RichardGibbons

Yes, but raising kids is a lot of work. One could equally make the argument "surely helping people build their retirements comes with an ROI - the happiness of seeing your customers having a financially-secure retirement where they have the assets to realize their retirement dreams". Really, if you start looking at things from "intrinsic reward" incentives, then you've basically conceded rkbabang's argument anyway. You could say that many politicians govern well because of the intrinsic rewards of improving their country and the well-being of their fellow citizens, which I think rkbabang wouldn't agree with at all. Rkbabang, I think understand your position. Parenting is a counterexample that refutes your rule, so you'll pretend that you and your kids are one entity instead of modifying your world view. That said, I understand it. If you concede that parents can act against their own best interests on behalf of their kids, then it's possible that other people might sometimes act against their own best interests as well. (FWIW, I think you are mostly right that people usually act in their own best interests. I just recoil against black and white world views.)

Hmm, OK, here's a perverse counterexample: parenting. Raising kids take up piles of money and time, yet I think many parent/child relationships work well.

There are lots of places from which it could arise. Something like the 1% rallies could turn violent. A galvanizing case of injustice could result in violence (e.g. maybe the death of someone in police custody). Or something like the tea party could escalate violently. I see it as akin to excessive leverage in the financial system. The system become inherently unstable, jeopardizing its ability to recover from shocks. So a shock can cause disproportionately large effects. Similarly, I think the wealth inequality reduces the stability of the system. (On the other hand, things like religion, the American dream, and the propaganda TV channels would tend to increase the stability, I think. So, maybe the system is stable enough that the distribution can become quite skewed before there are problems.) Your comment also makes me wonder whether it was that easy to identify the unrest in Egypt, Syria, and Libya before it arose. I don't know enough to know if that was a long-term thing with frequent riots that we just never heard about, but I suspect it wasn't. Eventually, poor people just get sick of being screwed by the system.

Well, yeah. You are arguing for a particular system of government. Seems pretty obvious that you'd want to talk about the place where that system of government has been tried. I mean, why the heck would you want to ignore the evidence where it has been tried? That said, I take it from your response that you basically wouldn't want to live in Somalia, despite the fact that it's the best example of what you want in existence today. So, for you, this is more like a "I want to complain about the government, and saying that it's violent gives me an excuse" type of argument. Got it. I'm shocked! So to summarize your argument, "unicorns and fairies exist, but you don't want to talk about where we can find them." OK. The thing I find fascinating about this whole discussion is how quickly the whole idea breaks down the second one starts talking about specifics, yet people still believe they are making a credible argument. It's like evidence and basic reasoning are totally irrelevant. I think I read 20 years back, though I can't recall the source, that all societies have roughly the same percentage of people with extremist beliefs. In Islamic cultures, that might manifest as people interpreting the Koran in a violent way. In the USA, it might manifest as the right-wing Christian views. In Europe, it might manifest as people believe Marxism can work. I wonder if this is another example of that.

That's because they are insane. I'll plagiarize a post on Reddit a while back as the counter argument. What will happen is that I will beat you up when are walking down the street and steal all your stuff. I may kill you, or not. Let's assume that, irrationally, I don't kill you. Then you'll probably want to band together with other people to ensure I don't beat you up again. Well, then I'll probably just want to find more people and build better weapons so that I can beat you up and take your stuff once more. As I increase my power, you might want to do the same. So, we'll have these armies dedicated to keeping ourselves safe. We'll pay them with money levied on everyone who is protected by them. Pretty soon, it will become evident what the best army is, and other armies will get killed off. The people running the army will realize they can do a lot of good by, say, having a fire department or a police force stopping people within the winning group from killing each other, or courts to enforce property rights, and so will enact that. And presto, we'll have government and taxation. And then someone will stand up and say, "This government is violent. If we get rid of them, everyone will hold hands and magically never want to commit violence against each other to get ahead, and the world will be Nirvana". The other question is, why don't you emigrate to Mogadishu, where this sort of environment seems to exist, rkbabang? It seems to fit your philosophy perfectly. (This is actually a serious question. I suspect your answer is "Mogadishu isn't what I am proposing", but I'm curious why you believe it isn't. The people themselves decide issues like property rights and survival, unrestricted by the onerous constraints of a violent government.)

Nope, climatology is decided almost as well as anything in science. At this point, being a man-made climate change skeptic says more about the person than it does anything else. To me, the fact that some people still believe there's a debate is pretty good evidence of the influence of the media on the minds of even relatively smart people.

