Niederhoffer In Trouble..... Again !!

[heech]

Quote from Pekelo:

....

1. What number of years is statisfying for you? LTCM had 4 good years and Matador had the same, before blowing up. Did they have real skill or see point #2...

This is where knowledge of the strategy becomes very important. Please note I'm not even talking about the "unknown unknowns" associated with a black swan event. I'm talking about the known unknowns.

I personally would never invest in an option-based strategy where I didn't understand the theoretical return distribution. I'm not talking about sharing enough information that I can replicate it, but at least speaking on the record about probable outcomes if we assume a fat-tail log-normal distribution.

Put it this way. If you're consistently selling options 2 standard deviations away (not at all uncommon), then assuming simplest normally distributed outcome you will be profitable 95% of the time.

Five years of performance is equivalent to 60 monthly samples... the strategy would be *expected* to be profitable 57 of those months. Even if a manager with a 5-year track record showed all 60 monthly samples were profitable, that isn't necessarily statistically significant.

 

[NTB]

Victor's fundamental premise of 'if it can be tested (quantitatively), it shall be tested' is a flawed concept. The reliance purely upon statistical evidence is a fallacy that drives many if not most of the risk taking enterprises today.

The fact is, NOBODY has a statistically relevant sample size of data to determine outlier events which seem to occur with great regularity (indicating that they aren't truly outliers at all). This is because it is impossible to determine what is a 6 sigma event with 100-200 years of data.

For example, if I told someone that 100 million years ago, there were these huge creators that were the size of ten story buildings that ruled the earth, I might be committed to Bellvue on only 200 years of data. The fact is, dinosaurs existed and if it weren't for bone evidence, this would be considered a statistical impossibility. For all we know, there could have been aliens roaming this earth just 20,000 years ago who left no trace evidence and we don't have enough data to say that this is impossible.

Bottom line, trading and investing is an art, not a science. The science part (statistical analysis) can be used as a tool, however, it does not substitute for a truly open mind that allows for the possibility of ANYTHING happening even if it hasn't been captured in a mere 100+ years of data.

This is the fundamental flaw of risk taking enterprises (Wall St. or otherwise) and has led to the demise of VN, LTCM, and would have/should have led to the demise of AIG and many other corporations if it weren't for the hand of the government.

 

[Red_Ink_inc]

Quote from Pekelo:

I say, let's play spot the Smurf!

He's pretty easy to spot. Just look for the neverending man crush on VN.

Looks like his previous split personalities of '1outernational' and 'Jt mcmasters' were banished, and this new one will be soon enough no doubt.

What kind of a queer name is JT Mcmasters anyway? Sounds like the gay lover of Thurston Howell the third.

 

[asiaprop]

Maybe that is why so many retail traders are drawn to options, wrong assumptions. You could not be more wrong. What you "wanted to" state is that 95% percent of times you end up within 2StDev at payoff. This does not say anything about where the underlying and option premium may traverse before expiration (and you already ignore early exercise possible increases in margin demanded, though thats your smallest worry among all the other assumptions you just made). A much smaller percentage of trades follows a path that never exceeds 2StDev during the option lifetime.

Quote from heech:

Put it this way. If you're consistently selling options 2 standard deviations away (not at all uncommon), then assuming simplest normally distributed outcome you will be profitable 95% of the time.

 

[asiaprop]

but you also ignore that almost nobody in today's enterprises actually cares nor has an incentive to care about preventing a blow up, at least if you work as agent rather than principal. Everyone, including CEOs seek short term gains after which they can comfortably walk away from the game. As trader why should I care whether my firm blows up, even while I am still employed as long as I can take leveraged risk? I can walk away and get hired some place else tomorrow and carry on with the game. I do not even think we ever want to change this, nor do shareholders want to. Most people in this game know that the ones who hold the bag in the end are the few who are blamed and fired and may not find employment due to their tarnished reputation and above all the retail guy in the end of the chain. At least its not the operators of the game who should worry, including you and me, Wall Street, Mutual Funds, corporations, government. Its the guy on the street who has his hard earned dollars (anyone still out there with savings....anyone?) invested in his 401k, pension funds that may blow up and the like.

Quote from NTB:

Victor's fundamental premise of 'if it can be tested (quantitatively), it shall be tested' is a flawed concept. The reliance purely upon statistical evidence is a fallacy that drives many if not most of the risk taking enterprises today.

The fact is, NOBODY has a statistically relevant sample size of data to determine outlier events which seem to occur with great regularity (indicating that they aren't truly outliers at all). This is because it is impossible to determine what is a 6 sigma event with 100-200 years of data.

For example, if I told someone that 100 million years ago, there were these huge creators that were the size of ten story buildings that ruled the earth, I might be committed to Bellvue on only 200 years of data. The fact is, dinosaurs existed and if it weren't for bone evidence, this would be considered a statistical impossibility. For all we know, there could have been aliens roaming this earth just 20,000 years ago who left no trace evidence and we don't have enough data to say that this is impossible.

