Friday, 28 April 2017

100 Years

If events 10 years ago today had played out slightly differently, you wouldn't be reading this post.

On the morning of April 28th, 1917, my paternal grandfather - born on 5th November, so always went by Guy - was injured at Gavrelle, Arras. He was 18, having added two years to his age in order to volunteer early in 1915 and follow his older brother into the military. There was little incentive to check records too closely in those days. He was with the Royal Marines.  
In the early hours of the 28th at 4.25 the attack started and little more was ever heard from 1 RM, piecing together the course of the attack involves much reading around. Many Marines were therefore shot down quickly and the attack began to falter badly. At 7:15 the first news of 1 RM was received at headquarters and that was that a wounded marine of the 4th wave said that the wire was very strong but the others had gone on. No official news was coming back from 1 RM only information from the wounded, the information was then out of date. The truth was 1 RM was now basically wiped out with remnants holding its jumping off trench, isolated pockets of men were trapped behind the German counter attack.
My Grandpa was one of those men.

After lying for several hours wounded in the mud, he was finally rescued that night. He lost an eye, and had serious injuries to his leg / knee, but ended up leading a 'normal' life before dying at the age of 88 in 1987. 

Sadly I missed his funeral as I was in Turkey at the time, and my family had no way of contacting me, but I have his War Medals which mean a lot to me.

His older brother was killed the following April in Belgium. 

It's hard to imagine what some people went through back then. Pondering genuine life and death matters helps to keep things in perspective. Losing a bet or a football match is incredibly trivial in the whole scheme of things.


Tuesday, 25 April 2017

Singularly Savage Southerners and Decently Dressed Northerners

The 1873 F A Cup Final was held at the Lillie Bridge Grounds in London, close to today's Stamford Bridge. The ground, home to Middlesex County Cricket Club between 1869 and 1872, closed in 1888, the year after it was destroyed in a riot. 


