Gentlemen's Stock Picking Club

[Dawg52]

Quote:

Originally Posted by Brat Twaddle, if you goal is an average of 10% return then put your money in Oakmark Balanced and sleep while they work hard. OK, I admit that this is not exactly what those of us who frequently the stock picking club want to do. However, I have been taking a look at recent market performance and am not unhappy with OAKBX fund managers during the recent instability. I have a high % of our investments in balanced funds and managed global funds, 5 years in cash/I-bonds, the rest in equities where I would like +20% return... fun money so to speak.

I have a similar approach only I use Trowe Price Cap Appr fund as my anchor. Also own a good chunk of DVY. Probably 7-8 years worth of cd's. Over all, 48% Stocks/52% Fixed income. Follow the 100 rule.

[greg]

Quote:

Originally Posted by haha Greg, it is awfully early in the day to be drinking. Ha

You're right! I'll switch back to beer.

[greg]

Quote:

Originally Posted by twaddle As we know, There are known knowns. There are things we know we know. We also know There are known unknowns. That is to say We know there are some things We do not know. But there are also unknown unknowns, The ones we don't know We don't know. Taleb is simply telling us that unknown unknowns -- the real surprises -- are always present and always mispriced. It's not a traditional risk that is included in some risk premium.

OK, ha has told me that I'm casting my net too far (among other things). That's good.

I don't disagree with anything said above, but I still need to interpret it into usable information for me.

Unknown unknowns: Yup, they exist. And there really is no way we can use them or do anything about them, and we especially cannot make money off them. In order to make money, you need to place your bet; if you don't know where to place the bet, how can you bet? If you know where, you automatically know something, so it isn't unknown any longer. There are no odds that can be found about something that is unknown,and this is especially true if you don't know it is unknown. To me, at least at this point, Taleb doesn't make sense to me. Unless you can point me toward better explanation of what he means?

Known unknowns: This to me is the juicy area, the real place where Black Swans, both positive and negative, exist. To me this says, for example, we can't know what specifically those dang pesky terrorists are thinking (the unknown) but we certainly know they are thinking nasty things (the known). This sort of stuff has an infinite number and variety of possibilities.

1) We can know something bad is going to happen and just not know where or when or how.
2) We can know something good is going to happen on our birthdays, but not know what or where or who.
3) We can be day traders and know that a stock is acting peculiar that day, but not know why. And further, we may know that it is acting peculiar and in a way that historically has indicated a large movement up in price or a large movement down. (More of these later.)

As I see things we really do have a large number of unknowns out there in the financial world. But they all exist somewhere in time and space, these unknowns. So we can point them out as "in a place" (where?: the financial markets or the options market or . . . ) and "in a specific time" (when?: the future, within the next few days, before my calls expire . . . ).

I really have to have a better definition of unknown unknowns to do a better job of criticism. Can you help? Otherwise I'm stuck thinking Taleb didn't think things thru.


The Great Depression happened unexpectedly (an unknown) to many folks. And many of these same folks that didn't know it was coming also didn't know what the consequences would be after the first day of the DOW crash. Obviously an unknown unknown to some. Others saw it coming (known--at least partially) and got the heck out of the way because they knew what the consequences were (known--at least partially).

My conclusion so far: The human mind plays an enormous role in knowing and not knowing and, consequently, acting. Ask Rumsfeld what he knew about Iraq before he went in;D? Ask Osama, who knew ahead of time, well before Rumseld figured it out, that Iraq would be at minimum a mess? Who of these two appears to have better judgment about Iraq today, at this point in time? Did someone partial know what was unknown to Rumsfeld?

[unclemick]

Depending on your body weight - six quick Budweiser's and then you'll be ready to buy a few hundred shares. The balance sheet/key stats begin to look better also.

heh heh heh - forget Rumsfeld and not to worry about the mailbox, I think you can autodeposit dividends to your bank account. Drink the Buds and all unknowns become known - until the next day when hangover hits. Plus you still have the dividends. Now back out to the BBQ(pork today).

[HFWR]

Quote:

Originally Posted by greg So to keep it simple: ten large cap stocks at 10K hypothetical dollars each=$100k total...

