A Refresher on the Fundamentals of Speculation (Audiobook)

Macro Fundamentals: Interpreting Friday's Jobs Numbers

Do you know why the June Unemployment Rate increased a tenth of a percent from 3.6% to 3.7%?

Because the Labor Force Participation Rate also increased: i.e., more and more people are entering the Labor Force. People who've quit looking for jobs in the past are now actively seeking employment again. 

Only those actively seeking employment get counted in the official unemployment rate; the more people there are seeking employment, the more people there are being counted as unemployed. (Job seekers that drop out of the labor market (stop searching) are excluded from the official number.)

So, the actual rate of unemployed people didn't increase; there's just a greater number of job seekers included in the sample.

To the casual observer, an uptick in the Unemployment Rate appears to be a negative development, but that is not the case.

Market effect
Traders view the number of unemployed people as a general signal of overall economic health, as consumer spending is highly correlated with labor-market conditions, and is also a major consideration for monetary policy at The Fed.
 
Investors tend to interpret the Unemployment Rate in relation to the LF Participation Rate as follows:

Unemployment Rate ↑ + Labor Force Participation Rate ↑ = +

Unemployment Rate ↑ + LFP Rate ↓ = -

Unemployment Rate ↓ + LFP Rate ↓ = +/-

Unemployment Rate ↓ + LFP Rate ↑ = ++

By forming a general but comprehensive view of fundamental economic data and getting a sense of the potential market implications a trader adds a valuable tool to his tool-belt

Equity Analyst Translations

Equity Analyst ratings changes in plain English:


"Buy" → I have a friend that needs to unload.

"Hold" → I gotta get paid for doing something, so here it is.

"Sell" → I have a friend that wants to load the boat.

"Sector Perform" → Gotta write something about this, so here.

"Outperform" → I have a friend that needs to unload but he isn't that important.

 "Underweight" → This thing was a POS from the get go.

"Overweight" → Best house in a shitty neighbourhood. "

"Price Target Lowered" → We're dumber than we first thought.

"Price Target Raised" → Everyone else is raising it, so we are. Besides, chart says momentum is building up.

October's Nikkei Short (NKD)

Pro Bono Warning for the Uninitiated - Tilray (TLRY)

Crash Model Results (after the big bounce)

SPY = S&P 500 Index Fund (investable)

Four Rules of Speculation from the Oldest Book on Speculation

"The first rule in speculation is: Never advise anyone to buy or sell shares. Where guessing correctly is a form of witchcraft, counsel cannot be put on airs.

"The second rule: Accept both your profits and regrets. It is best to seize what comes to hand when it comes, and not expect that your good fortune and the favorable circumstances will last.

"The third rule: Profit in the share market is goblin treasure: at one moment, it is carbuncles, the next it is coal; one moment diamonds, and the next pebbles. Sometimes, they are the tears that Aurora leaves on the sweet morning's grass, at other times, they are just tears.

"The fourth rule: He who wishes to become rich from this game must have both money and patience."

Algos Have Taken the Rhythm Out of the Market | Stanley F. Druckenmiller

Nikkei (NKD) Care Bear Call ↓

Nikkei down 1,956 points (-8.14%) since 4-Oct-2018:

Ten Jesse Livermore Quotes

On the futility of causal analysis in trading
1. "The tape does not concern itself with the why and wherefore. It doesn’t go into explanations. I didn’t ask the tape why when I was fourteen, and I don’t ask it to-day, at forty. The reason for what a certain stock does today may not be known for two or three days, or weeks, or months. But what the dickens does that matter? Your business with the tape is now—not to-morrow. The reason can wait."

On Coming of Age
2. "Money got tighter...and prices of stocks lower. I had foreseen it...However, the real joy was in the consciousness that  as a trader I was at last on the right track. I still had much to learn but I knew what to do. No more floundering, no more half-right methods. Tape reading was an important part of the game; so was beginning at the right time; so was sticking to your position. But my greatest discovery was that a man must study general conditions, to size them so as to be able to anticipate probabilities. In short, I had learned that I had to work for my money. I was no longer betting blindly or concerned with mastering the technique of the game, but with earning my successes by hard study and clear thinking."

