The Online Investing AI Blog

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If you notice some of the terminology of investing, you’ll see a connection.

Bet. Hedge. Loss. Long-shot. Odds. Risk.

All of these terms are interchangeable with gambling parlance. There’s a connection between the two — and while most investors will tell you that they aren’t gamblers, the words they use give them away. If there is a connection between gambling and investing, it follows that investing can have some addictive features, just like gambling does. Gamblers, after all, can go to Gambler’s Anonymous. Should there be an Investor’s Anonymous?

Investors may want to look at signs of addiction in their own trading behavior. Gamblers who become addicted to game of chance rarely are in it for the money, they are in it for the emotional jolt they get from betting. The rush.  If they win, that money goes into more bets and, usually, bets with much higher risks. Then, the crash.

All investors feel that same sense of exhilaration when a stock they bought starts to soar, or when a stock they shorted starts to drop. But, what do you do after the excitement. Can you take money off of the table? Can you wait until the market settles?

You may also want to look at how your emotions have fluctuated through the years. Do the “good times” of your life also correspond with bull markets — and the bad times of your life seem to be bear markets?

Asking these questions aren’t easy — and it’s hard for addicts to self-assess — but becoming more aware of whether we’re investing for fun or profit, or whether we’re just addicted to the rush of winning and losing, is important.

You may also find that you’re not addicted. But, this can still help you see how emotions can change your outlook on the market and directly influence how you invest — sometimes for good, but mostly for bad.

The National Journal makes the point that the Millennial Generation is the unluckiest generation.

Sorta.

Because it is also the luckiest.

The Millennial Generation is loosely defined as the generation of Americans born in the 80s or 90s. Obviously, a lucky generation wouldn’t have the exact date of their creation, right? Just like every tool becomes a weapon and every weapon becomes a tool, technology has shaped this generation’s limitations and opportunities as no other.

The National Journal’s main point — although they’re a little wishy-washy about it — is that technology has replaced a lot of the jobs that former generations could access. Computers have increased production and automation has totally transformed the job market. That’s all true, too. And this is just beginning. We haven’t seen nothing yet.

However, the article stumbles a bit on just what advantages that technology has introduced. After all, Millennials have more computer power in their pockets than most university computer labs had in their facilities just a few decades ago. The technology has created turmoil, but every period of massive change has a transition period.

Technology is also starting to break the chains of wage slavery for this next generation of workers. More Millennials can create their own businesses online. They have access to apps and tools that give them the power of dozens of corporations at their fingertips. There are also more ways to earn money–blogs, websites, app development, affiliate businesses, etc.. We can’t forget, either, that  more Millennials can arrange their work in ways that just was not possible in previous generations.

The jar is definitely half-filled for Millennials.

Or is it half-empty?

What do you think?

Entropy by Jef Safi

Entropy has a bad rap.

When you hear about entropy in science class it’s usually described as a messy bedroom, a completely disordered state. It has nothing to do with intelligence, in fact, it looks like the complete opposite of intelligence.

But, according to a Harvard computational physicist, entropy holds the key to intelligence and — defying the bad reputation thrust on it by millions of high school science teachers — entropy is more like a state of exploration, or even play. It’s an insight that could lead to new technologies and has important implications for econophysics and stock trading, believe it or not.

Alexander Wissner-Gross, who is part of both Harvard’s Institute for Applied Computational Science and MIT’s Media Lab, recently published a paper called, “Causal Entropic Forces,” which, using cosmology as its inspiration, seeks to reveal the “deep connections between intelligence and entropy maximization.”

And that gives us a clue to how it works in finances and trading. Wissner-Gross sees entropy as the universe’s way to explore possibilities and to seize future possibilities as possible. As he tells Io9, it’s a lot like playing Go.

Read more…

Bitcoin has had an interesting history. Launched in 2009, it was revolutionary in combining cryptography with money. Perhaps the motivation for this idea was to create a system that distributes financial resources to those who have computing power.

Image courtesy of BitcoinCharts.com

We may never know the motivations behing Bitcoin. The mysterious creator, Satoshi Nakamoto, cut off communication in 2011. The name appears to be a pseudonym and he has never been identified. It has been theorized that he is not even a single person, but a group of people who have opted for anonymity. If this is the the case, they have succeeded.

Has Bitcoin revolutionized the way that humans use money?

Consider the following 4 phases of money:

1. Barter
2. Money
3. Fiat Currency
4. Cryptocurrency

The first phase of human exchange predates the first villages. It was simply the exchange of x amount of one good for y amount of another good. For example, “I’ll give you 3 apples for 2 pears”. Although this worked, it was cumbersome because there was no simple way to value a given good.

