Nathan Wailes' Blog

My thoughts on time-dependent work-related topics.

Archive for the ‘Finance’ Category

I have made a bet that Trump will win the Republican nomination for President

leave a comment

In 2012 I wrote a post in which I suggested betting against people who believed that the world was coming to an end. Unfortunately I didn’t know how to find such people.

I recently discovered that you can currently go onto betting sites and get ~3:1 odds on a bet that Trump will be the Republican nominee (so if he’s the nominee, you get $3; if he isn’t, you lose $1). I bet some money on PredictIt.org on December 16 (about a week ago) at 3:1 odds that he’d do it, not because I’m totally convinced that he will, but because:

  1. Regardless of who the candidate is, those odds seem suspicious to me for someone who appears to be so far ahead in the polls,
  2. I don’t find it that hard to believe that the party that had Sarah Palin on the ticket as the VP nominee might nominate Trump for President,
  3. I find it harder to believe that Republican delegates would vote against Trump even if he won their state and was leading in the national polls,
  4. The betting market for this election appears to be relatively small compared to the financial markets and so it seems there’s more likely to be exploitable inefficiencies in the way people are making bets,
  5. The media has been repeatedly wrong about predicting Trump’s fall in the polls,
  6. I’ve read that many successful investors / entrepreneurs got experience picking stocks / making bets when they were younger, and I’m trying to copy the habits of successful people, and
  7. I have an interest in finance / trading / value investing but have avoided dabbling in the financial markets because there’s so much competition that I doubt I would have a competitive advantage, and smaller betting markets seem like a way to get experience in a less-competitive environment.

So I’m treating this primarily as a learning experience.

How I could be wrong

  1. A persuasive counter-argument I’ve heard is that it’s still early enough that anything could happen. I agree with that. I just don’t think that the odds should be 3:1 against someone with the kind of lead Trump appears to have.
  2. Another point I’ve heard is that Trump’s support is largely among people who have been less likely to vote in past elections, and that this low turnout is likely continue into this election.
  3. Another point I’ve heard is that Trump’s get-out-the-vote efforts are weaker than those of his opponents, and that this could lead to a difference between his polling numbers and the actual vote tallies.
  4. I think a danger for Trump that the media doesn’t seem to be talking about is character assassination; Trump seems to be filling the role of the “straight-talking, no-nonsense” candidate that Chris Christie was supposed to be playing in this election, until Chris Christie’s reputation was severely damaged by the George Washington Bridge lane closure scandal (“Bridgegate”). It seems plausible that what happened to Christie could happen to Trump.
    • The problem with waiting for a Trump-character-assassination before the Republican nomination is that:
      1. Democrats don’t seem to feel an incentive to use character assassination at the moment because they have reason to believe that they’ll have an easier time winning the general election if Trump wins the Republican nomination.
      2. The other Republican candidates seem to not want to risk being associated with going after Trump because they’re worried about ending up on the bad side of Trump’s supporters.
    • I think the best way for other Republican candidates to go after Trump would be to paint him as a lier. They could find people from Trump’s past to tell Trump’s supporters that Trump has historically loved to make promises that he can’t–and has no intention to–deliver. This way the other Republican candidates can avoid criticizing the controversial proposals that Trump’s supporters seem to love. However, to execute this strategy would require the candidates to be very aggressive about researching Trump’s past in a very short amount of time.

Ultimately I don’t like this way of placing bets; I’d much rather be Ed Thorp with his mathematically-proven blackjack system than someone who bets off a hunch. But this exercise is turning out to be a very useful way to motivate myself to get more practice at evaluating bets; I’m already thinking about using web-scrapers and machine learning to get an edge that I could be more confident about.

I’m keeping more-detailed notes here.

Written by Nathan Wailes

December 24th, 2015 at 10:03 pm

My Portfolio: June 2012

2 comments

Quick post:

What I’m thinking at the moment: For the past few months I’d been a bit suspicious of the rising market, and after thinking about it a while I started to suspect that it was a self-reinforcing rise that resulted at least partly from the collective pressure that lots of fund managers feel to get a certain amount of yield per year.  People were looking for good news because they needed something to go up to justify their (managers’) existence.  When I left Treasuries back in February(?) I put my money in a Vanguard money market fund until I could figure out a better place for it.  I didn’t get to participate in the rising market after then, but I also didn’t take on as much risk of a catastrophic loss if some big scary event cause a panic or forced sell-off.  However, in ’08 different MMAs saw losses, so even being in a Vanguard MMA isn’t totally safe.

