The internet is in love with Warren Buffett, and for good reason. He’s been a very successful businessman, and his firms (first Buffett Partners (BPL), then Berkshire Hathaway(BRK)) have handily beaten the market for over 50 years. That’s a solid resume, and there’s plenty to learn about how he did it.
What’s unfortunate about this internet man crush is that the object of affection is a fake person. The Buffett the internet loves bears only a passing resemblance to the real story. This is too bad, because the real story is far more interesting than the myth. This is especially true if you’re a speculator as opposed to an investor, because the Buffett fortune is actually built on a bedrock of speculation.
Here are a few aspects of the real story that usually get left out: Continue reading
( part 1, part 2. part 3)
Before continuing, you need to have a solid grasp of alpha and beta – otherwise the rest of this article will make no sense.
Back in part three, we developed a method for trading the S&P 500 for use in the long term speculative account. In other words, we’ve figured out how to trade beta. That’s good, but one of the goals of this speculation method is to limit beta exposure to +- 20% of the account value. The purpose of this limit is to mitigate account damage in unexpected crash situations (when long) or boom situations (when short). Since I’ve allocated 20% of the portfolio to beta trend following (which could thus produce betas between +-20%), ideally everything else in the portfolio should have a beta of zero. That’s a difficult requirement for stocks, however, because they essentially all have a positive beta, and in most cases that beta constitutes at least half of the stock’s movement. What we need is something that acts like a stock, but with no beta component. Continue reading
An arbitrage is a trade that produces near risk-free and near guaranteed profits. In general, independent and retail traders are not successful as arbitrageurs. We’ll get into the reasons why in a bit. But it’s still important to understand how arbitrages work, because they’re a fundamental part of the structure of the market. Each arbitrage defines an equation, for lack of a better word, of how the prices of various instruments should be related to each other and to interest rates. Some of these relationships are trivial to understand, but others are far from obvious. Continue reading
If you think way back to grade school, you may remember that you studied addition and subtraction one year, and then a grade or two later studied multiplication and division. Each pair of arithmetic operators intrinsically go together – they’re opposites of each other (algebraists would say inverses). What I want to explore today is that each pair of arithmetic operators carries with it a means of thinking about numbers, and thus by extension thinking about money. These two means of thinking are both useful but they’re surprisingly distinct, and people frequently make the mistake of applying the wrong type of thinking in a given circumstance. My whole premise here may seem irredeemably nerdy, and it is. But bear with me anyways – I reckon there’s real insight to be had. Continue reading
You don’t have to spend too much time around the stock market to discover that there’s something fishy about many stocks’ initial public offerings, (IPOs). The standing joke is that IPO really stands for “It’s Probably Overpriced”. While that may or may not be true in any given case, there are a large number of pitfalls awaiting the would-be IPO trader or investor. It’s a case of caveat emptor, and in order to be suitably wary you need to understand how an IPO works and how it can be manipulated to your disadvantage. Continue reading