Here's my favorite example of why the Oxford comma is good. (Warning: slightly NSFW). http://imgur.com/fycHx

I think the concept generally makes sense both before and after birth. I don't think argument is metaphysical argument, but rather just trying to create a basis for deciding what's a "good structure of society" and what's a "bad structure for society". For instance, one could organize society so that I own everything, and all you suckers only get what I give you. Is that a good society? I think most people other than rkbabang would argue it isn't (though it would be important to him that nobody could take my wealth from me). But what's your criteria for saying it's bad? The answer this reasoning provides is that it's bad because the odds are very high that life would suck for you if you were someone born in that society. So, that's why the argument "what society would you be in if you were randomly born into it" is necessary. (That said, if you think the "randomly born into some baby" criterion sucks, it would be interesting knowing what criterion you think is better. That's a really interesting conversation, I think.) The other thing worth noting, while people love to believe that wealth is derived largely from people working hard and making good decisions, a huge part of it is luck, even beyond whether or not you were born a white male in the USA. Did your parents go to university? Did IBM come to you to buy an OS because DEC was too busy to talk to them? Did you happen to meet a person who ended up funding your business? Were your parents rich enough to pay for your university so that you could start a business on the side while in school instead of working? Did a celebrity happen to see your website and tweet about it? Was Oprah in a good mood when she read your book, so decided to put it in her club? Did you happen to be in the tech sector at the same time as a tech bubble formed? Do your brother get cancer exhausting your family's savings? Basically, there's huge variances in outcomes, and it's quite reasonable for society to decide to smooth out those variances. The "how would you structure society if you knew you were to be randomly born into that society" is just a way of judging whether it's worthwhile smoothing out a variance or not. I think a huge part of it comes down not to comparing levels of wealth or trying to make everyone equal, but rather economic mobility.

Wow, I've never met anyone who thought it was immoral to fight if they or their kids were being raped or tortured. Fascinating perspective, but I think you're going to have a hard time making a lot of people believe it.

It's both moral and commendable. Reducing the variance of the genetic lottery and other forms of luck is good for pretty well everyone in society, including the people who benefited from that luck. That said, I can understand why people are greedy about it. I'm pretty greedy about it myself.

It should fall by the amount the owner earnings per share missed. I don't think any such business exists, since the example you gave requires perfect knowledge of the future, which doesn't exist. I imagine the closest thing to such a business would be a casino or a lottery that has the predicted amount of gamblers, but an unusually large payout.

I think when it comes to brand, it provides a greater competitive advantage for lower cost items. I'm not going to spend even three minutes researching candy bars on the internet, but I will spend at least an hour if I'm looking for a new consumer electronics device or vehicle.

I think I'd go with the following: 1. Low cost advantage/economies of scale 2. Network effects 3. Regulatory advantage (e.g. patents) 4. High switching costs (e.g. Fiserv) 5. Intangible advantage (such as brand etc.) 6. Dominates niche market that cannot support two producers

+1 - This is totally the right way to do things.

When you talk about moats, they're almost always associated with large-cap companies. I think this is partly because moats help a company become large, and partly because economies of scale and networking effects both cause moats and become more powerful with size. However, moats don't always need to be associated with large companies. So, which small-cap companies do you think have the largest moats? Which small cap companies do you think are almost certain to exist and maintain their pricing power 15 years from today?

You're right, it is that simple. It becomes complex when you start mixing together positions in your head, and fool yourself into believing it's more difficult than it is. It is a nice illustrative thread.

Nobody said or implied that you don't understand any part of this. That said, you've made my point and my goal isn't to convince you of anything -- I've read almost every post on this board for 12 years and I think nobody's done that before. The thing is, you've mentioned this idea of obfuscating positions quite a few times recently, like it's some sort of breakthrough and a really good thing. It isn't. It's a very bad thing, because it increases complexity and introduces cognitive biases that makes you misunderstand what you're doing. I think there's value in refuting that model for other readers of the thread who might have less experience with options, so that they have a fighting chance of not ending up with a bad mental model. That's the point of my post. For what it's worth, you're not being misunderstood. You're just being refuted, but I'm not really expecting you to realize that. I'm simply expecting some others to.

Yeah, this is precisely what I meant when I said that it leads to cognitive biases. (In this case, it's called the Zero-Sum Bias.) Basically, you're illustrating exactly what I was saying, trying to rationalize that the decay loss in one is matched by the decay profits in the other. If you think the decay in the long option is a big problem, then don't buy the long option. You'll get to keep the profits that you got from the decaying short option. That said, it is reasonable to have a variety of options positions with different bullish and bearish bents in such a way so as to reduce risk in the portfolio. It's just a mistake to group them together in your head as a single position, since that's what introduces the cognitive biases. (Also I think one of the biggest novice mistakes with options is thinking that long options are bad because they decay, and short options are good because you profit from the decay. I don't think you suffer from that issue, but it is worthwhile noting it when talking about trying to "offset option decay".) Richard

In general, this is a bad way to think about options, since it obfuscates the situation and thereby encourages cognitive biases. Typically, decomposing the position is much more useful than mentally co-joining positions. If selling a put on SHLD seems like a good idea, it should be a good idea regardless of whether BAC options exist. If buying puts on BAC seems like a good idea, it should be a good idea regardless of SHLD. If one of these two legs doesn't seem like a good idea on its own, then the aggregate position could be improved by removing the leg that doesn't seem like a good idea on its own. Obfuscating the individual trades is a bad idea because it can make you think, for instance, "that option was free because I got the purchase price from selling SHLD options". The option wasn't free, because you're still spending cash that you could have kept as cash. Decomposing the position lets you better determine whether each leg is good, without the unnecessary additional complexity of the combined position. (Unless, for instance, you believe that the two positions should be relatively correlated, like BAC and JPM. But I'm assuming that you're using SHLD and BAC for examples because you believe that they're relatively uncorrelated.)