Re: the global outlook

What I’m thinking at the moment: I’ve been slowly making my way through Reinhart’s “This Time Is Different” as well as a Peterson Institute report called “The Global Debt Outlook Over the Next 25 Years”.  And I’ve also just been reading lots of miscellaneous articles.  The general feeling I’m getting is that there were a lot of bad loans made by banks and pensions in the past few years, and someone is going to have to eat those losses.  Because the problem is so big it seems like governments are going to try to spread the pain as much as possible, and they’ll try to prevent another collapse like Lehman Brothers, so it doesn’t look like the next big shock to the market will come from a bank’s collapse.  Instead it looks like it will come when people try to flee the debt of particular countries.  That seems like it will be the point at which countries will no longer be able to “play pretend” about the reality of the situation.  I still don’t know where money could go to escape; I think the US has the most capital denominated in its currency and so if countries need to inflate away debts then the US may be able to do it in the least disturbing way.

Written by Nathan Wailes

June 1st, 2012 at 4:36 pm

Posted in Finance,My Portfolio

My Portfolio: April 2012

leave a comment

Quick post:

1. I pulled out of Treasuries about a week after my last post, when there was the first inkling of a sell-off.  I hadn’t realized that if bonds are really popular now and become less popular in the future, you’ll lose money if you’re invested in a bond ETF.  I think that’s how that works.

2. I also learned that the borrowing cost of Groupon is so high (~100% of the stock’s value per year) that you can’t just hold it for 5 years and wait for the company to go bankrupt.

 

At the moment I’m just doing a lot of macro-level reading, trying to figure out what’s going to happen in the market over the next few years.  I’m worried that there’ll be another crash like in ’08 because there’s so much bad debt out there that could knock over a bank and cause another forced sell-off.  I want to learn more about exactly why the ’08 crash happened.

Written by Nathan Wailes

April 1st, 2012 at 3:24 pm

Posted in Finance,My Portfolio

My Portfolio: February 2012

leave a comment

I’ve started making trades in the Investopedia Stock Market Simulator; my user name is Nathan_Wailes, and I’m playing in the “2012 No End” game.  I started with $100,000.

I don’t expect to be successful at first, but I figure I’ll learn more by trying things and making mistakes than by only reading.

Actions taken:

  • Bought ~$90,000 of Treasury ETFs (VGLT, VGSH, TLT) at the market
  • Bought ~$5,000 of the biggest S&P500 ETF (SPY) at the market
  • Sold Short ~$5,000 of Groupon (GRPN) at the market

I’ve moved my money into Treasury ETFs except for a bet that Groupon’s value will diminish relative to the market.  Right now I have it as a spread trade: $5,000 shorting Groupon, and $5,000 long on an S&P500 ETF.  This basically allows my bet to control for the overall level of the market, so if people start putting a ton of money into the stock market and the general level of the market goes up, I should still be able to make money as long as Groupon’s value relative to the rest of the market goes down.  The downside of this style of betting is that your reduced risk comes at the cost of reduced profits, since half of your betting money is being used to control for the general level of the market.

Reasoning for My Actions:

The Treasuries bet:

  • There is a lot of uncertainty now about what is going to happen in the EU and the US because of this huge credit bubble stacked on top of an enormous debt problem.
  • If growth for the next 10 years looks like it’s going to be flat, stock PEs may gradually go down as the consensus on stocks changes (ie over 5-8 years of zero growth people will stop looking at stocks as being worth the PEs they’re currently trading at).
  • I want to avoid another crash like ’08, and some intelligent investors have been saying that the danger to the banks that we’re seeing now is just as much worth worrying about as the danger to banks in ’08.
  • Kyle Bass has said (and I think I’ve heard this elsewhere as well) that investors see Treasuries as being the “high ground” in this disaster: the asset least likely to take massive losses in value if everything goes haywire.
  • Timeline for this bet: I’m going to keep the money in Treasuries until I find other uses for it.  So the money could be there for years if I don’t find any other way to use it.  More likely is that it will be there a few months.

The Groupon bet:

  • I’ve gotten the vibe that Groupon was a money-making scheme for its creator, and that’s not a good omen for its future.
  • The practices I’ve heard them engaging in don’t sound like they can go on for years.
  • At a $12 billion market cap, it’s worth more than Office Depot, Safeway, Suzuki, Sunoco, and Quest Diagnostics (individually, not combined).  It seems very unlikely to me that Groupon is that valuable.
  • Jim Rogers has said that he is short US technology stocks; given his opinion on the Facebook IPO (he recommends against buying Facebook shares), I’d be willing to be Groupon is one of the tech stocks he’s shorting.
  • Timeline for this bet: Based on the fate of many late ’90s internet companies, I would guess that Groupon would lose value within the next 5 years.

