Rhody Trader

John Stuart Mills introduced me to the term “tyranny of the majority” in his essay On Liberty. Basically, that means a group using its majority position to oppress a minority group in some fashion. A classic example in the US is the case of blacks being oppressed by the white majority.

Of course Mills wasn’t the first to introduce the concept. I just happened to read it first in his work. Plato, Aristotle, Madison, and Tocqueville (I’m sure among others), all addressed the issue as well in their discussions of democratic government.

I bring this up because we’re seeing the tyranny of the majority in glaring fashion in Congress right now with the healthcare legislation. Among the plans to pay for the proposed bill is to add a surtax to those who’s earnings exceed certain threshold levels. Why? It pretty much comes down to “because we can”.

This statement was made by answers.com in the definition of tryanny of the majority:

The main danger that worried Aristotle, Madison, and Mill alike was that the majority poor citizenry would vote for confiscatory legislation at the expense of the rich minority. For whatever reason, this has never happened.

Hmmmm….They might need to change that comment before too long.

I just got fininshed reading a really good post at the Psy-Fi blog, Mandelbrot’s Mad Markets. It’s a well written discussion of some of what underlies financial risk management and why it all went to hell in 2007 and 2008 – and why it will do so again some time down the line unless decision makers start understanding the limitations of their tools.

Basically the bottom line is that despite what some folks might lead you to believe (or delude themselves into believing), the markets cannot be modelled nice and neat with bell curves and standard distributions, at least not with current tools. This has very serious implications because it means things can go much worse than folks expect and are more likely to do so than would be predicted. This is something discussed in Benoit Mandelbrot’s book The (Mis)Behavior of Markets.

Traders may not think all this modeling and forecasting stuff impacts them, but they would be wrong. First of all, it tells us that markets can go further and faster than we’d ever expect. Can you see how that might  be useful to know? Also, it puts the whole idea of “risk reversion” in question because there may not be a proper mean to which prices can revert. Oh, and it may take much longer for that reversion to happen and see the market go much further away from the mean than would be expected.

Joe Weisenthal claims in his Clusterstock entry that Harvard Business School is Teaching Dangerous Nonsense About Leverage. It’s basically a little add-on commentary to a post by my corporate compadre Felix Salmon on his Reuters blog. Felix, and Joe by extension, are going after the Harvard folks for this statement:

It would not be rational for a public company to be funded only by equity. It’s too inefficient. Debt is a lower cost source of funds and allows a higher return to the equity investors by leveraging their money…

While I think there are plenty of reasons for bashing Harvard (I used to coach for Brown, so they are fair game as far as I’m concerned ), it’s definitely harsh to go at them for this, which basically just comes from well known financial theory. Certainly, it’s not confined to that Cambridge campus. My former professor, Dr. Gordon Dash, offered up the following in response:

That is traditional thinking at its best about lowever the avg cost of capital. Of course, what is not mentioned is HOW these folks estimate the cost of equity — well it is by the use of the old CAPM and its reliance on the linear relationship between risk and return. It might just be that the firm is so saddled with high-priced equity that it would not make sense to take on any other form of capital expansion without first reducing the risk adjusted cost of equity.

As much as the old methods of financial analysis have come under sharp criticism, there is definitely the question of cost of capital which needs addressing, and that’s something Felix and Joe have ignored. They’ve just harped on the “debt is bad” theme. I understand it given what we’ve gone through, but it risks swinging things in the whole opposite direction, which isn’t any better.

The bottom line is that each company should be making decision about their capital structure that make sense for their particular situation, maximizing the return of their shareholder’s investment, but with a reasonable risk profile.

Why does anyone care what Nouriel Roubini has to say? He’s an economics professor, not someone who manages lots of money who’s trading actions can move the markets. Why is the market reacting to his comments – or the lack thereof as it turns out was the case yesterday and today?

Maybe it”s a combination of a gloom and doom prognostication, an eye for getting himself in the spotlight, and a general public pessimism in many areas of society these days. In that case, he’s nothing more than the public mouthpiece for a lot of people who share his view. That’s nothing to move markets, though, since presumably those people already have the expressed opinions and have probably positioned themselves with that in mind.

Actually, I know why the market reacted as it did yesterday when it was thought Roubini was turning bullish, or at least lest bearish (thanks to CNBC). It’s a classic example of the market finding an excuse for doing what it already wanted. It’s no doubt that the market was already in a bullish mindset. That sort of thing happens all the time, which is why the same bit of news can have a widely varied impact depending on the underlying psychology of the market.

But I still shake my head at the idea that someone who was bearish at the right time suddenly has this reputation as a great pundit. But then I barely listen to the guy (or anyone else really, if I can avoid it), so what do I know.

JD at Get Rich Slowly posted  The Pros and Cons of Self-Employment recently and it got me thinking about my own experiences as an entrepreneur. It started in earnest back when I was coaching collegiate volleyball. That was a great job for many reasons, one of which was having a high flexible schedule allowing me to do some interesting things.  I’ve kept it up in different ways since then.

I guess you could say I started with launching a club volleyball program, though while that was certainly a business from the perspective of management and marketing and all that, it was never something intended to make money. The first real money making venture was the development of a training aid which came to be called the Precision Passer. Basically, it’s a target which hangs on the volleyball net (as you can see in the picture) that players use to catch the the ball in their ball-handling drills. They’ve been sold all over the US and to a few other countries as well.

