February 11, 2012
I want to make you aware that you are trading options in a game that is also being played by
high-frequency trading supercomputers. When you make a mistake and think that buying a PUT is like
selling a PUT, there is a supercomputer on the other side of the transaction that is not making any such
mistake. I have been trying to get you to play FreeCell with the available programs which record every
move and also provide you with the ability to see if the game can be completed successfully from the
current position. You have called this cheating. I know full well why you call it cheating and I also know
that using a slide rule was considered cheating at one point in time in the past.
So, why do I want to have you 'cheat' like I do? It is an awareness issue. As you calculate with a slide
rule, you get a feeling of two things. You see how mechanical devices can assist the speed at which you
multiply and divide as well as do logs and sine cosine functions. In one sense, you are aware that it
diminishes your ability to "do it all in your head". Then you move on to hand-held calculators and you
realize that this is even worse "cheating", because when you used the slide rule, you had to keep the
orders of magnitude in your head as you proceeded. Slide rules don't have zeros or multiple zeros.
You then accepted that you might make mistakes by dropping or inserting zeros as you typed numbers
in to the calculator. Without having to carry the orders of magnitude in your head, you lost a talent that
you had had at an earlier time. Cheating has its costs and benefits. So, you ask, what is the benefit of
cheating at FreeCell? I will tell you that by performing the act of playing with a machine which can offer
assistance to you, you are preparing yourself for the future that lies ahead. You are making yourself
aware that the machines can help you to solve the game--but wait--what else do you discover? You find
out that the machine only has a certain kind of smarts. A trial-and-error kind of smarts. It knows the
rules precisely and never makes a mistake. But it doesn't see the clever moves at all. When I get stuck,
I ask the random-thinking computer if it is possible to solve the game and how. It often gives me a 200
move solution to a game to which I didn't see any solution. I back up and analyze the game that the
computer played and see the little side passage in the "game cave". Meanwhile, I also see that the
computer randomly broke and stepped all over the cave formations and wrote grafitti on the walls.
(Okay, I exaggerate). Once I understand the "lesson" that the computer found through random
trial-and-error, I replay the game and reduce it to 50 or 60 moves instead of the 200 or so that the
computer might of discovered.
So what lesson do I learn? I am training my brain to live in the modern world where computers can do
somethings better and humans can do other things better. Why? Because this is the nature of the
What have I learned by doing this when it comes to observing you activities? I see that Bob has
convinced himself that he can play a game of trading options against a computer and win. Even though
Bob has played chess against his computer and found that he cannot beat it, Bob still thinks that he can
beat a computer against the options game.
Let me be more specific. Bob plays options in AGNC against a computer. The house rules are written
by the house, just the way that they are in Las Vegas. In the case of AGNC options, the house trades
them in increments of one-cent and the "gamers" like Bob can only make offers to buy and sell in
five-cent increments. Why? Because the five-cent rule gives the advantage to "the house".
When Blair Hull got started on his trip to being worth one-half of a billion dollars, how did he start out?
He looked for a way to get "an edge." He learned to "count cards" in Blackjack and made mucho bucks
in Las Vegas. Why did he stop? Because they banned him from the casinos.
What did Blair do next? He learned stock options forward and backwards. Then he bought a seat on
the options exchange so that he could be part of "The House". He knew very well from his experience in
Las Vegas that one has the advantage by being parto of 'the house' which makes the rules.
So, what did I do to make money over the last 30 years? I looked for special situations. I found two
"errors" in the options market and took advantage of them to make lots of money. I averaged 32% per
year for a number of years and then switched gears and averaged 52% for 7 years ending in January
2004. At that point in time, I decided that I probably had enough money and needed to spend time
doing other things. Later on, Kyle Young talked me into founding DLIC and teaching the younger folks
the tricks of the trade, so to speak. I really have not done that well trading and when I tried to trade
options in Larry's account, I ended up losing money for him. Given his nervousness, the best thing for
me to do is to keep him invested in AGNC for the next year or two.
Meanwhile John H. plays a magician's game and trys to say that "I knew it all along" while in the
meantime he is losing about 20 or 30% per year in his actual portfolio. When AAPL goes down, he sells
his stock or options and when it goes up, he buys back in. When I attempt to point that out to him, he
calls on social proprietary and tells me that I am being impolite.
I suggested that he would do better following the advice of Adam Bold and his recommendations in
Mutual Funds. John literally snears at me..."Mutual Funds?" he says. Snear Snear Snear but
meanwhile they are making money and he is losing money. He is into magic so he thinks nobody
notices. Larry was convinced by John and wanted John to handle his money instead of me. John
refused. If John were to handle Larry's money, then we would all see that John doesn't know what he is
So here it is, Bob. What is it that you know that the "market" and the "high-frequency trading"
computers don't know? Perhaps you think that the robots don't yet know how to compensate for
dividends in AGNC. Perhaps you don't think that they can anticipate when the secondary issuances will
be made as well as you do. You told me that the stock would or should be going down to $28 after the
earnings announcement. I was buying Monday before the announcement as the price was going down.
I bought for my self and my clients. Did I know what was going to happen? No. Did I know that I could
get better pricing in the after-hours market? No, I didn't. Did I know that the market had already
discounted a dividend drop and that it would drift upwards during the week? No, I didn't. My point is that
you thought that you did...and you didn't. I am telling everyone to simply buy the stock yielding a large
dividend and hold on. If you are getting 17 to 20% at a time when most people see inflation and
deflation is occurring, take it.
I have known you for a long time. You tend to have a negative outlook on things in general. If there is a
slightly paranoid theory, you are attracted to it. Get a gun and hoard gold seems like a reasonable
reaction to what is going on. Reading a tabloid such as Porter Stansberry seems sensible. My question
is how can you make money following a rag that brags of having 17 million viewers of his on-line video
and who keeps talking about this "special day" in 2011 even when it is well into January of 2012. The
guy is making money. The guy is smart. But are you really going to make money following anyone who
has so many followers?
What you need to do is to look for "special situations". Dave Padgitt was office mates with a math
genius and that math genius did special situations and married the beautiful Elizabeth Ferriani. I dated
her once and had her serve my and other friends a gourmeal at her appartment. Wow. Gorgeous.
Anyway, let me tell you that Special Situations are the way to go. When Long Island Lighting was going
to be bought up for scrap using eminent domain, the preferred stock was tanking. I bought it because I
went to the library and looked it up. I found out that a federal law prevents Governors and Mayors from
seizing utilities using the rouse of eminent domain. Later on, it happened again with Edison International
in California. San Francisco was going to take over the part of the utility that was covered by their
municipality and Governor Grey Davis was going to take over the rest. The governor also restricted the
price of electricity purchased "in California" so the Enron traders were shipping it out of state and back
into state to circumvent his rules. It looked like a total mess and it looked like both the common stock
and the preferred stock were going to zero. I bought with both hands. Why? Because the headlines
were written by people who wanted to sell newspapers and I had an ace card in the hole. Nobody in the
newspaper business saw fit to tell anything but the "crisis" and "panic" story. After all, it sells
So, we come up to the present moment. What is the best way to make money?
1. Play with stock options and bet against the high-frequency trading supercomputers who have the
benefit of trading in pennies when you have to trade in nickles.
2. Look for something that the supercomputers cannot fathom at this point in time. What would that be?
If you "cheat" at FreeCell, you get a good feeling at what the computers can do and what they cannot do.
I suggest that you read the book on Excess Heat and discover the new special situation that the
computers are not yet sophisticated to figure out.