Naked Capitalism in Las Vegas

Here I am in Las Vegas, staying at the Encore.  I’ve lost $297 today at the craps tables.  I’ve been using my “comp” card and out of curiosity asked the “casino services” representative why is a small-timer such as me even bothering to use my comp card at the tables.  He said that every player can get a comp, even if it is just a cup of coffee… all the way up to a private jet ride home.  I handed him my card and asked, “so if I keep playing like this for 3 days where do I fit on that spectrum”.   His answer:  “a cup of coffee… but please use the card.”

Hot dice!

Lady Luck?

The folks at the Wynn/Encore are exceedingly polite and professional.  Their job is to 1) make money for the casino, and 2) provide a positive experience for the customer while doing so.

So no private jet for me!  That said, I think I will quit using my comp card.  What’s in it for me?… nada.

I understand very well the rationale of the casino.  First, table games are expensive to operate… craps takes 4 dealers to run.  Second, the way I play is least favorable to the house.  I place pass line and come bets, and place odds bets on the points.  Other than tips, that’s it.  No “field”, no placed bets, nothing.  Given a thousand people like me the casino probably, on average, breaks even after expenses.

So why do they want my data?   My hunch is that players like me still fill a role.   We  seed the tables and have fun.  Some high rollers like that.   The guy next to me at one craps table walked away with $16,000 and change.  He mentioned that at one point he had $25,000, but he had lost a bit.  Still, he said, he was up overall.   I assume this guy rolled in comps.  He is the gambler casinos covet.   He tipped generously, perhaps $500/hour.

I have decided that my privacy is worth more than a cup of coffee.  (Perhaps I would have settled for a room-service breakfast for two).  I will try to keep a lower profile, but in Vegas that is a difficult game.  Cameras, RFID-enabled chips, facial-recognition software… good luck keeping a secret here.  But I’m gonna make them work that much harder, because that’s how I roll.

Stay tuned if you want to learn some of the worst craps advice I’ve heard in a while.  Until, then, best of luck!

Update:  The terrible craps advice?  To use “placed” bets rather than pure “odds” bets on numbers in order to get more “comps” and more “comps action”.  Follow this advice and you will see your $10 bet on “4″ pay back $18 instead of $20.  The $2 fee will get you about 2 cents worth of comps!  Plus you’ll get less action than you think because you’ll lose your money faster.

Bitcoin: The Inflation-proof E-Currency of the Future, or Not

Bitcoin LogoIf I were to design a new currency I would design something very much like BitCoin.  It is a digital currency with about 6.5 million units in circulation. BitCoin will never have more than 21 million units of currency in circulation…. ever.  Bitcoin is divisible into tiny fractions of a unit down to millionths of a BitCoin and smaller.

BitCoin is digital money.  Imagine PayPal but without the hassle, or the commissions.  Image digital gold.  Gold which is mined (by computers), but has a known maximum supply of 21 Million ounces.

Gold’s value is largely related to its relative rareness.  Gold’s usefulness is pretty limited except as jewelry and a form of currency.  Industrial uses of gold consume only a small fraction of gold’s supply.  And gold can be mined faster than it is consumed.

Gold cannot be as easily traded or exchanged as BitCoins.  Yes gold ETFs can be exchanged for cash which in turn can be used for web transactions, but this is a multi-step process.  BitCoins, however, can be easily exchanged from person-to-person or person-to-business with ease.

Today each BitCoin is worth more than $13.  BitCoin valuations have fluctuated rapidly.  One person, according to Forbes, turned $20,000 into $3 million by buying Bitcoins early then selling them for a killing.

BitCoins may one day be worthless relics on discarded hard drives.  Or BitCoins may become the E-commerce alternative replacing PayPal.  Right now BitCoins seem to be priced about what the current mining cost will bear.  The cost of mining is measured in 1) electricity (energy) and 2) depreciation of the graphics cards used to mine new BitCoins.  This tends to put a short-term ceiling on BitCoin prices.  However, the BitCoin system makes the cost of BitCoin mining escalate geometrically.  Eventually, if all goes optimally, the mining cost will be come prohibitively expensive.

