The Desire to Speculate

Passages from my book In Praise of Speculation!

It is said that the desire to speculate is very strong in the American people. That is why our country has made greater progress than any other country in the world, because progress is the result of speculation. We are not referring merely to stock speculations, but to the word in its broadest sense. Every new undertaking is a speculation.

An inventor speculates on what he is going to invent. Often such speculations result in losses, because many inventors, or would-be-inventors, never accomplish very much. They spend their money, time, and efforts, and probably live years in poverty, and then if the invention is not profitable, they are heavy losers.

It is the same thing with every new business. It is purely a speculation. It is a common saying that 95% of commercial undertakings fail. We do not know if that statement is correct, but there is no question but that the number of failures is very great, which shows the great risk in going into a new undertaking. It is far greater than the risk involved in stock speculating when it is done in accordance with the advice given in this book.

Yet, there would be no progress without speculating of this kind. If those entering a new business would make a careful study of the venture before entering it, and would exercise greater care and judgment in conducting it, the number of failures would be very much less. The same thing is true of stock speculating. The failures in stock speculating are caused mainly by ignorance and greediness. Many people, who would be satisfied with a fair return on their money in a business enterprise, think they ought to make a 100% profit in a few weeks in stock speculation.

It does not pay to take big risks. That is true in stock speculating the same as in any other undertaking. Most speculators are keeping their minds all the time on the possibilities of profit and not thinking about the possibilities of losing.

There is an old saying, and we believe a very true one, that a man who speculates with the idea of getting rich quickly loses all his money quickly, but that the man who speculates with the idea of making a fair return on his money usually gets rich.

Do not suppress your desire to speculate. All progress would stop if people did not speculate. But do not speculate in stocks or in anything else without any knowledge of what you are doing, and try to use as much good judgment and care as possible in all of your transactions. Stock speculating with safety is possible for those who make the effort to be guided by correct principles.

Michael Bigger. Follow me on Twitter and StockTwits.

P.S. Our New book How Traders Achieve Creative Flow will be released shortly (about 2 weeks). Performance Strategist Renita Kalhorn had this to say after reading the rough draft:

I LOVE IT!!!!!!!!!! I always feel smarter after reading something you’ve written. :-)

You have such a cool way of introducing new applications of concepts.

Lots of ideas percolating. Thanks for sharing, and including me!

If you are a blogger, I would be happy to send you a free copy of the material if you promise to write a review (good or bad) about it on your blog. Ping me if you’re interested. A copy of the material will be sent when the book is complete.

Apple, the Levy Flight, and Weekly Options

A while back, Seth Godin wrote a fabulous blog post about a cool mathematical concept called the Levy flight that shows up in nature (Wikipedia: Levy Flight Description).

It also shows up in finance.

A journalist finds an interesting story to write about. Think about Merck and Vioxx. That was big business news, and it stirred up emotions. Many people took a stance onboth side of the issues related to this event. Writing about Vioxx generated good readership and sold advertising. Eventually, readers got bored with the story and moved on. Our journalist had to find other news. The journalist’s path follows a Levy flight from one random walk to a cluster, followed by the same process over and over again, as depicted in the image (Source: Wikipedia).

Or you can think about it this way: the path between each cluster is a stochastic directional vector and the cluster is a manifestation of the cockroach theory. This theory states that if you find a roach in the cupboard, others are usually crawling in the same location. Using Godin’s example, once an animal finds food along its random walk, the animal will rummage in the same area because the likelihood of finding more food is elevated.

The Steve Jobs news has already attracted many truffle diggers (journalists), sending the frequency of Internet messages about Apple to the moon.

If Apple had just entered a typical Levy Flight news cluster, this is how we think things would play out:

• The cluster will persist for months.
• The cluster will attract more truffle diggers. For that reason, more news about the health of Steve Jobs will surface.
• Expect AAPL stock to remain under pressure and volatile until the tension is released.
• The diggers will eventually get bored and move on to the next story. "This too shall pass."
• The decrease in the frequency of news messages will be a good indication of when we are about to exit the cluster.
• A trader might want to initiate a long position at that time.

