Notes for Chat with Traders, Episode 117

Added on by C. Maoxian.

Episode 117 ... Larry Alintoff (72:00)

  • Lives in Florida
  • Sounds like a New Yorker
  • Trading for 30 years
  • University of Michigan grad
  • Sophomore year of college, watching FNN on day of 1987 crash -- hooked him on markets
  • Born in 1967
  • Started plotting prices on graph paper in his dorm room
  • Read as many books about trading as he could
  • Discovered "pressure points" 
  • Ascending triangle, or sideways action [he discovered coiling, power of ever narrowing range]
  • High frequency traders sniff out order flow and run ahead
  • Worked at RefCo, forex broker, odd hours from 2 PM to midnight
  • Worked for Paul Tudor Jones
  • Reminiscences of a Stock Operator (favorite book)
  • "Yuge"
  • "... if that makes sense." Ends a lot of sentences with this phrase
  • Paul Tudor Jones staked him and a group of people a bit of money
  • Traded from a little office at RefCo
  • "Yuman psychology"
  • No guidance from Jones or his people
  • Jones kept close tabs on positions of all the people he staked, created "sentiment indicator"
  • All people who trade for a long time evolve
  • Friend trading stock options on the American Stock Exchange, he joined him
  • Profits just handed to you there, no need to think or understand what you were doing
  • American Stock Exchange had no competition, everyone must see specialist on floor
  • Other exchanges started to make markets in options, spreads narrowed with competition
  • Pacific Coast, Boston, CBOE broke up American Stock Exchange monopoly
  • Went to New York Board of Trade, worked in frozen concentrated orange juice pit
  • Good traders can separate signal (good information) from noise
  • What should happen versus what did happen? Pay attention to that
  • People who grow oranges know the orange juice market better than guys on the floor
  • Have a point where you know you're wrong, and get out
  • He takes profits too quickly
  • Make sure no one trade really hurts you
  • When Trump won and the market should have gone down and didn't, that was valuable information
  • Turns over his portfolio every five days
  • Holds 80 - 100 longs and 80 - 100 shorts
  • Computing power today so great, he can filter thousands of stocks for his criteria in a minute
  • Larry has yellow pads, he's not a programmer, gives his ideas to the young programmers
  • Knew the floor was coming to an end, everything going electronic
  • Had to figure out how to do what he did on the floor once he was off the floor
  • Hated weekends, couldn't trade then, deeply depressed every Friday afternoon
  • Obsessed with markets for 30 years
  • He's not a quitter, not lazy ... a workaholic about the markets
  • "Yuman nature" will never change ... fear and greed still exactly the same, elation and despair
  • Keeps a low profile
  • Twitter: @AlintoffLarry

Notes for Chat with Traders, Episode 118

Added on by C. Maoxian.

Episode 118 ... Manoj Narang (58:47)

Sharp guy, interesting episode.

