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Sep 142015

Who will win the 2016 election?

By |September 14th, 2015|Blog|Comments Off on Who will win the 2016 election?

Who’s going to win the 2016 election? ElectionThere are a number of ways to figure this out.  Some people look at polling data.  Other people build models based on theories they have about how elections work.  Some folks might argue that its nearly unpredictable, because elections should be nail bitingly close.  In my favorite article on the subject Mickey Kaus argues that elections should split nearly 50-50 going for as long as we have a two party system.  The basic argument here is that each party wants to win elections and stay true to its philosophy.  Therefore, each party moderates their platform just enough to convince exactly the necessary number of people to vote for them.  This is referred to as median voter theorem.  In my view, none of these are the best way to determine who will win the election.

The Prediction Market

People are biased. They also let their biases influence their view of reality, especially if this view has no consequences. A twitter analysis showed that pundits are correct 47% of the time. People somehow become remarkably less biased when they are responsible for their predictions.  Rather than looking at polls maybe you want to see what a bunch of people who actually have something to lose thought would happen.  Enter the prediction market, in this case PredictIt.org.  In a prediction market people buy and sell basically bets on how a particular political event will turn out.  This has an advantage over regular sports-betting or political-betting in that odds aren’t set by a single experienced person.  Instead odds are determined by the market.  PredictIt makes this simple and pays out $1 to each holder of a correct bet.  Therefore, all bets trade at fractions of a dollar.  These fractions correspond to the percentage chance of the bet coming true.  If Hillary Clinton has a 50% of winning the presidency, then a rational person would be willing to pay no more than 50 cents for the right to receive $1 if she wins.

Who will winPredictit

On your first pass you would think that it appears that Hillary Clinton is most likely to win both the Democratic nomination (63% chance) and the presidency (42% chance).  The person with the second best chance to win the presidency is Jeb Bush with 26%.  (Add those together and ponder that depressing fact.) Particularly astute observers will note that there’s something funky going on here.  If you add up the chance of each candidate winning you end up with more than 100%.  Shouldn’t this be impossible?  Shouldn’t astute traders bet no against everyone in order to collect a risk-free profit?

The twist

The answer is that an arbitrageur needs to get paid for their time and risk.  If they make a bet today they still have to wait until November 2016 in order for the bet to pay off.  If you assume that they need to get paid 10% on their money for their time these numbers start to make a great deal more sense.  Take the “Buy No” chance and multiply it by 10% to get the opportunity cost of holding the contract.  Then subtract this number from the “Latest” value.  Suddenly all of the values sum to nearly 100% as expected.  After making this adjustment, we realize that the standings are:

  1. Hillary Clinton (36.4% chance)
  2. Jeb Bush (18.5% chance)
  3. Bernie Sanders (10.9% chance)
  4. Donald Trump (8.4% chance)
  5. Marco Rubio (7.4% chance)
  6. Joe Biden (4.3% chance)
  7. John Kasich (3.1% chance)*
  8. Ben Carson (3.0% chance)
  9. Carly Fiorina (2.9% chance)
  10. Scott Walker (0.7% chance)
  11. Remaining ~7 billion people (4.6% chance)

As always, a number is useless without a +/- uncertainty attached to it.  In this case the uncertainty may be estimated as the spread between the buy and sell for each bet.  For example, you can buy Hillary Clinton to win at 47 cents, but only sell it for 44 cents.  This implies an uncertainty of 3%.  (So, in honesty I have too many digits of accuracy on these guys).

Last thoughts

Just a few comments, first I’m firmly convinced that this is the “best guess”.  These are folks who have real money on the line.  Fortunately if you disagree, suppose you’re Nate Silver and you think Donald Trump has a substantially lower chance, you have every opportunity to put your money where your mouth is.  (Good luck with that!**) Second, its a little relaxing to see that there’s a 80.7% chance that someone not-crazy will get elected.  I sleep a little sounder knowing that.

*You may notice that I removed Chris Christie.  While the last trade for him took place at 12 cents the current bidding is between 8 and 4 cents per share.  The new bid-ask represents the most up to date information in illiquid markets. 

