30th January 2013: PhD Confirmation of Candidature Document

Confirmation of candidature is a PhD project’s one year milestone. You can download the second, revised version of my PhD Confirmation of Candidature document here. It outlines my project scope, some of the relevant literature, key research questions, and methodological framework.


My thanks to Michael Janover, Pete Lentini, Ben MacQueen, Andy Butfoy, and Luke Howie at Monash University’s School of Political and Social Inquiry for their critical feedback.

17th January 2013: Orlando, Your New Hedge Fund Manager?

The Guardian‘s cat Orlando has beaten professional fund managers with a chew toy and random throws on stock prices:


The result indicates that the “random walk hypothesis”, popularised in economist Burton Malkiel‘s book A Random Walk Down Wall Street, is perhaps truer than we thought. Burkiel’s book explores the idea that share prices move completely at random, making stock markets entirely unpredictable.


The Guardian article omits — or, does not discuss the implications of — two significant facts:


1. The competing investor groups (professional fund managers; students; Orlando)  each had 5000 pounds to invest on five stocks. That’s not a lot of money to allocate to each stock if done equally across the portfolio. It means that if the stocks are held for a year, they had to rise by a large percentage for the investor group to make any money. This limits the successful stocks to long only strategies and break-out trends — in what is often a range-bound and volatile market.


2. The competing investor groups could only “turnover” the stocks once every three months. The professional fund managers didn’t change their stock allocation in the third quarter, whereas the students did, and profited. This means that the professional fund managers appear to have adopted a long only or buy and hold strategy for the year, and perhaps without hedging global macro or market events. The rate of “turnover” means that more actively traded strategies such as tactical asset allocation were not tested, nor was the impact of transaction and execution costs in shorter time-scales.


The design and rules — let alone the portfolio selection and market timing decisions by the competing investor groups — appear to have affected the experiment’s outcome. The study design does not allow for the comparative testing of portfolio selection and market timing decisions that active fund managers use, and that highlight behavioural finance and market microstructure limitations on the Efficient Market Hypothesis.

16th January 2013: Herbalife

The hedge fund battle between Pershing Square Capital Management and Third Point Capital over Herbalife is fascinating. Third Point’s Daniel Loeb is long on Herbalife citing the potential for further value creation via a revamped management. Pershing’s Bill Ackman likens the health products distributor to a multi-level marketing pyramid scheme. Slate‘s Matthew Yglesias has a good summary of Ackman’s pyramid scheme allegations and the fallout in the media and financial markets. Loeb and Ackman’s duel is a valuable real-time case study that reveals how hedge funds develop variant perceptions; how they use long and short positions to create zero-sum strategies; how they analyse company management and performance to determine valuation; and how they discover alpha (active investment returns above a benchmark or passive strategy).

14th January 2013: Second Acts

Minyanville‘s Justin Sharon has profiled five ‘second acts’ in finance: Michael Milken, Henry Blodget, Martha Stewart, Jamie Dimon, and Apple.


Sharon’s choices have several lessons for career planning. Milken and Blodget developed new media and philanthropic vehicles after legal prosecutions ended their Wall Street careers. Stewart survived an insider trading case to re-establish her super-profitable media empire. Dimon waited for the right job and used his attention to detail to benefit from merger negotiations. Steve Jobs made turnaround cutbacks at Apple and then oversaw the development of disruptive new products that created profitable new markets. The common thread in all five cases appears to be: resilience; ‘decision rights’ control of an organization used as a personal vehicle; and either creating or seizing on breakout opportunities.

13th January 2013: Aaron Swartz, RIP

26-year-old internet activist Aaron Swartz — who co-wrote the RSS specification at 14; worked on Creative Commons, co-founded the site Reddit; and fought Internet censorship bills — committed suicide on Friday.


Swartz faced potentially 30 to 50 years in prison for using MIT’s computer network to download four million academic articles from the JSTOR repository. US Department of Justice (DoJ) prosecutors alleged that Swartz’s actions would lead to the loss of millions of dollars worth of intellectual property into the public domain because of data theft. JSTOR declined to pursue charges. MIT hesitated — likely due to Swartz’s hacked access of their network and JSTOR institutional requirements — and because of MIT’s policies and procedures on the appropriate use of its information technology and internet networks. This gave the DoJ and a Federal grand jury the pretext to pursue charges against Swartz. Wired journalist Kevin Poulsen details the “cat and mouse” game between MIT and Swartz over JSTOR’s articles. Forensic expert Alex Stamos offers a critical view of the DoJ’s allegations about Swartz’s use of MIT’s computer network and JSTOR downloads.