  • Has new fund: "MANA Partners"
  • Formerly of Tradeworx (left July 2015)
  • Quant trading the way to go
  • IP has more value than PL you can generate (does that make sense?)
  • Bringing high frequency trading to asset management investors
  • Double digit Sharpe ratios, most not comfortable with this
  • Started at First Boston, 1991, equity derivatives desk
  • Front office technologist supporting trading desk
  • 8-9 year career on Wall Street 
  • Knew nothing about Wall Street when in college
  • Never took a statistics class, finance class, economics class
  • Studied theoretical math and computer science (algorithms, graph theory)
  • Reasoning quantitatively and thinking logically are the key skills
  • Algorithmic trading is a quantitative challenge
  • At Goldman Sachs in late 90s, favorite job, phenomenally smart people
  • Trading manually back then was exhausting, nothing electronic
  • Burned out, wanted to start tech firm
  • Online brokerages to 40% market share in late 1990s, boom
  • Early adopter of Datek, 1996
  • Could build tools to help mainstream investors 
  • Started Tradeworx
  • "Analytical decision support tools"
  • 2001 -- Dot com bubble burst, 9/11 happened, everything changed 
  • Tradeworx became a hedge fund then
  • Why would a hedge fund commercialize its technology?
  • 2008 a difficult year for hedge funds, Lehman demise
  • Started high frequency trading in 2008
  • Eventually became a large high frequency trading firm by volume
  • Example of valuable IP: intraday trading signals, "MIDAS" bought by SEC to monitor markets
  • Early adopter of Amazon Web Services, tick data storage
  • Consolidated audit trail, successor of "OATS" owned by FINRA
  • Giving regulators investigative powers in modern, fragmented markets
  • Thesys, an offshoot of Tradeworx, won audit trail contract
  • Quantitative trading -- hypercompetitive, zero-sum
  • Paranoid conspiracy theories abound about high frequency trading
  • Inequality is a natural aspect of any system
  • Engineer systems to compete after studying the rules (which are complicated)
  • Questions of fairness, but it's really about discrepancies of skill [one way to rationalize it]
  • Simplify the regulatory regime, too many rules to understand
  • Proprietary traders are largest beneficiaries of HFT, then it trickles down
  • Fragmented markets glued together by HFT
  • Several dozen trading venues, both lit and dark
  • Quantitative investing strategies now very crowded
  • All quants use the same data, same inputs, so use of non-traditional data now key, such as:
  • Twitter firehose, e*commerce data now mined, satellite imagery
  • Discretionary managers not worth the fees they charge
  • If you charge high fees, must empirically show you deserve them, no one can
  • RenTech, successful quant hedge fund, all employee owned now, no outside money 
  • Secular trend towards mechanization, automation of investing process
  • Look for patterns in non-traditional data
  • Renaissance in artificial intelligence now, "machine learning"
  • Quantitative trading is tolerant of noise
  • Statistically orthogonal signals
  • Humans control the capital, not the quants
  • Quants have super short holding periods, generally
  • New datasets have very limited histories, so model building from them also limited
  • Investment success comes from bucking the trend
  • AQR, DE Shaw, RenTech ... you won't succeed if you try to copycat them
  • Think for yourself 
  • www.mana-partners.com

Notes for Chat with Traders, Episode 119

Added on by C. Maoxian.

Episode 119 -- @TAGRtrades (60:51)

  • "Alex"
  • Interested in trading in college, age 19 or 20
  • Waiting tables, summer job
  • Opened e*trade account with 2 or 3K savings
  • Dad suggested ag stocks
  • Retired Dad has CNBC on all the time
  • Grew up with Jim Cramer shouting on TV in background
  • Never thought about being a trader
  • Sounds like a Southerner, Texas maybe?
  • Worked in software
  • Used Yahoo Finance for research
  • Serious beginner's luck, made 20-30% on first trades
  • Solar stocks going nuts
  • Read message boards
  • Earthy guy all behind this solar thing
  • Put all his money in one small solar stock [doesn't say symbol]
  • Hands shaking, up 20K in one day
  • Frozen excited and scared
  • Told his wife he was quitting his job and going full time
  • Went 8 for 10 when he didn't know what he was doing
  • 25 years old, had some savings, wife had nanny job, no downside
  • We're going to get rich quickly!
  • Selling parents and in-laws on day trading much harder
  • Plowed through dozens of trading books
  • Had a written trading plan from the start
  • Quickly realized he didn't know what he was doing
  • Google search: how to make money in small caps
  • He did have security of being able to go back to software job, but never has
  • Spent thousands on alert services, chat rooms, DVDs
  • Learned horrible habits: averaging down
  • Red months for first six months
  • Green months ever since (not huge green but green)
  • Wife working, one check coming in, cut expenses way down
  • No steak and champagne dinners with the occasional winner [or cigars]
  • He did have a dollar figure in mind where he'd quit 
  • Tried trading options or futures -- whole 'nother world
  • Tried to short, didn't suit his personality
  • Learning experiences of what not to do
  • Talks a lot about trading with his wife [she must be an angel]
  • He didn't know what he didn't know, just made the leap
  • Wouldn't want his kids to trade -- the work is just too hard
  • Risked 2% in early trades, so he never blew up
  • Never once traded on margin, so he never blew up
  • You never hear from loser traders once they blow up, they disappear
  • First two years, profit curve: big spikes, big drops
  • Averaging down is still his biggest fault
  • Took a year to figure out averaging down is terrible thing to do
  • Good, knowledgeable chat guys are really helpful [but rare]
  • Nobody cares about how you manage a trade, or control your emotions
  • Track your progress, "journaling"
  • Must figure out what works for *you*
  • Get into the hot sector, you have a bid under you [a tailwind]
  • Chat with Traders podcasts were super useful to him
  • Constantly trying to evolve
  • Looks for specific set-ups, at specific times of day
  • 3-4 stocks in play
  • Plays small cap garbage stocks that will eventually do an offering
  • Been trading for four years but considers himself new
  • Chart set-ups that work intraday also work on longer time frames
  • "Grade A" setup -- something going bananas, looks for sector sympathy plays
  • Scales in and scales out
  • Gotten good at controlling his emotions, seeing chart clearly
  • Favors longs over shorts due to his personality
  • Doesn't want 11 good years of trading, and then blow out with one trade
  • What if your computer turns off and you're in over your head?
  • Used to play off scanners or people's trade alerts, no more
  • Comes in with 3-4 stocks each day, sets stop levels where trade no longer makes sense
  • He will put a third of his account in a single trade
  • Knows where he's going to get out
  • Takes starter positions then builds position
  • Tries to go home green every day
  • Hard to let winners run, psychologically hard *not* to take profits
  • First trade is smallest then larger then larger, as soon as it works take part off
  • Size is based on your confidence
  • Spends $1000+ a month on scanners and charts
  • Microsoft OneNote for trading journal + Excel spreadsheet
  • Time consuming to enter each trade but worth it
  • Works from home, just talks to himself all day [thus wife's suggestion to join Twitter]
  • Final notes at end of day
  • EdgeWonk, enters detailed information, time of day -- useful tool -- coupon code "traders"
  • Can find one or two trades a day
  • Wants to slowly increase his size
  • Still has never traded with margin
  • Does zero swing or position trading
  • Journal tells him that he shouldn't trade stocks under a dollar
  • Figure out what you're comfortable doing, must fit your personality
  • Can't fit in somebody else's mold
  • Just grind, no margin
  • www.tagrtrades.com
  • Twitter: @TAGRtrades

