ItsAValueTrap

If you have a lot of money, you can short treasury bond futures. You can short ETFs like TLT. You can short leveraged treasuries ETFs. I have some notes on leveraged ETFs here which explains why the borrow is slightly expensive: http://glennchan.wordpress.com/2012/11/07/leveraged-etfs-a-market-inefficiency/ *I am short TLT. **This thread is about short-term US treasuries... I am assuming you are talking about long-term US treasuries.

eBay is an example of an auction/bidding system with more integrity. (Though eBay has fraud issues and a lot of stolen goods are sold on eBay.) You have to beat the previous bid by a meaningful amount of money, unlike the stock exchanges.

It's four decimals? Sub-penny front running... it's BS. Here is one discussion on it: http://quantinvestor.wordpress.com/2010/01/09/sub-penny-pricing-is-it-price-improvement-or-front-running/ The front running can take place in different venues. If you have a retail order, your order may go to a company such as Knight Trading or any of its copycats. Your order rarely goes to an exchange. The sub-penny stuff goes on there too but with negative rebates and sometimes the broker will just pocket the rebate. If your order does end up going to an exchange, then there's the sub-penny stuff going on described on the quantinvestor wordpress site. Those guys trade on exchanges. Market makers (Goldman Sachs is the biggest) pay the exchanges money (or own the exchanges) and in return they get special advantages over everybody else. Sub-penny pricing is one of them. Note that institutional investors and other traders are not allowed to bid in sub-penny increments (there is some SEC ruling or letter that states this).

In the history of commodity businesses, that has rarely (never?) been a moat. People will enter the market anyways and engage in price wars. Memory/RAM might be a good example.

I don't live in the US, but if I did... buying properties at good cap rates might be a good trade. The financing looks extremely attractive for 30-year fixed rate mortgages. *I am short KBH. http://glennchan.wordpress.com/2012/09/18/kb-home-kbh-short-thesis/ LEN, TOL, and NVR are probably the best managed. I'm not sure if NVR's book value may be deflated since it came out of bankruptcy and there may be assets carried at very low prices. They have factories where they pre-assemble parts of houses. I believe that they pre-assemble part of the house in a factory, and then finish the rest of the work on site. Manufactured housing is cheaper than traditional housing... this may give them a slight cost advantage as they are somewhere in between manufactured housing (which Berkshire does) and traditional housing. Lennar management is pretty smart. They do some non-residential construction. There is an arbitrage situation between the A and B shares. Toll Brothers do high-end homes... the homes on their website look really beautiful (unlike KBH). The CEO brothers were smart enough to sell their stock at the peak. KBH does this custom-home thing, where you can highly customize your home. This is rather different than the other homebuilders. The homes on the website look poorly staged in my opinion. The interior design and color choices are a little weird and out there. They put too much furniture into the model homes (on the website) so they don't look as spacious (removing clutter really makes a room look bigger). Overall the sector strikes me as richly valued... the homebuilding rebound (if it even happens) is already priced in. If you personally buy a house with a 30-year fixed rate mortgage, you'll "create" your own housing stock with extremely attractive financing and a good yield (assuming you buy at a good cap rate)... in a theoretical sense that seems far more attractive than the public markets. Especially in Phoenix Arizona.