Bottom line, trading and investing is an art, not a science. The science part (statistical analysis) can be used as a tool, however, it does not substitute for a truly open mind that allows for the possibility of ANYTHING happening even if it hasn't been captured in a mere 100+ years of data.

This is the fundamental flaw of risk taking enterprises (Wall St. or otherwise) and has led to the demise of VN, LTCM, and would have/should have led to the demise of AIG and many other corporations if it weren't for the hand of the government.

 

[roctrend]

I haven't posted to ET in a long time, I think it was the last VN BBQ ET Party that i couldn't resist posting to. I also disliked his books but often peruse his website to view his guests posts. Some are okay when they are not comparing the Market to trees, butterflys, animals, oh gosh everything it seems they compare to markets.
However, right around Victor's latest blow up (Matador) he posted a rather bold prediction that markets were going a certain direction. Im pretty sure it was Up. Well. the market did not go his way and I called him out On it here in a Post. His site isnt a market predicting site at all btw. After my Post on ET the next day or two, he or an associate had gone in and changed the wording on his site to a more subtle and less bold, predictive Paragraph. That alone, changing the language after his bold prediction did not play out, told me ALL i needed to Know, and confirm what i suspected of VN. He is very Full of himself to say the least.
Furthermore, He continues to talk about Squash like anyone gives a HOOT other than a fun recreational activity. Yes VN you were the Chump, or Champ once long ago. Yawn..... Recently the predictive VN insinuated the French Open betting odds on Nadal to Win were too Rich and he was prone to being upset. Wrong! Also after Boston led Lakers 3-2, he assured his fellow readers that the Lakers offense looked LUCKY and in disarray and Boston Winning the NBAChampionship was assured, even when Lakers had 2 home games left.Wrong! His prude Know-it-all attitude prevails after his Fund's demise. Hey Vic? keep giving us sport events we can Bet for fun so we can Fade you like most public prognosticators who are Full of themselves too.

 

[Gabfly1]

Quote from heech:

...Put it this way. If you're consistently selling options 2 standard deviations away (not at all uncommon), then assuming simplest normally distributed outcome you will be profitable 95% of the time...

That would be a rather optimistic assumption, wouldn't you say? Hasn't it already been shown that a normal distribution does not fit the market particularly well? However, regardless of the assumption regarding distribution, I think the overriding idea is not to pledge an oath of fealty to any given trade.

 

[Rodney King]

Quote from roctrend:

That alone, changing the language after his bold prediction did not play out, told me ALL i needed to Know, and confirm what i suspected

Interesting. What's the URL of that post (assuming it's a true story)?

 

[heech]

Quote from Gabfly1:

That would be a rather optimistic assumption, wouldn't you say? Hasn't it already been shown that a normal distribution does not fit the market particularly well? However, regardless of the assumption regarding distribution, I think the overriding idea is not to pledge an oath of fealty to any given trade.

Absolutely, I would say that's a rather optimistic assumption. But even with this bar set so low, very few option selling programs would be able to pass it. There are just too many unsophisticated investors who are seduced by a 90% win rate, regardless of *how* the manager achieved it.

 

[heech]

Quote from NTB:

Victor's fundamental premise of 'if it can be tested (quantitatively), it shall be tested' is a flawed concept. The reliance purely upon statistical evidence is a fallacy that drives many if not most of the risk taking enterprises today.

The fact is, NOBODY has a statistically relevant sample size of data to determine outlier events which seem to occur with great regularity (indicating that they aren't truly outliers at all). This is because it is impossible to determine what is a 6 sigma event with 100-200 years of data.

For example, if I told someone that 100 million years ago, there were these huge creators that were the size of ten story buildings that ruled the earth, I might be committed to Bellvue on only 200 years of data. The fact is, dinosaurs existed and if it weren't for bone evidence, this would be considered a statistical impossibility. For all we know, there could have been aliens roaming this earth just 20,000 years ago who left no trace evidence and we don't have enough data to say that this is impossible.

Heh, I mostly agree with the point you're trying to make... but I do think you overstate it slightly. I have to say, if you started asserting the existence of huge creatures without any fossil evidence, and based strictly on statistical possibility... you'd deserve to be committed.

Keep in mind that the FDA approves drugs/procedures all day long on the basis of trials conducted with very sample sizes. Some might be tested on only a few hundred patients before approval. No one can guarantee that these drug trials will guarantee a drug's safety and efficacy... but by and large, the pharmaceutical system has saved a lot of lives... and similarly, quant-based financial traders have made a lot of money.

The key here really is statistical significance and conditional probability. I get the feeling that VN's testing has largely been based on expected value, period. But unless you fully understand the model, you don't know how to calculate the significance of the moon's movements on index prices.