RichardGibbons

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. :) )

Ben, Ken Fischer was the source of the 6x statistic. I quoted it so that I wasn't just making a political rant, but actually backed it up with some evidence and reasoning. It's irrelevant whether Ken Fisher is a genius or a baboon, as long as he can quote economic findings correctly. (After reading one of his books, I'd tend to agree more than disagree with your assessment of Ken Fisher.) Second, you missed the point. Mortgage money, after it is spent the first time, is the same as government money after it is spent the first time, is the same as private industry money after it is spent the first time. I used the phrase "mortgage money" because that was what economists looked at. The whole point was that if someone spends $1, even if it's spent "unwisely", after that the money is spent by the private market 5 times. The government spends $1 on booze. The liquor store spends it on beer and employees. The beer manufacturer spends it on employees, hops, real estate etc. The employees spend it on food, stereo systems etc. In effect, it's saying that it makes absolutely no sense to say that government spending is stupid spending, because over 80% of the effects from spending government money is done by people other than the government. Sorry if that wasn't clear from the original post. If you don't understand what I'm talking about with respect to the 6 times multiplier, you should think it through. That said, I'd agree with you that there is value in doing stuff other than trading financial assets. Saving is frequently bad when it comes to growing and stimulating the economy. It's frequently good when trying to avoid financial catastrophes. I thought we were talking about the former. Government spending does create more jobs than, say, tax cuts. I can't remember the exact numbers, but it was something like a $1 tax cut generates $1.04 worth of jobs, while goverment spending generates $1.70 worth of jobs. The reason is because of the 6 times multiplier. Of the 6 rotations, 1 of them is done by government, and the other 5 are done by capital allocators. That's why it works. Cashing welfare cheques won't increase the output of the welfare recipient, but it will increase the output of the 5 people who use that money in the next year. So yes, real wealth creation can come from it. Not in the first iteration, but in later iterations. (Just to be ironic, maybe the increased demand for food increases the need for farmers, which gives the welfare recipient a job.) Of course, you can ignore these second order effects. But it seems bad considering that the second/third/fourth etc order effects are in aggregate 500% bigger than the original event. In fact, I think the your mental model of economics is probably broken if you ignore feedback effects of government spending, just because the later cycles are so much bigger in aggregate than the original spend.

According to economists cited by Ken Fisher, when someone takes out a loan, that money typically changes hands six times over the course of the next twelve months. That makes the wealthy not spending their money a terrible deal for society since they're blocking the other 5 transactions. The government could spend the money on booze and hookers, and the money would still be spent productively five times in the next 12 months. (There are many reasons why the wealthy are good for our society. But hoarding resources really isn't one of them. This is another reason why, when you look at the numbers, government spending is much more efficient than tax cuts for creating jobs. The money gets spent rather than hoarded.)

FYI, one of the models of the Sony Reader has a touchscreen. That said, I prefer the non-touchscreen, since I never annotate, and the non-touchscreen model has a higher contrast ratio.

I grabbed the debt to income ratio from Garth Turner's blog: http://www.greaterfool.ca/2009/10/22/its-that-simple/ Interesting discrepancy from the Globe and Mail article. I wonder if it`s a June vs October statistics thing, or something else. If someone truly cares, I would imagine that you can find and calculate the USA data using a combination of statistics at http://www.federalreserve.gov and http://www.bls.gov.

