"Regulators are fundamentally dumb," Taleb added. "Traders will go around them. I want the system where regulators can be stupid without you and I being harmed by it."

If we're going to try to move away from the Madoff model of economic policy, there are quite a few places we could start, but this one's my favorite: The United States government is buying cars from General Motors (NYSE: GM) to help the company demonstrate viability and secure more government loans.

Or we could take the principled stance and admit that what Madoff is doing isn't different from what Wall Street and the government dose everyday with little fanfare -- and let him get back to work.

Taleb calls the stock market and private equity Ponzi-like originally appeared on BloggingStocks on Wed, 15 Apr 2009 15:40:00 EST. Please see our terms for use of feeds.

I was sitting in my statistics class and the professor walked in and said, "Today we are going to learn about correlations." He explained that correlation is very simple. It is a single number that describes the degree of relationship between two variables, and that there was a formula in our book we could use. "But right now," he said " it's more important that you learn the concept that a correlation is a single number that describes the degree of relationship between two variables," he repeated, as professors often do. "Your answer will therefore always range between -1 and +1."

Continue reading Were the mathematicians of Wall Street a blessing or a curse?

Were the mathematicians of Wall Street a blessing or a curse? originally appeared on BloggingStocks on Fri, 06 Mar 2009 17:00:00 EST. Please see our terms for use of feeds.

Reading through Nassim Nicholas Taleb's tome, The Black Swan is a tough slog but investors who bought into his strategy for protecting against plunging markets are celebrating their good fortune. (Taleb's book is about highly unexpected events -- the "black swan" refers to the formerly widely held belief that all swans are white which European explorers dispelled when they discovered black swans in Australia.)

Investors in Taleb's $3 billion Universa hedge fund made returns of 65% to 115% in October. How did Universa do this? Universa buys far-out-of-the-money put options on stocks and stock indexes, betting on sharp market falls. Universa keeps 90% of assets in cash so it either breaks even or loses small amounts in most months while waiting for black swans. One Universa killing: American International Group (NYSE: AIG) puts. In late July, it paid $1.29 apiece for AIG put options, which were going to pay off only if AIG stock fell below $25 a share by September (AIG common traded at $26 on July 31st). Universa eventually sold its puts for $21 apiece.

Should you try to replicate Taleb's strategy? It depends. If you believe that the worst is over and other hedge funds are already copying the strategy, then the answer is no. If you think that the markets have further to fall, but that other kinds of stocks will prove most vulnerable, you can buy out of the money puts on those stocks. I am glad to see that someone is making money in this horrible market. Why shouldn't you?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns AIG securities.

Black Swan author profited in last month's financial collapse originally appeared on BloggingStocks on Mon, 03 Nov 2008 10:27:00 EST. Please see our terms for use of feeds.

Continue reading Market stumbles on a black swan

Market stumbles on a black swan originally appeared on BloggingStocks on Thu, 03 Apr 2008 15:41:00 EST. Please see our terms for use of feeds.