This week I am speaking withDr. Jay Leavitt, founder and Investment Strategist for the Primata Funds. Prior to the Primata funds, Jay owned and managed, a website that specialized in financial newsletters. He has a Ph.D. in applied mathematics and spent twenty years as the director of academic computing at SUNY, Buffalo.

So, what's in your library Jay?

New Option Strategy Course by Lawrence McMillan - This is an excellent primer for trading options. What I found most interesting about the book is that it teaches how to visualize the behaviour of options. It showed me how to combine graphic constructs to build option strategies.

Option Profits: The Naked Truth - Profit Using Little Known Conservative Non-Directional Strategies Used by Option Pros. by Mike Parnos - Mike writes a syndicated column called The Couch Potato Trader. He writes in a very personable style and adds humor to his writing. One of his more lively quotes is "God gave man two ends - one to sit on and one to think with. Ever since then, man's sucess or failure has been dependent on the one he useed most." In this book, he talks about how to handle options in general, and iron condors in particular. 

The Black Swan - The Impact Of The Highly Improbable by Nassim Nicholas Taleb - Nassim is a professor of risk engineering at NYU. I believe a lot of what he has to say about risk. In fact, I am a member of the Carolina Black Swan Group, an investment/trading group that meets once a month to discuss issues brought up within the book and related topics. I will be presenting my fund's strategy to the group at next month's meeting.

No Higher Honor: A Memoir Of My Years In Washington by Condoleezza Rice - I recommend the audio version because it is read by Condoleezza. While I strongly disagree with her party's politics, I highly regard her ethics and opinions. She records her experiences as a young black girl in the segregated South and she has based her life on taking the best out of her past. One of the highlights of the book is her reaction to a personal slight by then President Bush. Although she and Bush had mutual respect for one another, when slighted she did not fail to explain to him the slight, even though it occurred in the oval office.

The Andre Gide Reader by Andre Gide - To be frank, this is not the Andre Gide book that I read. When I was in high school and college I took french and the classes often had collections of short stories by Andre Gide. After finishing graduate school, I became a Fulbright scholar at the University of Pisa and they immediately asked me to teach a course. I accepted and then realized that the course was to be taught in Italian. I managed to get through the semester by bastardizing my French, much of which came from text books by Andre Gide. The experience had a huge impact on my life, and I will always have fond memories of my Andre Gide text books. I challenge you to find anyone else who can honestly say that!

Thanks Jay.

As always, you can buy the books Jay mentioned in the Sniper Book Bin

Sign up for The Sure Shot Lettermy monthly newsletter. As an added bonus, I will throw in access to my blog, The Daily Kill Sheet. The Sure Shot Letter provides long-term investment ideas on a monthly basis, while The Daily Kill Sheet provides short-term trading ideas twice weekly.

Today I am interviewing Dr. Prakash Dheeriya, author of the Finance For Kidz series of finance books for children; Professor of Finance at California State University and owner of Fintelligence, which provides financial intelligence services on companies, industries, sectors and asset classes to high net worth clients. Prakash was born in Bombay, India and came to the United States in 1984 for his doctoral studies in Finance. After graduating from the University of North Texas in 1987, he worked as an assistant professor at the University of Tennessee for two years. In 1989 he went to work for Illinois State University before starting Fintelligence and moving to the West coast to teach at California State University.

Dr. Dheeriya is a prolific writer and has an entire series of books dedicated to helping to teach basic financial principles to children. W
hat is unique about these books are that they are simply children's stories, based on his own children's lives, but contain financial lessons in them. He explains complicated financial concepts like deflation, risk and return and identity theft (to name a few) through stories that all children can relate to. You can find his books on amazon through the link at the right or through his own website at: .

With that said, What's in your library Prakash?

Atlas Shrugged by Ayn Rand - This book really opened my eyes to the benefits of Capitalism and individualism. It taught me the dangers of Socialism and shows what can happen to a society over time when their political leaders make the wrong choices, and the brunt of the population embrace them.

A Brave New World by Aldous Huxley -  I found it fascinating to visualize what another world would look like. The scientific advances that Huxley imagined coupled with the degradation of humanity were scary, yet thrilling at the same time.

Animal Farm by George Orwell - This book explains the political maneuverings of human beings. One line that always stands out to me is "All animals are equal, but some are more equal than others." Written as a satire of the Soviet Union, it points to how the best intentions of the revolution were lost to personal ambition. 

