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Do educated traders make it harder to make a profit
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Do educated traders make it harder to make a profit

  #21 (permalink)
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wldman View Post
@artemiso

You switched coasts. Congratulations. Wondering if you are still extending Monday night or if it is very early Tuesday...posting before 4 a.m.?

I'd love to debate this with you. Not about winning points, being right or wrong, simply about the level of discourse. I can't do it though because while I am sitting/standing here I must eek out a living for my family...lol.

I'd have answered the initial question, No, it's the dumb ones. Actually it is not even the winning traders that make it harder to make a profit. That said, nicely constructed and well reasoned arguments are exciting and interesting for me...makes me something, but I'm not sure what.

For the guys that want to master the art, this is an interesting resource.

https://yourlogicalfallacyis.com/

Dan

@wldman

Dan, it's always great to have someone to discuss my personal life. My time has been divided equally between SF, NYC and Boston lately. I don't think I'll settle permanently in SF because of the state income taxes, but the city has its charms. I got up at 2 AM, swamped with work. What about you?

I originally declared a physics and philosophy double major. You could sort of see from my posts that I'm on the contractarian/utilitarian side. One of my professors was T. M. Scanlon and you could out him for all kinds of issues that were against your ethical beliefs, but you could never find an inconsistency in his reasoning. I think everyone should take a college class in ethics because most people have never thought seriously about what's ethical or not, beyond the values that they were brought up with.

I was taught never to name a logical fallacy as my argument, because that is insufficient for disproving a statement. You could be logically fallacious, but still correct: for example, I could claim that 1+1=2 is true because a math professor said so. This is an argument by authority (fallacious), but nevertheless justified, and universally true - it belongs to the class of Gettier problems (Gettier problem - Wikipedia, the free encyclopedia).

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  #22 (permalink)
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I am not smart enough ,so I let my PC make my trading decisions.

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  #23 (permalink)
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Philosophy


"Do all these professional runners make it harder for a 90 years old consumptive to win the day at the next New York Marathon?"

In zero-/minus-sum games like derivatives, statistics clearly show that most of the sheep are killed. Any competition is cut-throat for those who are submarginal. Is this the fault of the game? Certainly not. Is this the fault of the professionals? No - at least as long as they comply with the rules. (Stocks as an investment category are no zero-sum game, but we are at futures.io (formerly BMT)F, not at BMIF ...)

In the end it all comes down to the question "Who are your competitors and what's your edge?". As long as you can't answer that, you should probably think twice about putting on a trade. Thinking twice doesn't mean to leave it (you would never gain experience that way), but to realize your current status and act accordingly (esp. in terms of money management).

P.S.: PAT and many other methods may be starting points (providing that they fit your personality and resources), but always remember: The map isn't the terrain.


Last edited by choke35; February 25th, 2014 at 09:18 AM.
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  #24 (permalink)
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patidar View Post
I am not smart enough ,so I let my PC make my trading decisions.

Hopefully your pc is smart enough..

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  #25 (permalink)
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First, let's thank Artemiso for his insightful post on LTCM. Let's forget about LTCM and just bring up 2 other points I mean facts:

1. Most HFs underperform the market. Now we can agree that the people handling millions of dollars if not billions are probably more educated than the average Joe. Yet, as a group they can not achieve such a simple task as just being long of the S&P 500. So where is all that education and smartness wasted?

2. More than 90% of traders don't make it. Now we don't really know the average education level of Trader Joe, but unless Artemiso can show data that more educated traders make more money, we have to assume that:

a/ traders generally are dumber than average joe, thus they are losing money. or
b/ seeing the huge failure rate if traders are smarter than average Joe, that smartness sure doesn't transform them to be successful...

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  #26 (permalink)
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Going back to LTCM just for a moment, their bailout was like a trader who is using a martingale strategy and getting blown gets an infinity supply of cash from the fed, thus he can wait long enough for the market to turn.

Bottom line is, it wasn't for their genius if they eventually lost little, but for the bailout. Oh yes, the loss was by the way 4.6 billions. And what happened to the geniuses?

