Trading Stocks and Comedy.

 John Cleese released his memoirs recently, and reflected on how the broader loss of general knowledge in society has limited a wider variety of jokes from working.

People once knew where places, and whom historical people were, to make relevant jokes for instance that might fail these days.  He even went on to say that Monty Python Fans were very smart fans, and he has pride in his fan base for that.  Could "Life of Bryan" have worked without a historical context known to viewers?

Part of the problem is "lack of curiosity about important information that does not directly apply to their lives," he said.

"What people don't get about wealth is that it's very boring." (At least in accumulating it, and what you need to do to make it).  He also feels, “people that are obsessed with themselves will not have the energy to deal with other things or people in the world that are important.”

The Gen Y's are currently very uninvested in the market, having come of age though the GFC, and are very distrustful of investing, wealthy investors and banks.

However, they will eventually come to the market to trade and invest, but how will they do it?

Surely social sentiment through Apps, and social networking will play a greater role than in the past, I would think.  Stocktwits, Twitter, FB or something new will be playing a greater role in investment choices.

But will that mean, that they are simply the biggest Trend Followers of all time? Will trading on hyper social sentiment, with no historical context, be the norm?  Will they have the patience to hold long term investments at all, that are mundane and not receiving any social focus?

Or perhaps, have younger, new investors never been any different?

"An Irishman, an American and John Cleese carrying a dead parrot, walk into a Bar...."

The problem is, the two mid-twenty year old guys I worked with today, didn't know who John Cleese was when I asked them, or showed them his picture in the paper.......

Joke Wasted!!!  Opportunity Lost.  Carry On.

The First Ever Contrarian View of Markets?

“Is it possible that a young Man at present could pass his Time better, than in reading the History of Stocks, and knowing by what secret Springs they have sudden Ascents and Falls in the same Day?

Could he be better conducted on his Way to Wealth, which is the great Article of Life, than in a Treatise dated from Change-Alley by an able proficient there?

NOTHING COULD BE MORE USEFUL, THAN TO BE WELL INSTRUCTED IN HIS HOPE AND FEARS; TO BE DIFFIDENT WHEN OTHERS EXALT, AND WITH A SECRET JOY BUY WHEN OTHERS THINK IT THEIR INTEREST TO SELL.”

(SIR RICHARD STEELE, ~1695)  {My caps}

I think Graham and Buffet would agree with the capped statement. 

Steele was a proponent of the “Castles in the Air” theory – that stocks have no intrinsic value and are simply the product of investor psychology.

Steele also talked about the link to the height and extravagance of ladies’ headdresses, which peaked the year the 1695 London stock market collapsed, just as hemlines rose during the 1920’s stock market boom.

Basically, fashionable style, like a speculative movement, is subject to a popular consensus and follows a trend until it reached a point of extravagance, from which it can only retreat, (Chancellor, Devil Take the Hindmost).

I thought it interesting that some people were thinking about investor psychology, long before Psychology itself existed as a science, and that social and cultural behavior was influenced by stock market exuberance or decline – and vice versa!  Ladies Hemlines fell after the 1929 Crash too!

Anti Fragility, Robustness and Risk.

A great video of a conversation between Nassim Taleb & Daniel Kahneman discussing the concept of Anti-fragility. Interesting to see how two deep thinkers discuss the philosophical challenge of anti-fragility.

https://www.youtube.com/watch?feature=player_embedded&v=MMBclvY_EMA

Taleb argues that Greenspan, in trying to smooth out the economy to create no more boom or busts, actually caused a big bust.

Likewise it seems obvious that the Fed in smoothing out the GFC downside with QE, have created the current stock market boom cycle and likely future inflationary boom.

Controlling stressors (smoothing), leads only to the increased Magnitude of events later, and blowouts in volatility.  This creates Fragility in the system, not robustness or anti-fragility.  In other words the system does not learn - the risks have not changed (only the direction).

Anti-Fragility he demonstrates in the Airline analogy, is that everytime there was a crash (certainly a volatile event), the airline industry and aircraft makers, made changes to their products to decrease the chance of another same-cause highly volatile event.  Airlines became safer through these changes and volatile events occurred less, and then usually for different reasons.  "You never let the mistake go to waste."

The finance industry eliminated small risks at the expense of large risks, the airline industry mostly eliminated large risks, though small risks do remain.  We can handle the small risks, and therefore survive the big risks - most likely.  More so, taking the small risks, benefits and advances our lives - travel, opportunity, wealth and the like, whilst less exposure to the big risks negates the downside.

I think that is Anti-Fragility.  (I need to read this book when I can get through the ten others I have bought).

There is a lot more in this video to get my head around.

https://www.youtube.com/watch?feature=player_embedded&v=MMBclvY_EMA

The Power of Narrative. (I have ways of making you THINK!)

The Power of Narrative.  (I have ways of making you THINK!)

Simon Singh, a British Author has a neat trick.

He plays a snippet of “Stairway to Heaven” by Led Zeppelin, and then plays it BACKWARDS.

Time and again to new audiences, it sounded like Random sounds to most of the people in the audience.

