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05/10/02Lessons from Blackjack #

Guan Seng Khoo


Some Lessons From Blackjack

I recently went to the Beau Rivage for a short vacation. While I was there I ate, slept, laid out at the pool, and of course gambled. I play blackjack and craps. The reason I am writing about my trip is not to tell you about the resort but to tie in similarities of gambling and investing. The question has been raised by many uninformed people “Is option trading like gambling?” Don’t fret; I am not going to tell you that options are like gambling. In fact, I am probably the one of the biggest advocates in favor of options.

The first day in Biloxi was like a day of the FOMC meeting. I didn’t play until the last thirty minutes of the day. Instead, I played horrible golf and saved my money for better conditions. If you have been to a casino, you know that losing a big chunk of your money the first day is no fun. When in doubt, stay out. The first night I learned the biggest lesson of thew whole trip. In fact, it was this night that I realized the similarities between gambling and trading. I sat down and got all the right cards. So I buy in for at a blackjack table and in a short time I am up 250%. I had a gut feeling that I should get up. In fact, I even told my dad that I was up a lot and should go. Stupid me kept playing because I got greedy. I gave back $250 in 5 minutes and called it quits. The lessons I learned are; take you money and run, don’t get greedy, and the free drinks aren’t really free. So I still went to bed a winner.

Day two I started out losing. By noon I lost a lot. My problem was that even though I realized that the cards were bad, and my stack of chips was shrinking, I wouldn’t get up. When I would get back to even I wouldn’t get up. Anyone who knows about gambling knows that if you break even you are doing really well. Similarly, an option position can be identified as bad if upon initiating if it immediately drops or goes down and back to even. Jim has made a great analogy for this type of position with the bus ride. If the position is dropping or even hovering around even territory, exit it and initiate a new position. The idea is that if that bus isn’t on the right route, then you need to change buses. Furthermore, if the bus is about to go over a cliff, jump out the window. A few broken bones (dollars) are not as bad as death (broke). In addition, if the position goes down and back to breakeven territory, reanalyze the position because it may not stay at even for long. I actually had this happen where the position went up enough to cover the spread and a little slippage. I tried to get in between the spread with no result. So I realized the struggle the position was having going higher (the volume, intraday momentum and trend, support and resistance) and lowered the selling price to breakeven less slippage. The underlying security then dropped to 66.125 from 78.625 in a week.

So day three started out to be good because at one time I got back to even for the trip. But I was foolish and stayed on that “Bus” and lost even more. So I stopped playing until later that night and went to work. I analyzed the process and the trends just like the market and found a game plan that worked great. I determined that I was most successful in the market when I would take many small gains on different positions instead of playing the long-term trend. The long-term trend refers to all the ups and downs your option premium makes over a few months. It is also the times trader’s leaps are profitable and traders don’t take the profit because they have all of this Time and the security is speculated to have this large move. I am sorry, but in my opinion, this is wrong and greedy. Buy time for insurance not because you plan on holding onto the position a long time. Time is your foe. I will get off my soapbox by saying that I found that more success at the tables when I would sit down with my plan, stop losses, and profit targets. I also applied trailing stops. I probably got up too soon a couple of times, but that is just like “sell too soon” and “you can never go broke taking profits.” The story ends happily with me jumping from one table (position) to the next until I made back all I lost plus a little extra in just an hour and a half. In review, change positions if it is struggling to stay even or it is dropping (stops), take small profits on positions with some time ‘til expiration, and don’t get greedy with your profits hoping for more. As with trading, don’t buy in (invest) with your whole bankroll (assets) at one table (position). Diversify your assets and trade with your speculative money that you can afford to lose. The answer the question “Is option trading like gambling?” is determined by each reader’s trading conduct. On a final note, there are three ways to lose money in the market (casinos): hope, fear and greed! Good trading to all.

Robert John Ogilvie
ROgilvie@gunnallen.com

Neither GunnAllen Financial, Inc. nor Robert J. Ogilvie makes any representation as to the accuracy, reliability or completeness of any charts, formulas, and /or research opinions presented herein. This article is intended solely for educational purposes. Nothing herein should be construed as an offer or solicitation to buy or sell any securities. GunnAllen Financial is a Member of the NASD and SIPC. Please read the Optioninvestor.com’s Disclaimer.

