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Wired
I know a fellow who used to run a decent amount of equity money. His
specialty was retail stocks. He had a good track record. He took maximum
advantage of the quarterly income reporting cycle of a few medium
sized, well know big box retailers. He played that game from both the
short and the long side. If you catch that right you can make some good
money.
This group hired a number of part-timers around the country. These
people would sit outside a specific store with a hand counter and
measure traffic. Traffic does not equal sales. But if you have hard
numbers on traffic your estimate on sales will be better than most.
So they had an edge. They earned it and benefited from it.
Could you define the information they obtained as “material”? Sure you could.
Could you define this information as "non-public"? Sure you could.
Should we be in the process of unfolding the onion of what has been
defined as insider trading there is going to be a very big surprise. I
think that all successful hedge funds and big investors have “counters”
that are gathering/reviewing data. They all have (or try to have) an
edge. What do you think they are paid 2&20 for?
I have said this forever. If you’re a small investor relying on public
information you don’t have a chance. The S&P is ‘unched’ for a
decade. Wired money made a few hundred percent.
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Dual mandate but only one fork in the road to take.
Yeah, I'm honestly OK with it if the Treasury and Fed want to keep churning out little green presidential portraits. I just wish in the Land of the Free, we had the freedom to use and mint the currencies of our choice http://en.wikipedia.org/wiki/Bernard_von_NotHaus
Consider this situation: you're sit on the board of a small oil company and you happen to chair the audit committee. You sell all your stock, soon thereafter the stock tanks when information directly related to the audit becomes public--information you were directly responsible for discovering in your role. Effectively you have cheated everyone you sold your stock to just as if you sold them a car you knew was a lemon--and you front ran all shareholders in your sale. Oh yeah, you didn't file the disclosures regarding your stock sale. You are a board member and you have a explicit fiduciary responsibility to all share holders.
As it turns out you skate though because your dad is the US President and the head of the SEC is an old family lawyer. Even so, and tellingly, the SEC refuses to exonerate you, even though your ignorance defense is compelling in spite of your direct oversight position. Instead the investigation is dropped. Too bad most americans lack the discernment (ie. are too fucking stupid and/or ignorant) to understand the corruption illustrated here. History might have been different.
Bruce I love and appreciate your posts always. Maybe you wrote this one to garner the type of response that we see above.
But it comes down to a deeper issue: one of real morals and to question how we all got here. How did we get to this point where lying, cheating and outright fraud is applauded and rewarded?
Lying shares the unusual distinction of which our own personal moral handbook and that of society’s legal handbook converge. Most legal codebooks have provisions regarding lying or call it fraud. Lying is committing fraud and is deception. The basic belief that lying is wrong seems to exist in all civilizations. Most societies can’t carry on without an acceptance than we must tell the truth to one another in order to coexist and survive. Thriving in these societies is dependent on the truth. How can you coexist with me if you give me false information that makes mine ambiguous? Fraud creates instant inequality.
For instance let’s say you’re about to buy strawberries from a vendor and the strawberries on top look really good but the ones on the bottom are a bit rotten. The vender knows this and says nothing or lies and tells you that they’re all fresh. The vendor has information that makes his position superior prior to your transaction. The vendor lies but expects the truth from me. He expects that I will give him real and not counterfeit money at the conclusion of our transaction. The vendor’s lie does not change him knowing his position but his lie makes it impossible for me to compute mine. He expects something from me that he is not willing to give. It is really no different in the investment arena. We expect the truth and never imagine the opposite.
Children depend upon their parents to know their position. They trust until made to “untrust”. Children follow us blindly and believe whole heartily in what we transmit to them. They believe in what we believe and observe what we demonstrate. Is it not imperatively dangerous to play Russian roulette with this trust? When our children come of age, how they deal with the outside world will directly affect us and reflect upon us. Our children and grandchildren are business men and women, doctors, dentist, lawyers, politicians, financial advisors, hedge fund managers...and look at the foundation we’ve created. Is anyone really surprised at the level of fraud and lies that are exposed daily?
The guy standing at the entrance of Walmart with the counter isn't lying, isn't committing any type of fraud; but the guys at hedgefunds buying and selling info to a small select few, now that's some rotten strawberries.
Let's close this post by stating that being outside to gather information does not constitute insider information.
hedgies are being investigated because they are competition to the International Banking Cartel. what is the SEC going to do, investigate JP Morgan? sheesh.
As the weekly auctions demonstrate in those full page lists, the money is the crime. When credit gets contracted, all the cash out there is subject. It's Velocity of Money as business haircut and the banks and six industry monopoly barons pick up the pieces for pennies. Rinse. Repeat.
After certain drama, the insider trading dust-up will be done on obvious to prove, on-the-wire print and email deals amongst young corruptibles who need to make more noise than a wink or a nod.
+1
They count the cars via sattelite, cheaper and more exact.
and correlate to the marketing hype in the Sunday flier to see how many folks fall for what BS.