The second time he plays it backwards, he provides lyrics on the screen, like Karaoke lines.

As people follow along “the audience unmistakably hears the words, where before they heard nothing.” (The Success Equation, Mauboussin, p33).

It demonstrates how our mind has a great ability, and NEED to explain the world around us.  It does this through creating stories of  unlinked events, patterns in the clouds out of random air movements, and impressionist paintings of dots into a complete image.  It is such a strong occurrence its often difficult to ignore!

Taken further, “our love of stories, and need to connect cause and effect,”  “leads us to believe the past was inevitable and to underestimate what else might have happened.”  (The Success Equation, Mauboussin, p34).  This leads to biases and inevitable errors in judgment.

We are provided with unending narratives daily via the media.  It’s quite hard to see through that, when an opinion has been provided and seemingly backed up with some facts, to find our own opinion independently afterwards.  More so to refute that opinion completely.

I found a video on YouTube that demonstrates this effect.  I don’t want to pre-empt the lyrics, but its an entertaining 6 minutes!  After seeing the lyrics presented, close your eyes and TRY NOT TO hear the words that have been planted.

https://www.youtube.com/watch?v=0bG7EFhMw8w

To IPO, or not to IPO: that is the question:

To IPO, or not to IPO: that is the question:

HAMLET:

To be, or not to be: that is the question:

Whether 'tis nobler in the mind to suffer

The slings and arrows of outrageous fortune,

Or to take arms against a sea of troubles,

And by opposing end them?  (Shakespeare, 1602).

Hamlet was talking about the pain of life verses the uncertainty of death and damnation of suicide, and not Trading IPO’s, however I think the metaphor works somewhat.

I have only ever subscribed to an IPO once, and probably won’t do so again.  Risk/Return does not seem right. 

My recent reading highlighted the IPO’s of the Railway boom in 1845:

“If the subscription was successful, the committeemen retained a large allocation of stock for themselves and their friends and released only a few shares in the market, thus creating a scarcity which threatened to snare speculators who had sold shares short in anticipation of buying them back at a lower price.  The new railway company was then hyped by friends in the railway press and its stock bid up by agents in the stock market.  Once the shares were trading at a premium, the promoters would offload their retained shares at a vast profit.  Some companies even employed special “share committees” to oversee the success of those operations.”  (Chancellor, Devil Take the Hindmost, p130).

It all sounds quite familiar to TWTR and FB, and Alibaba.  Of course the banks these days are the “committeemen,” and their “friends” the Venture Capitalists perhaps.

I see some value in companies that have IPO’d and corrected into a nice long base perhaps in the months after IPO.  But they need some time for price and volume to become valid post IPO.  Before that, its ALL sentiment, usually too high a sentiment for investing in anything other than day trades.

There can be nothing worse than buying something when you only do so because everyone else already wants it, and it has been marketed to create that.

Oil, Growth, Sustainability - How the world cannot continue as it has for much longer.

Oil, Growth, Sustainability - How the world cannot continue as it has, for much longer.

Not a blog today, just a fascinating, though older video showing the mathematics behind growth, and how we fool ourselves into thinking the world can sustain 7% growth forecasts - semiindefinately.

Exponential and logarithmic thinking at work.

Well worth the hour long watch if you have the time.

http://youtu.be/O133ppiVnWY

http://planetforlife.com/oilcrisis/oilpeak.html

The Four F’s of Investing Behavior.

The Four F’s of Investing Behavior.

One of the first things I learnt in Psychology 1011 a lifetime ago, was the basic framework of the “Four F’s” to explain most basic human and animal behavior.

Otherwise known in part as the “Fight or Flight response.”

The Four F’s:

Fight

Flight

Feeding and:

“Fornication.” (Resisting using the other term!)

http://en.wikipedia.org/wiki/Four_Fs_(evolution)

Since I’m sure that most wont forget to eat while trading ….. or do the other thing, I was thinking how easy it is that we go from the fight to flight response under stress.

Having just gone through the correction, our rational behavior, or at least mine was tested by the flight response (fear), despite having a rational belief that “everything would be alright.”  No one is immune to emotional behavior sometimes, or certainly instinctual programming.  But there is hope.

Fear is often treated in people with phobias (arachnophobia etc) through exposure therapy.   I.e. Exposing someone to his or her fear in a safe environment, leading to extinction or reduction of the response to it.  Whilst I wouldn’t classify what I felt as fear, there was a little stress and avoidance going on perhaps.

 http://en.wikipedia.org/wiki/Exposure_therapy

So what makes someone less susceptible to this reaction?  Clearly experience, through seeing the events unfold, a skill increase through surviving such events and learning, and a solid foundation/training to rely on.

I bet US Navy SEAL Team 6 would score far less on fear scales under relevant stressors than the typical population does due to intense exposure to those factors above.  I also bet they NEVER stray far from their training or procedures!

These days I’m thinking far less about the profit I want to make in the markets, and far more in the learning & conditioning this year should provide.  It’s a good thing!

http://www.cartoonstock.com/cartoonview.asp?catref=shl090609