However, Apple will report earnings tonight, and that will add another dimension to the situation. With everything going on with the stock today, we are going to focus on the options maturing at the end of this week. These options offer a large amount of gamma.

I wrote a similar post about Goldman Sachs in April.

Michael Bigger. Follow me on Twitter and StockTwits.

Taking the Opposite Side of Dragonfly Capital’s Trade

Greg Harmon at Dragonfly Capital wrote a great blog post titled “Playing Games with Activision Blizzard or Take Two Interactive.” I love looking at charts that include an additional dimension than the typical two-dimensional charts. In this case, another stock is added to the mix, which makes things more interesting—or at least spicier.

Based on technical analysis, Harmon reaches the following conclusion:

Trade Idea: Long TTWO against Short ATVI on the move above the top rail, looking for a move to 1.36 in the ratio. Use the 1.07 just below the top rail as a stop.

At Bigger Capital, we would take the opposite side of the trade because our spread software tells us to go Long Activision and Short Take Two. See the software’s output below.

Whose trade ideas will be correct? We both could be right, or we both could be wrong, or one of us could be right and the other one wrong.  It depends on many factors. At Bigger Capital, we do many of these spreads, and what matters to us is to be right overall in our portfolio of spreads, not on one particular trade.

What do you think?

Software Output

• 1 * ATVI - 1 * TTWO two-year spread is 95% co-integrated.
• Current Z score is -2.0.
• The mean of the spread with 1:1 leg ratio is $1.35.
• The current spread is $-0.8.
• The spread is trading below the 30-, 60-, and 90-day moving averages.

Important Notes:

• Hedge ratio is 1.12. To keep things simple, we rounded the ratio to 1; therefore, the leg ratio is just 1:1.
• A Z score below -2.0 is considered an oversold spread. A Z score above 2.0 is considered an overbought spread.
• Buy the spread means go long 1 * ATVI and short 1 * TTWO. Short the spread means go short 1 * ATVI and long 1 * TTWO.

Written by:

Aris David. Follow me on Twitter and StockTwits.

Michael Bigger. Follow me on Twitter and StockTwits.

If You Have Something to Say, Be Brief and Publish it!

Josh Brown wrote a great post titled “Financial Blogging Secrets: Aesthetics.” Regarding the length of a post, he wrote:

If your visitor clicks a link, hits your page and is greeted with a wall of text, that visitor is gone.  No one wants to read something that looks like homework, no matter well written it is. Your first paragraph should never be more than one or two sentences. Each paragraph thereafter should be 3 to 4 sentences maximum. If you're over 500 words for the whole post, you better be writing something important or brilliant, otherwise just stop. The markets are moving and people won't even give your post a chance if it looks unconquerable.

When it comes down to reading books about trading, the same is true: the markets are moving, and people won’t finish them if they look unconquerable.

The end of the era of the two- to three-hundred-page business book is upon us. Publishers have been promoting thick books so they would sell better in a physical space. A thick book gives buyers the perception that they are getting their money’s worth. Who said the meaning of a book can’t be delivered in a shorter format?

For investors and traders, the opportunity cost of reading a fat brick is enormous. How about writing one of these? Ouch.

As publishing moves to digital, I believe the tyranny of the fat brick will end, and it will benefit everyone. How-to books are going to shrink in size to about twenty-five to one hundred pages. Readers will benefit by gaining the same meaning while investing a smaller amount of time reading to gain it. Self-publishing will thrive.

Publishers will continue publishing their fat bricks to satisfy the cravings of the physical stores and their bottom lines. But publishers are not the gatekeepers anymore.

For these reasons, the market for short financial publications is wide open. If you have something important to say, be brief and publish it! Digital publishing platforms make it easy for you to exploit this market with your own awesome work.

My book about creativity, flow, and trading, which will be released in a few weeks, is about 30 pages long. It is jam-packed with information so as not to waste your time.

