Capitalogix

Why Are The Patriots So Good?

Some things speak for themselves.

The Patriots just came back from a 25-point second-half deficit to win the Super Bowl.

There is a difference between 'luck' and 'skill'.

Nonetheless ... luck favors the prepared.

And, in life as in sports, hard work beats talent, when talent fails to work hard.

The Patriots, under Bill Belichick, epitomize that. 

Belichick has been a coach in 10 of 51 Super Bowls (seven of them with Tom Brady).

When you see this picture from the 2000 NFL Combine, it's hard to believe that Tom Brady would be a 3-time Superbowl MVP taking the Patriots to their 5th under his reign.

 

via CBS Sports.

It didn't happen by accident.

The Patriots are a well-oiled machine, and it's not because their players are better than the rest.  

Keep in mind, the NFL is a league at the top of the food chain (their athletes are the best of the best).  Moreover, the NFL actively creates rules designed to level the playing field and create parity.

So, it is hard to create a team that 'can't be beaten' –  When it happens, it happens because of culture, coaching, and process.  Ultimately, somehow, winners find a way to win. 

Bill isn't known as the friendliest (and he's certainly not known for dishing out praise) – but he is known for discipline (and lauding hard work when it's deserved). 

More importantly, Belichick created a framework of success that isn't reliant on the individual - and it is that which allows the individual to shine. 

Frameworks create the structure that allows, focus, specialty, and the freedom to improvise.

The System is the 'system'; but, within it, you can measure what works, who contributes, and use it to identify the best things to try next.

Win, lose, or draw ... some things speak for themselves.

The Dow Just Broke 20,000

In 2016, we saw some decent pull-backs and volatility.

Then Donald Trump was elected President.  

On November 22nd, the Dow reached 19,000 ... and in only 42 days, it's broken 20,000. That's the second-fastest rise ever.

Coincidence?

 

 via WSJ

With 30 components providing point value ... the 5 "heavyweights" this year are: Boeing, IBM, 3m, United Healthcare and Home Depot.

Are the markets  responding to Trump's consistency with his campaign messages?  Just happy to have some hope in change?

So, as the presidency continues, will the trend keep going up?

What do you think?

 

Related articles

Dow hits 20000 on revived Trump rally, earnings

The internet is fact-checking Trump's first UK interview

The Inauguration of Donald Trump by Vice News

Market Confidence Remains High Despite Glitch

Here Are Some Links For Your Weekend Reading - January 29th, 2017

With the explosion of Alternative Facts and Fake News ... It's important to remember to verify what you read. 

 

 

Here are some of the posts that caught my eye. Hope you find something interesting.

Lighter Links:

• Why Each Side of the Partisan Divide Thinks the Other is Living in an Alternate Reality. (The Conversation)
• Check out this Automated Resume Builder (It Could Help Former President Obama Get a Job). (Inc)
• Cybersecurity is Everybody’s Business. (Burrus)
• 25 CEO’s List 20 Things that Keep Them up at Night. (LeadershipFreak)
• Japanese Toilet Industry Agrees to Standardize Complex Bidet Controls. (TheVerge)

 

 

Trading Links:

• What Does the World Expect of a Trump Presidency? (The Conversation)
• The SEC's Reaction to High Frequency Trading. (QuantNews)
• US Jobless Claims down to 1970S Levels at 234,000 - about as Good as It Gets. (Forbes)
• SpaceX’s Leaked Finances Show Elon Musk is Betting Big on Satellite Internet. (Quartz)
• Fed's Yellen Says She's Upbeat about Short-term Economic Outlook. (Reuters)

Do We Still Need Humans?

In my office, we use a lot of what seems like "futuristic" artificial intelligence approaches to understanding financial markets. Most of my team are technical or data-science specialists that develop and drive the systems that create our systems. 

Pretty soon, we may start to question where using humans is still smart or cost-effective. 

