Tuesday, November 28, 2006

From Warren Buffett to Benjamin Graham on Speculation.

John Hussman of the Hussman Fund has done an excellent job of building on Warren Buffett's talk at the Columbia Business School.

Hussman's relates a couple of passages from Buffett's mentor, Benjamin Graham. Graham and Dodd are the foundation of understanding every investor needs to build on.

Of particular interest here are two passage's Hussman pulls out of Ben Graham's work.

"I should greatly welcome an effort by security analysts to deal intelligently with speculative operations. To my mind the prerequisite here is for the quantitative approach, which is based on the calculation of the probabilities in each case, and a conclusion that the odds are strongly in favor of the operation's success. It is not necessary that this calculation be completely dependable in each instance, and certainly not mathematically precise, but only that it be made with a fair degree of knowledge and skill. The law of averages will take care of minor errors and of the many individual disappointments which are inherent in speculation by its very definition."

Elsewhere, he warned, "but there are many ways in which speculation may be unintelligent. Of these the foremost are: (1) speculating when you think you are investing; (2) speculating seriously instead of as a pastime, when you lack proper knowledge and skill for it; and (3) risking more money in speculation than you can afford to lose."

Graham defined investment differently than I do, in essence he thought of investment as an almost sure thing. His idea of buying a business for under its value based on historical performance is diametrically opposed to the modern use where you pay someone to speculate for you based on a guess of future value.

Salesmen love the newer version. If they can convince you to trust them to gamble with your money, they will call you wise and conservative. I define investment as a subset of speculation, if you reread the Graham quotes above you can understand what I mean.

The key to success in speculation is many small losses more than offset by a few huge gains. To achieve this you will have to follow two speculation rules:

  • Keep losses small

  • Let profits grow

In any case you will be well served by reading John Hussman's article. He starts with Buffett, goes to Graham, and then gives a nice shot of Hussman to finish it off.


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  • Tuesday, November 21, 2006

    Squidoo for Building Wealth

    Just a quick note from vacation about a new Squidoo lens about building wealth; creating wealth - growing wealth - and protecting wealth.

    This was a fun few hours putting down some recommendations on books and some links to help folks manage their financial risks and get wealth. If you have read this blog for a while you will recognize my voice in the short passages.

    Drop by and take a look. Please give me a comment or suggestion - a little help is always appreciated.

    You might want to make a lens yourself - it's free, and you might even make some money for yourself or charity. I'll be using any money made to help re-engineer education over at Bastiat Free University. The education industry needs to be re-built from the bottom up - each college donation to BFU will help.

    The full name on the one page about wealth building; a Squidoo lens used to focus attention on one idea, is:

    Building Wealth - create and preserve your own wealth.

    I had created other Squidoo lenses including one for Bastiat Free University and a niche market test about Swiss watches, Swiss gifts, and other Swiss goodies.

    I've now created several other focused pages such as one on bureaucrat tipping adventures and another on becoming a permanent tourist. It has been fun.

    Back to vacation


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  • Friday, November 17, 2006

    It's Time For A Blogging Vacation

    I 'm off on a Hobbit adventure - don't hold dinner.

    In the meantime take a look at the archives or our main site. The dominate investment and speculation philosophy is not about yesterday's trades - but about surviving and thriving in difficult markets. It would be nice to have you around at the end of next year also.

    The markets appear ready to become far more difficult. Be careful out there.

    I should be back writing by early December, If you use RSS for this site you will be one of the first to know.

    May you discover the best in your life,

    Allan


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  • Thursday, November 16, 2006

    Doug Casey - Are His Advice And Picks Worth Considering?

    The short answer about Doug Casey's picks and advice is -- subscribe to the International Speculator.

    I am not a paid shill for Doug Casey, I am a long term satisfied customer.

    Doug has done me a favor in the past. He helped create a master's course for Bastiat Free University. The course is not based on his top selling books, it is based on the books that helped influence him as he was becoming a success. He has freely helped BFU students to look behind his intellectual development and offered tools to assist in their development.

    But that is not why I am writing this.

    I saw an article disparaging Doug Casey because of the extraordinary gains he proclaims in his advertising. While there is a good marketing and sales reason to make those claims, with Doug there is one added comment - he has actually accomplished those gains. Unlike the con-artists and scam boys however - he does not claim to have made those gains overnight.

    There is a reason those kind of numbers are thrown around by every marketing guru, inflated claims work. The difference with Doug Casey's numbers is that Doug takes a very informed, long term, fundamental view - and he is frequently too early.

    An example was in the Doug Casey uranium picks. It was five or more years ago Doug started talking about uranium. He gave specific picks, I bought a couple based on his reasoning and my subsequent research. Uranium was hated, Europe and the greens were talking about shutting down all nuclear generators, and the price had gone down to no-where.

    I held for probably six months to a year, that is very long term for me. I got out with a sizable profit on a short run. After their run the stocks settled back down again. I should have held. Doug was still recommending and accumulating uranium companies.

