The world if full of clowns providing trade or investing recommendations. And it’s pretty easy for these imbeciles to come up with an argument on why you should buy or sell fairly easy and quickly. There is a wide ranging set of “indicators”, “signals” and “data” to pull out of a bottomless rabbit hat. The stock pushers and pullers are like scientists that can do an experiment on the same thing 10 different ways and only report the results that support their theory. It’s even more ridiculous when you know that the experimental results that they gather are mostly random noise. Here are some example of what I mean just by taking a 5 minute look on seekingalpha.com, which is filled with so much garbage that a putrid stench fills my room when I launch it.

“The death cross (a technical analysis indicator) is here so markets are going to tank”

“The VIX is approaching a 12 month low and so it is time to sell”

“Uncertainty in Europe means it is time to sell”

“We are reaching a support level where there are a lot of buyers”

“Stock XZY is overvalued because it cannot sustain this growth”

What I’m amazed by is how these schmoes take one or a few “indicators”, “signals”, or “data” to backup their buy or sell recommendation and think that that makes it valid. This super complex financial market which no one can really predict the direction of is somehow handled by a few indicators and data sets. What really cracks me up about seekingalpha.com is the last line on almost all articles which look like this:

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

That should tell you basically everything you need to know. The guy making the recommendation through the 8 pages of his vomit garbage post has no positions (aka balls, aka experience, aka brains, aka cold hard cash) in what he’s laid out??! If you’re really going to read seekingalpha, just scroll to the bottom and see what positions they have on, because in the end, that’s all that really matters. I can tell you to go invest in goats because that’s the next big meat and its going to make you 1000% return, but if I’ve personally got nothing invested, that kind of a recommendation is utterly useless.

When you select investments, it’s a matter of balancing risk and reward. It doesn’t take a genius to know that the obvious choice between two investments that have the same expected return is to select the one with lower risk. And again, given two investments with the same risk profile it is obvious to select the one with higher expected return. Similar principles can be applied to food. But replace the terms risk and reward with nutrition and taste. It’s always a constant battle in our minds on selecting the apple (high nutritional content, low in deliciousness) versus chocolate (low nutritional content, high in deliciousness). Viewing it in this way makes it a  bit easier to eat healthier (but not necessarily uber- healthy). Evaluate how good something tastes to you personally and investigate it’s nutritional content. Do this for all the foods you regularly consume, or should be consuming.  Some obvious elimination or inclusions should become apparent. Items that have very low nutritional value that you don’t even enjoy that much can be shunned in the future. Food that doesn’t taste too bad, but has extremely high nutritional value should be placed in the consumption rotation more frequently. If you really wanted to get into it, you could probably make use of modern portfolio theory’s portfolio optimization analysis for food! But, if you wanted to keep it simple (as I do), just make the obvious eliminations and additions. One example for me is the inclusion of a lot more seafood, because it typically registers a high 7/10 on the taste scale and is probably a 10/10 on nutritional value (depending on the dish). But, whipped cream has been completely eliminated because it simply doesn’t taste good enough for me to justify adding a 0/10 nutritional content item. It barely improves the deliciousness of my triple chocolate mocha venti latte extra sugar extra cream double espresso caramel macchiato – no whip.

Why? Credit Suisse decided to reopen issuance of new shares (more supply) and now supply is meeting demand. But the premium that TVIX traded with while the issuance was halted  over the past month made no sense in the first place. There was a fat juicy arbitrage opportunity this whole time (if you could find shares to short). View this earlier post for further information.  http://livinginvol.com/2012/02/lucky-me-tvix/

I only recently discovered ABC’s program the Shark Tank and it has quickly become one of my favorite shows. The premise of the show is for business owners and entrepreneurs to pitch their ideas to a panel of sharks (venture capitalists) and seek an investment into their company in exchange for equity stake in the business. Having gone back and watched every single episode of the last three seasons, here’s a list of lessons that can be learnt from the sharks on investing in companies.

Numbers need to make sense
So many entrepreneurs come on the show with weak sales numbers and think that their company can be worth millions. Most of the time the sharks are willing to offer 1.5-3 times yearly earnings depending on how much potential for growth there is, but people come in asking for upwards of 10 times that amount. The sharks aren’t going to invest in a business where they have a very low chance of being able to make some profit. They will never over pay and never invest if the numbers don’t make sense. This is a cardinal rule, no exceptions.

