RichardGibbons

Where they worked voluntarily. ... as it was their only alternative to starving to death in the streets in a cold, capitalist world where they lost the genetic lottery. (No idea if this is true or not. I just like "build the sentence" games.)

Yeah, I imagine I'd hedge at $1=$2 CAD, just because of the reversion to the mean argument. (Or, if you want to put it another way, I suspect it would give you an extra volatility-adjusted return, the same way that periodically rebalancing a diversified portfolio provides a volatility-adjusted return.) I guess the other option is to learn how to value a currency. I haven't done that yet, but I suspect that you can do it a "roughly right" sort of way.

The challenge I have for this sort of a hedge is that I don't have a good mental model for currency valuations. It's easy to say "The Canadian dollar was at par, and now it's at 77c, so I should hedge the US dollar." But then, if instead, the Canadian dollar had gone from 63c to 77c in the same sort of environment, would I now be saying "The Canadian dollar was at 63c, and now is at 77c, so I should hedge the Canada dollar"? What's more, I kind of have a feeling that when the two biggest Canadian real estate markets blow up, it will be bad for the economy, and the Bank of Canada might ease more, which I would think would send the dollar down more. But I don't have a good model for that, so maybe that's no better than the faux technical analysis model of where the dollar has been. Thus, without a good model for currencies, grounded in math and reasoning, I sit here and suck my thumb.

Ah, I see. You think that the best benchmark for a mostly-bonds portfolio is the S&P 500. Or maybe that the float for an insurance operation should be 100% invested in equities. Either way, I think I understand how you reached your conclusion. Thanks!

Interesting comment... Why do you think the 15 year numbers in the last Chairman's letters aren't good enough? (11.6% for Fairfax hedged equities vs. 4.2% for the S&P 500; 11.5% for Fairfax's bonds vs. 6.1% for the Merrill 1-10 Year bond index) You don't see 15 years as a long enough time period? Do you think they're excluding some major investing losses from these numbers? Using the wrong comparables? You don't think it's good enough beating the indices by 5-7 percentage points? I assume financial engineering wouldn't touch these numbers, but am I wrong about that? I'm curious where you're coming from here. "One of the most overrated investors of all time" is such a strong claim that I figure I'm probably missing something obvious. (Because to me, these numbers look excellent, and the bond number looks ridiculously great.)

I wrote an automated trading system on top of the Interactive Brokers API using C#. In that case, my impression was that network latency mattered much more than computational time, so I didn't spend much time trying to speed up the algorithm. (That said, the algorithm was pretty simple.) I made a small amount of money at it, but for my algorithm and execution speeds, the slippage didn't make it worth the risk and the complexity. From memory, I traded several million dollars worth of stock, and, if I'd got the execution on the bid/ask that IB said I would, I would have made in the area of $40-$50K. Instead, I made under $10K because the execution of the orders was too slow.

I think you've got it completely right, yadayada, and expressed it brilliantly. There are plenty of examples of extreme people today, and it seems obvious that you need a political model that is robust enough to work even in a world with extreme people. Why bother proposing any model that breaks in a completely obvious manner the minute you toss a single extreme person into the mix?

Wow, these guys sound horrible. Luckily, since they're so awful, you should have no problem convincing the electorate to vote for someone who will abolish them. Democracy rocks--it's so awesome that you can have a huge gripe like this and, when you convinced the electorate to agree with you, vote in a government to address your concerns. It's such a great example of true accountability, society avoiding fringe views only held by a few ideologues who haven't really thought things through in any depth, while still providing justice for people like you with righteous causes that everyone cannot help but agree with.

Therein is the answer you seek. Elected positions in the USA aren't mostly unaccountable, they just seem that way sometimes.

Yeah, your premise is wrong. The goal of debate is rarely to change minds. It's entertainment and a tiny bit of learning. I've accomplished both those goals.

Yeah, that's the problem. If I'm a power hungry psychopath, it is in my best interest to thieve, enslave, murder, and rape. The libertarian society would reward this sort of behavior (because if I'm a powerful psychopath, the optimal self-interest path for any individual is to run away and hide. Survival, not self-sacrifice, is in their self-interest.)

Thanks rkbabang, I think I get where you're coming from. I didn't mean to ridicule it by using the word "Nirvana". Rather, I just meant "the idealized libertarian state after all the messy transition stuff is through and it reaches a steady state", but Nirvana seemed a lot faster to type. The thing I find most interesting about it is that it's pretty different than communism, but suffers from the same downfall, the idealized notion that people are better than they are. In communism, it's expressed by the idea that people will work as hard as they can and share for the common good, though there's no real benefit for them. In Libertarianism, it's that people without any checks or balances on their power won't use that power to act in really horrific antisocial ways that bring them happiness, but bring misery to most of the rest of the population. In fact, it seems much more fragile than communism, since I think in communism, if you were to get even 50% who worked as hard as they could, you'd probably have a decently functioning society. In libertarianism, you don't need many rich psychopaths at all before the whole thing breaks really badly. Anyway, thanks for your thoughts. I think you're right that our governing systems are far from perfect. So, I find it interesting to hear people's solutions to these sorts of problems.

