An Investing Lesson

A fascinating observation from this post about new chess champion Magnus Carlsen:

Instead, it appears the key to his success is taking games that he used to consistently lose — especially games as Black — and instead forcing them into a draw.

There may be an investing lesson in there somewhere. Success is too often seen as the culmination of a series a grand, dramatic moves, when the humdrum routine of avoiding harm is at least as important.

Cloud Offices

I think highfalutin offices are often like a skyscraper indicator for individual companies, almost always coming near the peak of corporate success. So I’m finding the number of tech company offices showing up on architectural sites rather disturbing. As an investor I want any profit or new capital used to generate more profit, or at least revenue. Yet too many startups are ensconced in costly digs without having an actual product, let alone profits, and offices produce neither one. When did using investor money to fluff your ego start counting as changing the world?

More disturbing, many of these companies are in cloud computing – in some way selling the ability to do what you need to do, and know what you need to know, wherever you are, whenever you want. A true game changer. But if these services allow you to do anything anywhere, why do they need any office? Why has the game not changed when the industry itself is the greatest argument against the need for a physical office – even a cheap one?

Managerial insecurity or incompetence is an obvious reason 30 years of lip flapping about the virtual office has led to almost nothing. Managers fear that without having employees directly under their thumb productivity will fall. But that attitude really only applies to physical labor, if at all. The process of knowledge work is largely invisible. No matter how much a supervisor breathes down necks there’s really no way to tell if anything productive is being done until something useful is delivered.

Expensive offices are also a status symbol. Power and status are diminished if they aren’t obviously displayed, so a corner office in a massive complex is always preferred to a corner office in a strip mall, regardless of the economic merits. When success is being judged by how many of your neighbors’ houses you can overpay to acquire, a de minimis brick and mortar (or steel, concrete, and glass) presence is just not done.

A more worrying possibility for users is that these companies don’t leave the building and embrace the technology they sell because they don’t trust it. They know their security practices, and what they do with data stored on their systems, and conclude their shit is too hot to risk to the cloud and virtual offices. Though they’re all hoping you will.

Whatever the cause, it’s a blatant disregard of fiduciary duty and a hypocritical refusal to eat their own cooking. It should be embarrassing but it rarely is, and discipline is often slow to come, so the mercenaries quickly overwhelm the missionaries. But in every generation of computer mania – whether it’s mainframes, PCs, internet, or cloud – people eventually wise up. Unlike mom, the markets won’t always love you.

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There’s also no reason for Congress to be in Washington D.C in the 21st Century, so send them home too.

Inov-8 Bare-Grip 200 Review **New Version

Bare Grip 200 v2.0

Latest, but not greatest

Inov-8 made a number of changes to the Bare-Grip 200 shoes I reviewed before, including the laces, upper material, lining, and side reinforcement. Now that I’ve had 6 hours in the new version here’s the verdict.

Nice try

There are some positive changes. The side reinforcements should improve durability right at the point that my other shoes wore through, and the denser mesh of the upper (more like Cordura) should take more abuse than the prior version too. The new upper doesn’t conform as easily to your foot, but the smooth laces self adjust a bit to make up for it, so after half an hour I really didn’t notice the difference. They also feel and fit just like the previous version so if the originals fit well these should too. On the surface, a few improvements to the same basic shoe.

But…

One of my favorite things about the green version was how quickly they dried on the trail. Water got in very easily but exited just as easily, so the shoe didn’t hold water and dried rapidly. But the new version has a full lining – presumably for the sockless crowd – and combined with the denser mesh upper it lets water in about 1 second slower, but lets it out far more slowly, so they literally take hours to dry. I’m not a fan of trench foot, and never go sockless on trails, so this is a big negative for me.

Another negative is the new yellow sole. I guess the marketing/design department won this argument because colored rubber simply doesn’t grip as well as carbon black, which makes it a poor choice for a high performance shoe. It makes no difference at all in mud or in many other trail conditions, but on smooth, slick rocks it’s a noticeable decrease which caught me by surprise a number of times in stream beds since I’m so used to the black version. It’s not a dramatic change, and they still grip better than most shoes, but they definitely don’t hold as well as the original version. I suppose the upside to the yellow soles is if you slip and crack your head open the brighter soles will make it marginally easier to find your lifeless body in a gully.

Something that didn’t change is the shape of the shoe, which remains very pointy toed. I’ve tolerated it since they performed so well in other areas but the longer I use minimalist shoes the more I’d prefer a natural/anatomic last.

Overall, it’s still a good shoe – neither negative is a deal killer in itself, and may not matter to many users – but taking one step forward and two steps back doesn’t equal progress to me, so I’m hoping Inov8 will make some course corrections in the next update.

Rapamycin-related Side Effects in Kidney Transplant

Here’s yet another study of the side effects of Rapamycin (Sirolimus) in kidney transplant patients. 46% of the patients discontinued Rapamycin, with proteinuria, edema, and oral ulcers listed as the most difficult to manage, and more likely to cause discontinuation.

For more than a decade I’ve been reading similar studies with similar conclusions and it’s getting old, so here’s my suggestion for oral ulcers caused by Rapamycin: 30-60 seconds of antiseptic mouthwash twice a day. When I started taking Rapa I had ulcers by the dozens – ulcers on top of ulcers – but within three weeks of starting the mouthwash the ulcers disappeared, and haven’t returned in 13 years.

Scientifically anecdotal evidence isn’t worth a hill of beans but in this case it could be a dirt cheap solution for a painful and potentially costly problem. Immunosuppressive options are extremely limited so give mouthwash a try before you scratch Rapa off the list.

 

Pauoa Woods Loop Trail

The quest to clean out my draft folder continues…

I’ve only done this trail once in its entirety so you can guess it’s not my favorite by any means. Yet there are some things of note that make it worth doing – at least once.

The good points:

  1. When you go after some hard rains there is a decent size waterfall, which my picture taken from the top completely fails to convey.
  2. Lots of old Board of Water Supply pipes and structures for the engineering fans. I try to avoid stepping on the oldest pipes since I know at least one person broke through a pipe and got a nasty gash in his leg.
  3. Judging by the tracks and other signs there are more pigs in the back of Pauoa Valley than any other area near Honolulu. If you are quiet and go in cloudier, rainy weather there’s a good chance you’ll see one.
  4. Some nice views of Nuuanu Valley as you go down the ridge toward Pacific Heights.
  5. A number of changes in vegetation and terrain.
  6. Once you get on the loop trail itself you are very unlikely to see anyone else on the trail. Depending on your view of fellow travelers, this may be a plus or a minus.

