Product Creation: Should You Go For A Breakthrough or Improvement?

The entrepreneurial and inventive spirit in you might dream about creating a revolutionary, breakthrough product that changes the world.

However, throughout history, new products or ideas that extend or incrementally improve on current technology have been equally (and perhaps more) important.

I have noticed that there are two types of creative people: Visionaries and Improvers. A Visionary (like Steve Jobs) can create successful products for people that they don't even realize they need. A scientific Visionary like Newton or Einstein can form radically different theories and models of everyday phenomena that are beyond common sense.

Society and, especially creative types, judge innovative success in Visionary terms. We want to change the world with a bang.

However, the Improvers are equally important. They change the world with a whimper. Their creativity lies in a less expansive vision, where they can see one step ahead. To be creative, they need a specific problem or observation that allows them to build on whatever the current state of the art is.

Personally, I'm an Improver. Whenever I focus on improving something that is existing, I am able to harness my creative juices and get absorbed in creating. If I try to create something totally revolutionary or involved, I get bogged down and lose steam - I lose any excitement or creative juice.

The problem is when I get down on myself because I think I need to create something big.

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Successful Investing Is About Finding A Simple Strategy That Works

My experience has been that successful investing is about finding a simple strategy that works, and then having the patience and discipline to stick with it - even when it is not performing in the short term.

Over short periods of time, randomness has a bigger influence. A lot of investors get impatient, and they then abandon the system and switch to trying something else.

With hedge funds and mutual funds, a lot of it is about needing good short term results to attract new money, so they keep trying complicated stuff to avoid any down performances - this helps keep them from getting good long-term results.

On this blog, I did write about a book called "The Hedge Fund Mirage", which is critical of that whole industry:

http://simple-trading-system.blogspot.com/2012/02/who-really-benefits-from-hedge-funds.html

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Stock Charting Flaws: Why Using Charts To Trade Does Not Work

Many traders use charts of past prices to trade stocks. They feel that, if the chart makes certain patterns, it can predict what the stock is likely to do in the near future.

One of the problems with chart reading is that pattern recognition is fairly subjective (the human brain likes to organize random data into pictures). One trader may see a pattern where another one doesn't. This makes charting-based trading systems hard to test.

However, studies that have been done using objective definitions of patterns consistently detect no trading advantage. They show that trading on chart patterns are equivalent to buying randomly.

I think that another flaw of chart based systems, which nobody really talks about, is scaling. Chart scaling, in my opinion, is the reason that patterns looks so seductive and accurate in hindsight.

Traders develop patterns by studying charts of big moves that have already occurred. They frequently "see" consolidations and patterns before the big moves.

For example, one pattern is called sideways consolidation - where the market trades almost horizontally in a narrow range. Then, prices eventually "breakout" and make a big up or down move.

The problem is that, after a market's range has expanded, the scaling of the chart changes as well. This scale change smooths out the movements that occurred prior to the big move, and creates the sideways consolidation. Prior to the big move, traders would not have seen the sideways consolidation, because the chart scale would have been different.

Let's assume that the market moved in a range between 10 and 20 for 6 months. The chart would be scaled from 10 to 20, and the chart will show lots of peaks and valleys. After the market moves to 85, the chart now reflects a range from 10 to 85. This compresses the peaks and valleys between 10 and 20. The result is that the 6 months before the move looks like a sideways consolidation pattern.

Unfortunately, you can't trade on patterns that occur after the move.

This is why my trading system does not use charts - only prices. Numbers are objective, and not open to interpretation. I only use charts to find prices for stocks I want to back test using my spreadsheet.

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Do Billionaires Have To Give Charity to Help Mankind?

People who think in terms of scarcity want billionaires to "justify" themselves by donating to traditional causes. With an abundance mentality, you realize that the wealthy help mankind no matter what they do with their money.

1. Let's say they buy luxury goods, like a Rolls Royce. Their money is then supporting jobs. The money is flowing to the dealership, salesman, service techs, etc. They, in turn spend money on themselves and their families, etc. So, if a billionaire doesn't give to charity himself, there is a good chance people downstream of his spending will donate.

2. If, instead, the wealthy save/invest the money, then it is used to invest in companies and businesses, creating jobs.

3. Even if they burned their money in a big bonfire, it would help mankind, because it would raise the value of all remaining dollars relative to goods (less supply of dollars).

The only thing that wealthy people can hurt are certain geographic areas, when they take their money elsewhere. For example, a corrupt African dictator gets his wealth locally, but then doesn't re-spend it locally - instead he sends it abroad. His country will have a net loss.

Even in this example, however, on a global scale, the money is not wasted. The dictator's money will help people somewhere in the world by getting invested or flowing through luxury good purchases. Maybe some of the people benefiting from his spending - such as a Ferrari dealer in France - might even donate money back to the dictator's country (not that this makes up for what he took, of course).

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Stock Trading vs. Football

When I was younger, and played the early versions of electronic football, I almost always went on fourth down - even from my own side of the field. I wanted to score quickly and often, and rack up points. What usually happened, however, was that I was stopped and ended up losing the game because the opponent always had better field position.

Now, being older and wiser, I always root for the Bears (my hometown team from Chicago) to play safe and conservatively. I would never think about going on fourth down unless it was late in the game and my team was behind. Also, when my team is looking at long 3rd downs (such as 3rd and 15), I don't automatically expect them to try a long pass. I'm ok with them gaining a little yardage, punting it away, and waiting until the next possession.

Similarly, you have to be patent when stock trading. When I was younger, I wanted to see success right away. I ended up losing a lot because I day traded and used futures, options, and margin trading to leverage my way to success.

My profits went up (and my stress down) when I stopped trying to make quick profits. Instead, like football, I started playing safely and conservatively.

Since day trading left me stressed with no edge, I switched to long term trading, which I found suited my personality much better. I also stopped using margin, futures, and options because they masked my edge. They left me dependent on short term luck to avoid margin calls.

I realized that one of the reasons I was impatient to day trade and make profits was that I didn't trust longer term trading systems. So, I took a few years off trading and did nothing but system design and testing until I proved to myself that my long term trading system had an edge.

I designed the system to suit my personality and needs. I then became passionate and excited about trading my system and knew that I would make money over the long term - even if I could not see profits in the short term.

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Does "American Airlines" Need To Terminate Its Pensions in Bankruptcy?

American Airlines' parent company AMR corp, which is currently in bankruptcy, wants to eliminate its four pension plans, which it says is a "multibillion dollar liability on its balance sheet".

The Pension Benefit Guaranty Corp. disagrees, and says that American can emerge from bankruptcy without terminating its pensions.

They say that American still has $3 billion in cash and Delta, which has higher pension costs, is currently profitable. Also, Continental did not have to terminate any of its pensions during its bankruptcy.

The Pension Benefit Guaranty is the federal agency that takes over pensions when the original companies can no longer run them. Instead of tax money, they are funded by premiums paid by companies with pension plans.

However, the premiums that Congress allows them to charge aren't enough, and they are currently running a $26 billion deficit which, according to a "Chicago Tribune" article, would become $35 billion if they took over AMR's pensions.

Because of this deficit, they would only be able to pay each American Airline pensioner up to $54,000/year. This would short change some retirees, such as pilots.

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Kindle Version Of "Stock Trading Riches" Reaches Top 100 Business and Investing Best Seller List

Today, the kindle version of my book Stock Trading Riches reached the top 100 on the Kindle Business and Investing best seller list.

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