Yes, that's right, you read it correctly, almonds.

By now, many of you have figured out that I like calling my paid subscribers to find out how they find the service. I always ask for suggestions for improvements. Then I ask what they do besides trade the markets.

I get an amazing array of answers. One reader flew helicopters in Alaska to inspect oil pipelines, executing trades on his cell phone in between flights. Another ran a Russian hedge fund in Moscow.

The sheep farmer in Australia relied on me as his connection with the rest of the world. The family office in Spain valued my American view of the world.

Then I called a subscriber in Modesto, Calif., who said he was in the almond business.

My interest piqued, so I proceeded to grill him. And with that, I obtained a fascinating insight into an obscure corner of the global economy.

If you thought marijuana, estimated by the Drug Enforcement Administration to be at $6 billion a year, was California's largest cash crop, you'd be wrong.

Grapes used to be our largest legal crop, at $5 billion a year. But almonds will beat all this year, possibly reaching as high at $8 billion.

You can blame the six-year California drought, which was then followed by a year of flooding of biblical proportions.

This has driven the price of almonds from $1/pound a few years ago to as much as $4/pound today.

The price spike has ignited fierce water wars across the state, with increasingly desperate farmers battling over an ever-diminishing commodity.

Those located in the eastern half of the Central Valley (which you will remember from your freshman English class in The Grapes of Wrath) are sitting pretty.

They have long-term contracts to buy water from federal public works projects at subsidized prices that date back to the Great Depression.

These rights can make or break the value of a farm, and are passed down from one generation to the next.

The eastern half of the valley is another story. When construction of Interstate 5 was completed in 1979, most of it was still barren desert, a rain shadow effect of the state's coastal mountain range.

Only the oil industry was there in force, especially around the Elk Hills oil find (watch the Daniel Day Lewis movie, There Will Be Blood). I know because my grandfather worked there for Standard Oil during the 1920s.

So when large-scale farming developed there during the 80s, they had to buy water on the spot market.

The problem is that during a drought, there is very little water for sale. So parched farmers have turned to drilling to irrigate their fields.

This has led to an even bigger headache. In the 19^th century, you could drill 100 feet and find all the water you wanted.

Today, they have to go as deep as 1,200 feet, and even these ancient deep aquifers are drying up. And that's assuming you have the $1 million it costs to drill such a well.

Indeed, the elevation of the Central Valley has fallen by 10 feet over the past century because of the underground water that has been withdrawn so far.

Destruction of rural buildings through catastrophic subsidence is becoming widespread.

The only alternative is to let your crops die. You see this in abundance while making the drive from San Francisco to Los Angeles, withered trees frozen in tortured and grotesque death throes.

Also plentiful are irate billboards attacking the government for depriving local farmers of their cheap water.

Even if you have plenty of water, it is still not smooth sailing in the almond business these days.

China is the world's largest buyer of almonds. The demand there has been so great that the Chinese have become major buyers of almond farms throughout the state, at premium prices.

However, the Middle Kingdom's recent anticorruption campaign is starting to take a big bite out of sales.

In years past, individuals would buy dozens of boxes of almond cookies to pass out to friends, customers, employers, government officials and regulators during the Lunar New Year celebrations.

Not so today. The difference has led to the cancellation of a few shiploads of the prized nuts.

My friend kindly invited me to tour his roasting and packaging facilities the next time I was in the neighborhood.

I was left thinking, this really is a global economy that is so integrated that, when a butterfly flaps its wings in Brazil, it causes a typhoon in Japan.

It also is a great example of how information about one asset class can provide insights about all the others.

With that, I opened a fresh bag of healthy unprocessed Nut Up almonds that I picked up at Save Mart and grabbed a fresh handful. I hear they're going to sponsor a NASCAR driver soon to bring healthy food to the hinterlands.

Another Batch for China

To the dozens of subscribers in Afghanistan and the surrounding ships at sea, thank you for your service!

I think it is very wise to use your free time to read my letter and learn about financial markets in preparation for an entry into the financial services when you muster out.

Nobody is going to call you a baby killer and shun you, as they did when I returned from Southeast Asia four decades ago. In fact, employers have been given fantastic tax breaks and other incentives to hire you.

I have but one request. No more subscriptions with .mil addresses, please. The Defense Department, the CIA, the NSA, Homeland Security, and the FBI do not look kindly on private newsletters entering the military network, even the investment kind.

If you think civilian spam filters are tough, watch out for the military kind! And no, I promise that there are no secret messages embedded with stock tips. "BUY" really does mean "BUY." "Sel" means "Sell" too.

