Internet is becoming more and more polluted with junk-mail, people selling crap, and businesses which don't know their place on the net. They're all trying to make this wonderful place (i.e.: the net) in to hell (i.e.: real world). Internet should be viewed as a place of imagination, creativity, and most of all: fun. Internet is not some really advanced tool for searching for people to rip-off. It's about searching, and finding, things which are useful, helpful, and promote the sharing of ideas. This is what this site is striving to become.

Hmm... apparently what I do at wr0k is now front page material: [Finra Expands U.S. Stock-Market Surveillance], [Direct Edge Selects FINRA for Market Surveillance], [FINRA Wins DirectEdge Surveillance], [Regulatory watchdog FINRA to oversee Direct Edge's surveillance], etc. Yey!

Uh, oh! Doomsday investors betting on market crash. ``People are starting to recognize that these market moves are unnatural and distorted.'' Hmm...

So here's how stock analysis works: There are essentially two camps: folks who think they can predict prices by looking at historical prices (technical analysis), and those who try to evaluate the value of a company from past/current (and reasonable-guess future) performance (fundamental analysis).

Technical analyst will look at average price and spot outliers. These often take the form of deviations from the mean or median. Obviously the mean increases as prices go up, so some clever folks will attempt to do things like regression and then look for deviations from regression lines. Some even more clever folks will do a 2nd derivative on the regression to look for acceleration (not just direction) of prices in either up or down direction. And that's just for 1 stock (or broad index). Then there's pairs trading (look for correlations between stocks, and trade appropriately when they temporarily [they hope] out of step).

Most day-to-day trading is mostly about technical analysis: the value of the corporation doesn't go up/down nearly as much as the stock does on a day-to-day basis. Even trading strategies that are designed to avoid market impact use technical analysis, e.g.: vwap, or volume weighted average price... trade volume throughout the day weighted by the historical volume for that symbol for that time window (e.g. trade more right after opening and right before closing---that gets you `volume weighted average price' for the day (or time period)---if you just evenly trade 10k shares every hour, you'll end up with prices that don't represent the daily average.

The major problem with technical analysis is that history never repeats. Patterns certainly do, which is why it is popular, but just because something happens over and over again, doesn't mean it will continue to happen. Consider you are a turkey (bird): every day you are cared for, fed, etc., folks take care of you and hope you don't drop dead. Then shortly before Thanksgiving Day your luck changes.

So what's the alternative? Fundamental analysis. Look at company earnings, and figure out how much the enteprise is worth. Then buy/sell depending on whether they're significantly mispriced by the market. That works on the idea of future dollars being worth less than today's dollars.

If I have $10 today, and I can invest it at 5% interest for a year, then 1 year from now, this $10 will turn into $10.50. After two years, it will be worth $11.025. You just multiply by 1.05, or (1+rate). Obviously "I can invest it at 5% interest" is a tricky bit. If you can only do 1% a year, then you should use 1%, etc.

Time reversing it, we can find the value of future dollars today. That $10.50 a year from now, is worth $10 today. That $11.025 two years from now is worth $10 today. Neat, isn't it? That is just the reverse of the above (instead of multiplying by (1+rate) you divide by (1+rate). E.g. 11.025 / (1 + 0.05)**2 = $10. So $10 left for 2 years will turn into $11.025. If someone promises to pay you $11 for $10 today, you know to tell'em to take a hike, since you can make $11.025 (and if they promise to pay you $12 in two years for $10 today, you can take that deal).

What does all this have to do with valuation of corporations? Well, corporations give you money. Dividends or some equivalent (increased value of stock). So lets say your local utility has consistently paid $10/share a year to their shareholders. Their share price fluxuates but only to the extent of dividend. In very rough terms, how much is that dividend worth?

Here, we do some guessing. We guess that our ability to make money at 5% return won't change. And company promises to pay $10 every year. So that's $10 in 1 year, then $10 in 2 years, then $10 in 3 years, then $10 in 4 years, and so on... after 10 years, that $10 is worth: 10 / (1 + 0.05)**10 = $6.1391.

So lets sum up the dividends and discount them appropriately, e.g.: sum=0; for(i=1;;i++){ sum += 10 / (1 + 0.05)**i }. After 10 years, the sum is: $77, after 20 years, it's $125, and after infinity years, it's $200. The ultimate worth of all those dividends, assuming the company will pay them *forever* is just $200. If you're confident in your ability to make 5% a year, you should *never* pay more than $200 for those dividends no matter how long of an investment horizon you have. Assuming you can buy/sell company at about the same price now and then, the company's worth to you is maxed out at $200/share.

