't receive further funding...and will eventually go bust. And speculators/gamblers can turn liquidity into a frothing market that can cause long-term problems after the swell has subsided.

Of course, your point is true that gamblers' short-term trades may be a net effect with each other...but that activity regardless of reason or length of hold...still provides liquidity for other players in the market.

Basically, remove any player from the game...and the market wouldn't be what it is.

That's it from here where I've got a softball game to prepare for this week. I haven't played softball since my college days. And haven't thrown many balls since my shoulder surgery. Should be an interesting show to say the least.

Later Trades,

MT

Weekend Readings - Search for Alpha

Sharing some great links found this morning while enjoying a Starbucks coffee and Krispy Kreme doughnut. :-)

A great Quantitative Primer from the Bionic Turtle.

Nice little profile on Parametric Portfolio Associates by Bloomberg Markets Magazine. I enjoyed reading their rebalancing alpha along with their contrarian weighting of individual stocks for each country. In fact, check out Parametric's Research & Whitepapers area...great information to be had. Their paper on Using Statistical Process Control to Monitor Active Managers is one to read a few times this weekend.

One view shared by Parametric coincides with my recent testing of alpha filtering in the U.S. Equities market. Parametric found that smaller countries exhibit less correlation to the broader markets. My guess is due to less investor attention, liquidity issues, and such. In essence the markets are less efficient which enable Parametric to extract alpha (non-commoditized beta) by overweighting these smaller countries in their portfolio compared to the index they track. I found that by increasing the frequency in my alpha calculations...the fewer stocks I found that could beat the market (high alpha). Increasing the frequency to daily in my alpha filter picked up only the most illiquid stocks in the market out of the 20,000 stocks in my database (including the delisted). What does this mean? These stocks are the less followed? Less efficient? Their returns are least effected by the broad market? Short-term...all other stocks are governed by the overall market returns? Only if you extend your time horizon do stocks capture more alpha from the market? My recent testing shows this to be a possibility.

So, what should an investor/trader do? Well, if you're a daytrader, you should pay much more attention to the market in general. The market acts as a powerful force in a stock's short-term returns. If you're an investor...extending your time horizon months if not years is a way to capture more (alpha) than the market gives (beta) to each individual stock. Think about it...anywhere the market is efficient...the market governs the behavior. Only when you drive outside of that efficient zone do you capture non-market behavior. Holding stocks for the very long-term is one road outside of the city.

World Beta finds an interview with Harvard's Endowment manager,El-Erian. El-Erian claims his biggest challenge is overcoming the popularity of the endowment model. Which I tend to agree.

Finally, for you R fans out there...check out the Econometric tools for performance and risk analysis created by Brian G. Peterson and Peter Carl. Need to calculate the Information Ratio, Sharpe Ratio, Sortino Ratio, max drawdowns, rolling returns, CAPM, Kelly Ratio, and Omega on your portfolio's returns? Then this PerformanceAnalytics package could be just the ticket. I have yet to work with this feature-rich package...but have it on my list of to-do's over the coming weeks.

That's it from TaylorTree...where the weather is beautiful, coffee is great, and I've got an afternoon of fishing in my future.

Later Trades,

MT

Manager Focus - Robert B. Gillam

I recently read an interview with McKinley Capital Management founder, Robert B. Gillam. Very interesting guy and investment style. Mr. Gillam setup shop in Alaska of all places. Despite the remote location...he runs a heavy "quant" shop. His work on ranking of stocks based on performance and risk (OR Index) bears further study from yours truly.

What drew me to Mr. Gillam's interview was his research on stocks making new highs and new lows. Mr. Gillam found stocks making new highs on any given day to have a greater than 70% chance of hitting another new high in the next 90 days. And stocks making new lows to have a greater than 65% chance of making another new low in 90 days. Then goes into the how and why of his research. Great stuff!

Check out these articles for further information on Mr. Gillam...

Background on Robert Gillam and McKinley Capital Management.

U.S. Blinders Hinder Stock Pickers. This is a great article covering Mr. Gillam's expansion into international investing.

Here's an article from Mr. Gillam's son, Robert A. Gillam...

STUDY CHALLENGES CONVENTION: Growth, value style distinctions also important in international investing from Pensions & Investments.
This breakup between styles reminds me of an interview with DFA's founder, Rex Sinquefield. Mr. Sinquefield discussed how value stocks were riskier than growth stocks despite their similar volatility. Thus the reason for value stock's higher returns over the years.