If you’re a small investor relying on public information you don’t have a chance.
Not true at all. I've added 300 basis points/yr vs. the S&P since 1998 on $1 billion in managed money with a portfolio which has averaged 10% cash over the period by:
1. Recognizing when the equity premium for the overall market is small, and putting some material fraction of my portfolio in Treasuries at those times.
2. Being contrary, and only buying well run, unleveraged businesses (long term ROE > 10%) at reasonable prices at times when the average investor is either panicked or bored with "the stock market". My average holding period is 8 years. I'm wrong about a third of the time w/my stock picks, but if I lose only 20% or so on my losers, the winners make up for it.
I have no special contacts or information networks. Patience and perspective make the difference.
You're managing 1 large and you don't think you have an advantage? How many people have you got working with you? Have a Bloomberg at $2,400 a month? A custudy clearing a/c with JPM? 3 cent a trade?
I have one analyst and a trader. We have a Bloomberg but it is way underutilized. Ninety percent of our AUM are custodied at Schwab, where we trade at $9 per transaction. So we don't have any great advantage over a retail investor, other than 28 years of experience and perspective. I make about 3 outgoing phone calls a week.
To me, this sounds like a dream business. If you don't mind, how did you get there?
Not a bad biz, though nowhere near as lucrative as some hedge funds. Much more stable, however, as we run money for over 1000 clients with a total of just 20 employees (3 on the investment side; 17 in client service/ops). Our average client is $1 million with effective rate of about 70bps. We're basically providing an institutional level of management and service to retail customers at a very good price. Our largest equity accounts (~ $15 million) pay 50bps, for example. We could charge more, but it would hurt net performance and we don't really need to.
I started in the business in 1983 working as a gopher for a guy running $12 million out of his house who eventually made it onto the Forbes Honor Roll for a decade. Went out on my own in 1995 when I hooked up with 5 people who literally lived to service their financial planning customers, were eager to grow their book and trusted me to not blow them up. We started with $40 million.
Bruce, your thoughts on the following:
Deutsche sits on 1 of every 4 fx trades on the planet. They actively data mine their counterparty orders and activity, flows, timing. Basically everything. Citi does the same, as does JPM. All the big players do, but DB has a distinct advantage, as they see both sides of the trade almost all the time. There is no surprise this information can be used to , for example, offer a price near the bid side which no one can beat, but they can still make money.
Does data mining in oligopolistic situations to gain competitive advantage mean trading on data the public will never, ever see, is illegal? Not me. but if Deutsche gets data from counterparty trading positions (e.g., Citi's book) and uses it, then I have a problem. If they get hold of GS's trading strategies (non-public), then I have a problem. If they load all their customer's FX hedging plans into a database and through analysis run positions on them, no problem.
When you get to the level of a Deutsche, Citi/JPM in forex you cross to a different world. They are supply and demand. They create supply and demand. Their customers are captive so the see all the flow. They have information and sources normal folks could only wish for. I doubt that either of these banks has lost money in fx trading in any given month over the past three years. This level of the game is completely a game of pro's. How far might they go? As far as they can. There are no rules in this sport
This case is so thin.
How is counting the number of people walking in public non-public information? It by its very nature is not. The fact that lazy analysts don't bother to count is irrelevant. The fact that the INFORMATION IS DERIVED FROM PUBLIC SOURCES is the key.
So now it is supposedly insider trading when a member of the public walks from their car to the store in a public place and someone sits there all day and counts them?
So prosecute all the perma-bull idiots on CNBC who tout their stock ideas constantly with the line "I was at the mall the other day and...."
Asking questions from non-employees in the supply chain, also publicly available information. Asking the snot-nosed kid at best-buy how sales of iPads are going, also public.
In fact, the corporate insiders probably don't even know that information!
These casese are pure shakedown, witch hunt stuff to get the headlines off QE2, Europe, Tax cuts, Obama's crashing ratings and anything else that goes against their game plan.
I'm sorry, I was being sarcastic above you there...
There was a massive insider trading sweep during George Walker Bush Administration.
Martha Stewart did time for this very same thing.
I don't see any need for further witch hunts like this.
Warren sells insurance, that's your first clue; on top of that he's rode a friendly wave of stock prices for 40 years, investing surplus funds that he raped from policy holders. I guarantee if he started today he wouldn't have the same result in 40 years.
IBTDisagree.
Warren profits from inefficient markets. The Casino 40 years ago would have sold you $1.00 for $0.50; they make that same offer today; and, the aggregate opinion will again be wrong 40 years from now.
Lever folly with a little insurance float and results will prove satisfactory.
Todd... Are you taking notes?
No, 'non-public' means information only known to the officers of the company.
Not limited to "officers" snowball. "Little people" often know more and are equally liable.
If by, "little people", you mean directors and/or people owning > 10% of their stock, yes.