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The market is broken and the free market system is not fair — it’s a sham.

I hear that all the time. And it’s absolutely correct.

The free market is not fair. In fact, it can be downright mean.

There’s plenty of evidence that this is correct. You only have to look at the recent economic meltdown to see that the market has failed millions of people in the world. Hard workers have lost jobs. Dishonest investors have screwed honest investors. Businesses and money evaporated overnight.

It’s difficult to tell people who have endured some of the pain of this crash this, but it’s true: the market doesn’t work and that’s why the market works. In other words, systems that can’t fail on their own, never grow on their own. This is adaptation at its finest.

Despite the pain of deep economic corrections, people are struggling back on their feet devising new ways to handle the problem. I don’t know whether Bitcoin will ever be the next currency — but it’s a sign of that innovation process and it’s a process that is happening all over the country.

The ability for the market to readjust is why it continues to be the worst — and best — system we have. Socialism, at best, subsidizes poor economic choices and ideas for as long as possible, then it collapses in a heap. Most countries that are embroiled in socialism rarely see this. It’s just a modern twist on feudalism. There are a group of lords — mainly industrialists and politicians — who provide the bread and circuses; in exchange, the citizenry doesn’t threaten their castles with torches and doesn’t threaten their entrenched businesses with competition.

It can be much worse.

Read more…

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You are on a hot streak.

Each trade you make is a winner. The money in your trading balance begins to pile up. You reach the obvious conclusion…

You are good. Real good. You have the skills and knowledge to dominate the market. Or do you?

The biggest problem that traders and investors encounter is the difficulty of separating skill and knowledge from plain old luck. And, just as a coin can flip to heads any number of times before it eventually balances out into the 50-50 range, so, too, can trades inconveniently arrange themselves in lucky — or unlucky — streaks. This “streakiness” can lead to over-aggression during lucky bursts and despondency when the trader faces a series of losing positions.

How can you separate your skill from the random nature of the market.

There are a few ways to test — all, of which, take time and patients, which is unfortunate for the get-rich-quick trading set.

Counter-Markets

One way to test your level of skill above luck is to measure your performance in poor trading markets. As the saying goes, all ships rise in the tide. But, during bear markets can you find winning stocks?

Significant Results

While there are always going to be lucky streaks and unlucky streaks, if you consistently out-perform the market, you can be more certain that you’re not just the beneficiary, or victim, of luck. This should be measured in years — nor days, weeks, or even months.

Risk Management

This isn’t so much of an indicator of luck as it is a way to manage luck. Traders should use proper position sizing. Both traders and investors should manage their portfolios. Some more advanced techniques including taking short positions to balance long investments.

Read more…

I’m reading Van Tharp’s latest book, Trading Beyond the Matrix. I just started it so this will not be a complete review — expect that in the future, though.

But I am already intrigued.

Tharp believes that you don’t trade or invest in the market; you trade or invest in the beliefs of the market. Those beliefs are yours to control, or to allow them to control you. Hence, trading for Tharp is almost a yoga, a mental connection between brain and spirit. Indeed, there are yogic paths that stress mental exercises and meditation exercises.

But we don’t think of trading as a spiritual act. In fact, it’s treated almost as an act of defilement. Our society has twisted views on wealth and earning wealth. We praise and hate the practice. The structure of our tax system treats earning money as a sin by punishing — not rewarding — you for earning more money. It’s the ultimate sin and deserves the ultimate sin tax. Notice: there’s no progressive sales tax on cigarettes or alcohol based on use or over-use.

Tharp though approaches it almost as a Zen philosopher, who sees the extraordinary in the ordinary and the ordinary in the extraordinary. By consciously watching your thoughts and beliefs, the trader is learning about himself. As he learns about his mind, he is learning about the universe.

I sort of saw this coming from Tharp. The last book of his that I read — Super Trader — contained the prerequisite number of charts and graphs, along with trading tips, but did not shy away from spiritual matters. Tharp believes they are closely connected.

Once I’m finished I’ll try to post a review, or summary, of Trading Beyond the Matrix.

Resources:

Tharp Institute

Trade Your Way to Freedom

Super Trader

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Don’t blame the media. Don’t blame the government. Blame Darwin and the occasional saber-toothed tiger.