**Disclaimer: You’ll probably lose all your money if you even think about this.  Yup, there it went.

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Sep 112015

How to Start a Business Part II (In Colorado)

By |September 11th, 2015|Blog|Comments Off on How to Start a Business Part II (In Colorado)

91e4091481414cb08833daad2898d54cWell, I took those SBA courses.  The “legal requirements for small business” seemed pretty useful.  The most salient point to me, which I hadn’t realized was that getting set up for sales taxes looks like a pain.  I don’t believe that sales tax will have to be charged on a tutoring business, but this is a really easy thing to forget if your current experience selling stuff simply involves eBay.

Step 3: Choose a location

This is fortunately a simple step for me.  I’ll be operating entirely at a location determined at the time of tutoring.  For you this may not be so simple.  Unfortunately, it’s an area I have little knowledge about, but if anyone out there would like to chime in, well, I guess I’d just find it pretty darn helpful.

Step 4: Finance Your Business

The rules for financing a business seem quite complicated.  I’ve read a very useful article that seem to indicate that raising funding by selling shares of the business could cause trouble with the SEC (seriously read it, its super interesting).  The SBA website seems to largely concentrate on loan products that it offers.  Today, given a prototype product, one can always look into using Kickstarter or GoFundMe.  Fortunately, my hypothetical business doesn’t require a great deal of funding.

Step 5: Determine the legal structure of your business

There are basically five different ways to organize a business in a legal sense:

  1. Sole Proprietorship
    • If you don’t incorporate the business, then this is you.  You will be personally liable for the business’s debts and actions. In other words, “Quantum Tutors” gets sued or goes bankrupt I’m on the hook.  The advantage here is that filing taxes is as simple as it gets.  You just pay taxes on your profits, though you have to make sure that you also pay the “self employment tax“.  The simplicity has to be weighed against the possible liability.
  2. Partnership
    • If you have a partner you can’t do a sole proprietorship, but this is basically the sole-proprietorship for when you’re no longer sole-o (pronounced: solo) (I’m pretty sure this doesn’t even really qualify as a joke).  You do have to additionally file 1065 (return of partnership income).  This just tells the government how much money the partnership made.  You also need to send partners a form (called a K-1) that tells them how much money they made, so that they can appropriately calculate the taxes they owe on those profits. General partners (people who manage the business) are liable for the business’s debts and actions.  Limited partners (if it’s a limited partnership) are not liable.
  3. Corporation (C-Corporation)
    • This is the first type of business where profits aren’t simply passed through to the owners for taxation.  Here the business calculates its profits, then pays taxes (a progressivish tax that moves from 15 to 39% and then mysteriously settles in on 35%) on those profits to the IRS.  When the corporation then pays those profits out (called a dividend) to owners (called shareholders) the shareholders have to pay an additional tax on the dividend.  So needless to say, this seems just terrible.  It does provide liability protection however.
  4. S Corporation
    • If you meet certain requirements (easy ones for a small business to make) like being a domestic corporation and having less than 100 shareholders. The benefit is that this structure passes losses and profits through to you for paying taxes on (no double taxation!) and also provides liability protection.  The S Corp is a legally distinct entity from you.
  5. Limited Liability Company (…or So That’s What LLC Stands For!)
    • The rules for this vary from state to state, but the important bits for me are that it is quite similar to the s-corp in terms of the ability to pass through taxes (though this can vary from state to state) and also does what it says on the tin. (Limits liability for those of you too scared/wise to click on a tvtropes link)

For my tutoring business I will certainly go with a Sole Proprietorship as all of the other structures simply have advantages that aren’t important for the sort of business I’m starting.  Anyone else working on a business?  Have you gotten stuck anywhere in the process?  Think of any uses of a C corp that a small business might actually care about?23433414

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Sep 92015

Google Finance Function for Sheets and a Merger Arb Sheet

By |September 9th, 2015|Blog|Comments Off on Google Finance Function for Sheets and a Merger Arb Sheet