I think you're confused? There is no riskfree arbitrage with put/call parity unless put/call parity holds true all the time (which is not true for stocks). There are very few riskfree arbitrages in real life anyways (and the HFT algo shops are likely all over it). Skew & volatility smiles exists because there is uncertainty as to the correct price of an opinion. Nobody knows what the correct skew and volatility smile should be. I'm not talking about constantly trading options. I'm saying that you should buy options when implied volatility is too low, and sell options when implied volatility is too high. Of course, too low and too high are subjective. Like stocks, the "correct" price of an option is generally considered to be uncertain (though there may be idiots out there who believe that the theoretical Black-Scholes model without any adjustments is correct). Anyways... buy options when they are cheap and sell them when they are expensive. 2- A logical extension of the value investing philosophy is to buy/sell options when you have a large margin of safety. If you don't have a margin of safety... then do nothing. Doing nothing is sensible. You could also avoid options if options aren't in your circle of competence. 3- I really don't think that you can make an argument for selling options on Berkshire. Maybe you could make an argument for buying far-out-of-the-money puts... the opposite of what you propose. There is a price where these far-out-of-the-money puts are so cheap that they would be worth buying. And there is a price where these far-out-of-the-money puts are so expensive that they are worth selling. Suppose that Berkshire's reinsurance did cover terrorism and that there was a major terrorist attack that devastated the reinsurance industry. Intrinsic value of Berkshire Hathaway would likely drop a lot. Suddenly the strike price of the put options may be far above the new intrinsic value. 4- There's another way of looking at things. If you delta hedge, the direction of Berkshire Hathaway stock largely doesn't matter. (*Nassim Taleb's book on derivatives is really good. You don't really need to understand the math... I don't.) 5- If you think that selling puts is "near riskless"... you are crazy.

You usually want to buy options when volatility is low and to sell options when volatility is high. That would be the "value" approach to options... buy cheap and sell assets when they get more expensive. 2- Remember, you can generally turn call options into puts or vice versa due to put/call parity. A call - a put + risk-free investments = common stock (*There are certain scenarios where put/call parity for stocks can break down, but usually that doesn't happen.) Due to put/call parity holding true most of the time, it doesn't matter too much whether you buy calls or you buy puts. You can turn calls into puts and puts into call. 3- So really, you can break the pricing of options down into implied volatility according to the Black-Scholes model. There is some value of implied volatility which is the "right"/appropriate value for an option. When the options trade at less than that value, it is cheap. When options trade at a higher implied volatility than the "right" value, it is expensive. The Black-Scholes model has well-known flaws. Many experienced traders will fudge the implied volatility aspect of the BS model to take those flaws into account. (So then it starts getting advanced... there is the volatility smile, skew, etc.)

Hmm I guess I have some preconceived notions about the storage industry. A- I thought that profits would have been really high during the tech bubble. I guess I was wrong about that. B- I don't see it as being a terrible industry, but I don't see it as being great. There may be some survivorship bias in only looking at WDC and STX? C- As to whether or not margins will stay high... I don't understand what industry dynamic would keep margins high. I guess you believe in consolidation. I try to keep my ear to the ground and the rise of SSDs really worry me so these stocks are not something I want to mess around with.

46.8% of HOV's float is sold short. Good luck with the borrow... you're going to need it. *I actually shorted HOV in the past (when I was bearish on homebuilders)... lucky for me I covered at a profit.

I don't think that any of us are going to argue that hard drives are going to go away completely. I am personally unsure if the # of units shipped will continue to increase. If you measure by exabytes, then it is likely that hard drives will always have the lion's share of the market (even decades from now). Where flash will compete is in low-capacity drives (e.g. the boot drive in consumer PCs) and in performance-oriented enterprise-class drives (e.g. 10k+ rpm drives). That small headwind might make a big difference to the industry's profitability. (Or it might not.)

Here's how Google works as far as I know: - If the data isn't that important, it is stored on two different hard drives. 2 copies. - If it is important, it is stored on three hard drives. 3 copies. - I also believe that Google does incremental backups onto tape. So at least another copy. - If your file is Justin Bieber's music video with hundreds of millions of hits, then it will likely need to be cached at multiple locations in the world and there will be quite a few copies of it. So I think that this is the only time when data is replicated onto several discs. Regarding WDC's performance... it is not bad. Unless you compare it to Intel (or Microsoft, Cisco, EMC, Xilinx, Altera) since inception. If you look back really far in history, hard drive stocks used to be all the rage (companies making "Winchester drives") and didn't make a lot of money for shareholders. Do you have data that includes the tech bubble? The tech bubble boom and bust had a huge effect on industry profits and margins. Intel is currently only starting to make more profit than its peak tech bubble days. The same goes for Xilinx and Altera. Google has cut out the middlemen (e.g. Dell, Ingram Micro) but I'm not sure that they will demand individual models of hard drives. They do buy unique models of motherboards. And I believe power supplies and UPSes (it's not exactly a UPS). I think that the biggest thing about Google is that it doesn't seem to buy enterprise-class drives. If you look at the way the Google File System works, it is sort of like a bunch of RAID1 arrays with commodity hardware.

