© Ed Seykota, 2003 - 2004 ... Write for permission to reprint.

Ed Seykota's

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January 22-31, 2004

 

 

Questions

(Quotes from Ed in Red)

Answers

Sat, 31 Jan 2004


The Role of Speculators


Sorry, what I meant was What is the ultimate PURPOSE of the successful speculator?


----- Original Message -----

Dear Ed,

What is the ULTIMATE role of the successful speculator? (Apart from to to help raise capital, pay taxes, provide liquidity and keep brokers and bankers in the money)



Yours,

Your own intentions give life purpose and meaning. 

 

Your Tribe can help you clarify your intentions and create your path of right livelihood.

 

 

 

Creating a Path

 

The Essential Work

of the Trading Tribe

 

 

Clip: http://www.eryptick.net/oz2001/

tidbinbilla-woodland-path-011028.jpg

Fri, 30 Jan 2004


The Younger Days

Hi Ed,

Congrats on your work and devotion.
In this forum we talk about different people, but what about you?


I have a few questions, and if you don't want to answer any of them - I understand - no problem - privacy...


Some say "concentrate on the goal", I say "concentrate on the goal AND the way you get to the goal". For a young man, like me (and probably many others), I wonder what were you like when you were young, how did you get there, where You are now.

I am curious:


1) when was the first time you made a trade?


2) why and how did you decide to be a trader instead of let's say being an engineer, what was your motivation?


3) when did you posses the knowledge about fractals and found out that it can be applied to the markets?


4) from which source did you learn the most about the markets (else than the Market itself)?


5) did you have a regular job, did you work within a financial institution?

I don't know if I can ask this question, but just in case I'll post it 4) did You have hard times, when you didn't know what to do, which direction to go?


5) when you were 21, were you more interested in the science&books etc, or the girls&party?

I hope You don't consider me as too daring, but I really would like to know, so I am taking the chance.

Dziekuje,  (Thank You in Polish:)

1.  First trade I remember: giving an aluminum commemorative coin and getting five magnifying lenses, circa age 5.

 

2.  I do both. Software engineering and trading can be complimentary.

 

3.  I view fractals as a market metaphor, not as a particularly rigorous trading system.

 

4.  I consider the markets to be unknowable. I study myself and my systems and how to clarify and focus my own intentions.

 

5.  I put a lot into the institution of The Trading Tribe - or maybe writing FAQ is putting me in an institution.

 

4. Some positive intentions of  uncertainty and confusion: to guide research and innovation.  Innovators seem to like the feeling of uncertainty.

 

5. I recall liking to party with girls who read science books.

 

 

Fri, 30 Jan 2004


Thar she Blows !


http://www.msnbc.msn.com

/id/4096586/ 

This whole whale mess could have been avoided had he taken his feelings to a tribe meeting. TTP, a better way to spill your guts.

Some investigators claim they can commune with dolphins.

 

 

Some Animals

 

may be able

to send and receive feelings

 

Clip: http://www.tomigaya.

shibuya.tokyo.jp/lilly/

Fri, 30 Jan 2004


Tribe Contact in Connecticut!

Dear Chief Seykota,


I have two questions for now.


1) Who is the contact person in charge of the Trading Tribe in my state, Connecticut? An e-mail sent by me to the person in New-Haven was returned as
undeliverable.

 

2) How can I get hold of your book: The Trader's Window. This book was referred in a talk by Sri Harold Klemp, Spiritual Leader of ECKANKAR. I have search in vain for this book but can find it on the web or local bookstores. 


Thank you for taking time to read my e-mail and I look forward to a favorable attention and feed-back.


Regards,

If you do not find a responsive Tribe Leader in your area, you can start a Tribe of your own.

 

The book in not in print.  I have a copy at my home, that people may read, while they are here.

 

 

Thu, 29 Jan 2004


An old TTP session from 1989

Ed,

I am writing you to re-make your acquaintance. We met at a Van Tharp seminar in Chicago in 1989, at which time you guided me through a TTP session in front of the group, and where we also shared a private conversation.

 

Although we ran into each other on two separate occasions the following year, I did not take the initiative to continue our earlier discussion. Accordingly it is my fault (and my loss) if I drifted out of your memory long long ago.