I used to be OK at chess. I beat a master in a tournament at one point. But I'm pretty mediocre now.

If XIV drops 80% in a single day, it will automatically be liquidated. This is the scenario I mean when I say it'll eventually going to 0. (I'm curious what happens if it gaps to over a 100% loss. I guess the fund company gets burned in that case.) I'm not sure if there are restrictions on the VIX futures movement. I'd guess not.

I'm also in XIV and SVXY (which is nice because it has options and it's fun to sell covered calls when the VIX gets low). It's worthwhile noting that XIV will at some point go to zero in a single day and UVXY at some point will probably go up ten times in a short period of time. So any investment strategy that involves those ETFs should be designed to be resilient to those sorts of events.

He should make significantly less than the average teacher. There's almost no leverage in the job, compared to teachers, since teachers can potentially have a huge influence on people when they are at their most impressionable and fastest-learning stage of life. That said, $100K is very low for people operating heavy equipment who actually care about making money. I know people who started that way, and through hard work/brains/luck had net worth in the 8 figure range within a decade. (That said, if he didn't want to make the sacrifices to do so, I understand that, and it was probably a good decision for him. Money is not even close to the most important thing in life.) All that said, I do still think $100K is a good salary. My only real area of disagreement is that I think there's more value to be had in incentivizing someone who has a huge influence on long-term life outcomes of hundreds of people than someone who uses a machine to move stuff around.

This is not necessarily true, because of rebalancing. The performance of a combined performance that is rebalanced periodically can exceed the performance of the individual components. e.g. Suppose that you have two investments, and you put $100 in each. Investment A falls 50%. Investment B goes up 50%. You'd still have $200. Supposed you then rebalance, putting $100 in to A, and $100 into B. If A then doubles, and B falls 33%, then both investments are back where they started. Someone who had just bought and held each investment would have a 0% return. However, because of the rebalancing, your investment in A is now worth $200, and your investment in B is now worth $66. Your return of 33% is better than either investment A or investment B.

The whole key to my volatility strategy is that the futures are mostly in contango, and therefore ETFs built by rolling one month into the next constantly lose money, and the inverse of those ETFs constantly gain money. The simpler of my two positions now is a ZIV long. As a result of contango in the medium-term futures on which is is based, I think it will deliver strong, but often bumpy returns. I think it will be comparable to the UVXY short, but less volatile, with fewer extreme outcomes, and also gives me the option of tax-deferred compounding for years. The more complex is long SVXY (basically the same as XIV), long way out of the money SVXY puts, selling 10% of the shares every time it goes up 20%, and buying occasionally as it falls when I feel like it. SVXY has a simple average return of something like 80% per year. However, the challenge is that there is a big difference between the simple average and the compounded average, because it will go to zero at some point, and will fall dramatically every so often. (e.g. look at the stock chart for XIV at the end of the year 2011. This sort of drop is a normal occurrence, not an anomaly.) So, I want to get those high simple returns, but not have my compounded average returns go to zero when, say, someone detonates nuke on New York City, and short term volatility doubles overnight. (I think it's very, very difficult for medium term volatility to double overnight, which is why I'm not so concerned about ZIV.) Therefore, the puts exist so that when the VIX futures double and SVXY falls to 0 in a single day, I recoup my entire investment. I'll also probably sell them after a long down-trend like the 2011 example above, because if the VIX futures are already really high, it's basically impossible for them to double overnight. There are a couple of other non-obvious negatives. First, if volatility is volatile, (i.e. SVXY bounces around a lot) SVXY loses money -- though hopefully not as fast as it gains from contango. Second, the futures are likely to go into backwardization (i.e. the opposite of contango where rolling futures hurts SVXY) when volatility goes very high. Thus, SVXY will constantly be losing money when volatility is high. So, there's the irony that, when volatility is high and SVXY is most likely to gain from reversion to the mean, it's likely also losing money daily from backwardization. And, when volatility is low, contango tends to be high and you'll be making the most money every day from contango, but it's also the time when you're most at risk of losing money as a result of reversion to the mean, and also when a disaster will have the most impact on your position. (That's one of the reasons why I have the sell 10% of every 20% gain rule. A 20% gain is most likely to occur when volatility is low and I'm greedy for contango, but the rule forces me to take some profits off the table, reducing my risk and providing gunpowder for when volatility increases.) It's also worthwhile noting that I haven't done these sorts of volatility trades for very long, so I don't know if it will work, but it seems plausible to me.