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Opened a gamma-scalping position in AAPL. As earnings have already been and gone, I won’t have this event to aid the position, however, with the general market pretty volatile and likely to stay that way, this trade might work out quite well. We’ll see.

I’ll monitor the trade on a 15 day basis and reset positions based on that chart metric. Obviously brokerage costs are a factor and you don’t [or can’t] reset on a daily basis.

I had a couple of scalping trades in GOOG today that went well. I didn’t bother posting them as: [a] they only lasted 300 seconds and [b] they were very small trades. However they were both winners. The intra-day trades [seem] easier than the swing trades that I tried last week.

The gamma-scalping is a market neutral trade. It would seem, that if you are going to swing trade, you need a market neutral strategy, the swings are difficult to predict.

Market pundits are advancing arguments that we are entering a bear market. Rallies into bear markets are fast, frequent, vicious and doomed to failure. Trying to hold swing positions in that environment is difficult and usually very expensive, as you will be stopped out of many positions on whipsaws.

I was planning on taking a ride tonight, but I have somehow caught a flu-bug. Currently I’m feeling pretty rough.


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When the stock market rose 30 percent in 2013, plenty of fund managers had a triumphant year.

Almost anyone can post good numbers in a bull market, though. It’s like sprinting downhill with the wind at your back: The chances are good that you’ll be pleased with your own performance.

Outperforming most other people consistently, year in and year out, is obviously a much more difficult feat, in any competition. But how rare is it, exactly, for stock market investing?

A new study by S.&P. Dow Jones Indices has some fresh and startling answers. The study, “Does Past Performance Matter? The Persistence Scorecard,” provides new arguments for investing in passively managed index funds — those that merely try to match market returns, not beat them.

Yet it won’t end the debate over active versus passive investing, because it also shows that a small number of active investors do manage to turn in remarkably good streaks for fairly long periods.

The study examined mutual fund performance in recent years. It found that very few funds have been consistently outstanding performers, and it corroborated the adage that past performance doesn’t guarantee future returns.

The S.&P. Dow Jones team looked at 2,862 mutual funds that had been operating for at least 12 months as of March 2010. Those funds were all broad, actively managed domestic stock funds. (The study excluded narrowly focused sector funds and leveraged funds that, essentially, used borrowed money to magnify their returns.)

The team selected the 25 percent of funds with the best performance over the 12 months through March 2010. Then the analysts asked how many of those funds — those in the top quarter for the original 12-month period — actually remained in the top quarter for the four succeeding 12-month periods through March 2014.

The answer was a vanishingly small number: Just 0.07 percent of the initial 2,862 funds managed to achieve top-quartile performance for those five successive years. If you do the math, that works out to just two funds. Put another way, 99.93 percent, or 2,860 of the 2,862 funds, failed the test.

The study sliced and diced the mutual fund universe in a number of other ways, too, each time finding the same core truth: Very few funds achieved consistent and persistent outperformance. Furthermore, sustained outperformance declined rapidly over time. And the report said, “The data shows a likelihood for the best-performing funds to become the worst-performing funds and vice versa.”

What should investors make of these findings? There is one clear implication, said Keith Loggie, senior director of global research and design at S.&P. Dow Jones Indices.

“It is very difficult for active fund managers to consistently outperform their peers and remain in the top quartile of performance over long periods of time,” he said. “There is no evidence that a fund that outperforms in one period, or even over several consecutive periods, has any greater likelihood than other funds of outperforming in the future.”

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This seems to bolster the case for index-fund investing. After all, if a fund manager with a great year can’t be counted on to outperform other fund managers later, it’s reasonable to ask: Why bother trying to beat the market at all?

A separate series of annual S.&P. Dow Jones studies has found that over extended periods, the average actively managed fund lags the average index fund. All of this may be enough to persuade you to abandon actively managed funds entirely.

But the story is more complex than that: The study also demonstrates that active managers can actually beat the market. Remember those two funds that did so consistently over the five years through March? The study didn’t identify them, but at my request Mr. Loggie did.

They were the Hodges Small Cap fund and the AMG SouthernSun Small Cap fund, which were also the top two general domestic funds over the last five years through June, according to Morningstar performance rankings conducted recently for The New York Times.

Each fund has rewarded shareholders spectacularly, turning a $10,000 investment to $35,000 over those five years, the Morningstar data shows. By contrast, the same investment in a Standard & Poor’s 500-stock index fund would have become more than $23,000. While hardly shabby, that’s not nearly as good.