We are surrounded by bad news because of evolution. Our brains developed to deal with an overwhelming amount of stimuli, mostly in the forms of threats to our safety and acquiring food and shelter. We watched for bears and worried about our next meal. Good news, quite frankly, wasn’t important.

This affects us today. When you’re on the freeway, do you stop and gawk at the motorist who successfully exits the highway? Or, do we slow down and gawk at the car accident at the side of the road? The media promotes the unusual and trends that threaten us before it shows us the common and trends that benefit us, even though, as we’ll see, there are far more opportunities than threats out there.

I believe this gives us a distorted picture of the world — and, in fact, may keep us mired down psychologically. We focus on the bad and ignore the good. (Although, to play my own devil’s advocate, it may also keep us from being complacent.)

Anyway. This week, I’m passing on links to prove my point.

Good things are happening, even if you believe your life, your world, and your reality sucks.

From Reuters, data indicate growing economic momentum.

There’s good news about job growth on Yahoo News.

Global poverty is shrinking — Pro Bono News.

From working in a sweatshop to being a billionaire, on the Good News Network.

Leukemia cure in one study — may just be the beginning, according to story at ABC News.

Quantum computing researchers are making impressive discoveries, according to one of the companies on the forefront of this new industry.

Exoskeletons can increase worker productivity. That’s from Next Big Future.

3D Printing? Yeah, that’s coming to, says the Wall Street Journal.

And lots more…

the Bushido Code

Samurai — those steely eyed, nerved and souled warriors of Japan — often served one master for life.

They fought, bled, killed and died for their masters.

And they never complained.

Maybe that’s why one of my favorite personal financial bloggers — The Financial Samurai — advised his readers to never complain about your employer or old employer if you want to have another job.

This is great advice — if you plan on living in feudal Japan. But I’m going to reveal several reasons why this is horrible advice for the employee, former employees, the employer — and even society.

Silence is Dishonest

If you have endured a bad experience on the job, summarizing your tenure as “it just wasn’t a good fit,” or “the culture was different from my expectations” are completely dishonest. This is a type of lying in abstentia. While FS accurately points out that “nobody likes a complainer,” most assuredly, “everyone hates a liar,” no matter what the stripe.

This type of dishonesty can have horrible ramifications, too. What if your friend seeking a new job overheard your lame summation of a bad boss? Or asks your advice about a job offer from a horrible former employer? Would you really offer a trite, know-nothing empty phrase, and cross your fingers that he or she bombs the interview? Often, when it comes to jobs, it’s “any port in the storm,” but if you advise your friend to get a job at — in FS’s scenario — what sounds like a hostile environment, you won’t have to worry about offering any advise to  this buddy in the future — this person will no longer seek your guidance, or, maybe even your friendship.

Silence is Cowardice

FS advises his client to keep silent and walk away with a severance package and a much better chance at further employment. FS did well for his client. But, if “Bob” in this scenario is being honest, it sounds like there is actual racial and sexual discrimination happening. And who knows what else?

Has he just thrown dozens of people under the bus, or placed female colleagues in jeopardy?

Is this so far-fetched? At Penn State, a serial child rapist, who was a well-respected, well-connected assistant coach, prowled for victims for decades, even after he was caught engaged in sex acts with children by fellow employees. Many of the employees admitted they were afraid of repercussions from their employer, which was and is, by far, the largest employer in the area, the truth of this heinous act.

Maybe they should have at least negotiated a severance package?

Read more…

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We’ve just witnessed a historic event.

Last Tuesday, the Dow — a benchmark for stock market strength — cruised to 14,285, well passed the former record set in Oct. 2007. As of Friday, the Dow rested at 14,397. And there was a collective shoulder shrug.

That reaction was in contrast to the heady days of stock market gains in the 1980s and 1990s when each Dow and Nasdaq record was reported breathlessly for days. It was a moveable feast.

So, what’s different about this record?

First, people are paranoid because the last record in Oct. 2007 was soon followed by an almost complete economic collapse. Within months of this record the Dow plummeted, losing half of its value and bouncing along those bottoms for years. Investors are wary of the same happening again.

They have statistical reasons to be wary. Raw economic numbers — GDP growth and employment, for instance — are not even close to the strength that led up to the rally in 2007. The housing market? It’s still a basket case. Also, the stock market gains are based a lot on government — especially the Fed — tampering with the numbers. Cheap dollars have fueled the rally.

However, it may be a mistake to hold this view on the economy exclusively. Remember fear can be just as damaging to your portfolio as greed. Also, remember that time has a way of balancing prices. What was up, might come down a little; what was down, may end up higher.

Read more…