On the importance of patience
3. A man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight."

On learning through experience and studying your blunders
4. "If I learned...so slowly it was because I learned by my mistakes, and some time always elapses between making a mistake and realizing it, and more time between realizing it and exactly determining it."

On every trader's necessary tuition fee(s)
5. "Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it."

On living in the Now
6. "It isn’t uncomfortable to lose when the loss is not accompanied by a poignant vision of what might have been."

On self-reliance and position trading
7. "Another thing I noticed in studying my plays in Fullerton’s office after I began to trade less unintelligently was that my initial operations seldom showed me a loss. That naturally made me decide to start big. It gave me confidence in my own judgment before I allowed it to be vitiated by the advice of others or even by my own impatience at times. Without faith in his own judgment no man can go very far in this game. That is about all I have learned—to study general conditions, to take a position and stick to it. I can wait without a twinge of impatience. I can see a setback without being shaken, knowing that it is only temporary. I have been short one hundred thousand shares and I have seen a big rally coming. I have figured—and figured correctly—that such a rally as I felt was inevitable, and even wholesome, would make a difference of one million dollars in my paper profits. And I nevertheless have stood pat and seen half my paper profit wiped out, without once considering the advisability of covering my shorts to put them out again on the rally. I knew that if I did I might lose my position and with it the certainty of a big killing. It is the big swing that makes the big money for you."

On the fruitlessness of attempting to pick bottoms and tops
8. "One of the most helpful things that anybody can learn is to give up trying to catch the last eighth—or the first. These two are the most expensive eighths in the world. They have cost stock traders, in the aggregate, enough millions of dollars to build a concrete highway across the continent"

On not losing even when you lose
9. "Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it."

On the subtlety between "trading" and "action" 
10. "The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals."

On the Importance of Sticking to Your System

Below is an excerpt of a story from the classic book Reminiscences of a Stock Operator by Edwin Lefevre. It's an excellent lesson on the importance of sticking to your own system until it requires modification. System trading can lead to extreme boredom, idle hands, and eventually unnecessary tinkering. The stock market is one of the few places where the ends justify means; that is, as long as your system is profitable, it doesn't matter what goes into it, nor does it require a readjustment. The only thing that matters is the outcome. As long as the outcome is satisfactory, plug your ears and stick to the system. 

 Enjoy:

I remember I met an old gentleman in Palm Beach whose name I did not catch or did not at once identify. I knew he had been in the Street for years, way back in Civil War times, and somebody told me that he was a very wise old codger who had gone through so many booms and panics that he was always saying there was nothing new under the sun and least of all in the stock market.

The old fellow asked me a lot of questions. When I got through telling him about my usual practice in trading he nodded and said, “Yes! Yes! You’re right. The way you’re built, the way your mind runs, makes your system a good system for you. It comes easy for you to practice what you preach, because the money you bet is the least of  your cares. I recollect Pat Hearne. Ever hear of him? Well, he was a very well-known sporting man and he had an account with us. Clever chap and nervy. He made money in stocks, and that made people ask him for advice. He would never give any. If they asked him point-blank for his opinion about the wisdom of their commitments he used a favourite race-track maxim of his: ‘You can’t tell till you bet.’ He traded in our office. He would buy one hundred shares of some active stock and when, or if, it went up 1 per cent he would buy another hundred. On another point’s advance, another hundred shares; and so on. He used to say he wasn’t playing the game to make money for others and therefore he would put in a stop-loss order one point below the price of his last purchase. When the price kept going up he simply moved up his stop with it. On a 1 per cent reaction he was stopped out. He declared he did not see any sense in losing more than one point, whether it came out of his original margin or out of his paper profits.