The Spectator's contemporary (24th September 1887) report of the event makes for entertaining reading, notwithstanding that someone 'died suddenly from excitement' (in journalistic parlance, this report is a classic definition of 'burying the lead') and the revelation that 'athletics, whatever their other merits, do not refine':
It was a savage one; but similar scenes are not infrequent in theatres when audiences are disappointed and the money is not re- turned.
Two professionals were to run a race in the athletic grounds at Lillie Bridge on Monday ; but one of the men was not fit.
The bookmakers discovering this, compelled both men to withdraw ; and the managers of the place seeing that, put the money received at the gate away in safety.
The crowd of betting men, sporting men, athletes, and roughs grew impatient, demanded their money back, and not getting it, wrecked the place.
Athletics, whatever their other merits, do not refine, and the mob displayed more than a mob's usual hunger for destruction.
The woodwork of the buildings was pulled down, the furniture destroyed, and an effort made to burn up the whole place.
The police, who as usual did their duty well, were savagely beaten, and a signal-inspector who was present died suddenly from excitement.
The riot was at last quieted by the arrival of an extra body of constables.
The police say, we believe, that the crowd was singularly savage ; but there have been much more dangerous riots in the North.
The Times had this more detailed report on the events of 18th september 1887, although strangely there is no mention of the signal-inspector's death:
The pedestrian and cycle racing grounds at Lillie-bridge presented a sorry sight in the daylight yesterday, as the result of the mischievous riot of Monday evening. The ground was strewed with broken paling, stones, and glass bottles, broken and unbroken, with signs of arson everywhere. What buildings there were upon the ground had been fired or wrecked. Yesterday further details were given with regard to the cause of the riot. One of the competitors came upon the ground yesterday and stated that the dressing rooms where the men were preparing for the race were broken into and threats of violence were used towards both if they dared to appear. An endeavour had been made, so it is alleged, on behalf of those who gull the betting public to cause the race to go one way. Failing success in this endeavour, a gang of roughs, stated to have been engaged by a bookmaker, broke into the dressing-place of the men who were to run and resorted to intimidation in order to prevent the race. Certain it is that before the competitors, [Harry] Hutchens and [Harry] Gent, disappeared bookmakers offered to bet "100 to 10 the race does not come off at all." This was heard by the occupiers of the ground, and they made preparations to secure the gate money, which, considering that between 6,000 and 7,000 people had paid a shilling a head, and some four or five shillings in addition for reserved seats, must have been considerable in amount.
The Lillie-bridge Grounds are spoken of as a place which every one is presumed to know all about; but, as a matter of fact, only a comparatively small portion of the public know it. The area of the grounds may be judged by the fact that the outside track, which covers the full extent, leaving only a bare pathway space, in some parts built up with seats for spectators, is 600 yards. About 230 yards long by 160 yards broad is about the extent of the space in all. At the north end are the stations of the West London and District Railways, some stables, and a meeting hall, and at the south end is the Fulham Fever Hospital of the Metropolitan Asylums Board. One side is covered by the railways and the other by Seagrave-street, Lillie-bridge-road. At the north end stood before Monday the pavilion, a series of low buildings, cheaply run up, comprising, in their length, members' seats and reserve seats in front, with offices and refreshment rooms behind. Cheap seats were erected on the Seagrave-street side. The riot really began, from all that can be gathered, in the corner near the railway. There is an entrance here direct from the railway stations, and a pay-box - another being over at Seagrave-street. When the news went forth, towards dusk, that the competitors had disappeared, and the bookmakers were seen to be making off, a rush was made to the pay office to demand the money back. The place was shut up. The people broke windows and peered in, but could see nothing, though it is said the money taker was there with the money taken at the entrance. He was soon spirited away, however, and the money with him. It is said that the people who began the riot were decently dressed people from the North, such as are to be seen in the Pomona Gardens at Manchester and in the sporting places of Sheffield, with a wonderful amount of time and money to devote to pedestrian and horse racing. They began to shake the places and to break down palings, and they were quickly assisted in the work by the rougher orders, of whom there were a good sprinkling on the ground. A full half of the people were glad to depart as best they could, but some of the bookmakers were marked, and followed out to the streets. They jumped into cabs, and the angry crowd held on so to the cabs as to lift the horses off their feet. Those within the grounds tore down the hoardings, piled the squab palings and seats on to fires, and set the pavilion on fire. They burnt out completely a pavilion on the railway side, and, as narrated in the Times of yesterday, they sacked the refreshment bar. Then they set the row of buildings on fire at the north-end, and growing more reckless by impunity, they began to fire the buildings behind the Lillie-bridge Grounds.
The police were at first taken by surprise, as were most other people. Only sufficient police had been detached as for an ordinary occasion, as a forced interference with a race on the part of bookmakers or others had never been dreamt of. The few police who were there did their best to stop the riot, but they were utterly powerless to deal with three or four thousand of the roughest classes. The Fire Brigade men came, and their efforts to cope with the fire were doubly embarrassed, as in the first place the mob stopped the work, and then there was a poor supply of water. The police protected the firemen in their work, amid showers of bottles and palings, injuring not a few, and there is reason to suppose that the assailants did not get off quite free from hurt. On reserves of police having been brought up the fire at the north end was exstinguished before it could extend to property outside. That destroyed within the enclosure was not of very great value. The building was completely destroyed.
It had been intended to hold an "assault of arms" in the Lillie-bridge Concert-hall, which adjoins the grounds. The hall is under management quite distinct from that of the grounds; but that did not matter to the rioters. They piled together boxes against the wall with the evident intention to fire the property, tore down gas fittings, and bombarded an unfortunate reporter who had made the roof of the hall his places of observation with bottles, parts of chairs, gas pipes and palings. The police came in time to disperse the crowd here. The "sets-to" as a finale to the sports on the ground did not come off. With the exception of the injury to the gas fittings the hall was uninjured.
The police testimony is to the effect that such a scene has not been witnessed in modern times in London. It is, as already mentioned, attributed to the action of certain bookmakers, who engaged ruffians to stop the race, because its termination one way would have been disastrous to them. Two facts are certain - one that it was known shortly beforehand that the race would not be run, and the other that the gate money was secured before the spectators had the knowledge that they were duped.
Duping and fixing have a longer history than paragraphs it would seem. 

I love the reference to those decently dressed northerners with a "wonderful amount of time and money to devote to pedestrian and horse racing".

The archives of the Spectator also contained this prescient paragraph from 2013 about the future of the Crystal Palace and grounds:
Another thought occurs to us. The organization of international athletic rivalry seems to be inevitable. We do not know whether Shepherd's Bush is always to be the scene of the Olympic games, but if it is proposed ever to hold them elsewhere no place could conceivably be better for a permanent stadium than the great basin of land in the Crystal Palace grounds which contains the present football ground and the bicycle track. It is an enormous place surrounded by lofty grass slopes. Nor is the objection any longer valid that the Crystal Palace is too far from London. Electric trains, motor omnibuses, and taxis have brought it recently within very easy distance. 

Monday, 24 April 2017

Ordered by Wins

Congratulations to Betfair Pro Trader on passing the 600k page views today.

James suggests that:

By the time it gets to 1.5M Green All Under will be pushing 3M.
At the current 2017 rate of 787 hits per day, I make it 4.99 years before I reach that milestone, but this year's hit rate is far above that of 2016, when a mere 436 hits a day were received. 

I must be doing something right! 

On the topic of my last post regarding the VIX trader, James commented:
I read the article too, which is probably why I used it as an example in my tweet.
50 cent could be a bot and part of an algo-trading firm. It could well be a profitable bot as we don't know what the other half of the hedge is. A losing algo would have long been terminated.
Interesting that although one side of the hedge has been recognised in the markets, the other side hasn't been, perhaps it is because it is spread more thinly across multiple markets, but then the financial markets are far deeper than say the 2:15 at Ripon so even large sums of money are insignificant in the whole scheme of things.

