Daily Speculations

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The Chairman
Victor Niederhoffer

1/14/05
Guaranteed Losers

1. An article in the year-end 2003 issue of Forbes, “Tech is Back,” said that Milberg Weiss brought an action on behalf of 800,000 doctors against an HMO for inadequate fees and the doctors received $250 each as a settlement and a promise that the HMO would stop the practice, and Milberg received $50 million in fees. One is reminded of the rabbiner in “Fiddler in the Roof” who arbitrated the claims of two competing businessmen and decided they were both so corrupt that the gold should go to the poor at Purim, and then the businessmen said "That's very just, rabbi, but what about your fee?"

2. So many of the investments the public makes are guaranteed to return almost nothing to them. One thinks about money market funds which after taxes and inflation have been yielding a negative return, and Dr. Luskin says the same is true about investment in five-year bonds, and others talk about how certain insurance investments are guaranteed to lose. Larry Williams notes, "beware of any investment ideas from Florida or Southern California (Newport Beach)."

3. I have concluded that there are many investments that you can’t make money on. One of them that I gave up on was the foreign exchange. Somehow it seems to be an accepted fact that banks make about $50 billion to $75 billion a year from foreign exchange. No matter what your position is, I always tell my associates, “Please, you're going to lose. Don't do it.” The thinly traded commodity market is another place where you're guaranteed to lose. "Like some gold firms exploring in Asia, Africa or South America that are listed on a certain Canadian exchange" says Tom Ryan. Also guaranteed to lose, Easan Katir points out, are Time Shares, viatical settlements, wildcat "insider deal" slant drilling, network marketing and diets (guaranteed NOT to lose ... weight, that is)

4. Over the years, I have often been approached by friends who have guaranteed ways of making money through arbitrage. All I have to do is borrow from one source, get credit from another , invest here at a higher rate, and rake it in at maturity But of course, the rates the banks pay for such activities are about 3 percentage points lower than mine, and they have much (is there any word in the English language for “bigger than a googol?"), bigger capital bases than mine. How in the world can I compete with them? And how long in this competitive society where rates on relatively riskless investment hover at 4% will it be until they relieve me of my chips. The same principle applies to all investments where a competitor has a much lower cost than you. My friend, you're a goner. No. Hoodoo. Go away.

1/14/05
Mr. E adds:

Others have tried the same kind of arbitrage and it has cost them dearly. And in their demise I was happy to take some of their chips. One guy I've dealt with in London had an ego that spelled the word "liquidity" with a Giant G...guaranteed. I taught this imbecile the real meaning of having enough cash to reach settlement. All these great so-called trades have a chaos put. In the aftermath of the 9.6 tsunami there is no danger for any fully-loaded giant tanker hauling oil to Japan from going at full speed through the Straits of Malacca, already the shrimp farms are totally gone so if we have a huge oil spill "what me worry". In the same way, this guy didn't think the reactions to the tsunami that hit arbs, interestingly at the almost same spreads that exits in credit spreads today, would have any impact. We love academics at some Ivy League schools because they impart theories of clean sailing ahead when the bridge that crossed the span has disappeared beneath the water and is invisible to the naked eyes of the liberal academic.

1/14/05
Other Specs' Favorite Guaranteed Losers

From Andrew Moe:

Step into any casino and you get a fast education on how tiny little fees can add up big in a hurry. Rows of one armed bandits proclaim great payouts of 98 and 99%, as though this were a favor to the gambler. The great structures of Sin City weren't built on luck. They were built on fees. Fancy trading platforms offer a multitude of eye catching charts, graphs, studies, layouts, colors and other wizardry. Do the creators use these technical wonders to trade? No, to generate fees.

From Bruno:

1. All the "guaranteed funds" marketed to the public in Europe. These are structured equity funds which promise downside protection, combined with various types of equity performance indexation. When one studies those funds in detail, one finds that they have a 99% chance of returning a money market rate or lower after fees.

2. Clickoptions. These are a mixture of digital and barriers options marketed to unsuspecting German and French customers. You can open an account with 100 euros.

From J.T.

1. Carnival games, e.g. knock down milk jugs, place hoop over Coke bottle, shoot basketball into smaller hoop, and even when you think you win it's a worthless stuffed animal.

2.Donations to TV evangelists.

3.Teaching your wife how to play card games (gin, losing percent vs. mine).

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