Cory Doctorow has written a powerful Remembrance that touches on Swartz’s battle with depression. Lawrence Lessig acknowledges that what Swartz did was “morally wrong” — if the DoJ allegations were proven to be true — and counter-contends that the DoJ prosecutor acted as a bully: prosecutorial over-reach and disproportionate legal charges. The Atlantic Monthly‘s James Fallows also notes Swartz’s contributions to information access, and his depression. The Electronic Freedom Foundation‘s Peter Eckersley has praised Swartz’s political activism and contributions to significant internet projects. The New Yorker‘s Caleb Crain wrote about Swartz’s activist causes. Swartz’s family will hold a memorial service and has launched the Remembrance site Remember Aaron Swartz. Archive.org has launched The Aaron Swartz Collection.


JSTOR’s response to Swartz’s death: “The case is one that we ourselves had regretted being drawn into from the outset, since JSTOR’s mission is to foster widespread access to the world’s body of scholarly knowledge. At the same time, as one of the largest archives of scholarly literature in the world, we must be careful stewards of the information entrusted to us by the owners and creators of that content. To that end, Aaron returned the data he had in his possession and JSTOR settled any civil claims we might have had against him in June 2011.”


Swartz’s case raises significant issues that academics and institutions have largely failed to confront. Many publishers require academics to sign over their full intellectual property rights to the journal in order to be published. Some also require payment for publication. These norms and practices resemble music industry ‘payola’ from the 1950s and 1960s: pay-to-publish and little artistic or academic control over the creative outputs and intellectual property. In academia, if you don’t abide by these norms and practices then you are very unlikely to get funding, time for research, tenure, or academic promotion. Repositories like JSTOR are also important to academic researchers — and very expensive to access as an individual without an institutional subscription (which is also expensive). If — as the DoJ alleges — there is millions to be made from published academic articles — it is being made by an international publisher oligopoly — and not by the academic researchers who create the intellectual property, or the institutions and universities who facilitate the research and provide resources to research teams.


In his overview of Swartz’s “brilliant life and tragic death”, Slate‘s Matthew Yglesias touched on the academic access issue:


Should people illegally duplicate academic research? I’ll just say that the other day a friend mentioned to me an academic article that he was interested in and I thought the title and abstract were interesting too. But none of us could read it. So I went on Twitter and asked if any of the academics among my followers would send me a copy. Within an hour I had a couple dozen instances of the article in question, forwarded a copy to my friend, and we both read it. That to me seemed wonderful. The public directly and indirectly subsidizes an awful lot of academic research on the theory that knowledge is an important public good. So the public should have access to it! We should be able to arrange the institutions such that this vast storehouse of human knowledge is open to the world without people breaking into closets at MIT or having a large social media presence they can take advantage of.


One initial solution to these issues is mandated publishing in open access repositories: a solution that internet activists like Swartz have helped to conceptualise, and to diffuse as a social innovation. He might even have played a further role in this important, unfolding debate — apart from interesting blog posts and a Twitter feed.


Now, we’ll never know.

12th January 2013: Killed By Death


Vanity Fair‘s Rich Cohen gives some family estate planning advice about United States billionaire and private equity maven Teddy Forstmann:


In the months following his death, his art collection was sold at Sotheby’s, bringing in $83 million. His Manhattan penthouse was sold in June 2012 for $40 million. The house on Meadow Lane in Southampton is on the market for $31 million. It seems as if little he collected has been preserved, but has instead been broken up and sold. Teddy, at least in part, measured his success in dollars: he was forever in search of a higher percentage, a bigger return. That was the game, how he kept score. If you judge by how big and how much, then, in the end, no matter your charity or causes, that’s what you’ll become in the minds of other people. Teddy was one of the richest men in the country, with his paintings, his mansion, his helicopter and plane. And when he died, that’s what remained: the fortune and the estate. If you are money, then, when you die, you will be spent.


You might start with Gregory Curtis’s book The Stewardship of Wealth (New York: John Wiley & Sons, 2012) for estate planning and inter-generational wealth transfer.

12th January 2013: Nuclear Iran & Strategic Culture Research

Bill Keller in The New York Times on new books about nuclear weapons proliferation:


What has been sorely missing from the debate about Iran’s nuclear program is a serious, reported effort to understand what goes on in the minds of the Iranians. David Patrikarakos, a journalist who has written for a number of high-end British periodicals, fills that void with “Nuclear Iran,” a cleareyed history of the Iranian nuclear program, enriched by access to a number of key participants and a wealth of scholarly empathy. The book contains more administrative detail and diplomatic byplay than a lay reader will crave, but it also includes a succinct and subtle rendering of modern Iranian political history and a digestible primer on the basics of nuclear science. (For the record, Patrikarakos, unlike Bracken, believes that, as counterproductive as an attack on Iran might be, “the prospect of a nuclear-armed Iran is worse.”)