If I did not know the higher ups at these agencies, as well as the Joint Chiefs of Staff, I might be bouncing off the walls in a cell at Guantanamo by now wearing an orange jumpsuit.

It also helps that many of the mid-level officers at these organizations have made a fortune with their meager government retirement funds following my advice. All I can say is that if the Baghdad Stock Exchange ever becomes liquid, I'm going to own it.

Where would you guess the greatest concentration of readers of The Diary of a Mad Hedge Fund Trader is found? New York? Nope. London? Wrong. Chicago? Not even close. Try a ten-mile radius centered around Langley, Virginia, by a large margin.

The funny thing is, half of the subscribing names coming in are Russian. I haven't quite figured that one out yet. Did we hire the entire KGB at the end of the cold war? If we did, it was a great move. Those guys were good. That includes you, Yuri.

So keep up the good work, and fight the good fight. But please, only subscribe to my letter with personal Gmail, Yahoo, or Hotmail addresses. That way my life can become a lot more boring.

Oh, and by the way, Langley, you're behind on your bill. Please pay up, pronto, and I don't want to hear whining about any damn budget cuts!

I Want My Mad Hedge Fund Trader!

Passing through Dallas, Texas on the way to my Strategy luncheon, I couldn't help but remember the assassination of president John F. Kennedy, on November 22, 1963, over 50 years ago.

The tragedy offers valuable lessons for today's traders, although we have to travel a circuitous route to get there.

It was one of those epochal events, where people remember exactly what they were doing when they heard the news, like the 1942 Japanese attack on Pearl Harbor, and the 9/11 attacks on the World Trade Center.

During the middle of my 5^th grade class there was a school wide announcement that the president had been shot while campaigning in Dallas, Texas, but was still alive. Hours later, we were told he was dead. The teachers started crying, and we were all sent home.

For the rest of the week, we were transfixed by the tumultuous events on our black and white, rabbit eared television sets. Lyndon Johnson was sworn in as president on Air Force One. Lee Harvey Oswald was arrested. Then nightclub owner Jack Ruby shot him in a Dallas jail.

It was all so surreal, witnessing history unfold before you. I remember that my dad told me this all might be a prelude to a military coup d' etat, or a Soviet nuclear attack, and that we should be prepared for the worst.

Our stockpile of canned food to feed our family of nine from the previous year's Cuban Missile Crisis was still in its cases. So were the boxes of ammunition. Those were scary times.

It seemed like the country went to pieces after that. The Vietnam War ramped up, igniting huge national demonstrations. Some 60,000 of our guys died, including three from my high school graduating class.

Race riots followed, setting cities on fire. I got caught in the ones in Los Angeles and Detroit. Then came the Oil Crisis, Watergate, and the Iran Hostage Crisis.

Things didn't get back to normal until the 1980's, and guess what? The stock market started going up, and I got into the hedge fund business.

The Kennedy assassination sparked an entire industry of conspiracy theorists, armchair historians, and assorted nut jobs, whose mission was to debunk the conclusions of the Warren Report.

Thousands of books were published, and even more lectures delivered. It inspired us all to distrust our government.

After all, we were told that Oswald made an impossible shot, and only a "magic bullet" could achieve what the report claimed. Witnesses died like flies, against all actuarial probability. The old Italian rifle he used to commit the crime was impossibly flawed.

I tended to believe the version that was taught in California state textbooks as late as the 1990s, that Kennedy was the victim of either a CIA, Mafia, or Cuban plot. The Hollywood director, Oliver Stone, fanned the flames with his 1991 film, JFK.

Then one day during the late eighties, while visiting big oil clients for Morgan Stanley, I found myself with a couple of free hours to kill in Dallas, Texas. I took a taxi to the Texas School Book Depository on Elm Street, now a museum.

It was a weekday, and I was the only visitor. So I took the elevator up to the 6^th floor. There, at a corner window, cases of books were set up exactly as Oswald had placed them on that fateful day.

I looked around, saw no one else, and then deftly stepped over the rope that barred public access.

It turned out that I shared some personal history with Lee Harvey Oswald. We had both been in the Marine Corps, and obtained a marksman's rating, which earned you a few extra dollars a month.

He had also been stationed in Japan a few years before, at a base I knew well. So I had always been curious about Oswald's incredible shot.

I sat down in the exact spot that Oswald had and watched the traffic below. At 62 feet away, the cars were moving at 8 miles per hours, the same speed as the Kennedy motorcade. Then it hit me.

