yudeng2004

Yes it is probably too early, but I do this based on intuition, not indicators. even if FFH goes to 320-330, that's only 20-25% upside left on those leaps. I can get better gains elsewhere. I think commercial real estate is still crap. I am too early into them. It is ok, if they decline 10% I will take my profit and run. I am largely betting on pullback rather than actual decline. The big decline will not come for a while, but there is bound to be pullback after all this runup. I want to profit from that pull back before the market actually recognizes the economic problems.

Bought 13 contracts of FFH leaps around 250 1 month ago and sold last few days for an aggregate 60% gain overall. Profit is going into various undervalued stocks + slowly building put option position in various crap to hedge against market decline. Pretty sure certain puts will lose money but those can be used to deduct gain. Puts make up around 1% of portfolio right now, I will put 1% more into them for every 3% the market rises. If market rises 30% more, I should end up with 10-12% of portfolio in puts. I think rally was due to recovery from pessimism but not due to recovery from economic conditions. Many things still have huge BK risk. US consumer is toast. I do believe certain companies will continue to rise even if market declines, as the market is still in the middle of a sorting process. I look for 300-500% return on puts if market goes back to march levels.

Unless applied with a PURE quantitative method with diversification such as the Walter Schloss way, value investing is AN ARTFORM. Bill Miller tried to do what an artist do while he should have been sticking to the Schloss method of pure Grahamian Value. He is a pretender. That's just my opinion.

Yudeng, you always come up with interesting posts. I'm curious, what sorts of option combos do you use, and what sorts of oversold/overbought 'indicators' do you look for? On the combos are you mostly buying options or selling options? Do you set up synthetic longs, or do ratios/backspreads? I presume you look more for unlimited upside scenarios than for selling theta decay? Is that right? So maybe buying calls and either selling puts to fund them, or selling a fewer number of sooner expiring calls? Then what do you use to time your exits and entries? Do you just use the classic 'calculate intrinsic value', buy at a MOS and sell as it gets close to the IV? Or is there something else you're referring to? Thanks for any insight. Bargainman. It is not true that unlimited upside are the best scenarios. I would say generally you want to sell short term and buy long term. For example say Google, when it was near 300, you would buy in the money or at the money long dated leaps and sell higher strike shorter term calls, and you would repeat selling the short term calls as they expired out of the money. It was worthwhile to do that. You could almost have the money you paid for the long term entirely earned back from the selling of the short term over the period - you were going to recover 80%-100% of your money at that point. Generally if you have a good grasp on the value of a stock with low EARNINGS VOLATILITY and likely to be growing earnings steadily and is undervalued, you can buy leaps and then sell out of the strike higher short term ones. Options can also be mispriced on volatility. I think overall it is more worthwhile to be a net seller of volatility than a buyer of one. It's also good to use very small amounts of money to buy puts on really crappy stuff. I rather do this than shorting - since my loss is limited with puts. Regardless, I believe these strategies could support you up to 50 million without doing much work. At 50 million+ I hope you have API's and computer algorithms finding things for you. In fact I say algorithms can help you up to quite a large number. Computers can improve your filtering and execution by a lot.

1) 10m-50m market caps 2) both catalyst + undervalue, but mainly I trade things that could return 50%, and I get the 25% more from trading. I think in the US market there are some stocks right now that could return in the 35%+ range, with the right option combination you could easily boost that to 50%+ with no added risk (options are still often mispriced). The question is whether you want to be active or lazy. If you don't mind doing the busywork with options, you can gain 15-20% more per year with option combos than your stocks. You don't even have to pick obscure stocks, you can do this with large caps like google. My personal idea of investing progress is like this: step 1) passive investing with index funds step 2) find good jockies (like ffh, markel, brk) and let them invest for you step 3) learn to value companies properly and train yourself to be able to do buy and hold on undervalued stocks step 4) learn to calculate risk/reward with option combos and use them to boost your returns step 5) learn overbought and oversold conditions that often happen with stocks/options and learn swing trade (u must be able to value the underlying security properly, of course) step 6) do combination of 4) and 5) until you have a ton of money that the liquidity of the stocks and options you are trading are no longer meaningful for the size of your portfolio step 7) now you have a lot of money and the liquidity no longer exists for you to trade, what can you do? you go back to step 2) or 3) if you want to enjoy life or you advance to the next step 8) step 8) attempt to understand global macro and learn to trade commodities and currencies, as well as use exotic instruments (such as CDS) to trade on macro scenarios. Use macro trends to help you get into stocks that will most likely to go from undervaluation to overvaluation (not just fair value) The return you can expect is that it should rise from step 1) until step 5), then it will decrease. I am pretty happily stuck on step 5) I want to stress that generally speaking the more higher-return methods you seek, the more "inhuman" you have to become. For example, if you were in Buffett's position in 1999 and you saw Coca Cola at 50 PE, you sell it, irregardless of how many friends you have on the Coca Cola board. You must not be comfortable with anything at any given time. Basically, you are on "alert mode" all the time, feel as if you are fighting a war, and operate in a very emotionally detached state. Applying "war mentality" to any activity usually does enhance your results, but in the end since most activities are not war, and the consequences are not life and death, so the effort put forth to put yourself in a "war mentality" while sacrificing the good feelings of life will not justify the results unless you are actually fighting a war. If you will notice that Buffet became more and more human as he aged and is making mistakes a younger version of him would not have made. He is more experienced and more knowledgeable as an older person, but he now lacks some of the mental toughness he had as a younger person. Mental toughness will decay as people age, this I am certain. So the goal right now is to build it up to a high point so when the eventual decay comes, you are decaying at least from a relatively high point. I don't have a family yet but the window of building these skills are closing very rapidly, I feel. 75% a year? that is impressive... 2 questions: 1) how small are your small caps (for example, when I think small cap, I think DCU, whereas, most would probably think of SNS as a small cap) 2) are you investing with a catalyst for your prospective 75% returns in small caps? or are they that undervalued?

