Wednesday, October 31, 2007

Driving & Investing Part II

I've previously written about this before, but it occurred to me recently, as I was weaving through traffic in Washington, DC, that I should elaborate on the similarities between good driving and good investing/trading. I've been working on this one, on and off, for months.

The key idea is probabilities.

Every maneuver I make, every lane change, everything is based on the probability of that maneuver benefiting me. Often (I would estimate 60 - 70% of the time), it does. The remainder of the time -- well, that's just the cost of doing business.

For example, we've got 4 lanes of road with 2 lanes in each direction. If I'm in the left lane with 5 people in front of me, there is at least a 1 in 5 chance (20%) chance that one of those people is turning left and will end up blocking the lane. That sucks. So I start looking for the tells - the brake lights, slowing traffic, people merging out to the right - that indicate that the probability has occurred or is occurring. Now, since I only have 2 lanes to work with, I have to also watch the right lane. The idea is that the right lane could have problems too, but are they as severe as the left lane's? If the right lane has a bus in it with an upcoming stop, there is a good chance (which I have no idea how to calculate) that the bus will stop. So now I am looking at the oncoming traffic, because if there is little or none, that guy turning left has a good chance of making his turn with little impact to me. Also, I'm looking for how much room that bus has to get out of the way (a shoulder or bus lane) giving me and others enough room to get around him when he stops.

Basically, I'm constantly calculating the probability of an event which impedes my forward progress. (Funny, just as I had started working on this piece again a few months ago, I noticed this post over at Accrued Interest. He then followed it up with this one which has more good stuff.) It all comes down to the probabilities of a given event occurring.

The markets generate enough data to make somewhat better (more accurate) predictions, but nothing is EVER identical so we have to discern patterns from the data to help estimate probabilities of various outcomes. It can be done, even on an ad hoc basis, I think, much like navigating road traffic.

I'll have more on this topic in the future, and I plan to get into specific scenarios and their "market equivalents". I need to start thinking like a trader in my trading; I already do it in my driving.

Tuesday, October 30, 2007

A Few Good Reads

While I know that most of my fanbase (ha!) has probably already dissected these pieces every which way already, I have to admit that they make for interesting reads and re-reads. I've kept them up in my browser persistently since stumbling upon them, and flip back to them regularly to look something up or just remind myself about the tendency of markets to strike when least expected. Minsky moments and all that.

First up is the Malcolm Gladwell piece on Nassim Nicholas Taleb entitled "Blowing Up". I know I don't need to introduce him to most of you. For the rest, well, that's what Google excels at. Start with his website.

Next we have the New Yorker's big spread on Victor Niederhoffer's return to and subsequent dismissal by the markets. Fascinating, in more ways than one. The Gladwell piece looks at Niederhoffer briefly as well, and if I can find it, I'll post the other article I read about him recently. Talk about overexposure.

Finally, The American's Hunt for Black October, seeking to expose the reasons for Black Monday, 1987. An interesting, if speculative, read. I love this kind of history stuff, and I'd rather learn from someone else's mistakes than make my own. I've got enough of those.

Honestly, while I like Taleb's approach to the market, and I respect his vigilance in preparing for a Black Swan event, there's something missing. It actually reminds me of how I drive, and I'll get another post up on how good driving and good investing rhyme in the near future. While we don't want to pick up nickles - or God forbid, pennies - in front of steamrollers, you can't just sit around waiting for Doomsday either. This, in the simplest of terms, is what I imagine doomed Empirica. Whether things are different now with his newest venture, we'll have to see. There has got to be some participation in the market besides collecting premiums on options, because the stability that would allow that to be a viable past-time can disappear in mere moments. Stability breeds instability, right?
Or that stability may not generate enough returns to allow your capital base to last until the return of volatility. And what's plan B when instability rears its head?

Of course, you could probably make the argument that by operating in this way, Taleb is playing his intended course perfectly. In stability, clip your coupon (aka option premiums). When volatility returns, hopefully you're on the right side of the trade and that's where the strategy shines -- if you're nimble enough.