In the meantime, I'm fascinated by what is becoming possible ... and how, even when the A.I. is little more than an elegant use of brute force, incredible results are becoming commonplace.

MIT has been looking at work by many different organizations - including Google Brain - who are working on AI that can develop machine learning software. 

In many cases, the results coming from machines coding other machines are matching or exceeding work done by humans. 

 As a point of reference, virtually all of our training techniques were developed or created by an A.I. process.

AI creating AI has many benefits.

But, at this point in time, it still requires lots of human input and insight. 

I suspect that won't be true for long.

  When that is true, what jobs will humans be doing?

 I have some thoughts, but I'd love to hear yours.

Here Are Some Links For Your Weekend Reading - January 20th, 2017

With technology becoming more ubiquitous ... perhaps Tweeting shouldn't be ... 

  

 

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• Ringling Bros. Circus to Close after 146 Years. (Washington Post)
• Why Your Brain Makes New Year's Resolutions Impossible to Keep. (Popular Science)
• When the Picky Eater is a Grown-Up. (New York Times)
• Your Dog Knows Exactly What You’re Saying. (National Geographic)
• Nestle Claims a Scientific Breakthrough and Chocolate Will Never Be the Same Again. (Inc)

Trading Links:

• The End of Cloud Computing. (A16z)
• Rethinking Global Finance. (Wired)
• All World Maps Lie. So Which One Should We Use? (FastCoD)
• Why Rich People Set up Trust Funds for Their Pets. (Flipboard)
• Apple Sells Nearly 400 IPhones Per Minute, and Other Insane Stats. (Insider)

Here Are Some Links For Your Weekend Reading -- December 31st, 2016

Any bold predictions for 2017?

 

 

Here are some of the posts that caught my eye recently.

Hope you find something interesting.

 

Lighter Links:

• The Top 10 TED Talks of 2016. (YouTube)
• The Year in Pictures 2016. (Nyti)
• The 12 Key Science Moments of 2016. (TheGuardian)
• How I Process a Massive Amount Of Content. (Medium)
• The Top Jerry Jones Quotes of 2016: Ugly Babies, Jumping off Buildings and Circumcising Mosquitos. (SportsDay)

 

Trading Links:

• Who Benefits from Market Speed Bumps? The Exchanges. (New York Times)
• Where are They Now? the 12 Members of the 1896 Dow Jones Industrial Average. (BizInsider)
• It's So Hard to Get Cash in India that Some People are Ordering It Online. (Money)
• Percentage of Young Americans Living with Parents Rises to 75-Year High. (WSJ)
• Contrarian Views for 2017, Seven Dos and Don’ts for Your Portfolio, and Trump's Market Mirage (Globe and Mail)

Here Are Some Links For Your Weekend Reading - December 25th, 2016

Even Santa was hacked this year.

 

 

So, were you naughty or nice?

  

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• The 10X Mindset – Life At an Exponentially Higher Level. (Medium)
• 21 Business Books Worth Reading At Least Once a Year. (Inc)
• Artificial Intelligence and Life in 2030 - Stanford's 100-Year Study on AI. (AI100)
• The Magic and Power of Placebo. (FourHourWorkWeek)
• How to Create a Happy Life with Hacks from Stanford’s Famous ‘Design Your Life’ Class. (Medium)

Trading Links:

• America's next Great Metropolis is Taking Shape in Texas. (Forbes)
• “Moneyball” in Commercial Lending: from Art to Science in Pricing. (BCGPerspectives)
• The Paradox of Quant. (TheReformedBroker)
• Bill Gross Says You Should Start Buying Land and Gold. (Fortune)
• UK ‘Sailing Blindly’ into Financial Meltdown Bigger Than 2008, Think Tank Warns. (RT)

Here Are Some Links For Your Weekend Reading - December 18th, 2016

It was cold in Dallas this weekend ... below freezing.

In contrast, it's officially colder than Mars in Canada

Don't stick your tongue on any flag poles. 