In large measure, the history of nuclear Iran is the story of the relationship (“pathology” might be a better word) between Iran and the United States. Our present Iran problem, we are reminded, is partly of our own making. We installed the shah, who embraced nuclear power as a flag of Persian modernity. We indulged Saddam Hussein in his brutish attack on Iran — a war that led Iran’s Islamist government to conclude that it was on its own in the world. The fact that we invaded Afghanistan while paying court to terrorist-­breeding (but nuclear) Pakistan taught Iran that weapons of mass destruction command deference. Then, in the Bush axis-of-evil years, our hard-­liners convinced their hard-liners that nothing short of regime change would satisfy Washington. Add these understandable fears to a long history of xenophobia and Persian status anxiety, and it would be astounding if Iran didn’t at least contemplate acquiring the bomb.


When a young Jack Snyder wrote a 1977 RAND monograph that conceptualised strategic culture he tried to understand Soviet politico-military elites and their decision-making on nuclear weapons. David Patrikarakos‘s book joins David Crist‘s The Twilight War (New York: Penguin Press, 2012) in exploring the strategic interdependence of Iran’s nuclear development program with United States politico-military decision-making. A nuclear Iran is thus exactly the kind of geopolitical problematique that contemporary researchers interested in strategic culture might study. Snyder was part of a so-called first generation that might have used national country studies to understand the Iranian leadership. Now, this is the domain of political psychological profiling and estimative assessments for strategic intelligence. The so-called second generation would highlight the strategic interdependence of Iran and United States decision-making, and strategic alliances — including the US support for Iraq’s Saddam Hussein and the George W. Bush Administration’s decision in late 2001 to invade Afghanistan in order to end the Taliban regime’s support for Al Qaeda. The third generation might examine the evolution of institutional decision-making which has led to the “present Iran problem” for the United States. The fourth generation might examine how the international system and regional developments helped to shape United States and Iran decision-making; and might also compare Iran as a case study to countries like South Africa and Libya that have rolled back their nuclear capabilities. Patrikarakos and the other authors that Keller profiles might be the beginning of a literature review for a research program on United States and Iranian strategic cultures, and their decision-making and threat perception role in nuclear capability-building.

6th January 2013: The Failure Test Entry Working

The Failure Test Entry Working

3:30-8:30pm, Saturday 5th January 2013

Melbourne, Australia


Preparation Material: Adam H. GrimesThe Art and Science of Technical Analysis (New York: John Wiley & Sons, 2012); Margery Mayall’s University of Queensland sociological research on technical analysis; BusinessSource database search on academic research into technical analysis, and trader development and learning; and MarketPsych.com behavioural finance and psychological tests.




(i) Identification of trading personal goals for 2013.

(ii) Illustrative understanding of technical analysis as a trading methodology for alpha generation.

(iii) Consideration of learning barriers to trader development.


Technical analysis (TA) is the study of group psychology in financial market using price, sentiment, and volume indicators, and pattern recognition. It arose in a modern context due to Charles H. Dow and Richard Schabacker’s study of market patterns in the late 1800s-early 1900s. Robert D. Edwards and John Magee’s Technical Analysis of Stock Trends became the TA bible of market patterns later promulgated in variations by Martin Pring and others. Richard D. Wyckoff (the Wyckoff Method), Robert Prechter (Elliott wave theory), and other TA theoreticians have made influential contributions. TA focuses on identification of trends, retracements, breakouts, pullbacks, support and resistance. It anticipated some aspects of current academic research programs on behavioural finance and market microstructure but from a trader or practitioner viewpoint.


Academics and traders remain divided on TA’s efficacy. In 1934, Alfred Cowles contended that a ‘buy and hold’ strategy beat Dow Theory trading. Early studies from 1966 to 1970 by Eugene Fama and his University of Chicago colleagues found that TA filter rules were unprofitable once transaction and execution costs were considered. Fama’s finding led academics to focus on the Efficient Markets Hypothesis, and, ultimately, mutual fund and passive index fund products. In contrast, TA became popular in the mid-late 1970s amongst trend-following Commodity Trading Advisors on volatile commodities and foreign exchange markets. The ‘housewives of Tokyo’ who speculated on currency movements now challenged the ‘gnomes of Zurich’ or institutional investment managers. Victor Sperandeo who traded for George Soros used Dow Theory. The bootlegged PBS documentary ‘Trader’ (1987) shows Paul Tudor Jones II and Peter Borish using Elliot wave theory and 1929 price data to predict a stockmarket crash in early-mid 1988. Finance theories in academic journals and hedge fund manager practices diverged into parallel universes.


