RichardGibbons

With Interactive Brokers, you can make the currency trade like any other trade. The commission is typically around one or two dollars (depending on the size of the trade), and the spread is tiny. For instance, I made a low six figure USD/CAD currency trade a few days ago. The commission was $2.51, and the spread was something like 1.03165-1.03205. Richard

It's unclear whether any shorts did well because you found a good list of shorts, or because we just went through the 6th biggest point drop on the Dow. (Unless you're claiming that your entire portfolio was short, or that you at least increased the number of shorts, but I didn't get that impression originally.) Or, maybe you just picked volatile stocks which tend to move more than the market, and the market moved down. I'm not claiming that you're being intellectually dishonest, but the minimum level of analysis requires showing that the portfolio went down more than the market. (And a fair level of analysis would be showing that, if you outperformed, it's not just because you named a bunch of high beta stocks as shorts right before a crash.) That said, if our positions were reversed, I might not want to spend the time posting proper analysis either. So, don't feel obliged.

On Medicare, Krugman makes a great argument: http://www.nytimes.com/2011/06/13/opinion/13krugman.html On the other hand, I'm from Canada, and USA's backwards healthcare system provides a large competitive advantage for Canada, as US businesses relocate their labor forces here to reduce healthcare costs. And, that competitive advantage will only grow as time passes and healthcare costs increase. I'm pretty sure that spending 30% less for equivalent or better healthcare would be good, right SouthernYankee? (Just doing that whole "Looking for common ground by starting with a question whose answer is obvious" thing that you suggested). Richard

The fact that a few innovative companies were able to have some success against Microsoft doesn't imply that their anti-competitive practices didn't hurt humanity. You can't say ivory poaching is fine because there are still some wild elephants. Perhaps there were 10,000 companies struggling to succeed, and 3 did, whereas without Microsoft, 500 would have. Perhaps there would be true artificial intelligence now or a polynomial-time algorithm for solving NP-complete problems, or a multitude of other beneficial advances if Microsoft hadn't been anti-competitive.

A long put gives you the right to sell shares to someone before a specified date at a specified price. So, short puts gives someone else the right to sell you shares before a specified date at a specified price. The downside of the latter is that you're taking all the downside risk, but not getting all the upside reward. So, suppose a few weeks ago, you sold Sino-Forest (TRE.to) $17.50 puts for $1. Your maximum profit would be $1. However, it turns out that TRE actually fell to $4. Now you have to buy shares for $17.50 that you can only sell for $4, so you've lost $12.50 ($17.50 - $1 - $4) in an effort to make $1. Thus, if you look at it from an overall portfolio view, one big loss will occasionally wipe out many profitable trades. And, unlike long share position, you'll never get a huge gain from, say, a stock being bought out far above its current trading price, to balance the occasional loss. Personally, I think this can be a bit of a trap. Psychologically, people like a lot of small gains and often overlook the occasional big loss because it's relatively infrequent. It's not to say that it can't be a profitable strategy, but rather that I think there's the risk with this strategy of taking credit for the gains, but mentally writing off the infrequent big losses as an aberration, and not giving it the full mental accounting it deserves. Richard

The fun stat now is by my calculations, Vancouver's been outscored by its opponents in the playoffs, by 2 goals. It would be funny if they could win the cup while being outscored.

We had the second Vancouver Value Meetup on Thursday. If anyone's interested in reading a summary of the discussion and some of the stocks came up as part of the conversation, I've posted it here: http://tickity.com/t/21924688301136127 Richard

Interesting. What method of risk control are you using, Harry? Stop buy?

I do. Forums work when people act as a community, treating each other with respect. When people are no longer treated with respect, they will not participate, the community will go away, and the value will be lost. Luckily, it's very clear that Sanjeev understands this as well. He's been good at knowing how much flexibility people should have to make vehement arguments, and where to draw the line. Richard

This whole saga reminds me of that Buffett saying: "In looking for someone to hire, you look for three qualities: integrity, intelligence, and energy. But the most important is integrity, because if they don't have that, the other two qualities, intelligence and energy, are going to kill you."

