Michael Rupp Friendica (AP)

Episode 597: That Time We Shorted America, Part One

I'm posting this to @Stock Picking Discussion because it's informative but woefully wrong due to omissions in reporting about what #Shorting #Stocks is all about. They are #Mathematically correct when they talk about having no theoretical maximum amount you can lose if things go the wrong way. They are terribly wrong in reporting as if there isn't a responsible reason for shorting securities. If you only listen to the embedded podcast below, you would wrongly assume that shorting is just gambling and dangerous gambling at that. That can be true but is not normally the case.

The #Long Buy of securities is simple, you hand somebody money and they give you a proportional right of ownership in a specific company. A Long Sale is merely the opposite.

A #Short Sale is when you sell shares that you don't own; this is possible if the finance company you trade through has a set of their own shares of the company you want to short. On the books, your account gets credited the cash from the sale to do with what you like, but your account is debited the quantity of shares you borrowed for the short-sale. You can't return the cash to settle the account, you must return the shares in their full quantity to cover the account.

As a metaphor, imagine your nearest neighbor owns a Ford Fiesta. Imagine you also think that something is going to cause the prices of all Ford Fiesta's to go down in the future. You short-sell their Ford Fiesta now and collect $10,000.00 then tomorrow you look on Craigslist or eBay Automotive or some newspaper want ad's and find one with the same color, options, condition, and mileage as the one you shorted for the price of $9,826.00. That one is what you will Short Buy to cover the borrowed one from your neighbor's house. You profited $174.00 on the decision. The reason the metaphor works is all shares of a specific class for a company are identical.

In that example, suppose you were wrong about the price going down. Suppose some news made them the best car to own on Earth! You might think, I'll wait it out. True, you will only lose money if you buy it back while it's high. While you were waiting, a lot of collectors start buying them and the pricing bids up by the minute. Do you wait even longer? What if the price got to $500,000.00? At what time do you give up hope and take the "L" on the trade? This is why there is no upper bound to how much you can lose on a short-sale. Obviously there's a slim chance that prices will run away like that, or that you wouldn't be able to wait till things got better, but if you have looked at enough stock charts, you will see steep cliffs that have happened in their history; violent price shifts are not rare in the market. They accurately point out that the long-run trend of the market is upwards. They were wrong to not state that most businesses do not last and their long term value goes to zero, although more new entrants appear than go out of business. That's all I want to say about speculative short trades.

If you know something about M.P.T., which in short is building a #LowRisk #HighReturn #Portfolio of stocks and bonds, you would know that you have to buy shares based on a specific set of proportions in order to have the ups-and-downs of your total investment smooth out. Sometimes the calculation to set the proportions tells you to short securities that you want in your portfolio. This is not speculation, it's #RiskManagement. Many money managers talk about #BuyAndHold versus #ActiveManagement. The way you short-sell in #MPT is a type of short-and-wait; it's a long-term short-sale akin to buy-and-hold. The reason this happens is the calculation takes into account the way every pair of securities in your set correlates over time. The #Statistics have determined that to reduce the ups-and-downs in your overall value the shorted security will act as a shock absorber to the total investment.

Michael Rupp Friendica (AP)

A funeral industry giant keels over

(This post looks best when viewed directly on #Friendica)
This is another great #Podcast for the @Stock Picking Discussion forum. The detail I caught in the story making it worth mentioning is one that might go past people who don't think about #Finance. It won't take you long to listen to this show, but here's the...
spoiler/rant alert:

The main point of all this is to beware of what the owners of & workers on #WallStreet decide to make a run at. You don't have to get #Screwed by them. Innoculate yourself. If you know they are trying to do it (hint: they always are), and what they are trying to do it with, you're well on your way to preventing them from getting over on you. Your common sense will do most of the rest.

Politics Matter!!!

This is a very nuanced thing. I didn't say it was the only thing that matters. I didn't say all publicly traded companies are affected by politics.

To be clear, governments—even good democracies—will have some of the people holding political power who act in self-serving ways by sneaking in legislation that gives a company or group of companies they are allied with an unfair competitive advantage in the marketplace. Normally we only hear about it when it reaches scandalous proportions.

Typically we don't even think about politics because it's all so complex, and who's got time to read and understand the ramifications of all the laws passed in just their own home country? Nobody, that's who. In the long-range plans of #OutsourcedMath, there will be a group dedicated to the analysis of legislation who report on the expectations of those nefarious acts.
#OutsourcedMath Business (x) Economics (x) Legislation (x) Politics (x) Society (x)

Method Man of Wu-Tang Clan fame has some investment advice

In the last few seconds, he reveals the secret to sage investing.
Investing (x)

Sam Harris | Making Sense | #155 - Mental Models

I like all episodes of this podcast, but this particular one touches on #Finance and decision making early on. Pay close attention to how he claims top performers like Buffet reduce risk by focusing on stable knowledge of stable business types.

