Scalper Algorithms, from Richard Owen

The Mrs and I are at Twickenham to see Rihanna with two no show tickets to sell.

What is the correct algorithm for touts (a.k.a scalpers in the US)?

First ask to buy then use that as a reference for an offer?

What is market standard discount an hour before start?

And what average vig does a tout make?

Here is my fast hand analysis of the market made by ticket touts.

Touts are generally criticised as parasitical, like many financial market participants. However, they provide a valuable service. Since concertgoers know there will be a market made, they are willing to show up for events without tickets. Last minute spare tickets that would otherwise be worthless to punters are therefore saleable.

For a £60 Rihanna ticket at Twickenham as the base of calculation we can note the following:

- Initial instinct in selling a ticket before the event to a tout might be to accept a discount to face value.

- The touts take advantage of this by using anchoring. Different touts rapidly quote heavily reduced prices of £5 or £10. This is accompanied by pained faces and "there's no punters around love" despite a stream of people walking by.

- Conversely, reverse anchoring is recommended: ask the tout "how much to buy a ticket?", then when they quote their price say, "ah, that's good, I have one to sell". And vice versa.

- In fact, the touts carry inventory, some of which they must have purchased before the event. This indicates that they expect to trade out their inventory for par or above, in order to avoid capital losses.

- Since the market is disorderly (although there may be unspoken 'exchange rules'), a punter could in theory join them and front run the next bid.

- All this suggests that tickets should never need to be sold for less than face value, despite this being the typical deal struck by punters looking to sell. This is especially true for ticket pairs.

- The tout's inventory drops to zero value at the time of the event. However, with Twickenham as our example, there are plenty of pubs and clubs nearby, one assumes that the last minute backup plan is to prowl the pubs offering the tickets to couples at knockdown prices. If offered a £60 ticket for £10, the price of a few drinks, one assumes it is easy to trade out of the inventory to locals at the last minute.

- As a finger in the air, one feels a buyer looking for a ticket before the event would pay ~£150 (and this is without factoring in any 'hotness' of the tickets in the weeks before the event thanks to EBay, etc.).

- Thus, for sake of calculation, if you assume (wrongly) for each tout a 50% chance of having to sell each ticket held in a forced sale just before the event at £10 and a 50% chance of getting it bid at £150, it suggests an average liquidation value of £80.

- If tickets are on average bought at ~£20 and sold/liquidated on average for £80, for a £60 ticket that's £60 or 100% roundtrip vig. For pre-purchased inventory, that's £20 roundtrip profit or 33% vig.

- So if 80% of inventory is pre-purchased and 20% bought in the market, that's an average vig of £28 or ~50%.

- For a ~50k seater concert, £3m of ticket inventory exists. So for every basis point traded (5 tickets) that's £300 face value.

- So for each basis point traded (5 tickets) that's £140 profit to the touts.

- It's hard to guess the actual number of basis points traded without empirical data. If you guessed 25bps, that would be £3500 profit to the touts.

- Since taxi drivers double up as the stereotypical tout, and they typically make ~£12/hr, for three hours work (£36), that would suggest an equivalent hourly income for ~100 taxis drivers (ignoring a fee for "return on risk capital").

- The above suggests either (i) very thin trading <<25bps of face value, (ii) my vig estimate is way off, or (iii) this is a way to make supernormal profits by taxi drivers. I eyeballed about 5 touts in total at our gate, so generously say 25 total.

Jeff Watson writes:

My dad used to scalp tickets when he was a kid. He financed me to scalp the Rolling Stones 1971 concerts, and I had to pay kids to sit in line to get the tics. Typical of my dad, I did all the work and he got his 60%. Still, it was a good learning experience, I made a couple grand (which was a lot of money in 1971), and that money was the seed money for my first excursion into soybeans and commodities in general. Had I never scalped the Stones concert, I would probably be a drone in a lab somewhere with a much different career path. Funny how the most minor things in life can affect the biggest changes. Heck, the most minor things in the market can do the same thing.

Richard Owen responds:

That reminds me of a story told to me by a friend acquainted with one of London's most successful touts. He is known at "Gary One-Point-Eight". Why? Because he bought a house in Chigwell worth £1.8m with the proceeds.

Mike Tyson, from Richard Owen

I watched this short documentary Mike Tyson presents The Heavyweights last night: pretty captivating. Mike Tyson has a reputation for being a bit of a mad man, but on his specialized topic, you can see a real depth of knowledge and intelligence.

Popovich, from Victor Niederhoffer

June 19, 2013 | 2 Comments

Popovich likes to yell at his players, possibly manhandling them the way he possibly did at the Air Force Academy. He reminds one of McNamara and the whiz kid when they toured the Ford factory in 1944 to install modern management methods there. In order to show the whiz kids how tough they were, Bennet, Ford's assistant in charge of security, manhandled all the operatives on the factory floor pushing them around and berating them for this and that infraction. Of course the whiz kids were astonished as they used cuddly management in the armed forces to embrace their soldiers to provide good morale. One wonders whether Popovich's yelling at his players caused them to slack off in the last 28 seconds and that's why they lost the game. Also, whether rough management in companies, firing willy nilly, and providing no benefits, a la Welch (assuming you couldn't talk sexy to him on Saturday mornings before golf), leads to inferior performance.

Richard Owen writes:

Branson's maxim is a company should be for employees first, then customers, then shareholders. That will create the best spirit, thus the best product, thus the best return. There seems to be a bifurcation of high performers: at one extreme are the psychopathic cultures that rule by fear, at the other, those that resemble religious/positive thinking inculcation.

David Bohm, Shared by Richard Owen

Faced with explaining gyroscopic motion, most physics students learn the various formulae, involving conservation of angular momentum, and produce an explanation in a relatively mechanical and formulaic fashion; but Bohm needed a direct perception of the inner nature of this motion. Once he was walking in the country, he imagined himself as a gyroscope, and through some form of muscular interiorization, he was able to understand the nature of its motion. In this way he worked out, within his own body, the behaviour of gyroscopes. The formulae and the mathematics would come later, as a formal way of explaining his insight.

From very early on in his scientific career, Bohm trusted this interior, intuitive display as a more reliable way of arriving at solutions. Later, when he met Einstein, he learned that he too experienced subtle, internal muscular sensations that appeared to lie much deeper than ordinary rational and discursive thought.

Without explictly knowing it at the time, Bohm had returned to that ancient maxim "as above, so below", the medieval teaching that each individual is the microcosm of the macrocosm. Bohm himself strongly believed himself part of the universe and that, by giving attention to his own feelings and sensations, he should be able to arrive at a deeper understanding of the nature of the universe

This particular skill remained with Bohm throughout his professional life. His colleague at Birckbeck College, Basil Hiley, once remarked, "Dave always arrives at the right conclusions, but his mathematics is terrible. I take it home and find all sorts of errors and then have to spend the night trying to develop the correct proof. But in the end, the result is always exactly the same as the one Dave saw directly".

I found this excellent interview with the gentleman in which he presents his views on perception and the necessity of incorporating many viewpoints in order to gain greater understanding.

The Style of Gerry Lopez, from Jeff Watson

June 4, 2013 | 1 Comment

Gerry Lopez, might not be the best surfer ever, but his style approaches sublime. No other surfer, ever, had the natural style of Lopez. I wonder whose style in the world of speculation is similar to his.

It's his flow, the way he glides along the face, always on the best part of the wave, gets tubed, and casually stands up fully erect, shakes some water out of his hair, little smile on his face, then kicks out of the wave and starts over again. He is totally relaxed, zen-like, despite the conditions being really hairy.

What you never see with Lopez is the horrible wipeouts that he took as the cost of doing business. He was brutalized by the reefs under the waves, yet he always kept riding. Lopez's style is something a trader would want to emulate but on a different plane.

Richard Owen writes:

An equivalent investor would be Crispin Odey.

The only man in town with enough style, accrued wealth, and know how to swing a book that actually looks like a hedge fund of old.

Able to turn gracefully on a wave before it engulfs him. Who pulls out the longboard, the quad, etc. dependent upon conditions. And who is likely as fascinating off the water as on.

A Parody of Our Town, from Richard Owen

May 22, 2013 | 1 Comment

Ten Moments Of Market History That Are Completely False

1. A posthumous memo distributed by Steve Jobs to Apple stating "focus only upon on a recap" was accidentally addressed to the R&D department rather than Finance.

2. Ben Bernanke carries a full beard because he and the boys went too far with a drunken jape involving an Illuminati tattoo.

3. Bunker Hunt later regretted a spot of Bazaar shopping whilst on holiday in Egypt when, upon his return, he left a housekeeping note to his secretary stating "ensure market silver is moved into corner."

4. Bernard Madoff was framed by exchange executives for running a legit fund that implemented an early version of a high frequency trading strategy.

5. Ben Graham originally began his career as an options market maker and wrote a less successful book around the concept of investing based on Marginal Safety.

6. Andrew Mellon - a culinary enthusiast - later regretted a diary mix-up in which he believed himself to be giving the quote "liquidate stock" to Wisconsin Soup & Broth Enthusiast.

7. Mark Carney is a Manchurian Candidate sent to the UK by the Quebecois secret service to settle colonial wrongdoings.

8. Warren Buffett had originally bought the Washington Post with the intention of introducing Page 3 girls but was vetoed by Katherine Graham.

9. The Denise Rich song "We Walked Away From A Love Affair" is an allegory about OPEC and the spot oil market.

10. The Paris Peace Accord was deliberately botched by Henry Kissinger because he was running a large short swap spread with his broker and saw another twenty points in bonds.

The Gold[smid] Crash, from Richard Owen

The Rothschild dynasty famously got one of its big breaks following Wellington's victory at Waterloo. With an information network, backed by his four brothers spread across the Continent, Nathan Meyer was able to receive news of the victory twenty-four hours ahead of everyone else. He then either (i) bought the British bond market, (ii) bear raided it and then bought it, or (iii) was really short (as the tale is untrue) and lost money, depending upon which version of history you want to believe. To finance the trade, Nathan Meyer utilised OPM. He had been elected fiduciary of Prince William's fortune. This should have been invested in gilts, but instead was used to back the Rothschilds' speculation.

But the Rothschilds were far from the only banking family to sprout up in the era. Constant European conflict provided repeated demand for sovereign capital. For example, 1715 and 1745 (eerily familiar dates) saw domestic invasion of Britain by the Old Pretender and Bonnie Prince Charlie.

Some useful lessons can be learned from the Goldsmid banking family. Led by Benjamin and Abraham Goldsmid, they were essentially on the other side of the Rothschilds' famous trade.

According to historian Derek Taylor, the Goldsmids got their start as London bill brokers to provincial banks. They moved into forex and loan raising, and eventually received an appointment as the Government's preferred banker alongside Baring Brothers. The Goldsmids were granted British preference by breaking a City cartel. The Government had historically raised funds on the back of gold reserves, but towards the end of the 1700s reserves had dwindled and brokers were demanding high discounts on underwritings. By fully extending their resources and forgoing substantial discounts, the Goldsmids broke the cartel.

Leadership of domestic financing led the Goldsmids to capital raisings for British supported activities in Russia, Prussia, Austria, and Hanover. The Goldsmids, not wanting to loose their preferred status, continued to back operations to the hilt.

Sadly, the strain from it all led to the suicide of Benjamin Goldsmid inv1808. Abraham Goldsmid continued operations, but in 1810 was caught with £800,000 of an unsaleable new issue, at which point the bond market dropped heavily in value. Abraham continued to back the deteriorating position, to great cost. He eventually committed suicide as well. The tragedy came only a few years from the nadir of the bond market and the Rothschilds' huge coup.

We might draw some useful lessons from the comparison:

1. If you accrue a fortune by repeatedly backing an attractive risk, at some point, stop doing that and diversify.

2. If you're leveraged in a position that's breaking down and could take you under, get out no matter what the emotional or reputational cost.

3. Make sure you have sufficient reserves to survive the nadir of the market in order to prospect in the rebound.

4. If it all blows up, dust yourself off and try again. People hated you for your success on the way up and hated themselves for their schadenfreude on the way down. Either way, suicide is not the answer!

John Tierney, the President of the Old Speculator's Club, writes in:

It seems there are several other useful lessons here. First, bankers with "skin in the game" will tend to be far more scrupulous in their lending practices than those utilizing other people's savings and backed by government deposit insurance. Second, shame and disgrace, once as fundamental to business as honesty and integrity, has been supplanted by bailouts and reinstatement.

Richard Owen replies:

I dig that people want to see bank CEOs disgraced, so these are great points.

I away wonder though, given there is a banking crisis approximately every decade, and without central bank support, e.g., in the 19th century, thousands of banks went poof every crisis, the only logical conclusion would be that no rational individual should become the CEO of a massively leveraged carry trade, as is will automatically lead to disgrace at some point. Nature is pretty smart for solving solvable problems by iteration, it has failed to do so for banking so far. Which gives pause for thought. [*Pulls out narrow banking manual*]. The only banks that seems to survive century to century are places like Moses Mocatta, which don't run a real balance sheet.

Vanity Plates and the Market, from Richard Owen

An article displaying many interesting price psychologies towards an asset of no intrinsic value is "Why Do People Still Buy Personalized Number Plates?".

And it's a successful £2bn seigniorage raised for the UK government.

Notice the classic auction room behaviours of those interviewed.

Not a single person overpaid (they declare).