Monday, October 29, 2007

Net Worth Update

So I'm only up to USD $110,000 (rounding) once you factor in my now $11,000 of CC debt. Yeah, yeah, yeah, please spare the lectures on CC debt. Its been a long year. I won't be traveling anywhere -- not St. Thomas, not Trinidad, or anywhere else -- anytime soon. Nor will I be buying gifts of travel for anyone anytime soon either, as I did 3 times this year. To paraphrase myself, the CC debt has canceled Christmas. Oh well, I did it to myself and I'll have to dig myself out from under it. At least I can pay my rent with my card now, so I earn points for it. By the end of the week, I'll cover the November rent payment plus I'm adding about $2000 on top of it, maybe more. I should be down to less than $9000 on my card by this time next week. Progress IS being made.

I'm definitely not on track to meet the goal of 150K in net worth by year's end. I'll be higher than I was at the start of the year (win), but not at all close to where I want to be. While I could just pay off the entire balance by wiping out my online savings account, something tells me that's not a good idea. Since I'm in the same boat as Single Ma, getting 3 paychecks in November, I figure I'll get it down to at least $6000 by year end. I'm so glad to see myself write that since it will have fairly immediate impact on my credit scores. The last tri-merge I pulled had an Experian boot firmly up my ass, just when I was expecting all of my scores to be > 750. *sigh*

Anyway, just a bit of a follow up. I've been avoiding this post for a while, but fuck it, here it is. You can't say I didn't follow full disclosure.

Anyway, until next time...

Sunday, October 28, 2007

Impending Doom

So there's all this coverage now about the next FOMC (that's Fed Open Mouth Committee) meeting this week and the expected rate cut.


FWIW, I think the Fed will cut. Look at who the chairman is. 25 bps. But that's just a guess, not even a forecast. To paraphrase a friend of mine, when it comes to economics, I'm not even a dilettante.

However, what will this cut (and God forbid if it turns out to be a 50 bps cut), do to the USD? OMFG! I think we see oil at $100 if that happens, quite honestly. Not for any actual, real, fundamental reason. It really becomes a psychological move at that point, but I think it happens. At that point, things get ugly. I think you face the imminent move away from the greenback by everyone tired of paying more dollars for the same resources. Look, Kuwait already made the move. You know the Chinese have to be looking for the exit, and how to get out of it before anyone notices they left the party. Fuck, I'm trying to as well, quite honestly. The question really becomes who is the next to fall if we touch $100/barrel oil?

While there are arguments against this ( sub req'd), and again, they involve psychology, they argue for an optimistic view versus a pessimistic one. In my experience, people are far more negative than positive, and I think the negative psychology on oil is becoming sticky. Look, real inflation is in the 6% - 7% range anyway, right? So how hard is it to believe that oil bounds up past $95 and continues, especially on a 25 bps rate cut? Sounds perfectly reasonable to me.

Until next time...

Saturday, October 27, 2007

Back to Old Habits

Startups are like socialism -- they take up a hell of a lot of evenings. I'm remembering this after staying up for the last 10 hours hacking at software on my web server. This isn't the kind of thing I would normally engage in on a Friday evening, but my partner and I had our first meeting in months on Wednesday. One of the outcomes was an agreement to spend Fridays hacking on our startup - coding, installing and configuring software, designing architecture, writing business documents, completing paperwork. We're targeting January 2008 for our public alpha, after re-tooling to a different mobile platform.

As an aside, writing software for cell phones in the US sucks ass. There's no gracious way to describe the way the vampires in the mobile telephony industry have sucked the very life from the market. All the stuff we originally planned to do can be done easily on a regular phone in pretty much any country other than the US. Here, we're relegated to the ghettos of smartphones. Granted, our spirits were lifted - slightly - when Apple finally announced a real SDK (software development kit) for the iPhone. But the entire original plan has to put on hold to focus on Windows Mobile for the time being, and the iPhone eventually. Hey, smartphones are the wave of the future and all, but right now, there are more regular Motorolas, Samsungs, and Nokias in circulation than Windows Mobile devices and iPhones. Just another reason to leave this country, in my opinion; it not quite up there with the declining dollar, but the more I think about it...

