On Trading Financial Markets

Well, it should probably be noted that not only is trading financial instruments not for everyone, but it's almost certainly going to end in disaster (in the form of financial ruin) for the vast majority. It's an odd phenomenon that exists to create a world that sucks people in and spits them out in such an astonishingly repetitive and predictable manner. I've discussed with friends in the past a trading algorithm that does exactly the opposite of what a new market participant chooses. We concluded that such an algorithm would be a phenomenal money-spinner!

So, in relation to the above, I have had to concern myself recently with a point posited by my old housemate. In relation to quitting my job and moving to Chamonix, he said, "Is Oli Sherman brave or stupid, that's the question."! Well, I can add to that the possibility that my trading history over the last few years is more likely to fall into one (or both) of the above categories than any other.

My favourite quote on leverage comes from Joel Greenblatt. He likened the use of leverage to running through a dynamite factory with a lit match. You may get away with it, but you're still an idiot. Well, I almost didn't get away with it over the last couple of weeks, which I guess puts me in the category of idiot, which is a shame as I thought I was some sort of financial genius!

However, all this trading is for the purpose of learning about market dynamics, as well as to understand better my own mind in relation to trading decisions. The last 2/3 months is a good case in point.

So, my view since mid-2008 has been that the Great British Pound will fall. Badly. I was calling for it to fall to around 1.60 versus the US dollar. I also thought that the dollar would fall against the likes of the Yen and Swiss Franc. So I decided to try and monetise these views via bets in the spread betting market. The results were favourable. For a period.

The last month of 2008 was a pretty disastrous one for holders of pounds with any international debts and/or future liabilities. But it suited me rather well as I made enough on my currency positions alone to fund a winter in The Alps. As 2009 started, the pound fought back, and I missed it as I wasn't checking prices at all for the first week. My £5k loss for the first week of 2009, it was kindly pointed out to me, translated to a quarter of a million loss for the whole year, which is significantly more than my net worth! Anyway, the loss didn't phase me too much as I understand how markets can undergo consolidation periods during trends, i.e. a rising pound didn't meant that I was wrong about the pound being in a strong downward trend.

As if to validate my position, the pound promptly continued it's slide through the next two weeks, and my loss for the year was rescinded. That felt good. Then something odd happened. The pound had found some friends, and it rose back to regain the pre-New Year levels.

OK, so markets fluctuate, what are you going to do. Well, my view hadn't altered on the pound, or on the dollar. I felt strongly that the fundamentals were in line with my view and that the trend (of both currencies declining in value) was still in the process of adjusting the exchange rates. So I increased my position size to profit from the consolidation.

And the pound continued to rise... And rise... And rise.

Whilst the movements weren't particularly large, my positions were. I was effectively short £200k of GBP, mostly against the Swiss Franc. This was starting to hurt.

Anyway, as the losses mounted, I continued to check the logic of my position, and I hung on. Then, over the weekend, with time to reflect, I decided to cut my positions in half as any further losses would wipe out more than next season's skiing (which I'd already lost over the past 2 weeks). As I was implementing the reduction in risk, I got carried away and decided I didn't know anything useful about trading currencies, so I should get out of it all together. So I did. I cut almost all my currency exposure.

Of course, what happened next, but the Great British Pound lost it's friends and fell. A lot. So I reinstated the shorts in half the original size. Then it fell some more, and here we are today.

Now, for future reference we're at 1.6825 for GBP/CHF and 1.4544 for GBP/USD. And that's not going to stay the same for too long. Markets move further than most people expect, and once a trend is in place, it tends to persist for longer than most people expect. So, I should be true to myself and stick with it all. Not value investing, sure, but a fine way to make a living if you can control your risk and your emotions. Interesting to see how this all pans out!!!

On Creating An Investment Partnership

Aspects of mountaineering have commonality with those of investment. But where is the artificial adversity in a sound investment practice: answer - nowhere. Artificial adversity exists for the speculators of this world. Is that my future?

Intellectually there is only one path that makes sense to me for a sound future as an investor. The lessons from Graham, Buffett and Munger are timeless. Their principles sound, relevant and, possibly, implacable.

Somewhere in the human spirit is the strength to fight adversity, indeed the desire to fight adversity. This emotion drives men to distraction, it can be seen throughout love, life and the joy expressed in exploring this emotion is what draws men to mountains.

But the goal of sound investment is to find the path of least resistance. To take knowledge from the tree and pluck the lowest hanging fruits. Why seek adversity when it may lead to ruin?

Thus far I have made little inroads into my investment research. Stocks have risen and fallen, pages have been turned and potential investors have been met. But crystallised investment decisions have not been reached and enacted upon.