What if the company doesn't pay dividends? In those situations you can try discounting future earnings. Assuming it's a mature company with few competitors and relatively stable earnings, and it makes $10m a year, how much are those earnings ultimately worth (after infinity years?). Stock price rate tend to revert back to earnings rate---so long term stock performance can be measured by looking at corporate earnings. $10m a year discounted at %5 forever is same number as before, ~$200m for total earnings of the corporation forever. The company may have assets, and you can add those too, but those would almost always be much less than $200m. So if company has 1 million shares outstanding, you shouldn't pay more than $200/share for those shares.

In the above, we made assumptions like "mature company with few competitors"... well, d0h. Nobody can predict the future. Which is why we can't just say "oh, that comapny is worth $200m, or $200/share, and it's currently selling for $100/share, so we'll buy it." Everyone is not stupid. In fact, very likely they're way more clever than we are. Perhaps we over estimate the company's ability to deliver the $10m/year earnings; what if current management retires and leaves their stupid grandkids to run the company going forward. What if federal reserve goes berserk and raises interest rates to 10% (to stamp out inflation---like they did in 1980s)... suddenly our 5% discounting would be very very bad.

And there are still other things. A tough competitor (perhaps foreign) could come along and compete on price. That kills profitability, and it's all over. So nobody knows the future. We need to re-evaluate "what we know now" and readjust our positions accordingly. For example, after our analysis, $100/share would be an amazing deal (since we've just calculated $200/share for this company). In a year, we do identical calculation [lets say long term interest rates started to trend down, along with reduced earnings [perhaps new competition, or just industry commoditization], and lets say we find that the stock is now selling for $120, and our valuation of it is $130... at this point it's probably a good idea to sell it, and pick a more lucrative thing.

Now, supposed we bought stock at $100 (sine we thought it was $200 stock). And a year later, it drops to $40. We valuate it, and we discover that yes, fundamentals tell us that future earnings are now worth $90/share. Should we sell just because we just lost $60 on it in a year? Heck no! Yes, we lost moneh, but we still think it's a $90 stock that the market is pricing at $40. Forget about the amount you lost---The only question to ask is: would you buy this stock today at $40?

The above brings up the point about margin of safety. Never buy at the valuations you think something is worth. Always buy stuff at a HUGE discount. If we figure the stock is worth $200... don't buy it unless it is priced at $40. Offer 1/5th the valuation. That way, even if we're off by as much as 50%, we wouldn't end up in a terribly bad situation.

So what prompted this long rant? Well... Why are stock prices going up (recently), while the economy appears to be in the crapper. Why are so many folks expecting a crash? Obviously nobody knows for sure... but we can guess :-)

so I'm guessing: it's because of the discounting rate folks use. Lets say over the last 30 years, a cookie company is making ~$10m a year on average. So they made $10m 30 years ago, and just last year, they also made $10m. Now, anyone can see that $10m 30 years ago was worth a heck of a lot more than $10m last year... so it's a declining business. BUT, we can still figure out how much their $10m a year is worth long term.

So we conservatively discount that $10m/year by 5% rate and end up with $200m business. Not bad, eh? Now federal reserve comes in, and lowers rates to 0.1% over the course of a few years (very suddenly). Then Fed Chairman comes on TV and says "low interest rates are here to stay, get used to it"... so after a bit of thinking, perhaps we should be discounting by something lower than 5%? (the difference between 5% and 0.1% is... astonomical). So lets say we pick something a bit more sane, and say discount the business at 1% a year... (instead of the Fed's artificial 0.1% rate). Suddenly, that $200m business turns into a billion dollar corporation! (and remember, we did say that it's a declining business, since they haven't grown their earnings in 30 years---and yet suddenly fundamentals tell us to pay a ton more for it!).

What happens if we discount at rate 0%? Well then the business is worth infinity dollars!

That's the peculiar thing about discounting, as the rate approaches 0, present value of future cash flows grows exponentially. E.g. When the fed is shuffling interest rates "close to 0" from say 0.02% to say 0.01%, that literally doubles the valuations of future cash flows. Next month rates tick back to 0.02% and suddenly valuations are halfed.

Volatility is built into this system.

So if you're a sane investor, and lets say you use a median-interest-rate for last 30 years to discount your investments, the artificially low interest rates in the last decade are going to screw you up big time... you will think astronomical stock prices are perfectly rational from fundamentals.

And that might just explain why: economy doesn't appear to be improving at the rate of stock valuations.

