Most Useful & Universal Mental Models

So what is a mental model? It is a process or way of thinking for solving a problem through using a representation of the environment. Because there are different ways to represent the environment and use intuition, there are alternative mental models. Some are focused on specific tasks while others may be more general. 

The great chart below provides a number of examples of effective mental models. Some are easily employed for investment decisions while others may help with productivity and work flow.

This weekend spend some time with people you love, you'll never regret it !

         love, joy, peace, patience, goodness, kindness, faith, mildness and self-control,                 to all

Equities versus Commodities

Equities are overvalued! Bonds are overvalued! In the minds of many investors everything is overvalued given central bank distortions, yet there may be an exception. Look at commodities. The difference between financial and real asset could not be larger. Financial assets have steadily moved higher while commodities have fallen or at best moved sideways relative to risky stocks in the last 5+ years. This relationship has applied to all equity indices around the world to varying degrees. 

One can argue that commodities are more closely tied to current economic growth while equities are tied to valuations of long-term discounted cash flows as one explanation. Equities have positive carry while commodities as measured through futures have seen mixed carry with market contango for the last few years; however, there are now switches to backwardation in some markets. The business cycle relationship with commodities suggests that these real markets peak late in the cycle not when there is a new surge in growth. Still, on a relative performance basis, commodities as an asset class looks like a better value.

Canada. Time for a refresher course?

The adage that “trees don’t grow to the sky” is being put to the test in the Great White North.   Despite a pullback in Toronto-area home prices in recent months, the Canadian housing market stands out even in this bull market-in-everything world:  The Canadian Real Estate Association’s MLS Home Price Index has risen by 130% since the beginning of 2005, more than double the 53% rise in nominal GDP over that period.  

As night follows day, rising prices are met with increased supply.  Thus, Bloomberg reported on Friday that Canadian developers are undertaking a record number of multiple-unit construction projects as they seek to participate in the boom.  Robert Kavcic, economist at BMO Capital Markets, commented that: “Canadian home building activity remains rock solid. Builders in the biggest cities appear to be responding to supply shortages as best as possible.”  The severity of these shortages, in Toronto at least, is disputable. Supply of new listings in Canada’s largest metro area has jumped by 37% year-over-year in November.

Local regulators have likewise moved to slow down the housing market’s ascent.  Canada’s Office of the Superintendent of Financial Institutions (OSFI) is introducing new regulations, set to take effect on Jan. 1, which aim to tighten lending standards. 

It may come as no great surprise to learn that the great Canadian housing bull market has been built on a foundation of debt.  Consumer debt as a percentage of disposable income has undergone a near-constant uptick since the turn of the century, reaching a fresh high water mark of 167.8% as of the end of the second quarter, compared to 144% in the U.S. in 2007. The encumbrances are particularly concentrated in home equity lines of credit, or HELOCS.

HELOCs, as a percentage of GDP [13.5% as of year-end 2016], are roughly three times higher in Canada then in the US at the peak of our housing bubble in 2006. In addition to consumption (“using your house as an ATM”) and borrowing to avoid delinquencies on other debt, Canadians have been using HELOCs to fund mortgages in the shadow banking market and buy additional speculative properties.
“People in Canada have been borrowing against their home equity line of credit - to lend to subprime borrowers directly.” Indeed, this linked piece from the Toronto Globe and Mail provides a detailed roadmap for readers who wish to use their home equity for investment purposes, in service of “leveraging their real estate assets to increase their net worth.”

Back in June, executives at Home Capital Group, Inc. agreed to pay upward of C$30 million in settlements over alleged disclosure violations related to mortgage fraud in 2015.  On Nov. 30, Reuters reported that “compliance officers at the Financial Services Commission of Ontario had evidence that syndicated mortgages were being marketed and sold in ways that broke the law . . . From 2011 to 2015, senior FSCO investigators rejected or ignored compliance officers’ multiple recommendations that the agency investigate or take action to rein in the marketing and sales of Fortress [Real Developments] syndicated mortgages.” Last week, Montreal-headquartered Laurentian Bank disclosed that it will need to buy back as much as $180 million of mortgages after discovering “documentation issues and client misrepresentations."
François Desjardins, president and CEO of Laurentian, defended his bank: “We’re very different organizations and this is a very different situation than what happened at Home [Capital]. This, to us, is really a process and paperwork issue that we have to resolve.” This morning, Laurentian issued a follow-up press release stating that: “Given recent reports in the media, the Bank wants to clarify why it does not believe these matters are material to its business, capital, operations and funding.”

Some see things differently and saying that:

The mortgage inconsistencies reported at Laurentian Bank (the third major Canadian financial institution to fess up to this problem) underscores what we have long believed to be a systemic problem with Canadian underwriting practices. 