The Earl of Chesterfield’s Letters to his Son, from Richard Owen

I've found a British version of the Chair's recommended "Letters from a Self-Made Merchant to his Son". It is "Letters to his Son" by the Earl of Chesterfield on "the Fine Art of becoming a Man of the World and a Gentleman."

Breaking the Educational Oligarchy, from Richard Owen

April 24, 2013 | 1 Comment

"More jobs for graduates than the unqualified in UK - study"

A very sad development, restrictive of freedom and upward mobility. The educational oligarchy must be broken. Did the Left ever imagine egalitarian policies would burden their constituents with a choice between permanent career Apartheid or back breaking debt?

One Queries, from Victor Niederhoffer

March 29, 2013 | 1 Comment

One queries whether Passover, Yom Kipper, or Rasha Shauna is bearish for stocks and will say a prayer of atonement and share a torte if it turns out not so.

Ralph Vince queries:

But what about Passover? What about the full moon and a shorting a (very) quiet market?

Jeff Watson writes:

Back in the pit days, during a quiet market, locals would start selling the market down to where it would trade and order flow would start coming in.

Anatoly Veltman writes:

Can this be a way of creating "real world" demand?

Anatoly Veltman writes:

The gold-platinum, of course, was entirely different as no Gold is ever consumed. It went out to at least \$225 (we should ask Rocky if he knows the high tick, and how long the price was available). To my recollection, the spread double-topped in unusually brisk manner, i.e. the record prints didn't last more than overnight.

What is it about spread trades that make them so treacherous? Gold/plat, corn/wheat, the Volkswagen stub, etc.

Is it because the mis-pricing is so "obvious" that people get greedy? Because it's a matched trade, they allow too much for a positive hedging effect? And because they want to trade the spread, they focus too much on maintaining the relative basis, rather than using risk-management appropriate to a gapping short, even if it screws up the net position?

Rocky Humbert writes:

IMHO the reason the spread trades are dangerous can be attributed to several phenomena:

1) Price Anchoring and false assumption bias. People believe that just because the spread between X and Y has been bounded previously means that this is a law. In the case of stocks, in the fullness of time, it's a good bet that every stock must eventually either merge, get taken over, divest or go backrupt. Otherwise, one stock would take over the world. This means that if you are long GM and short Ford (because it always traded within X bucks), you will eventually blowup. And because GM/F is a mean reversion trade, it has the typical person adding as it goes against you. Can you trade around it and get out at a profit? Sure. But that is intellectually dishonest versus the original motivation. I suspect trading around the position is, in reality, what most profitable spread traders do. They don't put it on, add to it and wait for total reversion. In the case of commodities, there are short-term supply and delivery issues, so even if you are conceptually right, if the convergence doesn't occur before the contract expires, you will incur a permanent loss since the mis pricing doesn't exist in the next contract. That's the case with C / Wheat right now. Corn is at a premium to Wheat in May. But at a discount in all of the other months. So you need to get the price and the timing right. Or you will lose money.

2) Difference versus percentage. I find that people look at the spread as X minus Y. They often ignore X / Y. As prices rise and decline sharply, the ratio becomes more important. But it's not how most people's minds work. For example, a 2 cent mispricing when corn is at 250 is quite different from a 2 cent mispricing when corn is at 736. Oops make that 695 (limit down)

3) False Volatility Assumptions. Assume the price of X0 and the price of YÂ™ and you are trading X versus Y. And assume that the spread moves up and down \$1. People mistakenly think in terms of \$1 on 100 … and that's not a big move. In reality, you are trading the spread of \$1 and so when it moves to \$2 , that's a 100% change — no different from Apple going from \$444 to \$888 . Don't laugh. I can't tell you how many people fall into this intellectual trap.

4) Butterfly traders. Before interest rates were pegged, I used to chuckle at the 2/5/10 butterfly traders in the bond market — who would do the trade in MASSIVE size. And they'd talk about how the 2 was cheap to the 5. Or the 5 was cheap to the 10. Deconstructing the butterfly trade revealed that (almost all of the time) the P&L of this popular duration neutral curve trade moved with the direction of the 5 year. So it really was a bet on the 5 year rising and falling. And everything was dwarfed by that.

When I was worked with Kovner, he always hated spreads. He would say that it's hard enough to get one trade right. Why add to the aggravation and try to get two or three trades right?

As Usual, from Victor Niederhoffer

As usual the reports of employment with all the adjustments to the economic numbers, coming from the government employees at the department chaired by the leader who likes her kids to sing the iron anthem, are designed to increase the importance of the department of the interior and redistribution and vote buying as Nock and Tollison and the public choice people said. First, the revised number from last month (which are 100,000 or so lower than previously reported) + the current number are very poor. And the total is about in line with the past dismal figures. (when will all these revisions be taken into account so that there is not such a big opportunity for the public to do the wrong thing).

The decrease in the unemployment rate comes from all the people who are not looking for jobs because they are on disability or given up hope. Third, the numbers are designed to show that when the rate goes up, they can attribute it to the fact that the survey was taken before sequestration (the economics chair has said this and important pro spending leaders of all sexes have it in her or his talking points already), so that when they report worse numbers in the future they can say it was because of the dreaded effect of reducing gov expenditures over 10 years by 800 billion rather than the fact that the numbers themselves are random.

Kim Zussman writes:

"What is then the connection between these numbers and the market?"

1. If unemployment and GDP numbers continue to improve, Oval Occupier takes credit and proving that higher taxes are pro-growth
2. If it worsens, it can only be due to House Republicans protecting the rich
3. If unemployment and GDP numbers continue to improve in a world without investment alternatives, stocks go up
4. If it worsens, time for more QE - which is now well known to be extremely bullish for stocks

Paving Wall St for Hillary (sorry Ross).

Always get long a fraud short you think is going to print above consensus. Men with gold filings and lucky silver dollars like their trading sardines.

Also, the disenfranchised pipe welder is the new fifties housewife. Instead of the little woman adding her own egg to the betty crocker brownie mix, the oxy acetelene operator adds his own self pity to a bottle of Jack Daniels. Growth in the fifties was still pretty good.

When Kruschev met Nixon and fulminated that Russia would outpace the US inside of seven years, it is easy to look back and laugh. At the time, much harder to be sure Russia wouldn't win out.

The Dangers of Rookies, from Victor Niederhoffer

March 7, 2013 | 3 Comments

One of the dangers of having a rookie on your team is that the rookies like to find regularities based on looking at every interval, every magnitude, every market, every combination thereof of x variables, and every time period. It's truly a search of implicitly hundreds of thousands of possibilities to come up with a regularity, fifteen on say 40 observations that has about a 5% chance of consistency with randomness assuming it was the only 1 selected. The problem is that they seem so good in isolation before you realize it was the fruit of a tremendous number of look backs, complexities, and multiple comparisons. I strive to tell them "Simplicity." Read Zellner. Another good thing to do is see all the biases from using cart or regressions trees of automatic interaction detector, and all the safeguards built into those methods, —- and of course they overfit, and multiple classify and are only recommended as preliminary by the authors. But …. but…. how destructive it is to receive one of these regularities during the middle of the day… especially when you have a position on the opposite side from the rookies. Proffer. What lessons can we derive from coaches that treat the rookies with grave skepticism like Woodson who calls Shumpert "Rook" and all the players that haze the rooks endlessly to prevent them from interfering with the natural order of things.

I have a rookie close to me and he tends to over-think things and makes grandiose predictions. I keep sending him back to the drawing board because he's not scientific and usually wrong. I love when he says if A is happening then B must happen down the road…..but then again it's not his capital at risk. Rookies, if they are lucky, are taught rational thinking, but sadly aren't taught that the world and the markets are very irrational. I think in the future that every assistant I hire in the future will list "Phone Clerk for a bookie" on his resume.

Richard Owen writes:

PLOS Medicine: Why Most Published Research Findings Are False

Baron Black, from Richard Owen

Baron Black was Chairman of Leyland Motors. Leyland was one of the UK's great domestic car manufacturers and eventually evolved into Rover Group.

Rover was subject to one of the great "almost happened" deals of British Private equity when, in 2000, Jon Moulton's Alchemy Partners bid to take it over. The deal failed and Rover was taken by the "Phoenix Consortium" - a transaction subject to much comment and controversy when Rover subsequently failed and its assets were sold to Nanjing Auto. The Alchemy deal became an "if only" daydream via which Britain's domestic car industry could have been saved rather than quietly parceling it out to Asia.

But back to Baron Black. Born in Barrow-in-Furness, Cumbria, the good Baron moved from humble beginnings to peer of the realm. Solid business principles no doubt helped him along the way, three of which (via Jim Slater) were:

- Be firm in decision and considerate in execution

So for example, if he had to deal with an executive who had illness, family problems, or was struggling with his job, Black would be firm in insisting upon a solution, but considerate in the way he went about it. Could extra training be given? A transfer? If a move to a new job was required, plenty of time should be given to find a more suitable role, and upon departure, compensation should be generous.

- Back or sack

Baron Black would rarely fail to put his weight behind an executive, and if he did so, it would be to the fullest degree.

- No misunderstandings with friends

In doing business with friends, Baron Black would ensure there was never confusion. He would tell the tale of how a coal merchant in Barrow gave him some advice when he was about to leave his home town. The merchant said "Bill, because I am your friend, I sell you your coal at nineteen shillings a ton, which is a shilling less than to anyone else. Also, because you are my friend, when we deliver to your house, my man only gives you nineteen hundredweight to the ton."

Not bad for a boy from Barrow Technical College.

Looking for Development Examples, from Richard Owen

If folks would be so kind: could they name their favorite examples of intelligent and rapid economic development of poor countries (but with reasonable educated workforces, so you're not starting with e.g., Afghanistan)?

Famous examples are: Singapore, HK (although these have a unique entrepot status, and therefore wider learnings are not so great?). And then South Korea was impressive.

And of course China, but this was so big and diverse that its hard to reapply. I am looking for more "turnkey" type stories.

Those few examples went totally against the "Washington consensus" for many of their policies, much to their benefit.

Any further case studies people would recommend?

Many thanks.

Gary Rogan writes:

Chile and the Chicago Boys come to mind.

Jan-Peter Janssen writes:

I recommend looking at Estonia. It's a tiny Baltic state which is remarkably advanced in IT . Skype was invented in Estonia. Programming is taught at school from age seven. The government aims to reduce bureaucracy through a so-called eGovernment. It is linguistically and culturally close to Finland (where Nokia is from) and together these two nations should have the critical mass of talents needed to create a high tech industry.

Estonia is ranked the world's 13th freest by Heritage Foundation.

Richard Owen writes:

Ok, here is a consolidated list of suggestions. Thanks to all.

Estonia
Tysons Corner, VA
Reston, VA
Japan WWII
Chile
Poland (Mazowiecki)
Latvia in 90s
Drexel Burnham under Mike Milken
Jaimaica vs. Singapore
Taiwan
Vietnam
Mauritius

Cultural Clues, from Richard Owen

February 12, 2013 | 2 Comments

Queen's Lady Gaga was a huge hit globally. It was beloved in the UK. It was Queen's major seller before their "live aid" moment which spurred them on to their greatest album and peak success.

I recently read, however, that it was a dud in the USA. Queen had been on the ascendant there. Thereafter, their name in the US was on a downward spiral. Which was aberrational as Queen were major sellers in pretty much every major western country.

Why? Apparently the comedic video, featuring the band all dressed up as women, left Americans with a funny feeling in their gut.

I guess to politics, religion and honeys one needs to add humour?

The market equivalent would be Blackstone (i) buying Celanese in Germany, (ii) fussing around and doing some jazz hands in the interim, and then (iii) reselling the same company in the USA for twice the price.

This History of Racketball and Markets, from Victor Niederhoffer

While most of you don't play racketball, I believe the hobo's history of racketball on site was very educational for those with kids who wish to play it or anyone who plays any racket sport. The torque and the backswings on the backhand and the bends in the pictures are most enlightening. One notes that there have been 4 champions who ruled the racketball world for about 5 years each, winning almost every tournament. I noted the same thing in squash, and tennis isn't too far away in that area also.

One wonders if a similar phenomenon relates to markets. e.g. is there one stock that can outclass all the others in performance for a certain number of years, like Hogan, Swan, and Kane. Eventually those champions receded due to age, competition, or injury. Is there a predictable turning point?

Alston Mabry writes:

Obviously, AAPL is the current version of this. And looking at AAPL, one sees an example of a company that stumbles as it fails to effectively deploy the very capital it accumulates due to its success.

A commenter writes:

This is the measure of how good a CEO Jobs was. He may have been a great innovator and manager, but he may not have been that strong of a CEO. A good CEO assures succession, and it isn't clear that Jobs was successful in this regard. The same was true of RCA and David Sarnoff, By comparison, Alfred P. Sloan accomplished this task for GM, Adolph Ochs for the NY Times, Hershey with Hershey Foods, and the Mars family with the Mars candy business. That hasn't been the case with Apple, at least not yet. Any guesses on how long the Board waits until Cook is replaced?

David Lillienfeld writes:

There will always be outliers.

There are also companies at the other tail with managements performing more for "enjoyment" (like me athletically–I suck at racketball but I very much enjoy playing it and when I've had access to a court, done so for 3+ hours a week). Are there stocks in which management is in it for fun rather than shareholder value "enhancement"? Sure. It isn't hard to identify underperforming companies.

