RichardGibbons

Here are some of my thoughts. I have no idea if they would work, but I agree with your general premise that it is likely that the education system could have significantly better outcomes that it does now. So, it seems like there could be significant value in experimentation.

I'm curious. Where does the Tragedy of the Commons fit into this world view? Does it just not exist as far as you're concerned? Or is it a new idea to you? Something else?

In general, I think it's a bad strategy to risk what you need in the hope of gaining something you don't need.

I'm a Canadian who uses the yearly average for currency conversions to calculate values for taxes. The strange thing I'm finding this year is that, with any stocks that I've bought this year and are roughly flat, it makes sense to sell them in December and buy them back in January. This will likely result in an average cost basis for tax purposes of about 10% higher than it would be if I just held, and thereby eventually reduce my taxes. I think it's pretty unusual it happens to this extent. You really need a big currency move near the end of the year to make it worthwhile playing such games.

Vancouver single family homes are already up far more than this chart in roughly half the time period. That said, they could go up more.

This is an interesting conversation. Some of the questions I've been thinking about--and I'm not directing these at anyone in particular--are: Did you originally consider investing in Fairfax because you believe that the Hamblin Watsa team are good investors who, in the insurance company structure, are likely to outperform the market over the long term? If so, do you now believe they aren't good? Or do you now think you can evaluate the odds of success of their approach significantly more accurately than they can, and you find their approach lacking? (i.e. are you a better investor than them?) How much does outcome-oriented thinking factor into your analysis? (i.e. are we sure Watsa's approach was likely to underperform, or is it more like he was the house playing craps, and a bunch of sevens came up in a row?) I'm pretty sure I'm a worse investor than them, particularly when you look at bonds, though their hedged equity investments have horrendously underperformed recently. I'm unclear about how much of their hedged equity results were foreseeable and likely versus bad luck (and if they were likely to underperform, was their record before these missteps just a bunch of good luck?) When I weight the probabilities, I'd guess that there's an above average chance Fairfax's future returns will outperform the market from here--their bond returns are awesome, and their equity returns were great for so long! But I'm not particularly confident in that assessment. One thing I am certain of is that they do provide diversification of thought in my portfolio. I almost always buy the types of stocks I like to buy. :) I will never mess around with deflation derivatives or credit default swaps. So, there's a reasonable chance Fairfax will zig when I zag, and to me, that has some value. So, I'll keep holding because of this combination of a) diversification of thought and b) my believe that there's still an above average chance that they'll outperform.

So I think there are a few issues. First, you actually need to be really confident in your strategy to do it. I can't remember how much TVIX theoretically would have gone up in 2008, but it was large, like 25 or 50 times. Second, at times like this, the contango becomes backwardization, so you'll be in the situation where you aren't only down 25 or 50 times, but you're also losing another 25% every month or so. Finally, at those times, you have the borrow risk and the borrowing fees to worry about. The fees could be at 100% a year at that time, and the risk might be that your short shares get called back, and you can't find another borrow, so are forced to close out your short position. So basically, you have to have balls of steel, and hope that you can maintain your borrow. (I did something like shorting a UVXY $60 LEAP call when UVXY was under $20. It wasn't pleasant when UVXY approached 60. I think I lost 5 times my small, experimental bet when I closed it out in the mid-50s, though I would have made money if I had held on.)

Ah, yes, that's where you went wrong.... Leave your silly and irrelevant facts at home. This is an ideological discussion. When the data doesn't support us, we'll make up new data. :)

OK, I get it. I, too, am worried that Bill Gates and the Koch brothers are underpaid. It's totally unfair to skew the equitable and just results of the genetic lottery. Wow, that's quite the statement about France. Just so I can see where you're coming from, which eight of these countries would you prefer to live in above France? Iraq: Hang out with ISIS South Sudan: Civil war, famine, high chance of genocide Sudan - 65% of citizens below the poverty line, frequent civil wars & genocide North Korea - Communist dictatorship, prison camps Somalia: The most unstable country on the entire planet, black market, warlords. But super-cool Pirates! Venezuela: Corrupt populist/socialist rule, 100% inflation rate, food shortages, violent crime Syria: Civil war, Sarin gas, and murderous religious folk Ivory Coast: Multiple civil wars, rape and murder! Chad: Most habitants live in abject poverty. Repeated coup attempts, Life expectancy below 50. Congo: Unstable, corrupt, civil wars killing over 5M people since 1998 Central African Republic: Ongoing fights between the government, Christians, and Muslims; ethnic and religious cleansing, and no safe drinking water Nigeria: No real rule of law, human trafficking etc. Laos: Single-party, corrupt Marxist republic Cambodia: Corrupt communist country with a history of mass killings ruled by an oppressive warlord Sierra Leone: Frequent civil wars, ebola outbreaks, and an average life expectancy of 46 Myanmar: Ethnic and religious fighting, frequent civil wars, military government Zimbabwe: Corrupt, human rights abuses, state expropriation of private companies, land redistribution I'm guessing maybe the pirates and warlords are on your list? They do make video games about such people, so I can see why someone might think they're kind of cool....

Yeah, I agree. I think the problem you elegantly expressed in your last paragraph will probably be one of the biggest economic challenges this century. I think there's a risk of things getting out of balance and ending up in a bad place (e.g. the poor rising up and killing all the rich, or the rich establishing enough power to permanently subjugate the poor.)

LOL. Asserting something like this doesn't make it true, except on Fox News. To what do you ascribe the reduced income inequality and greater economic mobility in welfare states relative to more purely capitalist countries? Correlation, not causation? :)

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