The bad points:

  1. Burrs, burrs, and more burrs. The Woman’s entire lower body was covered with them at one point on the trail. I didn’t have as much trouble due to a lucky clothing choice but it was still a nuisance, especially since they are generally nonexistent in the Koolaus.
  2. The trail comes and goes at a number of points in Pauoa Valley, often indistinguishable from a pig trail, so it’s a bit of a guessing game to find the right one. If you have no sense of direction or little hiking experience on unimproved trails this is not the one for you.
  3. Unlike many hikes in Hawaii where there are great views every 10 feet, once you leave the ridge above Pacific Heights the drama is limited to the waterfall and wondering if you took a wrong turn.

The counter-clockwise route – which I would recommend – goes from the Kalawahine Trail at the top of Tantalus Drive after crossing the bridge (next to the little telephone road), then to Pauoa Flats Trail, before handing a left on Nuuanu Trail. Rather than taking the popular route from the top of the ridge down to Nuuanu Valley, continue along the ridge toward Pacific Heights. The trail down into Pauoa Valley is pretty obvious, and the waterfall isn’t too far after the trail turns back into the valley. Not long after the waterfall the guessing games begin, before eventually climbing back out of the valley to Kalawahine trail, not far from the Tantalus Drive trailhead.

Here’s a tip for poorly marked trails: Pig trails can be so heavily used they look like the trail you should be on, but pigs are short. If you find a lot of branches hitting you in the face and torso it’s generally a good bet you are on a pig trail and it’s time to turn around and try again. Humans won’t put up with that for long.

Lastly, a note about ribbons: Ribbons in the woods near Honolulu are most often left by evil ribbon fairies, and are therefore as likely to mislead you as help you.  Humans no longer have to worry much about being tracked by predators and it shows in the trails they leave. Keep your eyes open and try not to rely on ribbons to tell you where to go.

Kalawahine intersection

Fungi

Overly attractive

Not a fish eye lens

Follow the pipe

A waterfall with no frame of reference isn’t much of a waterfall

Town view – Kona weather version

 

 

Swissstop BXP Brake Pad Review

BXP pads are the latest from Swisstop designed for aluminum rims. It’s surprising there’s any room left for improvement in something as simple as brake pads, but these pads achieve another small step up from the already excellent GHP II pads. They’ve been out for over a year now so I’ve had time to put a few thousand miles on them in a variety of conditions.

Pros:

  • Less grabby in wet conditions
  • More linear feel in hard braking
  • Slightly shorter stopping distance.

Cons:

  • Cost (as always)
  • Squeal a little louder than GHP when hot, though generally less

I’ve gone through pads at a similar rate to the GHP II, so that worry didn’t materialize, and BXP pads do seem gentler on softer aluminum rims (like the Stan’s Alpha 340 rims I’ve been using).

After I wore out the first set I started using the BXP pads only on the front brake, with cheaper black Swissstop or Koolstop pads on the rear. The combination works quite well, maybe even preferable if you’re a little ham-fisted on the rear brake, so it’s a good way to decrease the cost of your addiction.

Koolstop dual compound are still a great choice for the budget conscious, but if you’re willing to fork over the cash the BXP pads are the best I’ve found for aluminum rims. Of course there’s always next year…

Rethinking Immortality

I’m not rethinking the desirability of immortality. That’s best left to those far from death and lacking perspective. I still think the pursuit of human immortality is a worthy cause (see here). But the more I think about it, the more I think it simply isn’t possible to radically extend lifespans for humans as we know them.

The insurmountable hurdle in the quest for immortality is going to boil down to an evolutionary box canyon where, because of all the good-enough-for-reproductive-work “choices” made before, you just can’t get there from here. Evolution rewards expediency and economy, making do with what’s at hand and finding multiple, often opposing, uses for everything biological. Because of this, attempted improvements in the workings of the body at some point lead to a problem elsewhere. Pharmaceutical development is always an attempt to improve the benefits and reduce the costs, but the tradeoffs can never completely be eliminated. When man finds a new use for a wheel it could be a table top. When evolution finds a new use for a wheel it’s likely to be the table legs, chairs, half the fireplace, the front door, and part of the driveway too.

A counter argument can be made that there are some creatures on earth that live extraordinarily long lives, and by discovering their secrets we’ll be able to emulate them. While that research no doubt will lead to some improvements in longevity, those other species aren’t us. Different evolutionary histories lead to different box canyons (e.g. trees aren’t that smart and tortoises have to bear the indignity of petting zoos). We’ve been social animals for far longer than the last decade, and as a result our immune systems may be the most complex in the world. This has allowed us to survive domesticating animals and sending kids to daycare to trade secretions, but targeting all manner of pathogens over a lifetime inevitably results in false positives. Systemic inflammation and an early demise is one of the likely results. Being warm-blooded, with a far higher metabolic rate than a bristlecone pine or tortoise, is another example of a beneficial trait that imposes a significant set of hurdles to immortality. Biology is a package deal composed of millions of interrelated pieces. Because of this evolutionary baggage, picking and choosing the traits we’d like and putting them together doesn’t mean they will work the way we intend.

Reduce/reuse/recycle engineering isn’t the only issue. Once reproduction stops, anything that sends you to an early grave after that can accumulate in the genes virtually unmolested. To a large extent, aging is the result of that genetic neglect. In theory, that category of defect should be fixable with little downside. The bad news is that there are likely millions of such defects that would need to be identified and changed. The even worse news is, once altered, many of them will turn out not to have been deleterious junk after all – which leads back to the Rube Goldberg engineering problem.

This doesn’t mean that immortal biological beings couldn’t be created someday. Unfortunately it would require a complete re-engineering from the ground up, and the final result would be something quite different from the original. It’s the same problem as with the Transhumanists’ idea of uploading our minds: Human mind and body are an inseparable, integrated whole. In fact, if you look at human behavior objectively, the body is clearly in charge of the mind. Much of what we do revolves around simply maintaining homeostasis, with emotions created to motivate us to action, and most of the rest is a direct or indirect attempt to enhance reproductive success (e.g. buying a Ferrari). What would be left if that were removed or radically altered? I’m not sure, but it definitely wouldn’t be recognizably human. Even if the technical problems of uploading a brain could be solved, once separated from the bodily milieu it would cease to be you, and that’s hardly immortality.

