It's that time of year again. Wow, how time flies. End of the year and the first night of Chanukah - the Jewish festival of lights.
We light the Menorah (Chanukah candles), eat latkas (potato pancakes), exchange gifts, spin the Dreidel (a gambling toy), and enjoy a sense of family togetherness for 8 days and nights.
That's a long time right?! Sometimes it seems even longer with my family.
As a gift to all of you, here is "The Chanukah Song," performed by comedian Adam Sandler on Saturday Night Live. It became an instant classic (and he since released a second, third, and fourth version.)
Here is the video. And, if you're feeling left out - here's Adam Sandler's Christmas Song.
In my office, there's a series of artwork I had commissioned from GapingVoid. One important piece states that "wisdom comes from finer distinctions".
The more nuance you can capture, from less, the better – think Sherlock Holmes's perceptiveness compared to a normal police officer or detective. He noticed things others didn't and came to conclusions that others couldn't.
The best detective isn't necessarily the one who looked at the most stuff. It might be the one that was clever enough to ignore the wrong stuff (which led to being able to discern the right answer in less time).
The same concept applies to AI and data. More isn't always better.
The evolution of mastery requires gaining more from a dataset.
Don't get me wrong - data is a precious commodity, and more (and different) data is often better - but it means much less when you're not using it right.
More Data = Less Visibility
We're living in the best era (so far) but people are increasingly frustrated and unhappy. They're less happy in their relationships, they're less happy in their jobs, and they're more depressed than recent generations.
Comparison is the Thief of Joy
It's too easy to say it's because they're "snowflakes", but it makes sense. They're surrounded by people yet have less meaningful connections due to so much of it being "online". They see everyone's highlight reels and feel like they can't live up. They're inundated with media from all directions and they have infinite options in our hyperconnected society.
Data is exhausting. Choice is exhausting. It's the reason willpower doesn't work, and it creates anxiety and lack of movement.
It's the same with data - the more data an AI has to sift through the harder is to separate the signal from the noise. It's why daily optimization is harder than monthly optimization.
That doesn't mean that there's not value in more data (or in daily optimization) - but it means you need to be calculated about it.
It needs to be built on solving the right problem.
We Don't Have More Problems Than Ever, We Have More Complex Problems
As a society, we've solved so many of the low hanging fruit that we're having to solve more complicated problems. From a theory of constraints viewpoint, we've fixed a lot of life's bottlenecks and we're now dealing with the real underlying issues.
Solving for the "local optima" is fixing a symptom - we have to look for the global optima and solve for the disease.
Today, I'd rather have a 10-layer algorithm than an algorithm that looks at 10 datasets ... creating finer distinctions.
Sparse Data + Agile Decision Engine = Better Outcomes
You'll get a better outcome by focusing on answering the right question with the right datasets than by throwing a mountain of data at a random neural net.
Scale matters, but is secondary. It's built on the back of finer distinctions.
The more noise you can remove before feeding information to an algorithm the better.
It seems simple - but that's the game, and it's the one most aren't playing.
From governments, to Google, to Facebook ... it feels like it's impossible to have any expectation of privacy today. Amazon knows what I want before I do.
This is an issue that cuts both ways. On the one hand, increased surveillance means we are arguably safer – because the digital omniscience makes it harder to get away with crimes ... but all this extra data on us makes it easier to commit other crimes and to suffer from the increasing lack of privacy.
Unsurprisingly, 8 of the top 10 most-surveilled cities in the world were in China. It's even less surprising with the Hong Kong protests and the new social credit system.
Hedge Funds - and active managers in general - have been under fire for several years. Almost 50% of Hedge Funds saw a decline in assets under management (AUM) in 2018.
On the surface, it makes sense ... during a long-term bull market, indexes and other passive options like ETFs become en vogue. During a bear market, active management offers more opportunities to outperform the market.
Hedge funds are designed to, you guessed it, hedge risk. So, when investors see less risk in indexes, the demand for active management declines. Especially when performance declines as well.
When something monumental changes the past is left behind and you begin a new future. When electricity was created, no one was going to make candles the primary form of lighting. After the introduction of the car, horses & buggies were never going to be the #1 mode of transportation, and we're also seeing that with the adoption of AI & automation.
Most changes aren't monumental.
I have a fundamental belief that things go in and out of phase and that what's once old is often new again. You see it with fashion, music, phones - etc. First phones got bigger in order to do more, then smaller for convenience, and then larger again so that old dudes like me can read the text.