This was not an impossible shot. This was not even a hard shot. I could make this shot. In fact, half the Marines who went through basic training at Camp Pendleton could have made this shot on a bad day with a stiff wind.

It was a revelation.

It meant that the Warren Report was right. Oswald was the single shooter. It meant that all of the conspiracy theories I had heard about over the decades were lies.

Not only that, I also realized then that all conspiracy theories about everything were untrue, usually manufactured by people with ulterior motives, almost always driven by the desire to make money. The level of cooperation required between large numbers of people is far too improbable.

After that, theories about the Kennedy assassination started to unravel. During the 1990s, the investigative TV program, 60 minutes, got several professional marksmen to easily replicate Oswald's feat of getting off three shots with the same antiquated bolt action rifle in less than three seconds.

After a deal with congress in 1992, the government released 5 million pages of evidence on which the Warren Report conclusion was based, which had previously been secret (click here for the National Archives link).

We obtained hours of classified testimony from Marina Oswald, Lee Harvey's Russian wife, about how troubled the man was.

We discovered that a dozen people saw a man with a rifle in the window of the Book Depository minutes before Kennedy was due to pass by. They screamed at the police to intervene, but none could hear them over the noise.

The fourth shot from the "grassy knoll" recorded over a police radio with a broken microphone button turned out to be an echo off a building.

The FBI was aware that Oswald had taken a shot at the home of an army general only months before. A memo warning the Secret Service of the threat was found crumpled up in a Dallas agent's desk drawer.

The Kennedy assassination has become a favorite topic of modern risk analysts who advise hedge funds. The Secret Service was well aware of many assassination risks for the liberal, democratic president from Boston from a wide assortment of right wing fanatics in the Deep South, and they chased down many of them.

No one imagined that the actual attempt would come from the left, and they were blindsided. It is a valuable lesson that we trade and invest by today.

Finally, it was all put together is a 2007 book by Vincent Bugliosi, Reclaiming History: The Assassination of President John F. Kennedy.

I had the misfortune of working with Bugliosi while he was prosecuting cult mass murderer, Charles Manson (while working for the Los Angeles County Coroner, I had dug up some of his victims in the California desert, one with a missing head). I always found him a show boater and a tireless self-promoter.

However, in the book, Bugliosi does a masterful job of weaving together declassified evidence, testimony from missing witnesses, and the contribution of modern technology.

His conclusion: the Warren Report was dead right. As deranged as Oswald was, there was one thing he could do well, and that was to shoot straight. He then proceeds to expertly demolish every conspiracy theory out there, and uncover their promoters as the profit driven charlatans that they are.

Oliver Stone was a better storyteller than a historian.

It turns out that being perennially disbelieving of conspiracy theories is quite a useful philosophy to have as a trader. We are often asked by the media to believe in the conspiracies that underpin certain investment theses. Bet against them, and you'll win every time.

If we don't fight them in El Salvador, then we'll be fighting them in the streets of Los Angeles. Russia wants to take over the world, and when they finish their work in the Ukraine, we are next.

We have to invade Iraq because Saddam Hussein is imminently going to use his weapons of mass destruction against us. And don't get me started on the Ebola Virus.

When gold hit $1,900 an ounce six years ago, I heard that the bars inside Fort Knox were made of lead and painted gold. When this was discovered, the price of the barbarous relic was supposed to soar to $50,000 an ounce. I sold gold short.

After Barack Obama was elected president in 2008, the Internet abounded with assumptions of a vast left wing conspiracy that pegged our new president as a socialist, was born in Kenya, was going to destroy corporate America, and take away all of our guns.

Those who bought the story sold all their stocks because the market bottom, unloaded their homes, and ditched all their bonds because the US government was going to default on its debt, ignite hyperinflation, and collapse the dollar. The advice was to put all your money into gold.

I didn't believe any of this for a second, and did the exact opposite of what the Armageddon crowd was urging on to followers.

I bought stocks, ultra high yielding junk bonds, MLP's, REITS, and every other risk asset out there while avoiding gold like the plague. I sold short the Japanese yen and the Euro against the US dollar. So did my subscribers. You know the rest of the story. Some of my picks rose tenfold.

I met Senator Ted Kennedy when he was running for president in 1982, and have kept in touch with his staff ever since. They told me he hit the deck whenever he heard a loud noise, be it a firecracker, a backfiring car, or even a slammed door. He lived a lifetime in constant fear of assassination.

