Professors and Traders

Professors and traders are at opposite extremes of a continuum related to decision making.  Professors work very methodically and do a lot of careful research before publishing findings.  A lot of effort goes into their writing, so an article or book can take a long time.  Professors can lose reputation if they make mistakes, but they do not generally face immediate financial conequences.  Traders often make big decisions very quickly, with imperfect information, while using simplified analysis.  They usually do not write about it, even to record their reasons.

As someone who has worked in both worlds, I see the blog as my weapon of progress.  While I have the makings of a book — good thesis, nice fit with existing theory, lots of evidence, and some interesting examples — there are some problems in writing it.  First, I do not have a sabbatical year available.  Second, those interested in my work want the conclusions — preferably actionable conclusions–when they are still useful.  (They should also be interested in the theory, but alas they are not.  That discussion must wait for another time).

Conclusion:  I’ll start with some interesting trading topics and examples and sneak the theory in as we go along.  One of my themes will be what works and what doesn’t.  Investment returns that beat risk-adjusted market performance derive from finding market inefficiencies.  There are always people beating the market, but most of them (and their followers) have been Fooled by Randomness.

One type of inefficiency that may provide a lot of opportunity comes from mistaken analysis or information.  There is a bull market in that commodity!  Here is the process:

  1. Find a topic where there is a lot of posturing with little reasoning;
  2. Examine the analytic framework used, the evidence, and the conclusions;
  3. See if there is a way to trade on the opposite side.

Not every exercise will lead to a tradable conclusion.  Many winning investment decisions started with faulty analysis, but something lucky happened.  People can be "right" for the wrong reasons.  There may also be no catalyst, permitting a popular mistake to persist for a long time.

It is important to be very rigorous in this analytic approach.  One must be open and receptive to all ideas, especially those that do not fit one’s current position.  I will stick to issues where I think the evidence of error is very clear.  Comments are always welcome.

Using our three-step method I am drawn first to Energy stocks. I’ll include some of my recent trades as well as an idea that our team is checking out.

What’s it all about….

Why write any of this?  For the best reason:  It is in there and it wants to come out!  Some traders and investors just want to play the game.  Others, like the OldProf, are analyzing, asking why, and trying to figure out whether we were lucky or good.

Mostly I am writing this for myself — at least for the moment.  I have a number of ideas that fit a few specific themes.  There are some interesting notions that could be made better with some reaction and comment, and that is a good use for blogging.  Since I have had some happy consumers of my teaching over the years, maybe it will eventually produce something of more general interest.  For now, this is my workshop, but I open it to comments from anyone who shares the goals of understanding markets better and trading them effectively.

Like many other beginning bloggers I am using this as a way of quickly capturing thoughts during the working day or at odd hours.  I plan to identify some of the major themes right away, even though no particular proof is offered.  These are themes that represent conclusions I have reached — either tentative or firm.  I expect to offer persuasive argument, evidence, and examples as the occasion suits.

This is not a trading blog in the sense that I will describe most of my trades or my daily thoughts.  I will, however, identify some opportunities.  On other occasions I will present a situation that seems to be an opportunity and invite comment about how best to exploit it.