Recent academic research has shed new light on this academic-practitioner divide. In a review of 95 academic studies on TA from 1960 to 2004, Cheol-Ho Park and Scott H. Irwin found that “56 studies find positive results regarding technical trading strategies” (“What Do We Know About the Profitability of Technical Analysis?, Journal of Economic Studies 21:4 2007, p. 786). They note data snooping problems with Edwards & Magee-style pattern recognition which other academic researchers have also identified. Importantly, Park and Irwin found that TA was profitable in spot foreign exchange and futures contracts “from the late 1970s to the early 1990s” involving “unlevered annual net returns of 2-10%” (Park & Irwin 2007, p. 795). This finding reflects the period when Sperandeo, Jones, Borish, and other non-TA traders like Martin Zweig were ascendant in financial markets. It contradicts the earlier findings of Cowles and Fama that TA has always been unprofitable.


Park and Irwin’s finding about TA’s period of profitability is also mirrored in other post-1988 academic studies. These find that the traders used arbitrage on anomalies; the transmission shocks of central bank monetary policies; the anchoring, crowded exits and rational herding of institutional investors; and changes to the international monetary system and political economy. However, these studies often fail to link their finding to the practitioner literature which offers independent confirmation, such as Jones II’s interview in Sebastian Mallaby’s More Money Than God: Hedge Funds and the Making of a New Elite (London: Bloomsbury Publishing, 2010). TA practitioners like Jones II were also often aware of the speculative bubble literature—Charles Mackay, Gustave Le Bon, Charles P. Kindleberger, John Kenneth Galbraith, and Hyman Minsky—which has inspired contemporary research in behavioural finance. This is why Gordon Gekko’s apartment in Wall Street: Money Never Sleeps (2010) had pictures from the Dutch Tulip bubble (1636-37). The conceptual gap between TA and behavioural finance is perhaps not as large for financial market practitioners as some academic researchers believe.


The decline in TA profitability after the early 1990s can be attributed to changes in central bank policy coordination, market microstructure, and the growth of algorithmic trading. For instance, the Wyckoff Method identifies institutional trading and market patterns also found in Robert Shiller’s study of ‘irrational exuberance’ and speculative bubbles. But the growth of new trading—options, futures, and high-frequency systems—have altered what the Wyckoff Method found in pre-World War II financial markets.  Collectively, the above developments over the past two decades have changed markets and volatility from trending to more range-bound dynamics. Edwards & Magee’s TA indicators, and support and resistance levels, can now be programmed into algorithms that actively trade against institutional and retail traders who still use traditional TA methods. This Darwinian-like evolution has led to the demise of dotcom era day traders (1995-2000), and trend followers who benefited from asset price valuations due to housing and commodities speculative bubbles (2003-2008).


Academic researchers rarely refer to the TA practitioner literature beyond introductory books by Alexander Elder, Van Tharp, and other authors. Academics often state incorrectly that TA remains unstructured as a knowledge domain: Edwards & Magee, the Wyckoff Method, Elliott wave, Fibonacci, Japanese Candlesticks, and other major TA methods and schools each have their exponents and adherents. Instead, TA now involves an industry of books, consultants and custom indicators targeted at the retail investor. University of Queensland sociologist Margery Mayall found that TA indicators shaped the self-beliefs, mindsets, and decisions of the Australian retail traders who she interviewed. Some of Mayall’s retail traders became focused on the never-ending Holy Grail Quest to find the ‘right’ TA indicator or system.


In contrast, proprietary trading desks now combine TA with behavioural finance, game theory, and market microstructure. Professional traders seek what Michael Steinhardt called contrarian ‘variant perception’ in financial markets compared with the ‘consensus perception’ of retail traders. There is always someone else on the other side of the trade even if it is a market-making algorithm. Academic researchers could bridge the gap with TA practitioners if the popular models were evaluated and back-tested in a more rigorous manner. However, recent work by Andrew Lo and other authors on rehabilitating TA remains at the interview or memoir stage, rather than using a robust empirical research design. Recent TA practitioner work by Adam H. Grimes, Xin Xie, Charles D. Kirkpatrick II, Julie R. Dahlquist, L.A. Little, David R. Aronson, and others looks promising. Grimes links TA and trader development to George Leonard’s Aikido model of self-mastery; to Daniel Kahneman’s prospect theory and behavioural finance study of cognitive biases; and to Mihaly Csikzentmihalyi’s study of creativity, flow, and optimal experience. This augments earlier work by the late Ari Kiev, Brett N. Steenbarger, and Mark Douglas on trading and performance psychology.


