Stock Prices

I recently read "Flash Boys", a 2014 book by Michael Lewis about stock trading.  I intend to review it but for now just wish to discuss one point, the issue of what a "fair" price for a stock trade is.  Consider the market for IBM stock.  Suppose for example the market bid and offer prices are $159.99 and $160.01 (per share).  So there are people offering to sell shares for $160.01 and others offering to buy shares for $159.99.  So it seems plausible that a fair price is $160.  And if you should happen pay $160.01 or receive $159.99 the penny a share profit to a market maker providing liquidity doesn't seem outrageous to me. 

But this analysis only makes sense if the amount of stock you are buying or selling isn't enough to move the price significantly.  Suppose there are a billion shares of IBM stock outstanding and the elasticity of demand is 1 for IBM stock (this is just an illustrative example, the actual values will vary).   Then a small order like one thousand shares can be expected to move the price by one part in a million (since one thousand is one part in a million of one billion) or $.000160.  Since this is small compared $.01 it won't materially affect a market maker's profit.  But a large order like a million shares will move the price by one thousand time as much or $.16.  This is enough to turn an anticipated $.01 per share profit into a $.15 per share loss if  a market maker should be so unwise as to sell a million shares at $160.01 (or buy a million shares at $159.99). 

So what is a fair price for a large order?  It seems to me that it is the midpoint between the before and after prices.  Or $160.08 if you are buying, $159.92 if you are selling.  If you could obtain better prices than this then you could profit by repeatedly buying (driving up the price) and then selling (at a higher price) a large block of shares.  And you should be able to obtain near to this price just by splitting up your order and feeding it into the market slowly buying (or selling) at gradually increasing (or decreasing) prices.    

Much of the behavior of high frequency traders that Lewis complains about in this book just seem to be attempts of market makers to protect themselves from being blindsided by large orders.  Without endorsing every specific tactic this doesn't seem unreasonable in general.  And it benefits small investors (like myself) as the alternative is larger bid ask spreads (like for example $159.90 bid, $160.10 asked). 

My Vast Fortune

My local library had another Andrew Tobias book, his 1997 "My Vast Fortune", which I also checked out and reread.  I have mixed feelings about this book.  When Tobias keeps a light touch I find him an entertaining writer.  But when he gets all earnest and serious I find him less entertaining and sometimes actively annoying.  Much of this book humorously  chronicles Tobias's financial triumphs and misadventures and I generally liked that part.  But a big part of the book is devoted to Tobias's ill-fated crusade for no fault auto insurance which culminated in a 1996 California proposition which lost overwhelmingly.  He goes on at tedious length about the purported benefits of a no fault system and the perfidy of those, Ralph Nader foremost, who opposed it.  Even granting his case it is hard to understand why he thought logic and reason would count for much in a political fight and eventually his outraged sense of betrayal becomes a bit hard to take.

I also was a bit annoyed by Tobias's position that liberal programs like free legal services for the poor are fine ideas but they just need to be administered with a little discretion so as not to inconvenience people like Tobias.  I have no problem believing a case brought against Tobias by a former tenant was baseless but Tobias's proposal that legal services "settle" the case by having Tobias denote money to charity was ridiculous.    

I noticed a curious inconsistency between this book and "The Only Other Investment Guide You'll Ever Need".  In the earlier book Tobias recounted (p. 168-169) his investment in a research and development venture that was bought out by Johnson & Johnson doubling his money but leaving him (and some of the other limited partners) dissatisfied both with their return (they felt under the terms of their investment they should have tripled their money) and with the lawyer they had hired to sue to enforce their contract (who appeared to have lost interest).  But in this book he reports (p. 33) tripling his money in this deal.  So one is left wondering what happened.  Did his lawyer sudden spring to life and obtain a better deal or what?  I suppose it's probably just a mistake (possibly caused by confusion between a profit of double your investment and doubling your investment) though.    

So in summary I found this book too flawed to recommend but I did find some of it entertaining.

The Only Other Investment Guide You'll Ever Need

Having recently reread "Money Angles" by Andrew Tobias I decided to see what other books of his were in my local library. His book "The Only Investment Guide You'll Ever Need" was supposed to be there but apparently has been lost or stolen. But I checked out and reread the 1987 sequel "The Only Other Investment Guide You'll Ever Need". Although it is similar in some respects to "Money Angles" I didn't like it as much. One problem is the book comes across as more badly dated because it offers more of the kind of specific advice that depends on the details of things like current tax laws and many such details have changed. For example the book mentions at one point (p. 225) a tax on mutual fund advisory fees (which were to be included in income). But this tax on "phantom income" proved so unpopular it was repealed before it ever actually took effect.  Also I have read enough personal finance books that another version of fairly standard advice is not very interesting to me. 