I would have liked to have gotten to know you better as it is not often that you meet someone that understands the feeling of being on the razor's edge of life.

 

I think you know what I mean by that. It is the detached, surreal and primal feeling where the usual duality between man and his universe breaks down - you become part of and one with the universe. If you allow yourself to feel this sensation, there are no more good or bad experiences, just events that allow you to revel and grow in the sensation of being on the razor's edge of life. Fear and anxiety dissipate in the calm tranquility that begins to permeate your life.

A few years ago I met Norman Lear at the TED conference in Monterey www.ted.com  - fascinating people). He recounted that early in his career, before his success with "All in the Family", he had some modicum of success and decided to set up shop in New York with lavish surroundings and grandiose visions.

 

He soon found that he had overextended himself at a time when he could not produce a hit series. Yet he mentioned to me that on the day he was being evicted from his office with nothing to his name he did not feel despair, anxiety or anguish.

 

Rather, he said (paraphrasing and possibly embellishing from memory), "All I could feel was that life had given me a gift. I felt a thrill and elation in that I was able to experience this too, the feeling of losing everything."

 

Clearly he had opened himself to to life's wondrous experiences, and his life is a testimony of what is possible. I thought you might appreciate that story.

Ed, If you are so inclined, I would greatly appreciate hearing from you. I would like nothing more than to bask in a conversation about life in general with you. I will be in my office (toll free at xxx-xxx-xxxx) on Monday and Tuesday next week (Feb 2&3) and at my home office (xxx-xxx-xxxx) tomorrow Jan 30 and Wednesday to Friday of next week. We can try to arrange a time for a phone call via e-mail if that is more convenient.

Regards,

I prefer communicating about the work by email, to document the work and to allow others to listen in with their eyes.

 

 

Ear Ye, Ear Ye

 

 

Clip: http://www.seymoursimon.com/

images/eyes_lg.jpg

 

Wed, 28 Jan 2004

 

Kelly


Hi Ed,

I read the recent Kelly posts. Maybe I can clarify them. I think he is trying to say that Kelly can be expressed as Average Trade divided by Average Win. K=E/W, where K is the Kelly fraction of the account to bet, E is Average Trade, and W is Average Win.

If I had not worked out the algebra myself before reading the post, I doubt I would have understood it.

On another topic, I participated in the first Denver Trading Tribe meeting January 24 as a receiver. I clenched my fists and gritted my teeth and felt the anxiety and tension of staring at the screen as a trade goes against me, or against the sender in this case. Immersing myself in feelings is new for me. We had a good first meeting, and I look forward to sitting on the hot seat.

My own trading is so long term that I do not stare at computer screens, except to write code to backtest potential trading systems. One or two losing trades do not bother me, but when they pile up above 20% drawdown, I feel uneasy. I have to force myself to follow my system. I write code and backtest everything I can think of. I search for other markets to trade. I work out the mathematics of drawdown. Most of my learning has occurred during drawdowns. When I am hitting new highs, I feel on top of the world, follow my system with joy, go snorkeling in the Caribbean, and drink a Pina Colada while watching the sunset over the ocean.

Despite the pain of inevitable drawdowns, I have followed my long term trend system on commodities (it doesn't work on stocks) without breaking my rules for nearly 4 years. It has made me more money than my engineering job in that time. At the end of February I will cut the cord, ending my formal employment, leaving my time free to develop new trading systems.

Thank you for starting the Trading Tribe, writing FAQ, and giving me some things to think about.

In the Coin Flip Example from the Risk Management Page, your coin can win 2, or lose 1.

 

So from your simplification of Kelly

 

Average Trade (Wager) = $1

Average Win = $2

Then: K = 1/2

 

Actually, the full Kelly formula, and other methods all indicate an optimal risk of 1/4, so there is something a little loose here.

 

-----

 

You might wonder how you know that the feelings of drawdowns are really painful.

 

Also, you might wonder if you like the markets running your personal life - as you can only do fun things, like snorkeling, when the markets are up.

 

How about just do what you want and allow your feeling about the markets to pass through.

 

 

 Feelings can pass through

your experience

 

like a river passing through

a meadow

 

Clip: http://www.robertpaulgalleries.com/

products/full/778.jpg

Wed, 28 Jan 2004


Reasoning Out Loud


I assert that a trading system is not (a necessary and sufficient condition) to trade trends for profit.

