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  • Kill Short-Term Pressures [View instapost]
    As an illustration of (1), suppose we have some highly speculative security that has 50% chance to be worth say $2 to $6 (with a uniform distribution), but might have another 50% chance to be worth exactly U, where U is unknown to us. Classic value investing would suggest paying no more than $2 for this situation, as part of a diversified portfolio, because U might be 0.

    However, we could also look at this from a UU perspective, and ask game theoretic questions such as:

    (1) How easy is this situation for me to evaluate relative to others?
    (2) Is anyone I respect more of a domain expert on this situation than I, and which side are they on? Contrarily, does no one know much about this situation?
    (3) Does this situation interface with non-public companies or events that are not ordinary secondary market activities; if so, can I do any side-car investments with the relevant people?
    (4) Can I use my personal complementary skills to influence the business outcome of this situation?
    (5) Are counter-parties positioned in such a way that they are likely taking advantage of you, or vice versa?
    (6) Does this situation have one-off peculiarities such that computerized odds-making is more difficult here? Can we take advantage of errors in computerized models such as Black-Scholes?
    (7) Have I reduced any chances of myself being over-confident, by assuming appropriately large confidence intervals?
    (8) Over most sequences of events, which side has the more fragile thesis, e.g. it incorporates more conditionals or sequencing constraints?

    These kinds of analyses could suggest the expected value for the unknown U could be, say, $0.5, or $1, or $2, as opposed to the worst case of $0.

    Essentially the UU approach is to analyze the behavioral errors and game theoretic incentives of all the players, and select for situations that are impossible to quantify without an analysis that iterates through and explores these incentives. Thus one could hope to collect premiums off of what others might deem un-analyzable and un-investable.

    I think these UU situations fundamentally do have a quantifiable probability distribution given enough game theory analysis, behavioral priors, and domain expertise. The key though is that without these priors, the probabilities are non-quantifiable.
    Aug 1, 2015. 10:27 AM | 1 Like Like |Link to Comment
  • Kill Short-Term Pressures [View instapost]
    I finally read Investing in the Unknown and Unknowable and thought it was decent. A few thoughts:

    (1) These UU activities need not be taken as only speculations, as Ben Graham would define them. Often even though the intrinsic value is very difficult to calculate, one can establish some probabilistic lower bound (or when shorting, upper bound) that offers a statistical edge for mean reversion bets while in aggregate offering safety of principal and a reasonable rate of return.

    (2) I guess the complementary skills part was how Andrew Carnegie made a lot of money. He knew the steel and railroad industries very well, and had inside information, placing him firmly in box B ("Easy for You, Hard for Others"), with the leverage of complementary skills in the industry. I think that is the optimal box, but if it is not available, box F is sometimes reasonable ("Unknownable to You, Unknowable to Others"). (Although, the box F example of Buffett's California reinsurance shows that it should only be taken if the terms are highly favorable.) I think in public markets investing, typically only activist investors have complementary skills, by their ability to pressure/threaten/replace management. I guess this means that private markets on average offer more opportunity.

    (3) Retail investors are tend to be very bad at odds-making due to falling victim to behavioral biases. If one is on the same side as many retail speculators, and it is a UU situation, then I think this would be a bad sign, because it is likely that counter-parties are more sophisticated. Retail speculation on the long side in U.S. upstream oil companies is a recent example that I have noticed.
    Jul 30, 2015. 02:34 AM | Likes Like |Link to Comment
  • How P/B Reveals Xinyuan Real Estate's Value [View article]
    @subguy750: You're right. Thanks for the correction!
    Jul 27, 2015. 10:38 AM | Likes Like |Link to Comment
  • The Biffy Butler Bidet Sprayer/Digital Accessory Caddy Of Investments  [View instapost]
    One mathematical algorithm these funds remind me of is "stochastic gradient descent:"

    Let me describe this for the non-math inclined. It is a method for finding a minimum, like the bottom of a hill. If you were smart you would figure out which direction is steepest and go that way. But if you are dumb, you take the "stochastic gradient descent" approach: get drunk, put on a blindfold, and repeatedly spin around in a circle followed by taking ten paces forward if your feet tell you that "forward is downhill."

    Interestingly, if you stagger drunkenly around like this long enough, eventually you will find the bottom of any nearby hill/cliff/ravine/etc (or in the case of some of these speculative volatility funds, $0). Since the expected result of every such staggering is locally downhill, eventually, gravity wins. But in the interim there are many uphill movements made, since after all, your feet might tell you some direction is initially downhill, but when you proceed in that direction, it involves climbing a ladder.