I'm rescinding my HFWR value portfolio in order to participate here.

http://www.early-retirement.org/foru...lio-29836.html

I'm still using the mechanical bull monkey stock screener method. Stock screen: mkt cap => $50B, P/E <= 10, P/B <= 2, for the new, improved HFWR value portfolio...

As noted in the preceding thread, I've created a userid, pw, and portfolios on bloomberg.com.

http://www.bloomberg.com/apps/subscriber/webport

Anyone wanting to enter their "magic portfolio" can use id "erorg_portfolio" and pw "portfolio".

[haha]

Quote:

Originally Posted by greg My conclusion so far: The human mind plays an enormous role in knowing and not knowing and, consequently, acting. Ask Rumsfeld what he knew about Iraq before he went in;D? Ask Osama, who knew ahead of time, well before Rumseld figured it out, that Iraq would be at minimum a mess? Who of these two appears to have better judgment about Iraq today, at this point in time? Did someone partial know what was unknown to Rumsfeld?

I am not sure anymore what we are talking about, but if we are still discussing Black Swans, no way would Iraq meet Taleb's definition of a Black Swan, or for that matter a gray swan. A Black Swan is not unknown only because someone is too ignorant or too pig-headed to understand it. It has to be unforeseeable even to a person in possession of all facts and insights that it would be possible to have- including possession of a degree of humility and prudence. Unforeseeable at least in the sense that of all the many uncertainties that accompany a course of action, this one would not stand out as something to even consider.

A war going badly is a commonplace event that is almost always underestimated by governments and armies. The sub-prime meltdown is also not a Black Swan- any experienced and prudent person could have known that big instabilities and vulnerabilities were being built into that structure. No one could know when or if it would come apart, but only an idiot or someone with an agenda could deny that a considerable amount of risk existed. An over-stretched financial structure that caves in of its own weight and cumulative bad decisions is not a Black Swan.

A Black Swan comes out of left field; even prudent people do not seriously include it in their scenario planning.

Ha

[greg]

ha:

Has there ever been a Black Swan event, ever? Could you give me an example so that I can apply it to your definition? Thanks. 9/11, as a non-financial Black Swan?

[haha]

Quote:

Originally Posted by greg ha: Has there ever been a Black Swan event, ever? Could you give me an example so that I can apply it to your definition? Thanks. 9/11, as a non-financial Black Swan?

I have returned the book to the library Greg, so I am not sure I remember correctly exactly how he classifies these things. I didn't try to get it down, because I think he is only useful to my thinking in a general way. I already tended to think this way, just from observing how many large events in my life were due to random occurrences.

As I remember, he calls the crash of 1987 a Black Swan- this was so off the bell curve that vague feelings that the market was somewhat overvalued did not constitute reason to suspect anything like this.

I think that the most useful application of these ideas is to question one's scenario building and not put too much faith in engineering type constructs like confidence intervals, sensitivities, etc. It will not be a comfortable idea to Excel Jockeys!

Ha

[greg]

Ha:

Thanks for your comment. I really don't think our separate thinking about this matter is that far apart. My problem is that I really don't think there are too many random events in the world, if any, and even then they just appear random. At times these things are indecipherable to me, but my poor miserable ego will not give up on the notion that if enough time, energy and intelligence is applied to a seemingly random event problem, a cause will be found. That when push comes to shove and things are dissected after the event, legitimate causes can usually be found. But they may not be found before the event because no one bothers to look that hard. I suspect that the 1987 crash has enough written about it that we probably each could find some writing to back up our differing view points.

Of course, my bigger problem--to my mind--is that I took a course in business statistics 101 over thirty years ago and spent most of my time not thinking about math. My bad. I don't remember much. (And I know you see my bigger problem differently.) An idiot shouldn't play in the house of statistics.

So here's what I think we might agree on:

1) It's worthless energy spent trying to look for Black Swans, although one should always keep in mind that all swans so far may be white but a non-white one is possible somewhere, sometime.

