The Dominique Strauss-Kahn Case and Your Investments
by ilene - July 7th, 2011 1:52 am
By Brett Arends
There are some simple lessons from all this. The Dominique Strauss-Kahn case hammers them home.
We should never assume the crowd, or "everyone else," or the market is right or even rational. Five hundred ill-informed opinions don’t amount to a hill of beans.
We should always listen to what contrarians have to say especially when they sound most ridiculous, and especially when they are being shouted down. We should never trust any judgments reached quickly.
In reaching our own conclusions, we should fight the urge to join the crowd. We should take our time, do our own homework and make up our own minds. There is no hurry.
We should always be willing to change our minds if need be. This is the hardest thing to do. We constantly have to remind ourselves that we could be wrong.
Full article here: The Dominique Strauss-Kahn Case and Your Investments – SmartMoney.com.
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A MONKEY ECONOMY AS IRRATIONAL AS OURS
by ilene - August 25th, 2010 5:40 pm
A MONKEY ECONOMY AS IRRATIONAL AS OURS
Courtesy of The Pragmatic Capitalist
As
“The investment world is the civilized version of natural selection. It cuts to the core of every emotion imaginable. When Joe Schmo goes to work for 25 years straight in an attempt to create a better life for his family and suddenly sees his life’s savings going down the tube because Lehman Bros went bankrupt you can’t possibly expect him to react rationally in such an environment. This is no different than the man whose family is attacked in the middle of the night. Do you expect that man to react rationally when everything he lives for is suddenly in harms way? Do human beings make rational and efficient decisions in chaotic scenarios? Even more important, will 1 million humans working in tandem make efficient decisions all within the same system? No, the majority of them will make highly inefficient decisions. “Mistakes” as we like to call them. We all make them.
If we have learned anything over the course of the greatest mean reversion in stock
market history over the last 24 months it is that markets are HIGHLY inefficient. Why? Because the humans that write the algorithms are using flawed theories and the emotions upon which these trades are placed are not psychologically efficient.”
Despite our evolutionary leaps and bounds I believe we are not so far removed from our animal brethren when it comes to survival instincts. When confronted with complex decisions we make mistakes, we panic, we turn to our animal instincts which scream: SURVIVE AT ANY COST. And nowhere is this more apparent than it is in the most complex facets of our lives. Markets are highly complex systems and have become directly tied to important facets of our lives. In many regards it is the last place most human beings should be residing. …
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Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under Question
by ilene - July 13th, 2010 12:46 am
Scientific Proof That High Frequency Trading Induces Adverse Changes In Market Microstructure And Dynamics, And Puts Market Fairness Under Question
Courtesy of Tyler Durden
Up until recently, any debate between proponents and opponents of High Frequency Trading would typically be represented by heated debates of high conviction on either side, with discussions rapidly deteriorating into ad hominem attacks and the producer screaming ‘cut to commercial’ to prevent fistfights. Luckily, all this is about to change. In a research paper by Reginald Smith of the Bouchet Franklin Institute in Rochester titled "Is high-frequency trading inducing changes in market microstructure and dynamics?" the author finds that he "can clearly demonstrate that HFT is having an increasingly large impact on the microstructure of equity trading dynamics. Traded value, and by extension trading volume, fluctuations are starting to show self-similarity at increasingly shorter timescales. Values which were once only present on the orders of several hours or days are now commonplace in the timescale of seconds or minutes. It is important that the trading algorithms of HFT traders, as well as those who seek to understand, improve, or regulate HFT realize that the overall structure of trading is influenced in a measurable manner by HFT and that Gaussian noise models of short term trading volume fluctuations likely are increasingly inapplicable."
In other words, the author finds ample evidence that during the past decade (on the NASDAQ) and especially since the 2005 revision of Reg NMS (on the NYSE), stock trading increasingly demonstrates "self similar" fractal patterns, resulting in volatility surges, recursive feedback loops, and a market structure which is increasingly becoming a product of the actual trading mechanism. In the process, as demonstrated by a Hurst Exponent gravitating increasingly further away from 0.5 (i.e., Brown Noise territory), the Markov Process nature of stock trading is put under question, and thus the whole premise of an efficient market has to be reevaluated. Simply said: HFT has been shown to affect the fairness of trading.
The paper is, needless to say, a must read for everyone who has an even passing interest in stock trading and market regulation (alas, yes, that would mean the SEC, and Congress). And while one of the key qualities of the paper is presenting the history and implications of High Frequency Trading, and its rise to market dominance primarily as a result of the revision…
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Goldman’s Stock Crushed… All the Way to Last Month’s Level
by ilene - April 16th, 2010 1:21 pm
Goldman’s Stock Crushed… All the Way to Last Month’s Level
Courtesy of Econompic Data
By now, most of you have heard that Goldman Sachs was charged with fraud. So has Goldman’s stock taken a hit?
So is Goldman more valuable today after being charged with fraud (given the new economic / regulatory outlook) or last month pre-charge?
And people still claim the market is efficient…
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Goldman’s Stock Crushed… All the Way to Last Month’s Level
by Chart School - April 16th, 2010 1:17 pm
Goldman’s Stock Crushed… All the Way to Last Month’s Level
Courtesy of Econompic Data
By now, most of you have heard that Goldman Sachs was charged with fraud. So has Goldman’s stock taken a hit?
So is Goldman more valuable today after being charged with fraud (given the new economic / regulatory outlook) or last month pre-charge?
And people still claim the market is efficient…
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THE UNCORRELATED RETURN MYTH?
by ilene - October 30th, 2009 2:07 pm
THE UNCORRELATED RETURN MYTH?
Courtesy of The Pragmatic Capitalist
I came across this interesting paper (which can be found in its entirety below) the other day, while perusing Paul Kedrosky’s website, regarding uncorrelated returns. The basic premise of the paper was that there is no such thing as uncorrelated assets. The author conveniently cherry picks the last 36 months to prove his point. Of course the last 36 months can easily be described as unique if not an outlier. Many have been quick to come to the conclusion that the last 36 months not only disprove the efficient market hypothesis, but also disprove the theory of uncorrelated assets. This is highly flawed in my opinion.
Let me begin to dissect this issue from the beginning (without getting bogged down in too much mundane theory). Anyone who is a regular reader has likely taken the time to read the “about us” section on the site. If so, you know that my investment theories aren’t just some cookie cutter “fill the Morningstar box” approach. I believe the efficient market hypothesis is one of the greatest tricks ever played on the investment community. Any market is nothing more than the summation of the decisions of its participants. Markets, by definition are highly complex dynamic systems that are susceptible to chaos. To assume that the summation of these decisions is somehow efficient would mean that the decision makers as a whole are efficient. While this might be true to some extent, human beings (and even the algorithms written by humans) are guaranteed to be inefficient decision makers in a chaotic system.
The investment world is the civilized version of natural selection. It cuts to the core of every emotion imaginable. When Joe Schmo goes to work for 25 years straight in an attempt to create a better life for his family and suddenly sees his life’s savings going down the tube because Lehman Bros went bankrupt you can’t possibly expect him to react rationally in such an environment. This is no different than the man whose family is attacked in the middle of the night. Do you expect that man to react rationally when everything he lives for is suddenly in harms way? Do human beings make rational and efficient decisions in chaotic scenarios? Even more important, will 1 million humans working…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site