Though immortality may be beyond our reach, it doesn’t mean increased longevity is a lost cause. While our evolutionary heritage may have screwed us on a grand scale, increasing healthy lifespans by a significant percentage is a near certainty. If markets are allowed to operate, it could happen well within those filthy daycare tots’ lifetimes. But I’m afraid that will have to do, you lucky little bastards. Wetware life will always be too short.

The Loser Network

It’s often said that you should only associate with quality people, yet some people fail to heed this sensible advice. A number of years ago I discovered the reason. It’s because they’re part of a social network that doesn’t advertise, has no revenue, has hundreds of millions of members, and is always free to join. No, it’s not the next multi-billion dollar IPO, it’s the Loser Network, and it’s one network you never want to join.

Sadly, we don’t live in Lake Wobegon where everyone is above average. Almost any characteristic of a human population is reasonably close to normally distributed. The sad consequence is for any truly quality person there is also an incompetent, negligent, unethical, immoral, bitter, lying, evil twin – as well as everything in between.

The members of the Loser Network are drawn from that long left tail of the distribution, which starts from not quite up to par and ultimately stretches out to reach serial killers and heads of state. The danger of the network lies in one simple fact. Like a bad health plan, members of the Loser Network will only refer you within the network. It’s the unwritten rule of the Loser Network, and the reason for its quicksand-like ability to drag victims down to their doom. A bad attorney knows a bad doctor, bad mechanic, bad plumber, bad poker buddies, bad friends – and they all know and refer to each other. Once in the network you begin bouncing from one shady character to another, whatever the problem and wherever you turn. You become progressively isolated from the quality segment of society, with your judgments increasingly guided by bad examples and faulty comparisons. Those not in the Loser Network eventually recognize the dangers of associating with you and flee, virtually sealing your fate.

As with all dread conditions, prevention is the best cure. If someone rubs you the wrong way, for whatever irrational reason, don’t assume that gut feeling which evolution worked a million years to produce is nonsense. Run! There are almost 7 billion people in the world so there’s no reason you have to meet or associate with any damned one of them. Keep pushing your shopping cart down the aisle to you find a good one. You’ve been warned.

A Pocket Guide to Computer Security

The one step method is to never turn on your computer. Use it only as a household decoration. If you’re unwilling to be that thorough, here’s the alternative, based on the revelations of the last year.

IF you:

  • Build your device from parts obtained from various sources
  • Order said parts right before the shipping cutoff and use next day a.m. delivery for all purchases, tracking each step of the delivery
  • Accept delivery, build and use the device only in a secure site, protected by several levels of security, with the details known only to you
  • Use an open source OS, carefully verifying it’s a legitimate copy
  • Never use the internet
  • Physically remove the camera, sound card, mic/speakers, bluetooth, and networking card from the device
  • Use the device only in a windowless, EM/RF shielded, soundproofed room
  • Put RF filters on the AC power source and use the device only on battery
  • Never allow cell phones or any other communication device in the room
  • Never allow any other computing device in the room
  • Use open source full drive encryption
  • Never install any proprietary software
  • Secure erase all deleted files, system logs and other records
  • Never take the device from the room, and absolutely never cross an international border with it
  • Avoid making yourself a target, with “target” defined extremely broadly

THEN you MAY be secure. Otherwise…well, it’s probably better if you let the government handle security for you. They already offer a wonderful free backup service.

Adventures in TAA

I wrote my first tactical asset allocation system over a year ago (see the alpha version here). Not because I was enthralled with the power of the approach, but because I was concerned that my discretionary trading results would suffer a serious decline following my demise. For the sake of the family finances I wanted something that could function well without me.

Though it shouldn’t be, it’s still a work in progress. It shouldn’t be because even something as simple as the Permanent Portfolio has worked pretty well over several decades, and may perform relatively better as time defeats each wave of “smarter” approaches.

As logical as that is, I can’t do it. I feel stupid using something that simple and have to “improve’ it. So the challenge is to create something that will make me feel smart enough to be comfortable and stick with it, while preventing the additional complexity from having any real impact on the results. Ideally the embellishments should be like the Emperor’s new clothes: Good enough to fool the user, but in reality non-existent.

I had to wait a year for a little turmoil in the bond market, but after some modification I think I have a good candidate. It still needs another year in the sandbox and some tedious QA on the code, but here’s what I’ve learned so far:

  1. For a set it and forget it long-term system, momentum has been, and is likely to remain, the best method for selecting positions. Human psychology has been remarkably stable over centuries, and most people are sheep, so trends are likely to exist as long as humans remain in their current form. Mean reversion will always be around too – but it may stubbornly refuse to revert in your financial lifetime (which leverage in any form will considerably shorten).
  2. The number of simultaneous positions you should hold ends up a function of risk tolerance. Holding one position at a time in a fund switching system generally yields the best absolute returns, but the volatility which creates those returns cuts both ways. It looks great on paper when you know how it all turns out, but when you’re down 35% and staring into the great unknown it feels entirely different. For me, limiting the maximum number of positions to 2 or 3 funds seems the best balance between risk and reward.
  3. However it’s measured, momentum is a trend following approach and is therefore prone to whipsaws, especially in sideways markets. Including 20 highly correlated stock ETFs in your system is going to multiply whipsaws by at least 20-fold as it jumps from one to another, while adding far less than 20-fold improvement in returns.  Pick one fund in each asset class (preferably the one with the lowest cost and highest daily volume) and leave it at that. If you can’t hold the line there, then split your money and trade separate portfolios to limit the number of trades between correlated assets. One pot for international, one for domestic, or whatever floats your boat. Putting it all into one bucket will chop you into ribbons.
  4. Cash is an asset class which should be in any TAA system. It’s been almost 40 years since cash was truly king for any length of time, so it’s easy to dismiss the value, but that also means the next coronation is that much closer.
  5. Forget benchmarking. Beating some index means nothing to you as an individual. Your personal goals alone should determine success or failure. Technically, if you are beating inflation by even a little over time, you’re ahead of the game – and over sufficiently long periods I’m not sure much more is possible. If that’s not enough for you, reevaluate your spending and goals. Money is only a means to an end. Figure out what ends you’re really seeking with your money chase. Here is a good one (via Abnormal Returns).
  6. Test your system over as much data as you can and with the worst cases you can devise. Don’t assume the 20th century was a representative sample. In the last part of the 19th century deflation was frequent, incomes and GDP rose at the fastest rate in US history, and the stock market went pretty much nowhere for long periods. If the world has to make sense to you for your system to work well, it’s doomed.
  7. Simple = robust. It’s the fifth law of thermodynamics or something.
  8. Devising a system that’s truly agnostic about the future is extremely difficult. Biases resulting from early experiences can shape a lifetime of investing. So many assumptions are buried in how you view the world and markets, it’s hard to discover and unravel them all. Read every market history you can find to gain a better understanding of the possibilities.