 

 

Here are some of the posts that caught my eye. Hope you find something interesting.

 

Lighter Links:

• Clinton Campaign to Participate in the Wisconsin Recount — Plus Michigan and Pennsylvania If They Happen. (TW)
• America’s Top Spy Talks Snowden Leaks and Our Ominous Future. (Pocket)
• The Strange Psychology of Stress and Burnout. (Pocket)
• A New Program Judges If You’re a Criminal from Your Facial Features. (MotherBoard)
• 3 New, Must-Read Quotes from Tesla Motors, Inc. CEO Elon Musk. (FoxBusiness)

 

Trading Links:

• How Apple Lost China to Two Unknown Local Smartphone Makers. (Bloomberg)
• ‘A Rude Shock’: Indians Describe Life after Narendra Modi’s Currency Ban. (New York Times)
• NASA's New 'Intruder Alert' System Spots an Incoming Asteroid. (NPR)
• Is the Age of Asset Management Over? (FinanceMagnates)
• Immigration, World Poverty and Gumballs. (YouTube)

A Statistically Significant Edge

Last week we discussed that just because a trading system is making money doesn't prove it has an edge.  It means you have both the chance that the system has an edge - and also that it may just be lucky.

One of our advisors wrote back to see if they understood that approach.

 

The odds of flipping a coin and getting heads 25 times in a row is roughly 1-in-33 million. So if we have 33 million flippers and 100 get 25 heads in a row, statistically that is very improbable.  We can deduce that group of 100 is a combination of some lucky flippers, but also that some have a "flipping edge."  We may not be able to say which is which, but as a group our 100 will still consistently provide an edge in future flip-offs.

 

Well, that is correct.  In fact, if we were developing coin-flipping agents that would be as far as we would be able to go.  However, we are in luck because our problem has an extra dimension, which makes it possible to filter-out some of the "lucky" Bots from our trading systems.

 

Determining Which are the Best Systems.

 

There are several ways to determine whether a trading system has a persistent edge.  For example, we can look at the market returns during the trading period and compare and contrast that with our trading results.

This is significant because many systems have either a long or short bias.  That means even if a system does not have an edge, it would be more likely to turn a profit when its bias is in alignment with the market. 

We try to correct that bias using some math and statistical magic, in order to determine whether the system has a predictive edge.

 

It Is a Lot Simpler Than It Sounds.

 
Imagine a system that picks trades based on a roulette spin.  Instead of numbers or colors, the wheel is filled with "Go Long" and "Go Short" selections.  As long as the choices are balanced, the system is random.  But what if the roulette wheel had more opportunities for "long" selections than "short" selections?

This random system would appear to be "in-phase" whenever the market is in an uptrend.  But does it have an edge? 

One Way To Calculate Whether You Have An Edge.
 

Let's say that you test a particular trading system on hourly bars of the S&P 500 Index from January 2000 until today. 

 

1. The first thing you need is the total net profit of the system for all its trades.  
2. The second thing you need to calculate is the percent of time it spent long and short during the test period.
3. Third, you need to generate a reasonably large population of completely random entries and exits with the same percentage of long/short time as your back-tested results (this step can be done many times to create a range of results). 
4. Fourth, use statistical inference to calculate the average profit of these purely random entry tests for that same test period. 
5. Finally, subtract that amount from the total back-tested net profit from the first step.

 

According to the law of large numbers, in the case of the "roulette" system illustrated above, correcting for bias this way, the P&L of random systems would end up close to zero … while systems with real predictive power would be left with significant residual profits after the bias correction.

While, the math isn't difficult … the process is still challenging because it takes significant resources to crunch that many numbers for hundreds of thousands of Bots. 

The good thing about RAM, CPU cycles and disk space is that they keep getting cheaper and more powerful.

Switching Strategies

We said goodbye to Duke today.  He was our faithful companion for 13 years.  He will be missed.

 

 

We did everything we could, until we couldn't ... Then we switched to a different strategy.