Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

“Moneyball” Takes Down Wall Street

By -

By now I am sure all of you are aware of statistics guru, Nate Silver.

The unabashed numbers geek, professional poker player, baseball statistician and creator of the FiveThirtyEight blog on The New York Times website correctly predicted the outcome of all 50 states. In 2008 he accurately predicted 49 out of 50 states.

There is no doubt that Silver has ushered in a new level of credibility for statistical analysis.

Political journalist Dan Lyons said it best, “his accuracy on this year’s election represents what I call a victory of logic over punditry. Nate Silver was right and the pundits were wrong. And Silver won because of, well, mathematical science. Silver’s methodology is based solely on statistical data. He takes deep data sets and applies logical analytical methods to them.”

(more…)

My Mandatory Permabullishness

By -

Although I'm well-known as a permabear (which, given the past four years, is synonymous with blithering idiot), the three biggest profits I've made in my live have all been from "long" positions.

I put long in quotes because these are not trades of public stocks.

1013-bullThe first of these is my house in Palo Alto, which I bought more than twenty years ago. At the time, I was told it was the biggest mistake of my entire life, and in the year that followed, as I saw its value fall by 20%, it seemed that perhaps the naysayers were right. Suffice it to say that now I'm one of those guys who has been in the same place for so long that the price I paid for it seems science-fiction cheap these days. I could never afford to live in such a nice place if I had to buy into the current market. Of course, I have stuck with this "long" position because, well, it's where my family lives, and we have no reason to go anywhere else. Having a very low and permanent tax base doesn't hurt either (Proposition 13 in California basically means two neighbors living in identical houses can pay vastly different property taxes each year, depending on their purchase price).

The second of these was my business, Prophet. This company was no overnight success story. It took thirteen years of many ups and downs before it finally paid off, and it flirted with going out of business at least once. But I'm persistent and stubborn, and my desire to create the business and its products was very strong, so I finally saw it through to the end, when we sold it in January 2005.

And it is that sale which brings me to the third and most important "long" and the one which compelled me to write this post.

After the sale of Prophet, I had a lot of extra cash, and I allocated it to various purposes and investments. One particular opportunity came to my attention, which was a venture investment in a software start-up (I'm not going to reveal the name, but you've probably never heard of it). The company had raised money at a valuation of $10 million, but one of the shareholders wanted to sell his stake (which represented 5% of the firm), and he did so at a discount of 30%, giving the firm a "market cap" of $7 million. So now I had a meaningful stake in a startup.

I had never made a venture investment of any kind before, and I thought it was pretty cool that I still had an interest in a small company, now that I was divested of Prophet.

Soon after I made the purchase, I was at a social event, and I proudly told an acquaintance (who himself was involved in venture capital) about my investment. He immediately told me, "you should probably assume you're going to lose 100% of your capital." I guess he meant the advice as well-meaning, but it sure burst my balloon.

The thing is, the company really did struggle for a while. I had bought the stock in 2005, but a year later, it seemed questionable whether the company was going to survive at all. I started to think I had made a really huge mistake, but as you can guess, the market for private stock – – particularly of a stumbling startup – – is just about nil. My stake really was worth $0, effectively.

The firm managed to limp along through 2008, 2009, 2010……..and gradually began to actually build a real business. I would drop hints from time to time about my interest in selling my stake to any interested parties. There was never so much as even a nibble, but I'm sure I would have gladly sold my stock for $100,000, and I paid $350,000 for it in the first place. I just wanted out, and I would consider myself lucky to get any meaningful amount of cash back.

Fast forward to the present day. I did sell stock. I got all my money back. And a very handsome profit. And here's the best part of all – – – I still own the vast majority of the stock, since I only had to sell off a fraction of my holdings to get my investment and a nice profit back. So at this point, it's "house money", and obviously I'm in a vastly superior frame of mind, since I'll cheerfully hold on to what I have left as it continues to grow (the company in question is thriving now).

So what's the point of this? Well, the point is one that doesn't reflect well on me at all – – – given the opportunity, I would have dumped for a big loss something which a couple of years later was worth millions. I would have chickened out based on a combination of fear and impatience.

Does this sound familiar? I think this one-two punch of fear and impatience is what chases most people out of positions that, in the end, really blossom. How many people who paid $6 per share for Apple have held on to it consistently to this day? I'd guess approximately zero.

So by having no choice – – – by not being able to get out for one reason or another (be it my house, my business, or my venture investment) I have been forced into being a bull, and it's worked out in all three cases.  Since I'm apparently psychotic, I still focus on the bear side of things when it comes to the public markets, but that's probably the subject of extensive psychoanalysis for which I don't have time here.

You Know You Shouldn’t Be Trading When… (by Ryan Mallory)

By -

Dont-trade-1As a follow-up post to the one I did last week on How Big Should I Trade, I want to focus on "When I Should Not Be Trading". This is a little bit more straight forward that will focus on the more subtle traits for when you know you should just 'hang it up."

First and foremost, across the board – the main characteristic involved in every case a person shouldn't be trading is when it is done out of desperation. 

What does this desperation look like?

Desperation is what lures so many people into the stock market – much like the flashing lights of Vegas that offers the promise of a better life as well. In both cases it just leaves people further in despair and a lighter pocket too. 

Often times the position sizes that we choose to trade is often a direct result of what we'd like to  make from the market on a regular basis. Some people won't trade $1,000 or $2,000 in a single trade because they just don't feel like it offers enough in returns. 

Some folks will trade larger sizes because they figure that if they can make $X.XX doing so, that will enable them to quit their day-job. 

And then of course, there's the person that 'desperately wants to be a millionaire' and as a result creates a nifty spread sheet that calculates "If I trade "X" dollars and make "Y" return, over the course of "Z" years, I will be able to retire. 

But let me be frank – Trading is about developing a craft, a skill set, a TRADE that will allow you to consistently extract income out of the market outside of all external forces, opinions, people, and influences. Trading is not about making money and winning. That is the result of developing your skill set. 

You create the skill set and the ability to trade with discipline and accuracy, then winning will be an afterthought. 

But by trading out of desperation, it causes you to take short-cuts and circumvent the path to developing a long-term career in trading. It will cause you to trade larger than you should, more frequently than you should, and more often with out any reason for doing so. 

So learn to trade smaller dollars, amounts that you can withstand to lose. Amounts that if the trade goes horribly wrong, you won't be dreading telling your spouse about what happened. 


Dont-trade-2Learn to trade small!

That also means avoiding the all-too-alluring Proprietary Trading Firms – better known as "Prop Firms" – if you take this route, I can assure you that you will not blossom into the trader you are capable of becoming.

Why?

Because it is just another short-cut – and there are no short-cuts to trading successfully – the only thing that a prop firm makes you believe you can do is earn a greater amount of money by trading in bigger sums of cash that doesn't even belong to you, the likes of which you would never trade, simply because you wouldn't be joining the prop firm in the first place if you had that kind of cash. 

If you want to be a trader and be good at it. Don't take the short-cuts. Every other profession penalizes people for trying to take the short cut to success and if you do what I'm telling you not to do… well, then you are writing your own trading obituary as a result.

Learning to become a successful trader with large positions, requires that first prove yourself successful with the smaller positions.  

Be sure to check out Ryan's Blog at SharePlanner.com