Category: Finance

Warren Buffett: Oracle or Orang-utan?

Buffett has taken the criticism from these fellow giants of finance in his stride, responding with trademark wit and humour. He even compared himself to an orang-utan flipping coins. Joking aside, this is a testable hypothesis: Is Buffett’s performance better than chance? To test it, we will stand on the shoulders of another giant: Jacob Bernoulli.

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Again it is a very small number, but we can use our formula to calculate its value:

The expected value is much smaller than 1, so we can conclude that Buffett is a better investor than the luckiest orang-utan. If stock returns really do follow a random process – as Eugene Fama asserted – then Warren Buffett is more than just lucky. Compared with his competitors in the S&P 500, he’s brilliant.

→ StatsLife

That Time I Tried to Buy an Actual Barrel of Crude Oil


On how to buy, store and trade an actual pint of oil. Hilarious :

If gold is the equivalent of a pet rock, then I can confidently say that oil is the equivalent of playing host to a herd of feral cats; it demands constant vigilance and maintenance. If gathered in sufficient quantities, it will probably try to kill you, or at least severely harm your health.

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The ideal oil storage trade works something like this: Buy the crude and immediately agree to deliver it at a later date, thereby locking in the difference between the spot and futures prices for what is, in theory, a riskless profit. In 2008, when the forward price of oil vastly eclipsed the spot price, this kind of arbitrage could net a hefty return.

A true oil storage trade therefore required an early buyer. The usual suspects—think Glencore and Trafigura—wouldn’t dream of touching my puny amount oil, of course. So I looked further afield, all the way to my ex-colleagues, who I thought surely must still harbor those long-ago dreams of owning Black Gold.

→ Bloomberg

Did High-Frequency Trading Answer The Call ?

But it brings back bad memories of the stock market crash of 1987 when some Nasdaq dealers simply wouldn’t pick up their phones. They knew the investors on the other end were looking to sell their stocks and as market makers, these dealers would be obliged to buy—and they didn’t want to buy! In the aftermath of that incident, enraged investors demanded that the SEC prevent it from happening again. The Commission responded by forcing changes on Nasdaq, including mandating that market makers respond to messages on the fully electronic Small Order Execution System.

Today, the fully-automated Nasdaq market, with its market makers often using HFT techniques, is the very model of an efficient market that has dramatically lowered costs for investors.

Contrast that with the findings of the joint government staff report on the US Treasury “flash rally” which found high frequency traders “as a group continued to provide the majority of order book depth and a tight spread between bid and ask prices throughout the day, even during the event window.” In short, HFT answered the call.

→ Traders Magazine

Activision to Buy Candy Crush’s King for $5.9bn

John Gruber on the acquisition :

They were only going to pay $1 billion, but then they got stuck on a couple of levels, bought some gold bars, and, well, here they are.

More to follow later today (maybe), but as a reminder, here’s a poignant statement from an indie developer allegedly ripped off by King.com :

Congratulations! You win! I created my game CandySwipe in memory of my late mother who passed away at an early age of 62 of leukemia. I released CandySwipe in 2010 five months after she passed and I made it because she always liked these sorts of games. In fact, if you beat the full version of the android game, you will still get the message saying “…the game was made in memory of my mother, Layla…” I created this game for warmhearted people like her and to help support my family, wife and two boys 10 and 4.

I have never downloaded nor played to any of their apps, I find them dumb and unaesthetic. In light of the previous statement I could only encourage you to remove them. 

Plus, I see mostly bored housewives or early teens playing Candy Crush, which makes the price of the acquisition even more insane. They are not real gamers like the core business of Activision-Blizzard, which is used to produce highly polished and immersive games. But I guess that’s where part of the money is to be made anyway and that’s sad. 

→ Financial Times

How Repo Works


An interesting and simple explanation on how repurchase-agreements work :

In a repo transaction one institution (the lender) agrees to buy an asset from another institution (the borrower) and sell the asset back to the borrower at a pre-agreed price on a pre-agreed future date (a day, a week or more). The lender takes a fee (repo interest rate payment) for ‘buying’ the asset in question and can sell the asset in the case that the borrower does not live up to the promise to repurchase it. The fundamental purpose of this circular transaction is to lend and borrow funds (and, in some cases, securities). While financial institutions use it to raise finance, central banks use it in monetary policy.

The very same technique Lehman Brothers used and perfected through the now infamous Repo 105. Read further for the NPR account :

Everybody knows the bank isn’t really selling the bond to the big company — it’s really borrowing money. So under accounting rules, the assets a bank uses in repo deals stay on the bank’s balance sheet.

But when Lehman Brothers wanted to make it look like it wasn’t borrowing so much money, the company used a special technique to get around this rule. It did repo deals where it took slightly less cash than the asset was worth.

→ Naked Capitalism