 

Though, a trading system is necessary to trade trends for a profit. I then ask the question, "What is sufficient?" Sufficiency is found in TTP.

 

TTP, though vague, must influence intuition. Thus trading systems are not the mechanical authorities, I imagine them to be. They are augmented by some thing else either outside or inside the system. It must reside outside the system. If it were inside then the system would be complete and could not change—it would be perfect.

 

Looking back to risk management, I see hunch systems mentioned. In the final analysis, a hunch system plays a role in the picking and trading of instruments.

I believe that hunches are the intended results of TTP.

As you continue figuring it all out, you might become aware of the feelings that propel you to do so.

 

These are your feelings of wanting to figure it out.

 

Figuring out these feelings can be very challenging, since they may keep changing while you are figuring them out.

 

 

Figuring it Out

(Fundamental Analysis)

 

is just more drama.

 

Clip: http://www.nlgfl.org.uk/nlgfl/

Education_service/Advisary/Maths/

Resources/figure%20it%20out%202.jpg

Wed, 28 Jan 2004


System Returns


Dear Ed,

Thank you for your recent reply. We have checked the system and cannot see any bugs. I have enclosed several graphs to demonstrate the system returns, drawdowns etc. You may need to view it at 200% magnification to read it easily.

Yours sincerely,

If I read your reports and graphs  correctly, then your Core Equity goes from 20,000,000 to 120,000,000 in one day, your Sharpe Ratio is zero and something you call Core Equity High DD % is  -29.66.

 

You might try turning on the lights.

 

 

To See No Bugs:

 

Turn off the monitor

and program in the dark.

 

 

Clip: http://zebu.uoregon.edu/startup/dark.gif

Tue, 27 Jan 2004

 

Chief Ed,

 

I think you may find this interesting.

Candice Pert believes the body (not the brain) contains memories charged
with emotion. Also believes you have to 'speak it' ... see:

 

http://primal-page.com/pert.htm

CP: Let the emotion all bubble up. Let the chips fall where they may. My personal experience using catharsis was with the New Identify Process. I think the NIP bonding might serve to relax the cortex and let the emotion come through. I believe that the process of catharsis is not complete without saying things, because we must involve speech and the cortex, to know that the emotion has come all the way up and is being processed at the highest level. To feel and understand means you have worked it all the way through. It's bubbled all the way to the surface. You're integrating at higher and higher levels in the body, bringing emotion into consciousness.

For some, verbal expression is in tune with the process.  For others, kinesthetic body sensations work well.  Others find visual elements enlightening, and tactile sensations  stimulating.

 

Deep-judgment experience often has multiple anchors, in various experiential modalities.

 

A good receiver goes with the sender's experience, wherever it goes, and in whatever mode it presents.

 

The more you work out in your Tribe meetings, the less you have to do in public:

 

 

Click to practice receiving

some feelings

from a verbal-mode sender.

 

Clip: www.DrudgeReport.com

Tue, 27 Jan 2004


Bugs

Ed,

Hope you had a good Christmas and New Year.

Just read your response to the post about the results from my system. I did have an error in the code and it is now rectified. Many thanks.

 

I enclose a copy of the results from my latest system. I can't see anything obviously wrong with this version. As always, if you have any questions or comments about my system, then please don't hesitate to let me know.

Your drama seems to be to release buggy code, to have others report problems with it, and to generate yet another fix in a hurry.

 

You might take your feelings about making an effort to get things right,  like  your software, as a starting point, into the process.

 

 

CString cStrNewPlan(E_STATE eS)

{

if(eS == E_BUG_FREE)

return  "OK to release";

else

return "Stick with it, don't quit it.";

}

 

www.toonopedia.com/bugs.htm

Tue, 27 Jan 2004

 

Embrace Advice


I have been trying to incorporate the TT process into my family life. I am having trouble getting my son to understand the process. When he becomes upset at
something and losses control of his emotions, I try to tell him to embrace
these feelings. But he says he doesn't know how to embrace what he is feeling.
Any suggestions?

Part of TTP is not to insist other people use it. 

 

When you focus on being a good receiver for your son, he may just fall into it.

 

When you give up trying to control your son (getting him to understand the process, to stop being upset, to stop losing control, to start embracing his feelings) you give him room to change, and set yourself free in the process.

