i'm a dumb guy. i've struggled through the more technical works only to need a tylenol and a nap after....maybe a nip of the sour mash. when i first got into this business i had no idea what was going on. at the time, the schwager books were very inspiring. i haven't looked at them in a couple of years and still don't know what is going on but i certainly enjoyed them. the books might not offer any important insight into how to run a trading business but they are not without value.
Thanks for the reference. I don't trade options, but have been meaning for the longest while to get a bit better acquainted with them, if only to impress people at cocktail parties. And I suppose it won't harm my trading, either. And so, I will place it on my Amazon to do list. Much obliged.
This seems to fly in the face of most academic evidence for momentum. 52 Week Highs http://www.cxoadvisory.com/blog/external/blog5-23-07/ Does Trendfollowing Work on Stocks? http://www.trendfollowing.com/whitepaper/Does_trendfollowing_work_on_stocks.pdf
Good post, Pabst. As for your reference to randomness being the primary nugget gained, that may or may not be. Equally possible is that the traders who fell by the wayside have simply run their course. The skills they had, and the criteria they used which worked for them at the time, may no longer quite apply and they did not remain sufficiently flexible to keep up. While there is no denying the random component, it need not be the only variable in the equation.
The reason those books worked is because of ed seykota and the fact that schwager was selling the dream. If you were already a profitable trader the books lacked substance. If you had just been to your first IBD seminar or soes office or you just made enough to put in mutual funds or you were long a modem maker or dell and you were saying to yourself I can make more money trading................... those books were like crack to a junkie. those books caused me to alter my life. Until those books I still believed what my professors had said about no one beating the markets. I even turned down opportunties to work for financial guys in my hometown, Greenwich, because I thought they were only getting lucky in the short run. When I read those books, I said- I need an edge- I need to keep my risk small and I need to trade - nothing could stop me.
Well except for true arbitrage, not risk arb, the whole money making equation is variable. And where there is unknown there is randomness. Let's keep in mind that today's billionaire manager is not exactly hitting ridiculous outsized returns. Ken Griffith or John Henry have never run $400 dollars into $200 million like Rich Dennis did. A leveraged convertible arb trader who has a few 100% years strung together isn't a wunderkind. Yet those returns can make a hedgie one of the wealthiest guy's in the world. I'm sure if I sat down with Ken Griffin and picked his brain he'd have very little information or insight that could help me decide whether I should double down or not on my short bonds in front of to-morrows payroll release. Talking to most hedge fund managers about speculation would be like asking Randy Johnson for tips on baserunning. Not applicable. Our ability to accurately forecast is ripe with random results. Sometimes you're hot, sometimes you're not. Like most CBOT guy's, I am an unabashed admirer of Rich Dennis. Dennis however had an exchange with Schwager where I feel he missed a relevant point. Schwager asked Dennis if luck play's a roll. Dennis said luck doesn't make or break a trader yet on any given trade luck play's a roll because the outcome is random. I'd argue that if one's core strategy is built upon a condition than the appearance or prevalence of that condition does in fact make or break you. Hence market conditions enriched a generation of trend followers in the 70's and lack of index volatility has enriched a bunch of premium sellers this decade. Throw Dennis into a decade long commodity chop and he's toast. Throw Vic N. into a 22% down SPX day and he's toast. As atticus predicts, a 3 sigma move in some FX market's will blow currency carry funds into the black hole. Yes T-Dog adapting to new environments is important but it's still random as to if we're adapting to something that hasn't really changed. In other words if I'm a tend follower and I say, "this isn't working anymore I'm changing stripes" it's STILL random as to whether trendiness reappears or not. I'm still guessing.
There is definitely some truth to this, but you're carrying it too far. Just because a guy like Griffin makes his money arbing/spreading/scalping/trading esoterica, doesn't mean he doesn't have to make large-scale market calls. Arbitrage doesn't scale well; to make good returns on a decent pile of capital requires you to make decisions like any other kind of trader--they're just not the same decisions a guy sitting in front of the screen flipping stuff on his own is making.