Canada hasn’t seen a true credit cycle in nearly three decades, which warps the judgment of market participants and regulators alike.

Time for a refresher course?

The AI, robotics and VR technologies will grow into the major innovative players of the 21st century.

A while back I wrote about a new sector—artificial intelligence, robotics, and virtual reality and how these innovative technologies were set to transform numerous aspects of modern society—manufacturing, labor, health, energy, leisure, and of course transportation. 

I suggested that the low-priced ETFs—ROBO and BOTZ—were a more conservative way and my choice to trade the companies that introduce these technologies. My preferred ETF was ROBO, thanks to its slightly higher volume.

Since that post, ROBO has been racing to new highs with the other major technology sectors. Correspondingly, like the others, it has declined in the last couple of weeks. 

The run from June lifted ROBO about 25 percent to $42.50. So far, the decline has brought it back about 4 percent. In contrast, SMH, the semi-conductor ETF, is down about 11 percent.

The AI, robotics and VR technologies (along with renewable energy) will grow into the major innovative thrusts of the 21st century. The impact on the modern world will be tremendous, with huge potential for good or bad. Already, the talk is about taxing robots. New companies with breakthrough technologies will become major corporations as the sector grows. 

Until the companies in this sector mature, and the enviable shake-out occurs, I prefer the ETFs. At this moment, price is short-term oversold, and testing its breakout zone between $40 and $41. If it finds support, there’s a chance for a year-end rally.

How does a money manager reconcile all of the various prognostications he hears on a daily basis? Simple – ignore them.

From Galapagos, circa 1985:

The thing was, though: When James Wait got there, a worldwide financial crisis, a sudden revision of human opinions as to the value of money and stocks and bonds and mortgages and so on, bits of paper, had ruined the tourist business not only in Ecuador, but practically everywhere…Ecuador, after all, like the Galapagos Islands, was mostly lava and ash, and so could not begin to feed its nine million people. It was bankrupt, and so could no longer buy food from countries with plenty of topsoil, so the seaport of Guayaquil was idle, and the people were beginning to starve to death…Neighboring Peru and Columbia were bankrupt, too…Mexico and Chile and Brazil and Argentina were likewise bankrupt – and Indonesia and the Philippines and Pakistan and India and Thailand and and Italy and Ireland and Belgium and Turkey. Whole nations were suddenly in the same situation as the San Mateo, unable to buy with their paper money and coins, or their written promises to pay later, even the barest essentials. ..They were suddenly saying to people with nothing but paper representations of wealth, “Wake up, you idiots! Whatever made you think paper was so valuable?”

The financial crisis, was simply the latest in a series of murderous twentieth century catastrophes which had originated entirely in human brains. From the violence people were doing to themselves and each other, and to all other living things, for that matter, a visitor from another planet might have assumed that the environment had gone haywire, and that people were in such a frenzy because Nature was about to kill them all.

But the planet a million years ago was as moist and nourishing as it is today – and unique, in that respect, in the entire Milky Way. All that had changed was people’s opinion of the place.

The trend is still up. Stocks breaking out to new highs, new leg up. Enjoy the ride.

Commodity markets offer a wide set of alternative risk premium opportunities. These opportunities have improved with the end of the long-term super-cycle downturn. The dominate cycle factor has ended and has allowed more balanced investment opportunities.

The general framework for alternative risk premium can be divided into a number of categories:

Carry/Term/Backwardation - (Backwardation/Contango) - There is more variation in backwardation across commodities and through time than what can be found in other markets given the sensitivity to inventory changes, supply shocks, and hedging pressure. The changing supply dynamics and demand for hedging creates a greater number of "carry" opportunities.

Momentum - (Time series/Cross-sectional) - Given the inelastic demand and supply for many commodities, there is likely to be greater price responses to any shock. The use of futures as a hedging tool means that many trades are not done for profit maximization but risk considerations. This creates trend and momentum opportunities.

Value - (Long-term price levels) - More so than other markets, long-term price can be serve as a value indicator. As often commented by market pundits, the solution to high (low) commodity prices are high (low) prices. Extended periods of low prices will lead to supply reductions which will serve as the mechanism for future price gains. Extend periods of high prices will lead to new supply and future price declines.

Seasonal - (Market situational) - More so than other asset classes, there are distinct seasonal patterns that lend themselves to changing risk premium.

Volatility - The volatility risk premium is present like other asset classes; however, these premiums are more diversified relative to other asset classes given the low correlation across commodity markets.

useful views

#1: Concentrate on the process, not the results.

#2: Make decisions and money from your skills.

#3: It's never outside of you - it's always you.

#4: Every disappointment holds a sead of an equivalent benefit, a positive message.

#5: Never cease to try to be the best you can be, continue learning and growing.

