Martin Kronicle

Kapoor

For all my Indian friends, you can catch Anil Kapoor in this season of 24. He plays President Omar Hassan, of the Islamic Republic of Kamistan (it’s near Delhi). Crossing over as they say, Kapoor is riding the trend of 24′s success to re-introduce himself to American audiences. You can watch 24 for free over Hulu.com – if you can get a steady internet connection – or at Fox itself.

Americans will remember Kapoor from Slumdog Millionaire: he played Prem Kumar, the host of Kaun Banega Crorepati (Who Wants To Be A Milliionaire).

Trivia:

Jack Bauer likes to borrow actors who’ve been in other “24 meets Bourne Identity”-style films. If you look close, you’ll recognize the actor Akbar Kurtha (below) who plays President Hassan’s (Kapoor) brother Farhad. Kurtha played Prince Meshal Al-Subaai in the film Syriana – the younger Prince who needed “the cats paw” and who took over the kingdom from his father, much to his older brother’s dismay.

Kurtha

Syriana was based on 2 books by Robert Baer. Did you catch Baer’s cameo in the film?

More interestingly, is that Kurtha’s brother in Syriana, Prince Nasir al-Subaai – the older brother who gets blown up in the Range Rover – also had a significant role in 24 too. His name is Alexander Siddig and he played Hamri Al-Assad in Season 7.

Siddig

Tucker Carlson’s new blog The Daily Caller, has picked up my interviews with Bill Dunn. Bill is the Founder of DUNN Capital Management in Stuart, FL.

As important to me, he is also the Chairman of Reason Foundation, the publisher of excellent publication, Reason Magazine, who’s motto is Free Minds and Free Markets.

Memorable Quote (there are lots, but this one is best, from Part II):

“It is very tempting to be driven by the immediacy, but you don’t have any research on the immediacy. You have loads of research on lots, and lots, and lots of the past.” – Bill Dunn

I like the idea of automating your payroll deductions to jack up your retirement savings account, such as your 401k. This type of forced discipline is very helpful, and I’m not putting you on. Sometimes it takes automatic deductions to get you going until you get the feel of it – literally and figuratively.

What I don’t like are the investment choices you’re given to hold your money. All of them are mutual funds and all are long-only. Now, you can model yourself after Gil Blake – and I encourage you to do so. He was featured in New Market Wizards for having masterfully traded his account using mutual funds, so it can be done. But like anything in life, you have to make an effort, you have to persist and be determined.

Here a list of things I don’t like about Mutual Funds. They are the same reasons why you might consider wanting to become a trader – someone who is skilled in risk management. I’m not concerned with debating the salient points of market timing yet…I’m doing that in an upcoming post. Just get your arms around some of these features/characteristics of mutual funds:

- Long Only vehicles

- have to be 75% invested at all times

- they are over-diversified: you need 12 stocks to be diversified. Why own 60+ stocks inside a fund – one fund? How many funds does one own?

- no liquidity b/c of forward pricing

- no risk management b/c of forward pricing

- leverage of 2:1 after 30 days in taxable accounts, none if in a retirement account

- no transparency

- fees can be less than clear

- 7 out of 8 managers underperform their benchmarks

If nothing else, you should be encouraged that these are professional managers we’re talking about. I see these bullets as handicaps.

Answer this question: How many people do you know who have become wealthy by investing in mutual funds?

The Intro Course on Commodities is now available online. You should register early to get into the first class.

I received a lot of emails to my post yesterday about the expected value of a trade. Only one person got the correct answer to the game of flipping 2 Aces off the top of the deck – what I’ll call the Game of Aces.

Now I can easily publish the correct answer, but that would rob you of an aha moment I believe, so I’m not going to do that. Refer to my post a while back about the math in Michael Covel’s movie Broke: The New American Dream.

In that post, I showed you the math behind the playing the Roulette Wheel and why you’d never want to play it, despite the fact that you might get what economists call Economic Utility – pleasure or fun out of playing a game. For most serious traders though, losing money is not fun. Unless, of course, the trader gets more out of being a martyr or playing the role of victim, then it’s a different kind of game.

Anyway, to recap the Roulette Wheel, you have 38 spaces to bet on: numbers 1 through 36, a 00, and the blank space. It costs $1 to play and the winner pays $35.

Most of the answers I got from the Game of Aces, said “Yes, you play it all the time because you get $100 for your $1 bet, so that’s 100:1 – who wouldn’t want that all the time?” I think people get conditioned by the analysts on TV who suggest that “XYZ stock can go another $15 before we’d be worried.” They see the $15 as the payoff, but don’t see the downside risk.

What everyone left out was the frequency with which that result occurs. [For all the Lottery players, sit up straight and read closely.]

The payout ratio of the bet is irrelevant if the frequency with which it occurs is negligible. In the case of the Roulette Wheel, the payout ratio is in fact 35 to 1. However, the frequency (probability) with which you win per $1 bet is 1/38, or about 2.63% of the time. The other 97.37 % of the time you will expense your $1 bet. Playing this game with a fixed-budget constraint will surely make you Broke.

That’s why all the states in the Union market the living hell out of the Lottery as such a dreamy proposition: they sell you on what you could win, not the rarity of the occurrence. You’ll never win.

Spin the wheel 10,000 times (for $10,000 in bets), and on average you’ll get these results:

263 wins for $35 each = $9,210

9,737 losses of $1 each = ($9,737)

What’s compelling is not the 35:1 payout: it’s the frequency with which each occurs. So, if you’re lucky, and you come to the wheel and make $10,000 worth of $1 attempts, you’ll go home with $9,210 having lost $527 – the house’s edge. If you actually calculated the mathematical expectation from playing the Roulette Wheel, you’ll know it is – (1/19), which is -.0526 per attempt. Multiply that by 10,000 attempts and you’ll get approximately negative 527.

Think about this in the Game of Aces example from yesterday, and think about it next time you play Lotto. Don’t make a single trade with real money until you have an idea of how your thoughts manifest into winning and losing trades, and the frequency with which they occur. If you don’t care about this, you may be drawn to trading for the action, and not to make money.