“You know, a professional gambler is not looking for long shots, but for sure money. Of course long shots are fine when they come in. In the stock market Pat wasn’t after tips or playing to catch twenty-points-a-week advances, but sure money in sufficient quantity to provide him with a good living. Of all the thousands of outsiders that I have run across in Wall Street, Pat Hearne was the only one who saw in stock speculation merely a game of chance like faro or roulette, but, nevertheless, had the sense to stick to a relatively sound betting method.

“After Hearne’s death one of our customers who had always traded with Pat and used his system made over one hundred thousand dollars in Lackawanna. Then he switched over to some other stock and because he had made a big stake he thought he need not stick to Pat’s way. When a reaction came,  instead of cutting short his losses he let them run—as though they were profits. Of course every cent went. When he finally quit he owed us several thousand dollars.

“He hung around for two or three years. He kept the fever long after the cash had gone; but we did not object as long as he behaved himself. I remember that he used to admit freely that he had been ten thousand kinds of an ass not to stick to Pat Hearne’s style of play. Well, one day he came to me greatly excited and asked me to let him sell some stock short in our office. He was a nice enough chap who had been a good customer in his day and I told him I personally would guarantee his account for one hundred shares.

“He sold short one hundred shares of Lake Shore. That was the time Bill Travers hammered the market, in 875.My friend Roberts put out that Lake Shore at exactly the right time and kept selling it on the way down as he had been wont to do in the old successful days before he forsook Pat Hearne’s system and instead listened to hope’s whispers.

“Well, sir, in four days of successful pyramiding, Roberts’ account showed him a profit of fifteen thousand dollars. Observing that he had not put in a stop-loss order I spoke to him about it and he told me that the break hadn’t fairly begun and he wasn’t going to be shaken out by any one-point reaction. This was in August. Before the middle of September he borrowed ten dollars from me for a baby carriage—his fourth. He did not stick to his own proved system. That’s the trouble with most of them,” and the old fellow shook his head at me.

The Speculator as Hero 2.0

Once upon a time, a drought comes over the land and the wheat crop fails. Naturally, the price of wheat goes up. Some people cut back and bake less bread while others speculate and buy as much wheat as they can get and hoard it in hopes of higher prices to come.

The king hears about all the speculation and high prices and promptly sends his soldiers from town to town to proclaim that speculation is now a crime against the state—and that severe punishment is to befall speculators.

The new law, like oh so many laws against the free market, only compounds the problem. Soon, some towns have no wheat at all—while rumor has it that others still have ample, even excess, supplies.

The king keeps raising the penalty for speculation, while the price of wheat, if you can find any, keeps going higher and higher.

One day, the court jester approaches the king and, in an entertaining sort of way, tells the king of a plan to end the famine—and to emerge as a wise and gracious ruler.

The next day, the soldiers again ride from town to town, this time to proclaim the end of all laws against speculation—and to suggest that each town prominently post the local price for wheat at its central marketplace.

The towns take the suggestion and post the prices. At first, the prices are surprisingly high in some towns and surprisingly low in others. During the next few days, the roads between the towns become virtual rivers of wheat as speculators rush to discount the spreads. By the end of the week, the price of wheat is mostly the same everywhere and everyone has enough to eat.

The court jester, having a keen sense for his own survival, makes sure all the credit goes directly to the king.

I like this story.

The loose end, of course, is how the court jester happens to know so much about how markets work—and how he happens to know how to express what he knows in an effective way.

While we may never know the answer for sure, my personal hunch is that the court jester makes frequent visits to the royal library and reads Reminiscences of a Stock Operator by Edwin Lefevre, The Crowd by Gustav LeBon, Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, and the entire Market Wizards series by Jack Schwager.

Trading, it turns out, is the solution to most economic problems; free markets, sanctity of trading, and healthy economy are all ways to say the same thing. In this sense, our traders are champions and the men and women in Jack Schwager's books are our heroes.

