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jsl

Every significant market corrections lead to many regrets, leaving people wondering whether they have done the right thing all along. Most new players have to go though cycles like this to finally find their edges. Many of them give up before reaching the other side of the river, some of them drowned.

Put technical day trading aside, most amateur players at HT have an investment portfolio with occasional trading or sometimes more frequent. While this is the right thing to do, it is important to understand that investing is believing, trading is hedging.

When you buy a stock and intend to hold for a while, you'd better be sure that your optimism doesn't build on a shaky ground. Failing to do so means cutting lose too often to feed wall street scavengers. The reason to buy can be as simple as 200ma, Dow theory, or as detailed as bottom up fundamental analysis ( If you can do the later, you are probably laughing at me right now. ) The common traits about those rules are that they are not as spontaneous as you emotion, nor as unstable as five minutes chart. A side effect of this is that they all favors momentum. Since it is hard to have a proven secret weapon, I always have a tendency to be on the buy side. At least, I will be riding the tide of human evolution when every other reason fails. Also remember that when equities are your enemy, investment grade bonds are likely to be your friends.

Market uncertainties never make investment easy. Proper hedging will not only protect your portfolio, but also make you feel good. Two types of hedging are distinguished by the duration of the hedge positions. Paired positions frequently employed by hedge funds alike are meant to hedge out market risk all the time. More relevant to us is time series risk hedging. These hedge positions are on and off, increased or reduced due to current portfolio risk profile. Generally speaking, direct hedges are more effective, but sometimes costly. For example, buying puts of the same stock in the middle of a downturn is a more direct hedge, while short consumer discretionary for a commodity portfolio is less direct. Active diversification and leverage reduction can also be viewed as hedging since it changes portfolio risk level purposely.

Most people like to think short term trading as additional source of profit. Well, that is only for a handful of people among hundreds due to the fact that it is a zero sum game. However, trading can be a way to hedge, in the sense that such active trading activities are about to possibly reduce cost basis at the expense of less potential returns.

Long and short on the same stock is generally not considered a hedge, instead, should be referred as box positions that serve other purposes, or we can simply call it cutting loses. Trading on the same stock can be a hedge when deploy a complimentary strategy to the investment style. The complimentary difference may come from directional bias, frequency of transaction, mean reversion vs momentum, etc. A natural generalization of this is style hedge or strategy hedge.

Nothing complicated or secrete about trading. Knowing the purpose is a start. Nothing is for everyone. Take with a grain of salt.

thoughts after discussions
deflation topic
First, Anybody interested in the topic should have a serious read on Fisher's "The debt-deflation theory of great depressions" uploaded by X'ing. The paper argues that paired diseases of over-indebtedness and deflation are far more harmful than the occurrence of a single one by stating that deflation increases "value" of debt. This is an indirect explanation since the actual dollar amount does not change.

Deflation does not come out from nowhere. It almost always caused by some stress that leads to consumption withdraw. Although not at the root of a crisis, Deflation certainly can make it harder to generate profit from business conduct. Basic business operations involve capital investment, production and distribution. The whole operation cycle takes time. Under sever deflation scenario, profit margin may be seriously reduced or even turns into negative. Without cash flow to pay down the debt, the same amount of debt suddenly becomes a much bigger burden. Hard landing with flush of bankruptcies is probably the only way out.  So I do believe in helicopter money as long as it doesn't blow up the fiat money system. Can more debt solve over-indebtness problem? Rarely, but possible. It relies on many assumptions that we currently don't have for sure.

ypm968

deflation topic
First, Anybody interested in the topic should have a serious read on Fisher's "The debt-deflation theory of great depressions" uploaded by X'ing. The paper argues that paired diseases of over-indebtedness and deflation are far more harmful than the occurrence of a single one by stating that deflation increases "value" of debt. This is an indirect explanation since the actual dollar amount does not change.

Deflation does not come out from nowhere. It almost always caused by some stress that leads to consumption withdraw. Although not at the root of a crisis, Deflation certainly can make it harder to generate profit from business conduct. Basic business operations involve capital investment, production and distribution. The whole operation cycle takes time. Under sever deflation scenario, profit margin may be seriously reduced or even turns into negative. Without cash flow to pay down the debt, the same amount of debt suddenly becomes a much bigger burden. Hard landing with flush of bankruptcies is probably the only way out.

If you want to know more about the causes of the Great Depression, you should also read John Keynes' "The General Theory of Employment, Interest and Money" and Milton Friedman's "A Monetary History of the United States", because Irving Fisher's debt deflation is just one of many explanations.

