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Sabermetrician Bill James on Objectivity

Posted on by Michael Covel

I was forwarded this excerpt, which apparently first appeared on Victor Niederhoffer’s site from a contributor. It is Sabermetrician Bill James speaking, from his 1981 Baseball Abstract, on the difference between sports writing and sabermetrics:

1. Sports writing draws on the available evidence, and forces conclusions by selecting and arranging that evidence so that it points in the direction desired. Sabermetrics introduces new evidence, previously unknown data derived from original source material.

2. Sportswriting designs its analysis to fit the situation being discussed; sabermetrics designs methods which would be applicable not only in the present case but in any other comparable situation. The sportswriter say this player is better than that one because this player had 20 more home runs, 10 more doubles, and 40 more walks and those things are more important than that players 60 extra base hits and 31 extra stolen bases, and besides, there is always defense and if all else fails team leadership. If player C is introduced into this discussion, he is a whole new article. Sabermetrics puts into place formulas, schematic designs, or theories of relationship which could compare not only this player to that one, but to any player who might be introduced into the discussion.

3. Sportswriters characteristically begin their analysis with a position on an issue; sabermetrics begins with the issue itself. The most over-used form in journalism is the diatribe, the endless impassioned and quasi-logical pitches for the cause of the day–Mike Norris for the Cy Young Award, Rickey Henderson for MVP, Gil Hodges for the Hall of Fame, everybody for lower salaries and let’s all line up against the DH. Sports writing “analysis” is largely an adversary process, with the most successful sportswriter being the one who is the most effective advocate of his position. I personally, of course, have positions which I advocate occasionally, but sabermetrics by its nature is unemotional, non-committal. The sportswriter attempts to be a good lawyer; the sabermetrician, a fair judge.

James objective decision making process dovetails nicely with the objective decision making of his current boss trend following trader John W. Henry.

Brett Steenbarger Article

Posted on by Michael Covel

A good read (PDF) from Brett Steenbarger. An excerpt:

It is not at all unusual to find that a trader is losing with a trend following approach because he or she is acting out unmet personality needs in the market. One of the best trading strategies one can employ is to find adequate outlets for attention/affection, achievement, self-esteem, emotional well being, and excitement outside of trading. Sometimes traders I talk with try to impress me by explaining that trading is their entire life. They do not realize that their very ‘passion’ and ‘obsession’ with the markets are likely to sabotage them, imposing undue pressures and interference. If you have a trading system and you faithfully execute that system, trading should be reasonably boring and routine. Better to enjoy roller coasters outside of market hours than ride them with your equity curve!

Boone Pickens Interview with Michael Covel for TurtleTrader

Posted on by Michael Covel

I mentioned the other day I was meeting with a trader in Dallas. Well, that ‘trader’ corrected me today during the interview. Boone Pickens prefers to be called an investor and doesn’t consider himself a trader. To hear about his +600% for 2005 is simply inspiring. He is the rare man whipping Wall Street when many of his peers have retired. I don’t get the impression Boone Pickens is slowing down – he seems to be picking up speed at 78.

Note: Pickens is quoted about Salem Abraham in my book TurtleTrader.

Michael J. Mauboussin: Perspectives on Risk

Posted on by Michael Covel

Michael J. Mauboussin excerpts (PDF) from a presentation the Greenwich Roundtable:

LTCM used statistical arbitrage to “vacuum up nickels”, as one of the founders, Myron Scholes, described it. One essential component of their portfolio was that it was highly diversified: the correlations between the positions were historically quite low—10 percent or less. To be conservative, in their value at risk models LTCM assumed correlations could jump to 30 percent, vastly higher than anything they saw in their historical data. However, the summer of 1998 saw a real contagion—a diversity breakdown of epic proportions. Notwithstanding the substantial arbitrage opportunities, there were no arbitrageurs to be found, and correlations rocketed higher, to about 70 percent. Add high correlations, leverage, and declining asset prices, and you have the story.

Listen to Michael on the Trend Following podcast.