The track record is ticking away. I am still speculating for profit. Perhaps this is where my future lies. But speculation is no basis for taking on other's capital. Why is my story not that I have made investment gains in the past and will likely do so again in the future using the same strategy? Perhaps the strategy can be logically linked. No. Gains must come from principles that will be applied again in future.

The wall of doubt is there, but what is it made of? Not brick and, yet, not sugar. I have my doubters, my detractors, and perhaps I can thank them for making me stronger.

I asked a friend if he thought I had more chance of climbing the 6 classic North Faces of The Alps, or of becoming a successful investor with £20m under management. His response was that I was asking him to compare two very small probabilities!

But all human potential resides within each and every one of us, surely? If it's not impossible, then why not make it happen? There are hurdles to overcome, of course, but adversity just gives you a way to rise above and grow to meet the next challenge.

Creating goals, growing to meet these goals, helping others with their challenges, these are all things that inspire me.

The investment dream is taking shape. Slowly morphing out of the plasma of an unknown and uncertain future is a great and worthy reality. It seems wrong to have things just work. Perhaps low self-esteem keeps people from moving towards their true potentials. It's as if by telling yourself that the future is as malleable as you choose, that you can build it in your mind and shape it in your actions.

May 2010. Sherman Asset Management. The beginning.

To thine own self be true. Seek and ye shall find. The future is not written.

There are so many thoughts I have on the subject, so much going on in my head. Of quotations, past experiences and the experiences of others. I could probably write pages on just how I view the markets. Chapters on the movement of the tides, the pull of the moon, the way to catch the wave and then ride it in to shore.

Anyway, for now I've made my first pitch to a previously unknown potential investor. I've started reading Securities Analysis. I have stocks picked out to research further, and ideas to progress. The speculation continues, but it helps with my markets education. I still think the best risk-reward lies in Value Investing. To time it right, I want to be bottom fishing with the tide firmly out. After all, the best waves come with the moon full, an offshore morning breeze and the tide passing through the midway point.

On Moving to Chamonix

When is a dream not a dream? When it's a reality. The dream will remain, but you don't dream of bad times to come, or imagine the details too clearly. And 'Living The Dream' - impossible - as why would anyone dream of things they can have. Don't dream it, do it. Live life in a way that makes you jealous of yourself; but in a good way. Imagine who you can be. Imagine the best that you can be. And then become that person. Simple. As simple as life itself. But dreams and reality mix in turbulent ways. In any case, who wants to be normal? Not me at any rate.

So, now the reality is slowly setting in. And I'm basically unemployed in a town where the natives are slightly hostile, where I don't speak the language and where I can't even open a bank account as I'm considered too transient as an unemployed seasonnaire. And what of the other dreams - to become an accomplished investor and mountaineer. Was I just trying to leave the smog, or was I moving to cleaner air for more than just the vistas of snow-covered Alpine peaks?

Well, removing some distance between me and the mountains should help with the latter goal. And yet I feel unfit and unacclimatised to the mountain environment at the moment. Need motivated partners to get me out of the rut that city life makes us slide into. I need the mountains to brush away the cobwebs and detritus of cramped, city living. Where reality is as false and unreal as the masks that walk the streets all day long. Where has my reality gone, have I lost the will to really live - the will to explore what is possible when determination combines with skill and judgement against artificial adversity?

City life is still in me. I make the flat I'm in homely - but mostly so that others will see my recent success, for self-aggrandisement, or in search of praise. The great climbers slept in tents and on mountains, I'm in a heated flat. They scraped a living from any old job to get back on the heights, and I have spent the day indoors despite my proximity to the hills. The cobwebs surround me and cloud my thoughts and judgement. Where is the clarity of vision that once shone forth? It's up high, and soon I will seek it out.

At least the noise is subsiding. All that terrible, distracting noise of city life. To invest wisely you must know your own mind. You must think your own thoughts and make your own decisions. The framework can be externally sought, but must be internalised. You can learn from other's mistakes, and their own lessons. But you must think for yourself, or your decisions are not your own to check against for future fallibility. And knowing that you are fallible - that's the ultimate conscience raiser that creates a great investor. To face that fallibility is against human nature, but face it you must. Indeed stare at it with wide eyes and treat it as a lost child.  Lost, but once viewed appropriately... the truth is found.

And up in the heights, knowing yourself is once again key. To truly understand the humanity that lies within, you must seek what it takes to rise up. There is no gain without the possibility of loss. And no triumph except in the face of adversity. So creating adversity in order to experience the growth of a new reality, once that adversity has been overcome, would seem to be seeking some form of truth, some form of internal knowledge that will remain locked away otherwise.

So, here I am. Entering my new reality. One of my own creation. A dream of sorts. A way to seek truths that lie beneath. The truth behind the curtain of market noise. And the truth behind the cobwebs of the concrete and steel left behind.