I think this is a probably a straw man, Harry, though I'm not going to go through the whole thread to confirm it. As I recall, none of them implied that it was a short-term bet on the results of a single quarter. It would be pretty unusual if someone on the board said that their premise rested on this quarter. They will be proven right or wrong over the course of years, when NFLX tries to renew the license on their content and finds it's five times the price, and the telcos, cable companies, Amazon, and the odd tech company all start jumping into the game. Also, it seems somewhat odd to me that you're not changing your mind about their risk-control strategy when they've pointed out their risk control strategy. Haven't the facts changed? That said, I think you're 100% right that risk control is a good thing.

Zorrofan, what you describe is largely the XVIX, which is the equivalent to short 0.5 shares VXX, and long 1 share VXZ. As far as I can tell (it's pretty new), it works largely as you'd expect.

I think this gives the future indices: http://cfe.cboe.com/DelayedQuote/CFEFuturesSymbology.aspx Also, the contango will become backwardization if volatility spikes too high. If one data point is useful, last May, that transition seemed to happen about when the VIX hit the low/mid-30s.

There's no such thing as intellectual property in a free market system. That's just an artificial construct created by regulations.

According to this link, IB is covered: http://www.cipf.ca/Public/MemberDirectory/CurrentMembers.aspx Richard

I think the real lesson is about fundamentals of the company. There are lessons about risk control/admitting when you're wrong, but this isn't a good example of that.

XXV has kind of bugged me, because it doesn't seem to track VXX the way I expected it to. So I looked into it, and these are my tentative conclusions excerpted from a recent email I sent. I'm about 80% confident of the conclusions now, and will be 99% confident with another 6 months of data. The thing that's confusing is that it literally is as if you shorted VXX. This has a bunch of really odd implications. 1. If XXV was sold at an initial price of $20 when VXX was at about $25. If VXX goes to 0, XXV will go to 40. XXV can never go above 40. (Because when short a stock, you can never make more than a 100% return.) 2. The percentage changes of VXX and XVV are not inverse. e.g. If VXX goes from 2 to 1, that's a 50% decline. That doesn't imply a 50% increase in XXV. In fact, the return will only be something like 4%, since VXX will have already moved down so much that a huge percentage move in VXX will have almost no effect in XXV. It's the absolute magnitude of the move that matters, not the percentage, and a $1 move on a stock that you shorted at $25 isn't that big. 3. You can see the declining effects of VXX moves on XVV by looking at relative changes since XXV was formed. The constant used to be around -0.75. Now it's -0.5 or less. (i.e. if VXX moves 1%, XXV will move less than -0.5%). 4. XXV was way more attractive initially (but there was also a greater risk of liquidation if volatility rose and XXV went below $10 and was instantly liquidated for a 50% loss (a neat detail in the prospectus)). 5. If XXV ever gets options, short as many $42.50 calls as you can, since the stock can never get there. :) I think. 6. XXV is largely useless now. Maybe you can get a 20% return in the next year if it hits $35, but you're taking volatility risk to get it. It might become interesting again if volatility spikes/backwardization in VIX futures appears and XXV falls below $25. Of course, then you have to worry about the $10 floor. Richard Disclosure: Short VXX

Good points, Ericopoly and Bronco. I agree, with the caveat that the decision needs to take into account all the second order effects. I really like your point, Eric, about the second-order effects of downsizing. In other words, suppose the beauty contest is actually a dating game called "upgrade your wife", and you can keep playing the game until you pick a contestant other than your wife. In that case, the optimal strategy isn't to pick the $10 contestant, because then you only get $10 as a result of the second order effect. The right strategy is to keep picking your wife, making $5 day after day, because the impact of the second order effect is bigger than than maximizing your value. Or to state another way, the true value of the contestant isn't their price, but the discounted value of the future cash flows that result from picking that contestant. :) That said, I also think that many of the Buffett decisions that you are defending aren't rational decisions to maximize shareholder value but are rationalizations, because when you invert them, they don't make sense. i.e. if you have always have to preserve extra capital for when a good idea comes along, then shouldn't you similarly want to get extra capital by issuing shares as frequently as you can? (If holding capital increases shareholder value, shouldn't getting more capital by issuing shares similarly increase value (except you happen to be constantly on the thin knife edge where neither issuing nor buying back increases shareholder value)?) Of course, it's fine for him, and everyone else, to be irrational sometimes. Richard