As for a predictable turning point, there should to be tells in each industry, but that doesn't address your question about one sentinel stock. I don't think there is a sentinel today the way GM was in the 1950s and 1960s. (Some might argue that Johns-Manville was a better sentinel. Either way, there was a single stock.) You've got a globalized market and no one company occupies a dominant position in a sentinel industry (such as autos in the 1950s and 1960s). Of course, implicit in this uninformed comment is that a connection exists between stock performance and corporate performance.

Or have I misunderstood your question?

Alston Mabry writes:

Just to do a little bit of counting, here are the 48 non-financial US-based cos with cash of \$5B or more, with LT investments added in. The amounts are in billions of dollars, and the list is sorted by the Total column.

total cash: 729.4
total LT inv: 337.7
cash + LTinv: 1067.1

Ticker/TotalCash/LTinv/Total

AAPL   39.8  97.3  137.1
MSFT   68.1  9.8  77.9
GOOG   48.1  1.5  49.6
CSCO   45.0  3.7  48.7

XOM   13.1  35.1  48.2
CVX   21.6  26.5  48.1

GM   31.9  14.4  46.3
WLP   20.6  22.1  42.7
PFE   23.0  13.4  36.4
ORCL   33.7  0.0  33.7
QCOM   13.3  15.1  28.4
KO   18.1  10.2  28.2
IBM   11.1  15.8  26.9
F   24.1  2.7  26.8
AMGN   24.1  0.0  24.1
MRK   18.1  5.6  23.7
INTC   18.2  4.4  22.6
HPQ   11.3  10.6  21.9
JNJ   19.8  0.0  19.8
BA   13.6  5.2  18.8
CMCSA   10.3  6.0  16.3
DELL   11.3  4.3  15.5
UNH   11.4  2.6  14.1
NWSA   7.8  5.2  13.0
EBAY   9.4  3.0  12.5
LLY   6.9  5.2  12.1
ABT   11.5  0.4  11.9
AMZN   11.4  0.0  11.4

GLW   6.1  5.2  11.3
EMC   6.2  5.1  11.3

HUM   9.3  1.0  10.3
FB   9.6  0.0  9.6
UPS   9.0  0.3  9.3
WMT   8.6  0.0  8.6
SLB   6.3  1.7  8.0
DVN   7.5  0.0  7.5
S   6.3  1.1  7.5
PEP   5.7  1.6  7.3

PG   7.0  0.0  7.0
UAL   6.7  0.0  6.7

HON   5.3  1.3  6.5
DISH   6.4  0.1  6.5
RIG   6.0  0.0  6.0
ACN   5.7  0.0  5.7

COST   5.6  0.0  5.6
NTAP   5.6  0.0  5.6

DE   5.0  0.2  5.2

This is a brilliant list with many lessons.

- 80/20 rule: \$2tr of surplus cash is bandied about as the figure for US corporations. Here are 50 covering over half of that sum.

- The 1% have an internal dissonance. Here is their accumulated share of National Product, all stored up and failed to be reinvested. The 1% neither wish to reinvest their cash, to reduce their share of Product, nor to have GDP decline, nor to run deficits. This is in aggregate impossible.

- By giving you will receive. By being cowardly, you will realise your fear. Tim Cook is hoarding his cash out of fear. Nobody has EVER put that kind of cash to work successfully. Not even Warren Buffett could do it on his best day. If Apple attempts to do so, they will end up hanging themselves. David Einhorn is so on the point with his analysis. And for once an activist is helping make management's jobs more secure, not less. They just need to listen. Take some options, recap the stock, make yourself heroes. Don't think you can use that cash to buy another magic wand. You will end up buying a pup. The most recent example of what might happen to Tim Cook if he doesn't see the light is the CEO of Man Group. They totally feared that AHL would stop working. They grasped at their cash looking for any credible diversification. They bought GLG at totally the wrong multiple. And then it all fell apart. All totally well intended, all well thought through. But if they had just recapped the stock - "coulda been heroes". Get out of your own way.

Steve Ellison writes:

A couple of theories:

The crossover point from innovator to mature company occurs when revenue from continuing product lines becomes large enough that it dwarfs revenue that could realistically be expected from starting up a new product line in a new niche, was the theory in the innovation class I took in business school. Let's say that a company might develop a completely new line of business. If it were successful, it would be doing very well to get to \$1 billion per year of sales of the new line within 5 years. If the company already had \$20 billion per year in revenue, management would probably devote more attention to nurturing and further developing the cash cows that bring in the \$20 billion than to a risky venture that might, if all goes well, add 5% to existing revenue. One might test this proposition by setting an arbitrary sales per year threshold and checking stock price movements of companies after they move past this level.

Adoption of new technologies follows an S curve pattern, driven by a small number of early adopters followed by more cautious but herdlike technology managers at large businesses, was the theory advanced by Geoffrey Moore in Crossing the Chasm. One might test this theory by looking for companies whose sales growth decelerated to less than 20% of the maximum growth rate of the past 5 years.

The Myth of the “Secular” Bear Market , from Victor Niederhoffer

February 4, 2013 | 3 Comments

The professor once performed a beautiful study to see if all the turning points that one could retrospectively select

to be short and long a la birinyi who shows almost 5 times the market drift by getting in and out of the bear and bull markets with 20% being a fuzzy base line , —– and he found it completely consistent with randomness. It was a model of what a good study should be. Perhaps he will share it with us again, or at least tell us the drift.

Richard Owen writes:

That would be great to see. It is definitely one of the most mumbocentrically diverse areas of asset analysis and a firm and incestuous friend of the buy and hold debate. The more important corollary to the depressing corollary would therefore be that successful investing is almost entirely about the quality of your liabilities? Would a Japanese salaryman wealth manager with the Professor's report in hand have been able to maintain a career? If not, would he have been right to get a copy of Taleb out to console himself?

Charles "the professor" Pennington writes:

I have kind of forgotten how that went, but I will see if I can find it.

There was a study of something kind of along those lines from Big Al and/or Kim Zussman not so long ago that was very compelling, covering dozens of possible trading strategies, but only one or two could thread the needle and do better than random.

Russ Sears writes:

Not as rigorous as the Professor's, but I did a back of envelope study of the Dow from 1900 to 12/31/2012. Not including dividends, just the index.

There were 20 beginning of the years where the Dow was less than it began 10 years (of course these have overlapping decades).

What do do if you retrospectively find yourself in a "Secular Bear Market"?

The next year change in the dow average +14.35% min - 23.5% max 59.6% stdev of 21.1%. Whereas the overall was 4.7% and stdev of 20.9%.

Likewise the next ten years change based on roughly 20% steps of prior 10 years (again overlap) This only covered 1910 to year end 2012 since I needed 10 year periods before and after. There were 2 years 2008 and 2009 that the decade prior was negative, both had positive next years. But we do not know what it will be in 2018 and 2019 so they were not included. Here the overlap does matter since the next 10 year periods are not independent.

Count  group avg Range for Group    Next 10 years  Range for group

19     -16.8%     -49.7%       1.4%     108.5%      -3.6%     271.7%
19      16.9%       2.0%      33.0%      82.0%     -39.0%     238.8%
19      60.2%      35.4%      98.1%      95.8%     -15.1%     240.1%
19     137.9%      98.5%     169.4%      75.2%     -39.8%     323.4%
18     240.9%     172.7%     323.4%      96.8%     -49.7%     317.6%

Richard Owen writes:

Very kind and thoughtful work! Apologies to be very dumb: what periods do the five groupings of 19 counts represent? And group avg [col 2] (I would have thought trailing? But the premise is those periods were negative?) The "excluding divs" heuristic so common for stock analysis is, I guess, one reason why we need King Dimson so badly.

Russ Sears writes:

The period in the five groupings in the next decade. Hence, may double, triple or more count some years. It takes some time for the "past decade" to move into another grouping.

A Warning that Engendered the Discussion from Victor Niederhoffer:

Please don't write more as you have threatened about "secular bull markets" or "secular bear markets" that can only be described in retrospect and have no predictive significance, and are mumbo jumbo and depend on random selected starting and ending points and would only lead our fine readers to wallow in absurd, unhelpful charlatanism.

Cleared for the Option, from Chris Tucker

As the S&P 500 futures hover around the 1500 mark I am reminded of the "Cleared for the option" which gives a pilot the option to do a full stop landing, stop and go, touch and go or low approach or missed approach…

From the handbook:

1. The "Cleared for the Option" procedure will permit an instructor pilot/flight examiner/pilot the option to make a touch-and-go, low approach, missed approach, stop- and-go, or full stop landing. This procedure will only be used at those locations with an operational control tower and will be subject to ATC approval.

Richard Owen writes:

Let us say a small prayer for the hungry equity broker who's volumes were down 30% last year on an already tough year and wish him much whipsaw, turnabout and retracement around the top. His commissions will be deserved sustenance and emboldening for 2013.

Upon Waking, from Victor Niederhoffer

Upon waking up, the verse from Trial by Jury:

"one cannot eat breakfast all day/ nor is it the act of a sinner/ when breakfast is taken away/ to turn his attention to dinner. And it's not in the range of belief/ to look upon him as a glutton who, when he is tired of beef determines to tackle the mutton"

One can't decide or figure out whether this post was prompted by Mr. Grain's good fortune in marriage, or a Niederhoffer alert memorializing my inordinate tendency to be a contrarian sent to me by Miss Perfect.

Yes, I am a contrarian above 1500 S&P with all that implies about the euro and fixed income. It seems to me like the flexionists and other sinners determine to tackle the mutton after many rounds of breakfast.

Richard Owen writes:

It's always interesting to see how the anointed enjoy their lunch and dinners. On a recent visit to Hammersmith, one enjoyed a visit to the beautiful Church cafe — with discounted coffee — and spent an ultra-civilised half hour with button down marmish nannies and housewives. This was prior to an appointment with rare books at St Paul's Girls School, wherein one is greeted by a forest's worth of antiqued Edwardian wood paneling and transported back into a Mary Poppins netherworld. Walking back down the high street, there are plentiful and lavishly staffed cult cafes, ethical butchers, and second hand bookshops to visit.

It seems that with the squeezing out of standardised efficiencies; the disassembling of workforce collective power; the ravaging of the idyll to a barren landscape of unemployed, disenfranchised waitresses, butchers and bookshop owners, that the equity have collected their bounteous share thereof and reconstructed what they disassembled on their doorsteps. Drink down your Starbucks, else who will buy the cottage industrialist's cream teas?

Victor Niederhoffer replies:

One would inquire of Mr Owen whether any of the button downed nannies and housewives seemed to be of the kind that would administer spankings to the Royal Stock Exchange Members who frequented such clubs in the old days when the President was greeted on the floor with a standing ovation when he was outed for patronizing one.

Meet Mark Landis, One of the Most Prolific Art Forgers in U.S. History, shared by Richard Owen

Meet Mark Landis, One of the Most Prolific Art Forgers in U.S. History:

The Avante/Garde Diaries recently released these two brief clips of an interview with master art forger Mark Landis who for the last 20 years created dozens if not hundreds of convincing art forgeries including works by Picasso which he then donated to institutions around the United States including over 50 art museums. Landis would often arrive at the museums dressed as a jesuit priest with elaborate stories of how he had acquired the artworks he subsequently donated. Incredibly, after a 2007 investigation it was determined that Landis may not have actually broken any laws. He never once tried to profit from the fake artworks but instead seemed to gain enough satisfaction from fooling curatorial staff members at various institutions. While the interviews above by the Avante/Garde Diaries are not a comprehensive documentary, they are a fascinating glimpse into the world of this rather bizarre man.

The Ease of the Hoax, from Victor Niederhoffer

January 25, 2013 | 2 Comments

The ease with which Lance was able to maintain his hoax, and the difficulty that others had in breaking it, and the penalties they had to bear, and the great emoluments that were made from it by Lance and his crew should be generalized. What other hoaxes and conspiracies are there in the world? What is the dead weight and direct cost? I have been the victim of several such frauds and conspiracies but was smart enough in the last ones not to take legal action as I knew that my legal and opportunity costs would be many times greater than the possible recovery. I believe several on the list have also been so victimized. How prevalent is it? And how can they be defeated and fought against?

Anatoly Veltman writes:

Not a direct answer by any means, but the first time I heard Carl Lewis respond to a question on how good Ben Johnson was (question was posed way before Ben Johnson got publicly "discovered") — I was quite stunned by Carl's stern reaction. It was like you asked him if he could outrun a Martian in his prime. One might either conclude sour grapes from hints like that, or suspect that there is no smoke without fire. In any case, maybe one of the best ideas is to ask a competitor?

The question raised here, by the way, may be the most important question of the couple of decades. Every single one of you places your livelihood on the line daily in the system which is totally rigged against you in the worst way.

Jim Lackey writes:

I'll guess the opportunity cost of the lengthy background, due diligence to N^th, and flat out distrust of people, most of whom are benevolent and kind, would be something like the a 1,000,000% drift stocks give us per century. I'll flat out call it that being a skeptical, safe person is costly.

If it is too good to be true, it is, and we are not idiots. We all have some street smarts here. A well oiled con? I'll fall for it every time and I usually get the joke. To hell with them. To catch a thief one must be one or a good officer of the law.

David Hillman writes:

Some of the answers we know.

1] always get it in writing, 2] pigs get fat, hogs get slaughtered, 3] know thyself and resist your weaknesses, 4] invest in what you KNOW, 5] there's some business we just don't write, 6] most of us will make more money investing one's self than in someone else, 7] in the Shakespearian spirit…."neither a borrower or lender be", gifts are OK, but don't expect a return, 8] give at the office, 9] don't invest what you aren't willing to lose, 10] don't buy meat off the back of a truck, and 11] never buy anything with "Magic" in the name.

