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Tharp's Thoughts Weekly Newsletter

May 15, 2008 — Issue #372  
  
Trading Education

Van's Two Core Home Study Programs

Article

My Trip to Vietnam by Van K. Tharp, PhD

Coming Soon

Van Presenting in Munich, Germany This Summer!

Trading Tip

The Nobel Laureate and the Rice Trader – Psychology’s Role in Trading Strategies Part V by D.R. Barton

Trading Education

Van Tharp's

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Who should study this program? Anyone who wants to develop their own trading system or anyone who wants a better understanding of how to make more profits trading any market under any conditions. 
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Feature

Tharp’s Thoughts

My Trip to Vietnam

by
Van K. Tharp

 

I graduated from college in April 1968, right in the middle of the Vietnam War. Although I’d planned to go to graduate school, I soon found myself in the U.S. Army, stationed in the Canal Zone. I didn’t make it to Vietnam, and every fiber of my being wanted to avoid going there. I finished my tour in the army in 1970, very glad that I’d never made it to Vietnam. The war ended in 1975 with “reunification” as the Vietnamese called it about the time I finished graduate school. Over the years, as Vietnam became less and less hostile, I’d hear of people visiting Vietnam, but somehow I couldn’t imagine myself going there. It was still a communist country, and I had avoided visiting Vietnam for many, many years. So now it was time to face my demon. 

I was doing two workshops in Australia in March 2008 and those workshops were two weeks apart because of the Easter weekend. I’ve been to Australia about five times and have visited much of Australia, so I decided that this time I’d do something much more interesting: take my first trip to Vietnam. 

Vietnam is not an easy place to visit. It takes at least a week to get a visa to visit there. It’s also impossible to book a hotel directly through the Internet. When you decide where you want to stay and the price you want to pay, you are told to wait. About two days later, an email comes back quoting you a rate about 30% more. However, I was lucky. One of the workshop attendees in Singapore had lived in Vietnam, and he had a contact, Tuan, who assisted me in booking my hotel. As a result, I was able to book a suite in a hotel in central Ho Chi Minh City for $125 per night. The hotel was great, except that the suite had a huge bed where I should have had my living room. 

It was about 8 PM at night when I first approached the shore of Vietnam. I could see the lights of little boats in the ocean near the land. As we approached land, I suddenly felt an immense fear come over me. I was finally going to the country I’d wanted to avoid for so many years. I practiced some feeling release techniques and welcomed the fear and in a few minutes it was gone. Nevertheless, I was still a little concerned with what was ahead of me. I needn’t have been. The trip was delightful, and it was the only place I’d visited on my trip where the dollar had much value. 

The U.S. dollar is worth about 15,700 Vietnamese Dong, so my $100 gave me 1.6 million of the local currency. In addition, the Vietnamese often quote prices in U.S. dollars and make the assumption that 15,000 Dong equals a dollar, so there is a real advantage to having the local currency. One of my guides told me that the average Vietnamese in the country makes about $50 per month. That’s less than $2 per day. I was also told that the average city dweller makes about $300 per month or about $10 per day, which was valuable information in determining what real prices should be. 

For example, the cab from the airport cost me about $8. However, the meter read 76,000 dong or about $5. The first cab driver quoted me $15. And when I said, “No,” he started telling me all the nice women he would introduce me to – quite a common occurrence. 

The city is full of motorcycles – over 3 million of them. Most of them are made in China and cost about $500. And the motorcycles tend to not stop. They merge through each other at intersections. And as a pedestrian, you have to learn to allow them to merge around you. It’s not very safe, but it’s the only way you can get across a big street. And I saw small motorbikes carry up to a family of five. Apparently, it’s only a recent thing as well… most of the motorbikes have appeared over the last 3 or 4 years as Vietnam has become a little more prosperous. 

Near the center of the city were some major 5 star hotels ($400+ per night) and some luxury shopping. It’s really interesting to see a genuine Gucci store and the end of a street where you can easily buy fake Gucci watches or wallets. Vietnam apparently signed a treaty with the U.S. in which it agreed to protect copyrights in exchange for trade. However, they don’t do a very good job of that. Even top stores have DVD stalls where you can buy movies that are still in the theatres in the U.S. for about 12,000 dong and complete TV series (not just one season but all seasons) for about 150,000 dong. That’s not much copyright protection. I also saw $500 software programs selling for $1, but not for foreigners.