Alright, I know that I owe you part 2 to the how to start a business series. I am far more excited than I have any right to be about what I just learned about google sheets and google finance.  If you don’t know what google sheets is, its part of google drive, which is a cloud based storage service.  (Perhaps you’ve heard it called google docs?)  If you’ve never heard of, nor used this, just get a gmail account and start messing with it.  I do a great deal of collaboration via Google drive and I’m a big fan.  If you’ve never used Sheets before it is Google’s answer to Microsoft Excel.  (If you don’t know what Microsoft Excel is, I don’t even know what to say.  I’m not even sure whether you’re too young or too old.  I guess there’s an explanation available here.)  Google finance is a service that gives information about stocks.  Being able to combine the two is fun only if you’re a gigantic nerd that spends his/her time data crunching his/her investments.  Maybe you wouldn’t like it if you hate money, I don’t know.

Get to the point

Google Finance Example

Look ma, I can cut and paste!

The tool basically acts like a function.  You type in “=GOOGLEFINANCE”, then put some parameters in parentheses and you’ve done it.  The first parameter needs to be a ticker, and the second parameter tells the function what information you want about the ticker.   For example, lets say I want some information about Exxon Mobil.  Exxon Mobil’s ticker is XOM.  The information I want is the current price.  I would go into google sheets and type:

=GOOGLEFINANCE(“XOM”, “price”)

and that’s it.   After pressing enter the spreadsheet will update with the price.  Currently the different attributes you can get about stocks is quite limited.  Mostly this might be useful for investors who invest on the basis of technical analysis.  If you’re really a wizard at this you may be able to use it to give yourself automated buy/sell recommendations.  (I say wizard in part because we all know technical analysis is make believe.)

But I suck at spreadsheets

MergerSpreadsheetWell fear not!  I whipped one up recently that I thought was useful.  Linked is a copy of a spreadsheet I use to track different mergers and the possible profit which can be made by buying into the merger.  Don’t edit the greyed out columns.  The white columns need to be filled in by you for future mergers.  This is an example, not a recommendation. If you buy any of the stocks listed on this spreadsheet, you’ll probably lose all of your money, your spouse will leave you, and you’ll inadvertently start the apocalypse.  Let me say it again by paraphrasing Penny Arcade**:

If you buy any of these stocks because they are listed on this spreadsheet – I will kill myself*. And when my tainted spirit finds its destination, I will topple the master of that dark place.  From my black throne, I will lash together a machine of bone and blood, and fueled by your hubris this engine will bore a hole between this world and that one.  When it begins you will hear the sound of money burning – as though from a great distance.  A smoking orb of nothing will grow above your bank, and from it will emerge a thousand starving crows.  As I slip through the widening maw in my new form, you will catch only a glimpse of my radiance before you are incinerated.  Then, as tears of bubbling pitch stream down my face, my dark work will begin. I will open one of my six mouths, and I will sing the song that ends the Earth.

*No.  I’m not actually going to do that.

**Maybe if I read fewer webcomics and worked more I’d be a multi-thousandaire instead of a regular thousandaire

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Sep 72015

How to start a business Part 1 (In Colorado)

By |September 7th, 2015|Blog|2 Comments

HahaBusinessAh labor day, what a great day to learn how to start a business. Everytime I’ve ever thought, “gee, I should start a business” I’ve had a great deal of difficulty getting started.  All of the information on the subject seems to be from folks who have done it so many times that they leave out details that feel important to me.  There seems all of this information on how to start a business but its all like, “Decide what to do”, “Do market research”, and then there’s like one little note on the actual legal process of starting a business. In this series I’m going to start an actual business.  It’ll be a dummy business.  We’re going to actually detail the whole process.  I’m going to base the series off of the SBA’s 10 step plan.