1984 by George Orwell - This book provided a scary view of the "Big Brother" watching you. Reading the newspapers nowadays makes you wonder whether Orwell wasn't really that far off the mark! Imagine a world with hypocrisy and evasion by the state, a country where war was considered peace (as long as it was happening somewhere else), and torture was used not only on enemies but on those thought to be enemies. Couldn't happen here! Could it?

Catch-22 by Joseph Heller - This was a very funny book. I thought the writing style was unique and memorable. Well worth a read!

Thanks Prakash.

As always, you can buy the books Prakash mentioned in the Sniper Book Bin

Sign up for The Sure Shot Lettermy monthly newsletter. As an added bonus, I will throw in access to my blog, The Daily Kill Sheet. The Sure Shot Letter provides long-term investment ideas on a monthly basis, while The Daily Kill Sheet provides short-term trading ideas twice weekly.

Today I’m interviewing Leigh Drogen, a former quantitative analyst and fund manager who is now the founder and CEO of Estimize. Leigh started his career at Geller Capital where he ran a quantitative non systematic earnings acceleration and analyst estimate revision model which also relied heavily upon relative strength and trend following. He then went on to run Surfview Capital successfully employing a similar strategy before moving into the financial technology world. Prior to founding Estimize he was an early member of the product and business development teams at StockTwits, the largest social network of investors on the web.

Estimize, Inc. was founded in 2011 to provide the financial community with a platform for the generation of estimate data sets from buy side and independent analysts, as opposed to current data sets such as IBES which only source from sell side analysts. Beginning with a focus on EPS and Revenue models for public companies, Estimize now has over 13,000 member analysts and coverage on over 1,000 companies. Their consensus estimate numbers are not only more accurate than comparable data sets from the sell side, but their open and transparent platform allows members to view the depth of estimates and identify the analysts with the highest accuracy metrics over time. You can now find the Estimize data set on Bloomberg and can register for the service here.

So what’s in your library Leigh?

Reminiscences of a Stock Operator by Edwin Lefevre - There’s no other text that captures as well what it feels like to operate in financial markets than Reminiscences of a Stock Operator. This book really was my indoctrination at the age of 15 and taught too many lessons to count. Above all though it drove home the fact that it’s far easier to make money positioned in the direction of the primary trend as opposed to attempting to outsmart everyone else by going against it. Play big a few times a year when the odds are heavily in your favor and go to the beach when it’s not your market.

Six Days of War: June 1967 & The Making Of The Modern Middle East by Michael B. Oren - I studied war theory during my undergraduate education and was able to transfer many of the lessons into money management and building companies. Six Days of War was a detailed account of the calculations made by military and political leaders on both sides of the 1967 war between Israel and its neighbors as well as the global powers both before and during the conflict. The primary difference between Israel’s ability and Egypt’s inability to execute their strategies was the accurate, or in the case of Egypt, inaccurate flow of information from front line soldiers up to tactical and strategic decision makers. Information is power and you can not make quality decisions without it.   

Way of the Turtle: The Secret Methods That Turned Ordinary People Into Legendary Traders by Curtis Faith - Trading Places was a hilarious movie, so when someone told me a story about how some Chicago traders basically did it for real, I had to read Way of the Turtle. Putting aside the fact that it was an extremely entertaining story, the main lesson of developing and back testing a strategy that works, and then sticking to it over the course of time really resonated with me. It also deeply ingrained in me the belief that buying begets buying and selling begets selling. You want to scale up into longs and down into shorts, not the other way around, use momentum to your advantage don’t fight it, the big panic moves in both directions are where the money is made.

The World Is Flat: A Brief History Of The 21st Century by Thomas Friedman - Tom Friedman is one of my favorite writers for his ability to see the forest through the trees. Tom writes how our minds should operate, he takes a lot of individual anecdotal stories along with hard data and builds a thesis with them. The World Is Flat taught me how to step back and think about the inevitability of certain global trends and how they impact the micro environment. Just being on the right macro curve and not fighting against the larger forces at work can set you up for success in many cases to a greater extent than even your execution in a micro sense.

Technical Analysis of Stock Trends by John Magee - Technical analysis is scoffed at by many as using a crystal ball, largely because technicians have not positioned the skill set in the right way. Understanding patterns in the supply and demand for any asset is extremely important in order to manage risk, the study of technical analysis gives that to us. This book is basically the first text anyone who wishes to understand this practice should read, and in my opinion that is anyone who operates in financial markets where there is a bid and an ask.