Thanks rkbabang. I thought that was a problem, and just wanted to be sure that I wasn't missing something glaringly obvious. Sorry that I forgot about your previous response.... It's just whenever we have these discussions, I just get hung up on the "government theft" rallying cry and get really confused why people think a libertarian Nirvana wouldn't have equivalent or worse theft. I don't think that the private army variant is useful. For instance, it seems pretty horrible in Mexico. And if Bill Gates decides to build a big enough army, he can also choose to beat you and steal your money, turn you into a sex slave, or get rid of the free market, and you really can't do anything about it. Because he has more money and a bigger private army. It seems like such an obvious flaw in your "government theft" mantra that I find it kind of shocking that people say that. I guess it's more of a motto to inspire an extreme emotional anti-government reaction, rather than anything with any substance behind it. That said, I totally agree with you that governments have problems now as well.

Just out of curiousity, in your libertarian Nirvana, what happens when someone takes something they don't own, poisons a river they don't own, or takes a human life they don't own? What's the alternative to society agreeing to beat such a person with a big stick? Thanks, Richard

Yeah, it should have been only one game. The game immediately after the cheating was discovered. :)

It was mentioned in a (non-subscriber) mass email from the The Motley Fool Canada. That may account for it.

This is fun. I wonder, if Einstein near the end of his life decided to open a hedge fund, would he never have been a genius, stopped being a genius, or some other option? We should probably make a list of occupations that are unable to have geniuses, just in case a genius wants to change jobs, but doesn't want to lose their title of genius. I wonder if there was a certain time period before which it wasn't possible to be a genius then. Like, it wasn't possible to be a genius before the Renaissance because no jobs existed which qualified for the "genius" title. Except Ancient Greece, Rome, and Persia, because they had some guys with cool jobs. So, we had geniuses, they all went away, then they all came back.

Saying someone can't be a genius because of their occupation seems nuts to me.

I fit in here. A decade ago, I could have afforded to purchase a home with cash on the west side of Vancouver. However, I rented instead. This allowed me to get aggressive in wealth building, both in investing and starting a business. Now my net worth is roughly 4 times what it was then. That said, I might have done better if I bought 8 houses with maximum leverage. But I think that's irrational outcome-oriented thinking. (i.e. the same seeing a 10 come up in roulette in Vegas, then saying that I would have been better off if I bet all my assets on 10.) These are mostly the same thing. In the first case, your ownership of businesses and their cash flow is the same, while the price people will pay you for them declined. In the latter case, your ownership of the house and its implied rent is the same, but the price people will pay for it has declined. I think the main difference is that the former is likely much more diversified and much more liquid, and therefore less risky. You likely think there is something magical about owning a house and that it shouldn't be evaluated based on its cash flows because you live in Vancouver. Lots of people think that here. It only makes sense to use this sort of reasoning if the cost of the debt is fixed over the lifetime of the debt. Since, in Canada, almost all first mortgages are for a small fraction of the period of time that the debt is paid off, then this is bad analysis. If you want to use this sort of reasoning (which I think is a bad idea, but I'm conservative when it comes to large bets), then the most reasonable thing to do is to estimate the cost over the full life of the debt, then add a margin of safety. The funny thing is that most of us would say that it would be a bad idea to use 5 year debt to finance a project that will take 30 years to pay off that returns an extra 2% a year above cost of capital. The risk of interest rates rising or the business environment worsening is just too high to make a it a sensible bet. But call the project a "home" and suddenly people think it's a good idea....

Sorry Frommi, I missed that you were talking about buying puts 50% out of the money. In that case, you're right of course -- if you miss a couple times, you're screwed. I think you won't find a cost of leverage below 5% annually very often. Perhaps in some ETFs, but even then it would be hard. It's pretty hard to think of a security trading on an exchange that has such low volatility....

You fool yourself when you think that way. See it as 50% of your networth in call options and then ask yourself if this is a prudent thing to do. 2 full losses after one another will wipe out 75%, after 3 you start from 12.5% of your networth again. This is not the same as 50% of your net worth in call options. It's the equivalent of 5% of your net worth in call options. Suppose you have 50% of your net worth in stock, and that's hedged by 5% of your net worth in at the money puts. The worst scenario is that you have to exercise the puts because the stock falls. In that case, you lose 0% on the stock, and 5% on the puts (equivalent to putting 5% in calls, and having them expire worthless.)

Yes, that's a fair point. I think it's probably because of two things. First I was at an age where I actually thought about it. And second, because I believe that some reasonable people could believe that the others deserved it (even if I disagreed), whereas I had a hard time believing that anyone could reasonable believe that Obama deserved it at that point. It seemed entirely motived by his charisma and the judges' racism.

Yeah, I think the Obama one makes the organization lose all credibility. What they heck were they thinking?

OK. Here's the thread, Gio, with a tiny update: http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/leveraged-daily-return-etfs/

Bumping this since Gio asked in the painful Fairfax thread. The main difference between my thoughts then and my last post are. I shouldn't have said the ZIV long is comparable to a UVXY short. I'm not sure why I said that, because it isn't very similar at all, and I knew it then. It's similar in the sense that they will mostly move in the same direction, but the magnitude of the moves and the long term results will be very different. To me now, ZIV seems superior to SVXY, just because of its lower volatility and far lower chance of going to zero. That makes it much more tax-efficient, less complex, and less impacted by volatile volatility. I'll still do SVXY trades occasionally, but will be more opportunistic (i.e. caring more about mean reversion and less about contango).