Buying back shares at a good price is a good thing because the goal isn't to grow the value of the company, it's to grow the value per share of the company. If we just wanted to grow the value of the company, we could just issue shares again and again, and the market cap would go up higher and higher, while our share price went lower and lower. The problem is that growth has a cost. Buffett has said with a million dollar portfolio, he'd be able to do 50% annual returns. As you grow, the universe of potential opportunities diminishes, which means that your returns would typically diminish as well. Similarly, if Fairfax had 50% less capital for underwriting, they could get rid of 50% of their least profitable business. And every dollar they make after that point could be put into more profitable underwriting opportunities than it would be put into otherwise. (Except for the rare opportunity for which you need an absolutely huge capital base to underwrite, like that "win a billion dollars" lottery that Pepsi put on.) So, buy buying back shares, you're not just increasing your earnings per share, but second-order effects make it much easier to grow your EPS at a higher rate, forever. IMO, Buffett has done a disservice to his shareholders by not buying back shares when they're cheap. (That said, when you've so admirably acted as a steward for shareholders in almost every other respect, this issue is a minor quibble.) All that said, I trust that Prem will recognize these sorts of second-order effects and take them into account when determining whether or not it makes sense to buy back shares.

Yeah, except for the Internet, jets, nuclear power, a large proportion of medical discoveries.... DARPA and NASA are fairly innovative. Governments and universities are largely responsible for most basic research and a huge proportion of the innovation. Without this basic research, the pace of innovation in the US would be much slower.

Well, the article is also inaccurate. When they say, "Still, the 2,972 sales made it the second-busiest June on record for the West Coast city", they didn't verify their facts. This is actually the second-fewest sales in Vancouver out of the last 8 years. The only lower recent year was 2008, after Bear Stearns, but before Lehman. Richard

Yes. He gives an example of his boss asking each of the traders in his office what the most likely thing that the market would do in the next month, and Taleb said something like "Go up 1%". His boss was outraged, because Taleb had a large short position in index futures. Why was he trading against his belief about what the market would do? Taleb's answer was that he thought there was a 75% chance of the market going up 1%, but a 25% chance of the market falling 20%. Of course, that means that though the market's likely to go up, going short is the winning strategy. This sort of thinking has had a significant impact on how I invest in both stocks and options. If you think it through, it also is related to Buffett preferring a bumpy 15% return to a smooth 10% return. There are quite a few things in his books that have helped me think about the world differently. Taleb says some goofy things sometimes, but I derived an immense amount of value from his books. Just building those mental models.... Richard

I'm not so sure that this transaction is risk-free, because I think that the options don't wind down on the day of the transaction, and the transaction is not all cash. Basically, I think with the position as described, the day that the transaction goes through, the position becomes a bull credit spread on Berkshire equal in size to 40% of the original position. http://search.cboe.com/cgi-bin/MsmGo.exe?grab_id=0&page_id=43451&query=bni&hiword=bni%20 So, suppose that the transaction closes on Feb 15, and at that point Berkshire is trading for $70. Then each put would then become a contract for a combination of 60% cash and 40% Berkshire. Suppose that on Feb 20, Buffett dies, and Berkshire falls to $35 when the options actually expire in April. You'd lose half of your 40% of Berkshire, which would be the equivalent of a pre-merger price of $80 for BNI. So, you'd take the maximum loss of $3.90. Or is there something here that I'm missing? One interesting thing is that, if my reasoning is correct, this is effectively a way to trade options on Berkshire, though there are some complexities (like if you sell calls, will the buyer exercise them the day the transaction closes in order to get BNI's special dividend?) Looking at the LEAPs, I initially thought they were cheap, which made me want to buy them. But them I realized that the "true" price would actually be 250% (100%/40%) of the quoted price, which then made me want to sell them through a covered call. To me, it looks like the BNI July covered calls yield about 10% in a half year. So, 10% for taking the downside risk of holding Berkshire for half a year. I'm going to have to think about it a bit more.... Richard