I didn't hate the book, it does have some of the same sort of amusing stories I liked in "Money Angles".  And some of the advice is still good.  But if you are looking for a guide to personal finance I think you would do better with a more recent less dated book.    

Election Day 2014

I voted Tuesday on my way to work. This was easy as my polling place is conveniently located just off my usual route and there was no line. I didn't find the electronic voting machines being were used very confidence inspiring (as regards my vote being correctly recorded and counted) but I suppose this is partly a function of unfamiliarity.

I am registered as unaffiliated but like most independents tend to lean one way, in my case towards the Republicans. So I was pretty happy with the results especially the (apparent) defeat of the loathsome Martha Coakley in the Massachusetts Governor's race. It will be interesting (although of course almost totally meaningless) to see how the financial markets react Wednesday.

Goetz v. Zimmerman

Although I have no interest in "Gamergate", I found this essay by Ezra Klein on increasing political polarization interesting.  One point that struck me was Klein claims that while polls showed no difference between Republicans and Democrats in their opinions about the 1984 case in which Bernard Goetz shot 4 young black men on a New York City subway (only 15% disapproved) there was substantial disagreement about the recent (2012) incident in which George Zimmerman shot Trayvon Martin with 20% of Republicans (vs. 68% of Democrats) dissatisfied with the verdict (Zimmerman was acquitted).  I haven't tried to verify Klein's claim but if the quoted polling data is even close to accurate this is pretty striking as by any objective standard Zimmerman was far more justified in shooting than Goetz was.

If you don't remember the case, Goetz shot a group of 4 young black men on a New York City subway after one of them approached him and aggressively asked for $5.  While no doubt annoying and possibly intimidating it is really doubtful that this was sufficient legal justification for pulling a gun and shooting all 4 of them.  Goetz apparently realized this as he fled the scene.  But the jury saw it differently convicting Goetz only of a weapons charge (he was carrying illegally) a verdict that is difficult to defend in strictly legal terms.

Zimmerman on the other hand shot Martin (with a gun he was carrying legally) because Martin was sitting on his chest and punching him in the face.  Zimmerman didn't flee the scene and the jury properly found him not guilty.

One can speculate about the reasons for the difference in public opinion about the cases but one factor seems clear.  The initial press coverage was sympathetic to Goetz but hostile to Zimmerman and to quote Mark Twain "A lie can travel half way around the world while the truth is putting on its shoes.”

Money Angles

I recently reread "Money Angles" a 1984 book by financial writer Andrew Tobias. This book was derived from magazine articles Tobias had written on the general subject of money, investing and personal finance. It is little uneven but overall I liked it.   Tobias moves in moneyed circles and the book contains numerous entertaining stories about the financial lives of his friends and acquaintances with which Tobias illustrates his generally sound advice. It is 30 years old so I found it a little dated in places but not too badly. It did help that I am old enough to have lived through a time when for example "... A 9 percent fixed-rate mortgage is a treasure. ..." (p. 79).   But while the details of things like tax laws or current prices have changed the big picture hasn't changed that much.  There are still many ways to go wrong financially and this book warns about some of them.

This is not a good introductory book to personal finance and investing, it assumes some basic familiarity with the subject and it doesn't attempt to be comprehensive. And I can't really recommend you make a special effort to read it but if you happen to run across a copy you might give it a try.

Oddball

Yesterday (Tuesday) the market was down as were all of my stocks except for one.  Today the market was up as were all of my stocks except for one.  In both cases the oddball was Ensco (ESV) which seems a little strange.

Ensco owns and leases out offshore drilling rigs.  I bought some earlier this year because the stock (with a 6% yield and low PE) seemed cheap.  This isn't looking like a great pick as the stock has recently gotten quite a bit cheaper.  In hindsight I overlooked a couple of things.  First while a company like ExxonMobil may not suffer too badly post peak oil production as you would expect decreased volume to be offset by increasing prices it is hard to see a company like Ensco prospering post peak drilling as you would expect fewer leases and lower lease rates (as the surplus of rigs pushes prices  down).  Second a low PE doesn't mean much if it is based on inflated earnings.  The earnings a company like Ensco reports are highly dependent on how fast it is depreciating the expensive drilling rigs it is leasing out.  Ensco recently wrote down the value of some of its rigs which means it hadn't been depreciating them fast enough and therefore that its reported earnings have been too high (and hence its real PE was not actually as low as reported).