"After helping unwind LTCM, Meriwether launched JWM Partners. Haghani, Hilibrand, Leahy, and Rosenfeld all signed up as principals of the new firm. By December 1999, they had raised $250 million for a fund that would continue many of LTCM's strategies—this time, using less leverage. With the Credit Crisis, JWM Partners LLC was hit with 44% loss from September 2007 to February 2009 in its Relative Value Opportunity II fund. As such, JWM Hedge Fund was shut down in July 2009."

Pure genius for sure....

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  #27 (permalink)
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  #28 (permalink)
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Pedro40 View Post
First, let's thank Artemiso for his insightful post on LTCM. Let's forget about LTCM and just bring up 2 other points I mean facts:

1. Most HFs underperform the market. Now we can agree that the people handling millions of dollars if not billions are probably more educated than the average Joe. Yet, as a group they can not achieve such a simple task as just being long of the S&P 500. So where is all that education and smartness wasted?

2. More than 90% of traders don't make it. Now we don't really know the average education level of Trader Joe, but unless Artemiso can show data that more educated traders make more money, we have to assume that:

a/ traders generally are dumber than average joe, thus they are losing money. or
b/ seeing the huge failure rate if traders are smarter than average Joe, that smartness sure doesn't transform them to be successful...

Your post suggests to me that you aren't familiar with how hedge fund NAV is calculated.

Firstly, most of the industry is composed by those with >$5 billion in AUM. I forgot the most recent number but it was something like 90%. Most of the underperformance and failed funds come from the remaining group, and that's because the economies of scale are poor when you are sub-$1 billion.

Underperforming the S&P 500 is a remarkable feat when, on top of transaction costs, you have to pay $100,000 in formation fees, >$40,000 in your annual audit, 12 basis points in partnership accounting and about 360 basis points in management and incentive fees to the general partners (let's say they generated 8% gross returns and you have a vanilla 2/20 setup). Up until you hit substantial size, say >$100M, the frictional costs are huge. Would I be willing, as an investor to underperform the S&P 500 for the convenience of having only to log to a customer portal 52 weeks a year, and having a K-1 prepared for me at the end of the tax year? Yes.

Now, let's agree on a definition for sake of argument. Let's say "failure" implies closing your trading account with negative IRR since inception. I could very well believe that 90% of traders fail. Let's contrast this with some numbers that are too drastically different for you to ignore:

- If you ignore 2008/09, the percentage of institutional accounts at our primary clearing firm that closed in the last 10 years was less than 5%.
- PEAK6 is composed mainly of B.Sc's, and their average percentage of traders who are profitable year-on-year is about 96% even through 2008/09.
- Only 1 guy on Chopper Trading's algo team has only a BSc (from MIT), the remaining all have PhD's, and they are almost 100% profitable year-on-year.
- DRW's algo team composes 100% PhD's, and their average percentage of traders who are profitable year-on-year is 100%.
- I don't know the most recent size of SIG's algo team, but they were still staffed fully by PhD's in fall 2013 and 100% profitable.
- Two Sigma's algo team also composes 100% PhD's, and their average percentage of traders are profitable year-on-year is 100%.


Pedro40 View Post
Going back to LTCM just for a moment, their bailout was like a trader who is using a martingale strategy and getting blown gets an infinity supply of cash from the fed, thus he can wait long enough for the market to turn.

Bottom line is, it wasn't for their genius if they eventually lost little, but for the bailout. Oh yes, the loss was by the way 4.6 billions. And what happened to the geniuses?

"After helping unwind LTCM, Meriwether launched JWM Partners. Haghani, Hilibrand, Leahy, and Rosenfeld all signed up as principals of the new firm. By December 1999, they had raised $250 million for a fund that would continue many of LTCM's strategies—this time, using less leverage. With the Credit Crisis, JWM Partners LLC was hit with 44% loss from September 2007 to February 2009 in its Relative Value Opportunity II fund. As such, JWM Hedge Fund was shut down in July 2009."

Pure genius for sure....

I don't think you understand what a bailout means. A bailout certainly doesn't mean your investors get paid to recuperate their losses.

You still have not explained to me why you think anyone else could have done a better job of managing LTCM's assets after the hit from the liquidity crisis.