I have almost always found it best to be the "initiator" of an investment, an idea, etc. than to be "initiated upon". Also, when one is in the mud, it's usually better to hint at legal action, then settle rather than sue (The con often has the same legal and opportunity cost as you, at least the same amount of risk of losing and possibly more dire consequences.)

Even if one is optimistic and has faith in humanity, something I share with Lack and the chair, one of the best ways to avoid cons, scams, etc. is just to say "No, thank you" and go on about one's business. Except, of course, when the high school girls soccer team shows up at your door step in short uniform shorts and t-shirts, smiles all around, selling \$1 candy bars to raise money. You say, "Sorry, ladies, I don't eat candy, but here…..", then you give them \$20 and go on about your business.

Jim Lackey replies:

David,

First never let little ones have a coke out of kitchen or touch your computer. One of mine must have spilled soda in my key board.

Next I must differentiate a scam from a good con. A scam, as in Fla scams or any mumbo we see on buy it now sites, well, burn me once and the 2nd time I am a fool and we get that joke.

A well oiled Con, do not even try. Do not worry about it. These are men of genius and spend their lives dedicated to stealing. Cops are so silly. It takes the after the fact to catch most cons. Only a genius officer of the law with 100 years experience will catch these guys in the act.

If you ever read or see some of the cons these men come up with… yeah, I guess it's easy to see after the fact, yet I am amazed at the work, the genius the art and science, James Bond movie types.

They seem to prey on our weakness of love and benevolence. Give that up and ………….. well just don't.

I can see why a Mr or others are concerned. We try to warm family for their future. I guess that is what lawyers and trusts are for, to protect the pot.

Trying to prevent the next con is to me like attempting to predict the next tech innovation. We all saw the music deal and the Ipod, but we dissed or didn't get the Iphone's change of the world and laughed at a zillion Ipads later. Now my friends are trying to buy aapl on a pullback at 500. Umm it was 15 or 30 or 50 many baggers ago. Move along.

Anatoly Veltman writes:

Jim, yours is very good advice on relationships. My grandpa taught me exactly that. But when it comes to today's electronic financial markets, there are a number of caveats. And since you brought up drift again, let me try this: what if today's world heads have no interest in perpetuating the traditional drift? What if we're moving toward a reset, after which today's investors will not regain purchasing power in a generation or so? What statistics can you rely on, if the US has not conducted ZERP in many preceding decades? Nor has it ever experienced the current rate of deficit growth.

Gary Rogan writes:

To know about a large financial conspiracy for sure you either have to be present during its planning or see overwhelming and pervasive accounting irregularities. How can one ever be confident that some group has conspired for some wide-spread reset? Whose evidence can you trust? If any particular highly-placed person is saying "yes" or "no", or if someone is writing that it should be clear based on this or that, how can you be sure that any of this is a result of a conspiracy and not otherwise-originated processes or actions?

Anatoly Veltman clarifies:

I'm not saying there is conspiracy already in place as defined. There are certainly unusual goings-on:

1. The Fed has never entered the long-term market to this extent before.
3. The employment data has never been groomed in particular fashion for this long before.
4. The US deficit has never been in this shape before.
5. The European experiment has not been really tested yet.

There will come a point, when only unprecedented last-moment multi-national "co-operation" will save the humanity. Figure out in which way, and you are golden.

I was recently thinking about just this topic and was considering penning something along the lines of "Conspiracy and the Scientific Method" — even if just to try and settle what I think.

My sequence of thoughts about the helicrash in London had made me think of the essays by actuaries about 9/11. How your correct statistical assumption for 9/11 upon first impact was a terror event. One of Goldman prop's guys in London protected his book with Eurodollar to good profit.

Like all complex topics, it is complex. On the one hand, conspiracy or, more often, functionally equivalent structures, are very important in business. On the other hand, I think for the most part "there is no they".

To precis one thought: I think Lance is a good case study: it wasn't an 'illuminati conspiracy': he was widely known to be doping in the right circles. A public charade was maintained by many parties involved. The message was packaged and diluted appropriately for the media. That sort of "widening circles" structure is what differentiates it from the nutty "illuminati" type conspiracy concept.

For a very interesting case study, see Richard Heckmann and China Water. If Heckmann can be taken for a fraud, after huge ground work to avoid so being, so can all of us lesser mortals.

To quote Victor, "Market is pricing in inflation of 1 or 2% a year for the next 10 or 30 years. Yet every repub and every free market person predicts a catastrophic rise in inflation and interest rates. Who knows better?"

I can't agree that all will end well, but my theory of the market is that it doesn't really price what it has no idea about, so they just haven't figured it out. Under such circumstances, for anyone in particular, other than the guys planning it (paging Dr. Palindrome) plus some Free Masons and the Illuminati, it seems like figuring out how and if the unprecedented last-moment multi-national "co-operation" will save the humanity is too computationally intensive.

Jim Lackey writes:

Perhaps Mr. Stefan can overrule me as to when, but one doubts there was ever a time when the elite class wanted to perpetuate anything but the certainty of their own. Unless the rules in the USA go above and beynd the restictions of the EU, China and all, I can't see how anything but good can come out of our future. Less good or not as good as ones past or beliefs is relative. Yet I grew up in the 80s and saw the worst of it all for the good working men. Now we see the recession and depression of finance and perhaps the medical. Let's get the joke no way can the govie medical and finance command such a slice of the economy. It will be shared fairly by free market forces in new buisiness and growth. Construction is back and even oil refineries are being expanded again and never ending job at BP in Whiting IN.

I'll note the huge growth and investment now In Tulsa OK out to Nashville and building plants and things right here in US of A as even the advantage of current energy costs is enough to over come the rise in tax or any other threat. If you do not believe it, the Nordic EU venture boys are in deep buying all they can in Tulsa and kids are running Hass Machines out of their garage as start ups. The innovation is not in Silicon valley and instagram or new social…it's building real for the fracking that may or may not go global.

Tommy Ryan shot me an email back and once I figure out how deep this fracking can go global we shall have better answers to your questions. The DC boys are so far behind the kids. They are busy trying to regulate the white show firms that are already old line banks. From what I can tell, the kids already left for Singapore or some island to trade. I'll never leave the US, but if my kids were not in grade school I'd be Larry's neighbor.

Stefan Jovanovich writes:

There is only one reason to be optimistic about the future of the United States. It is that the country keeps redefining who the 'elites" are. It infuriated Henry Adams that a man with only a technical education could become the 19th century's most popular President. What was even worse was that a jumped up railroad lawyer's son could become the voice of all that Republican hard money. The Zinnistas, who never bother to do any counting, love the idea of the ruling class because that crude parody of Darwin's theory is as wonderfully tautological as the notion that a species' fitness determines its survival. The present Mandarin rule by believers in the pump theory of money spending is truly awful, but it hardly qualifies as a uniquely disastrous deficit ZIRP episode. One can argue that the country's entire history from the 1830s through the Civil War was comparably awful. We are not taught to see it that way because the extravagance, waste and fraud occurred not at the Federal level but among the states, not on Wall Street but among the country banks and state treasuries; but the country's government and official lenders were just as skint as they are now. All of this is now safely forgotten because of the explosion of wealth creation that occurred even in the defeated South in the last third of the 19th century; but no one visiting the U.S. in 1840 or 1850 or 1860 was writing home to tell everyone how marvelous it was. Dicken's sour descriptions were accurate, and Tocqueville's rosy forecasts were already an anachronism by the time they were published. No one was predicting that the Democrats' spoils system would do anything but continue. Yet within 2 decades the dollar had become an international currency and the marvels on display at Philadelphia were putting the Crystal Palace show to shame. We shall simply have to wait and see; the only certainty is that the Times (assuming they can get Mr. Slim to give them the money to survive) will be against whatever the future brings.

This is an interesting case of a hoax that refused to die even when exposed, it's illustrative of how no amount of denial will destroy a hoax that is sufficiently implanted prior to the denial.

The Indian rope trick is stage magic said to have been performed in and around India during the 19th century. Sometimes described as "the world’s greatest illusion", it reputedly involved a magician, a length of rope, and one or more boy assistants.

The trick, considered by western magicians as a hoax, was perpetrated in 1890 by John Elbert Wilkie of the Chicago Tribune newspaper. There are no known references to the trick predating 1890, and later stage magic performances of the trick were inspired by Wilkie's account.

The Death of the Eccentric, from Jeff Watson

January 20, 2013 | 1 Comment

Eccentricity/degree of crazy is class based. If you are rich and like to chase dogs down the street while naked, you're considered to be eccentric, but if you are poor and do the same thing, you're crazy.

Gary Rogan writes:

Eccentricity at the top is also somewhat cyclical as people often want the opposite characteristics to the last package that didn't work or simply became boring. You could argue that Hollande is far less eccentric than Sarkozy, that Putin, Yeltzin, and Gorbachev were/are significantly more eccentric than anyone between Khrushchev and them, and that the highly non-eccentric Bush Sr. led to a string of Presidents that were each differently eccentric, to coin a concept, with the last one being more non-orthodox in a number of parameters than eccentric.

That same principle works on Wall St. It's seems highly predictable (in retrospect, of course) that the dot com crash would result in a reversion to the mean in the investment bankers' wardrobes. Animal spirits that clearly go back and forth between extremes work the same way, as revulsion with past failures is probably one of the strongest forces in investment trends. The Depression and the subdued consumer spending in the US lead to the consumerist paradise which itself reversed to a kind of malaise, with a few more minor cycles that followed.

Eccentricity is in many ways like the periods of fast mutation in evolution, which themselves tend to revert to the mean. And speaking of Churchill the reversal he suffered after being thrown out of office after the war had a profound influence on him, and likely his health and was used as an example of being extremely powerful and then suddenly not, and the effects of such changes, in the book I'm currently reading. Nothing is forever, and I'm sure eccentricity will return to the British political scene in due time.

Richard Owen writes:

Winston Churchill would sit starkers in his bathtub and dispense to his secretary notes and instructions for the Great Offices of State. Soak complete, he would towel off, don a Chinese floral silk dressing gown with matching fez hat and take bedside visits from his Cabinet. Part of the game was to leave the odd setting and peculiar garb unmentioned. Out for duty, he would don a custom made Siren Suit - a glorified boiler suit - and set forth to whichever geopolitical circus he had budgeted his day to. Sartorial fruitiness featured throughout.

What does one look for in a great leader, thinker or doer? An ability to act independently? Think differently? To consider the facts of the matter and take provocative, even painful action?

Siegmund Warburg - perhaps the only individual in the modern era to create a full service European investment bank from scratch and entirely within his own lifetime - upon his death bequeathed a large library of fine literature and other books. Within sat a unique folio of pornography, surgically extracted, before handing over to St. Paul's School for Girls for posterity. Some of Siegmund's business rules included: good manners; consideration of others, particularly juniors; ignore the fashionable; non-conformism as a right, not a duty. This does not feel familiar in today's Wall Street.

To be branded an eccentric these days can be terminal. Particularly in the American paradigm. Instead of independence, determination, or contrary thinking, it is a signal of unreliability and cause for suspicion Some of the driving factors are positive: the British eccentric has class-based roots. The public schoolboy, assured his place in the firmament, could afford to transport his playground hijinks into the world of work. Just as investment bankers re-donned their suits after the dotcom crash, so did the pressures of openness and assessment mute some of the rakish public school excess. But a paradigm can swing too far.

Who do we have leading the Labour left in the UK? Mr. Edward Miliband, an impressive man whipped into a strait jacket of conformity. He arrived by Faustian deal with the trade unions; everything he utters is calculated for short term gain. Even the passion moments - the big conference set-piece speeches - feel badly scripted with an insipid instinct for popular policy.

The batty leaked clip of Miliband repeating the exact same soundbite answer to every question thrown his way at a media scrum - whether it made an iota of sense or not - gave the impression of a malfunctioning replicant whose circuitry had badly fused. The semi-autistic response mechanism was a guerrilla tactic to cope with today's minefield 24-hour news loop.

The irony is that Miliband's constituency - the unions - have backed a man who's supposed state educated, humble upbringing, disguises a militant intellectual father, likely private tuition, and all the other bells and whistles of hidden cultural advantage. The socialistic Labour left's distaste for the British grammar school has hamstrung a generation of intelligent working class and closed off their main vein of progress to the upper-echelons. Eccentric this is not.

And the Conservative coalition? Headed by David Cameron, every inch the PR man. A better looking, more charming and affable version of Miliband? Perhaps. But we need not repeat the basic assessment - they are both ultra-Blairs. But without the Blairite flair within.

Blair himself was most definitely an eccentric. He was willing to throw his whole reputation onto the pyre for a self-styled humanitarian war in Iraq. You can assess the merits, but at least it showed spine. Blair was so effective that he construed the ensuing hate into three back-to-back election victories.

Blair, however, left a messy intellectual endowment: the idea that, today, politics doesn't matter and one just acts as intelligent administrator. And just at the very turning point where hard choices, real budgeting, became essential.

What isn't obvious from the public record is that underneath the "call me Tony" demeanour was a burning intellect. A man who insisted on rising early to pen his own speeches. An intentionality. His followers have adopted the outer shell, but are missing the flavoursome crab meat inside.