Things that could make my decisions turn out to be bad ones:

The Treasuries bet:

  • Interest rates go up – Treasuries could lose value if interest rates go up.  Interest rates will go up if the Fed raises them.  The Fed will raise interest rates to avoid high levels of inflation.  High levels of inflation may arise if the amount of money circulating in the economy starts to rise by a lot.  The amount of money circulating in the economy would rise if lots of everyday people went into more debt.
  • The global outlook gets rosier – I’m not exactly how Treasury ETFs work, but it looks like if demand for equities goes up, and then demand for Treasuries goes down as a result, I could lose money.

Further Questions Regarding this Bet:

  1. How much more money, exactly, would need to start circulating in the economy to cause X, Y, or Z levels of inflation?
  2. How much inflation would need to exist to cause the Fed to raise interest rates?
  3. How much money would need to flow out of Treasuries and into the stock market to cause an X% decrease in the value of my holdings?

The Groupon Bet:

  • Groupon purchases or creates a new, exciting, and/or profitable business – Google has bought and created lots of businesses over the years, and my uneducated guess is that that type of growth has played a big role in its huge valuation.
  • Keeping it as a spread trade isn’t worth it – The reduced risk that I get from having it as a spread may not be worth the reduced return I will get from cutting my bet in half.

Further Questions Regarding this Bet:

Written by Nathan Wailes

February 14th, 2012 at 3:55 pm

Posted in Finance,My Portfolio

Investment Idea: Bet Against Apocalypse Believers

leave a comment

“What’s the idea?”

Find people who genuinely believe the world will end in 2012 and enter into contracts with them in which you give them the cash-equivalent of a fraction of the value of their property now (February 2012) and you get all of their property on January 1, 2013.

“A 2012 apocalypse? Huh?”

The idea of a 2012 apocalypse has been hyped up by the news for the past year or two.  I remember hearing about it being based on the Mayan calendar, but I also remember hearing about Christians talking about it, so honestly I don’t know what the whole story is.  I’m honestly not even sure how many people genuinely believe in it and how much of it is media hype, but I do remember the hype around Y2K and I’m pretty sure a bunch of people thought that Y2K would be the end.

“Why would a hedge fund / individual want to do this?”

Well, it might be too-small and too-expensive an idea for a big hedge fund, but for a smaller group or individual investor it might be profitable.

To understand the idea you need to understand that one of the main ways that people make money in a capitalist system is by removing inefficiencies from the system.  So, for example, if the owner of a painting thinks that his painting is worth $100, and you know that that painting would be valued by someone else at $100,000, it is inefficient for the current owner to have the painting.  You can make money by removing this inefficiency, that is, by buying the painting from the first guy and selling it to the guy who values it more.

In the case of the 2012 apocalypse believers, it is inefficient (from their perspective) to have rights to things that they will not need; that is, it is inefficient for them to have the rights to their property from 2013 on forward.  And from your perspective, these apocalypse believers have a mistaken view of the world that is a source of inefficiency in the economy: if someone believes in Y2K and loads up on food and equipment to prepare for the end, and then the end doesn’t come, that food may spoil and the equipment may never be used, and thus all the effort that went into creating those supplies has been wasted.

The real source of the profit here is the discount you might be able to get on the value of the property you’d be buying: since you’d be making an unusual offer, and since there probably aren’t other buyers out there who are making offers like this, you might be able to get extremely favorable terms with all of these sellers.  Since they think the world is going to end before 2013 anyway, what difference does it make to them whether they get 100 cents on the dollar for the value of their home or only 50 cents?  Or only 25 cents?  Their time is limited, and it doesn’t seem worth spending a significant portion of it trying to get the best possible price.

“How are you going to get these people to enter into the contracts?”

This is where some salesmanship may be required.  One thought that I’ve had is that you could find one believer who is willing to deal with you and use that person to convince the rest of them.  He could say something like the following: “Hey, I’m preparing for the 2012 apocalypse myself, and in order to spread the word to as many people as possible I’ve sold the rights to my property after 2012 to some foolish non-believers.  I’m then using that money to purchase advertisements on billboards and on Google to try to save as many people as possible before it’s too late.”

Written by Nathan Wailes

February 8th, 2012 at 12:16 pm

Investment Idea: CDS ETFs

leave a comment

“What should I have read to understand what you’re about to talk about?”

