Update: July 2014

Since September 2013 I have been working at a DC startup called “Hitch”, which coordinated the installation and management of credit card machines in the back of DC taxis. The installations were generally finished by December 2013, at which point the company shifted to troubleshooting problems with the systems (drivers not being paid, machines breaking down). The CEO is now hoping to use this position to create a taxi dispatch app that would compete with Uber.

While working there I have continued to study programming and business. Over the past few months I have been developing a computer program that automatically applies to jobs on Craigslist, and after getting it to work for myself I put in a few dozen more hours to get it working for other people as well. At the moment I have it running for 5 people, and I’m beginning to cold-call people to find more testers.

Update: July 2013

Here’s a message I sent to a math/programming-genius friend of mine who’s helping me stay motivated while I study math/programming:

I’ve been procrastinating about sending you an update, so this’ll be a partial list of things I’ve been thinking about:

1. If you find YouTube ads annoying, Google “adblockplus”. It installs in 1 click for Chrome and disables ALL ads. It’s amazing, and I can’t believe I’ve been dealing with ads for years when they’re so easy to get rid of.

Continue reading “Update: July 2013”

Monthly Update: January 2013

What I’ve been up to since my last post (June 2012):

– I started reading some books about programming / tech: Coders At Work, Founders At Work, the first few chapters of C++ Primer Plus (Prata), The Quants, started Dark Pools, most of The Facebook Effect, A Field Guide to Genetic Programming, most of Tesla’s autobiography, most of Googled by Ken Auletta (the story of Google), Automate This, started The Singularity Is Near, started Rainbow’s End, read most of On Intelligence, started some intro to Arduino books, tried to start “Concrete Mathematics: A Foundation for Computer Science” (it’s very slow going).  I also did some USA Computing Olympiad (USACO) puzzles on their website.

– I started reading some books about mathematics: The Quants, Mathematics: A Very Short Introduction, Letters to a Young Mathematician, The Cartoon Guide to Statistics, started A Prime Obsession, Logicomix, started Everything And More by David Foster Wallace, a biography of Einstein, Innumeracy, started The Colossal Book of Mathematics, read about half of Introduction to Mathematical Thinking (Keith Devlin).  I also watched a lot of KhanAcademy videos on math.

– read some (auto)biographies: Money Mavericks (re: being a hedge fund manager), started Ben Graham’s autobiography, read about half of Pour Your Heart Into It (re: Starbucks), started King of Capital (re: Steve Schwarzman), ‘Surely You’re Joking, Mr. Feynman!’ (great book), started The House of Morgan, The Education of Millionaires (easy read w/ good info and good anecdotes), started the bio of Einstein by Isaacson (mentioned above), bio of Steve Jobs by Isaacson

– misc books: The Cartoon Introduction to Economics (Vols 1+2), started The Great Hangover (re: Vanity Fair articles about the ’08 financial crisis)

My Portfolio: June 2012

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.

My Portfolio: April 2012

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.

My Portfolio: February 2012

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:

Investment Idea: Bet Against Apocalypse Believers

“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.”

Investment Idea: CDS ETFs

“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”.