07.27.09
Posted in All Categories at 8:05 am by Michael Goode
If you have followed my blog over the past two years then you have probably noticed that my interests have veered away from value investing to stock trading, short selling, and fraud. Calling this a “value investing” blog has become ever more inappropriate. Due to my changing interests and my desire to build a stock-trading brand, I have started a new trading blog, Reaper Trades (www.ReaperTrades.com). Those who know me from my association with Tim Sykes or my presence in the Investors Underground trading chat room know Reaper as my trading nickname. I will continue this blog although my posting frequency will decline.
What can you expect on my new blog? I will blog about trading strategy, trading psychology, and my own trades. For the time being I do not forsee offering any pay services even though some readers have encouraged me to start a Reaper Alerts service much like Tim Sykes’ TimAlerts (of which I am a lifetime member). I do not rule out offering such a service in the future, but for the time being protecting my best trading strategy is more important to me than earning a few thousand dollars from selling my knowledge.
Please note that I am no longer updating my @goodevalue twitter account. See my @ReaperTrades twitter account for all future tweets.
Disclosure: I am an affiliate of Tim Sykes and InvestorsUnderground and am a happy customer of both. See my disclosures & disclaimers page for more details on what products I have purchased from Sykes.
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07.15.09
Posted in All Categories at 7:56 pm by Michael Goode
It is always fun to observe the actions that executives of listed shell corporations (excuse me, I mean development-stage companies) will engage in as they try to pretend that they run real companies. They will put out press releases about the most mundane and inconsequential things; they will project absurd revenues when they do not even have the money to develop let alone manufacture products.
One of my favorite whipping boys (although in its defense it is not nearly as bad as many OTC BB listed companies) in this respect has of course been the amazingly overvalued Maxlife Fund Corp (OTC BB: MXFD). When the company in early 2008 formed a joint venture with a private California insurer (Capital Growth Planning Inc. or CGP), it said in an 8k filing: “The goal of the Joint Venture is to develop life settlement policy transactions exceeding $1 billion in total face value through the remainder of 2008, using several of CGP’s specialized life settlement products and strategies.”
I was of course dubious, writing, “I believe it unlikely that the companies’ joint venture will transact $10 million (face value) in life settlements this year, let alone $1 billion in face value of life settlements.” My blog post attracted the ire of Douglas Miller, CEO of CGP, who wrote a not very nice comment on my blog post, mostly focusing on a few misstatements I made regarding his company (that I immediately corrected). Oddly enough, he had little to say about the main point of the post, which was my belief that the joint venture was unlikely to ever lead to material revenues for Maxlife.
Of course, my main point was correct. Maxlife and CGP just formally dissolved their joint venture and as of Maxlife’s most recent 10Q the joint venture had apparently produced $0 in profits. So while Mr. Miller was correct to point out to me that “your right to free speech is not unfettered and it does not give you the right to make disparaging false statements and misrepresentations in a commercial/business context,” I remind him and all my readers that truth is an absolute defense against defamation; in other words, I have an unfettered right to make disparaging true statements and make known my negative opinions about Maxlife or any company.
Now that all is said and done I do have a question for Maxlife Fund Corp: how was it that an outsider such as myself accurately predicted the outcome of the joint venture while Maxlife Fund Corp’s prediction was so incredibly wrong?
Disclosure: I have no position (long or short) in MXFD (or CGP for that matter). I confess to a visceral hatred of everyone who has ever come into contact with the company except for Victor DeLaet (remember him?). I have a disclosure policy.
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07.10.09
Posted in All Categories at 1:13 pm by Michael Goode
Most people are ignorant of basic statistical facts. While this is fine for much of ordinary life, a lack of understanding of statistics will quickly lead investors and stock traders to lose money. So while an inability to understand statistics on the part of both Republicans and Democrats means we get plenty of stupid editorials instead of the acknowledgment that we can never know whether Al Franken or Norm Coleman won the election in Minnesota (the error in counting votes was greater than the margin of victory and different and equally plausible / legal methods for validating ballots led to different outcomes), in investing and trading, misunderstanding statistics leads to quick and painful losses.