2) Time is better spent looking for more obvious financial swans. This may mean looking for negative swans and buying puts or positive swans and then purchasing calls, both in smaller amounts to supplement our grander strategies of bearness or bullness.

Personally, I can't look for risk or measure it or explain it without believing it is possible to understand it also. Thanks.

[twaddle]

Quote:

Originally Posted by greg So here's what I think we might agree on: 1) It's worthless energy spent trying to look for Black Swans, although one should always keep in mind that all swans so far may be white but a non-white one is possible somewhere, sometime. 2) Time is better spent looking for more obvious financial swans. This may mean looking for negative swans and buying puts or positive swans and then purchasing calls, both in smaller amounts to supplement our grander strategies of bearness or bullness. Personally, I can't look for risk or measure it or explain it without believing it is possible to understand it also. Thanks.

I won't disagree, but I'll try one more example. Imagine this headline tomorrow: "China Attacks US!" Everybody understands that the risk is there, but nobody expects it to happen tomorrow, and in no way is this risk reflected in any risk premium.

Who knows what this would do to the markets, but it probably would be ugly and prolonged. Anybody counting on historical returns or historical variance would be hurt badly. And, if you happened to have deep out-of-the-money puts on the S&P 500, you'd probably be a rich man tomorrow. Does that mean you anticipated the event or "looked" for that particular black swan?

Edit: BTW, I chose that particular example because China recently attacked the US:

China hacked into Pentagon computer network - Yahoo! News

[greg]

twaddle:

You said:

I won't disagree, but I'll try one more example. Imagine this headline tomorrow: "China Attacks US!" Everybody understands that the risk is there, but nobody expects it to happen tomorrow, and in no way is this risk reflected in any risk premium.



I have to disagree with your set up above, the use of ‘everybody’ and ‘nobody.’ One can say “everybody” hypothetically but reality says that things are very different from that. Not ‘everybody’ understands that the risk is there; nor do they see it the same. Some folks who are part of everybody don’t even have a clue that China exists. Children don’t know for the most part. Some voters ignore most every thing related to politics and foreign affairs. There are gradations of understanding about that risk and when and where and if such an event might happen.

Here’s how I see some possible gradations, or concentric rings of knowledge, regarding your possible event and my attempt to expand and change your use of “everybody” into something different. There are varying degrees or amounts of knowledge that the parts of ‘everybody’ possess:

1)The CIA and military leaders and/or President would see things best, have the best knowledge. They direct the spies and spy satellites and gather the information first hand; they gather data from Ambassadors, etc, etc.
2)The next level consists of folks close to the top levels of the military or gov’t agencies or White House. (In other words, this whole thing is 'trickle down' in action.) These folks would, in general, have less knowledge ('need to know'?) or derivatives of that information that helps them get their job done.
3)Citizens may receive some sort of knowledge.
4)Parents may tell their children something.
5)A kid might tell his doll or GI Joe what to do about China based on what his parents say.

Of course, each set of folks in each of these five gradations carries within/among itself the seeds of how risk is seen and then applied. Ordinary citizens, with their probably partial set of knowledge may be soothed or panicked about info/war with China. Ditto with each other group; they each will react mildly differently and think differently. Collectively, and within the financial markets, some sort of economic risk is derived and allocated to various parts of the economic pie related to risk of war with China. The military deals with its own set of related risks, mostly non-economic, to this potential event. Lots of stuff going on, with lots of different chemistries interacting and newly emerging stuff springing up all over the place. Parts can be sought and found and examined.

I changed your above idea significantly from how you expressed it. You’re right. One can imagine it exactly like you said, but forcing it into a sort of condensed “everybody . . .” doesn’t allow the examination of how these things work out in reality, how knowledge reverbrates out into the world. As I see it, you're treating "everybody" like a flat hypothetical, a monolith, when in reality it is a dynamic, active entity, with lots of moving parts and interactions. It's alive and busy all the time.