If you look at the memory/RAM business, there was a brief period where the industry colluded to fix prices. Later on, they all got fined for doing it. 2- I don't see why their high margins will stay consistently high. But... I am not shorting or long these stocks. I made a lot of money shorting this company back in the day (after it announced its secondary and the CEO was selling his shares). I didn't understand the technology too well back then though but STEC was heavily shorted. (It still is... 17% of float short according to yahoo finance.) Management is extremely shady. Manouch Moshayedi has resigned amid insider trading charges and his brother (who probably knew what Manouch was doing) is now the CEO? Haha. As far as their products go, I don't really know. Go read storagemojo.com... it seems like the trend is towards commodity drives + software. Instead of paying a premium for enterprise-class equipment, you can buy more consumer drives and then you do the redundancy/reliability in software with RAID-like techniques. Google for example does not use enterprise-class drives at all as far as I know.

I think you're missing the point? He's simply saying that most companies won't survive over the long run. If you look at him as an investor, I don't believe that he would involve himself in the common stock or options on the three companies. His investment track record has consisted of buying the cheapest (extremely-)out-of-the-money options. It's highly uncertain what their values are but he is betting on the options being extremely underpriced. So he'll have long strings of bad years and hopefully every once in a while something crazy happens and he makes a killing. It's happened a few times so far.

The really obvious thing to do is to move video down that pipe. IPTV Netflix Youtube um... bittorrent, newsgroups, etc. Personally I haven't watched cable television for a long time (even though I have it). Commercials?!?! I remember those things. To me, and maybe I live in my own little bubble, consumers will gravitate towards streaming whatever it is that they want to watch. They might watch some live stuff such as sporting events or shows that all their friends are into... so traditional push model may still be around to some degree. But I see most people 'pulling' their content... illegally or legally. 2- John Malone has commented that the cap rates on fiber buildouts don't really make sense. 3- Google lets its employees do crazy and random stuff. (e.g. the employees are allotted a certain amount of time to work on whatever they want.) They are working things like on self-driving cars...

I've read "Trading with the Enemy" (Nicholas Maier) by somebody who used to work with Jim Cramer (as well as Cramer's books). Maybe the truth is that: A- Yes, his wife did teach Cramer sleazy hedge fund tactics that she learned from working for Michael Steinhart. B- The fund did well even after his wife stopped working for it. C- He loves his wife. In Confessions, he comes across as somebody who was smitten by her and thinks highly of her. D- They fight in front of their employees. (from Trading with the Enemy) When Jim Cramer ran his hedge fund, he engaged in a lot of tactics that would (most of the time) generate good short-term performance. Unlike most/all famous value investors, he did not have a string of three bad years. - Generate a lot of commissions for brokers. - Get them to tell you when their clients were doing dopey trading. - Scream at brokers to make the analysts pump a stock for you as you are trying to sell it. - Get journalists to spread good/bad news about your stock. - Talk to the CEO and CFOs of companies. They may give off tells about how their company is doing (through their body language) and whether or not they are competent at their jobs. If the CFO is clueless, you might short the stock. - IPO spinning - Gaming the way the investment bank analyst system works. You buy stocks that have no/little coverage. You hope that analysts will start covering your stock because it is in a hot field and/or the company is likely to generate investment banking business. I think he had a small portion of his hedge fund portfolio in value-esque positions. The problem with value investing is that his hedge fund clients were human beings who had trouble with short-term losses. The other problem is that Cramer spent most of his time on short-term trading strategies and likely never had a lot of time to devote to value investing. But he's not much of a value investor anyways because he recommends trading/flipping stocks in his books and on TV.