Have a great week!

MT

Weekend Linkfest!

The Beta in Alpha's clothing? (pdf) Bridgewater Associates' detail how various hedge fund's are charging Alpha prices for Beta returns.

How to differentiate Alpha from Beta in those hedge funds? Check out AllAboutAlpha's post titled, Mommy, Where do alphas come from? AllAboutAlpha does a great job of summarizing Andrew Lo's paper, Where Do Alphas Come from?: A New Measure of the Value of Active Investment Management. Lo explains how to differentiate active returns from passive and more importantly what value the active returns add to the total returns of the portfolio. Cool stuff!

Very interesting draft, When Do Stop-Loss Rules Stop Losses?, by Kathryn M. Kaminski and Andrew W. Lo. They find stop-losses improve returns and reduce volatility compared to buy & hold. And stop-out periods were distributed uniformly over time versus only during small market crashes.

MOSERS discusses how to handle residual cash in a portfolio in the following newsletters, Rebalancing and Cash Securitization and Rebalancing II. I was shocked to discover how big of an impact residual cash had on my returns during my market studies. A cash drag indeed! Very important to get that cash, no matter how small, back into the market in order to generate further market returns.

Enjoy your week!

MT

Quote of the Week - Busy Bee

"I really believe that success is just getting up one more time than you fall. It doesn't come from one brilliant idea, but from a bunch of small decisions that accumulate over the years. And you shouldn't underestimate the amount of work that's involved, the amount of fear that's involved." -- Roxanne Quimby

I love unconventional success stories. And Inc.com shares a great one with Burt's Bees founder, Roxanne Quimby.

Enjoy Quimby's story? Here are a few more interviews with the busy bee...

After Burt's Bees, What? from Business Week

Interview with Burt's Bees founder, Roxanne Quimby from Hilary Magazine.

MT

Sky is Falling...

According to this article, Jeremy Grantham believes the sky is falling.

"The bursting of this bubble will be across all countries and all assets, with the probable exception of high-grade bonds," Grantham warned. "Since no similar global event has occurred before, the stresses to the system are likely to be unexpected. All of this is likely to depress confidence and lower economic activity."

But, plenty of hedging is done as to the timing of the fall.

As for timing, he (Grantham) concedes that's impossible to predict. But here's the kicker: Even Grantham thinks you probably need to be bullish right now. The reason? Most bubbles, he notes, go through a short but dramatic "exponential phase" just before they burst. Like Japan in 1989 or the Internet in early 2000.

How does this type of prognostication help anyone...I asks ya's?

Grantham's bold statements and subsequent hedging of bets is something a lot of market pundits do. This allows them to zig and zag at the same time. If the market goes down big, Grantham claim's victory. If the market goes up big, Grantham claim's victory. A win-win scenario.

This type of hedge may prove useful in other pursuits. For example, wouldn't it be nice to lead a programming project and hedge the timeline of the project?

Yes, we will make the May 1st deadline unless we don't.

The above statement doesn't work because it's not wordy enough. Too simple...straight to the point.

We fully expect to meet the May 1st deadline. All components have been reviewed, tested, and verified to meet our stringent requirements. But, there is always the case that problems may arise due to circumstances outside our control. These problems may impact our schedule and possibly result in extending the deadline.

There, that's better. A great hedge!

Well, that's it for me this Saturday morning. I'm taking my daughter fishing today. Of course, the fishing trip may be delayed or cancelled if changes in the Earth's atmosphere produce drops of water from the sky. ;-)

Later Trades,

MT

Quote of the Week

"If you spend some time thinking about it ("ideal position sizing") you will realize that life just isn’t so simple. Every individual has different tolerances for different types of risks. A formula won’t capture all of them and a formula most certainly hides information that might be very valuable." -- Curtis Faith

Great article posted by Curtis today . Discusses some of what I found to be true in regards to the Sharpe Ratio and smoothness of returns. In fact, through much testing I have found using any type of volatility measure in my trading systems (entry, exit, position sizing, etc.) produces sub-par results when real-world results take effect. But, sometimes, those are the best measures we have. So, what do you do?

I think it's important to do what Curtis asks...

I’ll leave you with an exercise. Take your favorite position sizing methodology and then see what might happen if you happened to take the wrong side of a trade using that methodology on September 11th, 2001 or on Black Monday (October 19th, 1987).