Mis-priced risk, I think, can be found pimarily in areas of worse knowledge and in the seams between better knowledge and worse knowledge. (Everyone knows this; I would like to examine it in more detail?) We can find these spots if we know where to look. Bond traders, for example, always look in the places where knowledge and risk may be misapportioned—and then buy or sell into it. I suspect many are very good at it. Bad knowledge, or inadequate knowledge, about an event or potential event reduces comprehension of risk, its derivative.

“Nobody expects it to happen tomorrow.” When you say this, I suspect you mean as nobody ‘us basically uninformed ordinary citizens that aren’t privy to the best knowledge available from our intelligence gathering agencies.’ Your ‘nobody’ as I see it has the same characteristics described in my rudimentary five levels of ‘somebody.’ A particular high level ‘nobody’ will receive “when” knowledge first, as the first in line part of the organism. You're right, he, the collective nobody may very well not have it today, but we can almost guarantee that when it is received, someone higher up will get it first and then pass it down. It will then be disseminated down the line in some fashion and each level acting on it in their appropriate way. The President will probably receive the information first, for example, about if and when China may attack in some fashion. (Your software attack post was an enjoyable read; what is war and what isn't and who decides, who makes the judgment?)

Knowledge is disseminated over time to ever larger groups of people, emanating from scientists first, then to others in a comprehensible pattern. (K. Popper, Taleb’s source for some of his ideas, said this, or very close to it, somewhere in one of his books that I read thirty-some years ago.)

?

I'm working on a better analogy for Ha; it’s important that I win him over in some fashion—or try. Thanks.

[unclemick]

When I hear of Taleb's Black Swan - I usually think of how you are going to kill and cook the buzzard - after he shows up.

Think Bernstein and his buddy Angus Maddison with total lost of governments, currencies , markets, last train leaving Berlin, etc, etc. Having met Chinese children whose parents left Red China and Vietnamese - hey had a plan sometimes vague(think hammered gold, jade, semiprecious stones) that went into effect as/after events unfolded.

Sort of my version of 'do the drill' - I knew the slosh model said the levees went at Cat 3 - so I always did 'the last train leaving Berlin bogey' - but the financial plan occured after that fact not before.

I remember those folks in the 70's with freeze dryed food, gold/silver bullion coins and a Lee Loader for their guns.

Hopefully any Black Swans today are catchible and cookible after the fact.

heh heh heh - valid passport and 6hrs 37.5 minutes to the Canadian border if you don't stop to eat.

[greg]

So, I'm starting to get the feeling that this filament of the thread is getting too frizzy?

Twaddle:

You said:

I won't disagree, but I'll try one more example. Imagine this headline tomorrow: "China Attacks US!" Everybody understands that the risk is there, but nobody expects it to happen tomorrow, and in no way is this risk reflected in any risk premium.

Who knows what this would do to the markets, but it probably would be ugly and prolonged. Anybody counting on historical returns or historical variance would be hurt badly. And, if you happened to have deep out-of-the-money puts on the S&P 500, you'd probably be a rich man tomorrow. Does that mean you anticipated the event or "looked" for that particular black swan?

I'll try to look at this differently. I agree with you that China could possibly hit us with an attack coming from left field that no one saw coming (hypothetically). What you are describing is pretty much what happened on 9/11 too (we knew a particular and fairly large group was trying to get us; we just didn't know when or where or how). We all ended up pretty well surprised , and the consequences were ugly and prolonged--especially because they were combined with the dot com crash. With a China event, the effects on the stock market would be different and the order of magnitude would also, as would many other things.

We can't know when or where or how an event might happen (I'm following your construct here, because I, personally, think we can partially know and look and anticipate). But we can certainly guesstimate the consequences, at least the initial ones of a big negative event. How this event mutates and combines with other elements after the event are much clearer to us and more obvious to see.

[As an aside, we really do--as a country--quite a bit of anticipating and searching for all Black Swans. We have the Dept. of Homeland Security busy, the CIA, the Pentagon, Border Security, and so on.]

Paraphrasing you: "if you had puts in place, does that mean you anticipated the swan?"

Maybe, maybe not. I guess you'd have to ask the fellow who made boat loads of money off his bet. He may have been betting against the dot com bust or some other more or less likely event he saw coming.

.................................................. .

