Thursday, August 11, 2005

Motivations and resolutions

I've been purposefully trying to occupy myself with things other than stock market opportunities because I know that the market is cooling off and I will have more opportunities in the future than I do now. It looks like there are some good daily-chart setups forming in the bio-pharma groups, but it is too soon to act. Over the past few weeks I've flagged a lot of stocks making new 52 week highs that were featured at The Visual Trader but I haven't mentioned anything about this on the blog until now because I feel we may be right around the corner from some compelling low-risk buy opportunities.

In the mean-time, my commitments in the market are very small right now so it is a perfect time to revisit my motivations for trading in the first place. Futurist Ray Kurzweil has published a commencement speach he gave this summer on his website that does a nice job of briefly relating an informed vision of the future in an inspirational format.

Ray's ideas about technological progress and exponential growth are the main reason that I'm concerned with rabidly amassing wealth at an early age (24 years old in less than a month). While I do think that all of humanity eventually benefits from technological progress, only the few super wealthy are capable of fully taking advantage of all that medical, computer, comfort, and entertainment technology have to offer. And even more important, the super wealthy are the exclusive key players in advancing technological progress. A few years ago as a student in college, I knew there were two ways for me to make significant contributions to technological progress: either by jumping through hoops to compete with everybody else who isn't capable of creating the wealth they need to make key research and development work happen, or to create the wealth myself and do things on my own terms. I think it is obvious which path I have committed to, but I have a long way to go yet. Therefore it is important to periodically make sure the ultimate goal is still in sight.

I've heard it said that 60% of all trade volume is not even manually initiated by human beings any more. This means we've got computer programs trading against each other most of the time. Kurzweil mentioned in his speach that we can expect computers to be powerful enough for the earliest forms of strong ai near the year 2030. Can you imagine how much trading volume will be from manual trading 25 years from now? I suspect that opportunities in the financial markets won't be as easy to identify by humans at that time. A backing argument is that trading really is just an optimization problem: make this pile of bones as big as you can as quickly and safely as possible, and computers excel at this type of work. Do you know what happens when you have computer programs fine-tuning and re-writing other computer programs? It is going on right now, but these types of programs will be more prevalent and far more mature in the future. I'm a computer programmer, by the way.

Another important trend in the financial markets is that transaction costs are getting smaller all the time. It isn't just competition that is driving this trend, otherwise commission cost would already be just about negligable. It is the communication networks, computer processing efficiency, and database technology between all of the members involved in transactions. Transaction costs are also an optimization problem for everyone involved in the market.

In closing, here are some quotes from Ray's speach that I linked to above:

  • Now, people say you can't predict the future. And for some things that turns out to be true. If you ask me, “Will the stock price of Google be higher or lower three years from now?” that’s hard to predict. What will the next wireless common standard be? WiMAX, G-3, CDMA? That’s hard to predict. But if you ask me, “What will the cost of a MIPS of computing be in 2010?” or, “How much will it cost to sequence a base pair of DNA in 2012?” or, “What will the special and temporal resolution of non-invasive brain scanning be in 2014?,” I can give you a figure and it’s likely to be accurate because we've been making these predictions for several decades based on these models. There’s smooth, exponential growth in the power of these information technologies and computation that goes back a century—very smooth, exponential growth, basically doubling the power of electronics and communication every year. That’s a 50 percent deflation rate.

  • And finally R, which stands for robotics, which is really artificial intelligence at the human level, we'll see that in the late 2020s. By that time this exponential growth of computation will provide computer systems that are more powerful than the human brain. We'll have completed the reverse engineering of the human brain to get the software algorithms, the secrets, the principles of operation of how human intelligence works. A side benefit of that is we'll have greater insight into ourselves, how human intelligence works, how our emotional intelligence works, what human dysfunction is all about.

  • I was told that commencement addresses should have a vision, which I've tried to share with you, and some practical advice. And my practical advice is that creating knowledge is what will be most exciting in life. And in order to create knowledge you have to have passion. So find a challenge that you can be passionate about, and there many of them that are worthwhile. And if you’re passionate about a worthwhile challenge, you can find the ideas to overcome that challenge. Those ideas exist and you can find them. And persistence usually pays off.


At 6:03 PM, Blogger Frank Chiu said...

Nice post. I was just writing an essay about AI a few days ago. That is why i've been a bit passive on the markets. Anyhow, I think AI will not just act, but become intelligent entities in the future. Now, it is interesting to think about these AIs doing all the trading in the financial markets, but i'm sure this will lead to another crash if it does happen since this is somewhat like program trading.

At 7:25 PM, Blogger jontait said...


AI trading the markets actually makes it less likely to crash because each AI is trying to exploit market inefficiencies and take advantage of any and every money making opportunity. When you think about it this way, you see it is very different from the program trading concept from the '80's, which was really just big block basket trades. I don't mean to imply that crashes won't happen because they will, its just that the market will be more efficient (and probably less profitable) in many ways when software money management dominates.

At 7:29 PM, Blogger jontait said...

Another example: how many times have you identified a good trade and by the time comes to put it on, you forget. Won't happen to computers.


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