JWM isn't indicative of anything. Eric is a great guy, but the main firepower in LTCM came from Chi-fu Huang, Myron Scholes, and Bob Merton. Myron Scholes, Bob Merton still play a huge role at DFA, along with Gene Fama and Ken French, and they have outperformed the S&P 500 since inception in '81 for 33 years straight despite mutual fund restrictions.

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  #29 (permalink)
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artemiso View Post
Lastly, to go back on topic. I've said this before, the top 20 performing managers have one thing in common - they are incredibly well-educated. From https://futures.io/traders-hideout/23792-who-makes-more-money-scalpers-point-traders-11.html#post328253:

I wondered what the criteria were for determining that these are the top 20 performing managers, and think I found out. The names and their order seem to be taken from this Bloomberg article:

The 100 Top-Performing Large Hedge Funds - Bloomberg

Bloomberg compared large hedge funds, with assets under management greater than $1 billion. Not mid-sized hedge funds, nor any other type of investment vehicle.

The ranking method was simple: Bloomberg looked at the year-to-date return for the ten months ended on Oct. 31, 2012. That was the entire procedure to come up with the top performing hedge funds. A 10-month snapshot of returns.

As it turns out, Hintze, Cooperman, Odey, Hanover, Tepper, Loeb, Rosenstein, and Halvorsen suffered losses in the prior year 2011 with their funds from the top 20. More history is not available in the article.

You basically showed that a prerequisite to become a big hedge fund manager with large $AUM is going to college. However, there are quite a number of professions where college education is a requirement, this is not unusual per se.

The supposed link to top trading performance seems questionable, since the prior year's losses indicate the long-term nature of these funds. A 10-month snapshot is quite random for a long-term investment. Even if these were the best 20 managers, college degrees would certainly not separate them from their peers.

It takes me a bit of time to look up the details about just the short snippet I quoted. Unfortunately, this seems to be a common theme in your arguments. While you do contribute interesting and useful information, I think you make some of it appear in other ways than warranted.

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  #30 (permalink)
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artemiso View Post
For instance, you can get the data described in your second link simply by spending $30,650 per month and spending about 1 year of time writing a few software applications (it takes maybe 3 months of man-hours each). In my opinion, everyone should do this. I'm not holding anyone at gunpoint preventing them from doing it.

I make a profit each time I travel from New York to San Francisco, and it's enough to offset my costs of taking a round-trip flight from NY to SF.

Do I need to spend a significant amount of my time and money to generate this profit? Yes.

Is air travel absolutely necessary for me to make that money? Yes.

Is air travel giving me a latency advantage and facilitating me from making that money? Yes.

Is air travel illegal? Or am I making that money illegally? No.

Those who complain about a technological advantage that takes remarkable amount of time and money to build are like telling me air travel is illegal and that I am only allowed to walk from New York to San Francisco for any business that generates profit.


artemiso View Post
Another example: Unlike many of you who watched The Hobbit when it was released, I had to wait until it was out on Netflix. Are you watching The Hobbit illegally? No, you watched it at a movie theater. Should movie theaters be banned from selling The Hobbit tickets at a higher price than Netflix charges? No, that's how their business is run! I'm not upset that you spent extra time and money to catch the premiere at a movie theater...

Interesting examples. It turns out however that breaking SEC rules actually is illegal, regardless of how much money HFTs pay for proprietary feeds. That second link you explicitly referred to contends PACF violated a rule that NYSE was fined for in 2012.

http://www.sec.gov/News/PressRelease/Detail/PressRelease/1365171484740

"Washington, D.C., Sept. 14, 2012 —

The Securities and Exchange Commission today brought first-of-its-kind charges against the New York Stock Exchange for compliance failures that gave certain customers an improper head start on trading information.

SEC Regulation NMS (National Market System) prohibits the practice of improperly sending market data to proprietary customers before sending that data to be included in what are known as consolidated feeds, which broadly distribute trade and quote data to the public. This ensures the public has fair access to current market information about the best displayed prices for stocks and trades that have occurred.

According to the SEC's order against NYSE, the exchange violated this rule over an extended period of time beginning in 2008 by sending data through two of its proprietary feeds before sending data to the consolidated feeds. NYSE's inadequate compliance efforts failed to monitor the speed of its proprietary feeds compared to its data transmission to the consolidated feeds."

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