The General Theory of Employment, Interest and Money
http://books.google.com/books?id ... heory+of+Employment,+Interest+and+Money&printsec=frontcover&source=bn&hl=en&ei=MP8BTMTqDoyONaDdiTw&sa=X&oi=book_result&ct=result&resnum=4&ved=0CDwQ6AEwAw#v=onepage&q&f=false

A Monetary History of the United States
http://press.princeton.edu/about_pup/PUP100/book/4mFriedman.pdf


Causes of the Great Depression
http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression

Keynesian explanation

British economist John Maynard Keynes in 1936 argued that there are many reasons why the self-correcting mechanisms that some economists claimed should work during a downturn may not work in practice. In his The General Theory of Employment, Interest and Money, Keynes introduced concepts that were intended to help explain the Great Depression. One argument for a noninterventionist policy during a recession was that if consumption fell due to savings, the savings would cause the rate of interest to fall. According to the classical economists, lower interest rates would lead to increased investment spending and demand would remain constant. However, Keynes states that there are good reasons why investment does not necessarily increase in response to a fall in the interest rate. Businesses make investments based on expectations of profit. Therefore, if a fall in consumption appears to be long-term, businesses analyzing trends will lower expectations of future sales. Therefore, the last thing they are interested in doing is investing in increasing future production, even if lower interest rates make capital inexpensive. In that case, according to Keynesians and contrary to Say's law, the economy can be thrown into a general slump.[3] This self-reinforcing dynamic is what happened to an extreme degree during the Depression, where bankruptcies were common and investment, which requires a degree of optimism, was very unlikely to occur.
[edit]Monetarist explanations

In their 1963 book "A Monetary History of the United States, 1867-1960", Milton Friedman and Anna Schwartz laid out their case for a different explanation of the Great Depression. After the Depression, the primary explanations of it tended to ignore the importance of money. However, in the monetarist view, the Depression was “in fact a tragic testimonial to the importance of monetary forces.”[4] In their view, the failure of the Federal Reserve to deal with the Depression was not a sign that monetary policy was impotent, but that the Federal Reserve exercised the wrong policies. They did not claim the Fed caused the depression, only that it failed to use policies that might have stopped a recession from turning into a depression.
Monetarist explanations were rejected in Samuelson's 1948 Economics, writing "Today few economists regard Federal Reserve monetary policy as a panacea for controlling the business cycle. Purely monetary factors are considered to be as much symptoms as causes, albeit symptoms with aggravating effects that should not be completely neglected."[5] However, the work of Friedman and Schwartz became dominant among mainstream economists by the 1980s, before being reconsidered by some in light of Japan's Lost Decade of the 1990s.[6] The role of monetary policy in financial crises is in active debate regarding the financial crisis of 2007–2010; see causes of the financial crisis of 2007–2009.
Ben Bernanke, the current Chairman of the Federal Reserve, agreed with Friedman in blaming the Federal Reserve for its role in the Great Depression, and stated on Nov. 8, 2002:
"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." [7]
Before the 1913 establishment of the Federal Reserve, the banking system had dealt with periodic crises in the U.S. (such as in the Panic of 1907) by suspending the convertibility of deposits into currency. The system nearly collapsed in 1907 and there was an extraordinary intervention by an ad-hoc coalition assembled by J. P. Morgan. The bankers demanded in 1910-1913 a Federal Reserve to reduce this structural weakness. Friedman suggests the untested hypothesis that if a policy similar to 1907 had been followed during the banking panic at the end of 1930, perhaps this would have stopped the vicious circle of the forced liquidation of assets at depressed prices. Consequently, in his view, the banking panic of 1931, 1932, and 1933 might not have happened, just as suspension of convertibility in 1893 and 1907 had quickly ended the liquidity crises at the time.”[8] Essentially, the Great Depression, in the monetarist view, was caused by the fall of the money supply. Friedman and Schwartz write: "From the cyclical peak in August 1929 to a cyclical trough in March 1933, the stock of money fell by over a third." The result was what Friedman calls the "Great Contraction"— a period of falling income, prices, and employment caused by the choking effects of a restricted money supply. The mechanism suggested by Friedman and Schwartz was that people wanted to hold more money than the Federal Reserve was supplying. As a result people hoarded money by consuming less. This caused a contraction in employment and production since prices were not flexible enough to immediately fall. The Fed's failure was in not realizing what was happening and not taking corrective action.[9]

Poo

CRxyz

氢氧化钠

soulvirus

谢谢剪jj

colderdown

"So I do believe in helicopter money as long as it doesn't blow up the fiat money system. " That is exactly waht I was trying to say and that is exactly the reason I don't agree with Xing's big bear vision for NOW. Nevertheless, fiat currency's has shorter history comparing with gold, etc. We don't know what will happen. While the consequence of failed fiat currency system will far more outweight any markets (stock, bond, etc.), it only means one thing, the freaking WWIII.

jsl

谢谢剪jj
soulvirus 发表于 2010-5-30 11:09

    looks like very few people understand what I am saying. Those who knows well care more about deflation.

sooners

回复 8# jsl


   

xwj714

If you want to know more about the causes of the Great Depression, you should also read John Key ...
ypm968 发表于 2010-5-30 02:32

   

joep

"So I do believe in helicopter money as long as it doesn't blow up the fiat money system. " That is  ...
colderdown 发表于 2010-5-30 11:11

    Agree.

http://www.hutong9.net/viewthrea ... p;page=1#pid1063562

wangbin

谢谢

sfbayarea

economist always over thinking.

小鸟

thanks

bilko540

（：6_337：）

面包车

呵呵，看了。