My guess here is that Taleb in his books went thru the same problems mentioned here and many, many more. He came to the conclusion, I suspect, that one can't read folk's minds, either on the local level (the individual) or the general level (a large group). And if you can't, then you can only look at their behaviors. And if you can only look at their behaviors for evidence, then by necessity many events can only be seen at a much later point in time, oftentimes only right before the event. The magnitude can be greater too. Black Swans seem to pop from nowhere with this sort of thinking is my guess.

Technology has changed what we see, when we see it, where and how. We used to be able to see an army marching toward us many days, weeks, or months in advance.

I probably disagree with Taleb if I'm not putting words into his mouth about how I see him. I think we can really go into consciousness, into other folks' minds, and see things. But probably not in the way one might think. For example, we know that cell phone use in cars can easily divide the mind so that concentration on driving is impaired, and this increases the risk and probability of an accident. We pass a law so that, as best as we can, we prevent this sort of mental state in cars, e.g. no using cell phones while driving, pull over and stop or get a ticket.

Again, as I see things. God does not play dice with the universe. Everything is deterministic and follows rules. Nothing is random is my guess.

[unclemick]

Quote:

Originally Posted by greg So, I'm starting to get the feeling that this filament of the thread is getting too --- Again, as I see things. God does not play dice with the universe. Everything is deterministic and follows rules. Nothing is random is my guess.

Perhaps - but I think we all have an - if I observe this, then I do that - even if it is buried in our subconcious. God does a better job.

I evacuated 7 times before number 8 and Katrina. And I still have a 10% interest in a non working gold mine joint venture from 1973.

heh heh heh - I did eat the freeze dryed food - and learned to love dividend stocks even tho Homestake cut theirs and pretty much went down the tube. I still have a shotgun for that stupid Black Swan - too gunshy for puts.

[twaddle]

Greg, when you sit down in a chair at dinner, you don't check to see if it will first hold your weight, do you? You know the laws of gravity are still in effect. You know it's possible the chair may fail. It's even possible that Martha has insider information about the screws she removed from your chair's legs. Yet, you still sit down without checking.

You do this because of repeated observations of success from past sitting events in that same chair. You have come to expect historical performance and historical variance, and you discount the possibility of chair failure to essentially zero.

The difference between chair failure and unanticipated events in the market is two-fold: 1) you don't fall very far when a chair fails, and 2) there is no mechanism to get paid large quantities of money when a chair fails.

The arguments about whether somebody had prior knowledge and determinism aren't as interesting to me as whether or not the payouts on the bets are truly asymmetric to the costs and how those payouts are captured.

Another question I find interesting is this: if I make a bet with a HUGE pay day, what happens if the guy on the other side of that bet can't pay? Is there any mechanism in place to ensure that somebody who sells a put has enough capital to cover his bets when he has to cover?

[haha]

Quote:

Originally Posted by twaddle Another question I find interesting is this: if I make a bet with a HUGE pay day, what happens if the guy on the other side of that bet can't pay? Is there any mechanism in place to ensure that somebody who sells a put has enough capital to cover his bets when he has to cover?

Options Clearing Corporation. Have no fear, no bet you are able to make (financially or emotionally) will go unpaid should you win.

Ha

[greg]

twaddle:

I'll think about what you said. This Taleb stuff is fascinating. Thank you. I'm going to run down to the library for his book. The piece below gives a decent understanding of his thinking. Again, I always glom on to what I perceive as the most interesting part:

A black swan is an outlier, an event that lies beyond the realm of normal expectations. Most people expect all swans to be white because that's what their experience tells them; a black swan is by definition a surprise. Nevertheless, people tend to concoct explanations for them after the fact, which makes them appear more predictable, and less random, than they are. Our minds are designed to retain, for efficient storage, past information that fits into a compressed narrative. This distortion, called the hindsight bias, prevents us from adequately learning from the past.

Edge: LEARNING TO EXPECT THE UNEXPECTED

"Our minds are designed . . . . " This seed idea is very interesting. It contains Taleb's notion of decay within the mind and creation. Wow! More later if you desire.