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05/08/02A thought on taking losses #

Sean Phelan


Losses
“It takes courage to admit you are wrong. It takes courage to face it when you have lost money and not blame it on the other guy or blame it on circumstance. It takes courage to admit that it is your mistake.”
-The Mind of a Trader, by Alpesh B. Patel

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05/06/02re: INTECH investments- anyone know them? #

Guan Seng Khoo


Hi, In theory, models may work depending on the granularity of data used (5-min, hourly, daily, etc.). In practice, in an operational setting, you need to make adjustments for slippage, a phenomenon not encountered in theoretical models. Slippage, when the model yields a price to enter or exit, more often than not, the actual trade is not attainable

> Ken Berger wrote:
> This company has supposedly had great success applying math models to trading systems, something I'm keen on exploring more. They were recently bought by Berger Financial (no I'm not related).
>
>"INTECH's system capitalizes on the random nature of stock price movement rather than relying on estimates of future stock performance".

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05/06/02Trading models/Investing #

Guan Seng Khoo


Never forget diversification across assets & different models for different market conditions. Most can do the former. The latter (in combination with asset rebalancing) is usually performed by hedge funds depending on the market conditions. Even the best models, say, the trending models, get whacked when the market is range-bound. Model has to be dynamic.

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05/06/02Clarification re: Systematic vs. Discretionary Investing/Trading #

Sean Phelan


Apologies - I didn't notice that the URL doesn't change when one goes to the different bulletins. The Systematic vs. Discretionary confabulation is "Bulletin #27" from the list that this URL takes you to:

http://traderclub.com/cgi-bin/discus/show.cgi?107/107



> Sean Phelan wrote:
> Chuck Le Beau is a very well thought of trader/author who had his first trading bestseller over 10 years ago (one of the first trading books I bought back then). His website has many insightful discussions & I thought this one was particularly interesting in looking at a favorite time-honed debate: discretionary trading vs. systematic trading. Le Beau mainly addresses "trading", but I think it's valid for those with long-term time horizons, as well.
>
>http://traderclub.com/cgi-bin/discus/show.cgi?107/107

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05/04/02quote regarding operating without thinking #

Adrian Scott


neat quote from Alfred North Whitehead (along the lines of the mark douglas stuff):

"It is a profoundly erroneous truism, repeated by copybooks and by eminent people when they are making speeches, that we should cultivate the habit of thinking of what we are doing. The precise opposite is the case. Civilization advances by extending the number of important operations which we can perform without thinking about them."

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05/04/02Systematic vs. Discretionary Investing/Trading #

Sean Phelan


Chuck Le Beau is a very well thought of trader/author who had his first trading bestseller over 10 years ago (one of the first trading books I bought back then). His website has many insightful discussions & I thought this one was particularly interesting in looking at a favorite time-honed debate: discretionary trading vs. systematic trading. Le Beau mainly addresses "trading", but I think it's valid for those with long-term time horizons, as well.

http://traderclub.com/cgi-bin/discus/show.cgi?107/107

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05/03/02Streming numbers on an IPaq #

Ken Nakagama


Anyone using an IPAQ Bluetooth with a GPSR phone ?
Not even sure it will work yet

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05/02/02The effect of fear in trading by Mark Douglas #

Sean Phelan


"In a winning trade, the fear of losing will cause us to focus our attention on information that the market is going to take our profits away, compelling us to get out early. In a losing trade we will focus our attention on just the opposite information-anything other than that which would indicate the trade is a loser. Fear causes us to act without a perception of choice. When we are afraid to confront certain categories of market information, it drastically limits the choices that we perceive as available. Cutting a loss isn't a choice if we systematically block from our awareness any information that would indicate that we are in a losing trade. Staying in a winner isn't a choice if we are consumed with the fear that the market is going to take away our money... To prevent these blind spots in our perception, we have to learn to trade without fear."
- The Disciplined Trader: Developing Winning Attitudes, by Mark Douglas

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05/02/02Recommended reading... #

Joseph Schmelzer


I'm a product guy. Love to be able to touch and feel new, cool, toys. Especially if they're innovative.