It is an interesting question. I believed back in 2007 that the banks in the US would be hit by the US real estate collapse, but wouldn't be facing bankruptcy, because they had securitized their loans, offloading the risk. Turns out that they also owned the securities. That makes me wonder if it's possible for any business to be relatively insulated from the collapse of its own industry. I think probably not. What's more, even if they truly offloaded the risk on the risky mortgages, the market will shrink in two dimensions when it crashes. The average mortgage size will decline, and the volume will decline. Also, I'm sure you know this, but this thing about Canadians being financially conservative is a myth. Canadians have a debt to income ratio of 140% vs 132% for Americans. Almost nobody conservatively fixes their interest payments with long term mortgages; most take money for 5 years. The reason the Canadian market hasn't collapsed is because the goverment intervened. It started to collapse. Then, the government started handing out free money with low interest rates and and taking on high risk mortgages -- increasing CMHC's exposure from $300 billion to $600 billion. Vancouver may have perpetually inflated prices, but that doesn't implied that the current level of inflated prices is a "normal level" of inflated prices. In fact, they aren't. Even if you have inflated prices, you should expect prices to be inflated in a sensible way. For instance, there should be a reasonable correlation between the price to own and the price to rent. Right now, it costs much more to own than rent, even at extremely low interest rates. What's more, the average price to average household income ratio is insane. 3 is affordable. 5 is deemed oppressively unaffordable. Vancouver's somewhere around 10. Those sorts of numbers just aren't sustainable. Though the government can sustain things for a while, apparently. That said, if you don't have any assets, the right strategy is still to borrow as much money as possible and buy real estate, just as it was the right strategy in USA in 2006. The government will give huge subsidies to you, giving you extremely low interest rates, even though you're a very high-risk borrower. Then, if prices go up 20%, you make a killing. If prices collapse, you declare bankruptcy, leaving taxpayers with your losses. (Note: I'm not arguing that this is ethical to do, or that I would do it, just that it's the rational strategy.)

I disagree with this -- I believe that with many bubbles it is obvious. It was obvious that tech stocks were overvalued in 1998. It was obvious that real estate was overvalued in early 2007. I'm not just speaking in hindsight because I wrote about it here in January 2007: http://www.fool.com/investing/value/2007/01/09/profit-from-the-housing-bust.aspx Right now, it's painfully obvious that Vancouver real estate is overvalued (one just has to look at the cost to buy vs rent, and the median family income in Vancouver compared to the average house price.) In each case, the only thing that seems difficult to predict is when the bubble will pop. IMO, the Bernanke quote (and I think Greenspan said something similar), is a cop out. It's much easier to say "nobody could have known" than take responsibility for one's failures. Munger's always talking about bad incentives, and in this case, both Greenspan and Bernanke have every incentive personally to claim nobody could have known. Even if the greater good is to identify and pop the bubble, the fallout for them personally would be extremely negative. What's more, I believe if you cannot identify at least some bubbles, you also cannot identify value investments. It's basically the same thing -- calculate the intrinsic value of something, and determine if it's more or less than the price. If the IV is much higher, it's a potential investment. If much lower, then it's a bubble. By the same token, I don't believe Prem et al. just got lucky with their CDS "hedge", just randomly buying a cheap hedge that happened to pay off during a random panic. I think they identified something that was likely to be a bubble, and figured out a way to profit from it.

Try Interactive Brothers -- they're $0.70 US or $1.50 Canadian per contract. However, there's a fixed monthly cost for quotes if you don't exceed a certain minimum commission level each month.

This board is great. The board culture is focused on people sharing facts and honest opinions in a respectful manner. People very frequently disagree, but they do it by presenting contrasting facts or ideas, not by pouring vitriol. When we see far, it's because we stand on others' shoulders, not jump on their heads with steel-toed boots. The result is that everyone gets to discuss interesting ideas without fear of being smashed. We get to be exposed to contrasting ideas, learn more, and have fun along the way.