Some of you may recall the Betfair trader who started laying the draw in Rugby matches back in 2008 - it was a strategy that was soon identified, and given that he was playing with fire, a lot of people were watching to see when he would get burned, as he inevitably did.

On my ties in baseball post, James commented:
I would have thought that wins in a football league is perfectly fine. I struggle to remember the last league champion that didn't win the most games.
If teams have an equal win count then they should be ordered by the combined results between them.
Looking back at the last five EPL seasons, the last four were won by teams winning the most games. The one before those four was tied between Man City and Man United with 28 wins each.
However, taking City's 1-0 and 6-1 victories over United gives them the edge. They also won by goal difference using the current system.
Well think again James. While ordering by wins is usually fine at the top of the table, it is certainly not always the case.  

In 1983-84, four teams all had 22 wins (Liverpool, Southampton, Nottingham Forest and Queens Park Rangers) while seasons such as 1911-12, 1952-53, 1954-55, 1971-72 and 1985-86 also get complicated with three teams all winning the same number of games. 

For those interested, and who could possibly not love this stuff? : 


In 1911-12 Blackburn Rovers would have kept their title after winning the tie-break against Everton and Bolton Wanderers.

In 1952-53, champions Arsenal would have lost out to second placed Preston North End or fourth placed West Bromwich Albion.

1954-55 would have seen sixth placed Aston Villa crowned champions over fifth placed Manchester United and first placed Chelsea.

1971-72 would have seen the title go to Leeds United rather than Derby County, with Liverpool also level on wins. 

In 1985-86, Liverpool, Everton and West Ham United all won 26 games, with Liverpool winning a mini-league of the three clubs.

In 1924-25, Huddersfield Tow were champions despite two other teams (West Bromwich Albion and Bolton Wanderers) winning more matches. In 1927-28, Huddersfield Town won more games than Everton, but placed second. 

After the Second World War, Liverpool were crowned champions in 1947, yet won the same number of games as third placed Wolverhampton Wanderers who would have won the league based on the head-to-head results.


Burnley would have lost out to Wolverhampton Wanderers in 1960 and Derby County (for the second time) would have lost their 1974-75 title to Ipswich Town.

Queens Park Rangers would have won their only title in 1975-76, and in the Premier League era, Arsenal would have won the league in 1998-99 at the expense of Manchester United.

When time permits, I'll try to remember to take a look at the bottom of the table as well as at some of the lower divisions. I'm sure most of you can't wait. 

Tied and Trusted

It may not be well known, but when the Football League was established in 1888, the plan was for the table to be based on wins. 

After a few games, it was realised that this wasn't such a great idea, as drawing and losing were treated the same, and so the idea of two points for a win, one point for a draw was introduced, a format which lasted until the 1980-81 season in England, and longer in the rest of the world. 

In a league format, most of the world has long accepted that a draw is perfectly reasonable, whether they count as half a win or less. 

Major US sports are something of an exception. Tied regular season (i.e. league) games in the NFL go to an extra (up to) 15 minutes of play. The NHL play an extra (up to) 5 minutes of play before having a penalty shoot-out. NBA games play as many 5 minute periods of overtime as necessary until there is a winner, and baseball plays on forever.

However, Baseball is currently looking at ways of shortening their games, and one idea being mooted is allowing games to be ties if they are level after 12 innings, which seems perfectly reasonable to me. The idea that ties in baseball are "not traditional" is nonsense, as this 538 article details.

Ties in general are seen as un-American - must have a winner each time - although the younger MLS crowds have no problem with the concept. They also embrace the idea of games lasting under two hours rather than up to 8 hours and 25 minutes which is the record for longest professional baseball game! 

I'm not sure why there would be an issue calling games as tied after nine innings, but in line with other sports there, it seems at least a token effort at breaking the tie is required. 

As for the (not very interesting) question raised below - "how would baseball treat them" just treat them as half a win! There's already a play-off arrangement in place for teams tied at the end of the season, so whether the tie is 90 wins each or 90.5 "wins" each, it's all the same.

If ties did come back, one interesting question would be how baseball would treat them. In the days before lights, tied games were often replayed from scratch; the 1907, 1912 and 1922 World Series all featured extra games because of ties. Starting a brand-new game every time there’s a tie is unlikely in today’s game, however, when one of the chief arguments for allowing ties is reducing the risk of player injury. One alternative could be that tied games just remain ties, unless they need to be made up at the end of the season to determine playoff positioning. (That could make for an exciting finish to a pennant race!)
The idea of starting games over in a league format is nonsensical, but at least the perfectly reasonable idea of a tie is being discussed. 

