“Cybernetics was defined by Wiener as ‘the science of control and communication, in the animal and the machine’—in a word, as the art of steermanship.”

–W. Ross Ashby

CYBERNETIC TRADE CONTROL SYSTEMS

Cybernetics embodies a multi-discipline theoretical framework which focuses on goal-directed systems.  These systems use information, models, and control actions to steer towards and maintain a predefined objective while attempting to counteract anything which detracts from this objective.

Perhaps the most fundamental innovation of cybernetics is its explanation of purposiveness, or goal-directed behavior.

Cybernetics and Fund Management

“Goal-directed behavior” is particularly critical in the world of investment management.

A fund manager’s goal is simple:

1. To generate the best possible return given prevailing market conditions
2. To control the risk of loss

Hence the advantage of a systematic trading methodology designed to mitigate risk and optimize returns.  Achieving this goal, however, while safely navigating the Marketplace—itself a complex adaptive system—is no easy task.  Our constant immersion in subjective phenomena—the temporary consensus of values exemplified by changing stock prices—necessitates a scientific and objective goal-directed trading methodology, counter-intuitive as this may seem.

Goal-Oriented Behavior

Cybernetic trade control is characterized by its systematic pursuit of the fund’s objective, resisting internal and external obstructions from the environment which deviate from these goals.  Such a system forces the fund manager to operate within a very strict and highly regulated set of rules, the main benefit being the prevention of fund failure and catastrophic losses.  Thus, goal-directedness implies the regulation of—or control over—trader response (internal/controllable) to market conditions (external/uncontrollable).

Cybernetic thinking has impacted my investment philosophy by compelling me to seek:

• Scientific and objective means to identify the inception or existence of high-probability trends
• Scientific and objective criteria to enter, exit, and if need be re-enter those trends, while
• Never incurring greater than predetermined % of risk against total trading capital for any single trade.

This requires a systematic approach  to trade management which minimize the impact of subjective, emotional, or impulsive input on the part of the trader.

The net effect is a systematized goal-oriented discipline imposed on the trader that in principle is very similar to that imposed on the pilot of a jumbo jet.  In fact, I feel this is an appropriate metaphor and mind-set for a fund manager–insofar as his or her successful implementation of a system-driven approach has a dramatic impact on the lives of perhaps hundreds of people.

"ASEAN heavy, we confirm high-probability long-term trend. You are cleared for take-off."

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E. M. M.

See

When Failure Is Not an Option

Ouch.  You’re killin’ me Marcus.

So who is this guy?  And why would he have the audacity to say this?

If I didn’t know any better my knee jerk response would be to come out swingin’.  However, anyone who’s had the good sense to get their hands on Jack Schwager’s Market Wizards already knows Marcus is interview numero uno of 16 interviews from among the world’s top traders at the time.  I don’t know about you, but that’s reason enough for me to sit down, shut up and listen.

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Michael Marcus, Market Wizard

As Jack Schwager puts it, Marcus got his start as a professional trader at Commodities Corporation, a firm that hired professional traders to trade the company’s own funds.  Marcus’ profits eventually exceeded the combined total profit of all the other traders.  Over a 10-year period, he multiplied his company account a phenomenal 2,500 fold!  Since the Schwager interview (1989) Marcus, along with the other interviewees, is referred to somewhat reverentially as a Market Wizard.

Marcus was personally trained by Ed Seykota.  Judging from the Schwager interview as well as from Michael Covel’s provocative best-seller Trend Following, Seykota may hold the top known performance record of any trader of the 20th century  (e.g., 1972-1988 Seykota’s private account was up 250,000 percent).  Marcus also discovered and trained Bruce Kovner, himself a Market Wizard who in 1989 was one of the worlds largest currency traders.  By 2008 Kovner ranked #106 on the Forbes 400 with a net worth of $3.5 Billion.

This is the legendary stuff which inspires reverential silence even among the most hard-nosed brokers.

With that in mind, let’s listen in on the interview with Marcus and see if we can pin down why he slams the average broker:

Jack Schwager:  “What kinds of misconceptions about the markets get people into trouble?

Michael Marcus: “I think the leading cause of financial disablement is the belief that you can rely on the experts to help you.  Typically these “experts” are not traders. Your average broker couldn’t be  a trader in a million years.  More money is lost listening to brokers than any other way.  Trading requires an intense personal involvement.  You have to do your own homework, and that is what I advise people to do.”