Going through the process of developing and then marketing the Precision Passer was a great learning experience. There was prototyping to be done and a patent to file when it was ready. There was production to arrange and fund. There was a marketing strategy to develop and a fulfillment processes to put in place. In some ways there was success. In other ways there was failure.

Although the products are considerably different, the lessons I learned building the Precision Passer business, and running the volleyball club program, helped a lot when my book came out. Of course Wiley deals with the production and distribution of The Essentials of Trading, but a great deal of the marketing and promotion has fallen to the team of  me, myself, and I.

There’s no doubt in my mind that I will continue in an entrepreneurial manner for many years to come, if for no other reason than because I have varied interests and like having side projects. The one thing I would say about it, though, is that running a business is much more involved and complex than most folks ever thing about ahead of time. As one book I read said quite well, most people who quit their jobs to start a business find themselves with a job that’s much bigger than the one they’ve left.

Yesterday Brett Steenbarger posted Matching the Time Frames of Your Analyses and Your Trading which focused on how traders can sometimes allow their view of the larger macro picture affect their more micro trading. To put it quite simply, Brett was saying trade what price is doing now, not where you think it should be going in general terms.

I’d add another level to this discussion.

There is the additional trap that traders can fall into where positions which start as trades become investments because the trader looks to a higher timeframe and uses that as an excuse to stay in a position (widening the stop, perhaps) when they would have been out of the trade otherwise. And of course there’s the other way around as well where investments become trades because an antsy investor starts to narrow their focus on shorter timeframes. Either way it’s a breaking of one’s plan, which is definitely a no-no.

I was provided with a free copy of Broke: The New American Dream by it’s director, Michael Covel last week. Last night I gave it a look and figured I’d provide my thoughts.

Overall, I’d definitely call the documentary an enjoyable view. There are a lot of very interesting folks interviewed through the presentation – some very well-known names and some others who are perhaps not quite so well known in the public, but who are very noteworthy anyway. Interestingly, Peter Borish is one of those included. He was also featured in the Trader documentary working with Paul Tudor Jones.

The film starts off with a focus on the real estate market and what’s happened there. It then discusses gambling, Social Security, and the popularity of lotteries. The final part of the production focuses mostly on trading and investing.

Let me make two initial comments of a critical nature.

The first is the “How Wall St. Sold Out America” sign that shows on the front of the DVD, the site, etc. I think it’s a pretty blantant attempt to generate public interest through controversy, and nothing more than that. There is no discussion of any consequence in the film about Wall Street causing the mess we’re in.

Secondly, after watching the DVD I couldn’t actually tell you what the singular point of it was, if there is one. Covel definitely didn’t go the tried and true route of blaming the Fed or blaming the banks or blaming any of the others the media has loved to target up to this point. He seems to have been been placing the general blame on society for a combination of greed and a lack of understanding of risk, but I’m not entirely sure.

Now, that said, I did find the video entertaining and thought-provoking (some really funny outtake stuff in the closing credits). In particular, there’s a discussion of state-run lotteries which could very well have you thinking about some things in a different way. How does a government which seems so bent on protecting you from yourself justify promoting something which is a losing proposition in a worse way any Vegas casino?

The best part of the whole film, to my mind, is the discussion of trading. Granted, trading is major focus, so that’s probably a predictable thing. There were some great comments about developing as a trader and managing risks, though, from some folks who know a thing or two about it. If you were only to watch that part of the DVD I think it would be entirely worth it.

There’s a bond fund manager on CNBC now (as I write this) who supposedly has a 24 year record of no losses and a 60% return over that period, if I heard correctly. This is supposed to be impressive? Sue certainly made out to sound that way.

The compounded annualized rate of return that 60% implies over two dozen years is under 2%. That’s not beating inflation by any stretch of the imagination.

And who cares if a bond fund doesn’t take any losses? That’s easy. Just hold to maturity. Ta-da!

A note has been sent around in the office. There’s an account manager position open in our municiples group. Here’s what the note had to say:

We currently have one open position for an Account Manager working in the Muni group, if you or anybody that you know may be interested in the position please let me know by the end of day Friday. This position is located in Boston.

** Work with Sales to help generate leads and to retain existing business, grow existing accounts. Account Specialist are responsible to reaching out to all new clients in their territory to offer training and support. Travel to accounts that need visits, quarterly visits to named accounts, reach out to all cancel to try to retain revenue and assist in all sales campaigns.

** support the customer service line, entitlements with territory, product check, travel to clients, outgoing and incoming calls to clients, support billing issues, submit orders and work closely with sales and entire sales account specialist team.

** 3-5 years experience in client service

** College Degree, industry knowledge a plus.

Please send me resumes, interviews will be conducted and hopefully a decision will be made soon.

If you have any interest or know someone who might, let me know.

Peter Boockvar made a bit of a boo-boo on the Big Picture blog in his post 10 year bond yield/50% retracement. Since leaving a comment requires logging in, which requires being registered – which I’m not – I’ll use this blog post as a corrective venue for Peter.

In the Treasury market, coupon securities (those which pay semi-annual interest) with original maturities bewteen 2 and 10 years are called “Notes”. Those with longer maturies – meaning 30 years – are called “Bonds”. In other words, Peter should have said “10 year note” rather than “10 year bond”.

Back when I was a rookie analyst I worked in the rates market, mostly focusing on Treasuries. In fact, my first regular gig providing specific trading recommendations in a professional fashion – if I remember correctly – was on the 10 year Note.