I called the managers of the two funds. Both had good things to say about index funds, and about their own brand of investing.

Craig Hodges, manager of the family-run Hodges Small Cap fund, said that index funds are fine for many people, but that the intensive scrutiny his team applies to the often-neglected small- and midcap parts of the market should enable the fund to outperform the overall market in the future. “We won’t do it all the time, of course,” he said. “We’ll have bad times. We’ll make mistakes. But over the long run, I think we can keep doing very well.”

Michael W. Cook, the lead manager of the SouthernSun Small Cap fund and the founder of the firm that runs it, had a similarly nuanced view.

Index funds deserve to be core holdings for many investors, he said, and despite his own fund’s exceptional record, it may not be a good choice for everyone.

“One thing you don’t want to do is just read about performance numbers — ours or anybody else’s — and put money into an investment,” he said. “Chasing past returns doesn’t make sense.”

Asset allocation is crucial, Mr. Cook said. Before putting money into a fund like his, he said, ask yourself: Do you really need more small-cap stocks in your portfolio? These smaller companies can be volatile, and they may well decline in price. Janet L. Yellen, the Federal Reserve chairwoman, warned last week of “stretched” valuations for small-cap stocks.

That said, Mr. Cook spoke with the conviction of a true believer about patient, shoe-leather stock-picking discipline. He looks to buy shares in “businesses that we can own for a lifetime,” he said. “We spend a lot of time understanding businesses we buy. And we keep checking them and their competitors and their industries. We need to really understand them.”

Mr. Cook has closed his fund to new investors so that he can maintain control over the portfolio’s quality, he said. If the fund eventually reopens, and you want to consider investing in it, he said, “You shouldn’t expect that we’ll perform at the very top every quarter — we won’t do that, I’m pretty sure.” He said that he was happy about the last five years, but that they didn’t prove much.

Over the long haul, which is probably 50 years or more, he said, he will look back at his fund’s track record, and he hopes he will be able to conclude: “We had a good approach. We worked hard and we did well for investors.”

In the meantime, though, past performance doesn’t guarantee future returns.


Imagine you’re John Templeton, George Soros, and Paul Tudor Jones all rolled up into the worlds greatest trader. Since 1990 you were able to beat the S&P 500 every year by forty percent. If the market was up 10%, you were up 14% and if the market fell 10%, you were down only 7.15%

Beating the S&P 500 in any given year is a challenge. Beating the S&P 500 every year for nearly a quarter century is extraordinary. Beating the S&P 500 every year for nearly a quarter century by forty percent is all but impossible.

Typically when people look at performance numbers for active trading strategies, they look at gross returns and don’t pay attention to taxes. I wanted to see just how damaging paying taxes on short term gains would be to a taxable portfolio.

Going back to 1990, had you invested $10,000 in the S&P 500 and held on through 2013, you would have amassed $76,266 (assuming taxes are paid annually on dividends).

If the best trader of all time invested $10,000 in 1990 and beat the S&P 500 every year by forty percent, net of taxes he would have amassed only $69,197, less than the buy and hold investor (not even factoring in trading costs).

These numbers are pretty astounding but I want to emphasize that the point of this exercise is not to suggest that trading is for fools, or that it can’t be done. I want to demonstrate that taxes on short term gains can be a huge impediment to accumulating wealth. Had the best trader of all time achieved these same returns in a tax deferred account, he would have amassed almost $192,000!

Nobody can argue that buy and hold is rife with drawdowns, does nothing to stroke your ego and is extremely boring, however, for taxable accounts, you’d be hard pressed to find a better alternative.

What if you had started the experiment in 1999/2000?


Here is a Fund managed by a mate of mine, Mr Nick Radge. Check him out.



Interesting. That was the word that when I was at medical school students would use to the tutors when presenting a patient, and they had totally no idea as to what was going on with that patient.

Barry Ritholtz and Josh Brown launch today, a wealth management firm.


Lastly, thank you to Fusion Analytics for three great years, special thanks to Kevin, Mike, Joseph, Joe and Craig for everything. I’ll miss working with you guys.

How much success [market based] is the algorithm responsible for? Are they going to use the same algorithm, or, something else?

This appeared from a blogger featured on “Stocktwits” network. Most of the bloggers on that network are fairly experienced, with a couple of exceptions, this is another exception.

I was going to write a post about some really great investment strategies that would guarantee us all a life of freedom and untold wealth but sadly I couldn’t, because those strategies are really, really difficult to find on Google.