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Will the real trader please stand up?

So what, precisely, is Michael Marcus getting at?  It helps to understand that from a world-class fund manager’s perspective, not everyone who calls themselves a trader (or merely wears the label) is a trader.  Based on my own experience, there are at least 3 work roles labeled “trader” which interface with the investing public.  2 are “pseudo-trader” positions; 1 is the real deal. Starting with the “pseudo-traders”:

1. The Salesperson “Trader” :  If you spend the bulk of your schedule pounding the pavement, talking to clients, or looking for new ones, let’s face it:  you’re a salesperson.  If your boss is breathing down your neck to bring in more clients or increase your buy/sell transactions, don’t kid yourself, you’re in sales.  Hey, I’ve got no beef with sales. You may even be good at it.  If so, more power.  Just don’t confuse being a good car salesman with being Michael Schumacher.

"Have I got a hot number for YOU."

2. The  Cash Register Clerk “Trader” : These are the folks who populate the main trading floor.   Like the cashier at the grocery store, this is where customers line up, typically by phone, to buy and sell things.  In other words, the day is spent before a blur of retail investors who, by and large, have a less than profound understanding of how to manage their investments.  They buy and sell this, that, and the next thing depending on what they saw on T.V. last night, read in the paper this morning, or a “hot tip” gleaned over the office water-cooler.  The cash register clerk “trader” is paid to oblige them–after all, the “customer is always right”.  Right? (In this business?).  When the cashier trader is asked, “So how’s XYZ doing today?” what can you say, really?  Some variation of “Well, the Market’s up/down x-points today” always seems to work.  It’s tough for a cashier to give informed answers to uninformed questions.  It’s sad to admit, but after awhile it’s less taxing on the nerves  to lower the bar and be uninformed as well.  If you can’t beat ‘em, join ‘em.

"That's 20 Alaska Milk, 10 SM, and 100 Agrinuture? P20, 500 please."

3. The Trader:  Finally, this guy (or gal) is the real deal. He or she can articulate a complete trading system–in detail–and execute it accordingly.   If you have a Self-Directed Account and were to call a real Trader intra-day, he or she would have a prepared fundamental and technical assessment of potential entries and exits for you to act upon.  If you have a Managed Account, the Trader would manage your investment as if it’s a fund, and build your portfolio with the mindset of a portfolio manager.

"We'll stick with our trading plan, precisely as we've discussed Mr. Jones."

The real Trader has a highly refined skill-set but continues to seek the wisdom of renown traders throughout the years by means of self-education.  In fact, your Trader probably boasts a trading library that would rival anything you would find at Barnes & Noble or PowerBooks.  If you were to ask about Fundamental Analysis, Technical Analysis, Elliott Wave, Fibonacci, Pattern Recognition, mechanical trading systems, or high frequency trading,  your Trader would have a working knowledge of each, their relative strengths and weakness,  and would be able to explain which strategies he or she specializes in and why.  Lastly and most importantly, over time your Trader should be able to consistently generate competitive returns.

(See Pseudo-Traders with No Face-to-Face with the Investing Public).

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The Average Broker

So there you have it.  Now that we have more understanding of what Michael Marcus may have been talking about, it’s easier to see why he would say:  “Your average broker couldn’t be a trader in a million years.”  Speaking as a broker myself, I guess there’s no way around the fact that a broker must be able to demonstrate that he or she is not average.

From the perspective of an investor it’s easier to see the wisdom behind Marcus’s words.  Why on God’s green earth would you want an average broker to handle your hard-earned money anyway?

And if you’re a broker, why in the world would you be content to be average?

"I sure wish I had more than just sales training."

One thing’s for sure, based on my vantage point on the main trading floor, if I were an investor I most certainly wouldn’t want the average broker managing my money.  Not in a million years.

E. M. M.

For more tough medicine see

Be Careful Who You Listen To

The #1 Sign You Are Likely to Blow Up Your Trading Account

E. M. Murray. Customized stock portfolios. Professional Management. Fixed Downside Risk.

PSE Inks Pact with DepEd

In a thrust to further develop the Philippine capital market and enhance students’ financial literacy, the Philippine Stock Exchange (PSE) has teamed up with the Department of Education (DepEd) to pursue the integration of topics about the capital markets in secondary education.