Thinking Fast and Slow by Daniel Kahneman - Daniel Kahneman is a hero of mine and a huge influence on how I think about, well, thinking. I believe heavily in behavioral finance and that markets are extremely inefficient due to the large gap between was Kahneman calls “Humans and Econs”, Econs being the fictional perfectly rational actors. His study of heuristics that influence our behavior and decision making is necessary reading for anyone who wants to understand their own decision making and how to take advantage of the flawed process that others use.

Thanks Leigh.

As always, you can buy the books Leigh talked about in the Sniper Book Bin

Sign up for The Sure Shot Lettermy monthly newsletter. As an added bonus, I will throw in access to my blog, The Daily Kill Sheet. The Sure Shot Letter provides long-term investment ideas on a monthly basis, while The Daily Kill Sheet provides short-term trading ideas twice weekly.

Last week we published the first half of excerpts from a talk given by Samuel Eisenstadt, the former Research Chairman of Value Line Inc. at a QWAFAFEW meeting in New York during April of last year. QWAFAFEW (The Quantitative Work Alliance For Applied Finance Economics And Wisdom)  is a Quantitative Investment Society with chapters in New York, Princeton, Hartford, Boston, Washington DC, Chicago, Denver and San Francisco. The talk was given in a question and answer format. This week we'll finish up with the remaining questions from that talk as well as two additional questions that I asked Sam this week.

Sam started his financial career at Value Line in 1946. "In 1965 Sam persuaded management to change the Ranking System by using "cross-sectional", regression analysis, a procedure that measures relationships at a point in time rather than across time (time series regression). This was a major shift that greatly improved the performance of the ranking system in subsequent years. Sam became the Research Chairman for Value Line in 1987 and held that position through the remainder of his career at Value Line, which came to an end in 2009. Sam remains active in investment research and is often quoted by Mark Hulbert in his Market Watch articles. In fact, here is an interview with Mark that Sam did last week:
S&P 500 will be at 1,700 on Halloween - Mark Hulbert - MarketWatch

Special Meeting of QWAFAFEW, New York 
April 16, 2012

Question: Asset allocation models used to include just stocks and bonds or stocks, bonds and cash. Now we see institutions and pundits talking about allocations to foreign developed markets, emerging markets, currencies, gold, commodities and other asset classes; What are the challenges in trying to model so many asset classes? Are we trying to make the world too complex?

Answer: To start, lots more data are required as well as observations. With foreign markets, quality of the data becomes questionable and the consistency of the data from country to country raises doubts. I'm sure that powerful computer programs will be developed to manage these problems, however.

Question: Amid all the discussion and debates about indexes and indexing, Value Line developed its own index of the market. Could you shed some light about how that came about and what things you learned after launching the index? 

Answer: Some time in the early 1950's Value Line developed a geometric index of the stocks in the survey at the time. Why a geometric index? Keep in mind that from Value Line's standpoint each company was a separate report, and each company was equally important. In getting a picture of the "typical" stock, we sought an index that treated each company equally.

Subsequently, we found that a geometric index came close to passing through the middle of all of the price curves. In getting the relative price performance of stocks, we wanted a universe where as many stocks outperformed as underperformed. The geometric index appeared to achieve this. Thus it was used to measure the price performance of the rankings themselves - an improper usage in order to measure wealth performance. Here, of course, an arithmetic average would be the proper measurement.

The question arose, "which was the correct measurement?" To get the typical chart of relative price performance, I would argue the geometric index is correct. To get the correct wealth growth performance of the groupings, the arithmetic index is correct. Thus, Value Line currently publishes both. One final thought: The University of Chicago at one time suggested that the average of the arithmetic index and the geometric index came closest to measuring the "typical".

Question: Which people within the industry have earned the greatest amount of respect from you, including those you've merely observed through books and media, personal correspondence , or those you've met personally?

Answer: Obviously the first person that impressed me most was Arnold Bernhard, the founder of Value Line and the person that hired me after my release from the service. I had come to Value Line with an undergraduate degree in statistics - not finance. Hence Value Line provided on the job training for me in finance. The idea for a "Value Line" and an attempt (albeit non-mathematical) at objectivity was his. Bernhard was a great writer and any improvement in my writing skills, I probably learned from him. He was a good analyst, but lacked statistical training, so our association was a good one. I most admired that he was open minded and always willing to try new things.