I’m sure they’re there, they are just very well hidden between trillions of forex black boxes and to be honest after the first page on $GOOG I gave up.

It’s actually much easier to write about crap investment strategies because there are so many of them out there. In the interests of not taking 12 days to write the post, I decided to go with some of the strategies more commonly used in the non-professional world.
So, these are my three favourite Worst Investment Strategies Ever.

So let us take a look at these three investment strategies.

1 Buy And Hold

Is buy and hold dead? I doubt it, but it probably should be.

Buy and hold is the definitely the laziest investment strategy ever, and tends to be appealing to ‘investors’ who look at the stock market as an alternative to putting their savings in the bank. They know they need to invest, but have no idea how and no inclination to learn so they buy bank shares or some other well-known stock and marry it, till death do them part.

First off, I hate uninformed assumptions. How does she know anything about the class of investors to whom she refers?

There are so many problems with this strategy it makes me cry, but the biggest one occurs because of the typical mindset of the investor.

There are problems with this strategy, as there are with any strategy. Of course, if anyone knows the perfect strategy, hey feel free to drop me a line.

They buy the stock, watch it go up, and never lock in their profits which subsequently melt away. But they won’t sell, because in their mind they’re holding a $50 share, even though it’s now trading at $18.

Individual stocks do have that potential. Which is why “buy & hold” investors are recommended to hold a basket of stocks to diversify that potential risk. Or hold a Mutual Fund, or today simply hold an ETF, say SPY that holds the the S&P500.

Or, they watch the price fall straight off the bat, and continue to hold it because, “this is a long-term investment and the dividends are now yielding a whopping 7%!”.

Again, assuming a single stock. But let’s work with that example. If you are so inclined, and have the accounting skills, holding a falling stock is not an issue, provided you have knowledge of the fundamentals, and they are correct. There are far better strategies I agree, but stocks fluctuate, that is a consistent finding in the market.

Small point – it takes a lot of 7% dividends to recoup a 50% capital loss. Worth thinking about, especially because that 7% yield is now based on 50% less capital.
Also, those precious divvies are far from a sure thing and can potentially be reduced to zero if the CEO is having a rough day.

Not if the stock recovers, moving on to new highs. So now let us examine the real reasons why you don’t want to employ the “buy & hold” strategy. The issue is not that it is a losing strategy, far from it, look at the chart below. Rather it is that our timeframes, or lifespans do not correlate with the merits of the strategy. We tend to require the assets in money form, at potentially adverse moments, and we are not terribly patient. Further, stock market declines, bear markets, tend to effect us emotionally.

There is of course numerous middle ground strategies: dollar cost drip feed etc. My newsletter employs yet another strategy that involves buying/selling, that locks in profits, and has cash available to purchase dips. Over time, this strategy, which holds 1 ETF [SPY] will, as I am in the process of demonstrating, significantly outperform the straight “buy & hold” strategy.

2. Writing Naked Puts
This is sometimes promoted as a clever way to buy shares at a bargain. And to be honest, I still find this appealing until I remember coming undone in 2008 – that was my most expensive bargain ever. Thankyou, Lehman.

The problem with this strategy is that you make a few bucks that you get to keep if you’re right, but you lose your home if you’re wrong. Pretty crap deal, if you ask me.

Simply ignorant of a methodology that does not expose you to unlimited risk. I use this strategy myself. The purpose is to add yield to an active strategy, that involves a long term strategy.

I bought SPY on December 21 2011. I have not altered the position to date. I still hold the original number of shares. I also hold a cash balance. I can write a “naked Put” at a specific level [price] where I wish to transact [buy shares].

If the market falls to that level, from my cash balance, I can purchase the shares, thus covering my naked Put. The premium that I retain, lowers my purchasing cost. The caveat is that you must want the shares, and have a very specific price. If, as has happened to date, the Put expires, I earn extra yield.

Writing Covered Calls
The only people this can possibly benefit are people who are already committing Crap Investment No. 1. In that scenario covered calls can actually work well in a sideways to slightly down market.

But otherwise, it goes against every investment rule there is. Letting profits run? Er – no. Managing risk? No, the downside is all the way to zero, less the few bucks in your pocket from the written call.

All it does is make a really crap investment a slightly better one in junk market. Which begs the question, why are you participating in a junk market?

