December Reading

I've said before that recently, changes in supply/demand for money and risk are the biggest risks to my investments. I've intentionally not focused on these areas in the past; there are plenty of smarter, better connected, well capitalized people out there who can and will beat me at currencies. So I actually never took economics in college (met requirements with AP Economics), and economics was less than 10% of the CFA tests.

Also, the stuff I did learn just didn't seem right. Purchasing power parity seemed to show little of the real world, if I recall correctly the carry trade should have been impossible in theory, and GDP and CPI are considered far more - accurate, or precise - than makes sense... I got the impression it was over influenced by Keynes and started reading Mises' Human Action. I didn't think that was going to help me invest much, so I quit a hundred or two pages in.

This winter break I want to figure things out. My reading/skimming list:

-A Monetary History of the United States (Friedman)
-The General Theory of Employment Interest and Money (Keynes)
-Speeches from fed governers
-chapter 3 of Alchemy of Finance (Soros)
-The Theory of Money and Credit (Mises)
-then move on to this reading list (but no access to academic articles)

Wish I had more from practitioners...

T2 Partners on NFLX

Via Neo-Alpha, T2 Partners have given brief reasons for being long NFLX. They compare the balance sheet but only mention the contract obligations as necessary for growth. They cite 166million net cash and 201million fcf as strong positions, but this is up against these streaming content obligations:

Less than one year		$	740.8
Due after one year and through 3 years			2,136.9
Due after 3 years and through 5 years			535.7
Due after 5 years			45.5
Total streaming content obligations		$	3,458.9

These are up massively compared to prior periods.

Hey, maybe they'll pull it off. I hope they do, I had a great experience as a customer. I agree it looks good from a takeover perspective. But I wouldn't call that a strong balance sheet. (ok so technically it's off balance sheet...)

NFLX - Two Mistakes

I don't like NFLX even at the current price. The reason is the massive operating leverage they've taken on to maintain and expand their digital offerings. I suspect it has positive expected value, but definitely risky, so inappropriate for my situation.

1) First mistake was buying a small position after the huge drop, while starting researching it. I was thinking that there was significant overreaction - and likely many stop outs from the momentum players - and it would soon bounce back up. I had a wee bit of confidence because I'd looked over NFLX last December. Not enough to hold it over night, but I still shouldn't have done it - the situation had materially changed with their increased obligations.

Of course go figure with investing and speculating, I made money despite making a mistake. I would have made more if I hadn't fixed the mistake right away (now up over 10%).

2) I looked at NFLX in December from the short side. I should have kept up with it; if I'd read all their filings, I would have noticed the increased operating leverage, and been willing to short after the stock started dropping with the rebranding fiasco.

Miscellaneous

-Interesting to see Jim Chanos present on Gamestop. I've thought about it before. I didn't end up doing research because honestly, I don't know why their sales haven't dropped a lot more already. Nobody I know likes or uses the place. Bad customer service, average-bad prices... If I don't understand the motivations of their customers, it's going to be pretty damn hard to predict changes in customer behavior.

-Currently reading Security Analysis. This seems *far* better to me than The Intelligent Investor; next time I'm back in the US I'll have to look over my copy of the latter and see if I can figure out why my reaction is so different. Very useful in understanding the current situation.

-I've essentially finished my energy market research, need to write up my thoughts, but first -

-Currently studying NFLX (after yesterday's 35% drop, it has now gone from way overpriced to interesting in less than one year)

-Via Mish, bank runs in Greece; what the heck? What did they wait till now for? But then again maybe this is just the man in the street - those with more assets have been leaving for a while.

Pet Peeve

Bit off topic here, but the just a comment on the financial community in general...
The level of elitism is a huge turnoff. That just doesn't exist in my current work environment and circles. It's disappointing to see it show up so strongly on a blog I really like, kid dynamite's. Hopefully it doesn't continue down that road, like equityprivate...

August '11

Whew! I feel like Ritholz - the last two big market moves I've been traveling. The first one, during the Sendai Tsunami and Fukushima nuclear disasters, I bought a netbook and attempted to put on some trades from my hotel. This time I followed along and put in trades from a smartphone.

Performance wise I've been okay. I went in net short US equities, but with most of my assets in US cash - so on a yen basis or 50/50 USD/YEN basis I'm slightly down for the last few months. I actually cut two short positions during the prior two weeks, and bought some HII on the Friday before the big drop. Beautiful timing eh? On fundamentals I think it's quite strong though. At these prices it's at a tasty multiple. It wasn't hit as bad as some other stocks but had declined quite a bit. The Navy is the only significant customer, which won't be affected by an economic downturn. And a wind down in Iraq/Afghanistan military spending shouldn't affect them much (although they trade at roughly the same multiple as army/air force companies).

I've since put on the long gold miners/short gold trade too. On a dollars term it's a net short position but in the current markets trades like a long - so I consider myself net long now. Still primarily in cash.

Currency is something I've been working to understand more but have a long ways to go. I didn't focus on it while studying for the CFA; my rationale was that I would never have a competitive advantage vs large institutions/macro traders, so it would be better to specialize in other areas and bypass currency sensitive issues. I had essentially the same reasoning for not learning about oil and energy markets. Now I don't think I can even look at many securities on a micro level without a better understanding, and perhaps even a position, on these things. My current list of areas to study:

-the oil/energy industry. I'm particularly interested in gas. Read The Prize, reading Oil 101, will read ...

-currency/inflation. Read This Time is Different, need to read - and think - a lot more.

-technical analysis. I've stayed away from this in the past because it was drilled in to me at school that technical analysis is garbage, and the little I did read looked like mysticism. I'm very aware of the human, and my own, tendency to see patterns where there are none. That said, there are times where it seems relavent and makes sense logically. I suspect learning about technical analysis will give me insight into the yen's strength...

Book Roundup

Can't call these reviews because the books were so bad I didn't finish them.

Selling Short (Joseph Walker): A shade worse than useless. The very basics of shorting are covered much better on wikipedia; the hedging strategies includes advice like writing a put against a short position and trusting the professional skills and risk management of wall street.

The Disciplined Trader (Mark Douglas): Guess I didn't drill down in the amazon reviews enough. This one is spot on; the book is simplistic and new age-y. New age is fine if that works for you, but then do yoga and meditate, don't read this.

And one good one, but a short note will suffice:

Market Wizards: Interviews with Top Traders (Jack Schwager): Very good light reading. Felt similar to reading hedge fund letters. Interesting noting where the different interviewees differed and where they were the same (who's this Martin Zweig character?). Jim Rogers' stood out as the best. Incredible how a lot of his concerns were so similar to problems today (still? again? I will definitely read his books now; if those concerns can last through the market returns of the last twenty years, that's very important to know).