Mine: 85% developing country micro/smallcaps 5% FFH calls 2% mall operator puts 8% cash I expect 75%/year from micro/smallcaps, 40% from calls, puts are for the small chance there is mass fear, so those should make up for the losses in other positions, and cash is not something I really want to own given the kind of printing we have seen.

People think in micro terms. When you lose 10k in your investment portfolio, then you see a TV on sale at 30% off that saves you 200 bucks, the 200 bucks saved can make your day and make you forget your 10k loss.

I agree with most of your points - but I wouldn't draw the analogy to sports stars. Most sports stars are pretty unique products, in that there really aren't another 100 people out there who could do their jobs better. While I agree with the marginal benefit of traders in terms of providing liquidity as well as keeping prices in line with value, I was mostly referring to bankers - not traders - and especially the 95% of bankers who are below Managing Director. A lot of these Managing Directors or Executive Directors are pretty irreplaceable due to their personal connections, but it is the junior bankers that I have a problem with. My main point was that 90% of the jobs people do at Goldman or other banks are labor intensive, have not much intellectual requirement, and mostly involve fancy data entry and Excel work. These jobs on average pay 200k-400k per year, and there are tens of thousands of them in the financial sector. The question is why do these people get to use very backward methods to do a job that modern technology already has many many answers for while being paid like stars. Sports star pay actually make economic sense in that no matter how much the economy grows, there will simply be no more than that many people who can actually play at the highest level. So their value is increased since society is getting richer while their own numbers are not increasing. And nobody would watch sports if athletes were replaced by robots (and robot tech is nowhere good enough to replace them right now). Most of the junior bankers' job, however, should be automated, since they are repetitive data entry jobs. The key point here is how replaceable these bankers are. These jobs are not rocket science or brain surgery - they are just labor-intensive (due to unwillingness to use tech more than anything else) repetitive tasks. These jobs should not be commanding mid-6-digit salaries. Top athletes and top traders are unique talents, so they get paid for the uniqueness. Bankers are mostly labor, but are paid like talents - this is the biggest problem.

Sorry, I was merely expressing my view of why I dislike Goldman. I don't think the TARP money or bonuses are the problem - but rather that money is being paid in a way that does not justify the value of that particular kind of labor. If you invent the cure for cancer, you should be paid a few trillion. However, ibanks and especially Goldman, want to promote this model in which you sit near the pipes of capital flow and try to suck as many drops out of a leak here or there. When a Goldman banker get richer, society does not get incrementally richer because of it. There are two kinds of efficient capital allocation: 1) to increase cash flow in terms of monetary capital 2) to increase the productivity of labor through the introduction of technology or management paradigm shifts Paying someone 200k-400k/year to do fancy data entry is a embarrassment to both those two points. Progress will always threaten the relative economic power of a portion of people, so they will do whatever it takes to prevent it. But to be completely honest, I think the greatest fear of these people is that they are replaceable, that they are not special. The threat to their egos is even a greater concern than the economic consequences of improved efficiency. If 5% of the people provide 95% of the value, then the rest 95% of the labor can and should be replaced by automation. Just because a lot of automation is not mainstream yet does not mean the value is not there. Our society will have a much lower cost for banking services. We drive down the cost of service in every field we engage in (consumer goods, insurance products, etc) but why do we not reduce the cost of the banking services? Society would be better off for it.