 

Your son might be doing the resistance part of a dance that is very familiar to both of you,

 

When you experience your own feelings about what you want your son to do, your part of the drama may disappear, and the dance may also collapse into a more meaningful and satisfying communion.

 

 

Wild Dancing Disappears

 

when the audience goes home.

 

 

http://www.kinepathics.com/

images/Wild_dance.jpg

Mon, 26 Jan 2004

 

Update


Ed,

 

I have a question. In my TTP with [Name] as below, I set forth a broad issue rather than a trading-specific one: my tendency to "not begin things until so little time remains that I do a hurried shoddy job."

 

Through the process, I find various emotions and feelings relating to this. There is one predominant feeling - that of a tension in and around the neck and shoulders. This leads to some other feelings and emotions, eg, tightness in stomach, irresponsibility for setting unrealistic goal, pressure on back, etc.

 

We leave the words and verbalizations aside and concentrate on the feelings -- all of them dissolve but the original one (tension in neck) remains. Despite a fair amount of time in the process, this tension does not go away. At that point we are both not aware how we proceed, so I write this mail to you. The tendency I brought to the process is not gone. I notice some other changes though, eg, being more composed. This is our first TTP so perhaps we (I?) need more practice. Any thoughts, advice, comments from you or FAQ readers?

You might consider noticing the similarities and differences between:

 

Wanting to make a feeling go away.

finding it's positive intention.

 

The former indicates a grumpy judge protecting the feeling.  You might try experiencing the feeling of not liking the tension.  When that fades, you can proceed to experience the tension.

 

 

Some Feelings May Judge

 other feelings

in a Knot of Nots.

 

To untie a knot,

gently loosen the outside layer

and work inward.

 

 

Clip: http://www.netday.net.nz/

netday2001/news/photos/ak-kp-tangle.jpg

Mon, 26 Jan 2004


Trading Tribe Application

Hello Mr. Seykota:


My name is [Name] and I live in Reno. I recently listened to one of Van Tharp’s taped seminars, and he mentioned The Trading Tribe. I did a web search and was surprised to learn that you were just up the hill. Attached is my resume and essay. I look forward to hearing from you.


Sincerely,

Resume


...

B.A. in Anthropology ...

Occupation: Trader and investor.

Occupation Experience: I am a partner in a family owned [Type] company, based in [Place]. I began trading in the stock market while in college. After graduation, I began trading commodity futures. I have been a delegate member of the Chicago Board of Trade. I am currently an IOM member of the Chicago Mercantile Exchange, Inc. I have some experience with neurolinguistic programming. I spent three days in consultation with [Mentor] in an effort to improve my trading and my self.

Life Experience: I am an avid rock climber and skier and have traveled extensively in the western United States in pursuit of these activities. I enjoy foreign travel as well. I am recently engaged and I love to spend time with my fiancé.

I am available for interview at anytime, but preferably between the hours of 7am-6pm. My home phone number, xxx-xxx-xxxx, is the best number to call. Also, I will be out of town Jan. 31- Feb. 2. I look forward to the Trading Tribe Experience.


My Understanding of TTP

The Trading Tribe Process is an interactive process that objectively allows us to observe ourselves utilizing a supportive, group environment. Since we are all interconnected and interrelated, the more we understand ourselves the more we understand each other. Therefore, the benefits produced through TTP help us all.
“If you don’t know who you are, the markets are an expensive place to find out.” The trading experience penetrates straight to the core of our being. The intensity of this experience becomes the perfect environment for Fred and CM to act out dramas. The Trading Tribe Process allows us to resolve dramas without expensive lessons in our trading or personal life. Most importantly, TTP reveals that trading life and personal life are one and the same.

You are welcome.  Consistent attendance is essential.  Next meeting, February 5, 2004 - 7:00.

Mon, 26 Jan 2004


Confidence with Clients


[cc to Ed / FAQ as an update subsequent to the second [Place] TT meeting.

 

For Ed: We had one member unable to attend because of a medical emergency. This is a communication to keep him in the loop]

Oh, one update on the meeting [Name] and I did. My issue was the feelings that come up when I communicate with a prospective client.