#6: Long term trading success is like farming, there are no short cuts.

#7: Develop and believe that trading crates and add real value to you and your family, your friends, community and the whole of humanity.

#8: Develop a love and respect for free markets, individual liberty, initiative and trading as a part of a remarkable whole.

#9: It's never too late because it's never anything other than Now!

CME Group, the world's largest derivatives exchange operator, said it would launch a futures contract for bitcoin later this year.

The trend is still up. Enjoy the ride.

The Bull Market In Everything?

                                             The Trend Is Still Up. Enjoy The Ride.

'most investors find it difficult to remain patient and circumspect as the gravy train to apparent riches pulls out from the station. The loneliness of watching the caboose get smaller as it fades into the distance is more than most can handle'

market contemplations

"The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968. In 1968, TV and investigative journalism provided a generation of baby boomers access to unfiltered information on social developments such as Vietnam and other proxy wars, Civil rights movements, income inequality, etc. Similar to 1968, the internet today (social media, leaked documents, etc.) provides millennials with unrestricted access to information on a surprisingly similar range of issues. In addition to information, the internet provides a platform for various social groups to become more self-aware, united and organized. Groups span various social dimensions based on differences in income/wealth, race, generation, political party affiliations, and independent stripes ranging from alt-left to alt-right movements. In fact, many recent developments such as the US presidential election, Brexit, independence movements in Europe, etc., already illustrate social tensions that are likely to be amplified in the next financial crisis. How did markets evolve in the aftermath of 1968? Monetary systems were completely revamped (Bretton Woods), inflation rapidly increased, and equities produced zero returns for a decade. The decade ended with a famously wrong Businessweek article ‘the death of equities’ in 1979."

The trend is still up. Enjoy the ride.

equities

Trade like a Cheetah

Trade like a Cheetah 

The cheetah. An endangered species who has survived against the odds. It has survived by using a simple set of two rules: be faster than anyone else, and be smarter than anyone else. Sound like a good trading principle? Many top traders use animals and hunting as a mental metaphor to guide their thinking when they're trading. The metaphor I use is the cheetah.

To understand the cheetah you must understand a little bit of its history. The cheetah is a member of the large cat family, but it is a very different breed of cat. It was nearly hunted into extinction about 2,000 years ago. It somehow survived by retreating from populated areas and living in a confined space. The price it paid for this survival was a great deal of inbreeding, which has genetically weakened the species. Nevertheless, the species still survives, simply by following two "rules": be faster and be smarter than other animals. It is knowing how the cheetah employs its two rules in hunting that helps me in my trading. The cheetah hunts in six distinct phases, which I call the survey, the stalk, the spook, the chase, the kill and the rest.

The survey finds the cheetah in its typical sitting position. This may look like laziness, but the cheetah is actually very busy mentally. If you notice, it will be sitting in a position of perspective, such as a treetop, on a mound or a hilltop overlooking a watering hole, and what it is really doing is analyzing a herd of potential food. It is surveying the territory, like a trader tracking a group of stocks or commodities on a long-term chart, calmly watching the progress of price and time. Like the trader looking for emerging patterns, the cheetah is looking for particular movements in the herd.

The cheetah's next phase is the stalk, which is a patient stroll to examine a particular opportunity more closely, perhaps a group of animals which may have separated from the herd. The cheetah leisurely walks toward or alongside that part of the herd, checking out the potential prey, focusing on such details as size, strength, nervousness and position. This is like a trader taking a closer look at a few stocks or commodities, following major support and resistance zones, and observing cycles and oscillators. As a cheetah nears this smaller group of animals, he starts watching for motion, focusing intently on the weaker members of the group, much as a trader watches for the first price formation or zone break or oscillator crossing that could indicate the start of a move for a stock or commodity.

The cheetah is waiting for its prey to become fearful and panic, just like a trader waiting for other traders to build up fear or desire and go into a buying or selling panic. Every trader knows you make your big money when a stock or commodity moves fast. Both cheetah and trader are looking for the initial twitch that signals rapid motion. Both are waiting for the target to spook.

As soon as an animal stalked by the cheetah selects itself, the chase is on. The cheetah kicks in the afterburner and sprints up to 70 miles an hour. At this point, the cheetah is in full control, driven by desire, while the target animal is in absolute flight, controlled entirely by fear. The cheetah feels confident that it can catch the prey, but also knows it can abandon the chase and select another animal. For the trader, this is entering, selecting a stop, validating the move and pyramiding the trade. This phase requires absolute confidence in one's own skills. If a trader becomes fear-driven, the trader may become the victim and not the victor.
Like the cheetah who knows there are other animals to be hunted, the trader must keep in mind there are other trades always coming along. Just as the cheetah does not risk exhaustion of all its energy in one chase, the trader should not risk exhaustion of all his funds in chasing one trade. Like the cheetah who has developed the judgment to tell when a chase is fruitless, the trader must develop the judgment to know when a trade will not succeed. This judgment is gained only from the experience of many hunts, chases, successes and failures. Failures are absolutely essential in this learning process and are simply part of the natural order of things.