When discussing interesting investment outcomes on Wall Street, we refer to eccentric or non-systematic returns. Bespectacled, absent minded Leon Levy could thread profitable eccentricity back-to-back. Just don't ask him which subway stop he meant to get off at, next year's EPS to one decimal, or the date of his anniversary.

Wall Street now wants conformism pretending to be eccentricity. Actuaries demand excess return without deviating from the crowd. And yet we're surprised at the aggressive behaviour created.

Ace Greenberg, penning Chairman's memos to his staff would channel the advice of Haimchinkel Malintz Anaynikal, an imaginary and often hilarious business philosopher; a figment of Ace's minds eye. If Jamie Dimon tried that today, he would be carted off the premises and branded a loon. Perhaps private partnership allowed better for private eccentricities. But something deeper, more cultural, is at work.

To quote British banker John Studzinski: "after the dotcom crash, investment bankers were put through the meat grinder and came out robots." Warburg was so listened to by clients because he actually had something useful to say. His eclectic, eccentric outlook gave him a differentiated, potent opinion. Instead today's bankers collect endless, vapid powerpoint slides rather than bequeathable collections of fine literature. And they have opinions to match. Produce views and analysis like clockwork. But Warburg knew that producing was for the farmyard and generated opinions like manure. Quoth Siegmund: "One general reservation which I feel about some of the US investment banking houses is that they put too much emphasis on measuring, almost from month to month, what a specific partner produces. I don't even like the way they pronounce the word - not produce, but 'prodooce'. All this emphasis on producing - that is all right for a cow, but not for a human being."

Keynes, the great economist, trader, bon vivant, and political adviser was as likely to be found of an evening cottaging with the local bishop as penning a treatise on the National Product. Disraeli, a spectacular Prime Minister, was also a former bankrupt, mining entrepreneur and spiv. Try shoehorning such vitae into a political career today.

What do we have instead in British national life? Andrew Mitchell and the Plebgate inquiry, staffed by thirty full-time police offers, all straining to determine whether a politician muttered the word "pleb" to himself when heading past some cops at Westminster's gates. It's not so much fiddling whilst Rome burns as actively brainstorming more and better fuel supply lines.

Thatcher, every bit the eccentric, would have known what to do. Colleagues stung in the press by petty scandal would be grabbed by the arm and marched through Westminster's lobby. A show of support from the top; a smothering of the flame before it became entrenched in the press.

Straight-laced individuals, politicians, businessmen, forget their independence, their room for originality. Horrific, black swan events demand attention; perhaps a gun review is sensible post Sandy Hook. But don't forget the didactic nature of the Oval; exactly how FDR sucked billions of deposits back into the banks, or a gamely Reagan re-invigorated a whole nation. The lowest cost, highest impact fix would surely be a fireside chat on the benefits of sitting down for dinner daily with the family; taking an interest in your children.

On complex issues, one can't clear one's throat. The free-thinking intellect and the prejudiced have an intersection: the former will at least try on the latter's opinion to see how it fits. But don't dare be caught by the media as such.

Even the thesaurus is gripped by the modern will - it serves up for eccentric: aberrant, abnormal, flaky, crazy. Perhaps all those things. But also: essential.

Williamson Murray, from Stefan Jovanovich

January 15, 2013 | 1 Comment

OK, it's \$90 a copy but it still has to be required reading for any of us SpecLististas who want to continue babbling about history — War, Strategy and Military Effectiveness by Williamson Murray, Oxford UP.

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.

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Self Help Cults and Great Leaders, from Richard Owen

I was reading about entrepreneur Bill Liao to keep myself entertained on New Years. He is very impressive and went from high school dropout to wealthy magnate.

It doesn't take long, when researching him, to come across a handful of Irish articles trying to brand him a cultist for his participation in the Landmark seminars. Landmark is quirky, but just a self-motivational system. And clearly quite an effective one for Bill.

I find it interesting that such approaches to life are easily branded as "cults" or otherwise disparaged. Similar labels are found for Transcendental Meditation and Tony Robbins' work. Robbins' fire-walk seminar recently had a few participants out of thousands receive a burn (and even this may have been exaggerated) - much schadenfreude ensued.

However, if you study impressive men, you will so often find they had some toolset like this to help them during inevitable tough times: Bill Clinton and Paul Tudor Jones both are big Tony Robbins fans; Ray Dalio a Transcendental fan; Bill Liao a Landmark graduate; Warren Buffett a convert of Dale Carnegie.

The classic instance is Clinton calling Marianne Williamson, Tony Robbins and Stephen Covey to Camp David for a supercharge. Say what you like about Clinton, but you can't much question the resilience or achievement.

This is a common response to anyone who follows a belief set outside of the mainstream. I wonder why instinct is to be disparaging? Perhaps the strong leveling instinct in humans? Or the risk that wide adoption might crowd out the more stationary outlook of mainstream belief systems?

Tangentially, witness Mark Zuckerberg, pre-IPO, being subject to leaks of IMs he made as a youngster, quipping about the safety of subscribers data. Or any well known investor going through a tough time; suddenly all their prior victories are forgotten.

Are jealousy and self-motivation two sides of the same coin. Thus the evolutionary benefit of the latter necessitates the former?

Berlin Buys a Chrysler, from Richard Owen

The opening of a Berlin airport has been delayed a 4th time, till at least 2014.

This captures an interesting phenomenon: How can one make large greenfield projects attractive to commercial capital? It seems to go one of two ways: Cost Plus / guaranteed minimum return: a free bonanza. Or equity discount rates that turn out to be totally wrong followed by massive overruns and investors taking a huge bath.

If you go back and look at Eurotunnel, Eurodisney, etc. all ran their costs over by a multiple. One can ask if Buffett is being chintzy about the Wright Brothers, but what is the right (Wright?) alternative?

The other huge problem with Private Finance Initiatives is the major agency issue of negotiating contracts to a deadline: public vs. private players. This one is never mentioned, however. Maybe because it is insoluble.

A Yield of 3.1%, from Victor Niederhoffer

A yield of 3.1 % on the 30 year gov bonds corresponds to what kind of mortgage rate? And what kind of impact on housing?

Michael Cohn writes:

I am not near terminals, but I would guess that the 30 year rate is set by the marketing department over the appropriate tsy, but every mortgage analysis I see that includes the TBA product uses 2-10 year swaps and treasuries to hedge the production. The option adjusted simulations give mtg durations way far below the stated maturity. Of course this duration extends as rates generally rise–the dreaded Negative convexity….

If the 10 year rate is 2% and the 30 year rate is 3.1%, then the average 10 year rate starting in 10 years must be (93 - 20) /20 = 3.6%. Looks like a bust in housing somewhere the far side of the world of 10 years.

I'm wondering whether this can even be arbitraged away. It's always surprising to me how commodity deliveries are NOT, despite very obvious math, only a month or two, or a year forward.

I'm floored by the chair's ability (or eagerness) to predict any economic development 10 years hence. We've been on unprecedented path ever since ZIRP ensued. Both the political and economic moves should be viewed as completely unpredictable, if not random, that far out.

Is the perpetual commodities gap down to commercials being a 600lb gorilla? Particularly sovereign-backed commercials? They will smash open a small arb by being price insensitive, thus making the basis too painful to hold as it widens? Or rather, the basis is too uninteresting to hold if you do it in a size that will leave you safe upon arrival of gorillas?

Is the Chair's maths based on a risk-neutral expectation? ie., the current superlong end of the curve is a good estimate of the future long end of the curve? Which often does not work out that way? [I was trying to figure the formula you are using at the end - which one is it?]

Some of the back and forth over past days has had me thinking about science vs. mumbo. Science matters. But if at least one has a grounding in science, does that justify occasional "mumbo"? ie., We can allow the Chair his gut?

Kasparov knew his science cold: his brilliance was knowing when that grounding told him something in his gut, out of his range of proof, and to act upon it: Quoth Gary:

"Oh it [intuiton] does exist! It's the most valuable quality of a human being in my view. […] You have to learn how to trust your intuition. My view is we severely undermine the importance of intuition, because intuition involves taking too much risk. Whether we like it or not we live in a risk averse culture and intuitive decisions very often cannot be explained in the terms that should be required by corporate culture or by other family members. By adding this core of intuition to the decision making process, we can dramatically improve the results."

Or does Taleb apply, and we should all get back into bed, beneath the covers, as anything more impressive achieved during the day is luck?

Letter of the Day, from Richard Owen

This was written at the start of a memorable bull market, by the savviest commentator, to an insider: John Steinbeck to Adlai Stephenson. Found on the great blog Letters of Note:

===

Mainly, Adlai, I am troubled by the cynical immorality of my country. I do not think it can survive on this basis and unless some kind of catastrophe strikes us, we are lost. But by our very attitudes we are drawing catastrophe to ourselves. What we have beaten in nature, we cannot conquer in ourselves.

Someone has to reinspect our system and that soon. We can't expect to raise our children to be good and honorable men when the city, the state, the government, the corporations all offer higher rewards for chicanery and deceit than probity and truth. On all levels it is rigged, Adlai. Maybe nothing can be done about it, but I am stupid enough and naively hopeful enough to want to try. How about you?

===

New York 1959 Guy Fawkes Day

Back from Camelot, and, reading the papers, not at all sure it was wise. Two first impressions. First, a creeping, all pervading nerve-gas of immorality which starts in the nursery and does not stop before it reaches the highest offices both corporate and governmental. Two, a nervous restlessness, a hunger, a thirst, a yearning for something unknown—perhaps morality. Then there's the violence, cruelty and hypocrisy symptomatic of a people which has too much, and last, the surly ill-temper which only shows up in human when they are frightened.

Adlai, do you remember two kinds of Christmases? There is one kind in a house where there is little and a present represents not only love but sacrifice. The one single package is opened with a kind of slow wonder, almost reverence. Once I gave my youngest boy, who loves all living things, a dwarf, peach-faced parrot for Christmas. He removed the paper and then retreated a little shyly and looked at the little bird for a long time. And finally he said in a whisper, "Now who would have ever thought that I would have a peach-faced parrot?"

Then there is the other kind of Christmas with present piled high, the gifts of guilty parents as bribes because they have nothing else to give. The wrappings are ripped off and the presents thrown down and at the end the child says—"Is that all?" Well, it seems to me that America now is like that second kind of Christmas. Having too many THINGS they spend their hours and money on the couch searching for a soul. A strange species we are. We can stand anything God and nature can throw at us save only plenty. If I wanted to destroy a nation, I would give it too much and would have it on its knees, miserable, greedy and sick. And then I think of our "Daily" in Somerset, who served your lunch. She made a teddy bear with her own hands for our grandchild. Made it out of an old bath towel dyed brown and it is beautiful. She said, "Sometimes when I have a bit of rabbit fur, they come out lovelier." Now there is a present. And that obviously male teddy bear is going to be called for all time MIZ Hicks.

When I left Bruton, I checked out with Officer 'Arris, the lone policeman who kept the peace in five villages, unarmed and on a bicycle. He had been very kind to us and I took him a bottle of Bourbon whiskey. But I felt it necessary to say—"It's a touch of Christmas cheer, officer, and you can't consider it a bribe because I don't want anything and I am going away…" He blushed and said, "Thank you, sir, but there was no need." To which I replied—"If there had been, I would not have brought it."

Mainly, Adlai, I am troubled by the cynical immorality of my country. I do not think it can survive on this basis and unless some kind of catastrophe strikes us, we are lost. But by our very attitudes we are drawing catastrophe to ourselves. What we have beaten in nature, we cannot conquer in ourselves.

Someone has to reinspect our system and that soon. We can't expect to raise our children to be good and honorable men when the city, the state, the government, the corporations all offer higher rewards for chicanery and deceit than probity and truth. On all levels it is rigged, Adlai. Maybe nothing can be done about it, but I am stupid enough and naively hopeful enough to want to try. How about you?

Yours,

John

It was Steinbeck's sentiments expressed above which led him to write his last major novel, The Winter of Our Discontent.

The Secrets of Perenchio, from Richard Owen

January 1, 2013 | 2 Comments

In 1985, Jerry Perenchio bought Loews Theaters from the Tisch family for \$160m and flipped it in 12 months for ~2x. Given the Tisch brothers 'made' this asset and knew the sector, does anyone know what happened? Was it something to do with the anti-trust of movie companies not owning their theaters being lifted — something JP had seen but the Tisch's not?

Also, here are Perenchio's ten "rules of the road", which are a good read, particularly as there's twenty of them:

1. Stay clear of the press. No interviews, no panels, no speeches, no comments. Stay out of the spotlight — it fades your suit.
2. No nepotism, no hiring of friends.
3. Never rehire anyone.
4. Hire people smarter and better than you. Delegate responsibilities to
them. Doing so will make your job easier.
5. You've got to know your territory. Cold!
6. Do your homework. Be prepared.
7. Teamwork.
8. Take options, never give them.
9. Rely on your instincts and common sense. If you go against them you
generally regret it.
10. No surprises. We don't give them. We don't want to get them.
11. Never lose sight of what business you're in. Stick to your "last."
12. When you suit up each day it's to play in Yankee Stadium or Dodger
Stadium. Think big. 13. If you have a problem, don't delay. Face up to it immediately and solve it.
14. Loose lips sink ships!
15. Supreme self-confidence, never arrogance.
16. A true leader is accessible — no job too big, no job too small.
17. Communication is our business. You can reach any of your associates
anytime, anywhere, anyplace.
18. If you make a mistake, admit it. Just don't make too many.
19. Don't be a "customer's person" (man or woman).
20. Always, always take the high road. Be tough but fair and never lose

The Private Jet Indicator, from Jim Sogi

The Hobo may count cig butts: I count private jets at the Kona airport where the richest people in the world come to vacation and live. As you recall last year the fixed base operator was overflowing jets with over 75 with overflow routed to Maui. This year there are only about 30 jets. Mostly small jets. I guess the top 1% is worried about the higher taxes of about \$80 per mil which is about the cost for jet fuel for a private jet to fly to Hawaii. So this year the rich were flying at the beginning of the year, and the market was up nicely. Next year doesn't look so good by this forward looking indicator.