Though successful investing can be described very simply, implementation soon reveals an abyss of chaos and confusion lurking behind those simple ideas. In moments of despair, remember that living below your means will solve the majority of your financial problems given time, regardless what happens in the markets. Your most important task as an investor is to avoid making that too difficult.

The Trouble With Indicators

Market indicators can be like the mythical sirens luring men to their doom. With an irresistible song promising to pick a turning point or signal a trend, they all have the allure of nailing it at some point. But what’s the single best market indicator? Price, plain and simple. It may not be the most satisfying answer, but it’s the only market data that directly changes your account balance. No matter what arcane financial alchemy you can devise, price will always determine its success or failure.

Unfortunately for dreams of easy riches, price is also one of the worst indicators for gaining an edge over the competition. It’s the most widely watched number there is – even your favorite contrary indicator relative knows when the Dow hits a round number. Further, no matter how much fancy math is applied to the price data it can’t increase the amount of information it contains. As a result, the long run results of any system based on price will be quite similar to those of a simple moving average. You really can’t squeeze blood from a turnip.

In trying to overcome these downsides investors turn to indicators like volume, breadth, sentiment, intermarket analysis, and countless others – even economics (a clear indicator of desperation). Though these all add potentially useful information, it comes at a significant cost: They will all hurt your returns. They aren’t 100% correlated with price, so by definition there will be times when price does one thing and they do another, which ultimately leads to additional losses. To avoid that it’s tempting to add more indicators, each attempting to overcome the shortcomings of another, but that’s a sure path to decision paralysis. They’ll most often be contradictory with no clear signal, and in the rare case they’re in agreement they’ll almost certainly be wrong. [1]

What’s the solution? The ideal approach depends on your personality, but the generic version is to change your goals from beating the market to coexisting with it. Buy and hold is almost impossible to beat for mere mortals so stop adding complexity and risk trying to do it. As long as humanity avoids a downward spiral to extinction, a basic moving average system can perform more than adequately to fund a comfortable retirement over a career (see here and here). In many cases outperforming the broad averages on a risk-adjusted basis, while requiring very little time.

That seems like an easy sale, so why don’t more people keep it simple and avoid the troubles with indicators? First, because humans are never satisfied with anything for very long, the urge to tinker and “improve” can become nearly irresistible. Second, individual psychology can make simple trend following approaches difficult (typically due to a need to be right or feel superior), and it can take years of work to alter those preferences. Lastly, “outperforming on a risk-adjusted basis” is really just another way to say “underperform with smaller losses.” Even though that may be the optimal strategy for most people, it can be hard to stomach when trapped in conversation with the latest crop of bull market geniuses who’ve all doubled their money in the last 3 months.

The real money is made by people who are still playing the game 20 or 30 years later. If it takes very low drawdowns to keep you from bailing out, that’s the best approach for you to achieve your goals, even if it means lagging some benchmark to the point of embarrassment. You don’t have to worry about losing assets under management or beating the competition, the happy ending is all that matters. Leave the cornucopia of indicators to the flash in the pan home run hitters. Sustainability is the real key to financial success.

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[1] Not because that’s just your sorry luck, but because other market participants will make trades based on far less information while you’re waiting for a consensus, effectively front-running any trades you finally get around to making.

Automation =/= Salvation

Today software is often seen as the solution to nearly all of mankind’s problems, and to an old fart like me, when I’m not swearing at it too much to notice, information technology can indeed seem nearly miraculous at times. But before allowing yourself to be overcome by the siren call of technology as the solution to your problems, here’s something to consider: If you can’t get a slow, manual, human-based process to work well, all that automation will do is allow you to screw up at a much faster pace, with every mistake instantly propagated throughout the system.

The latest software and technology doesn’t guarantee success, and the lack of it doesn’t guarantee failure. The process itself is far more important than the platform and software than runs it, whether it’s a co-located HFT black box or the wetware between your ears.

A Simple TAA System

This is a simple tactical asset allocation system I wrote in Amibroker AFL as a framework for further development. There are still some bugs – some of the statistics don’t calculate properly for one – but it works more or less as intended.

When I get the time I’ll write about the difficulties of creating a system which is truly agnostic about future market behavior when all the building blocks are mired in the past and unavoidably riddled with assumptions.

Excuse the horrible WordPress reformatting, use some common sense to choose your own parameter values, and have fun!