 

My thoughts before our meeting go something like, "They won't understand me. They will think it's risky because I trade futures. They won't listen to me. They might shut down and not understand how I manage risk" etc. These thoughts are accompanied by various physical sensations like tightness in my throat and chest, butterflies in the stomach, etc. I send these feelings in the meeting and [Name] receives them until I sense them resolve and I no longer feel them. No big AHA, they just cease to manifest.

Before our TT meeting, I wonder if my thoughts and feelings might suggest that I have doubts about my abilities myself. An interesting side effect of the process is my realization (really more of a gut feeling) that I don't have those issues.

 

Instead I have issues surrounding my perception of my ability to communicate my competence to prospective clients. I also have the intellectual understanding that these feelings manifest when I focus on things that are not in the now, and when I worry about what "might" happen.

Today I have my first interaction since that time with a prospective client. It happens so naturally that I almost do not notice the big change! I have none of the feelings from before. I tell the person what I do. I tell him to go to my website and read my disclosure document, and to give me a call or email if he wants to proceed. I can't describe the feelings through all of this except to say that I do not notice any whatsoever. I feel very matter of fact through the whole thing. Just, "He needs some information. Here is how to deliver it. Now he takes the next step if he wants."

Like I said, no real feelings associated with the actions. Perhaps there are some feelings at the time, but since I do not get attached to them they disappear. I am not sure. What I am sure of is that my performance is improved because of my lack of self-consciousness about explaining myself.

 

I know this to be the case, as the prospective client responds to me very positively and with an inflection in his voice that conveys that he really does want to learn more about my service.

 

In situations similar to this where I focus on my worries, they do manifest with the prospective client and the response is more along the lines of, "That sounds complex and risky. I don't know about getting involved with some kind of technical analysis charting mumbo jumbo. How do you know what you are buying is a good value and not too expensive?"

 

This is an interesting response considering that I primarily communicate with supposedly sophisticated investors that I would normally expect to be familiar with trend-following tactics. This illustrates that people give me exactly what I expect them to, without too much regard for the range of potential responses given the investor's knowledge level.

It seems that I do not have to change the investors or their sentiments about what I do.

 

I can change my perceptions by feeling my feelings, thus changing my expectations from a focus on a negative outcome to a neutral awareness and readiness to respond in whatever manner is appropriate.

 

This might allow me to refrain from sabotaging a potentially productive relationship by forcing prospective clients to doubt me, and instead allow those that are a good fit with what I do approach unobstructed. The people that do not mesh well with me and my style may self-select themselves out of the process without any undue energy expenditure on my part. That seems like a win / win situation.

At any rate, the TTP produces results so far for me. See you guys when I return from the NYC meeting.

Yes.  Judgments about feelings about confidence can lead to dramas involving too much and too little confidence.

 

 

 

Confidence

can help you maintain balance

 

as long as your confidence is in balance.

 

 

Clip: http://www.marsden.school.nz/

lowerschool/confidence.jpg

Mon, 26 Jan 2004


Trend-following in NBA

Dear Mr. Seykota,

Thank you for bringing trend-following in my life. I've noticed the changes, and one of my goals for the year is to commit to continue developing and improving trend-trading ideas, and then implement and execute them as the game plan.

Another area I have been practicing trend-following is my fantasy game on
NBA.com called "Virtual GM." Like any other sports fantasy game, the goal is to pick players (under some cap constraint) that produce the most. To me, the game is about optimization, picking the players with the highest expected value under the given "salary." You don't have to know anything about the NBA, and you don't need to know.

The added flavor is trend-following. There will be players who have sudden streaks of hot shooting and playing extremely well for three or four games, and on the flip side, some stars started to play poorly (usually a warning of coming injuries). The true super-stars (like a strong trend) will tend to rebound after some poor nights, while the mediocre (weak trend) will have some great nights that followed by some poor nights. I've learned that it pays to follow the ones who have been playing well, and not try to follow the former stars who are out-of-favor.

I've learned not to question how long the hot streak would last. They can go for much longer than expected. Kobe Bryant scored 40+ points in 9 consecutive games last season, and I simply rode his trend. There were times I thought, "Hmmm, maybe he'll revert back to the mean soon," but I decided to commit to trend-following and hang on until he cools down, and a new trend emerges in another super-star player.