I believe it's the same with active management - the techniques may have gone out of phase - but active management still offers the potential outperformance. The trend mirrors the stock market; bulls turn to bears when buyers run out - so as outflows from funds continue to peak, and funds continue to close, it seems reasonable that there will come a time when demand rises again.
At that point, "active management" will give way to "Active Switching™" (which goes beyond stock picking to choose the markets, techniques, time frames, risk levels, allocation strategies, etc. using a variety of techniques, data sources, and real-time contextual clues).
This is part of what's covered in my upcoming book, "Next On Wall Street: Understanding AI's Inevitable Impact on Trading."
Looking forward to launching that book in early 2020.
My wife's mother and sister were staying with us last week. We also had two other house guests. And our Internet service went out. Not just momentarily, but for days. Catastrophe!
Is Internet access becoming one of our basic human needs?
In 1943, psychologist Abraham Maslow published his famous “Hierarchy of Needs”. The idea was simple: the essential survival needs in the lowest level of the pyramid must be satisfied before the individual can turn his or her attention to the next level, and so on. Maslow’s “essential needs” are physiological; food, water, shelter, and physical safety.
Today, as we approach the 2020s, perhaps we need to add one more layer to Maslow’s pyramid: WiFi.
OK, humans probably don’t really need WiFi more than food, but without it, we feel frustrated and "twitchy".
My solution: dual providers and a fail-over router.
When Beethoven was at the peak of his career, several of his contemporaries struggled to deal with the realization that they may never create anything that lived up to his creations. Brahms, for example, refused to make a symphony for 21 years. Schubert is quoted as saying, "Who can ever do anything after Beethoven?"
We're apparently seeing the same effect via Artificial Intelligence.
When it comes to popular AI, not much surpasses the popularity of AI's growing chokehold on gaming. Recently, I've shared about AI winning at video games, but in 2016 I shared about humans losing to AI in Go for the first time.
What it is: A computer has just beaten the world's best Go player. AlphaGo, a program created by Google-owned AI company DeepMind, beat European Go champ Fan Hui all five times they played in tournament conditions, and also won 99.8% of Go games against other computer programs. Unlike IBM's Deep Blue, which defeated chess champ Garry Kasparov, AlphaGo wasn't programmed to play Go. Instead, as Nature reports, it learned how to play via a general-purpose algorithm that interpreted the game's patterns.
Why it's important: AlphaGo's learning technique means it can recognize complex patterns, long-term planning and decision-making: refined skills that were once stricly human in nature. Imagine the possibilities when neural networks like AlphaGo, infinite computing and the 'Internet of Everything' converge.
This week, a former Go champion who was beaten by DeepMind retired after "declaring AI invincible."
Lee Se-dol quit for a couple of reasons. According to him, even if he's the #1 human, there's an undefeatable entity above him and he felt he had failed his country by losing to the AI. It's an unfair fight - AI plays untold millions of games to learn to play better and it doesn't get tired, bored, sick, distracted. - we can't do that.
Much like Beethoven, AI is discouraging competition.
Was Lee wrong to quit? It's hard to say, but as AI gets better at more activities, it's an issue we're going to see more often. There's always someone (or something) better - and a purely utilitarian approach isn't necessary or productive.
I'm an advocate of intelligently adopting AI, and a believer that the scale of AI's "wins" is going to skyrocket - but I'm also a believer in the idea that "the game isn't over until I win". If I enjoy something, I'm not going to let 2nd place stop me.
The passionate pursuit of a goal is valuable regardless of the result, and bettering yourself at a skill - like Go - may not be a sustainable job, but it can still make a great hobby.
AI is coming - but it doesn't have to be joy-sucking.
My children came to town, and we continued our tradition of going to the game as a family, and then having a family dinner afterward. This year, my wife's family joined us as well. The more the merrier!
Thanksgiving is a reminder to be grateful for the blessings in your life - big and small. But it's also a time to be thankful for the challenges in your life - the opportunities for growth.
Many times, when I think about what I want, the first thing I think of is what I don't want. Similarly, when I think about what's going well (or something worthy of being thankful for), I first think about what has been difficult or isn't yet to the standard I hoped for.
Challenges are often hidden gold mines. Instead of thinking about them being obstacles for you, recognize that getting past them creates an obstacle for competitors. In other words, figuring out a strategy to achieve these lofty goals creates a new status quo and a sustainable competitive advantage.
At Capitalogix, we often talk about "finding a way," "creating breakthroughs," and "setting new standards." The reason is that most things an innovator wants are just outside their current capabilities (otherwise they'd already have them).