//TAA ETF Moving Average System with trailing stops
//Fully invested regardless the number of open positions
//Trades once a month, but uses daily data and evaluates stops daily

//strategy parameters/////////////////////////////////////////////////
malen = Param(“ma length”,21,21,252,21);
//malen = Optimize(“ma length”,21,21,252,21);

//execution/trade management parameters///////////////////////////////////////////////
stopperc = Param(“stop %”,2,2,20,1);
//stopperc = Optimize(“stop %”,2,2,20,1);
redelay = Param(“rentry delay”,21,21,126,21);
//redelay = Optimize(“rentry delay”,21,21,126,21);
RoundLotSize = 1;
BuyPrice = C;
dom = Param(“day of month”,1,1,21,1);  //day of month to calculate scores
//dom = Optimize(“day of month”,1,1,21,1);
tradedelay = Param(“trade delay”,0,0,5,1);  //days to delay trading after calculation
//tradedelay = Optimize(“trade delay”,0,0,5,1);
ApplyStop(2,1,stopperc,0,True,redelay);
SetTradeDelays(tradedelay,tradedelay,0,0);

//Portfolio parameters and options///////////////////////////////
Maxposition = Param(“max positions”,1,1,15,1);
//Maxposition = Optimize(“max positions”,1,1,15,1);
Mindiff = Param(“Min diff to rebalance”,.005,0,.10,.0025);
//mindiff = Optimize(“Min diff to rebalance”,.005,0,.10,.0025);
SetOption(“InitialEquity”, 100000);
SetOption(“MaxOpenPositions”,Maxposition);
SetPositionSize(100/Maxposition, spsPercentOfEquity);
SetOption(“UsePrevBarEquityForPosSizing”, True);
SetOption(“WorstRankHeld”,Maxposition);

//Determine trading day//////////////////////////////////////////////
MonthChange = Month() != Ref( Month(), -1 );
Rebalance = IIf(BarsSince(MonthChange==1)==dom,1,0);

//Rotational trading parameters////////////////////////////////////
EnableRotationalTrading();
PositionScore = IIf (C>MA(C,MAlen), C/MA(C,MAlen), 0);  //If above moving average, rank by % above the moving average
AddToComposite( IIf(PositionScore !=0,1,0) , “~TAAPosCount”, “X”, atcFlagDefaults = 15);  //create artificial security to track number of positive scores
RawCount = Ref(Foreign(“~TAAPosCount”,”C”),-tradedelay);  //Must use count from calculation day to get proper results
PosCount = IIf(RawCount>Maxposition,Maxposition,RawCount); //Final count used for position sizing

//Custom Backtest Procedure/////////////////////////////////////////////////
SetOption(“UseCustomBacktestProc”, True);
if (Status(“action”) == actionPortfolio)
{
bo = GetBacktesterObject();
bo.PreProcess(); // Initialize backtester
for (bar=0; bar < BarCount; bar++)  //loop through all bars
{
bo.handlestops(bar);  //For daily stops this is outside the day of month loop
if (rebalance[bar]==1)  // test for day of month to trade
{
CurEquity = bo.Equity;
if (poscount[bar] !=0)
{
PositionSize = 1/PosCount[bar] * CurEquity;
}
for (pos = bo.GetFirstOpenPos(); pos; pos = bo.GetNextOpenPos()) //loop through open postions and rebalance to remain fully invested
{
posval = pos.GetPositionValue();
diff = posval – PositionSize;
price = pos.GetPrice(bar, “C”);
if (abs(diff[bar])>Mindiff*posval AND abs(diff[bar]) > price AND diff[bar]>0) // do scale outs first
{
bo.ScaleTrade(bar, pos.symbol, False, price, abs(diff[bar]));
}
if (abs(diff[bar])>Mindiff*posval AND abs(diff[bar]) > price AND diff[bar]<0)  // do scale ins
{
bo.ScaleTrade(bar, pos.symbol, True, price, abs(diff[bar]));
}
} //for scale in/out loop
bo.ProcessTradeSignals(bar);
} //for trading day loop
bo.updatestats(bar,1);
bo.updatestats(bar,2);
} //for bar loop
bo.PostProcess(); // Finalize backtester
}

A Harsh Reminder

I’m taking a break from my break to bring up an important and frequently forgotten rule, unfortunately inspired by this: Hiker who died after falling from Palolo trail ID’d

I was first made aware of this rule by a man working for the electric company way back when they had to physically climb up the utility poles to do repairs.

The Three Point Rule

It’s quite simple: Maintain three points of contact at all times! One hand and two feet, two hands and one foot – in dire straits I suppose one hand, one foot, and your teeth could count. Holding onto someone else only counts in a life threatening situation where the other person volunteers to risk their life to save your stupid ass. Any time there is even the faintest, farfetched possibility of danger this rule must be followed without fail.

The point of the rule is if one point of contact fails you still have two more to save yourself. This also requires maintaining your balance to avoid over-reliance on those three points of contact. Therefore, leaning out to take a one-handed picture defeats the purpose and breaks the rule because if your handhold fails you’re done. Three points of contact are your insurance policy, but having insurance doesn’t mean you’re free to start a bonfire in your living room.

When I talked that lineman he was nearing retirement and had never had an accident on the job. He told me the most dangerous time was when the new guys had been on the job just long enough to get comfortable. They’d been told the rules and heard all the horror stories but they’d almost invariably stop following the rules because they no longer felt the same fear as when they were new, and before long they’d fall.

This applies to any risky endeavor really. Your level of comfort doesn’t change the nature of the situation. Comfort is more a function of familiarity and ignorance than actual risk. Follow the rules and live to risk another day.

Epistemology on the Beach: Questions About Skill

How much skill is possible in the markets? I think the answer is often far less than we like to assume, yet that answer should impact everything you do. At the extreme, if the future isn’t predictable to any degree then any perceived skill becomes merely a comforting fiction. The older I get the more I conclude that we all succumb to that fiction to a significant degree. I think some level of skill is possible, but not an impressive level, and certainly not market-beating skill over the long-term.

For example, one fiction may be that successful investors pick a style of investing that suits their personality. This seems quite reasonable because any strategy can only work if you stick with it, and it isn’t hard to find examples that support the idea. However, it may succeed only because it reinforces a lucky match between personality, style, and market conditions. Those with the right personality for the times survive and are remembered as the investing greats of that era and the rest fade into oblivion.

Mauboussin and others have said the ability to lose on purpose is one way to distinguish skill from luck. That’s an appealing idea since it’s easy to imagine taking the opposite position on all your best trades and conclude your success is largely the result of skill. But could you really go against your natural inclination, take the opposite side of the trade, and then manage the position to realize the expected loss? If your behavior isn’t held constant why are you allowed to assume everything else would  be? Human preferences aren’t static so it’s never as certain as it appears.