Anyway, let me get back to figuring out why Apache 2.2.6 fails to compile with SSL support. I will admit I've missed just doing geek shit for the hell of it. The last 2 nights have brought back some serious memories, and given me a psychic boost as well. However, I do need to get some sleep sometime today! Doh!

Until next time...

Tuesday, October 23, 2007

Test Drive III: BMW 650i

I finally did it.

After thinking about it all summer long, I test drove a BMW 650i. Man, I don't know why I waited so long!

I made the arrangements last Thursday, driving up to Tischer BMW and sitting down with a sales guy for a few minutes. I just wanted to get everything in order so that I could come in on the morning of Saturday 20 October, do my drive, and bail. So all of that got worked out. Then I called on Friday to confirm that everything was in order. Since my sales guy - Andy - wasn't available, I spoke to Rick, the sales manager. Nice enough guy. He confirmed that the black on black 650i coupe with automatic transmission and the Sport package was going to be ready for 10 am today. Check.

(Before you purists go off, I think I said somewhere that I am still learning to drive stick, and I didn't feel like doing my first paddle shifter on a test drive in a $75,000 automobile. Get over it.)

So I roll up to Tischer today at 5 minutes after 10:00 am, and find my sales guy again. Good guy. West Indian. I want to say Trinidadian, but that's not relevant here. Andy gets the car prepped, takes my license to make a copy, and gives me the quick tour of the vehicle controls. My roommate came along for the ride, because experiences like this should be shared in my opinion. She played with iDrive; I played with the V-8.

So we meander out of the parking lot, and I immediately gun it. Schweet! Power on demand is a beautiful thing. So we jump on Route 29 north, merge into traffic, and once I get some open road I hit it again. I love the responsiveness of this car! So after crossing into Howard County, I find some open road on 29 and hit it. In no time, we're doing 111, and it feels like the world is standing still. I mean, you don't even notice the acceleration due to the amount of power available. Hitting 85 in this car damn near makes you feel like the engine is off. But now its time to reign it in a bit, because I'm coming on a new speed trap, so I ease down, come over the hill I hit it again to merge back toward the right.

Coming up next is MD Route 32, which I jump on heading east, and pull over in a parking lot to trade seats with my roommate. After playing with the seating controls for about 10 minutes, she gets everything positioned just so and we're on the road again. Being her first time behind the wheel of a car with this much power, she's a bit intimidated. The necessary touch to do anything - activate turn signals, give the engine burst of gas - is so demure that even she is surprised. So we get back on to 32 east and she promptly tries to run a Honda Accord off the road. Fuck! After we get past that situation, she navigates us on to 95 South and heads for the left lane.

So after a nice leisurely jaunt down 95 at about 85 or so (which positively feels like the engine is turned off if not for the trees and other cars being passed), we get back on 495 and come off at New Hampshire Avenue to trade spots again. I take over and head up NH to some back roads. Too bad that all morning the roads were crowded with people. The best part was the Toyota Highlander who kept trying to keep up with me. I love fuckin' with these guys. Reel him in a bit, then gun it and embarrass him. I could do that all day, I swear! The same thing happened the first time I helmed this ship earlier in the morning. When will these guys learn!?!? It was like everyone thinks they're driving a frickin' Maserati when they see you coming, and wants to race. Guys, either I'm chillaxin', not thinking about your dumb ass, or I'm going to (and did) smoke you like a Cuban cigar. There's no middle ground, so get over yourselves.

Anyway, we take the back roads back to Tischer then drop the car off and leave. On the last leg, I activated Sport mode and all I can say about that is "Whoa!" With Sport mode on, the road feel is much more eagerly transmitted back to the car and the acceleration is ridiculous. Jumping into traffic in Sport mode was the one time I felt that the car slightly got away from me, but I recovered control immediately and took us back in.