There is also a time when a star-player joined a new team and played poorly.
I was tempted to buy him, believing that he'll rebound. But then I felt the trend is really down, and if I buy him then it'll be going against the trend and bottom-fish. I ended up buying someone else who has shown a strong trend instead of him. He has some very good nights and keep playing well. It is true that I could have done much better with him on my team, but I am proud of myself to stay with my game plan.

Trend-following is in many aspects of life!! Trend-following is fun!! If one day I win the fantasy game because of the trend-following method, I guess I should invite you to watch the All-Star game (that's the grand prize)
together! :-)

OK.

 

 

 

Objects in Flight

 

obey the laws of momentum.

 

 

Clip: http://schools.tdsb.on.ca/riverdale/

departments/physed/images/

kobe%20bryant.jpg

 

Mon, 26 Jan 2004

 

Risk - Another Opportunity

from: Economist.com


LIVING DANGEROUSLY - 1ST

For businesses, governments and citizens, misjudging risks can be costly. A guide to better targeting, by John Smutniak.

SINCE September 11th 2001, it has become obvious to all that the world is a risky place. Even before that atrocity, the world had seemed far from safe to many, especially those concerned with business and finance. The end of the dotcom craze and the bursting of the stock market bubble had already created huge uncertainty. But those are only the most recent examples of unexpected events that can make a
mockery of people's plans.

Today's perception of heightened risk is fostered by more than al-Qaeda. Globalization, for one, has increased the sense of peril. Natural and man-made disasters, including forest fires, earthquakes, big industrial accidents and various transport calamities, have added to the feeling of being under siege. According to a joint study by Belgium's Centre for Research on the Epidemiology of Disasters and A.T. Kearney, a management consultancy, growing globalization happened to coincide with an increased frequency of both man-made and natural disasters.

Part of this fear is irrational. After all, earthquakes pay no heed to a rise in free trade. What has changed is that telecommunications and media coverage now ensure that such disasters are reported from ever more far-flung places.

But part of the perception of increased risk is justified. Some technologies are indeed making the world a riskier place, creating new potential hazards such as untried drugs and genetically modified crops, as well as innovations that can scupper the best-laid business plans (such as Napster in the music industry). Blow-ups of markets and firms often reflect risks in the real world. Terrorism, or even rumors of it, can send fortunes sinking. A new epidemic such as SARS can ravage an entire industry (in this instance, world travel).

Despite such perils, for most people in rich countries life has become much safer in a number of important ways. Over the past century their life expectancy has risen by around two-thirds. Workplaces, the wider environment and many diseases have become less hazardous. Democracy has spread. Wars in the rich world have become less likely. Even terrorism has become less of a worry in some places, such as Northern Ireland, Italy and Germany.

So it is not strictly true to say that life has become more risky; instead, some risks have become smaller, others have shifted to different people, and new ones have sprung up to take their place. This survey will review some of these shifts in the burden of risk and explore an extraordinary phenomenon: that when people confront risk, whether they are running governments, businesses or their own affairs, they tend to mismanage it.

LOOK ON THE BRIGHT SIDE
Risk is different from uncertainty, which is unquantifiable. It is more of an educated gamble based on the odds. Taking such educated punts has become easier, thanks mostly to two factors.

The first is information technology, which has made it easier for people to study many past risks in the hope of learning from them. For example, life-insurance companies have looked back at records of births and deaths to estimate lifes pans, create actuarial tables and set insurance premiums. Thanks to computer models, the odds on a freakish storm or earthquake are better known, epidemiologists are more successful at tracking diseases, and even man-made crises such as banking debacles and stock market crashes can be catalogued and studied to produce better (though, as we shall see, still far from perfect) forecasts. Such technology is also providing better information on the costs of such mishaps when they do occur.

The second factor that has made it easier to quantify risks is the growing use of markets. Markets are especially good at shifting risks from a party that does not want to bear them to one that does.

 

Insurance, for example, can move the cost of a house burning down from a home owner to the insurance company and its shareholders. A stock market listing can shift business risks from a single family to thousands of investors worldwide. Risks, though, are not as easy to trade as bananas or cars. People vary in their view of risk, and of how to value it.

For all the progress in using such tools, perhaps the biggest obstacle to dealing effectively with risk remains human beings' perceptions and misperceptions of it.

