Saturday, July 18, 2009

Compare ADM and the DJIA

I had a thought. Look at the chart for Archer Daniels. Big pop in October, which was when that sector of the market "bottomed", and prolonged sideways move in a range...

Then look at the chart of DJIA. Same big pop, but this time in March, followed by sideways range bound move.


If the DJIA follows the same pattern that ADM has, then DJIA will continue to trade sideways for a rather long time with many false break outs and break downs - similar to the ones we just endured.



Sunday, July 12, 2009

Appendix to The Bubble of American Supremacy

I recommend the Appendix of George Soros's The Bubble of American Supremacy. It lays out Soros's "Conceptual Framework" including his ideas on Reflexivity, Radical Fallibility, Open Society, the Human Uncertainty Principle and The Alchemy of Finance

After reading this portion of the book I realized that the error of the various actors leading up to the financial crisis wasn't that they didn't see it coming, it was that they failed to realize that their views were subject to error and therefore, might not have been the right way to proceed. It was an example of various groups being too sure about their various world views - whether it be real estate prices always rising, the panacea of securitization or the market fundamentalism that left derivatives, etc., unregulated.

The Bubble of American Supremacy
George Soros
Public Affairs, New York 2004
See pages 191-203

Saturday, July 11, 2009

Ten Heresies of Finance

I have had the pleasure of reading the (Mis)behvior of Markets, by Benoit Mandelbrot and Richard L. Hudson recently.

Here are the "Ten Heresies of Finance"

1. Markets Are Turbulent

2. Markets Are Very, Very Risky - More Risky Than the Standard Theories Imagine

3. Market "Timing" Matters Greatly. Big Gains and Losses Concentrate into Small Packages of Time

4. Prices Often Leap, Not Glide. That Adds to the Risk

5. In Markets, Time is Flexible

6. Markets in All Places and Ages Work Alike

7. Markets Are Inherently Uncertain, and Bubbles Are Inevitable

8. Markets Are Deceptive

9. Forecasting Prices May Be Perilous, but You Can Estimate the Odds of Future Volatility

10. In Financial Markets, the Idea of "Value", Has Limited Value

Chapter XII: "Ten Heresies of Finance"
Pages 225-252
The (Mis)Behavior of Markets
A Fractal View of Risk, Ruin, and Reward
Basic Books, New York 2004.