If BitCoins gain wider and wider acceptance I anticipate they will hold or increase in value.  However if either of the following happen they will end up virtually worthless: 1)  BitCoins simply don’t gain wide acceptance, and lose acceptance over time.  2) The algorithmic infrastructure underlying BitCoin is found to be flawed.  There is yet another alternative:  That a BitCoin-like system is created the competes with the original BitCoin.  Finally one more possibility:  various governments outlaw BitCoins.

In closing, BitCoin is a brilliant idea and a risky “investment”.  It is riskier than gold, silver, or index ETFs.  It is similar in risk to buying options, because the value can rapidly go to zero.  However, it is an interesting speculative play that is potentially inflation-proof.  Inflation-proof because, unlike government currencies, the printing presses (BitCoin mines), are held in check.  Buying 1500 dollars worth of BitCoins is no sillier to me than buying a $1500 gold coin. Just make sure you guard your BitCoins like you would your expensive gold coin… security, security, security.   Because BitCoins can be stolen, just like gold.  And they can be stolen without the thief even setting foot in your house.

Just don’t call it QE3 nor Inflationary

Drilling for stimulus, finding inflationWhether it’s Barack Obama releasing 30 million barrels of oil from the Strategic Petroleum Reserve, or Ben Bernanke saying they might buy another $300,000,000 worth of U.S. Treasurys… even after QE2.  But, no, it’s not QE3… nah.

The oil gambit was, from a purely stimulative standpoint, an interesting move.   It would have been more effective when oil was at $110 and rising rather than in the $90′s and falling.  But, perhaps there was some political hay to be made.  Short term this was not an inflationary move.  However, someday, those 30 million barrels will have to be repurchased… which will have an inflationary effect.  It was a short-term political move.  From a geopolitical perspective, it also signals a US willingness to manipulate the oil markets… rather than being truly “Strategic” (aka for military and other strategic purposes).    Ironically the Obama administration is accusing others of oil price “manipulation” while they just did just that with the SPR oil release.

And for Helicopter Ben, QE and QE2, both unprecedented;  it seems that maybe a little more magic juice is called for.  He doesn’t understand the current economic problems, other than to call them (mysterious) “headwinds”.

The situation, as I see it, is inflation-triggering non-stimulus.  The magic “CPI” may not reflect this right away.  In fact I believe inflation is currently outpacing “CPI Index” inflation by 1 to 2 percent.

I’m not fully aware of the whats or whys of QE3, I just know that I’m not supposed to call it QE3.

Smart People, Dumb Investments

When I started this financial blog a couple years ago, I wondered if I would run out of ideas to blog about.  Luckily, so far anyhow, I have had a different problem — How to choose amongst all of the ideas that pop into my head.

Thing train of thought takes me to consider what explains the relative success and failure — the investing fates if you will — of various investors.  It would be foolish (and wrong) of me to make the blanket statement that smart people make poor investors.  On the contrary I believe that successful investors are very smart people — John Bogle, Warren Buffett, Carlos Slim, Peter Lynch, Bill Gross.

What is interesting and occasionally baffling to me are the poor choices that I see smart people making.  For whatever reason, people tend to share two things with me:  personal information and personal investing information.  If I had to guess why, it is for two reasons.  1) I am actually interested, fascinated in fact. 2) I am very discrete.  Still this doesn’t quite explain why relative strangers tell me these things.

One thing is for sure.  I listen. And on thing I have learned is that people love to tell of their investing success and are hesitant to share their investing misses.  I feel privileged to hear both types of stories.

For the record there is, perhaps, no such thing as a bad (or good) investment in the present.  The “goodness” or “badness” of a given investment is only truly realized when the position is closed and the gains and/or losses are counted.   There are, however, in my opinion, poor portfolio decisions.

Here is my overall impression of the types of under-performing (aka bad) portfolio decisions that smart people make.  Most notably rationalizations for extreme non-diversification.