Exactly the same [just reversed] of the naked Put. I hold shares. At specific prices, I want to sell a number of shares, to lock in profit [adding to cash balance]. I therefore again choose the price that I wish to transact, and write a Covered Call. Should price trade at that price, I am willing to pocket the premium, and sell the shares. If price does not trade at that price, I earn the premium, which increases my yield.

The sum total of running these two auxiliary strategies adds approximately 10%/annum to the portfolio. That is a serious return. That they are sub-strategies to the primary strategy is the differentiating factor: they are not the primary strategies, thus risk is controlled via the primary strategy.

Her summary:

You don’t have to, there are no rules that say you have to hang on through thick and thin. The thing, in my eyes, that sets the real investors (and traders, for that matter) apart from the wanna-be’s is the ability to recognise a junk market and adjust accordingly.

A junk market? I’m assuming a “bear market.” Good traders/investors, make use, and profit from a bear market. Money and returns can be made on all types of markets. What is really required is a fluctuating market.

This single ability has the power to change everything. The buy and hold investor who sells when he sees his profits eroding has money ready to go when things start to look up again. The trader who recognises that the market is not great for their strategy has the reserves to find opportunity elsewhere.

The crux of the matter. Recognition of market conditions, and, taking the appropriate action. Well, that of course is the holy grail of trading/investing.

In truth, the strategy you choose is one very small piece of the investment puzzle, but if you get it wrong it will ensure you never have the opportunity to see the whole thing come together. You can have the best psychology ever, but if your strategy sucks you are doomed from the start.

You are going to struggle if you accept, as she seemingly has, the established view that certain strategies are bad, or wrong, etc. They are not bad strategies, they may simply be inappropriate “means” to achieve your desired “ends.” Applying a value judgement to a strategy, is simply the amateurs error.

I’ll definitely get around to responding to this post, but for the moment, have a read.

Was speaking with some friends the other day. We are a bunch of old pit traders dealing with the new electronic world. Each of these guys was successful in their own way. That was one of the great things about a trading pit. Find your niche, and you could exploit the hell out of it. There were infinite ways to find value. It just wasn’t buying and selling.

In the course of our conversation, one asked, with an electronic environment where are all the traders going to come from?

It’s a fair question. Pretty relevant. When Congressman used to visit the CME ($CME) floor we’d take them around. I always told them that “we grow locals around here like Illinois grows corn”. There was never a shortage of people looking for the opportunity to get into the pit and trade.

Think about it. What credentials or qualifications did you need? You didn’t need a degree from anywhere. You didn’t need a certification. All you needed was cash, a survival instinct, and a strong stomach. There were very few barriers to entry.

In the electronic arena, the game is very different. The co-location game has made it impossible for but a few firms to get close to order flow. Bandwidth is only so large. While it’s supposedly more democratic because more people can easily access the market, it’s not unlike an order filler being overwhelmed and just dolling out his order to the people closest to him.

To successfully trade today, you have to develop a computer program. The start up costs are significantly higher providing a barrier to entry to most people. It takes a lot of testing to make sure whatever you have cooked up will work. Testing means either burning through working capital or taking your chances in the live market.

Not only are the costs much higher, but the high tech marketplace has commoditized opportunity. Why should it be different than any other distribution system that has been radically flattened by the internet? It’s much tougher to find a niche and exploit it. Today’s successful arbitrage play is quickly eaten up buy algo’s and machines. Even if you are right the market, the intraday moves can be so big they force you out of a winning position. There is no way to protect yourself.

When I was in the pit trading, even when I got lambasted with a big number, I had a place that I could go with them. I have pit traded liquid contracts, Eurodollars($GE_F), and illiquid contracts, Hogs($HE_F). I also spent a little time in currency and the S+P ($ES_F) pits. Mistakes generally weren’t fatal. Today they are.

One long time successful trader I know who said it best. He said, “In the old days, I would always buy the high and sell the low of moves. It’s because I was working in and out of stuff and you never knew if that was a point where the market would really blow through and take it to the next level or not. It was worth the risk, because when I was wrong, I would only lose a few points getting out. When I traded, through the whole day I’d be right 70% of the time. The other 30%, I’d be wrong and lose. Today, every time I put a position on, the market runs against me. Doesn’t matter the size. How can I be wrong 100% of the time?”

I think it has a lot to do with bandwidth and co-location. There are only so many feeds that can quickly go across the net. Only so many servers that can go next to the main server. Unless you are one of the chosen few, you are out of luck.

In the old days, we never ran out of traders. In the new times, I think the world is contracting.

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