An excerpt from an email from Graham to the LinnSoft Yahoo Group on 03/29/02

I have been grappling with myself how to give meaningful input to this excellent psychological debate as led by Hayden.

So as to disclosure, as all co-hosts are supposed to do on CNBC, Hayden and I have been in off line communications outside of this group, so we have a good understanding of our trading styles. Whilst Hayden is a day trader, I am a position trader with an average hold of 27 days for my winning longs and 13 days for losing longs. The situation is different with short positions, at 17 and 4 respectively. I offer these stats only to mentally position you as to my trading thought process, and thus my beliefs and use of TI's and strategies.

What Hayden and I however have found in common, is that we both trade a basket of stocks at any one time, further endorsing the concept that after one has fully tested and retested your trading system then one HAS to go fully invested as dictated by your trading system or strategy.

Not to do this, is lacking in discipline and money management, that we all recognize as essential in the conduct of our daily life's. I personally have experience of losing more money on the long side, when the market turns down ,when I have not been fully invested to my trading system and the indicated basket of stocks.

I know that sounds incongruous, and opposite to what one would anticipate, but essentially one has to fight, control, and conquer the fear factor as one is hit in the face with all external factors. We all know them.....market has topped, we are overbought, the market P/E is too rich; the press, the news letters, TV all bombards us with the message. These are psychological hammers that are hitting us to sway and tempt us away from our strategy. (If one wants further proof of this you only have to read Nicolas Darvas book on How I made $2 million in the Stock market.)

No better example was after 09/11, my system was screaming at me to go long as from the end of Sept (having got me out effectively before
09/11) , but I knew "that I knew better" there would be further terrorist attacks, the economy is in the dumpster...... So I initially modified my system to take into account this once in a life time event. WRONG, WRONG.

I thing that it is instructional, for me as well; and I had no intention to start drafting this missive this way, but I haven't talked once about TI's, just money management and the psychological effect on traders. Dr Elder would be very proud of me. When I first read his book,Trading for a Living, some 5 years ago, I really thought that he was some sort of successful but mad head shrink. All his early chapters on psychology of trading, how right we now know he is.

So, Conclusion 1...
Is that money management, emotional management rates 100.

This reminds me of another phrase I must share with you.
I am reading a book by Corelli Barnett, The Verdict of Peace. Barnett has written a quartet of books that covers the rise and fall of the British Empire. The Verdict of Peace covers the period from after the end of WW II and the 50's. For all anglophiles it's a must read, and for all who believe in history. (don't we all with TI's), It's a lesson on how not to do things and how to screw up royally . Another disclosure my birth town was Oxford England.

I quote from his book
" In 1983 the President of the Sony Corporation, Masuru Ibuka was to enunciate in one sentence the strategic principle that had by then enable Sony to win dominance over the world markets in consumer electronics...........................
if the weight of invention or discovery is one, the weight to bring it to actual development should be ten, and the weight to produce and market it should be one hundred. But in the first decade of the post war era the British weighting was virtually the opposite. Here invention won first prize not only because they thought that it was high minded and noble, but also because under the label "science" they were even seen as the key to future national success......." Ha, the Yanks nailed us !!!! As did the Japanese, the Germans, the French. PS. America comes out as a glowing example of how to do things right.

So in this analogy we have established what is 100.
We can also then determine that TI's rate 1.
They are the inventions, the discoveries in our world. They have little or no meaning unless brought successfully to market. As we know there is such a plethora of them, that as pointed out by John, we don't know which ones belong to which Chapter and therefore it is better to design one's own, perhaps inferior TI's so that one knows that they are complimentary. I would fully endorse that.

It therefore only remains for us to develop our TI's into a coherent application strategy that will then rate 10 on Ibuka's scale. Here I have read nothing on this thread, apologies if I have missed something. Are you going the way of the POMS? I can already feel and hear the cry of indignation from my red blooded American readers, that I know represent nearly all the 300 odd subscribers to this Group. Just joking, and in any case you will never find me here in "Deepest Africa" Certainly this is what Hayden's new project is, I would believe. Trying to assimilate all the nuisances of the TI's to fit them into his "application layer"

Now I believe that there is another way, not necessarily better but different. Here I suggest drawing on the dimension of history. We know that we can learn from history, We also know, many individual stocks have their price action genetically lock into their future actions, thus we can with some certainty determine how they may act in future given the recognition of a past historic pattern.

If one then uses this characteristic and multiply it by the basket of tradable stocks concept, one further reinforces the gene approach and therefore mitigate out the risk of the inevitable problem child who has decided for good reasons of his (her?) own to change character.

That is were Backtesting is such a powerful tool, and can be the answer to defining the application layer of your strategy. It helps create the cost effective, ever increasing productive manufacturing, as referred to by Dr Ibuka. What won the WW II? Not Churchill, or the immortalized Spitfire or all the Allied Generals or the soldiers in the front line, and not even the invention of radar. It was the awesome power of American industry that could turn out trucks, bombers, Liberty boats out on a scale and at a cost hitherto unknown.

Conclusions

1. Money management, emotional management rates 100 on the Ibuka scale. It is better to trade a poor strategy well, than a good strategy poorly.
2. There is need to develop a second dimension to ones trading, that I have called the application layer. This rates 10 on Ibuka scale.
3. TI's in themselves rate least important, and one should avoid the use of many and complex TI's that one does not fully understand. Use the KISS concept. Spend time researching what TI's work best for your trading time frame, and then develop them further if necessary or use in a unique manner.

Does this approach work?
It would appear to.
A Position trading system, using the basic concepts above, if used from Jan 2001, going only LONG the market would have produced in excess of 100% return on capital employed. That period, I think you would agree, encompasses about all a market could throw at a long only strategy.

I have written enough, and far more than I intended, but as in all cases, the writing has help clear thought processes that were locked away in my own recesses. Best wishes for the Easter holiday.

gb