Nice Finance Video Collection

While web-surfing I stumbled across a nice collection of YouTube videos by Bionic Turtle on statistics, finance, and quantitative finance.

The videos tend to be short (under ten minutes) which makes them convenient to watch. Also, the author effectively uses Excel to work through examples and highlight the key points.

So far, I've only watched a handful of these videos but I plan to work my way through them gradually with a priority towards the topics relevant for re-balancing and evaluating the performance of my portfolio.

An Algorithmic Trading Primer

While I was getting my MBA I developed a strong interest in quantitative finance. I doubt I'll ever pursue a career in this field but I continue to enjoy reading about it in my spare time as part of a larger, general interest in applied mathematics (more about that in a future post).

Needless to say, I was eager to read the paper Algorithmic Trading: A Primer published in the summer 2009 issue of The Journal of Trading.

Unfortunately, I apparently misinterpreted the title as instead of discussing the algorithms themselves, the article covered the high-level points that clients of algorithmic trading firms should be aware of. To this end the article did cover some important points including:

• The desire (nay need) for algorithms to increase trader productivity
• The importance of Regulation NMS and why it favors electronic trading (which I must admit was new to me).
• The basic framework of algorithmic trading systems such as performance benchmarks, assumptions, etc.
• The rationale for and limitations of using log-normal models for price fluctuations.
• The importance of avoiding trades that signal the market and may therefore invalidate the algorithm's model.
• The importance of using the right algorithms at the right time to achieve the intended goals.

So, although the article didn't cover the topics I had initially hoped for I did find it a useful read anyway.

Book Review: Outliers

Outliers by Malcolm Gladwell

An interesting book asserting that rather than just latent talent, an individual's success is do to:

• timing: some people are born at just the right time to take advantage of historical watershed moments (e.g. the PC revolution) or age-based selections (e.g. birthday cut-offs for joining sports teams, schools, etc).
• practice opportunities: Gladwell asserts that the "universal" requirement for achieving expertise is 10,000 hours of practice. Gladwell further asserts that successful individuals have often been given abnormal opportunities to obtain that amount of practice in a short period of time and at an early age.
• environment: the amount of nurture and support that a person receives from his family and community has a significant effect on their success. This includes parents teaching their children how to be assertive, and actively guide their own lives.
• culture: cultural values and behaviors can have a profound effect on an individual's level of success.

To some degree, Outliers reminded me of other recent readings:

• In the Black Swan, Taleb asserted that individual success in "scalable" fields was due primarily to luck and a rich-get-richer effect. In Outliers I think Gladwell provides a compelling explanation for that phenomenon in his focus on lucky opportunities for obtaining expertise.
• The StudyHacks blog ran a post on how one person successfully entered the music industry by selecting a single nightclub to perform at and then focused all their energy on becoming the best performer at that venue. To me this resonated strongly with Gladwell's assertion that opportunities for obtaining 10,000 hours of practice are one of the keys to success.

So, there appears to be supporting opinions for some of Gladwell's assertions. Personally, I suspect that he is on the right track.

I enjoyed the first half of the book but found the second halves multi-generational discussion weaker as I suspect a "lucky event" can be found in everyone's family history if you go back a few generations.

Being a computer geek, I enjoyed the brief biographies on both Bill Joy and Bill Gates. I had no idea that Gates had so much programming experience before going to college. By all appearances both Bills had rare opportunities to become expert programmers at just the right age to ride the PC technology wave.

Some of the excerpts that I dog-earned were:

• Page 11: … the values of the world we inhabit and the people that we surround ourselves with have a profound effect on who we are.
• Page 42: (regarding the assertion that 10,000 hours of practice are required to become an expert at any particular skill) … ten thousand hours is an enormous amount of time. It's all but impossible to reach that number all by yourself by the time you're a young adult. … In fact most people can only reach that number only if they get into some kind of special program … or if they get some kind of extraordinary opportunity that gives them the chance to put in those hours.
• Page 149: Those three things - autonomy, complexity, and a connection between effort and reward - are, most people agree, the three qualities that work has to have if it is to be satisfying.
• Page 267: … success follows a predictable course. It is not the brightest who succeed. … Nor is success simply the sum of decisions and efforts we make on our own behalf. It is, rather, a gift. Outliers are those who have been given opportunities - and who have had the strength and presence of mind to seize them.

Upon reflection, I reduced (perhaps too far?) the book's message down to the following three points:

1. Pick a meaningful skill and practice it as much as possible.
2. Maximize your exposure to opportunities that require the chosen skill to be successful and provide more practice.
3. Aggressively pursue the opportunities that you come across to extract the most value from them.

Over all a good book, and worth the time to read it.