Richard Owen writes:

I think it was Andrew Smithers who noted that the IMF when flying their jets over latitude generally made good decisions, and over longitude bad decisions. Thus attributing the difference to jet lag and the importance of sleep.

Empathy vs. Analysis, from Mark Goulston

Does caring as shown by understanding and empathizing with another person's feelings have any place in the analytic world which shows caring more often by analyzing, assessing, evaluating and solving problems?

One woman I knew years ago made the statement, "just because someone is emotional doesn't mean they are irrational and just because someone is logical doesn't mean they are rational."

What do you think?

Richard Owen writes:

I was trying to place your name — then I realized you're the author of Real Influence — I've randomly been recommended it as a modern Dale Carnegie!

I would say that the experiences I have had that cost me the most were where I was analytically right but naive about how I communicated it. If "rational" is acting in your own interests, sometimes the full brunt of logic will only do you disfavour. Socrates was respected for his dispassion and logic. However, he was also ultimately made to take his own life. Principally for getting on everyone's nerves.

Leveraged loan bankers in their gut in 2005/6/7 knew they were underwriting spicy stuff. And by '07 were feeling queasy. But the cold analysis they had disproved it, so they carried on. You can argue that the "emotional" feeling was more rational than the analytics.

Nguyen Chi Thien, shared by Stefan Jovanovich

This obituary of Nguyen Chi Thien is fascinating. A poet and a hero.

Nguyen Chi Thien, who has died aged 73, spent nearly 30 years in prisons and
“re-education” camps in Vietnam because he had the temerity to insist on
historical truth and to write poems which attacked communist repression.

Richard Owen writes:

I have often thought that if in the unlikely circumstance someone forced me to invent one test to spell high future potential trading macro, it would be poetry comprehension.

Market Mixtape, from Richard Owen

My girl has escaped to the Galapagos for a pinch hitters holiday. Last minute, she substitutes for a broken off boyfriend on a mother-daughter romantic cruise. I am left to fend alone back home. This provides the opportunity for a swift beer with a friend to turn into an impromptu night out, clubbing in Shoreditch.

One needs a spright female on hand to perfect the nightclub experience. I love to dance, but my beau is far away and tonight I boogie alone. I content myself with being a wannabe insipid Susan Sontag for the evening and see what market lessons can be pried from a meta state of mind.

Shoreditch is now Chelsea mark II. We pile into one of the McNightclubs that have sprung up, impoverished attempts to replicate the Shoreditch of old. But only the immigrant toilet attendant has stayed the same, swallowing his multi-lingual, degree educated pride to beg pound coins from drunks passing through his urinaled office. The rest is all change.

In five years, all the themes of Global Capitalism have sprung through. Asians and Russians. New money. The true roughneck suburbanites have been pushed out to cheaper Dalston, preparing the cultural groundwork for its inevitable rich-bitch colonisation in ten years time. London spreads its tentacles outwards, a multicultural Tokyo in the making.

Everything must bubble up through the ecosystem. Out in Dalston, they're preparing the cool of tomorrow. That's where the real coke and E, life limiting Epicureans can be found. Venture a little further, be the artists and repertoire man for the market, and you might learn something. When Robert Johnson sized up his Asian shorts, he knew the outcome. That the cracking of the currency band would also break the backs of subsistence Thais. He knew the multi-order effects that would ripple through and was prepared. But most have such a vanity of their profession that they don't want to think through the other side of the trade.

The margins must inform the centre always. Innovation is never from the middle out. Here in Shoreditch, they deceive themselves that they have urban cool to themselves. But the beats of Dalston today cannot be offered up to Shoreditch's dance floors. Social permission must be given first. Schwarzman has whip hand. David Swensen tells you to pile into PE. You do so gladly.

Doorman paid off and inside, I pull off my jumper and roll up my sleeves. I suddenly remember I dressed scruff for a quick beer. Hauling furniture for my father in law has stunk up my shirt. But here's a market lesson: sometimes you can blend into the beta and cover over your current flaws. In the funk of a club, nobody can spot my sub-hygiene; right now I don't need to do better than the crowd. And soon, my own deposit to the toilet attendant wins a spray of Calvin Klein from his collection.

For the youngsters seeking romance, the club is a floor market of old. Position and size is offered in full view of all players. Bargains are transacted; matched orders are paired and moved off to the side. Like the great traders, the great seducers know core principals, but the art can't be reduced to a set of rules.

Look to the DJ. He is a super skilled hauteur, playing all the Mixmag approved material for pop connoisseurs. But he is deeply mistaken. Watch the floor. He has forgotten this is pretend, bought hedonism for urban wealthy. Experian's Mosaic calls them Alpha-As. This crowd wants the cheap, easy beats. The Ibiza classics. They don't know how to dance to this complex, nuanced stuff.

Similarly, to shoot the lights for your clients, you need to pick the right ones. Play in the connoisseur nightclubs only. The right families know to endow the smart boy with his bar mitzvah gift and give him room. But if you're sourcing from the broad crowd, offer 200 over the index only. Play the same tune as everyone else, just execute a handful better.

Switch to later - back home and unwinding briefly in front of the TV as the ringing clears my ears. Bruno Mars shows how the DJ should have worked it. Bruno mixes doo wop and reggae traditions with a sweet voice. He's an ultra-straightforward mix of old time Motown, Jackson, with a hint of Blues Brothers. Nothing he is doing is rocket science; Bruno is just great at it. When suddenly his big band start to dance behind him in syncopation, the crowd goes wild. The moves are so simple, and that's why we instinctively love it. Our need to empathise with the protagonist overwhelms everything else. We could do that! Bruno's reward is scale: best-selling global artist of 2011. Get out of your own way.

The market is alike: it wants to trend to a simple tune and dispose of nuance. Into the election we get a consistent menu from the central bankers, Merkel and Obama. It vibes simply and pleasantly and the market moves accordingly.

On the club dance floor the same can be seen. As soon as the DJ offers the basic beats, the crowd immediately ratchets up and energy spreads across the room. A range breakout has occurred. What's our leading indicator? Certain attendees got to see the DJ's playlist before hand and know when we are set to change tone. The cool-kids roughing with the bouncers and the bar girls. Watch for when they rush to the floor. Don't want to live that lifestyle ourself: hedonism takes its toll. But we can watch for their moves.

Same for the break-ins. When the DJ falls back to his instinctive complexity, uncertainty starts to spread and the floor slowly clears. But not quickly. By being alert, we can get out in front and hit the bar first.

I shift naturally to rhythm whatever it is. Girls look quizzically as to how, and compliment me on my moves as the rest of the floor jars. Similarly, the good trader sticks to his system, but adapts to the nuance of the current tune. I would readily exchange all rhythmic skill for even an ounce of the same in the market.

A Chelsea girl grabs my ass as she shuffles past on the dance floor. When you want to raise capital you can't and when you've got your fill, everyone's interested to add more. I ignore it and self-indoctrinate, thinking to my girl in the Galapagos. Don't be tempted into the cheap, impulsive trades. Don't go on tilt. Remind yourself of your principals and stick to your proven system. Work your long term plan and you'll profit more.

The light must be catching me favourably or my perennial uniform of old chinos and worn out dress shirt must have accidentally intersected with the current whim of Shoreditch fashion. But any false flag cool on the dance floor belies my cardigan wearing, shoe staring tendencies. Do your diligence in the light of the day, not the setting the vendors or advisors have picked. Don't bid the banker's book for an asset. It's the pork not the rouge that matters on the lipstick wearing pig.

A drunk in our party rabbits into my ear. I can't make head nor tale of what they're saying, but I'm sure it makes perfect sense to them. They are intoxicated by the market of the moment and convinced of its internal logic. Tomorrow, a hangover.

Back home. After only a few hours sleep, I pay the penalty, rising too early to return a borrowed car on-time to a friend. I peer brain-dead over the steering wheel onto the icy road and hope for the best. Selling out hard-touch front month options on myself, I get to my destination safe and in favour. We all do it, let's hope the vol isn't mispriced.

Victor Niederhoffer writes:

Mr. Owen's fine soliloquy is wonderfully poignant and is as good as the soliloquy from Carousel and should be made into a ballet or set piece of a musical.

Daniella Craig, from Richard Owen

December 3, 2012 | 2 Comments

James Bond used to use charm, guile and judgement to rock his opponents. More recently, however, he lays down the physical smack and appears more credible as prime rib attendee of a gay bathhouse and sauna.

I say this with utmost respect to all fans of such bath houses, living across the road from one of the UK's largest. And listening regularly to the dealings of an ultra-camp local steroid dealer who's evening office is frequently my local Pret cafe.

This is actually topical to real life Bonds. You can also see reflected in my above snap of Chariots Spa, the headquarters of the UK secret service. I wonder how many "extraordinary renditions" have occurred at Chariots on her majesty's service.

What might this tell us of the market zeitgeist? Judgement and art is a bust. Focus instead on the pumped up, superficial and artificially stimulated. Bruise your way to success.

Is That a Concession in Your Pocket, from Richard Owen

In the early seventies Canadian magnate Roy Thomson's family fortune was vastly enhanced by a speculative co-investment with Armand Hammer in the North Sea. At the time British Energy Minister Tony Benn insisted on Scottish bidders. Thomson owning a Scottish newspaper was considered to suffice in desperate resort. When the bankers forming the consortium for Thomson sent a fax regarding their fee, a typo led to read that it should be increased as they had "played a bugger role."

Benn had previously, under the first Wilson government, been involved in the state sponsored restructuring of British industry. This helped facilitate, among other things, the liquidation of several assets into the hands of Jim Slater who's shell Slater Walker was one of the first raiders in Britain. When Slater Walker collapsed in the secondary banking crisis of 1975, Slater declared that "cash was now the best investment". The Bank of England was forced to bailout out the shell and acquire Slater Walker's banking book.

By the late seventies, having written several cheap options for the taxpayer's account, Benn had a change of heart. He turned to promote pipe smoking syndicalism as the way forward.

Armand Hammer later cameo-ed on the Cosby show. Benn had tea and biscuits with Saddam on Channel 4 news.

All were wise men.

Thought of the Day, from Jeff Watson

I know of at least 3 suicides from the action of the 2007 WZ/MWZ spread which bankrupted an entire class of grain speculator. I haven't heard of any suicides from the gold/platinum spread action the past 16 months.

Richard Owen writes:

Some funds will only short through long put options because of the non-zero probability of totally wiping equity with a margin balance. And simply reduce gross when vol / time value erosion is too costly (ie., just be long, albeit less long). Is this excessive prudence or sensible? I would argue that for some portion of assets at least, it is sensible. Large players can have a bankruptcy remote portion of their assets that will short and make margin.

What’s Changed in the World, from Craig Mee

November 13, 2012 | 1 Comment

Whether it's politicians or bankers or previously highly regarded journalism i.e the BBC, it seems no amount of cutting sacrificial heads will vary the course of the ship. The culture has changed, and whether it's due to changes in morals, etiquette, the transfer of private to public companies, or an attitude of extreme competitiveness, I'm not sure. Listening to an interview I believe on the BBC the other day, they mentioned something they could have been sued for, and said something like, "yes we overstepped the mark yadda yadda", all the while staying very business like…. The interview finished with the memorable last line of "we got away with it!", which showed their true colors of course.

I don't have an answer, but I know that the BBC has been inviting problems for years in its transfer from high end to mass appeal, and as one paper editor mentioned recently in West Australia, words to the effect of "after all the masses are not that bright", they want more goss than substance….maybe that is the conundrum across the board.

Market wise…well…the need of most to think about themselves first and foremost, especially in times of chaos, will always provide the cane swinger with opportunities.

Richard Owen writes:

Like so many things perceived to be a linear spectrum (eg. left wing / right wing), at the extremes it bends round in a circle. In an attempt to achieve equality of opportunity, the world is now bending round to extreme disparity from that.

If you allow people access on a meritocratic basis, you need measurement. But all reasonable measurement systems exceed the patience of the professionals concerned.

It is everywhere, from employee measurement systems within General Electric a-la Jack Welch; political voting structures; the index measurement of asset classes. The aspiring middle class has become subject to as much whipsaw as Ed Seykota's SPU contracts.

In politics, you have 10 year duration policy being set in response to sentiment on 2 hour rotation news bulletins. Churchill used to read and paint in the afternoons to give him perspective during the war — can you come close to imagining that for a PM now?

This means the well held canes of family capitalism are stronger than ever.

Add in the fact that branded education and prime property is on the way to being repriced only for that family elite, and you have something quite pernicious in effect. If you look at where Hittlerite Germany really took off, the legitimacy came not through working class populism, but when the aspiring middle class goat soaked by currency default. It's when the 80-95-%tile (who have worked their asses off to always get grade B+) get their hands slapped down that things get really ugly. They are smart enough to create real havoc.