Any examples of a non-manager (we have to draw a line somewhere) being busted?
Or should I be hitting up cashiers for material info?
Anybody employed by the company that has material information, picked up in the course of that employment, that is not publically available. So it could be an administrative assistant, an analyst, an accountant, an engineer, a lab worker, anybody. Very important operating information is mostly gathered at the top but is generated lower down the org chart.
IMO, observed store traffic is public information information because it's available to anyone willing to make the effort to gather it.
Exactly. The key is in Bruce's observation that foot traffic is not necessarily equivalent as sales volume. Now if the firm bribed the manager of each store to provide sales figures at the end of each day, that would definitely be inside information and both parties could be prosecuted. But this is not the scenario described.
As an individual I obviously don't have the data gathering and analysis capability of a big house. Their size provides many advantages that I must take into account when managing my expectations as a lone trader. It becomes an unfair (and illegal) advantage when it results not from their greater resources, but from their access to information specifically denied to me.
Well said. What I described is definately not anything that is wrong. Just good research. But I wonder if all of the action of the last few days does not lead us into this direction.
My point is this is not a level playing field.
I agree that it just good research which is why I'm thinking these SEC arrests are just a bit of a distraction. I think there may be bigger fish to fry.
Working in tech there are a few things I look at like press releases, patent filings and changes to home pages. The most telling though is who they are recruiting - usually a big tip into where the company wants to go and/or what the weaknesses might be.
Edit: all of the above is available in the public arena.
Bruce,
We have already passed a non-level playing field---many years ago. When your Republican pal Phil Gramm sucked all the resources out of the SEC. If not before that. You lived this stuff with Boesky and Michael Milken. Strange when it's your buddies sitting at the next trading desk rigging markets how short your memory is Krasting. And if you call what Steve Cohen is doing "field research" then I would call your analysis "intentional misleading of the public". That's only my opinion though.
I just don't understand how Phil Gramm is my Republican pal. Couldn't be farther from the truth. I'm a commie at heart.
As for insider trading, never did it. Not once. Was I wired? Every chance I could. We walk tightropes in the pusuit of money....
just my opinion, based on nothing but instinct, but i find it hard to believe that a guy who lives in a house like this made his money legally;
http://virtualglobetrotting.com/map/steven-cohens-home/view/?service=1
level playing field? I'm having a hard time remembering when it ever was.
Folks - think about this angle. If you were truly getting the inside scoop and knew it was illegal, what is preventing you from also constructing some bottom up data ala the bean counting scenario to put in your files to generate the "trading" decisions that match that inside information?
what you say is absolutely viable, and i'm *certain* it happens all of the time... just from my experience with human-nature.
but, i don't believe the essence of the debate is related to 'getting away with it'... apparently that's pretty easy these days, and sadly accepted in the regulated markets as being OK (vs the 3-card monte guy on the corner). i see it as a debate on the perception of fairness where there seems to be institutionalized unfairness.
No problem -- unless the person feeding you the insider information gets caught and rats you out as part of a plea deal.
years ago merrill IPOed a piece of dog crap called mossimo, a fashion company. I went to a few stores like Macy's and Bloomingdales and asked the sissy that worked there if they were doing well, he said it blew, I shorted the stock from the 50's to under 10. Just lucky because the stores were very close to the home.
Oh you have a brain and know something I dont? No fair! Arrest that man!
Bzzzzt. Busted.
Nice Try though.
IBWA:
In olden days it was called: Investing By Walking Around
Maybe we should just outlaw gambling on securities. What does society gain from this guy's activity? What does he produce? Why is this industry exalted above going to the dog track? Other than having more insight into what dogs might win or lose, what's the difference?
If this were some little sideline, I wouldn't care. But it grew to 40% of the economy. Why should the rest of society be indifferent to that?
> What does society gain from this guy's activity? What does he produce?
On the same basis you could call for a ban on drinking and similar behavior.
People should be allowed to gamble with *their own* money.
and consumer spending is 70% of GDP. A service economy isn't any different than gambling
Good point.
We are a highly leveraged society.
I think of this when I drive down main street of my 125,000 resident town.
As soon as the population went over 100,000 the Chili's and Olive Garden and Second WalMart moved in.
People in $50,000+ vehicles driving from $200,000+ homes both bought with credit on payments using income from a job that may not be there next month and using the credit card to pay for someone else to make them dinner and serve them.
I suppose if the FED hadn't reflated the markets with trillions in debt this game of musical chairs (database dollars) would have ended; but how long can it continue?
Exactly
Exactly.
A+
Non public info, as in you have the inside scoop.
Bruce usually posts some good thoughts/topics. But this one is off-base. He's trying to make a comparison that just doesnt work, and in the process, undercuts his whole argument.
Taking time to do field research like this is not non-public/insider knowledge. Sorry.
if it is, then my observations during my visits to costco for food might qualify as insider activity, eh?
homework differs from "cliffs notes"/plagiarism.