Another person that helped me along in my beginning years was a gentleman named Daniel Embody - a name that I'm sure is unfamiliar to all of you. He joined Value Line a year or two after me. He came from the Bureau of Ships, U.S. Navy. I learned a lot about hand-run multiple regression analysis from him. He devised worksheets that enabled us to run by hand four- to five-variable analyses with ten or twenty years worth of observations. This was many years before electronic computers made their way into our office. While time consuming, running these studies manually gave us a better understanding of the process.

Another person I must mention is Dr. Herbert Arkin, my stat professor at the City College of New York. He is the one who originally opened my eyes to this field, which was still in its infancy. So much so, that few at that time had any idea what a statistician did for a living! In Wall Street jargon at that time a statistician was an analyst that worked with numbers, but who had little training in statistical methods beyond measuring averages and medians.

Professor Fabricant, a physics professor at Brooklyn Polytech who observed that when a Value Line analyst raised their annual earnings forecast on a company, there would be a favorable price response subsequently.  This thought gave rise to the earnings surprise factor in the Ranking System sometime around 1969. Others have since started services that are primarily based on earnings surprise and claim its discovery.

Victor Niederhoffer, a prominent trader and a strong believer in statistical testing of systems. Despite his University of Chicago training, he has devised strategies that have served him well, and sometimes not so well, but has remained stalwart in his belief that one must subject ideas to significant tests before acting upon them. He is the author of several books - The Education of a Speculator and Practical Speculation, both of which I would highly recommend to any budding speculators.

Peter Bernstein, an eminent economist, financial theorist and original thinker, recently deceased and author of several excellent books on finance and economics.

Mark Hulbert, financial reporter for the Wall Street Journal and Market Watch. Mark is one of the few financial writers who applies and respects statistical methods and testing in his writings. He keeps up with the learned economic articles and journals and keeps his readership informed on new developments in finance. He runs a service that evaluates many advisory services and keeps them honest on the basis of their advertising claims and results.

Dr. Fischer Black (deceased) -  A professor of Finance at the University of Chicago and MIT. Dr.Black wrote a now iconic paper,"Yes Virginia, There is Hope, Tests of the Value Line Ranking System". This paper, presented at the University of Chicago, propelled the Ranking System to the attention of academia and subsequently resulted in numerous research papers. Had Dr. Fischer lived, there is little doubt that he, too, would have received a Noble Prize in Financial Economics along with others.

Question: Which industry practices and/or cliches irritate you the most? Are there any assertions that people continue to make even though the data simply do not back those assertions up?

Answer: Discussions of price charts breaking moving averages of various lengths. Typically, these are made by chartists to justify resistance levels for stock prices. I think there are as many moving average rules as there are chartists. And you find them all over TV! I find these most irritating since no evidence is presented.

Question: What are the dangers in trying to draw conclusions or derive investment strategies from historical data?

Answer: Historical data can be tricky. Trends, auto correlations, and serial correlations can all impact the data. Transformations of the data may be necessary. Use of differences or absolute data, and seasonal adjustments may be called for. Data should be carefully examined before proceeding with the analysis. Also, trends can change. Keep in mind that we are not dealing with physical laws, like when the next eclipse will take place.

Question: Have you ever tried using valuation relative to the stock's past trading multiples as a factor, and if so, what limitations kept you from adding it to your system? 

Answer: Annual earnings ranks and price ranks (non -parametric equivalents of price earnings ratios of preceding years) are  components of the timeliness ranking system.  At least they were when I left Value Line more than 3 years ago.  I am not aware of what changes have been made since then. Also historical price /book, p/e and yield have been tried in the past but did not add to  the explanatory power of the model.  Keep in mind that the ranking forecast is for 6-12 months, a period that may be too short for valuation factors to assert themselves.

Question: If you have found that the Timeliness Ranking System has stopped consistently outperforming because value oriented strategies have come to the fore since 2000, have you tried to add any value oriented factors to the system? If so, how has it turned out? 

Answer: .The Timeliness Ranking model was  based upon many years -  more than 30 when I was there. Predominance of value factors in recent years were not sufficient to overcome the "growth" of earlier periods, despite their out performance in recent years.  Models based upon too few years can be susceptible to short-term cyclical behavior which would tend to make the model unstable. A  model based upon the last 13 years would be essentially a "value" model and could be misleading when and if the market environment should change.

Thank you Sam.

Sign up for The Sure Shot Lettermy monthly newsletter. As an added bonus, I will throw in access to my blog, The Daily Kill Sheet. The Sure Shot Letter provides long-term investment ideas on a monthly basis, while The Daily Kill Sheet provides short-term trading ideas twice weekly.