The PSE and DepEd, through the Bureau of Secondary Education (BSE), will undertake a module development project to create a curriculum in the form of a Teacher’s Guide. Beginning academic year 2009-2010, high school students will learn about the fundamentals of saving and investing.

Sealing the memorandum of agreement are (from left) BSE Director IV Lolita M. Andrada, DepEd Secretary Jesli A. Lapus, PSE President and Chief Executive Officer Francis Lim, and PSE Vice President and Capital Markets Development Division Head Enrico M. Trinidad.

Source:
PSE Info Matrix, Vol. 3. No.1, Official Newsletter of The Philippine Stock Exchange, Inc.

The long-awaited ASEAN Trading Link may do more to stimulate both investment in the Philippines and Filipino investing than any other current development.

According to the PSE Info Matrix a Memorandum of Understanding was signed earlier in the year between the exchanges of the Philippines, Malaysia, Singapore, Indonesia and Thailand. Within twelve months, investors based in any of these countries will be able to buy stocks on the index of any participating ASEAN exchange, just as easily as purchasing at their home exchange.

Bloomberg’s Trading Link Affirmation

The Bloomberg ASEAN Equity Investment Roadshow, staged July 22, 2009 in Makati City, showcased experts from each Trade-Link participating ASEAN market, culminating with the Philippine economic outlook by ATR Kimeng.

5 Point Market Stimulant
The ASEAN Trading Link may do more to stimulate both investment in the Philippines and Filipino investing than any other current development. The are at least 5 key reasons:

1. The opportunity to buy stocks on the indices of Singapore, Malaysia, Indonesia, and Thailand means the trading universe for Philippine investors who invest only in well established companies will expand several hundred percent. In other words, we will be able to scout for and benefit from opportunities in these other markets, too.
2. Likewise, Singaporean, Malaysian, Indonesian and Thai individual and professional investors will be able to easily explore opportunities in the PSE. Over time this may lead to dramatic and sustained increases in PSE trading volume.
3. Local Mutual Funds will greatly benefit from this expanded universe. Either 1) local-only funds will adjust their mandates to allow their managers to take positions throughout the ASEAN arena , or 2) new ASEAN oriented mutual funds will be launched and promoted to the investing public.
4. Hedge Funds: I hate to say it, but a PSE-only hedge fund is almost a laughable proposition. However, the ASEAN trading link will encourage the formation of “regional funds”, that is, Filipino-managed hedge funds that carve out niches throughout the ASEAN exchanges. In other words, aspiring Filipino hedge-fund managers will have an opportunity to demonstrate their capabilities on the international stage.
5. All of the aforementioned will bring much needed currency into the Philippines and, to the extent the “trickle down theory” is true, will bring the nation one step closer to First World status.

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ASEAN Signs Trading Link

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E. M. Murray. Customized Stock Portfolios. Professional Management. Fixed Downside Risk.

]]> http://divineeconomy.wordpress.com/2011/01/01/5-reasons-the-asean-trading-link-will-revolutionize-philippine-investing-2/feed/ 0 Paris E. M. ASEAN TRADING LINK COUNTRIES Chinese Blue Marble Button Chinese Blue Marble Button E. M. Murray. Personalized Stock Portfolios. Professional Management. Fixed Downside Risk. http://divineeconomy.wordpress.com/2011/01/01/the-intelligent-investor/ http://divineeconomy.wordpress.com/2011/01/01/the-intelligent-investor/#comments Fri, 31 Dec 2010 17:15:10 +0000 Paris E. M. Murray http://investphilippines.org/?p=1945 ]]>

Benjamin Graham

“Smart investors look to the market not as a guide for what to do but as a creator of opportunity.”

–Benjamin Graham

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We all like the idea of being intelligent investors, don’t we?  Some of our more seasoned readers however may have picked up on my allusion to Benjamin Graham’s landmark work:  The Intelligent Investor.

Although I’m not a Value Investor per se, I have great respect for Benjamin Graham, as I do for all of the 20th century’s great investors.  Graham, the late teacher and mentor of Warren Buffet,  is renown as the father of security analysis and value investing.  His classics Security Analysis and The Intelligent Investor are the definitive texts of value investing.