Notes for Chat with Traders, Episode 120

Added on by C. Maoxian.

Episode 120 -- Mebane Faber (72:32)

  • Biotech equity analyst [which firm?] while going to grad school
  • Moved to LA in 2006
  • Started Cambria 2007
  • Chatted about stocks with his father growing up
  • Worked for a CTA 
  • Interested in trend following
  • [What is Cambria? Research maybe? Not clear....]
  • Money management, ok they have mutual funds
  • Enjoys skiing
  • Everything they do is rule-based, quantitative
  • Value investing + trend following the ideal
  • Mutual fund managers skim 1.25% [How much does Cambria skim?]
  • Fund managers know their product is expensive and tax-inefficient, so they don't buy it
  • Triumph of the Optimists (his favorite book)
  • Global Investors Yearbook by Credit Suisse (great, free resource)
  • 5-2-1 Rule ... Stocks 5% Bonds 2% Bills 1% (real long-run returns)
  • Market-cap-weighted indexes, price of the stock times shares outstanding
  • US is half of world market cap
  • Home country bias, gives you concentration risk
  • [Does Faber have a CFA?]
  • Maybe 20% of the stocks contribute all the positive returns
  • It's the best time to be an investor in the history of investing (low cost portfolios)
  • Robo-advisors -- re-balance for you, tax-manage them for you
  • Fund business very predatory, high fees, tax inefficient
  • There are even ETFs now that have a negative expense ratio
  • Index funds -- market-cap-weighting, low turnover, low cost
  • Change weighting methodology, you'll outperform market-cap-weighting
  • Start with US 60-40, then add global, then add real assets
  • Then move away from market-cap-weighted to momentum (trend following) and/or value
  • Wealthfront, Betterment [never heard of them]
  • Most people don't have a written investment plan
  • Emotional component of long-term investing the hardest, people panic
  • January 2000 the AAII survey was at its most bullish ever (greed)
  • March 2009 the AAII was at its most bearish ever (fear)
  • Why pay an advisor 1% a year? [Big expense best avoided]
  • 10-year PE ratio as anchor, gives you common sense check (CAPE ratio)
  • Japan was half of global market cap in the late 1980s
  • Correct mathematical choice is to invest all of your money right now (global multi-asset class portfolio)
  • Rebalance tax efficiently
  • Afraid he's putting listeners to sleep
  • Taxes (high turnover) and fees (high fees) way more important than asset choices
  • Hedge funds sexy but taxes and fees are killer
  • Average mutual fund fee 1.25% would kill the best performing portfolio to worst performing over the long term
  • People should think about fees (and taxes) and almost nothing else
  • People struggle with their emotions the most
  • They don't teach personal finance or investing in high school or college
  • They don't teach how to manage money in school
  • Mutual fund salad -- people hold 30 funds ... just sell everything and start over (consider taxes)
  • People outside US esp. killed by fees (no Vanguard)
  • www.mebfaber.com
  • Twitter: @mebfaber