And I think what Craig points out is another symptom of this development.

Anton Johnson writes:

It is human robustness that is undergoing what could be termed reverse-evolution. Numerous historically attenuated genes, ranging from those coding for hemophilia to astigmatism, are now proliferating. Consequently, as a species, we may well morph into that frail, technology dependent brain-vessel depicted in the advanced alien species of science-fiction.

John Henry: the Box Score, from Rocky Humbert

November 11, 2012 | 2 Comments

As noted previously by a spec, and confirmed in today's WSJ, trendfollower John Henry is leaving the money management business — having had his assets dwindle from 2+ Billion to well under \$100 million.

JWH will be ensured a footnote in financial history if only for his purchase of the Red Sox. As to his money management, his latest disclosure document is here. Interested specs might want to download it for posterity — so the facts and track record will never be in dispute…and before he shuts his website down (which will presumably happen forthwith.)

There's a lot of grist for statisticians in his track record — including the fact that he has no visible, continuous track record from his launch in 1982 to his retirement this year. The closest thing to a track record is his financial & metals portfolio which launched in 1984 and which closed in 2011. And even here, the results have an asterisk (reminiscent of certain baseball hall of fame members' asterisks). Henry claims a 252% return in 1987, but the asterisk reads, "The timing of additions and withdrawals materially inflated the 1987 rate of return. The three accounts that were open for the entire year of 1987 achieved rates of return of 138%, 163% and 259%.

Anyway, for this fund, he claims a 27 year compounded rate of return of 19.8%. And if you eliminate the home run in 1987, I reckon his lifetime record is around 14% — which isn't too shabby. His worst years in this fund were 2009 at -17%, 2005 at -17%, 1999 at -19%. So his average 19.8% compounded return over a lifetime matched his maximum drawdowns — and that's pretty darn good in my book — certainly hall of fame material for a 27 year run.

Unfortunately, his other funds have not performed anywhere close to this fund. He shuttered a bunch of funds that were disasters (and doesn't report those results) ; and his other open funds have returns nowhere close to this fund (and much higher volatility.) So a skeptic could rightly attribute the aforementioned 27 year return to a combination of luck and survivor bias. I am agnostic. It is what it is.

More interesting to me is the fact that from 1985 to about 1996, his returns really were consistently excellent. You can see them on page 43 of the pdf. Then something happened. And so the point of this entire post is for people to consider the question: WHAT HAPPENED AFTER 1997? Did the world change? Did he change? Did he have too much capital?

I have some theories, but before I weigh in with my theories, I'll allow others to chew on this… There's many meals to be found in correctly answering this question.

Richard Owen writes:

A component seems to have been the purchase of a groin guard: Beginning in August 1992, the position size in relation to account equity in this program was reduced approximately 50%.

Anatoly Veltman writes:

Some great points, because I believe trend-following died exactly when the leverage left the regulated exchange trading, which went all electronic; and moved to exclusively OTC derivative biz, which is more flexionic. An easy example, a rule that used to work well in futures of the open outcry era: surprise (i.e. big intraday price change) follows trend. Don't try to fade a market that's been gradually and continually trending, as you are likely stepping in RIGHT IN FRONT OF FORCED LIQUIDATIONS. But since electronic execution prevented over-leveraged position-taking, this rule muted up: nowadays, it may well be a profitable strategy to fade prolonged trend - as more surprises began to SUDDENLY correct overdone trends

anonymous writes:

Hard to tell without analyzing the cash flows, but I propose JWH followed the time honored tradition making great returns on a small assets base then poor returns on a much larger asset base.  The compounded annual rate of return may look very good, but in absolute dollars making a large contribution of investor funds to the market infrastructure.  Paulson is carrying on the tradition more recently.  On the performance degradation I sense from interviews I have read he developed his trading ideas in the 70s and did not modify much since then.

The Professor and the Pathological Leverage, Richard Owen

November 5, 2012 | 1 Comment

One sigma daily, two sigma occasionally, three sigma rarely, six sigma never.

High sharpe always. The Professor smiled to himself. He looked at the drawdown, sortino. Beautiful.

Months of work. Days away. He flicked off the monitor, stood up, letting all the stored aches shoot up his hamstrings, into his back.

He glanced at the clock. 1.05. Traipsing across the floor, he pulled off his shirt, rolled onto the bed and closed his eyes. Bliss. Everything was ready for presentation to the team. All the numbers were checked. The initial framework was there. New. Perfect. Months of hard work lay ahead, but the core was ready.

For a minute he pondered. Would he run it for the endowment? Sell it up to Man Group? Perhaps get some capital from Stanley Fink.

He'd dreamt up the core years ago. But he needed markets to meet him halfway. To get there technologically. For the high frequency guys to put in the infrastructure. For the futures brokers to cannibalize each others spreads down to nil. His edge was niche, specialised. Skilfully risk managed. The leverage needed to get it humming at 600 over T-Bills wasn't even that high. Most of it was embedded in the contract terms. And it was scalable. Give it fives years and every corporate treasurer in the country was going to push their actuaries to get in on this thing.

He yawned and lay back. The pillow was fresh. It was one of those moments, all was right and in equilibrium. Just as it should be. The Professor sighed, stretched and slowly drifted off to sleep.

§

Urgh. The Professor startled up. "Hello, what!" he cried reflexively. He shot backwards, square to the headboard. As his eyes adjusted, the outlines of a ghostly body appeared in front of him.

Pulling his hands to his face, he squirmed, rubbed his eyes and cheeks, and looked again. "What is this?"

"Hello Professor," said the apparition.

"Oh god. What is this, what's going on?" The Professor span round to look at the radio clock. Half three. He glanced at the Restoril bottle next to it. None had been taken last night, right? Wait. All the late nights had got to him. The sleeping pills were sending him loopy. Slapping his face a few times, he sat up straight and looked forward again.

"Professor, I need to speak with you about your model," the apparition said calmly.

"Oh god. Still there," the Professor mouthed, sub silento. Just engage with it. Let the hallucination happen and then ring Dr. Green. Give him a bloody earful in the morning and get switched over to Klonopin. That was the best way to get this over with. Let it happen. "Okay, so my imagination has created you. What do you want?" the Professor said cockilly.

The apparition smirked. "Your model. Quit now."

"W-what?"

"Publish, sure. But then give it up. No good can come of it."

"Your model. Quit now!" the apparition repeated.

It clicked, suddenly. The Professor remembered his psych classes. This was the Restoril bringing out his superego. Anthropomorphising his inner fears. Just a matter of self-control. His taut muscles relaxed.

"Our work is revolutionary," the Professor objected, feeling faintly bemused at what his mind was having him engage in. At least it was another sign that he was a budding genius. To imagine this at half three. Gotta be smart, he concluded smugly.

"Revolutionary? So was Leland and Rubinstein, so was Black, Scholes."

"Who? What? That's old news."

"Have you spoken to anyone from the real world about it, Professor?"

"Sure I have. I went over the fundamentals with my buddy at the B-School the other week."

"The B-School? The B-School?! What, the same colleague who wrote up the case on the petrodollar merger? Said it was down to pioneering EVA analysis and infrastructure considerations?"

"Yes."

"The same colleague who forgot to mention that the VP for MENA Corporate was doling out back handed favours to every reserve-toting, sinecure cashing, oligarch-connected dolt who came through Heathrow?"

"T-they thought our model seemed practical," the Professor offered, defiantly.

"You don't get it. That Deutsche salesman with the piercing blue eyes, hot butt, and breathy tones? She didn't grab your port sheet whilst you were buying her a drink?"

"I've never even so much as been into a German bank, let alone done business with one!" The Professor reached out to his bedside table, grasping to touch his hardcopy of Hull. He needed some sort of anchor.

"You don't think your risk management framework hasn't been faxed all over town? That Eurotrash capco banker you've been courting hasn't already sold the system up to Rentech? They aren't already running it live? Think your PB lawyer hasn't slipped a special set of terms into the repo appendices just for you?" The apparition was beginning to talk forcefully.

"You're garbling nonsense at me."

The apparition fixed his eye right to the Professors, "I know, you shmuck. You're not getting this are you. God you're so… I bet you never even tried to bed one of your hot postgrads."

"That's it," the Professor fumed, "I'm calling Dr Green about these pills right now."

"You don't think every Merrill Lynch salesman in the country isn't already halfway down their client list, marketing your positions to every dentist and realtor they can get on speed dial? Samuelson's reforming CC, pulling back Kovner, sending Tudor the other side. Leitner and the BT boys are clubbing back together to grind out your spreads. Millennium is six deep into your positions. Izzy's got five guys in already, working over a book."

"We haven't even selected which asset classes to focus on yet!" the Professor yelled.

The apparition let out a curdling laugh. "You really believe Munger and Buffett haven't got your stops list in fifty inch bold font, searing from a three hundred hertz overhead onto their office walls? Einhorn is already buying your distressed claims. Riffing at a conference to a thousand adulatory guests about your liquidation."

"What stops list?" the Professor whimpered.

"You think your model code hasn't already been passed hand to hand in a battered attache from MI5 to Mossad to ISI. Travelled half the world in a diplomatic pouch."

"But… but I haven't written it yet. You're not making any sense."

"You don't think James Bond has had it injected into his forearm in microcode?"

"Bond doesn't exist you idiot," said the Professor, grasping.

"That a Bolivian drug mule hasn't got twenty thousand lines of Python code jammed up his backside on a capesize, on the Panama. He hasn't already sold it to the Zetas?"

"What?"

The apparition started to crescendo. "You don't think your positions are being taught in grade school, recited in church, presented on the ten o'clock news? Inserted into magazine centrefolds? Served free with coffee? Written on the back of cereal packets? You don't think everyone, everything. Everybody! They all know your position, your stops, your model, your approach?"

The Professors cheeks fell. His lips curled. "Everything you're saying. It is insane, ludacris, madness. Nobody knows my stops, nobody has my code. They're my ideas. You're talking like a madman. It's a work in process. It's great risk management. Revolutionary. It's going to change the way people invest. It's going to get me the Fields. Going to get me rich."

"And get you laid for once, I bet?" The apparition gracefully floated down and an ethereal hand emerged from the dark. "Let's shake on it," the apparition sniggered. As the Professor offered his hand, the apparition yanked him forward. "It's going to get you busted, you idiot." He released and shook his head. He'd seen it so many times before. "Goodnight Professor."

§

Sunlight. The Professor startled awake. His mouth burnt. Ah, so bright. He covered his face and circled the room with his eyes. He locked onto the bottle of Restoril. Smashing it with his hand, he let out a burst of anger, the remaining pills scattering across the floor. He shouldn't rely on these things. He knew they were a slippery slope. Addictions and emotions weren't for him. Cold numbers and analysis.

Then he remembered the dream. He shuddered. That's definitely it, he thought. Cold turkey on everything save for Aspirin.

Suddenly a burst of energy caught him, and he leapt up from the bed. Stretched his arms up and smiled. Today was the day. He was going to present his model.

Inside the Investors Studio, from Richard Owen

November 1, 2012 | 1 Comment

Recently, I've been enjoying a nightly course of steroids (ROIDS!) which has immobilized me for a half hour or so. This has provided a perfect opportunity to catch-up on junk TV.

Thankfully, I have discovered Inside The Actors Studio. It is my first encounter, albeit a long running series probably long since known to all those in the USA.

There are quite some similarities between the field of movie stardom and investing. Both are fickle industries where talent and determination are necessary, but not sufficient, conditions for success. A favorable tailwind helps. Intelligent, trusting partners matter perhaps more. Room for some failure is essential to survive. Low barriers to entry, high barriers to success.

The Studio focuses on interviewing the big stars. Some consistent themes come out in their personas, that might be familiar:

- All are highly inspired by their craft. They seem like they could talk endlessly and enthusiastically about it.

- Upbeat personalities seem a given.

- Many went through a long apprenticeship, constantly revising their core model until perfected. Others seemed blessed by the Hand of God from day one.

- Focus on process and love of the art seems to matter almost as much as the outcome. Which is good, because often others are going to hate it.

- The media of both industries has it's similarities; they're gonna puff you up one minute and deflate the next. Spine is a requisite.

- There's constant reference to precedents and pioneers in the industry; everyone's looking to to see what the other is doing.

- Mimicry and plagiarism are rife.

Some more niche analogies can be made:

- Eddie Murphy is the model trader, focused on the short term. He's got his system down cold and is constantly trying to tweak his market (the audience) for eighths and quarters (laughs). His only issue is if times change and his tastes become outmoded. The persona is so embedded, it's going to be an upheaval to adjust.

- Sean Penn and Francis Ford Copola are maybe the maverick strategists. Perhaps Jim Rogers. Brilliant, mercurial, coming up with leftfield views nobody else anticipated; always with initial backlash. Eventual vindication and celebration await. But sometimes being so far from consensus takes its toll, and turns them a little wild. They wouldn't have it any other way.

- Tom Cruise is Warren Buffett. Economics have been maximized in the principals favor. Intensive research goes into each project; this is how they de-risk. Cruise invested countless hours into Japanese history before even discussing The Last Samurai with the director. Their favored asset is the big ticket, no-nonsense production. Risk is capped, but with big upside potential.

- Pacino is Soros. He's got the full package; attacking from all angles and styles; pulling in other big guns where needed. But with an underlying dedication to craft. Occasionally he'll use sheer force of personality to get the trade or film over with.