Mauboussin further argues that results in the markets end up depending mostly on luck because of the preponderance of skilled participants. I appreciate a compliment as much as anyone, but a simpler explanation is that the skill market participants feel they possess is an illusion. Regardless the cause, the numbers give strong evidence for market performance being far more luck than skill. Over any significant length of time the number of market beating investors is so small it’s entirely consistent with them being nothing but examples of survivor bias, regardless how compelling their rationales and manifestos may be. According to this bracing summary, less than 1/4 of 1% of mutual fund managers beat the market over 10 years (and hedge fund managers fare no better despite, or maybe due to, far greater latitude in investing decisions). Further cheery news can be found here, which also makes a good case that the dumbest money is also the smartest  Worse yet, over an investing lifetime the odds are likely even more unfavorable [1].

In thinking about the future, I view this universe as just one trial out of an almost infinite number of rounds. Learning a particular set of skills and taking certain actions can lead to particular outcomes in ways that, in hindsight, can seem almost preordained. However, that’s just one trial. Since markets move based on the changing preferences of the current participants, executing identical steps in similar situations in another trial may lead to very different outcomes, and we have no idea what the distribution of outcomes looks like on that meta level. Starting again from time 0, and ending right here, reading this, has a probability of approximately equal to zero.

Question #1: Trading is always a matter of odds and small edges. No matter how long your trading career, it’s only a very small sample from a vastly larger unknown population. Your results could be entirely from sampling error. In how many universes do you think your attempted losses to prove your skill would actually be realized?

Question #2: A number of experiments have caught humans unconsciously making up reasons for rapid, instinctive behavior after the fact. In some cases the subjects remain unaware of this reversed causality even when their explanation is preposterous. To borrow from Taleb’s title, how do you know you aren’t being fooled by randomness and then inventing skill as the explanation for your success?

Question #3a, b, and c: There’s no disputing it feels like market success requires skill, but some gamblers have an equally intense feeling they’re on a hot streak. Would the skill to beat the market feel different from the skill to under-perform in a sustainable way? Even over a number of years, both could result in similar strings of winners and losers, with similar returns. How do you know which you have? Many have been very wrong about that answer and in fact had neither skill (see here for an amusing rundown). How do you know you aren’t one of them, waiting to be discovered?

Question #4a, and b: Imagine you are transported 500 years into the future and forced at anti-matter gunpoint to get into the market, without really understanding what’s being traded, what’s going on in the world, or if any other market participants are human. What approach would you use? How is this scenario significantly different from the situation faced every day in the markets?

Think about it for a while. Do you feel shaken and humbled yet? I often feel as though I’m flogging a dead horse when I write about money. It’s all been said before, many times, from many perspectives. I keep doing it because maybe this peculiar version, at this equally peculiar time, will click with someone. If not, and you’re still feeling smug about your skill, ask a significant other for assistance in increasing your humility. They’ll probably jump at the opportunity.

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[1] For another example see Warren Buffett: More myth than legend  Great success, whether from skill or luck, quickly leads to managing an enormous pile of cash, and it’s hard to beat the market when you are the market.

Pseudo Random News and Comment

You may have noticed many of the links are now on Twitter. I’m not thrilled with the change but with the demise of Google Reader it’s easier to put most of the short comment links there.

Transplant experts challenge assumption, describe pathway that leads to organ rejection  It’s about time. It’s been pretty obvious something is missing from current treatments, and what do you know? It’s those damn dendritic cells again.

Predicting risky sexual behavior Scripts get the blame in large part. Makes sense. Everyone knows you go wild in college, as well as drink and do drugs, so it’s no surprise it’s rampant there.

Overspending Has Become a Modern Form of Mating Deception’ The modern potlatch, signaling what you really don’t have and are then committed to trying to maintain. Not high odds of long-term success.

The Killer Robot War Is Coming   Coming up with legal restraints. I’m not sure that property rights aren’t the right approach, as long as they’re strictly enforced – which they rarely are. But if one set of laws can’t be adequately enforced there’s no reason to assume another set will fare any better, particularly when they are aimed at the law enforcers.

Is Google a rat? The curious timing of the Mt Gox bitcoin exchange shutdown and the Gmailing money announcement has me wondering. There’s no way in hell the bank ratted on itself since they have a long history of laundering billions for drug dealers and others. There’s also the question of why ICE is handling FINCEN in the first place, but mission expansion and empire building always seem to be job #1 at homeland security.

Pseudo Random News and Comment

Why Is It So Hard to Keep the IRS Out of Politics? A: Because it’s so damn politically useful. I especially love this bit: “If I were Obama, I’d ask Eric Holder to appoint a special prosecutor…” Eric Holder. Ummm……

Is Psychiatry Dishonest?  Are its lips moving? Good piece on the emperor’s new clothes.

Let’s Cut Through the Bitcoin Hype: A Hacker-Entrepreneur’s Take The best thing I’ve read about bitcoin recently, maybe ever.

Our Algorithms Can Predict Future Disasters — Now What?  Knowledge is power, but also questions and confusion. Too many false alarms will quickly be ignored.

Living close to major road may impair kidney function. At least in stroke patients.

How to quickly spot signs of a stroke. Maybe. I had a hemorrhagic stroke and had none of these signs.

Did FBI Counterterrorism Agent Reveal That Feds Now Record All Phone Calls?  Of course! An obvious attempt to prove we’re getting our money’s worth with the million acres of server farms. They can’t fill up that much hardware with only employee porn stashes.

Exercise-related changes in estrogen metabolism may lower breast cancer risk. Get up, stand up, stand up for your breasts. If that gets used in a PSA I want some money.

Secular Bull or Bear? Excellent summary. Secular bears are no stranger to new highs, which makes diagnosis difficult. But if it was obvious which, it would have already happened.

Investment Risk Re-imagined Excellent rethinking of risk.

Study links diet with daytime sleepiness and alertness in healthy adults.  Fat puts you to sleep. Carbs do the opposite, Protein does neither.

Antibiotics could cure 40% of chronic back pain patients I had to check the calendar to make sure it wasn’t April 1st. It’s not. Backaches could be contagious.

Rewarding Behavior

I think it’s a general rule that over time people tend to do what they are rewarded to do, often despite finding the behavior initially repulsive. Rewards will find their own justification. So what is being rewarded today? Here’s one answer, from a Zero Hedge post to which I’ve added some snazzy interpretive graphics:Looting

What does this say for the future of society?