Overall, I think we were out for about 45 or 50 minutes. A short and simple yet hugely worthwhile experience in The Ultimate Driving Machine. I think that description can safely be applied to the 650i, no holds barred.

I'll admit that the 650i was a hugely enjoyable drive. Not only was the giddy up flatly amazing, but its an extremely comfortable car. It is definitely pure GT driving fantasy. I can definitely see the 6 series as my everyday ride, just as long as I don't have to move passengers from point A to point B. Unless those fools fit in the trunk, there's no room for them. I'd hate to be the poor bastard rising in the limited back seat, my knees in my throat as the countryside roared past. There are worst places on Earth to be, but not too many, I imagine.

Anyway, until next time...

Thursday, October 18, 2007

Ooooh! Guns, guns, guns!!

Well, not quite, but that's what it felt like Wednesday night at the first face-to-face meeting I've had with my real estate investing partners in some months.

What was the cause of all the tension? We decided to unwind the operation. After 22 months, a lot of learning, but not nearly the level of progress we had originally committed to, we're shutting it down. Its always an emotional experience to shut down a business. However, the commitment to the original goals, or even modified goals, wasn't there, or at least wasn't distributed evenly.

So why now? Why after 22 months, $11200 invested per person, lots of meetings and gas expenses, 4 properties and the headaches of being landlords, why shut it down now, when we're on the brink? In my opinion, because we've been on the brink for a long time, and in 6 months, we'll still be on the brink.

Last Saturday, at the regular meeting of DC REIA, the leader of the group, Sherman Ragland, said something I wish I'd heard 2 years ago. He said partner, but don't create partnerships. Meaning, find a partner to get the deal done but don't create a structure which marries you to a partner or a group of partners (like an LLC) until you actually have a working relationship with them. If the first, then second, then third project with those partners all work out, then maybe its time to consider formalizing it. Our mistake, as a group, was rushing into marriage, all in the name of being "legal". We see how well that worked out.

So thankfully, with all the heat of the meeting, no one got hurt, no chairs or other furniture were thrown or anything like that. (Although I was tempted.) So now we wind down the operation and we'll find and close our deals in our own independent ways. Its definitely for the better. 5 guys, all with engineering backgrounds, trying to pull together deals, it was like herding cats.

Oh well. Time to move on now.

Man, You're the Sickest!

I just had to interject with this one. Does it have anything to do with alpha? No. Still fuggin' cool tho!

Thursday, October 11, 2007

Middle Eastern Plays in Western Markets

My biggest question is how are the sovereign wealth funds and other middle eastern investors reconciling their religious principles against the fact that private equity investments involve the application non-trivial amounts of leverage? Owning non-controlling stakes in Carlyle or any other PE firm isn't going to position them to remake the business along Islamic finance lines. I doubt they would want to anyway (hopefully) seeing as how they are investing on the basis of the returns the firms have generated using levered tactics. If a private equity firm can't lever, is it a private equity firm anymore? I think not; now its just a mutual fund with worse overhead.

Monday, October 08, 2007

Weekend Update

Whew! What a weekend! I spent the last Friday through Sunday in the DC REIA Super Meeting which was a very worthwhile experience, at least for a real estate investor in the DC metro area. Lots of good information shared, and I didn't shell out any money for any additional educational programs. I have enough to work with at the present time. However, I'm starting to really "get" this real estate investing thing, to really see it as a part of my being and my life. Now if I could just get this one bloody deal closed!

I apologize to all my readers for the neglect. Things should be more sane this week since I won't be working tonight as I usually am. That will give me some time to clear out a great many outstanding items I have on my to do list.

Monday, October 01, 2007

Prime Brokerage Disintermediation

This is what I am talking about! I'm not the smartest guy on the planet, but this area -- prime brokerage -- looks so susceptible to being broken up. First, I can see an increase in credible competition to Goldman Sachs, Bear Stearns and Morgan Stanley. The credit crunch has shown that, as the big commercial banks with big balance sheets - Citi, BofA - have made inroads in this area. The European banks will be next. However, it will eventually become an issue of service optimization. Plus, there are the competition issues like front running that hedge funds just don't want to deal with. Services will probably peel off into independent providers; that's what makes sense to me.

