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.

My stock portfolio, which you can follow, more or less exactly mirrors the result here, although, my result is more like for the half-year. It is, long only [directional] value based, which currently has resulted in the following result of [-17%]

That however needs a little context. When I opened the Fund in April, the total common stock holdings were 117,230 common shares.

Currently common stock holdings are 260,177 common shares. The average dividend yield is 9%. I still have some cash on hand, and the micro-caps are starting to ‘outperform’. That is a 141% increase in shares, over a 6 month period.

I would expect significant relative out-performance over the next 4 months [taking me to the 1 year mark] for the over-all portfolio. This has been accomplished through opening the portfolio to scrutiny at more or less the ‘top’ of the market in 2011. The subsequent months have seen a nasty bear phase.

The portfolio will continue. I am going to provide the newsletter primarily because risk can be controlled far more easily. There will be no ‘company’ risk, only ‘market’ risk. The newsletter will allow those interested in ‘absolute’ returns to pursue them with whatever money management techniques/strategies they wish. Absolute returns are always a more aggressive stance. For example, my position in Kodak. While I ‘expect’ that in time it will be profitable, it could also go ‘bankrupt’. Currently a [-72%] drawdown is simply too brutal for most, I’m not exactly happy.

Therefore I will also provide a less aggressive ‘relative’ return, based upon the same money management system that I employ within the common stock portfolio. The idea is to compound the returns gradually through increasing the shares held, via ‘market timing’ with judicious buys/sells, while maintaining a ‘core’ holding of common stock via the SPY ETF.

When I’ve traded ‘spreads’ I’ve generally gone with ‘similar industries’. Having said that, I’ve also traded Gold and Oil via XOM. I’ll have a little think on the following.

Michael and Jennifer have different views on a critical issue regarding statistical spreads. The question is whether the two companies need to be similar (in the same sector or industry) or not.

The basic pillar of spread trading is that the two stocks are tied together with some sort of force, and a deviation from historical levels is an opportunity to bet on a return to those levels. Without such a force, the spread may not ever return to past levels.

Michael’s view is that all stocks are subject to the Law of One Price (LOP), this is the force uniting all securities. “Ingersoll (1987) defines the LOP as the “proposition…that two investments with the same payoff in every state of nature must have the same current value””(Gatev, 2006), regardless of whether the two companies are in the same or very different businesses. The profit generated by the arbitrageur is a compensation for enforcing the LOP.

Jennifer’s view is that current price is expectation of future cash flows which are impacted by many outside forces. Companies that have similar businesses will be impacted similarly by small changes to inputs like interest rates or commodities prices or consumer sentiment. A deviation in the prices of a bank versus an oil company may be an anomaly, or it may be due to fluctuations in inputs which could take a long time to correct; for similar companies it is more like to be an anomaly we can exploit in the short- to medium-term. Given a relatively short time horizon, it is essential that the two companies have similar businesses.

This is an important issue because requiring the pair to be similar companies means fewer potential trading candidates and therefore less diversification across positions. However, if we open up to pairs of different companies we may introduce more data mining errors.

What do you think? Do you think statistical spreads need to be pairs of similar companies, or can you make money trading statistical spreads with companies in different industries


The ‘Turkey Gods’ have been missing-in-action this week. However do not lose all hope. The index is in the churn area of the last consolidation, and no new lows have been made. Markets do not recognise technical points consistently, 50ma etc. False breakdowns/breakouts are common.

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Obviously something up in the market, I had an e-mail this morning saying that margin requirements were being raised, now the system crashes, and of course you are in a que to actually find out what is going on. I’m calm, I don’t day-trade so I’m not unduly worried at the moment.

This is one of those issues that periodically resurfaces as soon as market volatility ratchets higher, platforms turn to custard, so that if you did need to trade, you can’t, and you miss the best trades, or you get caught in the market and can’t get out.

You are now chatting with ‘Tess’
Welcome to optionsXpress, how may I help you?

Grant Macdonald: Has the system crashed?

Tess: We sincerely apologize for the issue you’re experiencing. Please rest assured that this is being looking into with the highest priority.

Grant Macdonald: All my logins are getting rejected

Grant Macdonald: Hello?

Tess: I apologize for the inconvenience. We are working to get this resolved as soon as possible

Grant Macdonald: What has actually happened, short story?

Tess: I’m sorry I do not have this information at this time

Grant Macdonald: Ok, thank’s.

And so there it is. Best have a back-up plan for days like this. I have GTC orders in the market, but I have no idea if the system crashes with the broker whether any trades would actually get executed. So if you ‘need’ to make a trade best have a second option.