Sunday, 23 April 2017

$89 Million Down, 50 Cents at a Time

James Tweeted yesterday:

Rather facetious, but the mention of VIX reminded me of a story I read earlier this month about a real trader nicknamed '50 cents' whose apparent daily strategy is to buy Call options in the aforementioned VIX.
"Basically they come in every day and they buy 50,000 VIX calls worth 50 cents. So in other words, they don't care too much what the strike is; they just pick the option that's worth 50 cents."
So far (as of 22nd April) the strategy has cost our friend ~$89 million, although it's likely a hedge with actual losses far less. 

The concluding two paragraphs caution against trying to work out the strategy:
It may be impossible to say for sure. At the same time, it's worth noting that tracking down 50 Cent's motives may provide little in the way of useful information.
"After 30 years in the business, I have seen far more money lost than made by speculation on 'other people's positions,'" Dennis Davitt, partner at Harvest Volatility Management, wrote to CNBC. "I find it is hard enough to make money just managing my own positions."
Apparently last Wednesday, 50 Cents doubled down:
On Wednesday morning, the trader bought an additional 100,000 VIX calls betting that the index will climb about 40% by May.
Goodness, at this rate we'll soon be talking real money.

The original CNBC article is here, and reproduced without the pretty pictures:
A pattern of huge, near-daily trades on the VIX is turning heads in the options market.
What's most notable is that even after losing some $75 million by betting on a volatility spike, the huge options buyer known as "50 Cent" shows no signs of slowing down.
"I would categorize them as someone who doesn't flinch at losing money," commented Pravit Chintawongvanich, head of risk strategy at Macro Risk Advisors, who flagged the activity in a series of research notes.
The money-losing trades in question have been purchases of call options on the CBOE volatility index. These represent bets that market volatility is set to rise, and to a lesser extent, that stocks are set to fall.
Sussing out the actions of an institutional trader based on public information about options trades can be difficult, if not impossible. But this trader made it easier by leaving a clue out in the open.

"They have a very particular pattern of buying options," Chintawongvanich explained Wednesday on CNBC's "Trading Nation."
"Basically they come in every day and they buy 50,000 VIX calls worth 50 cents. So in other words, they don't care too much what the strike is; they just pick the option that's worth 50 cents."
On Thursday, for example, 50,000 of the VIX 21-strike calls expiring in May were apparently purchased at a price of 49 cents. These options will expire worthless unless the VIX skyrockets 82 percent in a bit more than a month and a half, and will lose money unless the VIX closes above 21.49 on expiration (the VIX closed Thursday trading a bit below 12).

Since the multiplier on VIX options is 100, the purchase alone comes to nearly $2.5 million. In terms of the number of contracts, it was the single biggest trade of the day on any index or stock.
And that wasn't all. Also on Thursday, 15,000 May VIX 20-calls were traded at 51 cents, and 10,000 May VIX 21-calls were traded at 47 cents.
In total, the party that has become known as "50 Cent" after its favorite purchase price has spent about $90 million, and has already seen $55 million worth of purchased options expire worthless.
Unsurprisingly, this strategy appears to have a marked effect on the overall market for VIX options. Total VIX call open interest has risen to an all-time high thanks to 50 Cent's purchases, Chintawongvanich said.

A huge share of those calls have 50 Cent's name on them.

Ironically, the huge bets on the VIX could end up dampening volatility.
"50 Cent becomes very well hedged in a risk-off event, and would be in a position to provide liquidity for those scrambling for a hedge," Chintawongvanich wrote. "The presence of '50 Cent' could mean that future volatility spikes are muted."
In fact, Jake Weinig, founding partner at options-centric hedge fund Malachite Capital, commented in an email to CNBC that "the size is probably too big"; the very enormity of the trade "almost makes it a self-fulfilling prophecy that it won't pan out."
Of course, if it does pan out, the rewards could be sweet indeed. In 2008, the VIX closed above 80 on a couple days; looking at Thursday's $2.5 million purchase alone, a close at that level on expiration day would yield a profit of about $300 million.
So is this the case of a huge hedge fund quixotically betting it all on a volatility spike in the near future?
Perhaps, but the story is almost certainly not that simple.
"We think it's highly possible that this is some kind of systematic hedge run by a larger asset manager," such as a government pension fund, Chintawongvanich said. "Even though $90 million is a lot of money to us … in percentage of their total assets, it might be a lot smaller."
He added that "the persistence and the fixation on actual costs" suggests that "someone sat down at the beginning of the year and said, 'OK, we're going to spend this much on hedging our books every day. Go out and do it, and I don't care what you do — just spend this much money.'"
Further, the options trades may simply be one part of a broader hedging strategy.
Weinig theorizes that while buying VIX calls, 50 Cent is also betting against volatility in another form, such as VIX futures — which have indeed seen their share of shorts spike recently.