Ignorance Can Be Bliss

There is an absolute limit to how much profit can be extracted from a market in any particular period of time. You will never make as much profit in the markets as hindsight and imagination can lead you to believe. Back-tested, theoretical profits will be devoured by a nearly limitless number of factors. The biggest profit eaters are shown below:Losing Your EdgeLosses from slippage, not following the plan, commissions and fees, taxes, and the relative merits of different investing styles have been covered endlessly in the financial press. But the biggest factor is largely ignored. NASAYAYA: Not As Smart As You Assume You Are. Welcome to the future! The place where everything is out of sample and all that is certain or assumed goes to die a grisly death. You think you know X. You’re certain about Y. You think 10 years of intraday data is a representative sample of something other than those 10 years. The market will react the way it “should”. You feel your past results are mostly the result of skill. Whatever it is, the more you think you know, the greater the odds that you don’t know shit. Understanding comes with a curious byproduct: The more you know, the more you know you don’t know. Thus, true insight can only come with a generous side order of humble pie.

I’ve become increasingly convinced that trading nirvana is reached when you accept your near absolute ignorance in the markets. As dangerous as the inherently uncertain future is, it’s a known unknown. The unknown unknown, and even more dangerous, is what your preconceptions are blinding you to right now.

Ben Bernanke once said he was unable to imagine a set of circumstances that would convince him he was wrong about the economy. Burdened by that level of certainty he has no real choices or flexibility left. In his world he can’t be proven wrong and if you’re right, why change?

That’s the exact opposite of where you want to be in the markets. When you accept the completeness of your ignorance you’re free to listen to the market and go with the flow. Whatever theories, beliefs, preferences and biases you have lose their power to blind you because you know they’re all crap, and any help they may provide can only be temporary.

So take a seat. It’s time to start the meeting…Hi, my name is Mortalitysucks and I’m an ignoramus.

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Next time: Knowing enough to know you don’t know much of anything isn’t the end. The next rung on the ladder of enlightenment is answering whether it’s even possible to know anything. In other words, is there really such a thing as market-beating skill? How should the answer alter your approach?

Pseudo Random News and Comment

Four Basic Traits of Successful Investors I think #5 should be they’re boring.

Porn, rape, and a ‘natural experiment’  Read ‘em and weep anti-porn zealots. Leaves unaddressed what Dad’s sock drawer is doing to stay relevant when free porn is readily available elsewhere.

How to spot liars in official interviews Police interviews that is. When interviewing actual officials the old fallback of “when their lips are moving” is far more accurate than the 68% this increased cognitive load method identified.

Money Buys Happiness and You Can Never Have Too Much, New Research Says  Really the study highlights the difficulties of studying happiness, since this is measuring satisfaction rather than happiness. It’s possible to be quite satisfied with how things have turned out but not happy. I think generally satisfaction is based more on objective measures of outcomes. Happiness really doesn’t care…

Meet Mr. Money Mustache, the man who retired at 30 (via Crossingwallstreet) Naturally, I’m 9 for 9 on his tips.

Does Working From Home Work? As I’ve long suspected, if you read between the lines it’s better for the employer than the employee. Anyone have that Yahoo’s email?

Study Finds Women Most Aroused By Men With Intermediate Level of Beardedness. Most disturbing – because I didn’t find it first. This explains my unconscious avoidance of shaving more than once a week.

But I think this one tops the last one: Antibiotic Protects Men from Being Too Trusting of Attractive Women  A new meaning to “using protection.”  Normally used to treat acne, this means they made themselves more attractive to the attractive women but then didn’t trust them. Life can be so cruel.

Sperm cell release can be triggered by tightening the grip around the delivery organ  Pretty much says it all.

Why Still So Few Use Condoms. Because they suck. But Bill Gates is going to lend a hand.

Baby knows best: Fetuses emit hormone crucial to preventing preeclampsia  So manipulative they can’t even wait until they’re born to start working you.

Are Doctors Diagnosing Too Many Kids with ADHD?  “Data suggest, however, that a bright dividing line does not exist.” Exactly, any cutoff imposed on the distribution is arbitrary, and imposes drastic changes in how everyone will treat them.

Seven simple lifestyle steps may decrease risk of blood clots  Boils down to taking good care of yourself, which doesn’t make it easier.

Wall Street Is A Rentier Rip-Off: Index Funds Beat 99.6% Of Managers Over Ten Years  Even worse than I thought.

Pseudo Random News and Comment

Gene controls three different diseases  Just the sort of pathological cheapness on the part of nature that will make genetic cures for disease difficult. Multiple uses needn’t be all good or all bad. Fixing one thing may often break something else.

Build Your Own Neutra Home!  They still look modern a generation later.

What Martial Arts Have to Do With Atheism  Interesting interview with Sam Harris.

Sexually explicit material affects behavior in young people less than thought I always wonder how you find a control group of males who haven’t watched porn. In this study 88% said they had. 88% of the other 12% were lying. So the lack of statistical difference isn’t surprising.

Autism risk spotted at birth in abnormal placentas  This raises an interesting question of who is doing what to whom.

Pleasure and pain: the effect of (almost) having an orgasm on genital and nongenital sensitivity. I’m going to go way out on a limb and guess that subjects who perform in these conditions may not quite represent the norm, thought the results seem reasonable.

Thought Prenda Was Dead? No, It’s Up To Its Old Tricks… And More  Amazingly limitless depravity.

The Gold Medal Gold Model, Tarnished?  A fundamental model for gold. For the patient it seems to be holding up quite well.

Why Sleep Deprivation Eases Depression  Glial cells strike again.

Judge says giving up your password may be a violation of 5th Amendment. Forcing you to divulge evidence against yourself “may” be a violation of the 5th Amendment. Ya think? Totally gutless.

Calm Down … You Are Much More Likely to Be Killed By Boring, Mundane Things than Terrorism  I love numbers about relative risks. “You are 8 times more likely to be killed by a police officer than a terrorist.”

Pseudo Random News and Comment

Consciousness After Death: Strange Tales From the Frontiers of Resuscitation Medicine  I think he’s let a desire to believe something outrun the science to support it. He also seems to assume consciousness resides only in the brain rather than being an emergent property of a complex system involving the entire body as well as the brain.

The Most Stressful Places to Live  The least stressful state is, of course, Hawaii.

I’m on the drug that killed Paul Erdős  Smart drugs are coming to a workplace near you, and some day they may even do what is hoped. Keep in mind you can’t turn a donkey into a racehorse, and more isn’t always better.