Step 1: Write a business plan

A business plan is an essential roadmap for business success. This living document generally projects 3-5 years ahead and outlines the route a company intends to take to grow revenues. -From SBA’s website

Before starting a business you should probably sit down with an excel spreadsheet and start making conservative assumptions about costs.  Make sure that you’d actually make money with conservative assumptions.  Preferably start with a business that doesn’t have any start up costs.  This seems to be the safest approach.  For example, I do a lot of tutoring as a contractor through WyzAnt.com.  For this series I’ll be starting my own tutoring business.  For such a simple business going through this whole process is probably unnecessary, but the real point here is to learn.

Sample Business Plan

The one paragraph business plan: “Quantum Tutor” (working title) will be a business which specializes in tutoring upper division physics students in their courses.  The knowledge required is very specialized and there are few available tutors with the requisite training.  I will therefore charge a premium to typical tutoring services ~$50 per hour. This will be a small side-gig and I expect to do no more than ~5 hours a week of tutoring.  Therefore the expected revenue in the first year is $12,500 at maximum.

If I needed investors, which I don’t, this would be my “elevator pitch”.  Simple, straightforward and enough to get started.

Step 2: Get Business Assistance and Training

The SBA website has a bunch of free training and counselling services.  Between now and Wednesday I plan on taking the “Legal requirements for small businesses course” and the “Customer Service” course.  Both are available on the website under step #2. Both are expected to take 30 minutes. Go ahead and find some courses that interest you and start working on them, and maybe between all of us we can cobble some useful knowledge together.

 

 

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Sep 42015

So you want to learn economics

By |September 4th, 2015|Economics / Politics|Comments Off on So you want to learn economics

Basic-Economics-Large

Savings on cover design passed on to the consumer no doubt.

It takes considerable knowledge just to realize the extent of your own ignorance.  

-Thomas Sowell

The easiest way I’ve found to learn any subject in particular is simply by reading books. Reading lots of books.  If you want to learn something about economics the best place to start is Basic Economics by Thomas Sowell.  This is a very math-lite introduction to economics, and is designed to be understood by the layperson (ie me). I read this book in about three sittings.  I found it to be as engaging as popular science books such as A Brief History of Time or Guns, Germs, and Steel, so if you’re into that sort of thing this’ll be right up your alley.

Plot Summary

Economics is not simply a topic on which to express opinions or vent emotions. It is a systematic study of what happens when you do specific things in specific ways. In economic analysis, the methods used by a Marxist economist like Oskar Lange did not differ in any fundamental way from the methods used by a conservative economist like Milton Friedman. It is these basic economic principles that this book is about.

You are a citizen, who doesn’t understand economics.  Thomas Sowell makes you understand it.  Through the use of intuitive examples and clear language Thomas Sowell discusses what forms the underlying basis of economics.  This often focuses on the role that prices and incentives play in determining how scarce resources are distributed and consumed.

Politics

The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.

Basic Economics covers a number of political issues.  Thomas Sowell is a conservative economist.  The book supports free-market economic policy.  Mostly it does this by using examples to show why the price system and incentives matter.  Sowell goes on to show that time and time again the consequences of most political policy are often far different than the intentions of that policy.  Mostly Sowell is pointing out clear cases where virtually all economists agree with the free-market point of view.  For example, an early chapter in Sowell’s book deals with price controls.  The vast majority of economists would agree with a general statement such as, “most price controls cause more problems than they solve.”

A short explanation of price controls might be useful here.  For example, when there is a price ceiling set on, say bread, in ancient Rome some producers decide to stop producing bread.  Since it is cheaper some consumers use more bread, buying it instead of other foods.  This mismatch causes a shortage.  Everyone as a whole is worse off because there is less bread to go around, and more people are using it when an alternative would do as well.

Now Sowell uses actual real world examples, rather than ones he made up for a blog post.  I think this makes his argument more convincing, though the logic is the same. Sowell, however, fails to identify areas where there is more disagreement among economists.  The minimum wage is a price control and is largely lumped in with other price controls, though there seems to be substantially more disagreement among economists about its overall effects as opposed to price controls on other goods and services.  The arguments he makes are no less convincing for it, but you should know that he may be overstating the economic consensus in a few rare cases.