Schwager's books define trading by vividly portraying traders. He finds the best examples, he makes them human and accessible, and he allows them to express, in their own ways, what they do and how they do it. He gives us a gut feel for the struggles, challenges, joys, and sorrows all of them face over their entire careers. We wind up knowing each of his subjects intimately—and also as a uniquely complete expression of repeating themes, such as: be humble; go with the flow; manage risk; do it your own way.

Schwager's books are essential reading for anyone who trades, wants to trade, or wants to pick a trader.

I go back a ways with Jack. I recall meeting him while we were both starting out as traders, long on enthusiasm and short on experience. Over the years, I watched him grow, mature, and develop his talent, evolving to become our Chronicler-General.

Schwager's contribution to the industry is enormous. His original Market Wizards inspired a whole new generation of traders, many of whom subsequently appeared in The New Market Wizards, and then, in turn, in Stock Market Wizards. Jack's Wizards series becomes the torch that traders pass from one generation to the next. Now Hedge Fund Market Wizards extends, enhances, and perfects the tradition. Traders regularly use passages and chapters from Schwager's books as a reference for their own methods and to guide their own trading. His work is an inseparable part of the consciousness and language of trading itself.

Some 30 years ago, Jack reads Reminiscences of a Stock Operator and notices its meaningfulness and relevance, even 60 years after its publication. He adopts that standard for his own writing.

I notice that books that actually meet that standard tend to wind up in the libraries of traders and court jesters alike, on the same shelf with Reminiscences, The Crowd, and Extraordinary Popular Delusions and the Madness of Crowds.

That's exactly where you find Jack's books in my library.

Ed Seykota

Bastrop, Texas

February 25, 2012

This foreword was originally published in Market Wizards by Jack Schwager

Interview with Warren Buffett (1988)

Buffett squeezed a lifetime worth of investing wisdom into the last 60 seconds of this interview from 1988:

Q: Warren, your approach seems so simple, why doesn't everybody else do it?

Warren: Well i think partly because it is so simple. the academics for example focus on all kinds of variables - and the data is there, so they focus on whether you buy stocks on Tuesday and sell them on Friday you're better off, or if you buy them in election years and sell them in other years you're better off, or if you buy small companies - there are all these variables - because the data are there; and they learn how to manipulate data. And as a friend of mine says, 'to a man with a hammer everything looks like a nail.' And once you have these skills you just are dying to utilize them in some way, but they aren't important...If I were being asked to participate in a business opportunity would it make any difference to me if I bought it on a Tuesday or a Saturday or an election year or something? It's not what a businessman thinks about in buying businesses, so why think about it when buying stocks? Because stocks are just pieces of businesses.

From the Brilliant Ed Seykota:
"The Zero Point, or Zero Information Point, is the condition of nothing in CM upon which to base a judgment - including, say, even the very judgment that judgment itself is good or bad.

It is dancing joyously, with abandon. It is splashing your hand in a mud puddle and just being there with the experience. It is putting on a trade and succumbing to the enchantment of the whole process including the market, yourself, the prices, the pluses and minuses and the pretty colors on the monitor screen.

It is being able to read the markets directly and having no attachment to the ability to do so.

It is the sourcing condition for creativity. It is the feeling of feelings passing through, leaving no trace. It is beyond description in words and yet it somehow rides along from one person to another when Freds communicate without words.

When you have zero information, and do not even know that, then there is nothing you do not know."

QOTD

"No great performance ever came from holding back."

-- Don Greene, motivational coach, former Green Beret

Quote of the Day, from ROSO

"A brilliant operator, James R. Keene! His private secretary told me that when the market was going his way Mr. Keene was irascible; and those who knew him say his irascibility was expressed in sardonic phrases that lingered long in the memory of his hearers. But when he was losing he was in the best of humour, a polished man of the world, agreeable, epigrammatic, interesting. He had in superlative degree the qualities of mind that are associated with successful speculators anywhere. That he did not argue with the tape is plain. He was utterly fearless but never reckless. He could and did turn in a twinkling, if he found he was wrong" (Lefevre, 1923).