Now consider this: as soon as fed hikes rates back to 4.5% or so, everyone will suddenly realize that their multibillion dollar businesses are worth mere millions...

And in other news... school ended! Now just gotta grade everything...next week.

In still other news, my request for leave of absense from PhD program was approved: I'm now on a break until August 2014.

And in yet-more-news, embarking on another one of my kwaizy trips: flying out to Utah tonight.

- Alex; Fri May 24 07:51:07 EDT 2013
May 24th at wikipedia...

Nikkei index plunged by 7.3% :-/

- Alex; Thu May 23 07:16:28 EDT 2013

...and onto a wr0k trip to Rockville, Maryland...

- Alex; Wed May 22 03:41:14 EDT 2013

Finished reading Seeking Wisdom: From Darwin to Munger, 3rd Edition by Peter Bevelin. I'm generally a fan of self-help books like these, and this book has some nice nuggets from Warren and Charlie [half the book is just quotes], I have to agree with the few amazon reviewers who gave it 2 stars---this book is poorly written and edited, and... to put it in the words of one amazon reviewer: ``Reeks of self-published vanity and Munger rear-kissing''. Couldn't have said it better myself. I seriously doubt either Warren or Charlie have actually read this book (perhaps they read an early draft, and that draft only?).

- Alex; 20130521

Making the Grade. Eh! Students should realize that grades don't matter at all. Anywhere. If you're good at what you do, NOBODY will ever ask you for your diploma, let alone a transcript. And sorry to tell you this, but high GPA often means careful professor analysis (pick easy ones), no risks, no exploration, so heart. It is not nessasarily advertising what you want it to advertise.

- Alex; Sun May 19 12:11:29 EDT 2013

Rice Professor Predicts Humans Out of Work In 30 Years. Damn it! Why does it have to be in 30 years... and not any-day-now?

- Alex; Fri May 17 08:50:32 EDT 2013

Beh!...there goes my crazy plan of going to mnt.washington (and/or katahdin) this upcoming weekend. There are apparently avalance warnings on mnt.washington, and katahdin trails are closed until all the snow melts :-/

- Alex; Thu May 16 08:05:35 EDT 2013

Japan: Is Abenomics working?. I had to lookup what Abenomics is. So much for not paying attention; I didn't even realize `yen falling 29% against the dollar since November'... This is some experiment. Hmm... Maybe a cheap time to visit Japan...

Georgia Tech Announces Massive Online Master's Degree In Computer Science. This is just a moneh grab by the educators. I mean really... $7k for... online courses? Hmm... On the other hand, someone who learns the materials for the degree, can then charge $5k everyone else to do the course work for them. After all, with this scheme, 1 person can literally be in 100s virtual classrooms (all teaching the same subject!) at the same time.

And in gruesome news, on a hike to Mnt.Marcy last February, I froze my toes... one of the nails just fell off :-/

- Alex; Wed May 15 08:04:44 EDT 2013

In other news, finally got first ticket. 3 years after I got car. Entered intersection on yellow (was going a bit too fast to stop on a dime), light turned red in middle, and... saw a red-light camera flash behind me :-/

- Alex; Thu May 9 08:06:02 EDT 2013

Probably caught a cold/flu or something during teh travels; feeling a bit under the weather the last few days.

In other news: [pix from Berkshire Hathaway shareholder meeting]. No pix from actual meeting (no cameras allowed during interesting bits); just before/after pix. Might as well post: [link to all albums].

- Alex; Wed May 8 17:06:24 EDT 2013

The Delta flight was delayed yet-again. Departure time 10:30pm. Delta gave everyone $50 certificate for the delay. Barely made it to Kansas in time to rent car (Budget closes at 1am; I got there 15 minutes to 1!). Budget also completely ran out of cars except for half a dozen odd-ball models (the rental parking lot was literally empty). They upgraded me to a Ford F150 (the other choices were either a minivan, or an actual fullsized van).

Drove to Omaha, with a nice relaxing nap at a rest stop. When I got to Omaha with-just-enough-time, apparently that whole area grinds to a standstill around 7am-ish---so spent half an hour in traffic driving perhaps only two city blocks. There was surprisingly plenty of free parking (the traffic to the paid parking lot---just 1 block difference in walking). So I parked free without any hassle.

The doors to the meeting were supposed to be open at 7am (so I timed my arrival to coincide with around 7am-ish), but this year they opened them at 6:30am, and everyone seems to have rushed in and grabbed the good seats (no fair, I was gonna rush in and grab a good seat!).