    A couple of years latter the stocks started their major run. I watched from the sidelines. eventually the stocks bypassed my exit point - but I had my money elsewhere and was happy I had made a quick profit. Then the stocks doubled, and over time - doubled again, and again.

    Those claims of 1000% profits are not made up. They were also not made on a lucky stab at a hot market. They were made by research, walking moose pasture talking to geologists and company management, and by sitting.

    Doug will get you out of his stock and land picks at the mania stage - when everyone is claiming huge profits and stocks are jumping. That is; he will tell you when he exits, and you can follow if you have not joined the crazy mob.

    Doug Casey will then be putting his money into the next boring thing that hasn't moved in a very long time, something people hate. This is not exciting investing you can talk about at a cocktail party, but profitable? Oh my yes!

    The report that bad mouthed Doug did so on the basis those huge gains came in the energy sector, that is a hot sector - and a lucky guess can create big gains. If the writer would have investigated he would have seen the start of those energy picks was well before the markets took off. You can say the same about gold stocks, property in Aspen (he was there too early, left too soon), and the other markets Doug discovers or uncovers.

    Being too early and leaving too soon are speculation rules that can help you gain and keep wealth.

    I don't make a cent by recommending Doug Casey. But I would suggest you pick up one of his news letters. If you are able to sit on an opportunity of great value and wait for it to mature, pay close attention to his next recommendations of an out-of-favor sector.

    Doug does not call his picks "reccomendations," he just states that they are records of what he is thinking and doing at that moment. He both thinks and works very hard at his speculating.

    You will learn a great deal more from Doug Casey than just speculating - but I will let you discover that bonus for yourself.

    Try The International Speculator today, at any price it is a bargin.

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  • Tuesday, November 14, 2006

    Very busy at BFU - a bit off topic

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    I of course take the time to manage my speculations, but I have slacked off a bit from blogging as I work on some other projects. As an on topic aside, your own business can be an excellent speculation in its own right.

    "What projects" you ask.

    Well since you insist I've been working around the Bastiat Free University concept and adding some new touches.

    We have started on two rather exciting new projects. The first is packaging classes into an Achievement Certificate Program, but others have done that before. Our first offer package is an Entrepreneurial Achievement Certificate. We also have another project that we don't think has seen the light of day in centuries - a subscription college.

    The idea in the subscription college is to pay one low monthly fee, and take as many college courses as you think you can handle. There are no administration fees, unit fees, or other costs - just one low automatic monthly charge.

    As part of the marketing for Bastiat Free University I have created a couple of Squidoo lenses, that has actually been a fun exercise. While they will need a bit of polishing they are up and running. Once polished a bit, they should be easy to maintain. The second is a concept test - a niche market lens on Swiss Gifts.

    I will try to remember to come back here and post about alternatives that are available in finance, but those type of posts may be infrequent for a while. In the meantime I've given you lots of links to click above, and there are the archives to the right.

    I'm enjoying life, it is my sincere wish that you will also find the best available in your life.

    Allan


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  • Wednesday, November 08, 2006

    Algorithmic trading

    By definition an algorithm is simply a rule set, instruction set, or an established procedure for solving a problem in a limited number of steps.

    Algorithmic trading is a marketing buzz phrase for an idea that has been with us for decades. If you want to try algorithmic trading check here; if you want to learn more, read on.

    Why call it algorithmic trading? Because it sounds sophisticated. Non-math or non-computer types are unlikely to understand the phrase - so brokers and salesmen sound competent when they say it.

    The odds are you say algorithmic trading occasionally so you sound knowledgeable too. I am using it in much the same way right now. The key is that algorithmic trading is not new, it has had its components jiggled a bit, but it is still just speculating rules directly managed by a computer.

    In the past we used marketing phrases that denoted the same idea - program trading, computerized trading, portfolio insurance, scientific investing, and others. Once they were too well known, or discredited, they dropped from the investment lexicon.

    So, exactly what is algorithmic trading and why are investors excited by it?

    It is the, as yet unfulfilled, promise to make everyone's dream of automatic money making come true. In prior decades it was touted under those other names; names like portfolio insurance, computerized trading tools that were supposed to automatically gain profits and protect wealth.

    Portfolio insurance blew up and took the market with it - they had the wrong algorithm. Today algorithmic trading is bigger than portfolio insurance, and we don't yet know why it will fail. It has a larger share of the market than prior computerized trading tools, but in essence it is still the same idea.

    As an aside, what the exchanges and the press will say was the cause for market failure is unlikely to be the real reason.

    Ah, I hear the common man say - "but we are more sophisticated now." That's true, but we also thought we were sophisticated scientific traders when we believed portfolio insurance would work. It did for a while, then once it reached a certain size and event it imploded.

    The most accurate pricing mechanism is still open-outcry, the sort of trading that transpires on the floor of commodity exchanges.

    We are still as ignorant as prior generations - wait ten years and read what we will write regarding what we think works now. We will then claim our new phrase is real sophistication.

    In brief: life is not linear. computerized trading assumes that life can be captured in a mathematical formula and emulated. Somehow they can never allow for lemmings.