My second day there, I had breakfast with the man who helped me get a room. He picked me up on his Vespa motor scooter and I got to hang on for my life as we rode all over the city. My friend was about 10 years old when reunification happened. He said that all his parents' savings were confiscated by the government, but he was fortunate in that they valued education and didn’t force him to work as a child. It’s paid off for him now that Vietnam is entering more of a free enterprise period. 

During my week long stay, I managed two day trips. One of them was to the famous tunnels that the Vietnamese used to fight off the Imperialist American aggressors (as the brochure they gave me read). I couldn’t fit through the small hole that was a hidden entrance to one of them. Another one, however, had a big staircase going down for big tourists like me. But once I was in the tunnel, I had to crawl on all fours while my guide merely stooped down slightly. Between that and seeing all of the traps that they’d developed to fight the Americans, I was glad that I was visiting Vietnam now and not 40 years ago. 

I also managed a day trip to the Meekong Delta to get a taste of country life in Vietnam. Each of my day trips cost me about $100. For that, I got an air conditioned car, a driver, and an English speaking guide – all for me. Apparently, you can get a car and driver to take you to Hanoi for about $50. However, you pay the gas and the driver drives without stopping to sleep – two days and one night – so he’s not very safe by the time you arrive. 

I find it interesting that Vietnamese consider themselves to be one big family. I think that is why the country, despite its low standard of living, is quite safe for tourists. I walked around a lot by myself. And it was quite different from Brazil, where they’d warn me about the dangers of going out on my own and of going to the wrong neighborhoods. I felt perfectly okay going anywhere on foot by myself. 

Yes, I was taken advantage of twice. For example, one person with a trishaw followed me around the city wanting me to take a ride. I kept saying “No,” but I also continued to talk to him and that kept him following me. Eventually, he quoted me 30,000 dong to take me around the city and show me things. That was only $2, so I agreed. However, when I got off he said it was 800,000 dong. I said that was insane, but he was insistent that that’s what I owed him. I eventually gave him 300,000 or a little under $20. Remember that my cab fare from the airport was only $8. I had two incidents like this that cost me about $20 – but what makes me laugh is that it was only $20. And for each of those there were twice as many incidents of people being very honest. For example, I liked some little purses that something I’d bought came with and wanted to get 5 more. The woman just gave them to me and didn’t want to charge me anything. As a result, I just bought another $20 item from her because she wouldn’t accept any more. 

Anyway, I thoroughly enjoyed myself in Vietnam and I highly recommend it as a place to visit. In another article, I’ll talk about what’s going on economically in Vietnam. I don’t think there is much profit opportunity for a while, but who knows.

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling book Trade Your Way to Financial Freedom and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com.

 

Coming Soon

Van Tharp Is Presenting in Munich, Germany this August!

Book now to ensure your seat at the workshops

Blue Print for Trading Success August  4-6 Germany
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Trading Tip

The Nobel Laureate and the Rice Trader – 
Psychology’s Role in Trading Strategies Part V

by
D.R. Barton

My son Josh is playing in a fantasy baseball league with his friends from school. The whole concept of fantasy sports is an interesting one. People get to be general managers of teams (baseball, football, basketball, etc.). Their teams score points based on the statistics that their players generate during the week. It’s truly a numbers game; it doesn’t matter if a player’s team wins or loses. As long as they put up good numbers, a fantasy owner is happy.

This mindset can creep into the thoughts of markets participants as well.

Many traders and investors are in love with the numbers. Winning percentages, expectancies, moving averages, stochastics, P/E ratios, you name it. This love of numbers can verge on the obsessive. At the extremes, people can become like fantasy sports participants and get so obsessed with the numbers that they miss the big picture – profitable trading.

I started this series on Nobel Prize winner Daniel Kahneman and famous rice trader Munehisa Homma because they both wrote that the numbers are important in decision making, but our thought process, psychology and decision making shortcuts are much more important!

In a way, Kahneman put some quantitative experimentation behind the trading psychology espoused by Homma. A couple of weeks ago we talked conceptually about three decision making shortcuts that get traders and investors into trouble. Today, let’s do some quantitative exercises that shed some light on these decision making inefficiencies.