Since circa 1992, a subset of TA academic research has also used genetic algorithms and high-frequency tick data analysis to identify trading rules. The findings from this research often either remain proprietary or reflect mathematical and quantitative models. Hedge fund managers who use TA are closer to Aaron C. Brown’s Bayesian risk managers who revise and update their beliefs. Such hedge fund managers are often aware of confirmation bias, the disposition effect, overconfidence, model risk, and other cognitive biases identified in the behavioural finance literature. Hedge fund managers and professional traders now use TA in a mixed methods approach – if they have not already been replaced by algorithmic trading systems. Another problem with the genetic algorithms research is that whilst it identifies trading rules it often does not include trader learning, risk and money management practices. These are what Sperandeo, Jones II, Borish and other TA traders use, and thus these practices modify the efficacy of the trading rules identified. For instance, the PBS ‘Trader’ documentary (1987) shows Jones II using deception and rumour – closer to the Chinese 36 Strategies – to mask his order size and to influence other traders. Academic researchers using genetic algorithms and other methods have often overlooked this cunning or metic intelligence.


I resolved in 2013 to integrate TA’s relevant insights into a personal knowledge base and bespoke trading system for alpha generation. Academic research rigour can be combined with professional trading insights whilst retail trading myths promulgated by the TA industry and self-styled trading coaches can be avoided. A mixed methods research approach looks promising: where TA sees trends and retracements – a market microstructure researcher may see the interaction of strategic traders, order flow, and order types – and a behavioural finance proponent may find specific cognitive biases and decision heuristics. All three approaches look at the same market data via different lenses and vantage points. I took several MarketPsych.com tests to identify and to understand personal cognitive biases and psychological preferences. Once identified, I then compared the personal cognitive biases with past trades using an after action review approach. This illustrative research will inform operative action research to improve decision heuristics, mental models, and risk preferences for future alpha generation.

5th January 2013: Al Jazeera America


ThomsonReuters’ Felix Salmon and TNR‘s Rebecca Dana have some fascinating postmortems on Al Jazeera’s $US500 million deal to buy Al Gore’s Current TV. Both authors contend the deal gives Al Jazeera ‘soft power’ access to between 40 to 60 million American households and strengthens Qatar’s negotiation position with US cable television distributors. Each credits Gore with facilitating the final negotiations and providing a premium that likely increased the deal value. The potential gridlock is that US cable television distributors are not Current TV fans; Gore’s network did not have a large audience, and many of its programs are up for contract renewal; and the new Al Jazeera America will be kept separate from Al Jazeera English. However, Qatar’s Emir has the capital to possibly acquire other cable television networks. We’ll see if the Current TV deal suffers from the winners curse . . .

5th January 2013: Going Clear

I first discovered Lawrence Wright’s reportage with his Rolling Stone profile of Church of Satan founder Anton LaVey. Wright’s Al Qaeda book The Looming Tower is on my in-progress PhD’s bibliography. I’m looking forward to Wright’s new Scientology book Going Clear (New York: Knopf, 2013) which builds on his Pulitzer Prize-winning New Yorker profile.


Charles McGrath’s New York Times profile has this gem:


Among his peers Mr. Wright is known for his thoroughness and for his legal pads and his filing-card system, which in the computer age is as complicated and as antique as the historian Robert Caro’s. Lauren Wolf, a recent graduate of the journalism school at the University of Texas, who worked for Mr. Wright as a fact checker and researcher on “Going Clear,” said, “I think the reason Larry hired me was that in the interview I said, ‘I think one of my faults is that I don’t know when to stop researching.’ He looked at me and said, ‘I don’t think that’s a fault.’ ”

She added: “He’s incredibly thorough. He does an immense amount of reading and researching and talking to sources.”

McGrath’s insight is that background due diligence, interviews, fact-checking, and source analysis still matters with reportage. Index filing cards and legal pads can sometimes be the best way to capture and track ideas — in an offline form that can’t be hacked to compromise an investigation. Research managers look for Wolf’s ‘fault’ when assessing a researcher’s capabilities, skills, and performance track record.