The time I did not spend wrapping the book in another two hundred pages of coating is better spent interacting with others on liquid networks such as StockTwits and my blog.

Publishers don’t converse with their end customers, but we can!

Written by Michael Bigger. Follow me on Twitter and StockTwits.

Free Business and Investing E-books

I just came across some great free business and investing e-books on Amazon.com.

Get them Here. You can upload them to almost any device with the Kindle App.

These books caught my attention:

• Apples Are Square
• Kaplan Technical Writing
• MBA Fundamentals Business Writing
• Campus CEO
• Tribal Knowledge: Business Wisdom Brewed from the Grounds of Starbucks Corporate Culture
• Democratizing Innovation
• Money Girl's Smart Moves to Deal with Your Debt

Enjoy your free brew while it lasts!

Written by Michael Bigger. Follow me on Twitter and StockTwits.

So, You Want to Write a Book about Trading?

It’s been a dream, hasn’t it?

I’m excited because I am about thirty days away from publishing my book about creativity, flow, and trading, and I want to share my journey with you.

What got me thinking I could publish a book? I am French Canadian, and I can’t write in English very well, so great writing skills can’t be the answer. Seth Godin answered this question in his book Linchpin: Are You Indispensable? According to Godin, creating and inventing are the most powerful drivers of value creation in a competitive and connected society. Writing is creating, and I find it highly rewarding. Writing makes me a better trader and investor.

This will be the second book I have published. The first one was In Praise of Speculation! It is not for everyone, but this is what Aris David (@fledglingtrader) said about it:

Honestly, I'd pay more than $30 bucks for it (now priced at $3.99). It is a GEM and the value you get out of it will make someone wealthy—if they just appreciate what speculating with safety is.

I use Amazon.com’s Digital Text Platform (DTP) to publish my work globally and instantaneously. My books can be read on most electronic devices such as the Kindle, iPad, BlackBerry, PC, Mac, etc. How cool is that?

Getting back to the book I am currently working on, I completed the rough draft this week and sent out a few copies for review. The first comments I got came from Sean McLaughlin (@chicagosean), who wrote a chapter for the book about the minimalist trader’s mindset. McLaughlin blogs at chicagosean.com and he is a great “person to follow on StockTwits.” Here is what he had to say about the work:

I definitely achieved flow when reading your rough draft...I've just completed it! :)

Great work! I don't really have much to add that you haven't properly covered. I think this work will resonate with many people in your audience.

The world is transitioning from "proprietary" information to shared, or crowd sourced and collaborated information. Your work here is a perfect example of this and hints at the potential. Exciting stuff!

Thanks for including me in the project. If you need anything else from me, don't hesitate to ask.

Best of luck!!

In the next few weeks, I will be posting more about this journey. Stay tuned! If you want to learn about my experience with self-publishing, feel free to ask.

P.S. If you are a blogger, I would be happy to send you a free copy of the material if you promise to write a review (good or bad) about it on your blog. Ping me if you’re interested.

Written by Michael Bigger. Follow me on Twitter and StockTwits.

A Trading Experiment

Recently, I read Something Incredibly Wonderful Happens, Frank Oppenheimer and the World He  Made Up. This is a fabulous book about the life of the famous physicist. It is a book every trader should read. Here is why.

In this book, Frank Oppenheimer discusses the importance of experimentation and play:

"So much time is spent just playing around with no particular end in mind," he wrote. "One sort of mindlessly observes how something works or doesn't work or what its features are, much as I did when, as a child, I used to go around the house with an empty milk bottle pouring a little bit of every chemical, every drug, every spice into the bottle to see what would happen. Of course, nothing happened. I ended up with a sticky grey-brown mess, which I threw out in disgust. Much research ends up with the same amorphous mess and is or should be thrown out only to then start playing around in some other way. But a research physicist gets paid for this 'waste of time' and so do the people who develop exhibits in the Exploratorium. Occasionally though, something incredibly wonderful happens."