The problem with Goldman Sachs is not that they are using taxpayer money and not paying back (they did pay back) nor is it with their ability to allocate capital. The problem with Goldman Sachs is what it represents - that financing and speculation are better rewarded in society than building and innovating. It speaks to what we currently reward the most - that trading things around should be more beneficial than creating and providing high quality products and services. If you are just out of college, and you work as a banker - what exactly do you do? You are an "excel monkey" - you do data entry and you make sure the pitchbook is formatted correctly. For this you are paid well into the 6-digits. 80% of that work can be done by a smart computer algorithm nowadays, and unless you are higher rank than a VP, you don't get to interact with the customer that much anyways. Why is the computer algorithm not there to do the data entry and the formatting? Because unlike the internet, the banking industry is not "open". It is governed by habits, and old tradition. So banking, especially investment banking, is a very "labor intensive" industry. Did you know a lot of banks actually have people changing the stock price in their Pitchbooks MANUALLY every day as the stock price changes?? Did you know you can generate 80% of the content of a pitchbook by writing a smart google spreadsheet in less than 1 hour? And did you know you can earn 200-400k/year writing these pitchbooks using the dumbest methods known to man ? Nobody doing this kind of work should be paid that much considering the much cheaper alternative is there. The banks don't adopt it because the higher-ups don't know much about tech and they can still earn healthy margins without it. I can care less about the TARP money, I get more angry when i see people doing things that can be done at 1 dollar and charging 100 dollars for it. What Goldman Sachs represents is the opposite of what Henry Ford represents: Ford - don't make money by how much less you can give for a dollar from the customer, but by trying to always give more for a dollar from the customer. Goldman is the exact opposite. I think it is not an accomplishment to be rich and be able to afford a car when everyone else is on horses in the early 20th century, but it is an accomplishment to drive the cost of a car so low as to make everyone be able to afford it - this is called progress. Goldman does not help progress - it merely tries to get as rich as it possibly can without contributing to it.

I liked this book overall. But there was one aspect of it I really didn't like - that the author conclusion was too focused on individual success and not on systemic ignorances that need to be fixed. The real takeaway from the book is that the system could be improved to provide better equality in opportunity. But the author focused too much on why individuals were successful, so the audience basically can easily say "I don't have those circumstances, so I won't try". If the focus is on individual success, then he needs to elaborate on WHY DID THOSE PEOPLE SPENT 10,000+ hours? He kind of brushed aside personality throughout the book, yet this the most important reason why individuals put in those grueling hours. 10,000 hours and luck is how you acheive success, but personality + passion is how you put in 10,000 hours and increase your luck. I rather learn more about WHY PEOPLE put in 10,000 hours. From my own experiences, it generally comes from a desire to win (whatever this means, but that's the internal engine) and passion (psychological feedback loop is such that what most consider to be 'work' they consider to be 'enjoyment'). So that's my 2c - that reading this book gives you a sense of systemic imbalances in opportunity, but certainly does not explain why certain individuals are able to do the things that cause success more than others. A good book would focus on both, as that would take away people's excuses to say "I don't have this, so I won't try".

I would agree to this, I am 27, and last 12 month, I am up about 30% after-tax. I would be up 100% if I had more experience with trading. I hesitate too much when trading due to lack of understanding some patterns that i had a gut feeling for but lacked the experience to pull the trigger. But I would also say that extreme mental concentration is the best best way to do any activity. I also got too lazy since I was making money too easily prior. I am learning to change my attitude to "regardless of how much I make, I will not become more or less happy". The idea is to do activity as well as you can do it, regardless of the payoff. I am slowly, slowly getting there. Sometimes I still smile when I beat the market and others, but I am learning not to. Every time I get happy, bad things happen.

I am doing more engineering work myself now than when I was employed at microsoft. Investing takes only 30% of my time right now. But I have observed something with the engineers/entreprenuers that I hang out with - the productive capacity of the ultra-skilled few has been increasing at a faster pace than the productive capacity of the average. I think more and more productive powers are concentrated in the hands of a few people, and their relative values have increased dramatically in the last few decades. What this means is that unless we move even more into Human Service based jobs for the many, we will likely find ourselves with more unemployment. See, labor used to be more based on physical work - the difference between the best physical laborer vs. a regular person was not in the order of ten or hundred-fold range. Now, labor is going to be more and more based on intellectual work - and intellectually the difference between people can be huge. So what this means is that we better hope there is a lot of real and value-added work that the average person can do to keep employment high and retain a middle class. I do not doubt our ingenuity at all, but it's just how do we retain a middle class which is really a social problem more than an economic one, that is worth thinking about. I mean you don't want to have a society where a bunch of geniuses own automations, programs, robots, and machines, and an army of unskilled service people like you see at walmart. That is increasingly what society will look like as we become more and more efficient. How do we become more economically more efficient but retain the middle class?