Typically, I hate business books. Real waste of time. However, I recently picked-up 'Piloting Palm', by Andrea Butter. Ostensibly, it's about a small group of devoted people trying to bring the PalmPilot to life.

But, the observant reader will find many stories, and valuable lessons in this book. Venture capital, corporate finance, human factors, product development, teamwork, business psychology, etc...

I strongly recommend the book to anyone interested in, or wanting to learn more about, the process of turning an idea into a company, and making that company spit out a product.

Really cool.

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05/01/02Technical Security Analysts Association #

Sean Phelan


This is a local Bay Area industry association open to anyone. It's primarily of interest to all interested in or practicing technical analysis on any type of financial security.

Annual dues are cheap and activities include monthly meetings, annual conference, good speakers & the like.

I've been a member for several years & it struck me that I should put it out there.

More information at:
http://www.tsaasf.org/

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04/30/02Snippet on Discipline #

Sean Phelan


Interesting:

Discipline
Making money has nothing to do with intelligence. Think of all the bright people that choose careers on Wall Street. If intelligence were the key, there would be a lot more people making money trading... To be a successful trader, you have to be able to admit mistakes. People who are very bright don’t make very many mistakes. In a sense, they generally are correct. In trading, however, the person who can easily admit to being wrong is the one who walks away a winner. ” [from interview of trader Victor Sperandeo]
-The New Market Wizards, by Jack Schwager, p.265-266

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04/30/02re: re: Recommended reading #

Sean Phelan


Thanks Adrian
I haven't read Schwager's 3rd installment in the series yet. It's good to see your moderate endorsement of it - I'd heard it wasn't as good as the first two & hadn't really focused on it yet.

I generally don't get to the pure fundy reading because of reading time constraints (periodicals, class material, industry assoc. lit., etc.) & it's not what I do but I should probably make an exception with a Buffet bio-type piece.
Thanks

> Adrian Scott wrote:
> great pic there Sean!
>
>any thoughts on schwager's more recent one on stock mkt wizards. i thought it was pretty decent, though the first two are still the best, imho.
>
>for books, i also like lowenstein's book on warren buffett. though you might not want to follow his investment approach, i think that looking how he got started, taught classes, set up his partnership, etc., is quite intriguing.
>
>links to a few books at:
> http://www.adrianscott.com/finance/books.php
>
>-adrian
>
>
>> Sean Phelan wrote:
>> Highly recommend the following books:
>>
>>1) Market Wizards by Jack Schwager
>>2) The New Market Wizards by Jack Schwager
>>3) Trading in the Zone by Mark Douglas
>>
>>
>>The first two books are interviews of some of the best securities traders of their day. Very easy entertaining reading containing a cornucopia of insights.
>>
>>The third book is necessary information on what a successful trading model looks like and how to handle the inevitable psychological issues that result from market participation.
>
>

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04/30/02Financial calculator app for Palm? #

Sashi Sabaratnam


Does anyone know of a good financial calculator app for the Palm? I am trying to avoid hauling around yet another device! :)

- Sashi

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04/28/02Recommended Book #

Keith Butler


Confessions of a Street Addict, - James J Cramer, A real look into the inside world of hedge funds, very entertaining.

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04/28/02re: Psychological Studies of Risk Seeking #

Keith Butler


Interesting, without a second thought I chose (B) for the first question, and I chose (A) for the second question.... Exactly opposite what (as the article states) 80% of the people would do. I wonder what that makes me??