 

People tend to get risk wrong in a variety of ways, often consistently. A growing awareness of this has been revolutionizing economics. It has also been changing the way corporations, governments and citizens deal with the risks they face. This survey will argue that the largest gains will arise from coming to terms with this softer side of risk.

More and more of the world's risks these days are taken on in financial markets. Stock markets, which on one view are simply an estimate of the future rewards of all firms discounted by their risks, have become more volatile in recent years. This is partly because technology has made financial markets more efficient, which makes them swing more quickly as the economic outlook changes.

But not all of the volatility in the markets is a response to real changes in fortune. In their eagerness to minimize the risks of financial markets, investors sometimes exacerbate their wobbles. The sheer sophistication of the instruments to manage the risks of market moves may, paradoxically, have made them riskier.

 

Perhaps the biggest risk of all remains a very human emotion: panic, which can cause markets to seize up completely because they are insufficiently liquid, as nearly happened during the LTCM hedge-fund debacle in 1998.

Those wobbles in financial markets have led to a boom in derivatives (meaning financial contracts--such as futures, options and swaps--derived from the prices of other securities).

 

The chairman of America's Federal Reserve, Alan Greenspan, thinks that this kind of financial innovation is good for the global economy. It makes the financial system more flexible, increases the potential rate of economic growth and allows banks and businesses to control the level of
risk they take.

HIDDEN HAZARDS
Yet many disagree. Last year, Warren Buffett, America's most famous investor, called them "financial weapons of mass destruction". Certainly the new market for credit derivatives, in effect a type of
insurance against bond defaults, is causing worries. And America's Freddie Mac, a quasi-governmental mortgage underwriter, had to restate billions of dollars in profits because of improper valuations of its massive derivatives portfolio.

 

Around 90% of the world's 500 biggest companies now use derivatives, according to a poll last year.

 

This survey will argue that some of the worries over derivatives stem not from any inherent evil, but from their power to disguise the intentions of their users.

Companies used to concentrate on the more easily spotted risks, such as financial ones. Now, just as bosses have learned to use sophisticated tools to manage financial risks, they are facing a whole array of new hazards. Increased scrutiny of corporate governance after the scandals in America and Europe has complicated their life. Increased regulation makes managing a company a minefield. Globalization has intensified competition. Instant communications and heightened media interest mean that a company's reputation can be quickly and easily tarnished.

Governments have the most to learn about risk. Without a better grasp of the costs and benefits of the rules they create to control it, they can do more harm than good. In most rich countries they are still expected to take on risks when markets fail.

 

Yet they have been making bad choices: banning some activities that carry low risks and potentially high benefits, and encouraging others that are highly risky without offering much return.

One of the trickiest problems in dealing with an uncertain future is people's seemingly irrational response to it. But advances in psychology have given us a much better understanding of the way people behave in the face of risk. The results are striking, as the next article will explain.

Yes, Much of the current growth in derivatives associates with people not wanting to experience risk.

 

The current fashion of our society is to avoid / suppress the feeling of risk. 

 

Suppressing feelings tends to precipitate drama in which Under-Fred finds a way to for the feelings to manifest.

 

For example, the anxiety suppression (security) methods we use at airports don't work very well and  may actually increase anxiety.

 

When you become willing to experience risk, you make wiser choices and life becomes less risky.

 

 

 

 

Regulations against Risks

rarely eliminate risk.

 

They shift it, say, to balancing

the risk of getting there late

with the risk of getting caught.

 

 

 

Clip: http://primes.utm.edu/curios/

includes/gifs/31.jpg

 

Sun, 25 Jan 2004

 

Gems


Hi Ed !

The recent days at your house included a lot of good things. One: the graduation to professional musicianship. Another gem is the principle you articulated that you don't want a company where you have to baby sit people, follow-up on others' projects, or find out why people didn't do what they said they would.

 

Your management advice "do whatever you want" I perceive starts with the communion of wanting the vision of the company to manifest, then doing whatever one wants.

 

This evaporates that burdening attitude which has crushed the human spirit for centuries: "I'm working for someone else who's making me do something I'd really prefer not to" That's all gone. What's left is the alignment of desire with vision.

I see this attitude is revolutionary for management. Personally it inspires me to work more, to dive in, to be work, and be attentive to keep agreements.