The average 2009 estimated P/E ratio for stocks in the S&P 500 is 11.9. Currently, 48% of stocks in the index have an estimated P/E of less than ten. Below we highlight stocks with the lowest estimated P/E ratios in the S&P 500. Either earnings estimates are still way too high, or many of these stocks are trading at values of a lifetime. Just looking at the top three stocks on the list (GNW, X, CF), even if their ’09 earnings come in at half of current estimates, at current prices their P/Es would still be less than five.

The problem with looking only at the P/E ratio without any context, is that you can make some really nasty mistakes. In this particular case however, with the speed of the decline in the indices and numerous individual names, there are some bargains out there.

Notice however that the P/E ratios are based on “estimated next years earnings” this is where the errors start to creep in. If the earnings are a disappointment, assuming no change in the price, the P/E starts to get higher, and the bargain, less of a bargain.

Analysts who “predict earnings” are invariably wrong. Think not? There is some very good research that shows otherwise. The analysts tend to assume a “trend.” Trends by definition must be either right or wrong. If wrong, well, the market doesn’t reward wrong in a bear market.

From the Economist

HEDGE funds are supposed to hedge. This year, they haven’t. The fund-weighted composite index compiled by Hedge Fund Research, a firm that tracks the industry, fell by 4.7% in September, the second-worst month on record. Since the start of the year it has lost 9.4%. The industry’s promises of “absolute returns” for investors now ring rather hollow.

To be fair to them, hedge funds have not been allowed to hedge. The restrictions on short-selling (betting on falling prices) imposed by regulators round the globe have played havoc with managers’ strategies in recent weeks.

Take the worst-performing strategy, convertible arbitrage, which lost the average fund 12% in the month. Convertible bonds are fixed-income securities that can be exchanged for shares in the issuing company. Historically, these bonds have been underpriced, because too low a value has been placed on the right to convert them to equity. So arbitrage managers have tended to buy the bonds and sell short the shares. Thanks to the Securities and Exchange Commission’s ban on the shorting of more than 900 stocks from September 19th to October 8th, that strategy no longer worked. And since the managers could not short the shares, they had to sell the bonds. As a result, the bonds’ prices plunged.

Perversely, issuing convertible bonds would have been one way for banks to raise capital. But that route has been cut off, a typical example of the unintended consequences of meddling with the markets in response to populist pressures.

Another strategy that has suffered is statistical arbitrage, known in the trade as “stat arb”. Such funds use computer models to look for anomalies in the market, and exploit these wrinkles by buying and selling shares very rapidly. By doing so, they provide liquidity to the system, in effect acting as marketmakers.

Without the ability to short many shares, stat-arb models have been disrupted. The cost of trading in such stocks (defined by the difference between the bid and offer prices) duly rose, more than doubling according to Credit Suisse. The market became less liquid, adding to the volatility of share prices in recent weeks.

And then there is the most popular type of hedge fund, long-short equity. Such funds rely on the stockpicking ability of their managers, buying their favourite shares and shorting companies they dislike. If the managers make the right selections, they can protect investors from a falling stockmarket. In the first half of the year, for example, a popular strategy was to buy commodity-related stocks (such as miners) and short the banks.

Again, the shorting ban disrupted that strategy, forcing managers to cut their long positions as well as their shorts. Because many in the market were well aware of the favourite positions of hedge-fund managers, prices of some of those shares have fallen rapidly–another unintended consequence of the shorting ban.

Nor is that the end of the hedge funds’ problems. As an investment bank, Lehman Brothers was active in prime brokerage, a vital source of finance for hedge funds. When prime brokers lend money to hedge funds, the funds are required to put up collateral (Treasury bonds and the like). Lehman then used this collateral as security for its loans, a standard industry procedure known as “rehypothecation”. But the result has been that assets belonging to some hedge funds have been ensnared by Lehman’s bankruptcy. One leading lawyer describes this as “an unmitigated disaster”.

In addition, the remaining prime brokers have become more cautious about their exposure to hedge funds. This week the IMF cited figures showing that funds are now required to put up collateral of 25-40% of the capital when trading in high-yield bonds, against 10-15% in April 2007.

All this means that hedge funds have been unable to ride to the rescue of global markets. According to the IMF, the average cash balance of hedge funds has risen from 14% last year to 22%, while the amount of leverage (borrowed money) they use has fallen from 70% of capital to 40%. In theory, that gives them the firepower to buy now that prices have fallen; in practice, they may need their cash to repay clients that want to redeem their holdings. Charles MacKinnon of Thurleigh, a fund manager for private clients, says it has given notice on some 70% of its hedge-fund positions.

Individual hedge funds will doubtless be brought down by this crisis. Their fall will have far less economic impact than that of either Lehman or Bear Stearns, although if they are forced to sell assets that will not help the banks. But the industry can feel justifiably aggrieved. It has not only been clobbered by a crisis that started in a regulated industry (investment banking), but it has been given a good kicking by the regulators too.

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