More Old Pro Wisdom

Posted on by Michael Covel

I have developed a friendship with an old pro trader who sends me regular insight. A recent email in:

Hello again everyone-due to other commitments today will be my last “morning market comments”. As most of you know several months ago I was invited to be a ghost analyst for a well-respected daily newsletter writer in the futures industry. For a number of reasons I decided not to get involved but in my trial period I found a number of things about myself I had never recognized before. Some things I learned are not necessarily about me per se but more about trading and I learned a few things about some of you. My readers included two successful commodity trading advisors, a surgeon, a real estate developer, a successful businessman, a successful salesman, and a federal law enforcement agent. The point here is that people from all walks of life have an interest in trading on some level.

A few of the things I learned are as follows:

#1 there is a huge gap between market analysis and trading markets to make money.

#2 There is no relationship between being “right” and making money.

#3 While markets are not predictable people are.

#4 Anything can happen in the markets so how worthwhile is a market opinion?

#5 Having a definable game plan and following it will overcome poor analysis.

#6 I know some very rich traders but I have yet to meet a rich analyst.

#7 You should never give out market advice because readers don’t need your bad advice and they will ignore your good advice so don’t give them any advice.

#8 A correct market opinion does not answer the questions of how and when do I place a bet, when do I know I am wrong, how big is my bet in terms of dollar or percent risk, and most important how do I manage my trades when they are working.

#9 Some very smart people think the stock market is going up. Some other very smart people think the stock market is going down. Since I don’t have a clue what the stock market is going to do I totally agree with both opinions.

#10 Managing the money and more importantly managing the trade is more important than being “right”.

#11 A good trade is a trade which was entered and exited following one’s rules regardless of the dollar outcome be it a gain or a loss.

#12 Most newsletters offer both sides regarding market direction. Whichever way the market goes will then be highlighted in subsequent newsletters as if the writer new what was coming.

#13 The more negative email you receive regarding a market opinion the more you should bet.

#14 If you receive emails endorsing your view you might want to re-think your opinion.

#15 You learn very little “watching” someone else trade and you might very well harm yourself as a trader by following the advice of others. Be your own man or in one case lady!

#16 Keeping a trading diary on a daily basis will teach you how you think. Be honest and don’t edit your diary in hindsight. Again trading is not about right and wrong but it is about doing and not doing.

Great Trading Insights from an old pro.

Good trading to everyone!

 

Bill Eckhardt’s Timeless Money Management Wisdom

Posted on by Michael Covel

A good piece of wisdom from Bill Eckhardt:

“If you make a bad trade, you have money management, you have a whole bunch of things that will come to your aid, and you’re really not in so much trouble if you make a bad trade. But if you miss a good trade there’s really nowhere to turn. If you miss good trades with any regularity you’re finished, you’re doomed in this game.”

More on William Eckhardt can be found in Michael Covel’s bestseller TurtleTrader.

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More Insights from An Old Pro

Posted on by Michael Covel

A good piece of insight recently shared with me from an old pro with 30 years trading experience:

“I guess most readers are familiar on some level with the sport of hunting. I am sometimes amused by the new outdoor channels portrayal of the sport of hunting. Jackie Bushman has a nationally syndicated show from Alabama that weekly portrays the harvesting of trophy bucks. A buck is a male deer for you who are somewhat challenged in the sport of hunting. Almost every week a trophy animal is harvested on the Bushman show. To the novice deer hunting appears to be simple and effortless. Of course what the cameras and most certainly the promoters never reveal is the countless hours of scouting for trophy deer that go into the eventual production of the show. So what’s my point and how does all this relate to trading. Sometimes in trading there just aren’t many trophies to be found – a trophy in the sense being a trending market. These times separate the great traders from the not so great traders. Over my 30 plus year career I have witnessed numerous “times like these”. The good news is that they don’t last forever and my bet is things are about to change. Trend followers have had a pretty tough time lately but tough times don’t last but tough people do. The next question I often receive is “where is the next great trading opportunity?” Not to be a wise ass but if I really knew that I probably would not be sending this to you today. Well I might because this is fun for me and I hope educational for you. I enjoy teaching almost as much as trading. Trust me on this there are some very big trades coming and with hard work and patience you can catch them just like a real trophy deer hunter does.”

Don’t take his last sentence as a prediction, it’s not. He is simply pointing out the reality of trends.