Two days of staging as effective as four for high-altitude climbs  The short-term adaptations are quite rapid so there’s no point in diddling around any longer.

After Boston: Don’t Get Fooled Again by the ‘War on Terror’ Hawks  Nice dissection and prophylaxis.

Low-dose aspirin stymies proliferation of two breast cancer lines, study finds  More benefits from lowly, old aspirin.

Flu shots boosted by exercise  In moderation – prolonged intensive exercise is an immunosuppressant.

IRS Says It Will Change Its Policy On Looking At Emails Without A Warrant… At Some Point  Never assume you have any privacy. Perhaps at the end of a long trail, under a waterfall, whispering into the ear of someone is safe, but only perhaps, only if you’re not already under surveillance, and only for a very limited period of time.

My answer to John Hussman  Good example of the importance of knowing your time frame and goals. In 1995 when I first had the epiphany that we would be repeating the market action of the 1970’s on a grander scale I had intended to trade the swings like a madman. Instead, my time frame changed and I’ve mostly done nothing. Either way can be right (and it’s possible to do both at the same time).

An example:  Broadening the Window – Aligning Indicators with Correct Holding Periods

Virus kills melanoma in animal model, spares normal cells  Edging just a little closer to the immortality virus.

Decision making in scientific peer review unravelled with mathematical modelling  With all the fraud going on, is there any doubt this bit of reverse engineering will be abused?

Random Thoughts on Apple  Nice summary. The biggest risk to me is a very large percent of revenue is from the latest products so it wouldn’t take more than a couple bad quarters for Apple to lose a significant chunk of their revenue….and Samsung Galaxy is doing quite well in China.

Pseudo Random News and Comment

What will the neighbors think? Tinshed / Raffaello Rosselli

Kidneys grown in lab become functional in rats Still a long way to go but it’s progress.

Dr Michele Ferrari is using his free time to take on Osymetric Chainrings. If you ask me the trials have suspiciously low variability. However, the results do match my experience, and not allowing for muscular adaptation should give the most favorable results.

Circumcision alters penis bacteria  Refining the improved hygiene theory for reduced risk of HIV

FDA Lets Drugs Approved on Fraudulent Research Stay on the Market  Money talks everywhere in the halls of power.

New Zealand legalises same-sex marriage  Continuing to make their bid for most civilized English-speaking country. Probably because they’re small enough everyone still knows where the politicians live.

“Markets Are Debates Between People Who Are Speaking With Money”  Great way of looking at it. These days I just don’t care to get involved in very many debates.

Tacrolimus Inhibits the Revascularization of Isolated Pancreatic Islets  Another reason to pat myself on the back.

The ‘learning curve’ of living with Asperger’s  The difficulties of learning to fake it through every social interaction.

Does Brain Training Work?  A resounding kinda, sorta, maybe. Plasticity certainly argues that benefits should be possible but, like every other form of physical training, specificity trumps all, and what brain training exercise can truly be specific to broad, general intelligence?

Super-volcanoes in the Ancient World  If you are running short of disasters to worry about, this is a great one.

Pseudo Random News and Comment

This naturally has to be the lead off today: Penis size does matter to women, researchers say in PNAS study   This doesn’t necessarily mean women are lying when they say it doesn’t matter. All that’s required is an unconscious preference driven by increased reproductive success of the resulting horse-dicked sons, not [necessarily] anything to do with conscious preferences or pleasure derived – especially since they found no upper size bound in the study. A physical indicator of ejaculate volume would work the same way, with perhaps even stronger selection pressures, but I can’t think of an obvious physical attribute for that.

Bigger Not Always Better for Penis Size A more measured view of the study, though the headline is misleading since bigger was always better, but with rapidly diminishing returns The additional metabolic cost has to become a factor at some point too.

The art of recruiting a software developer A lot of companies need to pay attention to the “micro-positions” disease, which is the reason I never got into the field.

Your Least Engaged Employees Might Be Your Top Performers  The less talented make a lot of commotion about everything they do because they’re always at the point of drowning.

Document Accidentally Filed Publicly Reveals Google Fighting Back Against Government  Maybe the no evil slogan isn’t just BS.

Why is Eric Sprott Selling PSLV Shares Fast and Furiously?  Good question.

Dead animals keep turning up in China under mysterious circumstances  Disease and pollution are obvious causes of death, but the best guess about the choice of disposal method would be it’s cheaper to dump them in a river than dispose of them properly, if it’s even possible to do it properly in some areas. I’m a bit surprised they wasted the plastic bags in the one case.

Should the Modern Man Be Taking Testosterone?  If you make the drugs it’s a resounding yes, but there’s not yet much science to go by.

Blood Cells Are Attracted to Good Food Smells  I thought a brain was needed for that sort of smarts.

Pseudo Random News and Comment

Top story: The cure for obesity is at hand!  Study proves masturbation leads to weight loss.

So what does make humans unique?  Sharing changed the world, not Steve Jobs.

How Do Childhood Diagnoses of Type 1 Diabetes Cluster in Time?  More support for infectious agents as the trigger.

Is Fukushima Radiation Causing the Epidemic of Dead and Starving Sea Lions In California? When you are at the top of the food chain everything gets concentrated so it wouldn’t be too surprising.
Yes, the Chinese are the Borg. And yes, they are spying on you  Based on recent personal experience, internet communication is being disrupted a lot more this year than last too.
Tornadoes Here, Tornadoes There, Tornadoes Everywhere?  Has an interesting map which also demonstrates tornadoes don’t like mountains. Something I need to remember the next time I have a nightmare about tornadoes.
Are B-Cells to Blame for Chronic Fatigue Syndrome?  Intriguing, though small, studies hint that they are. It could also explain why my chronic fatigue went away as my kidneys failed. Still, the treatment they used is nothing to be trifled with.
The evolutionary consequences of infidelity: Can extra-pair relationships give rise to sexual dimorphism?  As usual any study on sexual selection is almost guaranteed to get linked here.
“Betray Your Bank Before Your Bank Betrays You”  After the last 5 years I’m amazed anyone still needs to be told this, but the lack of fleeing depositors says they do.
Jim Chanos on the Cycle of Frauds Excellent interview on a pervasive problem.