1) I work in field X.  I understand field X.  I believe the outlook for field X is tremendous, therefore I’m going to pick my favorite stocks that participate in X.  [I heard this all the time during the tech/dot-com pre-bubble and bubble].  I’m going to focus my portfolio in X…. meaning I’m going to severely underweight all other sectors.

2) I’ve followed fund manager, fund company, or my investment manager Y, and I trust and believe in them.  I’m going to put most/all of my money in their hands.

3) I understand the economy, the markets, and what’s going on.  I’m going to make my own decisions, and cut my losses when appropriate.  I’m going to manage my own money, and I’m not going to sheepishly follow conventional wisdom (things such as time-horizon-based asset allocation and CAPM models).  I’m going to bet big and win big on what I believe in.

Over the years I’ve seen that hubris and pride are subject to positive self-reinforcement.  When bets pay off, bettors place bigger bets.  In most cases though, luck eventually runs out and large losses are realized.  This is soul searching time.  Some respond by becoming hyper-conservative for a while (I will only save money in the bank and in T-Bills), some by becoming moderate for a while (I will own some stocks, but mostly bonds), and some by doubling down.

I understand these impulses.  In fact I see that impulse control is a key factor in rational investing.  I understand that smart people are accustomed to being correct.  It is instinctual to believe that this extends to investment decisions.  I’m saying, “If you believe you are orders of magnitude smarter than ‘the market’, think twice.” Or put another way, it is better to be wise than smart when it comes to investing.

To summarized, I know first hand that smart people sometimes make very dumb portfolio decisions.  They believe that their personal academic and career success will translate directly to investment success.  I also know that many such very smart people have been burned, to the tune of $100,000+ (if not millions) of losses directly attributable to non-diversification.

And finally, as to my personal investments, I happily say that I have been relatively steadfast in my Boglehead-like investing style.  So far it has paid dividends.

Safest Possible Investments?

I was talking with a friend the other day, about, what else, investing.  He said he had lost about $100,000 on dot com investments.  He said he had some cash lying around and wondered what was a very conservative investment.

I thought some, and mentioned that, for me, paying down the mortgage is a nice, safe investment.  It certainly  beats earning between 0 and 1 percent in a savings account.  I look at the difference between short-term rates and one’s mortgage rate.  That difference could be 4+ percent.

There is no way this type of investing will pop and make you rich overnight.  But it is a safe, sensible option.  And it is likely to improve your credit score.

The Thrill is Gone, but the Love (of Finance) Remains

When I was born, my birthday gifts included US savings bonds ($50 dollar face value, I believe).  I’ve had a savings account since about age 7, and started reading brokerage account statements at around age 9.  My brokerage college fund started with $1000 and nicely grew to about $4000 by the time I started college at the tender age of 17.

Before the age of 10, I was enthralled by the concept of compound interest.   I was curious about the difference between monthly, weekly, daily, hourly, and by-the-second, even instantaneous compounding.  Little did I know at the time that this concept lead to the mathematical concepts of limits, calculus, and the number e, Euler’s  number.

Needless to say, I love math and finance.  But I first experienced a truly heart-pounding thrill when I started online trading sometime in the late 90′s.  I could see the bid and ask constantly moving, and tried limit orders.  The asks kept rising, and I kept inching up my bid.  Eventually my bid got hit and I was an owner of my first online stock.  This was different than buying mutual funds on the phone from Vanguard, and getting quarterly paper statements.  This was in real time and it was exciting.

I’ve read a lot about Peter Lynch, including his books, and I’ve learned some lessons good and bad.  The bad lesson, as I read his words, was “Don’t buy bonds unless they paying at least 8 or 10 percent.”  The good lessons were “Don’t buy what you don’t understand.” and “boring investments are good… boring names, unsexy, but solid investments are good.”

My next financial thrill revolved around options sales and purchases.  I even recall making a 20-option spread trade that was scary, but ended up netting me about $3000 in a very short time.