Overall

Sowell does a great job both explaining how the market economy functions, and what serious problems can be caused by government’s meddling in the economy.  If you’re aware that Sowell is an economist from the Chicago school (read: pro free-market) this is a fantastic book to read.  What I would hate to see, however, is someone read just this economics book and assume that it has vindicated their political opinions.  If this is all of the study of economics you’ve done you don’t get to have political opinions on the subject. (Yes, I know that you are legally allowed to.  Just work with me here.) The opposite of this is even worse.  Anyone considering skipping the book because they disagree with free-market economists are doing themselves a great disservice.  You are probably wrong about a number of things.  Reading is part of how people become less wrong.  Especially reading the work of folks who disagree with you.  Thomas Sowell has a great deal of knowledge to drop on you, and the vast majority of it is consensus in the science of economics as far as I could verify, you’d be seriously remiss to ignore the book because of your political bias. I particularly enjoy the way Sowell emphasizes the power of incentives in this book and I’d like to leave you with my favorite quote of his regarding the intersection of politics and economics:

It is hard to imagine a more stupid or more dangerous way of making decisions than by putting those decisions in the hands of people who pay no price for being wrong.

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Sep 22015

Cheer the crash

By |September 2nd, 2015|Blog|Comments Off on Cheer the crash

SaleStockClearanceSince we had a great deal of market volatility last week I thought this would be a good time to remind everyone that unless you are taking your money out of the stock market soon a market crash is generally go
od news for you.  This is even more true if you are a net purchaser of stocks going into the future.  Every stock is partial ownership of an actual business.  If business goes south, that’s bad.  If just the stock price goes south, all that means is that you can buy the same percentage ownership for a lower price.  You’ve probably heard this before.  Many financial bloggers enjoy pointing it out.  Stocks are on sale, they say.  They’re right.  Market drops are great for net savers, which I hope most of the readership is.  The lower market prices are, relative to current book value and future profits, the better off you are.

What about people who aren’t buying, just holding?

Let’s say that you and a friend make a bet.  Let’s say you think Verizon will do better for investors over the next 15 years, and he thinks AT&T will do better.  You agree to both reinvest your dividends.  The winner is the person with the most money at the end of the bet.  For simplicities sake let’s suppose that the dividend yield of each is exactly 5% rather than the 4.87% and 5.88% that they are currently at.  The day after you make the bet disaster strikes, Verizon shares go down 50% in one day, for no discernible reason and AT&T shares stay flat.  Worse yet, Verizon shares stay down for all 15 years, and AT&T shares stay at basically the same level for all those years.  In fact, both businesses earns the same profits for the next 15 years, and their dividends stay exactly the same.  The only difference is that on day one your shares fell 50%.  Who wins the bet?

Well clearly you wouldn’t be asking if my friend won, so what gives? How is that possible?YearsAfterDrop

You win by a small margin about 1% of the size of your original investment. It was a benefit to you that the stock fell on that first day, and its too bad that it didn’t fall further, because then you might have crushed your friend.  When you reinvested your dividends you were buying twice as much future dividend income as your friend was, that extra dividend income made up for the 50% drop on the first day.  Not only that, but based on a $100 initial investment you are currently collecting about $21 in annual income, while your friend is only collecting about $10.

Bigger crashes are better

If you look closely at the plot you’ll notice the larger drops catch up quicker.  This is counter-intuitive, but true.  The bigger the crash, the better.  If that Verizon stock only fell by 1% you wouldn’t have caught up in time (maybe for centuries).  This is because the lower the stock falls, the higher its dividend yield is.  Since returns are compounded each additional percentage point of return is worth more than the last one. Now all of this only really applies assuming that the market is basically dropping for reasons that are unimportant.  It is quite likely that if a business is doing bad, their stock price will deteriorate.  That isn’t good.  Every stock price deterioration isn’t evidence that a business is doing badly.  This also applies to the stock market as a whole.  I find it very difficult to believe that the actual future expected value of the businesses in the US swung by trillions of dollars over 5 days.  Hopefully, all that happened was that some of your stocks issued dividends and they were reinvested at relatively lower prices.

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