    So you get long-term trending down but interim very spiky plots like this for SGD:

    This same SGD approach is also used by a lot of big tech / Big Data companies like Google and Facebook for training neural networks to recognize photos (e.g. cats). The computer just does a lot of blindfolded staggerings very quickly to "train" the neural network to recognize the photo.
    Jul 27, 2015. 09:52 AM | 1 Like Like |Link to Comment
  • Weird Stuff For Sale By The Government [View instapost]
    My best friend in childhood had a nice two story house that was bought for $750 from the owner after being condemned I believe for code violations, loaded on a truck, shipped out the countryside, and repaired. I always thought that was pretty savvy.
    Jul 25, 2015. 11:17 AM | 1 Like Like |Link to Comment
  • Michael Kors: An Unfashionable Portfolio Accessory [View article]
    That is a nice strategy Michael -- thanks for the share.

    But why not just close out the short put by buying it back? How does the IRR of buying back the put compare with creating a spread?
    Jul 19, 2015. 02:19 AM | Likes Like |Link to Comment
  • Michael Kors Is Simply Too Cheap To Ignore [View article]
    Thanks Josh for the article, and Stan Ackman and SmartAlpha15 for the great comments on this company.
    Jul 19, 2015. 01:58 AM | Likes Like |Link to Comment
  • The #1 Stock In The World [View article]
    I am not a trader. But those who are interested in trading volatility ETFs may wish to check out these two links:
    - "Easy Volatility Investing" by Tony Cooper:
    - Contango and Backwardation Strategy for VIX ETFs by Nathan Buehler:

    One caveat to the first paper though is that I don't think they should have suggested to go long the long volatility intra-day funds such as VXX. The reason is that VIX futures are usually in contango except when the VIX is super high [1]. And in addition you have to pay for the daily rebalancing. So being long funds such as VXX in my opinion has too low of a probability of success, for it to have positive expected value. Even if the long volatility strategies show positive EV in some special cases, that may be a fluke. This could be caused by overfitting, or an unstable effect due to momentum or black swans, or some other strange thing, rather than because of an economically robust reason.

    Jul 3, 2015. 10:51 AM | 3 Likes Like |Link to Comment
  • Troll Hunting [View instapost]
    Trolls can educate:
    Jun 24, 2015. 07:28 AM | 1 Like Like |Link to Comment
  • A Good Pair Trade Might Be Going Long King While Shorting Twitter [View article]
    I mostly agree with the KING long (but as with everything it depends on the price).

    I do not agree with the TWTR short. Like other commentators, I have concerns that for short positions the timing needs to be right. So we would need to wait for a short catalyst, such as Twitter's revenue leveling off or the overvalued tech sector starting to blow off steam.
    Jun 23, 2015. 07:49 AM | Likes Like |Link to Comment
  • Is Yield All That Matters? [View instapost]
    I like short CUBA better, because:

    - It has yield (5.8%)
    - Gigantic premium (46%)
    - High fees (2.47% per year)
    - Presumably low-information retail investors have piled in based on an event in the headlines ("Cuba is opening up, so buy CUBA!"). The catalyst is then that everyone forgets the headlines and moves on.
    - The country of Cuba maintains a poor credit rating with Moody's. But the fund doesn't have that much exposure to the country.
    - The NAV has trended down from $9.65 in 2007 to $7.5 currently

    But unfortunately for me it is not optionable, and I don't establish short positions without options protection.
    Jun 22, 2015. 08:23 AM | Likes Like |Link to Comment
  • The #1 Stock In The World [View article]
    Actually, you can get data going back 11 years from

    The most exciting event is the 92% drawdown in SVXY in 2007-2008. Nevertheless, if one bought at the worst possible time in 2007, one would be made whole by early 2013. Dollar cost averaging would have done substantially better.

    Also, I would second Brad's concerns about the accelerated redemption, as well as many of the other "screw you" clauses in both SVXY and XIV's prospectuses, and the high fees of ~14% per decade. One possible solution is to maintain an appropriately hedged short position in the 2x long volatility funds, as previously discussed on Chris's blog.
    Jun 16, 2015. 08:52 AM | 1 Like Like |Link to Comment
  • The Best Long Opportunity For The Remaining Days Of 2012: Ocean Shore Holding [View article]
    I bought some OSHC. I haven't found many great bargains recently so this seems reasonable in a generally overpriced market.
    Jun 16, 2015. 05:08 AM | 1 Like Like |Link to Comment
  • Who Will Win The 2016 U.S. Presidential Election?  [View instapost]
    My bet is on Hillary.

    I found a fun quiz "," which lets you identify a preferred Presidential candidate based on policy preferences. My candidate is Rand Paul (R). I liked his father Ron Paul also despite his wackiness.

    My economic views have changed from when I was younger, when I preferred more Democratic candidates. But I still tend to disagree with people like Rand on social issues, where I have a more progressive view.
    Jun 12, 2015. 08:27 AM | 1 Like Like |Link to Comment
  • Capitol Acquisition Corp.: All Aboard, This Ship Is Ready To Sail [View article]
    Sounds promising. Thanks for the update Dane!
    Jun 11, 2015. 01:43 PM | Likes Like |Link to Comment