- Woody Allen [ed: not yet on actors studio] is Marty Whitman. He's gonna grind it out; never levering up into one trade. But he's also going to concentrate his resources; finding high quality at low cost themes, producing a great risk adjusted return. His following is loyal. All this lets him sleep well at night.

- Spielberg and James Cameron are Peter Lynch. Only the Toniest product goes into the portfolio. Everything is visionary and of highest production value, but in a way that uniquely channels mainstream, not maverick tastes. Ten-baggers a plenty. And for the occasional busted asset - well they're the big dogs and can take it on the chin.

Why We Need Sleep, from Scott Brooks

October 19, 2012 | 2 Comments

I recently read this interesting National Geographic article called "The Secrets of Sleep" :

If we don't know why we can't sleep, it's in part because we don't really know why we need to sleep in the first place. We know we miss it if we don't have it. And we know that no matter how much we try to resist it, sleep conquers us in the end. We know that seven to nine hours after giving in to sleep, most of us are ready to get up again, and 15 to 17 hours after that we are tired once more. We have known for 50 years that we divide our slumber between periods of deep-wave sleep and what is called rapid eye movement (REM) sleep, when the brain is as active as when we're awake, but our voluntary muscles are paralyzed. We know that all mammals and birds sleep. A dolphin sleeps with half its brain awake so it can remain aware of its underwater environment. When mallard ducks sleep in a line, the two outermost birds are able to keep half of their brains alert and one eye open to guard against predators. Fish, reptiles, and insects all experience some kind of repose too.

All this downtime comes at a price. An animal must lie still for a great stretch of time, during which it is easy prey for predators. What can possibly be the payback for such risk? "If sleep doesn't serve an absolutely vital function," the renowned sleep researcher Allan Rechtschaffen once said, "it is the greatest mistake evolution ever made."

A favorite pastime of mine is spotting that well held societal nostrums are in fact most often false. For example, Europeans holiday excessively relative to Americans, Mexicans are lazy, that the USA is the land of Horatio Alger and opportunity, etc. I once collected a lot of these for a slide called "Is Everything You Know False?"

Unsurprisingly, the floated nostrum typically serves some form of vested interest.

Sleep and leisure time probably also fall into this category. Sleep has become a deprecated activity. Many myths surround great men and their willingness to sleep only four hours a night. In many cases it is a myth. In others, like Thatcher, it's probably true. But Thatcher also allegedly was borderline nuts by the end of her premiership.

The greatest real time experiment in this regard was the three day week introduced during the miners strike in Britain under Edward Heath. Despite 2/5ths of the working week being cancelled, GDP dropped hardly at all.

Contrast this to an industry such as M&A advisory where 100 hours weeks are mythically common (and myth then dictates reality). Most of the work completed in this regard is surplus to actual transaction requirements and of zero utility. Back when the City was staffed by Etonians, they could take a 100bps spread and simply answer that they had got their client \$10/sh more than expected, so surely the fee was just. Now, instead, a senior banker must recruit a handful of young slaves to work to the bone and spread rhetoric of 100 hour weeks as a form of justification for the perceived premium.

Contrarily, those whose achievements are without question are often willing to be totally open. In this regard, Churchill slept twice a day and felt it essential to his productive output. Einstein, when pushing against difficult problems, notched up a few extra hours of z's.

How Not To Sell Textbooks, from Stefan Jovanovich

Dad's advice about how to do well in secondary school and college in all subjects other than math and physics and chemistry (the ones where God provided the answers) was brutally simple:

"Write down everything the teacher says, study it so that you remember everything and repeat it back to him or her on every test."

In his business he took it for granted that the same rule applied. If the English teachers believed Noam Chomsky had discovered a better way to teach grammar, then you gave them watered-down Chomsky regardless of what you thought of his theories or his politics.

This would appear to be a lesson that at least some of his competitors failed to learn…

"From the Halls of Chicago Schools: Memoirs of a Textbook Salesman"

Richard Owen writes:

Is handing back to your boss his own prejudices not a recipe for success in all fields?

Keynes' conventional failure trumping unconventional success?

e.g., Some of the smart investors you speak to who were up big in 08. They had prior caution in 07 and so got redeemed. They made their big alpha off trough assets. For "showing off" their peers disclaimed them. Some I have met question if it was worth the bother and are swapping to grind it out market neutral. You can only sell yourself close to the index, even if it's an alternatives index.

The Value of a Bachelor’s Degree, from anonymous

September 28, 2012 | 7 Comments

Last night, during our breaking the fast supper, my daughter had an interesting discussion with me and my wife. My daughter is a senior in high school, and she's finalizing her applications for college–early decision application, early decision 2 applications, and regular admission applications. (When we first started talking about colleges last spring, I gave her a book on game theory–intro level; she never read it, unfortunately–too busy with classes.)

She had wanted to go to Wesleyan. It had everything she was after–small liberal arts school with lots of on campus activities, a strong record of graduate/work placements, small size, and a school where parties were not the rule of the day. Oh, and that it was on the other coast, away from my wife and me, only increased her interest in the school. She was also looking at Wellesley, Colby, Bowdoin, Carleton, Grinnell, and so on. Some public ivies too–U Wisconsin Madison, U Washington, and even some of the U of Californias, though the latter is her safety school.

The problem with the liberal arts colleges is that they now cost a fortune. Generally north of \$45K a year and often north of \$50K. The situation with the ivies isn't much different–they also cost a small fortune. The out-of-state tuitions for many universities (including the public ivies) are in the mid-20K range, and the chances of finishing in 4 years when attending them is diminishing by the semester. Needing to attend a U of Cal for 6 years to finish a major used to be a rarity. Not anymore. And there is no reason to think the status quo will improve any time soon. Here in California, the system developed by Pat Brown (the current governor's father) had the U of California system, the Cal State system, and then regional community college system. Not only are these systems struggling to find some way of increasing their capacity, but they are doing so at a time when the state government is cutting funding for education throughout the state, including these three post-secondary systems. This problem is not limited to California. In the SUNY system, all tuition goes to Albany, and the state legislature decides how much goes back to the individual campuses, rather than looking at each campus as a P&L center (as U of C campuses do).

Why bring all this up? My daughter is now contending with the question of what's the best value for getting a college education rather than what's the "perfect place" for her. So far, so good. This was what we discussed last night at dinner, and it got me thinking about the post-secondary education system here in the US. At the college level, that system has been in place for three centuries or so. At the graduate/professional level, the current system came into being during the mid-to-late 1800s. The problem is that with the current levels of tuition, the cost of a baccalaureate is rapidly becoming (if not already there) out of reach for much of the middle class population. Using loans is rapidly becoming untenable in the face of college grads unable to find jobs and one-in-twelve of the workforce unemployed. (I won't get into the loan fiasco as regards professional grads–the average medical student having debt north of \$150K and for more than a third, it's in excess of \$200K.) For many of the existing loans, it seems likely that someone other than the college grad will be left paying the bill. That's debt of about \$1.2 trillion at risk. The bottom line is that the current system is rapidly becoming–if it is not already–unsustainable.

The question must be asked about what is the value of a bachelor's degree. I ask the question because it is becoming easy to have access online to some of the outstanding courses available at many of America's premiere universities. Will a degree really have much value when an employer is interested in what you have learned somewhere–online or in person? It used to be that the only way to obtain the knowledge was to attend a college or university in a degree program. The degree was a proxy for knowledge. But there are now other sources for obtaining that knowledge–does spending the money on a college degree make sense any longer?

The situation is even more daunting when you consider that during the mid-1970s, when I went to Johns Hopkins, tuition was about \$3K a year. That was also the price of a Chevy Nova car at that time. A Chevy Spark now costs under \$15K, and has a MSRP of \$12K and change. Tuition at Johns Hopkins today? \$50K.

All those contributions to one's alma mater are prolonging the day of reckoning for a system that will need to undergo extensive reform, and that reform will need to accommodate other forms of education rather than only in-person class attendance. Western Governor's University (www.wgu.edu) may be one example, but insofar as it is built around actual degrees, I'm not sure that it's the only type of solution.

An educated workforce is a major prerequisite for a competitive United States, yet the education system is in the middle of a crisis about which there is precious little discussion. That has to change.

Richard Owen writes:

Education is becoming the quintessential branded luxury, taking a commodity input and stamping it with a brand.

Markets are made at the margins: the price driver has been (i) the rising share of wealth located abroad and (ii) the higher percentage of production available to the best paid domestic workers. The West is importing the GINI ratio of the Emerging Markets when it comes to high end property, education, etc.

Take British public schools: fees are now \$45k/yr for the full school life, rather than just a terminal three years at college. For three children that's \$135k/yr post-tax wage dollars. 7% of the UK is privately educated historically, yet the former figure is well into the 1% income range. Whats made up the marginal demand? Wealthy foreigners with untrammeled, untaxed, EM boom dollars. London is undergoing a reverse colonization. Hence in some bijou streets in the capital, residential is up 40% in two years, (having fallen not at all during the crisis, so that's not a bounce off the lows).

I have two daughters in their 20s. Both have Ivy-league degrees. Frankly, I'm not sure Ivy matters.

There are wonderful state and private colleges. Most decent universities offer inquiring minds incredible opportunities. If a student is looking to learn and grow, most "average" universities can dish out more than most students can handle.

A good example is my cousin's daughter. She attended a low profile public college in Florida. She went in with the attitude of learning and developing. She and several of her classmates became Fulbright Scholars. Now she is Ph.D. candidate at Duke.

If you look at Ph.D. candidates at the nation's leading research institutions, you may notice most of them never attended Harvard, Yale or Princeton. The same can be said for many business, political and military leaders.

Each school has its own culture. In my opinion, a key to a parent's success is matching the college with the student's personality. If the student love the place from day one, all is good.

Suppose We Wanted to Know, from Victor Niederhoffer

Suppose we wanted to know the likely price of cotton in 3 months. Would it be better to look at the decisions of thousands of people like Jeff who at the margin are constantly adjusting the price to the myriad uncertainties and paths, or to take a poll of farmers about it. A terrible error in this line is the idea that we're in grave trouble from the overhanding interest rate increase from the federal deficit. Should we poll all the conservatives on this point or take account of the predictions of people like Zachar and DeRosa as embodied in the market. Which is more accurate. It is interesting that Berg suggests using a random walk model to determine uncertainty attached to such noble forecasts.

Richard Owen writes:

The voter prediction markets are probably a reasonably clean example of superiority as they relate to a specific timebound events in which nobody has an interest other than to calculate as to the most likely contract conclusion; nobody is assessed professionally on the outcome; bettors are not levered and unlevered; people do not have to recycle capital forcibly into prediction markets; etc.

Other markets probably have much more complexity and thus greater potential for becoming disjointed.

Can a PAC or similar vehicle not raise money to douse the prediction market spreads?

But to answer the primary question, money where is rapidly adjusting mouth is probably a good litmus test.

Rakesh Jhunjhunwala, from Richard Owen

Rakesh turned a regular man's PA into \$1bn+ on the Sensex. He is known as the Indian Warren Buffett. However, he is more of a stock operator than an investor and will gear up when he thinks the chips are ripe to bet. He claims to "leverage to the hilt, when tailwinds are favorable"

But his rules for leverage are: –Ability to service interest cost and principal repayment –Dividend enough to repay interest, establishment costs –Principal not to exceed more than 10% of portfolio value –Liquid Assets to be 5x of leverage

Debt Principal <10% of Gross Assets does not seem to match to "the hilt". Can anyone reinterpret? Are there unusual rules for Indian brokerage borrowings?

One other interesting thing to think about w.r.t. Rakesh is the nature of "core bets". The high teens inception CAGR of the SENSEX helps a lot. If one had done the following (top three lines courtesy RJ) then a lot of heavy lifting and vig paying could have been avoided:

1970s GOLD 30% CAGR
1980s NIKKEI 21% CAGR
1990s NASDAQ 26% CAGR
2000s SENSEX 15% CAGR
2010s ?

Obviously figuring this out on a forward basis is the issue. But the short side is automatically there for you in the historic data (I am implicitly saying the SENSEX is a short?). But is this, combined with out-taking of canes at appropriate junctures, the way to bliss?

Dividend Reinvestment, from Richard Owen

Does the market lift higher to support the ecosystem when dividend cash arrives on deposit to be reinvested into same shares?

For tax purposes, the UK has an ISA. This is a relatively small wrapper that allows you to put money away each year and buy securities with no income or cap gains.

Given it is a retail product, to take advantage, one has to hold shares in a nominee account at somewhere like Hargreaves Lansdown.

Because it is an aggregate nominee holding, if shares have an in-kind vs. cash dividend option, all accounts must accept the cash option.

So if one is reinvesting dividends, one must wait for the cash to arrive and have the broker's automatic dividend buying program take care of the share purchase.

1. The cash purchase typically has a 1% fee, so you lose 1% of your dividend, plus the bid/asked share. De rigueur.

2. Worse: the "in-kind" dividend option typically prices around the ex-date. My casual observation from my nominee held stocks is that: a. When the in-kind share ratio is determined, the security is conspicuously often down. b. When the cash arrives and there is forced buying, the price is conspicuously often much higher than on the dates when the in-kind ratio is determined.

If statistically valid, this would achieve:

1. Expropriation of the small accounts
2. Benefits to hedgies etc. who don't hold nominee + management who's own options / dividends will typically time inline with the exchange ratio days rather than the cash deposit days.

Has anyone seen data to confirm or deny this sort of thing?

Richard

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