Week 34 trading results

Trading: 0%.

Behavioural road-map score:  no score.

No trades presented themselves this week. Life goes on. The rut continues. 

Copy Kat hedge fund returns

The New Yorker has a nice piece on Harry Kat’s creation of FundCreator, a tool designed to replicate hedge fund returns with much lower fees. I don’t know how true it is, but I like Harry’s take on the top bracket, monster hedge funds:

It is notoriously difficult to distinguish between genuine investment skill and random variation. But firms like Renaissance Technologies, Citadel Investment Group, and D. E. Shaw appear to generate consistently high returns and low volatility. Shaw’s main equity fund has posted average annual returns, after fees, of twenty-one per cent since 1989; Renaissance has reportedly produced even higher returns. (Most of the top-performing hedge funds are closed to new investors.) Kat questioned whether such firms, which trade in huge volumes on a daily basis, ought to be categorized as hedge funds at all. “Basically, they are the largest market-making firms in the world, but they call themselves hedge funds because it sells better,” Kat said. “The average horizon on a trade for these guys is something like five seconds. They earn the spread. It’s very smart, but their skill is in technology. It’s in sucking up tick-by-tick data, processing all those data, and converting them into second-by-second positions in thousands of spreads worldwide. It’s just algorithmic market-making.”

And I love this hedge fund managers idea of replicating himself…it’s the ultimate arb trade:

Not so long ago, Kat recalled, one hedge-fund manager, a “global macro” investor who specializes in betting on currencies and stock markets around the world, approached him with an offer. “He said, ‘Harry, I want to buy your thing so I can replicate myself. Then I’ll be able to enjoy life a bit more and keep sending my clients bills for two plus twenty. It’ll take them years to figure it out, if they ever do.

Hawk-eye is no good for tennis, kind of

The introduction of hawk-eye technology is an interesting evolutionary step in the game of tennis. The technology allows for quick, accurate replays of the contentious line calls from umpires and line judges. Players are allowed a number of challenges in each game. If they are proven right they retain the same number of challenges, and if they are wrong the have one less challenge. I think this is a good development for the game because it gives the players more confidence and it also provides good entertainment value for the crowd (replays are shown in the big screens for everyone to watch).

However, I believe hawk-eye challenges take something away from the game, making it a less valuable source for trading insights. Previously, we would sometimes see players slide in to their own self-made hell, quite often when a poor line call (or two) sent them in to a spiral of negative thinking; or perhaps they had already been playing poorly and the bad line call was an excuse to externalise the problem. This was clearly evident in Andy Murray’s earlier years. I believe these moments provided a valuable test of a player’s behavioural temperament, serving to separate the true champions from the pretenders. By removing this potential obstacle I believe there we will see fewer players games tip over in to these vicious circles, and while it may make for better viewing, it also means we lose an important element of the psychological game.

Week 33 trading results

Trading: +1.4%.

Behavioural road-map score: 9.5 out of 10.

I was quite fortunate in my trading this week. My gross return was just under 4%, but setting aside a few hundred pounds for expenses (car MoT due, tyres and brakes need replacing) whittled the number down to a more modest +1.4%. Alas, the problems of inadequate capital are becoming quite glaring.

Something unexpected has happened to my behavioural score, which seems to be consistently at the higher end these days. After practicing a fairly disciplined approach for a few weeks, my equity has climbed only incrementally. However, these small gains are the product of disciplined hard work and they give me something to ‘protect’. Because I know a small slip-up could easily wipe out these gains, I am trading on the safer side, sticking as closely to my script as possible. It is purely psychological, but it does feel like a virtuous circle of a sort.

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It’s worth noting that the current goings-ons in the currency market are particularly interesting:

• GBP is supported by high and rising interest rates, and continues to flirt with the 2.00 handle.
• The RBNZ is fretting over the strength of the kiwi and intervention is proving of limited value (no surprises there). I wonder, do they not believe in the free market?
• The yen – the carry traders funding currency of choice – continues to plumb the lows.
• FX volatility is at unbelievably low levels.