Selling futures "would cover the carry cost of the options, while still maintaining a nice tail hedge in an upside shock to implied volatility," Weinig wrote. "The event where this investor would lose would be in a slow and modest rise in VIX. As we haven't seen this in some while, our 50c friend remains unscathed for the time being."
In other words, the big purchases of calls may simply be the most dramatic part of a big asset manager's comprehensive plan to cheaply protect itself from a market crisis. Or, a bit more exotically, it may represent part of a fund's outright bet on a particular sort of volatility environment.
It may be impossible to say for sure. At the same time, it's worth noting that tracking down 50 Cent's motives may provide little in the way of useful information.

"After 30 years in the business, I have seen far more money lost than made by speculation on 'other people's positions,'" Dennis Davitt, partner at Harvest Volatility Management, wrote to CNBC. "I find it is hard enough to make money just managing my own positions."

Saturday, 22 April 2017

Conviction, Self Interest or Strategy?

An interesting post from Professor Leighton Vaughan Williams on the topic of differences (of opinion) which is relevant to the recent theme on this blog of how people can have such differing views about someone or something:

Why do views differ, and how can we resolve these differences?
When two parties to a discussion differ, it is useful, in seeking to resolve the ‘argument’, to determine from where the differences arise, and whether these differences are resolvable in principle.
The reason for the difference might be that the parties to the difference have access to different evidence, or else interpret that evidence differently.
Another possibility is that one of the parties is applying a different or better process of non-evidence based reasoning to the other.
Finally, the differences might arise from each party adopting a different axiomatic starting point.
So, for example, if two parties differ in a discussion on euthanasia or abortion, or even the minimum wage, with one party strongly in favour of one side of the issue and the other strongly opposed, it is critical to establish whether this difference is evidence-based, reason-based, or derived from axiomatic differences.
We are assuming here that the stance adopted by each party on an issue is genuinely held, and is not part of a strategy designed to advance some other objective or interest. The first thing is to establish whether any amount of evidence could in principle change the mind of an advocate of a position. If not, that leads us to ask where the viewpoint comes from. Is it purely reason-based, in which case (in the sense I use the term) it should in principle be either provable or demonstrably obvious to any rational person who holds a different view, without the need to appeal to evidence.
Or else, is the viewpoint held axiomatically, so it is not refutable by appeal to reason or evidence? If the different viewpoints are held axiomatically by the parties to the difference, there the discussion should fall silent. If the differences are not held axiomatically, both parties should in principle be able to converge on agreement.
So the question reduces to establishing whether the differences arise from divergences in reasoning, which should be resolvable in principle, or else by differences in access to evidence or proper evaluation of the evidence.
Again, the latter should be resolvable in principle. In some cases, a viewpoint is held almost but not completely axiomatically. It is therefore in principle open to an appeal to evidence and/or reason.
The bar may be set so high, though, that the viewpoint is in practice axiomatically held.
If only one side to the difference holds a view axiomatically, or as close as to make it indistinguishable in practical terms, then the views could in principle converge by appeal to reason and evidence, but only converge to one side, i.e. the side which is holding the view axiomatically.
This leads to a situation in which it is in the interest of a party seeking to change the view of the other party to conceal that their viewpoint is held axiomatically, and to represent it as reason-based or evidence-based, but only where the other party is not known to also hold their divergent view axiomatically.
This leads to a game-theoretic framework where the optimal strategy, in a case where both parties know that the other party holds a view axiomatically, is to depart the game.
In all other cases, the optimal strategy depends on how much each party knows about the drivers of the viewpoint of the other party, and the estimated marginal costs and benefits of continuing the game in an uncertain environment.
It is critical in attempting to resolve such differences of viewpoint to determine whence they arise, therefore, in order to determine the next step. If they are irresolvable in principle, it is important to establish that at the outset. If they are resolvable in principle, setting this framework out at the beginning will help identify the cause of the differences, and thus help to resolve them.
What applies to two parties is generalizable to any number, though the game-theoretic framework in any particular state of the game may be more complex. In all cases, transparency in establishing whether each party’s viewpoint is axiomatically held, reason-based or evidence-based, is the welfare-superior environment, and should be aimed for by an independent facilitator at the start of the game.
Addressing differences in this way helps also to distinguish whether views are being proposed out of conviction, or whether they are being advanced out of self-interest or as part of a strategy designed to achieve some other objective or interest.

Memories and Thinking Critically

To start this post on a personal note, it was exactly 50 years ago today, Saturday 22nd april, 1967, that a very young Cassini made his first trip to Selhurst Park to see Crystal Palace beat Birmingham City 2:1. A memorable day, and one that has influenced my life hugely ever since.

Now if only they would bring back those elegant claret and blue kits!   