This ongoing series will focus on selection bias (also called selection effect) and how it leads to inappropriate conclusions. I will not concentrate solely on trading and investing but rather will highlight selection effects in many different fields. Selection effects arise when conclusions are made from sampled data that are not representative of the population of data as a whole. An example from my field (psychology) is the use of college students in most memory research. A researcher who ran experiments only on college students and tried to say the results exemplified people in general would be making false statements because of a selection effect. To make generalizations about the population as a whole, the sample needs to be randomly drawn from that population.
Today’s selection effect comes from Allstate. On their website they proudly announce, “People who switched from Geico to Allstate saved $473 a year on average.” This statement can be interpreted in two ways. The first interpretation is that Allstate insurance is on average cheaper than GEICO. That is an incorrect interpretation; it not supported by the data and it is probably not true for the majority of car insurance customers. The second and correct interpretation is that Allstate and GEICO have different underwriting standards, and for some subset of GEICO customers, Allstate will be cheaper. Those people will likely switch to Allstate if they check out Allstate’s prices. For the most part, people who switch insurance companies do so because they can get insurance cheaper elsewhere. Those who cannot get cheaper insurance do not switch. Therefore, the people who switch from GEICO to Allstate will by definition be those who can get insurance cheaper with Allstate. Furthermore, people generally do not switch insurance unless they can save a significant amount of money; this makes the the average savings from switching seem higher. This type of change in observed average as a result of a selection effect is one of the more insidious types of selection effects; I will give further examples of this in future posts.
Allstate’s statistic would look even dumber if we had the same statistic from every insurance company. We would likely find that 90% of people who switch insurance companies save money when they switch. On average, the switchers would save hundreds of dollars no matter what company they switched to. This tells us nothing about which insurance is the cheapest. So if you are searching for insurance, check out many different insurance companies; depending upon your special circumstances it is hard to predict which one will be cheapest. I recently switched to GEICO from Farmer’s (and saved hundreds of dollars on auto insurance); but back when I had a house and rental real estate, Farmer’s was the cheapest.
Disclosure: I am just about to switch from Farmer’s to GEICO for all my property/casualty insurance needs. I am currently long 30 shares of Berkshire Hathaway B stock and short 1 share of Berkshire Hathaway A stock (in an arbitrage trade leaving me with no significant net position). GEICO is a wholly-owned subsidiary of Berkshire Hathaway. My disclosure policy suffers occasional bouts of selection effects itself.
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07.06.09
Posted in All Categories at 8:55 am by Michael Goode
I encourage all my readers to take a detour to the Wall Street Journal and read the article The Triumph of the Random. The importance of randomness in our lives cannot be overstated. One great example from the article concerns Joe Dimaggio’s 56-game hitting streak, by far the longest ever in baseball. This seems like an incredible feat, and for any one man it is. But consider that professional baseball has been played in the United States for over 100 years and over that time thousands of baseball players have played tens of thousands of 60-game stretches. So it is not unlikely that someone would have put together such a long hitting streak. A couple researchers conducted a simulation of 10,000 potential histories of baseball:
The researchers found that 42% of the simulated histories had a streak of DiMaggio’s length or longer. The longest record streak was 109 games, the shortest, 39. In those 10,000 universes, many other players held the record more often than DiMaggio. Ty Cobb, for example, held it nearly 300 times.
As investors or traders, we must be students of the probable, not of the actual. Multiple times I have suffered a large loss on a trade and considered it a good trade, while I have enjoyed large gains on what I considered to be bad trades. What matters is not the actual outcome, but the probability of a good outcome.
The author of the above-linked article, Leonard Mlodinow, has also written a book on the subject, The Drunkard’s Walk: How Randomness Rules Our Lives, and I recommend checking it out.
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