Notes for Chat with Traders, Episode 121

Added on by C. Maoxian.

Episode 121 -- Michael Mauboussin (57:11)

  • Pronounced Mo-bisin (like Larry Curly and Mo)
  • Works for Credit Suisse
  • Liberal arts major
  • Did training program at Drexel Burnham Lambert
  • Gravitated to research
  • Junior analyst job
  • Hired by First Boston, early 1990s
  • Morphed into a "Strategist"
  • Teaches at Columbia Business School
  • 25 years of teaching security analysis
  • Kahneman, Tversky behavioral studies: humans rely on rules of thumb with decision making
  • Humans have cognitive limitations
  • Auditing quality of decision making
  • Valuing process over outcomes
  • How much of a role did luck play?
  • Heuristics and biases -- shorthands lead to biases
  • Prospect Theory
  • Overconfidence -- projecting narrow outcomes
  • Confirmation bias -- we seek information that confirms view, dismiss new information
  • Recency bias -- weighting recent events, not a larger sample size
  • How to combat confirmation bias? Keep an open mind
  • Phil Tetlock -- "beliefs are hypotheses to be tested, not treasures to be protected"
  • Bayes Theorem -- new information, update views
  • Your views should be tenuous [tell that to a priest!]
  • Framing -- how you present the problem skews things
  • Intuition is robust in a stable or linear realm (chess)
  • Usefulness of checklists -- pilots have them, keeps them consistent
  • Do-confirm checklists
  • Read-do checklists (for emergencies)
  • Stock down 10% versus the market, investors take out their read-do checklist to react calmly
  • "Think twice" -- inside outside view
  • Analysis paralysis -- some domains more information *isn't* better
  • Paul Slovic -- tested handicappers, accuracy of bets didn't get better with additional information, but confidence soared
  • Professionals don't want too much information, just the key information
  • How to combat indecisiveness: do you need to move or not?
  • Technique to get you moving: write down plus / minus columns
  • Techniques to surface alternatives: "pre-mortem" pretend decision worked out *poorly* by projecting into future
  • Spend as much time as you can reading, exposing yourself to different points of view
  • Cognitive neuroscience 
  • Hyperbolic discounting -- future self is good, self at moment is bad
  • Humans want immediate gratification while promising to be good in the future
  • Link things you like with things that you don't like
  • Treadmills (hard) and podcasts (fun) -- one way to motivate self
  • Split brain patients -- left versus right hemisphere activity
  • Left hemisphere has the "interpreter" -- links cause and effect
  • Humans love stories (narratives)
  • Statistical arguments are palid, while a story is salient
  • Be a good storyteller, don't spout dry statistics
  • "Tales from Both Sides of the Brain" -- good book
  • Gazzaniga Scientific American articles
  • Keep a journal of your decisions (date and time it)
  • Go back and audit quality of decisions
  • Hindsight bias and creeping determinism
  • Skill dominant games -- the best player wins
  • But games where probability matters, process is all important
  • Good outcomes, horrible process
  • Adherence to good process, will win over time
  • World is dynamic, can only have components of process
  • Process must be transparent, economically sound, mathematically devised, repeatable
  • Fascination with Richard Dennis, Turtle Traders 
  • Curtis Faith book on Turtles
  • Skill versus Luck
  • Mauboussin an avid athlete 
  • Loved Michael Lewis's Moneyball book -- sticking to process
  • Taleb's 2001 book didn't quantify where the randomness was [annoying]
  • Short run luck will dominate, long run will zero out; then skill will shine
  • Techniques to isolate skill from luck
  • 82 NBA games a season, large enough sample to work with
  • All great investors think probabilistically
  • All great investors always have odds in their favor (positive expected value)
  • All great investors understand the role of time
  • Live to see another day -- "preserve optionality"
  • Puggy Pearson advice best: Understand the 60:40 end of a proposition (edge), money management (how much to bet), and knowing yourself (know your psychological shortcomings)
  • www.michaelmauboussin.com
  • Twitter: @mjmauboussin

  

Notes for Chat with Traders, Episode 122

Added on by C. Maoxian.