James had a comment for me:
I guess that one day Cassandra... I mean Cassini is going to correctly call an election. ;)
I find it disheartening that someone like Jordan Belfort (whose only record of 'success' is a charge sheet) should now be a motivational speaker.
What on Earth does he teach, Crime 101?
And what are the imbeciles parting with their money think they are going to learn? How to run a pump and dump operation? How to scam people? Well, they are learning that with hands on experience of scamming themselves out of their own money.
The web is a powerful research tool and yet the majority of its users prefer to go to forums and ask dumb questions or sign up for a course. Not once do they think, "Maybe I can research my question through a search engine to find a balanced answer" or "I can check out this person promising me a beach lifestyle".
The more simple you expect life to be the harder you make life for yourself.
My post yesterday appears to have caused some confusion, with comments on Twitter such as this one from Trevor ( @whatatrevor ):
Terrible article @CaanBerryTrader if u r full time trader not allowed to invest ur money or run any other business?
Deepak Kumar replied with:
Blogger is really talking about bullshit. I always invest in stock and mutual fund some part of winning. And its working great for future.
I certainly never intended to tell anyone not to invest. This blog has always said the exact opposite, and to start early in life. Deepak Kumar has it right, although he didn't mention low-cost index tracking funds.

The post from Dan Solin was included to illustrate the point that people tend to form opinions, and despite evidence to the contrary, are reluctant to subsequently shift their positions. As James says in his comment, the web is a powerful research tool, but too many users lack the curiosity, or perhaps the ability, to carry out their own research. It was in no way intended to deter anyone from investing in their future.

Back to James' opening line about my political betting record, it certainly had a poor 2016, but not too bad before that, although 1992 was a disaster.  

Survivorship Bias

Courtesy of xkcd and @day25

Friday, 21 April 2017

Mistakes Were Made

Somewhat related to my post yesterday on low-cost index tracking funds, I came across this post today from Dan Solin, author of the Smartest series of books. 

The message about low-cost index funds is really not the point. What was interesting to me was his observation that for many people, pre-conceived beliefs or ideas are immune to evidence. 


The betting trading world has more than its fair share of charlatans, yet once lured in, their gullible followers are somehow able to ignore evidence that proves, to any impartial observer at least, their hero to be a fraud.

One recent example is the now infamous Caan Berry, whose claims of making £100,000 a year from full-time trading has been discredited by evidence both direct and circumstantial. 
Direct evidence shows that he was actually selling Solar Panels, and thus was clearly not full-time. We also know that the registered address for Caan is rented out for around £900 a month.

Those are facts. Circumstantial evidence leads a rational person to question why such a high earning individual would live so shabbily relative to their claimed income, and question whether his living arrangements mesh with the claim that he's in the market for a new car

One might also wonder why the Solar Panels job wasn't mentioned at all. It's revealing that Caan has no problem telling readers about his supposedly almost monthly holidays abroad, the high performance cars he supposedly drives and the copious amounts of beer he consumes, yet somehow forgets to mention the impact to his trading during his failed attempt over several months as a Solar Panels salesman. Presumably readers are meant to believe that selling Solar Panels pays at least £2,000 a week. It doesn't - perhaps half of that, which begs the question - why would someone give up the huge trading and tax-free income that Caan supposedly had / has, for £50,000 a Year, Boss, Worse Living? 

My guess for why followers ignore the evidence is that it's human nature to find it hard to accept that you were wrong. It's the same reason why traders sell winners too fast, yet hold on to the losers. 

If you've bought a video pack from someone, then it's preferable to believe the reason why it hasn't helped you is because you haven't got what it takes, rather than that you were duped. 
We all have a hard time admitting that we're wrong, but according to a new book about human psychology, it's not entirely our fault.
Social psychologist Elliot Aronson (co-author, Mistakes Were Made (But Not by Mesays our brains work hard to make us think we are doing the right thing, even in the face of sometimes overwhelming evidence to the contrary.
Here's the Dan Solin post in full:
I remember the meeting like it was yesterday. It had taken me almost a year to persuade the head of human resources for a mid-sized industrial company to agree to discuss their 401(k) plan with me.
It was a typical plan, populated with expensive, actively managed funds, with a couple of token index funds added to the mix. I was confident that, with the right presentation, I could persuade him to switch the plan to one consisting solely of a limited number of portfolios (at different risk levels) using low-management-fee passive funds. I knew I could demonstrate lower cost to plan participants and higher expected returns.
I wasn’t going to take any chances with such a large, promising prospect. I wanted to be sure my presentation was flawless. I arranged for the meeting to be held at the office of the fund family I was using, and asked them to have their best client-facing person lead the meeting.
They didn’t disappoint. The person they selected had a Ph.D in finance. He was engaging and articulate. His presentation was flawless. He reviewed the data showing the impact of high costs on performance. He discussed the peril of stock picking, market timing and chasing returns. He provided compelling data on the dismal performance of actively managed funds. He illustrated his points with a few well-designed slides.
I thought his presentation was brilliant – far better than anything I could have done.
I left the meeting elated and congratulated myself on making these extensive arrangements. The HR person seemed impressed and appreciative as well.
A week or so passed and I decided to follow-up. The HR person told me they were “considering their options” and would get back to me.
They never did.
What happened?
I made a logical assumption many of you embrace when dealing with prospects. I thought the use of logic and reason would change the mind of my prospect. A study by Yale behavioral economist Dan M. Kahan sheds light on why my premise was flawed.
In a series of experiments (discussed in this article) Kahan demonstrated the use of data aggravated pre-existing differences in positions on a variety of issues like climate change. One commentator summarized Kahan’s findings as follows: “A conservative Republican with strong science intelligence will use their skills to find evidence against human-caused global warming, while a liberal Democrat will find evidence for it. This is also true for issues like fracking, evolution, and the risks associated with gun possession – whatever your preconceived political belief on this issue, you’ll use your scientific intelligence to try to prove you’re right.”
The more data you provide to someone with a pre-existing belief, the more likely they are to align themselves with their belief, even though it’s contradicted by the evidence.
Of course, there are exceptions. People who are genuinely curious are more likely to be persuaded by the evidence.
How should this research affect your meetings with prospects?
If your prospect (like my HR person) believes strongly in active management, you’re unlikely to change his or her mind by overwhelming them with data. This approach may have the opposite effect. They will use your data to adhere more strongly to their pre-existing belief.
If I could go back and redo my meeting, I would have conducted it myself, without an impressive expert. I wouldn’t do any formal presentation. Instead, I would ask a series of questions that initially would establish an emotional connection between the prospect and me.
As the meeting progressed, my questions would focus on their existing plan and elicit his perceptions of its pros and cons.
I would let him lead the meeting, instead of trying to educate him on the merits of passive investing. I would try to elicit his concerns and then attempt to address them.
I still might not have converted him from a prospect to a client, but the odds of doing so would have increased significantly.