I have also has some thrill involving real-estate offers, counter-offers, counter-counter offers, and purchases.   Mostly, tension and anxiety are better descriptors than excitement.  Mild disappointment mostly describes failed attempted real-estate purchases.  Moderate to exuberant happiness describes my successful real-estate bids.

In the last year or two, my trades have not elicited an significant cardiac or endocrine event.   While almost always cerebral and well-considered, my trades have occasionally made my heart go pitter-patter and my endocrine system give me a pleasant rush.  But lately the trill is gone.  My pulse is steady and the motions are vaguely methodical and systematic.

My love of research, introspection, and contemplation remains.  Trading, for me, is just a means to an end.   Increasingly dispassionate.   In the end I hope and believe this makes me a better trader.  As always, time will tell.

Softball, Baseball, Gold and Taxes

I’ve been rather unmotivated to update this financial blog lately.  The reason?  Taxes!  I generally like to keep the tone of this blog upbeat, and when taxes are on my mind my tone tends to be closer to beat up.  Speaking of… my tax payment checks are going in the mail today.  My property tax checks will be going out next month.

However, baseball season is now underway, and that is good.  And my softball league will start up next month… one of the highlights of summer for me.  I wonder how much complicated MLB player’s taxes are and how many states they have to file in?  Also US military personnel.  If I made the rules, US soldiers would not have to pay single cent of tax on their wages while in combat tours.

Whoops, I’ve done it again!  Thinking about taxes and spoiling the prospect of a good mood.  So on to the topic of gold.  I can’t seem to go anywhere with out seeing or hearing either “We buy Gold!” or buy physical gold from us because someone thinks gold will go to $2000 per (troy) ounce.

If I had some gold trinkets or coins sitting a drawer somewhere — gold items that didn’t have any sentimental value to me — I’d get some local cash quotes, pick the highest, and sell.  But as for buying gold… nah… I’d rather buy index funds or black gold, in the form of ETFs XLE and/or VDE.  In fact I currently own XLE, VDE, SPY, VTI, SCHB to name a few.

Well, I’ve got to cut off this financial/baseball/gold/taxes blog post early, as I’ve got to run the dog to advance canine training class.  Best investing wishes, and may taxes not bite too deeply this year.

Suprising Investing Conversations

It started with a conversation where I said something like, “I’m not talking about overly sophisticated investors, I’m just talking about folks who know what a P/E ratio is.”  And she said, “I don’t know what that is.”  And I said, “You know a price-to-earnings ratio?”.  The reply, “Nope!”

So I asked other people I know — smart people.  And good fraction of them, over 1/3 said they did not know what a P/E ratio is.  And these are people who own stock.  In some cases hundreds of thousands of dollars worth of stock… company stock!

If you read this finance blog much, you probably know that I’m not a fan of most investment advisers.  However, if you don’t know what  a P/E ratio is, maybe you should find a good one.  One who can explain the benefits of diversification… convincingly and persuasively.

Its not that these people couldn’t learn.  Its just that they don’t want to.  REALLY don’t want to.

Well, I guess there are people like that.  And I am unlikely to change their mindset.

However, for people with an open mind, this is the finance blog for them.  Finance is my passion.  Few people are so wrapped up in finance.  That’s cool.  I’m writing for folks who care a little bit about finance.  Folks who realize that their investment decisions are important to their future.

Investing is serious business, but it is not hard.  Really.  The hard part for some is overcoming their emotions around investing.  But investment choices don’t have to be.

Gambling vs. Investing

I am in Las Vegas this week.   I am gambling and having fun.  So far I am down $280.

There are similarities between gambling and investing, however there are key differences.  Here are the big ones:

  • Expect to make money investing; expect to lose money gambling.
  • Investing returns are best measured over a year or decade.  Gambling results are almost instant.
  • The “best” gambling is exciting.  The “best” investments are boring.

Trading stocks and especially options can turn investing vehicles into gambling vehicles.  However the opposite process is virtually impossible: turning gambling into investing.  Playing poker (well) can do this, but it is more like working a job than investing.  The best way to turn gambling into investing is to buy gaming stocks.