[greg]

Quote:

Originally Posted by twaddle The difference between chair failure and unanticipated events in the market is two-fold: 1) you don't fall very far when a chair fails, and 2) there is no mechanism to get paid large quantities of money when a chair fails. The arguments about whether somebody had prior knowledge and determinism aren't as interesting to me as whether or not the payouts on the bets are truly asymmetric to the costs and how those payouts are captured.

First, I don't agree with your two points in the first paragraph: 1) "you don't fall very far . . . " (Remember, I always look for th extremes of possibilities first--not at the middle ground first, which is the most likely event area.) If I had osteoporosis (brittle hips) and sat down 'without consideration' in that chair, it is very possible that falling a short distance could crush my hip, put me in a rest home, and I would wither away and die a short time later. This would be a black swan event--to my mind--and body too. Possible but not likely, given all the circumstances mentioned all occurring in proper sequence. All I'm saying here is that distance to the ground is absolute, but risk to the experiencer is relative, that for an old man an eighteen inch fall could be very serious. For a middle age one, not worthy of any consideration. (Risk is assigned to events by humans and in a relative way, dependent upon what they know about an event or its possibility and what they know about the environment.)

2) "no mechanism to get paid large quantities of money" Again, not absolutely true, although significantly different than you may have been thinking. Do you remember many years ago they often sold little insurance policies that paid off if, for instance, you lost a finger or hand or arm or eye, etc? Depending on what was lost, you could collect a predetermined amount for each part or combination of parts. Anyway, the possibility exists that some similar type of odd or mundane events have certainly been insured in the past and will be in the future--and that such possibilities exist for the potential chair sitter. But again not likely. But . . . we all have medical insurance that covers expenses, and may be forced to pay out huge sums to hospitals or rest homes. Sometimes enormous sums jump over our heads and into the pockets of others. We may not pocket the money, but we are definitely the beneficiaries, Large quantities of money are at our beck and call if events warrant it. In addition, we may have home owners insurance that might cover a guest that falls off one of our chairs. We have all these risks covered ourselves already or have products available to cover such risks, white swan or black swan induced.

Enough said on that paragraph.

In your second paragraph, you identified exactly where your interests lie. You said " . . . are the payouts truly asymmetric to the costs and how those payouts are captured." That really is the question that I'm investigating also. George Soros made a whopping huge amount of money on the British pound in the 1980s (?). He bet against it holding its value and was so confident in it happening that he leveraged up--way up. Jackpot for him and his friends. A negative black swan occurred that made the rest of his life very easy. But, again it always comes down to knowing things beforehand, finding that asymmetrical event, and then acting on it with enough confidence. He did it with consciousness and his mind first and with the data he gathered. He then put it all together in a specific, reality based way. As far as I am aware, he and friends were the only ones to know about this beforehand. This non-knowing by others creates much of this asymmetic risk skew in such situations. Knowledge is incredibly powerful.

I don't want to get all Buddisty here . . . so I won't.

But in response to your implied second paragraph question: in order to get that prior knowledge yourself, you need to know the mechanics of how it happens in others and where they go to find it so that this information can be applied to your own . . . um . . . quest (as I see things). It's now mine too.

I need to take a break from this stuff and read Taleb. and a few other things. Thank you. This is turning into a wonderful process for me. PM me if you want.

[CCdaCE]

I think the best summary I've read of Taleb is:

Here.

-CC

[theoldwizard]

I watch "Mad Money" from time to time, mainly for the entertainment factor (Watching a middle aged man run around, screaming, stabbing things, playing weird sound effects IS entertaining !)

I do agree with Cramer on a few stock, especially for the short term (6 months or less). I like Apple (especially after their recent dip) and I think HP will do well for the next 6 months. And Google still can't seem to do anything wrong.

I was a big Boeing fan, until they had "some delays" in their parts delivery of the Dreamliner. It makes me nervous that they won't make their target date, but long term, I think they are a good investment.

Can someone explained to me what happened to AT&T ? They have been going "sideways" for about 6 months. I would expect them to be doing well with all of the iPhone activations. That is 2 years of guaranteed income.