On another subject, this afternoon [Name] had some conflicting issues making her unhappy, so I guided her through the right/left hand polarity, and they resolved. Nice.

Thank you for the C++ debug training.

regards,

The lift of a driving dream seems to empower people more than does structure and discipline.

 

 

 

 

 

A Good Leader

Points the Direction.

 

A good manager

gets you there.

 

 

 

Clip: http://members.aol.com/

h0tp00lman/leader.jpg

 

 

 

Sun, 25 Jan 2004


Mastering Nothing

Hi Ed:

Ed Says: "To be a good trader, you have to be good at doing nothing."

You said that during the Reno workshop and the words stayed with me. Since the workshop, I have been working very hard at doing nothing, and I'm starting to make progress. However, I have much work to do. On a daily basis I have the feeling that I should be doing something. After all, I'm a trader, shouldn't I be TRADING?

If you'll recall, I day-traded stocks for four years. Five or six hours a day in front of the monitor. I spent much of the rest of the time thinking about trading. I did well early on, but the last 18 months I just churned my equity. Before the workshop, I quit trading, mentally and physically burnt-out. If I was going to continue trading, something had to change. At the Reno workshop, the Tribe helped me begin to gain insight into my trading issues. In the goal-setting portion of the workshop I chose "Integrated Trading" as my "snapshot". I committed to making trading part of my life, not my life.

I no longer spend hours watching prices change. I have back tested and implemented a very simple system: See setup. Enter trade. Enter stop. Hold position until trend changes. I enter trades in the morning, then begin the work of doing nothing-- get the kids off to school, take a run, clean the house, go have a coffee, read the papers, go to lunch with my wife or a friend, etc. Occasionally I return to my office to check for new signals, raise stops, etc. I resist the temptation to fiddle with the positions most of the time. I admit it's been challenging to sit patiently with unrealized profits. My new approach has already paid off -- I've been very long equities since November. This has been my most profitable period in several years. I'm still long many of these positions.

However, doing nothing has its challenges. Now that I'm not busy, there is time to contemplate. As a frenetic day trader, my brain was constantly preoccupied/distracted with data/noise. With free time, repressed feelings and issues percolate to the surface and new feelings appear. For instance, even though I've had early success with my new approach, I don't really feel like a "trader" anymore. I spend so little time trading. I now feel unemployed. In fact, I could actually have a "real" job and still execute my system. What do I want to do with my time? With my life? As I vacuum the house in the middle of the afternoon, these thoughts come to mind.

But I know what you're going to say. These feelings need to be taken into the Process. Thankfully, the Denver Trading Tribe is now coming together. We're having our first meeting this weekend. I look forward to the Tribe's support in my quest to be a master at doing nothing.

Thanks for your help and inspiration.

Best Wishes,

People who are willing to experience:

 

boredom

confusion

uncertainty

 

seem to have ample supply of excitement, clarity and knowledge.

 

 

Practice

can be boring or interesting

 

The committed musician

such as the lunar banjoist, above,

practices his licks

over and over,

 

until they are spontaneous.

 

Clip: http://www.masterengraver.com/

astronaut-banjo.jpg

 

Thu, 22 Jan 2004

 

Small Request

Re: Website Posting


Dear Ed,

Thank you very much for calling me accepting me into the Tribe. I understand the attendance and participation requirements.

In our conversation you said that you would be posting the letter I wrote to you. That's totally fine. However, in the letter I mentioned my boss's technical system, which he calls [Name]. I feel that he may be upset at me if he saw his trading theory posted on the internet.

Thank you,

OK.

 

You might consider the feelings you have about revealing too much information.  When they become your allies,  you can use them to avoid repeating the drama.

 

 

 

Reveal Enough

to make it interesting

 

not enough

to make it boring.

 

Clip: http://www.nlm.nih.gov/exhibition/

perez/drawings/revealing.gif

Thu, 22 Jan 2004

 

Receiving Suicide

Hi Ed !

I have something for you. Since your recent hot seat issues involve relationships, and you like Erickson, I have a book of interviews of Erickson on the subject of couples, his approach to therapy with couples, examples of cases, etc.

One case, for example. The husband constantly used threats of suicide to control his wife. Erickson recommended getting lots of brochures from funeral homes and mortuaries, and leaving them around the house !

Good receiving can empower remarkable change.