Thursday, 20 April 2017

Vanguard Dominant

I'm not sure this blog can take all the credit, but a New York Times article last week reported that Vanguard, king of the Index Tracking Fund companies, took in about 8.5 times as much money as all its competitors (some 4,000) combined in the last three calendar years!

The article also states that:

…since 1976, fees on Vanguard funds have fallen to about 0.12 percent from about 0.70 percent. By comparison, Lipper calculates that the average fee for all mutual funds is currently 1 percent, although it has been coming down rapidly.
If there is anyone out there who still things that higher cost, actively managed funds, are the way to make your fortune, the article by Landon Thomas Jr. is well worth reading in full. 

Not only do those higher costs seriously hurt your compounding over the years, but actively managed funds don't beat the market in the long-term. Read Warren Buffett on that topic. Here's the full article:
The Vanguard trading floor is the epicenter of one of the great financial revolutions of modern times, yet it is a surprisingly relaxed place.
A few men and women gaze at Bloomberg terminals. There is a muted television or two and a view of verdant suburban Philadelphia. No one is barking orders to buy or sell stock. For a $4.2 trillion mutual fund giant that is still growing rapidly, it occupies a small fraction of the space of a typical Wall Street trading hub.
You can barely hear the quiet hum of money being invested — money in scarcely imaginable quantities, pouring into low-cost index mutual funds and exchange-traded funds (E.T.F.s) that track financial markets.
In the last three calendar years, investors sank $823 billion into Vanguard funds, the company says. The scale of that inflow becomes clear when it is compared with the rest of the mutual fund industry — more than 4,000 firms in total. All of them combined took in just a net $97 billion during that period, Morningstar data shows. Vanguard, in other words, scooped up about 8.5 times as much money as all of its competitors.
“Flows of this magnitude into one company are unprecedented,” said Alina Lamy, an expert on fund flows at Morningstar. “Since the crisis, investors have been saying, ‘I may not be able to control the market, but I can control how much I pay in mutual fund expenses.’ And when they look for quality funds with low fees, the first answer is Vanguard.”
The triumph of index fund investing means Vanguard’s traders funnel as much as $2 billion a day into stocks like Apple, Microsoft and Amazon, as well as thousands of smaller companies that the firm’s fleet of funds track. That is 20 times the amount that Vanguard was investing on a daily basis in 2009. It is manageable, in large part, because no stock-picking is involved: The money simply flows into index funds and E.T.F.s, and through February of this year, nine out of every 10 dollars invested in a United States mutual fund or E.T.F. was absorbed by Vanguard.
By any measure, these are staggering figures. Vanguard’s assets under management have skyrocketed to $4.2 trillion from $1 trillion seven years ago, according to the company. About $3 trillion of this is invested in passive index-based strategies, with the rest in funds that rely on an active approach to picking stocks and bonds.
More broadly, this deluge of money abandoning higher-price actively managed funds for Vanguard’s plain vanilla cut-rate vehicles has come as an existential shock to a mutual industry that has long been resistant to change.
What is being called the Vanguard effect was felt last month when the indexing giant’s rival, BlackRock, announced that it would revamp its stock-picking operations, promoting instead a process that relies more on computer-driven methodologies.
The effect within Vanguard has been no less profound. For decades, the firm has made the case that cheaper index funds will, over time, outperform more-expensive mutual funds that rely on brainy portfolio managers to pick stocks.
The main advocate of this doctrine was the founder, John C. Bogle, who retired in 1999 but runs a research operation on the Vanguard campus. For years, the firm has relied more on his simple message and the passion of his devotees than on fancy advertising campaigns to spread the word.
Unlike its peers, Vanguard is owned by its funds — and ultimately its investors — so as money rushes in, expenses are persistently reduced, resulting in perpetual savings for the legions of Vanguard clients. They number well over 20 million and include New York Times employees: Vanguard runs the company’s 401(k) retirement plans.
The model has been a powerful one: Since 1976, fees on Vanguard funds have fallen to about 0.12 percent from about 0.70 percent. By comparison, Lipper calculates that the average fee for all mutual funds is currently 1 percent, although it has been coming down rapidly.