I voted "no" for two reasons. The first is that I have enough Fairfax in my portfolio. The second is that I don't need to borrow to achieve my goals. My goal isn't to maximize the size of my portfolio, it is to maximize the size of my portfolio with an acceptable level of risk. The biggest risk to me a achieving my goals is becoming to aggressive trying to maximize wealth, and too confident in an investment, and as a result taking a big loss.

Benhacker: Since there was such demand, I dredged up the link from my old email. Here's the research of the $1.02 from tax rebates vs $1.59 in infrastructure spending increases from that notorious left-wing think tank, Moody's. :) http://www.economy.com/mark-zandi/documents/assissing-the-impact-of-the-fiscal-stimulus.pdf That said, if you're already convinced the stats are bogus, I'd recommend skipping them. If evidence doesn't matter, why waste your time reading anything that disagrees with your viewpoints? You could spend time with your family instead. Looks like the best way of stimulating the economy is giving to poor people. But if it's hard to convince you that goverment spending in general is stimulative, it would probably be even harder to convince you that the best type of spending is giving money to the people most likely to spend it. That said, I agree with you 100%, ben, that broken incentives is a terrible side-effect. Private industry is terrible at this, and I think you're probably right that the government is worse. It's a huge challenge finding the right path -- every path has huge problems, which is why there's a discussion at all. Yep. I'm not arguing that it's something that is immediately obvious or that reality is never absurd. I think if you look around, I think you'll find that reality is often quite absurd. Yeah, I'd agree with this too. It's much more sensible to avoid financial catastrophes in the first place. Once you're in one, you have to figure out how to get out, though. Interesting hypothesis -- because money has to be paid back someday, it can never lead to sustainable activity. Better warn Buffett to stop issuing those zero interest bonds, since he'll have to pay back the money. Prem must be completely insane -- why the debt? And banks, well, we won't even go into how that business model is completely unsustainable, creating nothing of value ever. That said, despite the jest, we mostly agree. Incentives matter. Stupid spending is generally a bad idea (IMO, even though stupid government spending is stimulative, it's a better idea to put it in smart things.) As far as I can see, our main difference is that you seem to have built your belief system around the idea that goverment spending can have no long term benefits, which makes you occasionally need to do odd intellectual contortions, like claiming debt can't lead to sustainable growth. Williams: That goverment spending multiplier being "zero" argument seems nonsensical on the face of things, since if you let people work for money, it seems likely that they'll spend it. But Barro must have some reasoning behind it. I may read the book to figure out what he's actually trying to say. The tax multiplier thing is pretty neat, though I'm not 100% sure of what it means. Is the 3%number compounded annually, or just a one time thing? I think neither makes sense really, though saying "over time" kind of makes it seem like it's a one time thing. It seems extremely odd when combined with the Moody's numbers. If both were true, then Moody's 1.02 yields a 3% increase in GDP. So, if you taxed to give foodstamps, you lose the 1.02 from the tax, but gain the 1.73 from the food stamps, resulting in some massive 50% gain in GDP. :) kcbar: So to summarize your perspective, if I take my money, spend it on cars that depreciate (a terrible negative return for me), that's far worse for the economy than if I hide it under my mattress for a 30 years (a 0% return for me), then die. I disagree. If you're simply saying that good allocation is a better idea than bad allocation, I'd agree. (That said, I'm done with this thread -- not because I want to be rude and go away right when you make your most convincing argument ever, but because I'm an entrepreneur, and want to spend some time creating weath from minimal capital investment, rather than just talking about it. :) )