Running in Place

I'm sure you noticed the little burst of activity there at the end of September. I assure you I wasn't painting the tape. (Ok, maybe a little bit.) I had a bunch of things I wanted to get out during September and I just sat down and forced them (or their remnants) out. Anyway, I hope they are at least enjoyable, given how dated they are. Still working on the CDS project, but I haven't had time to do the research I want to do on that one. (Or the real estate derivatives; I think there's more to explore there.)

Anyway, until next time...

Test Drive II: BMW 750iL

I'm not going to say much about the process this time. All that need be spoken about is the car.

But first...

I can understand why the sales guy wanted to stress the fact that the 750 would NOT be like the A8L. I'm sure he sees tons of people who are disappointed by the difference in feeling between the 750, the Mercedes S Class and the Audi A8. I notice that a lot of people don't really know what a BMW is supposed to be purchased for. So let me attempt to clue them in by saying that a BMW is meant to be DRIVEN! Yes, boys and girls, BMWs are for people who like to the thrill of driving. People who speed up in the twisties. People who drive fast and relish every bump in the road as an expression of their connectedness with the road.

These are the type of people BMWs are designed for. There is a reason that they call themselves the ultimate DRIVING machines. If you don't like the way the road feels, buy a Benz or an A8 or even, God forbid, a nouveau riche Lexus. BMW is not for you.

Now that I've said that...

I have to start by saying that it is a miracle of modern automotive engineering that a $90,000+ (2007 dollars) automobile can feel like a $30,000 auto (1999 dollars). I don't mean that disparagingly at all. It was a natural experience to get behind the wheel of the 750iL. Just as my 2000 Honda Accord allows me to feel the road (more than it should), the BMW really put me in touch with the driving experience and road feel (exactly as it should). It was a just a bigger vehicle to maneuver!

Let's get iDrive out of the way. It sucked ass -- totally. The A8L's controls were much more intuitive and easier to use. Whomever thought up iDrive should be executed like Buddhist monk in Myanmar. I can see some poor bastard dying in a horrible crash trying to change radio stations in any BMW with iDrive.

Anyway, the model I drove was snow white, with the most comfortable leather seats I've had the pleasure of sitting in in a while. Just a beautiful machine. While the car is big and heavy, it is not unwieldy. It sure looks like it could be, but the handling was superb. While taking it through some of the back roads of Montgomery County, MD, hitting some fairly tight turns at speeds that would turn my Honda into roadkill, the car was just taut and eminently controllable. Again, more modern engineering at work - traction and stability control are beautiful things. I loved how the sales guy kept pushing me to give it more power in the turns and soon that heart pounding fear starts pushing the adrenaline throughout your system. This car can make you feel like Superman, or at least Michael Schumacher. :)

Unfortunately, I did not leave the dealership with one. My Accord has years of life left in it, and I plan to drive it into the ground. But if Mercedes continues to mutilate the S Class as they have done, once my Accord keels over, BMW might well get my business.

The Subprime Crisis and Ratings Issues from the NY PRMIA Meeting

Here is a fascinating recount of some of the events at the Professional Risk Managers International Association meeting on 20 September. Unfortunately, I can't remember how I came across this. :(

From reading this, the first thing that comes to mind, for me, is "why doesn't Egan-Jones just start rating paper independently and let the market develop for their ratings on the basis of that competition?" Of course, I can see S&P and Moody's getting very litigious, based on the comments that came out of this. I could even see the SEC stepping in and trying to invalidate their work. And of course the issuers aren't going to come to Egan-Jones because they know they can go ratings shopping among Moody's, S&P and Fitch anyway. This whole situation stinks to high heaven.

The bits from Josh Rosner are well worth reading as well. Of course, these are meeting notes so they summarize what was said, but the thoughts are complete enough to see that things are seriously broken in the housing finance and securities ratings arenas.