Beginning in 2009, I’ve had the privilege of teaching a seminar at the Philippine Stock Exchange entitled Trend Following: Technical Trading for the Intelligent Investor.  Astute attendees  often wonder aloud about my marriage of technical trading with value investing. After all, it’s a rare thing to hear value investing and technical analysis mentioned within shouting distance of one another.   (Click here for a detailed look at Technical Trading and Value Investing)

Nevertheless, my “big wave investing” approach (See Riding Giants at Very Low Risk) is based upon a long-term performance ethos amenable to both value and growth stock methodologies.  It is, however distinct from value and growth stock investing as stand alone strategies in the following ways:

1. Big wave price movement encompasses the best performing value and growth stocks.
2. We require that security analysis of value or growth stocks  be technically confirmed by favorable price movement prior to putting on a position.  In other words, our fundamental analysis is confirmed by technical analysis.

Value and Growth Stocks

Value Investing and Growth Stock Investing enjoy phenomenal track records.  Value Investing favors underpricings of fundamentally sound Large and Mid Cap companies.  Champion value investors include:

• Warren Buffet of Berkshire Hathaway
• John Templeton of Templeton Growth, Ltd.
• Mario Gabelli of GAMCO Investors
• Seth Klarman of The Baupost Group

Growth stock investing, by comparison, favors sustained stock price increases in fundamentally sound Small Cap companies.  Champion growth investors include:

• Philip Fisher
• William O’Neil of Market Wizards, owner of Investor’s Business Daily
• Marty Schwartz of Market Wizards
• Dan Zanger, and others.

Rather than choose one technique over the other, to the extent both are proven to generate competitive returns, we are happily open to both.

Technical Price Confirmation

Meanwhile, we have concluded the best defense against prevalent financial statement hocus-pocus and media-driven disinformation is for fundamental analysis to be confirmed by favorable price movement.  Put another way:

“Fundamentals don’t mean squat unless prices go up.”

–E. M. Murray

Please see The Reluctant Technician: Death Toll for Fundamental Analysis?

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John Bogle help us.

Vanguard Group Inc., the largest U.S. provider of stock and bond funds, is deciding whether to keep Axa Rosenberg Group as manager for about $1.5 billion of its assets, after that firm said a “coding error” disrupted its quantitative investment process.

“We’re taking a very hard look at that relationship, but we’re still in fact-finding mode,” Rebecca Katz, a spokeswoman for Valley Forge, Pennsylvania-based Vanguard, said in a telephone interview. Axa Rosenberg, a unit of Paris-based insurer Axa SA, manages assets for three Vanguard funds.

Axa Rosenberg told clients in an April 15 letter that founder Barr Rosenberg is taking a  30-day leave of absence and director of research Thomas Mead will resign within a year, after an error in the model used to select investments was found in June last year.
Senior executives failed to report the error, which was corrected between September and November, in a “complete and timely manner,” according to the letter.

Oops.  Maybe they should be calling John Bogle out of retirement.

SOURCE:  BLOOMBERG

E. M. Murray. Customized Stock Portfolios. Fixed Downside Risk. Professional Management.

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Due Diligence Helps

Bad Boys What You Gonna Do: Anti Money Laundering Protocol

E. M. Murray. Customized Stock Portfolios. Professional Managment. Fixed Downside Risk.

RECOMMENDED.

Not for wimps, the lazy, or the faint-of-heart.

Perhaps the most widely quoted work by industry professionals.

Awesome in every sense of the word.

RECOMMENDED

Interesting insights from a pre-high frequency prop trading perspective.

This is a totally different angle from your typical retail trading experience.

RECOMMENDED.

“The greatest benefit of mechanical trading systems is their ability to reprogram traders away from destructive types of behavior in favor of successful trading habits.”

–Richard Weissman

Perhaps W. Edwards Deming said it best: “If you can’t describe what you are doing as a process, you don’t know what you’re doing.”

I can count on one hand the number of traders I’ve met on the Philippine Stock Exchange trading floor who can describe every facet of their trading as a process.  True, some veterans can kick butt trading ‘by their gut’ but they are few.  I suspect the majority let their emotional state or whims of the moment play a inappropriately large role in putting on trades.

If you’re serious about your trading, you’ll systematize what you’re doing.