If you look at mp3 players... the history has been that hard drives got killed by flash (remember non-flash iPods?). We just... stop increasing storage. 2- Whether this will play out in the laptop and desktop space remains to be seen. Right now, the only thing that consumers need a lot of storage for is video. In my opinion, video will play out a lot like audio. In the audio world, mp3s at a bitrate of 128/192kbps is good enough for almost everybody. We even developed better audio compression (e.g. AAC) but mp3s will remain the most popular due to its license-free nature and its popularity. For video, I think most people will be happy with less than Blu-Ray quality (or Blu-Ray quality). We already know the answer to this because movie theatres released some movies in 4k and nobody cared (Sony has a list of 4k releases on its website). 2K/1080p is good enough for most people. Then it comes down to how much compression people are willing to accept... Youtube is not quite good enough, Blu-ray may or may not be overkill. The valuation comes down to predicting future cash flows. I'm not smart enough to predict future cash flows with high precision or accurate. But I don't think that the HDD makers will be able to consistently maintain high returns on capital. I might be wrong here, but historically it has never been this high and the secular growth in computing was much higher in the past than it is today.

I think that it's important to note that solid state drives differ in performance mainly due to the flash controller and the type of flash used. The companies making the flash controllers may make some very good profits... an example would be LSI buying Sandforce. In some cases they compliment each other, in some cases they don't. Part of the analysis will rest on your forecast between what the mix of flash and hard drives will be in the future. Look at it from the point of view of the consumer buying a laptop. Do they go with flash: high performance, computer boots in several seconds, somewhat lighter, longer battery life? Or do they go with hard drive: more storage, lower price, etc. It also depends on whether some new feature/application will cause consumers to need a lot of storage space. Currently, really the only thing that consumers need a lot of storage space for is video. Maybe really fast Internet will cause people to do a lot of streaming and not need a lot of local storage. Or maybe not. If you look at audio, we are at the point where many people use Spotify/Grooveshark and don't even need to store music locally anymore. 10 years from now, things might look like this: If storage capacity doubles every 2 years, then storage capacity in the future will be 32X what it is today. (*It may be less because flash has problems scaling down to smaller transistors.) A 40GB flash drive today will be 1280TB in the future. A Blu-ray disc is 25GB so you can store about 51 Blu-rays (*this math is a little wrong since drives hold less after they are formatted). This could be enough for 90% of people out there. Then there are people who do need more storage... they will simply buy hard drives on top of their flash drive. Maybe people will move towards 4K resolution which will take up 4 times the amount of space, assuming no advances in compression technology. If video moves towards 60fps instead of 24/30fps and 3-D instead of 2-D, then storage requirements will be higher. But I think that almost everybody will be booting off a flash, or a flash/hard drive hybrid (the latter scenario is beneficial for Seagate/WDC). On the server side of things, the picture probably won't look as bad.

There are different segments of the storage industry. Companies like EMC and Netapp that do enterprise storage are increasingly becoming software companies. (With some services and integration... because their products are complicated.) I think that this segment of storage will be an area of a lot of value creation. Dell paid a ridiculous P/E multiple for Compellent. There are companies that make flash hard drive controllers (e.g. Sandforce). These chips will become increasingly complicated as time goes on (in the future, they will have to do a lot more error correction). There may be some unusual value creation here... though I don't know who the winner will be. There are companies that slap parts together, e.g. OCZ. I don't think that this is a great industry. There are companies that make the parts that go into a hard drive... e.g. Hutchison Technology. Not a great industry.

