Trader’s Narrative

When you have a comedy show like The Colbert Report mention an esoteric indicator like the CBOE volatility index… you know that things have run their course:

The picture is from Monday’s show in which Stephen Colbert riffed off the “fear index” and mentioned that it “is at an all time high” He then said, “Even worse? The fear index is scared of heights!”.

As I mentioned before, I was in Spain a few years ago and in that trip was introduced through friends to a mutual fund manager. To protect the guilty no names will be mentioned. Over a few drinks talk inevitably turned to the markets and I commented on the VIX index. From the puzzled looks it seemed she didn’t know what it was so asked and once she confirmed that she had never heard of it, I explained it to her and told her where to get more info.

My world was a bit shaken though - how can you manage money without even knowing what the heck the VIX is? Sheesh.

The VIX hasn’t become a household term but, we’ve already seen similar financial spreads and indicators, normally reserved for economists, traders and quant-jocks being bandied about liberally in the news: LIBOR, TED spread, CDS, CDO, etc.

Today continued the divergence between the VIX & the S&P 500 Index (SPX). Volatility barely budging even though the market fell 3%.

You can watch the segment here:

If you are outside the US, tough luck! With the exception of Canadians who can go here.

Revered by housewives, loathed by neutered pets, Bob Barker is an American institution. He has been hosting the day time tv game show The Price is Right long enough to make it the longest running show of its kind. Of course, many belive that CBS replaced him with an animatronic robot sometime in the 80’s.

But it is undisputed that the Price is Right is a very important part of getting over a cold. It has been scientifically proven (look it up). Rest coupled with lots of liquids isn’t anything if you don’t have reruns of the Price is Right to watch.

As I was thinking about the upcoming retirement of Bob Barker next week, I realized that The Price is Right teaches you everything you need to know about the market:

#1] E-v-e-r-y-t-h-i-n-g has a price
…and everything also has a value. But they are rarely the same. Each day market forces determine the price for a myriad number of securities. Of course, you have to respect price. It is the net aggregate result of millions of minds and billions of dollars. But at the same time, you have to keep in mind that value is a totally different thing. Just because IBM is priced at $100/share doesn’t mean it is worth $100/share.

# 2] Do not overpay
There is but one simple rule: if you go over the retail price, you lose. The same can be applied in the market. Overpay and you’ll be sorry. On the otherhand, pay what the asset is worth or pay less (if you’re really good) and you’re sitting pretty. Refer to Rule #1 - buy when the worth is more than the price.

# 3] Hear the roar of the crowd but don’t defer to it
All during the show, the studio audience participates rather loudly. They yell and scream at the contestants, telling them what do do. In the market, the same roar of the crowd can be heard. But it is unwise to defer to it because the crowd can get too emotional. In fact, if you are an astute observer you can watch for extremes of crowd psychology and zig when they zag. It is extremely difficult, but thinking for yourself is rewarding.

# 4] Don’t get distracted by eye candy
The Price is Right has models - known as “Barker’s Beauties” - who drape themselves over the products. The equivalent would be glossy annual reports, chiclet-toothed CEOs giving confident speeches, or foaming at the mouth while blaming short sellers for the company’s woes, off balance sheet financing and any other gimmick thrown at you by insiders.


#5] Think it terms of probabilities
A lot of the mini-games in the show involve probabilities. The more a contestant understands this and the more they apply it, the higher their chance of winning. The same can be said about the market. Nothing is known as 100% fact or can be taken as gospel. Everything is “probable”. Your job is to figure out how probable and how much you would win/lose one way or the other.

# 6] Think on your feet and act fast
Easy to overlook but actually it is vital. If a contestant dawdles or can’t think fast enough, they lose. In the market it is the same. To take advantage of opportunities you have to be both vigilant and agile.
If you snooze, you lose.

# 7] Take risks
Sometimes you have to be willing to lose the BBQ to win the speedboat. In the market, to make a killing you have to be willing to bet big. I’m reminded of the story where Soros asks one of his traders who had told him about his convictions for a certain market move, how much he had bet. When the trader replied $1 billion, Soros shot back, “You call that a position?”

# 8] Greed is good
As Gordon Gekko, famously put it, “Greed, for lack of a better word, is good.” The Price is Right has been a shining beacon of greed and conspicuous consumption. The same underlying ethos powers the market. Of course, sometimes it flips to its polar opposite: fear. But without the motivation of greed, where would we be?

9] Keep doing what works
The show was first aired in 1956 but since 1976 it has had the same format and host. Why change a good thing? In the same way, when you have a strategy that works in the market, just keep doing it. Until it doesn’t. Simple, right? But few can actually stick to their knitting. It is more challenging than it appears.

#10] Understand the game
If you watch enough reruns, you can easily catch the people who have no real clue about the game. They haven’t really studied it, they haven’t familiarized themselves with all the mini-games and some just don’t really want to be there. In the market, some participants have no clue what is really going on, a few have some inkling while others may even think they have a right to make money. Or that just following the crowd will be reward enough. Soon enough they learn a rather painful lesson.

#11] Don’t forget to jump up and down
Its not worth much if you’re not having fun!

Its sobering. Wall Street lost one of its institutions today.

I can’t remember the first time I watched Louis Rukeyser on his eponymous show. But I do remember that there was something quite unique about him.

The man had class. Something sorely lacking in today’s Mad world of financial journalism. And he had a sense of humour too. He was always up for a good hearted joke and never too shy to chide the myriad analyst that he had as guests.

You’ll be missed Mr. Rukeyser.