Blogger’s graveyard

It was only a month ago that I was lamenting the death of some of my favourite trading blogs. The exodus continues, with Abnormal Returns reporting on the departure of two more prominent bloggers (Yasser Anwar and Trader-X). Update those blog rolls, folks. Because I didn’t read this blogs regularly there are no tears, but I’m sure they will be missed by many. Nevertheless, it is important to remember that for many folk, blogging is a passing, constructive phase in their lives and moving on is part of the cycle. Discussing why blogs are often short-lived, Abnormal Returns comments:

‘Investment blogging is hard. Creating and maintaining a investment or trading blog requires time, dedication, creativity and perseverance. Again we should not be surprised that there are relatively few blogs that consistently achieve that standing.’

‘As a chronicler of the investment blogosphere through our daily linkfests we recognize that maintaining a good investment blog is difficult. That is why, in our opinion, we are seeing a relative shift toward blogs affiliated with the mainstream media.  Good blogging, like all other writing, requires a full-time focus (and at least part-time pay).’

This blog operates along similar lines of Tyro Trader’s and JP’s Developing Trader blogs, of providing new content pretty much when we see fit. In my case, it is a few times a week. By keeping my blogging objectives humble (although, yes, I am in talks about selling out to CNBC), I hope to continue blogging in the foreseeable future.

Lastly, the blogging drought was made worse by David at Dismally falling ill, and Brett Steenbarger at Traderfeed hospitalised with acute appendicitis. What was that about two buses coming at once? We wish them both a heartfelt speedy recovery.

Victor Niederhoffer knows competition

Victor Niederhoffer has ‘played in more than 10,000 refereed matches in squash, tennis, racquetball, and paddleball. …won some 20 National Tournaments in singles and doubles in squash, once won the North American Open, won three National Paddleball singles and doubles tournaments, and once was ranked in the top 10 in racquetball.’

Here is his ace advice to people who engage in competition.

1. Always maintain a calm demeanor. Winning requires all the physical and mental energy that you have at your disposal. Dissipating that energy gives your opponent more resources to beat you.

2. Survival is key. Chance plays a large part in the outcome of every game, and you must leave a large enough margin so that the normal fluctuation in conditions don’t do you in.

3. Losing should be a lesson. Everyone loses and all great competitors use their losses to improve their games. When you lose, consider it a normal part of the competitive arena and strive to bounce back through attention to detail, hard work, and practice.

4. Start your competitive efforts early and teach your kids to compete. That provides a platform for greatness.

5. Be a good winner and loser. Your competitors are necessary to bring out the abilities within you. The better they are, the better you will get, and the better will be the game that the spectators or customers receive.

6. Practice every day. It’s too easy to lose your edge if you let a day go by, and the key to greatness in any competitive activity is never having to worry about your fundamentals. They require repetition and sharpening at all times.

7. Keep records.

Constant pruning

WordPress Matt recently provided an insightful quote on the importance of pruning:

Pruning is an important and necessary step in growing roses. Pruning keeps the plant healthy. It promotes new growth, removes dead, broken or diseased canes and trains roses to a desired shape. Pruning encourages flowering, either more blooms or larger blooms, and is essential to keep modern rose varieties blooming repeatedly all summer long.

For a long and more profitable trading season, I believe it is imperative to attend one’s trading strategies much in the same way that a gardener attends his flowers. Approaches and markets that are proving unprofitable must be cut back so the energy (equity) can be directed to producing more flowers, whether they come from a return of focus to one’s core approaches or from new approaches entirely. For the trader who adopts the pioneering approach and is constantly experimenting around the fringes, pruning is a continuous process, an essential requirement for balanced, sustainable growth.