Dealing with this on a daily basis requires a resilient mindset and the ability to be comfortable being uncomfortable.
Having no problems either means you're blind to your flaws, or you aren't playing a big enough game (which is a problem in itself).
I am thankful to face a continually better class of challenges that forge a path to a bigger future.
Millennials ruin everything. I don't really believe that ... but it feels so good to type – and the following two stories make it sound true.
Trading is more accessible than ever before. We've gone from scrums of traders in trading pits to armchair experts investing in real estate, cryptocurrencies, options, and more from the comfort of their couch in their underwear.
With accessibility often comes misuse. Here are a couple of examples.
Infinite Leverage Glitch on Robinhood
Robinhood, which launched in 2013, has been a pioneer in app-based commission-free investing. While based on a solid mission of democratizing the financial system, it has also created an opportunity for "kids" to abuse the system.
The most recent glitch allowed Robinhood Gold users to abuse the allowed 2:1 Margin. Robinhood incorrectly counted the stock price and the option value as account value, raising margin limits. Users would sell puts and take in option premiums, use that to buy more shares of that stock, and then sell puts against those shares, Ad Infinitum. So, with a couple thousand dollars of risk, a user could take millions of dollars of risk.
The speculators at r/WallStreetBets famously used the glitch (which has been around since January) to lose massive amounts of money.
Here's a video of a man opening his Robinhood account to record the effect of the market open on his AAPL puts. If you look at his total return you can watch it go from 0.00 to -47K in an instant.
If they wanted a safer investment, they could have gone to Robinhood's bug bounty program and netted a cool $25k. Oh well, who needs risk management?
"Mercury Is In Retrograde ... Should I Sell My Stocks?"
A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts. - Burt Malkiel, “A Random Walk Down Wall Street”
My son brought to my attention a new iPhone app - Bull and Moon; "Find stocks whose stars align with yours".
After you create your "astrological investor profile" their "proprietary financial astrology algorithm recommends an optimal portfolio of six stocks, and shows your compatibility score with thousands more."
The picks were pedestrian: Oracle, Hasbro, American International Group, Microsoft, Yum! Brands, and FedEx.
The logic and commentary were entertaining. The choices were based on "similarities in business decisions," "shared outlooks on humanity," and "strong mutual success metrics."
My favorite excerpt is
Zach can usually let strong FedEx Corporation lead the relationship, but at the same time, Zach will invest many times over. This relationship will be full of success, understanding on many levels, and a lot of fun.
At least it's entertaining ... but I don't think it constitutes an edge.
And as the last note to the millennials behind these two great travesties...
Hedge Funds: Do Not Go Gentle Into That Good Night
Hedge Funds - and active managers in general - have been under fire for several years. Almost 50% of Hedge Funds saw a decline in assets under management (AUM) in 2018.
On the surface, it makes sense ... during a long-term bull market, indexes and other passive options like ETFs become en vogue. During a bear market, active management offers more opportunities to outperform the market.
Hedge funds are designed to, you guessed it, hedge risk. So, when investors see less risk in indexes, the demand for active management declines. Especially when performance declines as well.
via Bloomberg
When something monumental changes the past is left behind and you begin a new future. When electricity was created, no one was going to make candles the primary form of lighting. After the introduction of the car, horses & buggies were never going to be the #1 mode of transportation, and we're also seeing that with the adoption of AI & automation.
Most changes aren't monumental.
I have a fundamental belief that things go in and out of phase and that what's once old is often new again. You see it with fashion, music, phones - etc. First phones got bigger in order to do more, then smaller for convenience, and then larger again so that old dudes like me can read the text.
I believe it's the same with active management - the techniques may have gone out of phase - but active management still offers the potential outperformance. The trend mirrors the stock market; bulls turn to bears when buyers run out - so as outflows from funds continue to peak, and funds continue to close, it seems reasonable that there will come a time when demand rises again.
At that point, "active management" will give way to "Active Switching™" (which goes beyond stock picking to choose the markets, techniques, time frames, risk levels, allocation strategies, etc. using a variety of techniques, data sources, and real-time contextual clues).
This is part of what's covered in my upcoming book, "Next On Wall Street: Understanding AI's Inevitable Impact on Trading."
Looking forward to launching that book in early 2020.
Posted at 04:58 PM in Books, Business, Current Affairs, Ideas, Market Commentary, Science, Trading, Trading Tools, Web/Tech | Permalink | Comments (0)
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