Link to the show's page
# #Finance Economics (x) Logic (x) Philosophy (x)

The "Shell Company" scam

Before addressing the scam, I want to address the legitimate use of a shell company. Also, you should be advised the OTC Markets will identify Shell vs. Shell Risk companies when you look at their ticker page; e.g. ADHG - Ando Holdings Ltd. is a Risk but BFCH - BitFrontier Capital Holdings, Inc. is not. Neither of these conditions on the OTC is saying they are a scam.

A typical legitimate use of a Shell Corporation would be to obtain early seed funding by investors with enough wealth to speculate on a whim. You are buying a promise of something at such a low price that if you were wrong you wouldn't care. It's akin to regular people buying a few lottery tickets and not minding when they become worthless. The promise is that eventually, the ownership of shares in the shell company will translate into real ownership of shares in the real company which the shell was created for. To be more abstract though, Speculators looking to diversify their investment portfolio just want to put money into a genre of a company (assume medical), so Wall Street types will make a shell company with an abstract name that sounds medical and investors will park money in that. Those same Wall Street type people will now seek a non-public medical company that has some promise and try to sell their shell company to them in order to finish the attachment. To clean up later, the listing agencies will get a notification of a ticker symbol and/or company name change and Voila! the shell company becomes a real company.

However, suppose you were a nefarious person on Wall Street and you wanted to get a new Lamborghini but you basically didn't have enough because you spent yourself out on mansions and yachts. You could launch a shell company with the following plan to fleece the general public.

In the past, you would get an accomplice but with technology being what it is, you might be able to go it alone. One thing that makes a company look good is if it's price steadily increases over time. A shell company—unlike a high volume publicly traded real company—has its share price determined by very few people who know about it. With this shell, you and your partner can buy and sell your shares to each other on the open market. Nobody will be paying attention to your trades because it's just a shell company. Every morning you lay out your plans of how you are going to price the trades throughout the day and what volumes you are going to trade at to look just like an ordinary good company when charted. Each day is about the same as the last but a small amount of price rise is apparent in the chart.

After you and your partner build up some history, you begin loud-talking about the company in public places. This makes people overhearing you think they are getting private information that they can capitalize on. You also start to hype the breakthrough the company has made in technology or medicine through some public means like a shell website for the shell company. When people start searching for more on the new company they overheard about in a bar or restaurant, they find confirming evidence that its gonna be a great thing.

Human nature makes those people promote the finding to friends and relatives because a secret is something you tell one person at a time. The hype starts to grow like a virus and real investors begin to seek out this fictional company to put their real money into it.

You and your partner start to see volume numbers in the trades that aren't your own and you know that other people are buying into your scam. At this point, you can increase the hype for the company and keep the internal trades going to make sure the price is rising. As real people buy your shares, the money they paid is basically yours now. You just keep running the scam until you've sold enough of the shares to buy the Lamborghini, you've sold off all the shares to the general public, or something goes wrong with the ruse. As long as you can avoid the FCC, SEC and other law enforcement agencies as well as any civil charges that are going to look for you, you get to keep all the money.
Cautionary Tales (x)

The Perfect Predictions Scam

It would be surprising if you were to be a victim of this scam in the future, but knowing how it works is important.

From the point of view of the person being scammed, you get a message that says somebody can predict price changes of stocks and that they do it for a fee, but you are getting a free sample; this letter/eMail/SMS includes a ticker symbol and an up or down prediction for this week. You discover that the prediction was correct. A week later you get another similar message, the ticker symbol might be different but it will have a prediction. Again you will discover that the prediction was right! Amazing? This pattern will go on for many weeks and you will be convinced that paying for the service will grant you access to this insiders club where you can make a fortune and fix all the problems in your life.

The way it works, in reality, is the scammer sends out a million messages, but half say the stock ticker will go up and the other half say it will go down. Some buy after the first week; they are done. Some got the wrong prediction so they get no more messages. On week two about 500,000 people get messages where 250,000 are told it will go up and the rest that it will go down. Of the 250,000 that got two correct predictions in a row some will buy the service and they are out. Another 250,000 never get the message again. The scammer runs this trick until the halfling runs out, but along the way, lots of people got perfect predictions not knowing that there was another much bigger group getting non-perfect predictions.

The length of the string of perfect predictions feels like the scammer is really good, but it's just the random chance that the scammed person was sent the correct prediction over and over again.
Cautionary Tales (x)

I'm still coding the back end software for the big Outsourced Math LLC project, but I'll say that what we're making is going to mitigate the problems outlined in this episode of @OnPointRadio where they scrutinize #IndexFund #Investing.
Callers to the show raised great points.
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