. . . He asked his friend Bob Karplus, a physicist at the University of California at Berkeley, if he thought there was anything a young person must learn before it is too late, and Karplus' answer was "play."

Be creative and experiment.

In 2011, you might want to try the following experiment:

In a sandbox account, create a notional neutral (long notional-short notional=0) portfolio of stocks using the best methods you have developed to find long and short candidates. Track the return of the portfolio and see how it performs over time.

As you are running the experiment, ask the following questions:

• Should you rebalance your portfolio at specific intervals of time to account for changes in your selection criteria or changes in the value of each position?
• Can you think of any ways to improve your results?
• Are you learning anything?
• Have you observed anything unusual in how the portfolio is performing?
• Are you generating alpha? If not, why not?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

99 Percent of Traders Are Missing Out

If you are a non-blogging trader you are missing out big time.

Seth Godin and Tom Peters explain the importance of blogging for everyone, including traders, in this one-minute video:

Did you hear what Seth said about metacognition? In a nutshell, blogging compels traders to sharpen their trading thesis by thinking it out loud.

On the Internet, a trader’s home base is a blog. Look at it as your Internet real estate, your home turf.

How do you get started in building your thinking-out-loud platform? Start simply. Write without worrying about what will resonate with your audience. Heck, you won’t have an audience at the beginning, so who cares? If in doubt, view your blog as a scrapbook where you collect ideas, insights, hunches, and everything else you dream up. See my post about the importance of writing everything down.

If you're so inclined, step it up a notch by writing about topics other traders might find helpful. Being helpful will attract a small crowd. You now have an audience. Congratulations! The Internet works magic that way. Everyone is a genius at least five minutes a day, including you. Capture these brilliant moments and share them with this new found audience.

I started my own blogging venture by writing financial stuff for my kids. The initial posts were mediocre at best, but so what? Eventually, I got better at it, and some traders reached out to me by commenting on the posts or by retweeting them on StockTwits and Twitter. I have been learning what resonates with like-minded traders, and I have nudged my writing in that direction. I followed the Internet lead, stepped up my game, and cranked out better posts. I now blog at biggercapital.com and on the StockTwits network at thisisbigger.com. Not bad for a French Canadian who can barely speak English!

Get out there and broadcast your insights to the world. Cool?

Written by Michael Bigger. Follow me on Twitter and StockTwits.

Great Spread Trading Posts from Dynamic Hedge

I finally caught up on all the great blog material that accumulated in my Google Reader over the last few weeks. While emptying the queue, I came across some informative spread trading posts written by Dynamic Hedge.

Since we announced that we have been working on an educational product about spread trading, many traders have approached us to learn more about it. If you have an interest in learning about spread trading download our free e-book titled Coolest Financial Tools and we will notify you when the product becomes available (the download icon is located on the right side of the landing page).

In the meantime, there is plenty to learn about spread trading from these Dynamic Hedge posts:

• GDX – GLD Volatility Play
• Know When To Walk Away
• Cotton Spread — Volatility Porn
• Gdx – Gld Spread — Flat
• Wrong Move, Smart Guy

Enjoy!

Written by Michael Bigger. Follow me on Twitter and StockTwits.

What Howard Said at Le Web

Howard Lindzon gave a great presentation about StockTwits, entrepreneurship, and opportunities in finance at the Le Web conference held in Paris a few weeks ago. I agree wholeheartedly with Lindzon’s view that many vertical niches in the financial space are untapped. Lindzon delivered great advice to entrepreneurs wanting to exploit them. He concluded his presentation by emphasizing the importance of finding market "slivers," attacking them, and remaining focused on the simple stuff.

Google the following terms and you will get an idea of what Howard means by "slivers":

• Stock Twitter
• Minimalist trading
• Traders and creative flow

Yes, they are tiny today (StockTwits, not so tiny). However, tiny in a market that is globally connected could be big and very profitable, especially if this wealth creation trend persists.

This is the time to claim your stake!

Happy Holidays!

Written by Michael Bigger. Follow me on Twitter and StockTwits.