In regard to formulas hiding valuable information. Pay attention to your stock data. There's a formula in there adjusting your time series for splits and possibly dividends. The longer term your system is...the more important this adjustment formula will play in your overall results. Common entry/exits formulas such as Average True Range (ATR) become rather out-of-date when processing IBM back in the 1960's. Something for all aspiring long-term trend-followers to consider when backtesting their systems.

Enjoy your week! I'm enjoying my first day of vacation since moving up to Missouri. And what a pretty day I picked out. What to do...what to do... ;-)

Later Trades,

MT

Another Year Down...

Enjoyed a great birthday today. Co-workers took me out for lunch. Wife and kids took me out for dinner. Wife and daughter baked a birthday cake. Between all the eating...received some great presents. Gifts centered on my favorite things...

Movies...some goodies for movie nights at the Taylor House.

Music...received the iPod Nano...and loving it. Can't wait to get back to music during my working hours. Bring some calm to the ADD. Serenity Now!

Coffee...all kinds of great flavors. And a few trips to Starbucks are in my future.

With another year in this world notched in my belt...what have I learned? What wisdom can I share? Well...

1) Moving your wife and kids out of state...miles and miles away from home, family, and friends...is easier than I thought it would be. Of course, we went into this move 100% committed. And chose a great city to live, company to work for, and people to work with.

2) Moving away from your home state draws you closer to your home state. Make sense?

3) Winters are cold in the Midwest! But, the snow is fun! Still upset I found the best place to sled on the last day of the last snow.

4) I miss living in the country...the quietness...remoteness. But, city living sure has its perks. A Starbucks a few blocks away is one of them. ;-)

5) I still don't know why every Fall and Spring when the weather is beautiful...I want to hop in my truck...grab a cup of coffee...throw on some Charlie Robinson and look for houses to fix-up. What's even stranger...a friend of mine noted the same feeling to me today. Maybe it's a guy thing? Or maybe it's because I spent the last 8 years fixing up houses. This is the first year I don't have a fixer-upper to fix-up.

6) So much time is wasted on the market. I know...I've wasted it. But, this wasted time is the filtration process of learning what's important in investing. The more time wasted and time wasted acknowledged...the closer you come to what's important.

7) Learning is hard. Scary. Stressful. And very rewarding. Of course...

"Learning is not compulsory...neither is survival." -- W. Edwards Deming

8) Life is up for grabs. Whatever you want...it is yours to take. It's usually not the brightest, best, or most deserving person that gets the job...raise...or whatever opportunity you wanted that they now have. It's usually the person who wasn't afraid to take it that takes it. The person who won't let things such as not being the brightest, best, or most deserving from getting what they want. One of the most amazing things in life is...Momentum Builds. And as long as reasons prevent you from taking that first step...you'll never get anywhere else than where you are right now.

9) Great mentors are another amazing thing in life. If you don't have one...seek one out. I think this was one of the biggest problems in my life. I attempted to do everything on my own. And this works up to a point...until you get stuck. And when you get stuck...mentors have the ability to...

"share their hindsight which can become your foresight."

10) And finally, birthday's are just another day. Unless you make more of them than that. They are after all...the day you started Life University. And each year marks your progress towards your chosen degree. You do have a chosen degree don't you? Otherwise, how else are you going to graduate? ;-)

Later Trades,

MT

Showing Up

"Seventy percent of success in life is showing up." -- Woody Allen

You will earn more respect recovering from a failure than by never failing at all. Weird, I know. But, very very true. Question is...how do you recover from a failure?

Show up, don't give up, pound away at your problem until it is no longer there. Steve Leslie discusses the essentials of "pounding the rock" and never giving up in this post over at Daily Speculations.

"It also provides inspiration for all of us who tend to get absorbed in our own challenges and problems, and serves as a reminder that most of success in life is showing up for work every day and "pounding the rock". And if we stay the course and never yield and keep swinging, eventually the rock will yield and break up and victory will be had. There is a light at the end of the tunnel if we do not quit and no matter the challenge, success is far closer than we think it is."

Steve mentions the Daniel Ruettiger's story...the inspiration for one of my favorite movies of all-time...Rudy. I can still remember watching it with my wife before we were married. Tears, laughs, and all. Good stuff!

MT

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