“Mr. Bogle used to say, ‘This is not our money,’ and I agree,” said F. William McNabb III, Vanguard’s chief executive, referring to the extraordinary inflows. “For many years, there has been a real move to our way of investing. And it’s more than active versus passive — it’s high cost versus low cost.”
This no-frills approach has come under some strain as cash flowing into Vanguard funds reaches new highs year after year, some people who follow Vanguard closely say. There have been reports of operational snarls, including website outages, longer-than-usual wait times on the phone and misdirected fund transfers.
“All this growth has come at the same time that the company has been cutting costs,” said Daniel P. Wiener, the editor of the Independent Adviser, a newsletter for Vanguard investors, who says he has received many complaints about the current state of customer service at Vanguard. “Most companies when they are growing spend more. Vanguard is trying to spend less. At some point, cutting costs will bite you.”
There is no doubt about Vanguard’s commitment to pinching pennies. In touring the 287-acre campus of pathways, low-slung buildings and a commanding statue of Mr. Bogle, the sensibility is decidedly puritan.
There are few flashy cars to be found in the parking lots. The walls are largely devoid of eye-catching art — with the exception of some musty paintings of the HMS Vanguard, a Napoleonic-era British warship that inspired the company’s name.
In sum, the look is slightly drab, certainly by Wall Street standards: rows of uniform cubicles, colorless carpets and an executive boardroom that seems more appropriate for a community college than one of the largest financial institutions in the land.
Vanguard executives say they are disciplined in terms of plowing money back into people and technology, but not overly so. “Our true investment spending has doubled in the past five years,” Mr. McNabb said.
This tension between breakneck growth and spending restraint is most acutely felt in the firm’s retail division — or the front lines, as they are referred to here — where 6,000 customer service representatives attend to the wishes, demands and whims of the close to eight million clients who purchase their mutual funds directly from Vanguard. In 2015 and 2016, this division added 350,000 new accounts each year, numbers never before seen at the firm.
“The spotlight is on us, given the growth, and there have been operational challenges,” said Karin A. Risi, who oversees Vanguard’s retail investor group and is in the midst of an aggressive hiring push. “But it is not fair to say we are not investing. Bringing in 2,000 crew on a base of 6,000 is not insignificant.”
As with many executives at Vanguard, Ms. Risi gets a glint in her eye when she talks of the virtues of investing in low-cost index funds. Like the majority of her peers, she has spent the bulk of her career at the firm and, as a certified culture carrier, it is clear that she is taking the current growing pains to heart.
“My parents were Vanguard investors, and I was investing in Vanguard funds in high school,” she said. “So I feel the burden of this responsibility. We are serving a mission here.”
Beyond their devotion to indexing, Vanguard employees talk as if they are working on a frigate, a nod to the nautical images and themes embraced by Mr. Bogle at the company’s founding.
Employees are called crew, one eats at the galley (not the cafeteria) and works out in the “ship shape” room, and new workers come onboard as opposed to being hired.
“You absorb the culture and you join the cause,” said Joseph Brennan, who, as head of global equity indexing, has had a front-row seat as the firm has expanded. His division embodies Vanguard’s credo of do more with less: The 45 people he oversees globally look after $2 trillion in assets.
“Our assets per head are incredible,” he said. At $44 billion per person, that certainly qualifies as an understatement.
Up and down Wall Street, where the sum of a firm’s assets under management has become a badge of power and sway, Vanguard’s ability to attract and run so much money with so few people has been a cause for envy and disbelief. Some have even warned that index funds will distort the broader market, especially if active stock pickers are pushed farther to the sidelines.
Already, six out of the 10 largest mutual funds by asset size belong to Vanguard, with the largest, Vanguard Total Stock Market Index, now weighing in at $465 billion, according to Morningstar. Only two — American Funds’ Growth Fund of America and its EuroPacific Growth Fund, both belonging to the Capital Group — are actively managed, promising higher returns for a steeper fee.
“There is this existential crisis in the soul of every professional asset manager,” said Josh Brown, a financial adviser and blogger at Ritholtz Wealth Management. “Vanguard has become synonymous with the idea that people should pay less — not more — for stock market exposure.”