Episode 122 -- Doug Cifu (39:38)

  • Co-founder of Virtu
  • Formerly a corporate lawyer
  • Formerly a partner at Paul, Weiss, Rifkind, Wharton & Garrison in NYC for 18 years
  • Fast talker, sounds like native New Yorker
  • Private equity firm General Atlantic a client
  • General Atlantic had idea that exchanges would become electronic, for-profit
  • He was the lawyer representing GA in all their investments
  • Met New York Mercantile Exchange (NYMEX) chairman: Vinnie Viola
  • Vinnie Viola asked him to leave Paul, Weiss and partner with him to found Virtu in 2008
  • Virtu is an electronic market making firm
  • "Old school market maker" using latest technology and automation
  • Vinnie was a local risking his own capital, just wanted to make a tick
  • Provider of liquidity without customer order flow
  • Doing one thing, doing it well, and repeating it
  • Latency arbitrage isn't illegal or immoral
  • Data centers in New Jersey, data centers in Illinois
  • Spread Networks: it's not evil, it's just commerce
  • Evolved to microwave network transmission, even faster
  • Being faster by a microsecond isn't a sustainable business model
  • Virtu takes no directional trades, they think they can make a tick
  • They don't pray for mean reversion
  • Trading 4.5MM times a day
  • Bias based on bid side or offer side being stronger, classic market making
  • The old rewards available to market makers don't exist anymore
  • For example, specialists got 25 cents a share (the spread) in 1982 on NYSE for holding inventory on blue chips
  • Wins 51% of time (usually) ... will never disclose scratch percentage [but it's obviously huge]
  • Michael Lewis running around with his hair on fire
  • Big barrier to entry to what they do, smaller firms can't succeed
  • Madison Tyler consolidation in 2011
  • To be US equities electronic market maker, costs are enormous ($70MM a year), market data, connections
  • Co-location at data centers, infrastructure, footprint incredibly expensive, wouldn't be profitable for equities alone
  • Their business is a scale business 
  • Little guys can't make it, must sell out (to Virtu)
  • Putting out bids and offers is taking risk, so lots of pre-trade risk controls, including human involvement
  • Hubris is a horrible vice
  • Virtu went public April 2015
  • One losing day in five years, operational error, mistake to put that info in, Cifu's fault
  • Not an arrogant cocky firm ripping people off
  • We're not swinging for the fences, just hitting singles
  • Regretted putting "stupid histogram" out there
  • Guys at ZeroHedge writing crap about it
  • Michael Lewis's book true of market in 2009 but not 2015, "didn't really know what the hell he was talking about."
  • Lewis is anti-money, anti-Wall Street ... "he's a capitalist dressed up like a communist"
  • Lewis wrote fictionalized nonsense
  • Markets have gotten more efficient, it's *better* than the old days because of firms like Virtu
  • He was "a reasonably smart young man"
  • Worked his ass off in high school, got into Columbia, worked ass off there
  • Got into Columbia Law School, worked ass off, got into Paul Weiss, worked ass off to become a partner
  • Kept eyes open, learned a lot about a lot of different things, was well rounded
  • Worked on top-flight deals, big M&A deals, exposed to a lot of stuff
  • Met Vinnie Viola, became good friends, they worked well together
  • Need some innate ability, but he's "the dumbest guy at Virtu," must work your ass off
  • Hire really smart people and empower them
  • Be modest enough to know what you don't know
  • No politics at Virtu, flat organization
  • His success based on hard work, many people helping him out along the way
  • No clue about financial markets in 2008
  • Titles are bullshit, don't have them at Virtu
  • "I'm a smart guy, I can figure it out"
  • Vinnie took the risk on a "loud-mouthed lawyer" like him
  • Client used to call him "Dougie Large, the man in charge" (because he's a little overweight)
  • Twitter: @Dougielarge