The host will always open at least 98 of the doors that don't have goats. Therefore, the probability of the car begin behind the other door is 1 - P(it's behind the door you pick). In other words, when you start, there's a 1/100 chance that it's behind your door, so there's 99/100 chance that it's behind one of the other doors. After the other doors are opened (and the host will always open 98 other doors with goats), there's still a 99% chance that it's behind one of the other doors. The only other door left is door 57, so there's a 99% chance that it's behind that door. Richard

In that case, Biaggio, I'll propose a great deal for you then. We'll play the game with a random number generator and 100 doors, 99 goats and 1 car. The computer can hide the goat, and you can pick a door. Then we'll have the computer open 98 of the other doors that contain goats. At that point, you stick with your original pick, and I'll take the unopened door. If I have the car, then you pay me $10. If you have the car, I'll pay you $20. If it's 50-50, then this should be a pretty lucrative game for you. I propose that we both commit to playing this game 100 times, to attempt remove the effects of bad luck. If the odds are 50-50, your expected return is $500. If the stakes aren't big enough to make it worth your time, I'll commit to playing this game with up to 5,000 times, with you expecting to gain $25,000. (My wife wouldn't be happy with me gambling more than $100,000.) Just let me know. Maybe Sanjeev would be willing to act as a intermediary to hold the cash for 5% of the winner's profits. It could help pay for the website. :) Richard

Partner, there is a beneft to switching. You can try it and see what the results are. However, an intuitive "proof" that might help is if you take the same problem to 100 doors. Suppose instead there's 100 doors, 1 car and 99 goats. Suppose you choose door 1. Then the host opens doors 2, 3, 4 ... 56, 58, 59, ... 100. So there's exactly 2 doors closed, door 1, which you picked, and door 57, which the host decided not to open for some strange reason. Would you still claim that there's no benefit of switching from door 1 to door 57, that it's still 50/50? I think it's the same question, just reframed. Richard

The cigar butt in question was First Industrial Realty (NYSE:FR).

Yes, it is a covered call. If your broker doesn't recognize it, you can always move the shares from a Canadian-denominated account to a US-denominated account. I think I've done this in the past.

Options are very different than long stock, though LEAPs are much closer to long stock than shorter term options. With short term options, a 5% move in a stock can effectively wipe out 100% of your investment. I think options can be used to hedge, but are also effective as a speculation. There are a variety of strategies, on both the long and short side. When you start combining multiple option and stock positions, it can get confusing. You should understand how different positions combine and what your equivalent long/short position is. For example, possibly the most common options position is a covered call -- buying shares and selling calls against those shares, then waiting for the sold options to expire. A surprising number of people seem to believe that in this situation, the best result is for the stock to stay flat or fall a bit, so that the options expire. However, this position is equivalent to being short a put, so truly the optimal result is the stock to skyrocket instantly, so that the position can be closed out the next day at a high annualized return. Generally, I'd say that there are two strategies, hitting singles by selling options and pocketing the premium when the options expire (like the covered call strategy), or going for homeruns by buying options. When selling options, a key thing to understand is that one big loss can wipe out a lot of gains. e.g. suppose you'd been selling AIG covered calls a year or two ago when the stock was at $60. You might have got $2 premium for a short term call. Maybe you did this 3 times, making $6. Then the stock fell to $2. Then, you've basically lost $52 (and also can't sell more calls at a reasonable price with the stock at $2). One interesting way around this problem is to sell longer term options. Then you bring in a lot of premium, protecting the downside, but the annualized return isn't as great. But returns can still be good, particularly if the stock moves up quickly and you can close out the position early. The first thing to understand about long options is that it isn't uncommon to lose 100%. Even if you say that you're going to sell after a certain time period -- before hitting the worst of the time decay -- if the position moves against you, you can lose money quickly. So, the strategy you chose should be robust enough to handle a string of huge losses. Thus, the key to long options (and maybe short options too) is money management. You want to invest far less in an options position than in an equivalent stock position. It would be very stupid to have 50% of your portfolio in call options, because the market could go down for 2 years, and you'd lose that 50%. One reasonable way to play long options is with 90% cash, 10% in options, with a rule that you can only lose 10% in one year. I think generally, one should aim for 400%+ returns on long options. Then, if you win once for every two losses, you're still doing well. You might be able to get away with smaller returns on LEAPs, since your winning percentage might go up. But generally, I think the right strategy with long options is to try to win big.