The Netflix Culture

The other day a co-worker sent me a link to a presentation from Netflix that describes their corporate culture. Well worth the twenty minutes required to read the slides.

I'm sure like many others, I found the described culture very attractive. I thought the desired values were so compelling that I printed out slide 19 and hung it up in my office as a reminder of my self-development goals. I think anyone in a creative profession, technical or otherwise, wants to work with "stunning" colleagues as a means for improving one's own skill. Too often I've seen loyalty appreciated more than performance so I liked the "adequate performance gets a generous severance package" rule. The guidelines designed to increase employee automaticity, decrease complexity, and minimize process strike me as recipes for success, provided that you have the suitable talent. Finally, I really liked the notion of always paying at the top-market rate. Frankly, the practice of reactively adjusting compensation to market rate when an employee tries to resign never made sense to me; why not pro-actively pay appropriately to avoid the employee from feeling unappreciated or being tempted by external opportunities?

Congratulations to Netflix for creating such a unique and outstanding corporate culture. It will be interesting to see if this culture persists as the company grows and the original staff moves on to other opportunities.

Crooked Crazy Eddie's

One of my iconic memories from the 80's is the commercials for Crazy Eddie's, a NY-NJ-CN area consumer electronics store that claimed to offer "insane" prices. Since I grew up in RI, I had no direct experience with Crazy Eddie's and never knew what became of the company.

My ignorance came to an end upon listening to an interview of the company's former CFO in episode 82 of NPR's Planet Money podcast. Evidently, Crazy Eddie's was crooked!

The corruption began with skimming sales and tax revenues but progressed to full-fledged money laundering as the company's size grew and the amount of unreported money became considerable. As the CFO became more financially savy, he hit upon the clever and even more profitable idea of:

• taking the company public
• gradually bringing the skimmed monies back onto the books to artificially inflate revenues and profits which led Wall Street to overestimate the company's future growth and over-value the stock
• selling the owner's majority equity position at the inflated market prices yielding over $100M of capital gains

What a story! In the end greed tore the family owned business apart which resulted in someone informing the authorities out of revenge thus bringing the whole operation to an end.

The podcast is very entertaining if you're interested in this kind of thing as the CFO seems to be proud of his cleverness despite its illegality. As it happens, he is now a consultant and instructor to various government agencies on the topic of corporate fraud. So much for the notion that crime doesn't pay.

Struggling with Book Reviews

When I started this blog, I thought it would be a good idea to write book reviews as I finished readings. I've discovered two problems with this goal:

1. It takes a long time to write a worthwhile book review.
2. Due to the voracity of my reading appetite, I have been unable to delay starting a new book until I have finished writing a review for the previous book.

The result, I am now behind in writing two reviews and close to finishing a third book. So much for posting book reviews anywhere as frequently as Eli Bendersky.

I can think of five solutions:

1. Write shorter reviews.
2. Force myself to write reviews before starting a new book.
3. Only write reviews for selected books.
4. Don't worry about it and write reviews when the time permits.
5. Stop writing reviews.

Of these, only options 2 and 3 are acceptable. Part of my rational for writing reviews is to obtain a deeper understanding of the material through extended contemplation, review, and summarization. This motivation rules out options 1 and 5. Option 4 is more or less a formalization of the current situation which I already know isn't working; I'll just keep on reading and never get around to writing the reviews. This, again, leaves options 2 and 3.

So, going forward I will attempt a hybrid approach of:

1. Writing reviews before starting new books.
2. Only writing in-depth reviews of selected books which deserve the most reflection.

Hopefully this new approach will lead towards fulfilling my goal of getting more out of the books that I read.

Cool Commodore Hack

Although I enjoy all of the content on the PageTable blog, I like the archeology stuff the most. This post about the hack used to do directory listings on the Commodore is a great example.

Essentially, the Commodore's disk drive acted as a co-processor handling all of the mass storage management and file system operations. The Commodore's kernel and BASIC shell used a file oriented API (i.e. open, close, read, write) to communicate with the floppy drive. Commands like list-directory were performed by an open() call to a special address and file name and reading the results from the open "file" until an EOF was received.

For reasons that are unclear from the post, it seems that the Commodore's kernel and BASIC shell were unable to natively perform the list-directory operation. As a result, a hack was needed to avoid users from having to write a BASIC program every time they wanted to list a directory.

The solution was for the floppy drive to return the directory listing in the format of a BASIC program. Thus, a list-directory operation consisted of:

• opening the special file
• reading the returned fake program into memory as a program
• listing the fake program to display the directory contents

What a clever hack!

If I understood the post correctly, the returned fake program simply used the structural description of a BASIC program but wasn't a valid program itself. In other words you couldn't execute the program returned by the list-directory operation. Too bad because it would have been really cool if the floppy drive returned a lambda function!