As far as I can tell, this idea is mainly based on three things: The Big Short by Michael Lewis (from which I learned how profitable CDS can be), Kyle Bass’s 2010/2011 AmeriCatalyst videos (from which I learned how profitable a bet against indebted countries could be), and my CFA Level 1 Alternative Investment textbook’s explanation of what ETFs are (from which I learned how useful ETFs can be).  Google them to find them.

“What’s the idea?”

Create an exchange-traded fund (ETF) that is completely invested in a certain credit-default swap (CDS).  Basically, it’ll be a way to let the little guys out there with not that much money place bets on whether certain countries/companies will default on their debt.

“ETF? CDS? Huh?”

An exchange-traded fund (ETF) is a fund that is bought and sold on a stock market like any other company.  ETFs make it easier to quickly buy and sell small pieces of things that would otherwise be difficult to buy and sell.  For example, the most popular ETFs nowadays allow people to buy and sell packages of stocks; there are S&P 500 ETFs, tech stock ETFs, etc.

A credit-default-swap (CDS) is basically a life-insurance policy on bonds sold by a particular company or country; it protects people in case the country/company is unable to pay back the bond.  CDS became famous after a bunch of hedge fund managers (the first being Michael Burry) used them in 2008 to make a killing off the subprime mortgage collapse, and for some unknown reason banks are still selling CDS at very low prices.  Warren Buffett has said that he would charge much, much higher prices for CDS.

“Why would a hedge fund want to do this?”

It’ll be a way for a hedge fund to profit from the large body of people out there who are nervous about the state of the world right now.  On 2012/01/30 the WSJ had an article that said you could pay $155,000 for a CDS on $10 million worth of Japanese government debt.  If I understand this stuff correctly, that’s like a bet where you lose $1.50 if you’re wrong and gain up to $100 if you’re right; or to use a more pertinent example (based on the dollar amounts individual investors typically trade), a bet where you lose $150 if you’re wrong and make up to $10,000 if you’re right.  I would bet that a LOT of small investors would want to get in on that bet if they had the chance, but the problem is that CDS are typically only negotiated between the big guys in the market (big banks and hedge funds with hundreds of millions of dollars under management).  So if you could buy CDS from a big bank at a low price and sell shares of that bet to smaller investors at a higher price, you could make a profit regardless of how the bet eventually turned out.

“Why are you so confident people would want shares of the ETF?”

Well…1) The Big Short was a very, very popular book, and CDS was the centerpiece of the entire thing.  2) In just 2-3 months after Kyle Bass recommended the stock of a particular mortgage insurance company (MTG) at AmeriCatalyst 2011, the value of the stock almost doubled, which suggests that a lot of people are paying attention to Bass’s ideas.  If word spread that people could get in on a Kyle-Bass-style CDS bet against Japan, I think it would have the potential to go viral.  The sheer novelty of the idea could make headlines.

“What’s the downside risk here?”

Well…one risk is that no one will buy shares in the ETF.  If that happened you’d be stuck with the CDS unless you could re-sell it.  But the CDS doesn’t seem to be such a bad bet; I spoke to one guy who works at a fund-of-funds who said that his fund would have invested with Kyle Bass if they knew that his Japan bet would pay off this year (his Japan bet is to buy CDS on Japanese gov debt).  Their (fund-of-funds’) problem was that they couldn’t afford to have their money sitting around for 3 years waiting for a big payoff, because the people who have invested with them follow the fund’s yearly returns and will pull their (investors’) money out if they (the investors) don’t see results every single year.  Re-selling the CDS via an ETF could solve their problem because they could make an immediate profit from arbitraging* the difference in price between what the banks are willing to sell at and what individual investors are willing to buy at.

“Would this even be allowed by the SEC?”

I’m honestly not sure.  My guess is that the big hurdle here would be the fact that only accredited investors are allowed to invest in hedge funds, and CDS is something that is typically done only by hedge funds.  On the other hand, though, since little guys are allowed to invest in mutual funds / pensions that invest in hedge funds, and little guys are allowed to invest in ETFs, it seems plausible to me that the ETF would be allowed if structured the right way.  And from the SEC’s perspective, this could actually be a better way of pricing CDS: one of the touted benefits of a futures exchange is its ability to help find more efficient prices for goods, and so if there are tons of little guys out there bidding up the price of CDS, regulators might not have to worry as much about making sure banks are shooting themselves in the foot by selling the stuff too cheap.  That’s a thought, anyway; I’m new to this stuff, so I could be way off here.

 

*when I say “arbitrage” I’m using it in the colloquial sense, not the strict sense of “riskless profit”.

Written by Nathan Wailes

January 31st, 2012 at 8:25 am