Sales are everything
No sales = no deal. Very few sales = still no deal. A lot of sales over a very long time = still no deal. Sales are paramount. They prove to the sharks that the idea is sound. People, other than the business owner, are providing positive feedback by purchasing the product or service with their hard earned cash. The sharks are not willing to risk a lot of their money on long shots. They are not looking to come into a business on the absolute ground floor with no sales.

Ability to scale is also important
The sharks don’t want to invest in something that has no growth potential. If the idea only applies to a small niche market, it’s usually not appealing as there is really no opportunity for growing money.

Stick to the businesses you know and can understand
Just like Warren Buffet preaches, the sharks stick to businesses they can understand. Each individual shark is talented in select industries and will very rarely make a deal outside their comfort realm. A shark that’s excellent with “As seen on TV” products will not jump into a technology/internet based company as he can provide very little value to the entrepreneur and doesn’t know how to value the deal properly. It’s best just to stay away since there will always be another deal down the road.

License instead of attacking
A lot of entrepreneurs don’t understand how difficult it is to go up against an large established brand with deep pockets. It takes a very large investment, mass scale promotion and quite a bit of work to even have a chance to compete against an established player. It’s almost always better to simply try to license the idea instead of forming a company and trying to crush the large player.

Food and clothing are extremely difficult markets
The key to a product in the food and clothing markets is branding and marketing. Branding and marketing are expensive ordeals. And there is so much fierce competition that it makes success in these industries a very daunting task. Sharks typically find it extremely difficult to invest in these ventures unless they can get a fantastic deal.

Know when to quit
A lot of entrepreneurs come on the show with an idea they’ve been working on and trying to sell for many years. They have poor sales over that time period that have stagnated or are even falling from year to year. These are zombie ideas that the sharks will never invest in because it is simply the stubbornness of the entrepreneur that has kept the company alive for so long. There is nothing wrong in failure. If the idea isn’t working out after a reasonable period of time, then simply shut it down. Never give up is horrible advice.

Important to consider the individual and not just the business
When the sharks invest, they also consider the fact that they are investing in the entrepreneur as well. Likability, charisma, intelligence and hard work ethic are all characteristics they sniff out and value. Sometimes a deal is made because of faith in the entrepreneur has tipped the scales. Sometimes the sharks will make a deal for the idea in it’s entirety and try to remove the entrepreneur out of the equation completely.

I’m always amazed how the most regular of schmoes like to have an idea of what the next hot IPO (like Facebook) should or shouldn’t be worth. And from a valuation point of view, this is one of the most difficult investments to value. Even the most experienced and highly regarded experts can’t do it very well. This is why IPOs launch with insane amounts of volatility, the initial price is almost always wrong and differing opinions cause it to swing around wildly after launch. Valuing the newest of IPOs is like trying to start off doing stochastic calculus when you don’t even know how to add. Let’s go through the knowledge pyramid step by step to know if you are even close to being qualified to utter an opinion.

The easiest: Risk-free bond issued by Theoretica (land of the theoretical where assumptions always hold true)
You get a series of payments at defined times in the future. There shouldn’t be too much variability in its determined value.

“Risk-free” bond issued by a strong nation or company
Same as the above but now you must take into consideration, a small, can almost be ignored, chance of default.

Risky bond
Same as the above, but now the risk of default cannot be ignored.

Long term or perpetual bonds
Same as the above, but estimating interest rates further out becomes increasingly difficult. Differing opinions will lead to a larger variability in valuation.

Solid established no growth company paying dividends
Dividends are just like the coupons of a bond as they get paid on a predetermined frequency. Valuation will be the same as the above, but you must now take into consideration the possibility of the company being poorly run, macroeconomic risks, etc.

Growth company paying dividends
Same as the above, but now you must evaluate what the prospect of growth is worth and factor that in. Factor in the fact that dividends should grow as the company does.

Pure growth company
Same as the above. Dividends aren’t paid to the investor, but rather re-invested back into the company in the prospect of stimulating further growth. That is until the company plans to slow growth and starts distributing dividends. What is that worth exactly? How good are their plans for growth?

IPO
Same as the above, but you have limited historical information, no idea what others and thinking and how they will react, no easy way to estimate or forecast anything. Fuhgeddaboudit.

As you go from the top of list to the bottom, from a theoretica issued bond to an IPO, the ability to value things goes from:

• Purely mathematical to more of an art
• Easy to very difficult
• Less to very volatile (makes sense since more people will more wildly disagree about what an IPO is worth versus a bond)