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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: E_K_S who wrote (38585)	7/23/2010 2:26:48 PM
From: Jurgis Bekepuris	Read Replies (1) \| Respond to of 78671

countless millions that Niederhoffer had made over the years -- he could not escape the thought that it might all have been the result of sheer, dumb luck. /snip/ ...Suppose that there were ten thousand investment managers out there, which is not an outlandish number, and that every year half of them, entirely by chance, made money and half of them, entirely by chance, lost money. And suppose that every year the losers were tossed out, and the game replayed with those who remained. At the end of five years, there would be three hundred and thirteen people who had made money in every one of those years, and after ten years there would be nine people who had made money every single year in a row, all out of pure luck. Yeah, ancient random-walk argument against money managers, debunked by Buffett in his talk "The Superinvestors of Graham-and-Doddsville" ( tilsonfunds.com ). For some reason, not one, not three, but tens (if not hundreds) of Graham students outperformed market for ages. Yet, we hear this random walk crap again and again. :( Color me sceptical when Spekulatius claims this to be one of the best books about market. :(

To: E_K_S who wrote (38585)	7/23/2010 2:59:57 PM
From: Jurgis Bekepuris	Read Replies (1) \| Respond to of 78671

BTW, Taleb's strategy of holding 9x% money in cash/Treasuries and betting the rest on out of money options is not new either. I've heard that from some option-trading source ages ago, can't remember where, probably someone here might remember the source (Cramer? - just a guess to stoke the fire ;)). The problem with that strategy is that you can't blow up (unless your currency and/or Treasuries blow up), but you CAN die from thousand paper cuts. Let's say you'd use this strategy to bet on oil spills. How long would you have lost money until this year's spill occurred? Would your wins recover your losses? Not clear. Obviously a counter example is Mike Burry's bet on subprime mortgage collapse, but it's kind of a strawman, since apparently he had strong conviction about the event (it was not unpredictable?) and the options (CDS) were terribly cheap (mispriced). And the jury is really out whether this strategy works long term without deep macro insights, such as Mike Burry's. Assuming that the markets will become more and more volatile, it might. But if the volatility also increases the out-of-money option prices, it might be that the volatility increase won't cover the costs. It's in some way similar to "Gorilla Game" - the claim that Gorillas were always underpriced was right until it wasn't. Or looking closer to our own field, Buffettology huge-moat companies like KO were underpriced (in 1980's, early 1990's) until they weren't and 10 years of zero returns followed. It might be that Taleb can avoid overpaying for deep out-of-money options. He argues that they are (always?) underpriced because people price them using too low standard deviation distributions, so tracking the distribution needed for apparent pricing might let him know when not to overpay. Then it would become a question of discipline to sit out situations where available options are too expensive.