> Sean Phelan wrote:
> Interesting column:
>
>PSYCHOLOGICAL STUDIES OF RISK SEEKING
>
>Psychologists have been studying the conditions under which people seek out risk. You may have seen a classic set of questions that has been used by psychologists to study risk:
>
>In which stock would you prefer to invest?
> (A) Stock A will produce a sure profit of $250
> (B) Stock B has a 25% chance of producing a profit of $1000, but there is a 75% chance the stock will produce no profit.
>
>About 70-80% of the people asked such questions choose option A. They prefer a sure profit of $250, even though there is a chance they can earn four times that amount by purchasing Stock B. In other words, they avoid risk when they think an investment will produce a gain.
>
>People think differently when they consider taking a loss, however. Consider a similar question that is "framed" in terms of losses rather than profits:
>
>In which stock would you prefer to invest?
> (A) Stock A will produce a sure loss of $750
> (B) Stock B has a 25% chance of losing nothing, but a 75% chance of losing $1000
>
>When asked this question, presented in terms of losses, people tend to choose Option B. When it comes to considering a loss, they are willing to take a chance on preserving their investment. But, they also accept the possibility of losing the entire investment, rather than taking a sure loss. In summary, responses to these questions show that people are risk averse when they believe they are about to make a profit, but risk seeking when they think they are on the verge of taking a loss. This is a seminal finding in investment psychology.
>
>A recent scientific study by Drs. Lerner and Keltner reveals that this traditional understanding of risk and decision-making is not shown by everyone all of the time. One factor that predicts risk aversiveness is the tendency to believe that the outcomes of events, such as future stock prices, are easily predictable, in contrast to viewing outcomes as difficult to predict. In addition to measuring the tendency to view outcomes as easily predictable, Drs. Learner and Keltner asked participants to make choices similar to the ones outlined above.
>
>They found that participants who tended to believe that outcomes are easy to predict tend to seek out risks. They are willing to take a gamble if there is a chance they can make a big win. In contrast, people who tend to believe that outcomes of events are often uncertain and difficult to predict, tend to take the sure thing. They don't like taking chances.
>
>Where do you lie on this continuum? Do you tend to think that one can easily predict the future price of stocks and commodities? Do you have high expectations that prices should move in your favor? Are you often disappointed when price action is not consistent with your expectations? If you tend to agree with these questions, you may tend to seek out and take unnecessary risks. You may want to look out for this tendency. Make sure that when you make an investment, your predictions are based on solid evidence, rather than on your gut instinct. Be aware that you may tend to be a little too sure about your ability to predict events and this will make you want to take unnecessary risks.
>
>Remember the old adage "cut your losses short." It's probably beneficial to show caution and be appropriately risk averse. Take a sure loss, rather than take an unnecessary risk that could result in the loss of your entire investment.

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04/27/02re: re: Milken Institute conference -- overall pretty good for me #

Dave McClure


actually i enjoyed most of it... some parts were dry, but others were great. the talks by de Soto were very good, and the discussion on latin america was particularly educational (i didn't know much about that area before).

i was also able to meet a few folks i'd been wanting to speak to there, so overall it was worthwhile. gave me some new perspective on the industry, and insights into what the Institute is doing.

still, the price was a bit steep. maybe next year i can finagle an opportunity for PayPal to speak ;)


> Jonathan Kim wrote:
> Dave,
>
>Did you enjoy the conference? I thought it was a bit bland. No?
>
>> Dave McClure wrote:
>> I'm going down to the Milken Institute Conference in LA on April 22-24... anyone else going?
>>
>>If so, lemme know:
>> http://www.ryze.org/eventdisplay.php?eventid=149
>>
>
>

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04/25/02re: Recommended reading #

Adrian Scott


great pic there Sean!

any thoughts on schwager's more recent one on stock mkt wizards. i thought it was pretty decent, though the first two are still the best, imho.

for books, i also like lowenstein's book on warren buffett. though you might not want to follow his investment approach, i think that looking how he got started, taught classes, set up his partnership, etc., is quite intriguing.

links to a few books at:
http://www.adrianscott.com/finance/books.php

-adrian


> Sean Phelan wrote:
> Highly recommend the following books:
>
>1) Market Wizards by Jack Schwager
>2) The New Market Wizards by Jack Schwager
>3) Trading in the Zone by Mark Douglas
>
>
>The first two books are interviews of some of the best securities traders of their day. Very easy entertaining reading containing a cornucopia of insights.
>
>The third book is necessary information on what a successful trading model looks like and how to handle the inevitable psychological issues that result from market participation.

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04/25/02re: Milken Institute conference -- anyone going? (April 22-24) #

Jonathan Kim


Dave,

Did you enjoy the conference? I thought it was a bit bland. No?

> Dave McClure wrote:
> I'm going down to the Milken Institute Conference in LA on April 22-24... anyone else going?
>
>If so, lemme know:
> http://www.ryze.org/eventdisplay.php?eventid=149
>

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04/25/02More recommended reading... Need to get organized? #

William Forney


Getting Things Done by David Allen is a really good book if you need to get organized...

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