    The following is adapted from a story at Bastiat Free University, who adapted it from somewhere else. I'm sure we could find the original source if we just had the right algorithm.

    An investment quantitative analyst came to a horse handicapper and said he had found a mathematically sound way to predict the winner in horse races. The gambler became excited; no more reading stats, comparing jockeys, watching weather, etc. In other words, winning could be done with a sophisticated formula and would no longer be hard work and risk. The bookie took the algorithmic trading quant off to one side and asked for a hint to the process. The Nobel prize winning genius said:

    " well, first we assume all the horses are ellipses."

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  • Tuesday, November 07, 2006

    Are you worried about your investments?

    If you are not worried -- your money is already in danger.

    Worry is a sign of respect for risks that threaten your future. Don't try to hide from what are unavoidable risks, instead embrace and manage risk. If you are not worried, you probably are not risking enough.

    There are many comforting investment rules and guidelines, most of them are reasonable sounding, many of them are traps. Investment allocation models, economic models, and general advice have little personal value. You are unique, your holdings are unique, your needs are unique.

    As an example a government bond is sold as a secure, blue chip, safe investment by most advisers. They may even quote investment "rules" that suggest the bonds allocation for your portfolio should be the same as your age. Age thirty = 30% bonds -- age seventy = 70% bonds.

    Government created money growth is usually far greater than their bond's yield. Government induced money growth is a hidden tax, decreasing the purchasing power of your cash and raising the prices of goods.

    Excess money growth causes inflation to be greater than your bond's return. That solid, safe, respectable government issued bond loses value every year. This is not often mentioned by investment advisers.

    Bonds and government notes may be an excellent speculation during periods of decreasing interest rates or in special circumstances. However as a long term secure investment all they offer is: The investment safety of a guaranteed loss.

    Most investments are like that, they seem safe, but undisclosed and hidden risks are stealing your money. other costs include fees and commissions your investment manager charges for leading you to these dangerously conservative investments.

    Develop an understanding of the speculation rules that determine the outcome of your investments.

    Most investors lose in the long run.

    Most investors follow advisers.

    To succeed in investment, learn to think like a speculator. Follow a system of reasoning trying to discover opportunity from within inconclusive evidence -- act upon that reasoning - and then react quickly to fresh information.

    Follow the speculation rules of successful speculators.


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  • Saturday, November 04, 2006

    Investment Surfing, Don't Eat Sand

    That great surfer dude Bill Shakespeare said it right when he talked of how you have to be set for a wave before it comes - then paddle like all get out to catch it, riding the sweet middle section, getting out before it hits the beach.

    It does not matter if it was the blow off in stocks in 2000 or the blow off in housing in 2006, the vast majority of those involved in markets wipe out.

    The cause is riding emotion, the excuse to start investing will almost always be research. The research will usually boil down to:
    • historic trends
    • tips from acquaintances and friends - equally as ignorant of reality as the majority
    • believing those providers of research with a vested interest in motivating the investor to act.

    A wave is always most exciting where it crashes on the beach or in the rocks.

    Speculation will be blamed when the emotional mass throws their money at the waves most dramatic moments - just prior to the roaring finale. That is not speculation, that is gambling in a casino where the financial news media makes noises like chips hitting the tray of a slot machine.

    Soothing voices will call the emotional frenzy "investment" and urge all to come aboard. After the waves crash responsible voices will proclaim everyone was duped by manipulative speculators. In reality the frenzied mass did not need to be manipulated - they have willingly manipulated themselves.

    Some will proclaim "truths" such as for any five year period in the years 1975 to 2000 the market always rose. These are in reality no different than stating a ball at roulette dropped into red three times in a row; there are many that will now be assured that it can't happen again or is a trend and must happen again. In reality the odds remain the same as before the trend, or after it ends.

    The third wave set is always biggest - trust me dude.

    You will hear that the crowd is always wrong, that is not exactly true. The crowd, your friends and acquaintances, can be right for quite a while in the middle of a wave - they just wont be able to cut out and exit when the wave ends. The crowd is only always wrong at extremes.

    Those most prone to manipulation would be professional advisers. They make money off the crowd - and an excited feeding frenzy gets them excited also. There is a proverb that it is always easiest to sell to salesman, they will convince themselves a product is good before they sell it.

    The honest ones sincerely believe what they tell you - but they can be sincerely wrong. A broker understands selling his product - if he understood the markets he could make more speculating himself. As Mark Twain said "A gold mine is a hole in the ground with a liar standing next to it." The salesmen can sell even better if they ignore reality and choose to believe the lies.

    Speculators don't need to manipulate markets - the crowd will manipulate themselves, the speculators just need to position themselves for profit. Enter a market when it is boring, get out prior to the peak of excitement. The sunsets are beautiful when the chop and surf quiets down and it is time to wait for sunrise to re-enter the markets

    As Surfer Bill said:

    "There is a tide in the affairs of men, Which taken at the flood, leads on to fortune. Omitted, all the voyage of their life is bound in shallows and in miseries. On such a full sea are we now afloat. And we must take the current when it serves, or lose our ventures."


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