To me, this was a big lesson that took me some time to realize. Folks like Taleb will never say this, he lives in NY and is a pessimist but this is the kind of thing that SHOULD have been in his books. The truth is that negativity/pessimism in the stock market is fragile. Positivity is a lot more robust, sometimes even antifragile. Therefore, if you want to become a good investor, you got to get rid of certain traits and cultivate others. And also look to achieve a balance between both. If someone had taught me this back in 2007, I would be a lot richer today
Global Macro Trading Journal
- Thread starter Daal
- Start date
I believe that energy affects everything and it would be quasi impossible to form a "Core" PCI although I still have to read the 116 page specification that the Census bureau hands for CPI.
At the same time, inflation didn't crash when oil crashed mid 14. I think this is the result of the INTENSE stimulus we had at the time, QE Works ?!!
The Kashkari baldie might be right, we need moaaar stimulus.
The bond market is different. Especially things like gov bonds, investment grade corporate bonds, mortgages etc. There if you are right, you make a little bit, if you are wrong, you can lose huge. The assymetry tends to run the other way (exceptions are things like junk bonds, certain EM bonds, distressed debt but even there, there is a lot less convexity compared to stocks because the upside is known and limited).
You are supposed to be a lot more risk averse in the bond market to do well (if you put a lot of capital in a AA+ bond that goes bad, you are really screwed). So when people look at bond and stock prices and say 'these markets are in disagreement, but the bond market is smarter so I go with that' I think that is very wrong. These markets have different payoffs and the people managing money on them think differently (they use different heuristics), they are supposed to act differently. It would be a surprise if these "disconnections" didnt happen. With so vastly different payoffs, as information change, they have to move differently to reflect that.
It also puts in context when people like Gundlach and Bill Gross come out making certain predictions (usually negative/bearish), you got to consider that in their little world, they rather lean on the side of being conservative rather than risk happy, its the bias/heuristic that has worked for them historically. So if one relies on them to invest in risk assets like stocks or other exponential investments, it will lead to more trouble than benefit. It was like 1 year ago that Gundlach was saying that the SPX bellow 2100 had little upside but a lot of downside. He was off by a lot. This is typical in stock markets, it will punish bearish mistakes exponentially (through missed profits) but reward smart bearishness logarithmically (with decelerating benefits).
Bond managers are too conservative/negative to give stock market advice, certain TV presenters are too positive.
When it comes to stocks, people should probably only listen to people that have a good balance between positivity and negativity. There is not a lot of these people around but there are some. Of course, the better choice is to become one of these people so you don't need advice
https://www.economist.com/news/busi...n-companies-balance-sheets-united-states-debt
"What matters, however, is the size of firms’ net debts (debts less cash) relative to profits. Comparing these is rather like deducting the cash in your bank account from your debts and comparing the net amount to your salary. The ratio for S&P 500 members, adding up all their accounts, is a reasonable 1.5 times, slightly higher than a decade ago and lower than in Europe and Asia. Some firms are more “geared” than others. But the share of total debt owed by highly leveraged firms has been fairly stable over time. Although figures for the S&P 500 capture only big, listed firms, national-accounts data include all of them and indicate similar trends, with the net-debt ratio flat compared to 2006."
"Before the collapse of Lehman Brothers in 2008 firms assumed they could always tap the money markets or borrow from banks. Now they do not entirely trust either. For every dollar of total gross profits that the present constituents of the S&P 500 earn, they carry $1.25 of cash, compared with 72 cents a decade ago."
"What matters, however, is the size of firms’ net debts (debts less cash) relative to profits. Comparing these is rather like deducting the cash in your bank account from your debts and comparing the net amount to your salary. The ratio for S&P 500 members, adding up all their accounts, is a reasonable 1.5 times, slightly higher than a decade ago and lower than in Europe and Asia. Some firms are more “geared” than others. But the share of total debt owed by highly leveraged firms has been fairly stable over time. Although figures for the S&P 500 capture only big, listed firms, national-accounts data include all of them and indicate similar trends, with the net-debt ratio flat compared to 2006."
"Before the collapse of Lehman Brothers in 2008 firms assumed they could always tap the money markets or borrow from banks. Now they do not entirely trust either. For every dollar of total gross profits that the present constituents of the S&P 500 earn, they carry $1.25 of cash, compared with 72 cents a decade ago."
I'm still making mistakes when it comes to convexity and powerlaw trading ideas. I bought Ethereum as a swing trade on Sunday at 138. It popped to 150s and 160s and I sold half of the position and kept the other half as a convexity bet . I then put in sort of a trailing stop to try to ride ETH for as much as I could. But my stop was too close and I got liquidated at 162, right before it went to 260. My stop was badly designed and contained some parts of my old self, skeptical and afraid "heights" (things that are up a lot). This made me wrong exponentially as the price rose by several times whatever profit I was trying to protect (the traits of my former self are extremely fragile in convexity markets like this one).
Given that I only truly got these ideas in the last year, I still got a lot of refinements and improvements to make in my trading approach. This learning will compound and in a few years, my techniques will probably be a lot better than what they are now
Given that I only truly got these ideas in the last year, I still got a lot of refinements and improvements to make in my trading approach. This learning will compound and in a few years, my techniques will probably be a lot better than what they are now
I obsessed over little gains there, trying to lock profits and trading with my "smart" thinking, yet the bulk of the profits lied in a unsmart passive approach that simply tried to capture exponential gains
If you think about it, thats how Richard Dennis, Ed Seykota and others got rich. They exploited convexity in commodities really well in the 70s. Its possible that Dennis didnt had that much skill and when the commodity game was up, he was out of business. But if I can develop and improve in a overall approach that can be applied to any market, then I got a system that can be used almost forever
But a key part of any system, is the psychology part. Thats why I have been hammering on positivity vs negativity. People are their worst enemies when it comes this, its very hard not to shot yourself on the foot and behave like a pessimist (like I did when I trailed the stop too close to the current price or when I locked half of the profits too early). So both things are huge, a good convexity system and the psychology to execute it
Can you expand on convexity ? is it simply the idea that when a chart points up it attracts other buyers for some time ?