Flash is rapidly growing in datacenters. People have figured out how to overcome that problem (to some degree). It is already selling right now. Here is a great blog on the high-end storage industry: http://storagemojo.com/ Unfortunately, I couldn't figure out who the winners will be. A desktop drive at 15k rpm would be extremely uncommon. The Western Digital raptor runs at 10k rpm versus 7200rpm (and 5400rpm) of mainstream hard drives. I don't know of any products targeted at the desktop market that is faster. I think that flash will clearly kill off most demand for high-rpm hard drives.

A minor point to consider is that flash technology will have trouble continuing its rapid increases in capacity and performance. Shrinking the size of the transistors will start running into some big problems in the next several years. Technology changes can happen very very quickly. Software... look at ICQ and Myspace. Smartphones... look at RIMM and its stock price (or market share or free cash flow). Storage... look at the Jaz drive. USB thumb drives and mp3 players have killed a lot of demand for CDs and floppy discs. I think it's perfectly reasonable to expect the current trend of more flash to continue for the next few years.

A: Any analyst who is worrying about that fundamentally doesn’t understand the industry. Flash is a complimentary technology, it’s not a competitive technology. It seems like the CEO is trying to talk up his company. To me, it is very obvious that the mix in storage between flash and hard drives is moving towards a higher % of flash. I'm not smart enough to know what the ultimate percentage will be, but I think that hard drives will always have some share of the overall market. In laptops/ultrabooks (e.g. Macbook Air), there are clearly a lot of consumers who are buying a laptop that only contains a flash drive. This trend will increase slightly. In enterprise markets, storage will likely be a hybrid of flash and traditional hard drives. Flash storage allows for many IOPS whereas hard drives have the advantage of storage/$. I think there will be a lot less high speed hard drives as hybrid flash solutions would offer better IOPS/$. 2- Historically, computing has been in an incredible secular bull market but many segments of it haven't made that much money at all. Look at IBM... it has gotten out of memory manufacturing, making consumer PCs, and making hard drives. These aren't high-ROE areas of the overall computing market. IBM is probably one of the smartest players in the computer industry as it has transformed itself from a dying mainframe company to a software/services/integration company. Intel is getting out of making flash memory (and it got out of making memory a long time ago). Berkshire Hathaway companies in the computer industry would be IBM, Microsoft, Intel, etc. (It currently only owns IBM.) 2b- Of course, flash storage could turn the hard drive industry into a slowly-declining industry. It's really hard to make money in a tough business. I think that 10/20 years from now, IBM/Microsoft/Intel will make a lot more money for shareholders than Western Digital and Seagate. *Long Intel, so I am biased.

Finally... haha. This is one of the reasons why I will never go long any Chinese reverse merger stock: http://www.theglobeandmail.com/report-on-business/international-business/asian-pacific-business/in-china-silvercorp-critic-caught-in-campaign-by-police/article4528671/?page=all Like Francis Chou I bought QXM/XING... unfortunately the insiders just ran off with all the money. :(

There may be some adverse selection going on. The private education sector has been pushing students into taking courses that may not be suitable for them. Many students drop out and/or have difficult finding employment (sometimes the education is not so good, they are unsuitable for what they thought they wanted to do, etc. etc.). The dropout rate and employment rate of students aren't that important to a private college's financial success... for the private college, it is mostly about volume. So they have been trying to get marginal students to enroll in their school. The housing boom was caused mostly by low interest rates and cheap financing from the private sector. Ironically, the private sector was crazier than the US government. The securitization market was behind most mortgages. Now the FHA is going to become the #1 idiot lender. 3.5% down payment...

Part of the problem is that the for-profit education sector was able to generate a lot of profits by making students pay for education that wasn't suitable for them. They would devote a lot of effort into sales and call centers.

http://www.teslamotors.com/en_CA/forum/forums/it-true-there-will-be-model-s-price-increase-near-future Tesla will increase prices on the Model S. Is this a sign that they are missing their margin targets at the current Model S pricing? *Not gonna lie... this has been an awful short so far. The borrow is ridiculous. We'll see how it all works out in the end.