Anyways, after grabbing free breakfast (~1k calories of sugary and caffeine stuffs), went over to the `best' seating area, and managed to find 1 spot. It's on the left side of the stage, and close enough to see faces of board members.

The presentation was pretty neat. No free candy, but funny and insightful as last year. The movie was pretty funny too (buffet wants to be the evil terminator in the terminator 5 movie, and arnold thinks it's the stupidest idea of all time, and instead picks charlie to be the evil terminator :-). Then the Y-M-C-A song parody only with B-R-K-A-B-R-K-B and other clever commentary for words. Questions ranged from developments in various places (EU, etc.), low Fed interest rates (and what it means overall), berkshire valuations, share repuchases, aquisitions, ideas for stuffs, etc. It's not something I can summarize in a paragraph.

Will likely go again next year.

Aftre the presentation went to the shopping place and contributed to BRK profits a bit. Geico is my favorite desk: they sell all sorts of neat things, and take a free pic of you with the lizard.

Then onto the cookout at the Nebraska Furniture Mart... and shareholder disconts on stuff at NFM.

And that's pretty much it. Back to Kansas airport, and now drinking spiked orange juice and typing this; flight won't board for another hour or so.

- Alex; 20130504

This is the future of gaming: Turbulenz WebGL Engine using Quake 4 assets. Not nessasarily Turbulenz, but the whole idea... you go to website, click, and play a full blown 3D game. If there's stuff to download, your browser manages that (e.g. a few features built into a web-browser, and no reason for things like steam or itunes to even exist).

And... Epic Citadel.

Feh, the 6pm flight got delayed until 10:15 :-/ Flying out to Omaha, Nebraska tonight. I hope. Delta sux.

And in other news, I'm now on twitcher: Follow @profphreak.

- Alex; Fri May 3 17:46:05 EDT 2013

ECB cuts rates to new low as recovery fades. Hmm... The problem is leverage. If I have $10 worth of bets behind every $1, the economy is operating on $10, and when I start deleveraging the money supply shrinks by 10x... at that point, even low interest rates won't help. In the last decades, folks have been increasingly leveraging the money supply for all sorts of crazy things (that has a tendency of increasing money supply by several orders of magnitude---life is good when there's more money everyday), and now with slowing economy, some of those positions are unraveling: It's either a horrible deflation (where about 10 other folks are desperate for your $1; and businesses are failing since there's literally no money around), or horrible inflation (0% interest rates won't do; the money supply needs to expand tenfold to make any meaningful impact). The US Fed is on the case---they're buying up as much as they can; just keeping pace with the unraveling of leverage, but even they realize that's not enough. ... and the best part: the folks who benefit most are exactly the folks who caused the problem in the first place: the leveraged positions are very lucrative when the money supply complies and actually increases.

- Alex; Thu May 2 08:06:12 EDT 2013

Went to hike a bit around Sams Point. The ice-caves were unfortunately closed (due to too much ice :-).

- Alex; 20130427

Finished reading The Theoretical Minimum: What You Need to Know to Start Doing Physics by Leonard Susskind and George Hrabovsky. Guess nobody warned these folks about ``every equation in the book the readership would be halved'' principle, since this book is full of equations! And not the easy kind either!

My next book is... re-reading this book. Then probably re-read it again after that. In short, this book is amazing. A huge bulk of the book went right over my head (bare minimum indeed!). I didn't struggle this much with Feynman's lecture books. I know differentiation, but some use just... went from easy to magic a bit too suddenly.

This book does an amazing job at summarizing what makes for a law of physics, how it ties into symmetries, how symmetries are equivalent to conservation laws (in fact, all of the laws are just paths that conserve some quantities; energy, momentum, etc.). It's really like magic---you see math working out physics laws. In physics courses I've taken, you take some quantities, plug'em into equations, and get an answer. In this book, you learn the source of those equations, and why they have the form they do---and that they're all very similar. Now, the way it goes about doing this was a bit too technical for me to appricate on the first reading... calculus of variation isn't my cup of tea. But that's probably correctable via a second reading (I hope).

- Alex; Thu Apr 25 00:47:56 EDT 2013

Finished reading The Signal and the Noise: Why So Many Predictions Fail - but Some Don't by Nate Silver. Not a bad book. Not great, but definitely not bad. Talks about various aspects of predictable things and why they're predictable, and unpredictable things, and why they're unpredictable, even with lots of data. For example, weather is predictable (like tomorrow's temperatures), since roughly we have a good grasp of the model, and uncertainties---so more computing power and data helps us get progressively more accurate temperatures. Earthquake and terrorism is a different kind of area, where we don't have a good model (we can predict likelyhood of magnitude), and more data often acts as noise, without contributing towards better understanding of the model. For example, we can say "there will be so many magnitude 5 earthquakes this year around the world" but can't predict exactly where one will strike. Same with terrorism: we can say that there's a good chance that around N humans will die from terrorism this year, but exactly where and how that will happen is beyond us. And once it happens, it doesn't help us in predicting the next event.