Some scars never heal.

On my next trip to Tokyo I will be spending some time at the magnificent, white stucco edifice that has been the residence of US ambassadors there for nearly 100 years.

I will also give a briefing to our ex ambassador, Caroline Kennedy, the daughter of the late president, who served as the 29^th United States ambassador to Japan until January, 2017.

The National Archives will release the last of its files on the assassination 70 year after the event, on November 22, 2033.

I hope to live that long, for by then I'll be nearly 82. Then for me, the Kennedy story will come full circle.

Taking the Story Full Circle

How many mutual funds would you guess outperformed the stock market since the bull run started almost nine years ago?

If you guessed 1,000, 100 or even 10, you would be dead wrong and even off by miles. In actual fact, not a single mutual fund has beaten the market since 2009.

Remember all those expensive, slickly produced TV ads boasting market beating ratings and top quartiles?

You know, the ones that show an incredibly good looking, but aging couple walking hand in hand into the sunset on a deserted beach?

They are all just so much bunk. The funds mentioned rarely quote performance beyond one or two years.

Like my college math professor used to tell me, "Statistics are like a bikini bathing suit. What they reveal is fascinating, but what they conceal is essential."

Recently, the New York Times studied the performance of 2,862 actively managed domestic stock mutual funds since 2009. It carried out a simple quantitative analysis, looking at how many managers stayed in the top performance quartile every year.

Their final conclusion: zero.

It gets worse.

It is very rare for a manager to stay in the top quartile for more than one year. All too often, last year's hero is this year's goat.

The harsh lesson here is that investing with your foot on the gas pedal and your eyes on the rear view mirror is certain to get you into a fatal crash.

The Times did uncover two funds that stayed at the top for an impressive five years. They turned out to be small cap energy funds that took inordinate amounts of risk to achieve these numbers and have since lost money.

The reasons for the woeful under performance are legion. Management fees are sky high and grasping. Hidden costs are everywhere. Read the fine print in the prospectus, as I do, and you would be shocked, truly shocked.

Real talent is in short supply in the mutual fund industry, with all the real brains decamping to start their own 2%/20% hedge funds. The inside joke among hedge fund managers is that employment at a mutual fund is proof positive that you are a lousy manager.

Let's go back to those glitzy TV ads, which cost millions to produce. If you are a mutual fund investor you are paying for all of those too. They are made at the expense of a lower return on investment on your money.

And those sexy performance numbers? They benefit from a huge survivor bias. As soon as fund performance starts to tank, the managers close it, lest it pollute the numbers of other funds in the same family.

The number of funds with good, honest 20-year records can almost be counted on one hand.

Now let me depress you even more.

An industry performance this poor under performs random chance. That means chimpanzees throwing darts at the stock pages of the Wall Street Journal would generate a higher investment return than the entire mutual fund industry combined.

So much for all of those Harvard MBAs!

Are you ready to throw your empty beer can at the TV set yet?

If you think all of this stuff should be illegal, you are probably right. But since you watch TV, then you have probably been trained like a barking seal to oppose the regulation that would reign these people in.

This is what the attempt to kill the Dodd-Frank financial regulation bill was all about. The mutual fund industry complains bitterly that they are over regulated and spend millions on lobbyists to get themselves off the hook. By the way, these expenses also come out of your fund performance.

These are all reasons why the Mad Hedge Fund Trader is able to generate such high performance numbers year in and year out.

I am not charging you with any of my overhead. I am not jacking up your commissions. Nor am I selling your order flow to high frequency traders for a tidy sum so they can front run you.

Being a small operation, I'll tell you what I don't have. I lack an investment banking department telling me I have to recommend a stock so we can get the management of their next stock issue or a sweet M&A deal.

I am absent a trading desk telling me I have to move this block of stock before the prices drop and my bonus gets cut.

And I am completely missing a boss screaming at me that if I don't get my orders up, my wife would have to become a prostitute to support our family (yes, some asshole sales manager actually told me that once. I later heard he died of a heart attack).

You just need to pay me a low, flat, annual fee, and I'm done. I don't need any more. It's up to you to search out the best deal you can get on executions.

Don't even think about trying to give me your money to manage. I don't want it.

This is why the overwhelming bulk of investors are better off investing in the cheapest Vanguard index fund they can find, diversifying holdings among a small number of major asset classes, and then rebalancing once a year (click here for my "Buy and Forget Portfolio").

Welcome to the brave new world.

But We're In the Top Quartile!