More on trading addictions

Reading this ‘New Statesmen’ supplement on addiction, I came across the following quote:  

Raj Persaud … Everyone is addicted to something. In the film Wall Street, Martin Sheen says to Gordon Gecko, “When is enough enough?” because Gordon Gecko is already worth hundreds of millions and is hell-bent on destroying yet another company in order to strip its assets and to have yet more money. For Gordon Gecko, there is no enough.

We are biologically wired to be addictive because we have endogenous opiates. We have a reward system within us that makes evolutionary sense at some level to have certain addictions. When we taste a sugary food, our brain is wired to be very rewarded by that and to seek more sugary foods. Millions of years ago, it made biological sense because we were living in an environment where there was scarcity. Now we live in an environment where you can have as much sugary food as you like and you have to exercise self-restraint. You have to act against your own biology. The commercial world encourages a lack of self restraint because it is in advertisers’ and products’ interests to get people not to exercise self-restraint, so you have advertising slogans like “Naughty but nice” and “Go on, treat yourself”.

Week 32 trading results

Trading: +0.9%.

Behavioural road-map score: 8 out of 10.

I managed to grind out a small gain but it certainly won’t be enough to cover next week’s car expenses (MoT due, tyres and brakes need replacing). I’ve recently been considered selling my car because it is my most cash intensive item by a long way. Then I thought about the less drastic option of moth-balling the car and bringing it out of retirement when I had sufficient funds. Now, however, I hope to keep it running for as long as possible because despite the heavy on-going expenses, I need it transport my golf clubs around (golf is my second greatest expense!).

Knowing when to give up

Over at Daily Speculations Victor Niederhoffer offered some words of wisdom on knowing one’s limits:

‘One of the best things that I’ve done in my own speculative career is to realize that I am a loser in various niches and to exit those forever.

I retired relatively gracefully from squash after losing for only a year or two. I did the same with fixed income, and after a loss with foreign currencies.’

‘I shudder at how active and how good one has to be at something just to try to stay above water. I would urge all who trade the markets to periodically stop and think whether they have an edge. They should decide if they’ve made money, taking into consideration all their bad luck and the rule of ever-changing cycles.

The market loves to let you make money on small capital (like they did with the trend followers and so many hedge funds) just so you invest humongous amounts on ‘the system that can’t fail’, only to take you for billions later on.’

In the comments section of the post, Alan Millhone quotes Clint Eastwood, ‘Man’s got to know his limitations.’

This got me thinking about that moment when people decide to give up and move on to new endeavours. I think it’s important to think about quitting before the event because it puts you in greater control of the final decision to exit.

In the sporting world, UK tennis player Greg Rusedski decided to retire a few months ago. Discussing his decision on a UK chat show, Rusedski expressed great humility in appreciating that he no longer had what it takes to compete at the highest level and that he just didn’t seem to want it as much anymore. The likes of Agassi and Ivanisevic are proof that players can continue to play well into their middle years but players need to have the internal drive, and flame of ambition burns at different rates for different people.

Elsewhere, another recent high profile retirement came from the world of ballet, with 38- year old Darcey Bussell exiting the stage when she was at the peak of her career. This left a lot of fans puzzled, even angry, but Bussell stuck to her decision to bow out. She commented that it was increasingly difficult to maintain the strength to get through three hour ballets, and that her priorities were shifting toward her two children. Bussell also said, ‘I think I have seen so many dancers not retire when they should have’, ’I don’t want to start fizzling out and people wanting me to retire’ and, ‘As long as I feel good about it I have no regrets… and I’m very happy.’

When to exit a niche or life endeavour is a difficult decision to make but surely it must be better to leave on one’s own terms, rather than staying in the game well past one’s prime and potentially becoming an example of ‘how not to do it’. In trading, it probably doesn’t make sense to exit a niche until we experience a string of losses, evidence that we have truly lost our edge. In that sense, the signal to retire can be quite clear.

Returning to my own trading, I have a point of ruin at £9000 but on top of that I have decided that I will exit the game if I lose money ten weeks in a row. That would be ample evidence that it is time to move on.