- Alex; Sun Apr 21 17:27:28 EDT 2013

Booked trip to Omaha, Nebraska for first weekend of May, and to Utah for last weekend of May [wanna go Zion national park to hike Angels Landing; then visit Capitol Reef and do some hike there, and perhaps great basin national park, if there's time].

- Alex; Thu Apr 18 08:02:42 EDT 2013

Social Security: Many pay more in taxes than they'll get back. Uh, oh! But...isn't this exactly how taxes work? (and supposed to work?, e.g. you pay what you can, you get what you need). And what about those folks who drop dead at 65? This is yet another article biased towards "retirement savings accounts" that lots of folks are trying to turn SS into. Why? Because there's LOTS of moneh to be made.

Right now, there are a few major participants in the market: private funds (rich dudes, holding corporations/hedge funds, etc. strategically holding stuff long term; generating money by swings in the market and perhaps a bit of proprietary knowledge), trading funds (tactically holing stuff short term; generating money by clever buying/selling; the middleman), induhvidual investors (generally stupid short/long term investors who hand over their money to strategic and tactical investors), and institutional funds (corps that manage large retirement funds, etc.). [there are also the corps trying to raise capital, but they're tiny by comparison].

For the most part, retirement/pension funds buy into the position and sit on it for decades. Bulk of the money in the market is tied up in those. Just consider retirement/pension fund for a modest corporation, say MTA (new york city `public' transportation)... lets say they have 100k workers (I have no idea whether this is anywhere correct), each with a pension perhaps averaging 100k (young workers, old workers, etc.; again, have no idea of accuracy). In any case, that's $100B right there! Yes, they might have 10k workers, average account could be higher/lower, but in any case, we get into billions pretty quickly. Consider that this is just 1 of many such corporations in the COUNTRY, and you realize that a TON of money is ``out there'' but is untouchable by private funds or traders.

So what would a privatized social security look like? All the current SS funds (again, many many many billions) will be funneled into institutional accounts (e.g. the Fidelities of the world). While that is happening, private funds and traders will have a field day, skimming off billions. Not to mention that such a huge dump of cash into the market would wipe out current investors (and current retirement funds).

- Alex; Mon Apr 15 08:07:52 EDT 2013

OMG: U.S. retail sales decline 0.4% in March, hurt by weakness in electronics and gasoline, government says.

- Alex; Fri Apr 12 09:01:46 EDT 2013

...and I'm back in NYC :-)

Trip pix: [Trinity and Rosswell], [Great Sand Dunes and Pike's Peak].

`Editing?' What's `editing?'

- Alex; 20130408

Day 2

On way to Pike's Peak, noticed a road sign for Great Sand Dunes national park. Since Pike's Peak is open until 3pm, and it's just mr0ning, why not see the sand dunes?

So I get to sand dunes national park, and... it's just huge mountains of sand! With biggest one of them being around ~700 feet high... and I'm wearing sandals... for sand walking... this calls for a hike to the top. An hour or so later, I was at the summit of the biggest seeming sand dune (e.g. ``The "High Dune" is neither the highest in elevation nor the tallest in the park, but it looks that way from the main parking lot.'').

Sand is surprisingly tough to walk on---you take three steps forward, and you slide at least one step back. And for some obscure reason, it's damn cold and very windy. I must've swallowed a ton of sand during that hike---(no face mask on this trip). Yes, you do get sand in your eyes, and shoes :-/

Right after the desert hike, drove to Pike's Peak... and it was even colder up there... 14.1k feet elevation. It was a snow blizzard at times. Just as with Mnt.Washington, I decided to get pizza right at the summit. It was much crappier than Mnt.Washington pizza :-/

After Pike's Peak, stopped by for a walk around Garden of the Gods.

And later, went for dinner at IHOP. I remember a while back I had a very unusual ihop meal consisting of waffles with chicken and icecream, all together. So ordered that. Apprently that was a one-time-thing and isn't one their regular menu, but this IHOP did their best to bring me all the ingridients---I mixed chicken/waffles/icecream/syrup (otherwise known as calories overload, or heart-attack-waiting-to-happen) into one big meal :-)

...and off to the airport.

- Alex; 20130407