This is the key here - the most HEALTHY way to progress from this point on is to have productivity of the extremely few create efficiencies but have a EVEN BIGGER SERVICE sector. So sure I can be a genius and design an assembly line that decreases the cost of computers 10-20x, but what it also means is that there must be accompanying HUMAN SERVICES created that people need and want along those products. If we have smaller and smaller amount of very very productive people, then new sectors must emerge that offer products/services never seen before. The ONLY WAY to keep the majority of people employed in a society where productivity is more and more concentrated, is to CREATE MORE HUMAN SERVICE. People will always want or need something, and as long as people want or need things, there will be an economy. But if wealth is entirely related to productivity, I am not sure if the current trends will work from a SOCIAL point of view.

ben - that was some nice writing. Now regarding education - I remember when I was in China, when I took an exams, the scores of every student was POSTED ON THE WALL for EVERYBODY to see, so everyone knew who the best students were and those who didn't do well were embarrassed by this. This is crazy brutal but IT WORKED. A lot of this has to do with what is considered COOL in school. When I was in China, the smart kid is the cool kid. In America generally it is someone who dance/sing or play sports well. This is a SOCIAL INCENTIVE and it has huge effect on the behavior of kids. Also today, education level AND PRODUCTIVITY has been polarized. For example, if you look at some of the entreprenuers of today and the amount of productivity that they are generating vs the average, it is crazy. If you work in a factory, at most you can be 2 times more productive than the average person, but if you are a computer programmer, a systems designer etc you can be HUNDREDS TIMES more productive than the average programmer. That doesn't diminish the value of the average programmer, however. We are slowly becoming a society of not only concentrating wealth, but CONCENTRATING PRODUCTIVITY as well. The internet is also concentrating productivity.

I am not sure if everything is based on incentives. I have so far done ventures where I have shown talented people that they can earn real revenues doing something, but it does not seem to motivate them. It is NOT the case that incentives work like expected. Sometimes people are just simply lazy. They are happy to put in 50% effort to earn 100k/year as opposed to put in 150% effort to earn 1 million/year. I have met many entreprenuers the last year, and I am convinced that they have some kind of mental short-circuiting (the thing that makes them passionate). I met a girl who quit 150k salary right out of college to start a company that had crappy prospects because her reason is "I cannot work with dumb finance types from business school, I will quit regardless of how much I am earning". She's now doing about 20x as well, but still, it was a huge huge risk and her parent at the start of her venture told her that if she failed, they wouldn't support her. I think the motivation to be independent and the motivation to achieve at the core, seem to be even stronger than monetary incentives.

yup!

I have thought a lot about the economy in the last year, and I noticed that we often discuss the effect of culture,media and psychology on the market or a company, but rarely do we discuss its implication on the real economy and the country. The economy is simply consisted of people providing goods and services that are needed and wanted by others. The only way to produce goods and services is to do work, and the only way to increase the quantity, quality, and variety of goods and services is through innovation. It would seem logical to think that the best way to stimulate the economy is to enhance education, encourage innovation, and create a fair and competitive system based on meritocracy. While the market is down, the banks' balance sheets are broken, and the fed is using actions not ever seen before, rarely mentioned are the pillars that make up the core of an economy - its people. K-12 education in the US pales compared to its university system, and in the last 10 years, we have also rewarded the trading of value in such a way that encouraged many intelligent people to pursue careers in finance as opposed to science and technology. These factors have long-term consequences much greater than the gyrations of the market, interest rates, or banks' balance sheets. I have many intelligent friends from the Ivy League school I went to, and for the last 4-5 years, the majority of them worked at ibanks or hedge funds, and over these years, it has eroded away certain qualities that they used to have - hunger, courage, curiosity, and creativity. They have been trained to do work based on 1 line of thinking "how do I gain the most $$ per energy spent" and they now think that is the representation of achievement. About 80% of them have gained about 40+ lbs, look like they are 40 when they are still in their 20's, and are worried to death about losing their jobs in the financial sector. If you are 70, and about to retire, I can understand your worry about your nest egg and such, but in your 20's and fearing the future??? Is it too late to learn ANYTHING in your 20's (other than sports which you peak in your early years). What has happened to their spirits and will? I think as a young person, one should not fear a loss of job, or the loss of net worth, and certainly not the future. As much as I hate what the ibanks did with their synthetic products, I hate what they did to a young generation of bright young minds even more. If a strength of a company can lie in its culture, so too can the strength of a country. Buffet cares more about the culture of wells fargo than the balance sheet of wells fargo. And I think we should have a discussion about the culture of the US with relation to its economy as opposed to the balance sheet of the US. Anyone care to comment?

I don't see that unless a new sector replaces the over-bloated financial sector in terms of contributing earnings to the index, and I don't see any of the current sectors being able to do that in the next 2-3 years. I think the market will be up and down for 2-3 years, so better to find good stuff, and trade as they move up, and then find other good stuff. I don't see the mass fear of the last few months, and I don't see a new bull market either.