The next phase is the kill and the cheetah kills its prey very cleverly. Since the lightweight cheetah does not have the jaw strength of big-boned cats, it kills by pulling up alongside its prey at 70 miles an hour, reaching over and tripping the animal with one smooth kick. The prey crashes to the ground, usually breaking its neck. In the worst case, the cheetah will have to pounce on the prey and clamp its jaws on the throat of the already damaged, weakened and nearly dead animal. This is just like the trader who waits for a fast move to crash into a measured move zone or resistance point, waits for the change in momentum, and then closes out the trade.

The final phase is the rest. The cheetah and, I believe, the trader need a rest after a series of intense chases. Neither can run at high speed constantly. After the kill, the cheetah eats, celebrates and rests. I believe the trader should do the same. A good practice is to always reward yourself ( a special meal, a massage, ext. ) then rest from trading for a while. My rule is that after a trade, win or lose, I don't trade for a time. This allows me to refresh myself, stabilize my thoughts and return invigorated to the hunt.


an addition, video
https://www.youtube.com/watch?v=v7p6VZiRInQ

one way of doing it

"and ‘til now I followed the same basic approach I used as a 12-year-old caddie trying to beat the market, i.e., by 1) working for what I wanted, not for what others wanted me to do; 2) coming up with the best independent opinions I could muster to move toward my goals; 3) stress-testing my opinions by having the smartest people I could find challenge them so I could find out where I was wrong; 4) being wary about overconfidence, and good at not knowing; and 5) wrestling with reality, experiencing the results of my decisions, and reflecting on what I did to produce them so that I could improve."

“Wall Street bubbles – Always the same.”

American financier J. P. Morgan is the bull blowing soap bubbles for eager investors.

"When you hit a wrong note it's the next note that makes it good or bad."

war or peace

trading

The trend is now down.

The trend is still up. Keep your stops tight and enjoy the ride.

S&P cash

                               Trend is still up. Enjoy the ride.

Trend is up as of yesterday. Enjoy the ride.

The trend is still down. ETR.

The trend is still down. Enjoy the ride.

                                 BUT NOT HERE, stay alert and focused

The trend is still down. Full hedges on. Enjoy the ride.

"the trend is your friend, until the end when it bends"

                                                               it bent, the trend is down now

Trend is still up. Keep your stops tight and enjoy the ride.

Trend is up. Enjoy the ride while lasts.

Not Dead, Can't Quit

                                                                   
                                                          OR 
                                           DO NOT

America's Best Days Lie Ahead

https://www.bloomberg.com/news/articles/2017-02-25/for-warren-buffett-america-s-best-days-always-lie-ahead?utm_content=bufferc8756&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

Treasury Rate Rise

“The best advice I can give you is to ask yourself what do you want, then ask ‘what is true’ — and then ask yourself ‘what should be done about it.’

Mandatory reading for any trader.         Principles

Live life on your own terms!

The "secret" over time is the ability to adjust, allocate and manage risk as you go.

                                 Trend is still up. Tighten the stops and ETR.

"When you win you might not be as good as you think you are. When you lose, you might not be as bad as think you are."

                                            Trend is still up. Enjoy the ride.

"Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception, a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way, and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced."

                               Trend is still up. Keep your stops tight and enjoy the ride.

“You are going to bed with an upset stomach because you have lost money most of the time and do not know what is going to happen”

“Most of the time even when we are in a good investment, we are in a state of regret."

“You are in a drawdown state 80% of the time and of that, you are in a severe drawdown state (greater than -20%) 67% of the time”

“Most of the time an investor is facing a market of regret…”

Dow Jones, 20,000.00 ATH

Whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times. This arises from the fact that they are produced by men who have been, and ever will be, animated by the same passions. The result is that the same problems always exist in every era. - Niccolo Machiavelli

Trend is still up. Keep your stops tight and enjoy the ride.

"Our mind is constructed so that in many situations where we have beliefs and we have facts, the beliefs come first. That’s what makes people incapable of being convinced by evidence."

http://www.collaborativefund.com/blog/a-chat-with-daniel-kahneman/

Trend is still up. Keep stops tight and enjoy the ride.

Today the U.S. dollar touched a 14-year high and major stock markets got off to a solid start in the new year, boosted by strong data, while debt yields edged up after upbeat economic figures out of China and Europe.

                                         Trend is still up. Enjoy the ride.