Three Shortcuts That We Shouldn’t Take

• We hate losses more than we love wins. Dr. Kahneman found that people overreact just to avoid losses. As traders and investors, we tend to do the same thing. Traders are drawn to systems and strategies that have high winning percentages when there are other issues that are equally important. Try this question:

Would you rather have a strategy that wins 60 percent of the time or one that wins 40 percent of time? Think about this one for a second or two before you respond. The answer is at the bottom of the article.

• We love certainty and avoid uncertainty. People will make irrational choices to avoid an uncertain outcome. This phenomenon helps to keep insurance premiums and extended warranty prices high. As traders and investors, we also pay for lots of “extras” in an effort to reduce uncertainty. We pay for extra data, new systems, indicators and research and real time news feeds all in an effort to reduce our uncertainty about the markets. Approach uncertainty as a normal part of your trading business and as something you can understand (at least in terms of percentages). If you approach each trade as a decision with a certain percentage chance of succeeding, you will be much more likely to quickly take the trade and much less likely to overreact if the trades goes against you. How do you handle uncertainty? Choose between these trading strategies:

Would you rather have 60% winners with losers twice as big as the winners OR 40% winners with the winners twice as big as the losers? Once again an explanation is found at the bottom of the article.

• We draw big conclusions from a small number of examples. Traders and investors tend to concentrate on a few big ideas instead of looking at multiple opportunities for profits. The number of opportunities a strategy offers us is as important as its winning percentage or the size of its winners. Once again, pick one of the following strategies:

o Strategy A: 75% winners, winners twice as big as losers, trades once a month.

o Strategy B: 50% winners, winners twice as big as losers, trades once per week.

Answers are found at the bottom of the article.

Understanding the numbers can help us to overcome trading by emotion and can keep us from using ineffective decision making shortcuts. BUT – understanding our personal psychology and the mass psychology that drives the markets is even more important (this is another of the big edges that Homma employed).

I still haven’t found a copy (in English) of Homma-san’s book The Fountain of Gold - The Three Monkey Record of Money, so if anyone has any leads, I’d greatly appreciate an e-mail sent to drbarton “at” iitm.com (replace the “at” with the symbol).

Until next week…

Great Trading!

D. R.

Here are answers and explanations for the questions posed above:

Q: Would you rather have a strategy that wins 60 percent of the time or one that wins 40 percent of time? 

A: The best answer is that we don’t have enough information to make this choice! However, many people jump into a trading strategy just because “it wins a lot.” As we’ll see in our other answers, to evaluate the strategy, you also need to know how big the average winner and average losers are and how often it trades.

Q: Would you rather have 60% winners with losers twice as big as the winners OR 40% winners with the winners twice as big as the losers?

A: The system that wins 60% of the time actually loses money over time, because the winners are only half as big as the winners! Here’s the math:

(0.6 x 1.0) – (0.4 x 2.0) =  –0.20 
You lose twenty cents for every dollar you risk.

The system with 40% winners makes money of the long haul:

(0.4 x 2.0) – (0.6 x 1.0) = + 0.20 
You make twenty cents for every dollar your risk.

Q: Pick one of the following strategies: 

Strategy A: 75% winners, winners twice as big as losers, trades once a month.

Strategy B: 50% winners, winners twice as big as losers, trades once per week.

A: Both strategies make money, but even though Strategy B makes less per trade, it makes more per year. The math for one year of trading goes like this:

((0.75 x 2.0) – (0.25 x 1.0)) x 12 trades per year = 15.0
You make 15 times your average risk amount for the year.

((0. 5 x 2.0) – (0.5 x 1.0)) x 52 trades per year = 26.0
You make 26 times your average risk amount for the year.

About D.R. Barton:  A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena.  He is a regularly featured guest on both Report on Business TV,  and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio.  His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  “drbarton” at “iitm.com”. 

 

Melita's Inspirational Corner

Melita has been in the hospital. Her spirits are still good and she hopes to soon feel well enough to update her blog. Check her progress at the address below.  

Melita Hunt is the CEO of the Van Tharp Institute. If you would like to keep up with Melita’s progress regarding her recently diagnosed lung cancer (she is a never-smoker). Please feel free to read her blog at www.myleftlung.com. You can contact Melita at mel@iitm.com

 

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