I bought Carnival Cruise (CCL) Today

[TripleB]

I speculate that the market over-estimates the cost of a black swan event for an individual stock. I put my money where my mouth is, and I put some VP money into CCL today, mid-day, at around 14% below Friday's close price.

I posit that CCL will gain 5% or more tomorrow as the market re-calculates damage estimates.

Due to the (a) human nature of overexaggerating both good and bad news and (b) the short time span involved, making it impossible to truly calculate the cost of damage, I believe in most cases, a mini-black swan event that affects a single company will result in an immediate drop followed by a partial rebound the second day (or across the following week).

Of course CCL might drop another 15% tomorrow. I mention this not to suggest you go out and buy CCL (unless it does drop 15% more tomorrow, then it would still be a buying opportunity), but to simply put my money where my mouth is. I made a similar post on GS and made about 5% in a few days.

I'm sure eventually I will be wrong, and I can prove HB right, that going 100% PP is the way to go, and I invite all of you to watch this happen 

[MediumTex]

I hope the trade goes your way.

Let us know when you close it out.

[TripleB]

Update: I traded out this afternoon at about 3% above what I paid for yesterday. I was hoping for a 5% gain, but 3% is good enough.

With this speculation, my concern is more information could come out in coming days that is negative, and bring the stock price down.

My "bet" is really a very short term one, in that the market over-reacts to the initial information on Day 1. On Day 2, the market re-equilibrates once it's had time to process the information and run the financials.

Also on Day 1 there may be Stop-Loss triggers that cause the stock to drop further than necessary based on automated trading.

Day 2 is the slight rebound. Day 3 might bring new bad information. It's unlikely the market is still figuring out the problem by Day 3, so the "free money" train has already left the station.

Obviously, it's not "free money" because there's still substantial risk in the trade, however in my belief, on a risk-adjusted basis, it's "free money" compared to trading a single stock on any other day.

I'll take my 1 day 3% return and be happy with it. I can effectively put that money back into cash for the rest of the year and say the "cash" earned 3%

[murphy_p_t]

i tried something similar, adding to some of my uranium miners after the Japanese event last year...I had waited a few weeks before getting in...i'm still waiting to break even.

was looking @ AEM recently. they had to close a mine recently...stock was down sharply the day announcement was made...needless to say, I'm glad I didn't go for that one.

[TripleB]

i tried something similar, adding to some of my uranium miners after the Japanese event last year...I had waited a few weeks before getting in...i'm still waiting to break even.

was looking @ AEM recently. they had to close a mine recently...stock was down sharply the day announcement was made...needless to say, I'm glad I didn't go for that one.

I hate to come across sounding like an "expert" because I admit there are no experts in speculation. Here's my interpretation of why your bet is different from my bet:

1) My bet focused on a black swan event of a single company. Yours was of an entire sector.
2) I went in on Day 1 and got out on Day 2. You went in on day 15+.
3) The black swan event you invested in did not have complete information revealed on Day 1. It took a long time for information to be released.

Compared to CCL:

Single company involved so there's less confounding factors.

The event had complete information on Day 1. We knew how many people died. We knew the cost of the boat. We knew the value of the insurance coverage.

What we didn't have on Day 1 is interpretation of the information. The market is efficient, but it takes time to estimate the liability of a lawsuit involving thousands of people. There's no excel spread sheet on the analyst's laptops that lets you plug in the number of deaths, number of injuries, nationality of passengers, etc and spits out an estimated cost of the future lawsuit with a nice sensitivity analysis.

Doing something with the information takes time. I'm sure there were people working overnight doing calculations.

Another example of a Black Swan event that would be bad to invest in, is the BP oil spill. The information on Day was not complete. No one knew how much oil was spilling. No one knew when it was going to stop. It wasn't a matter of inefficient interperative ability of the market. It was a matter of uncertainty.

The reason I got out of CCL today, on Day 2, rather than trying to ride it out a bit more, is because new bad information could be released tomorrow. In this case, I'd estimate that 80%+ of the pertinent information was available on Day 1. That doesn't mean we can't find out the Captain of the ship tested positive for heroin, or a 15 year old female crew member stepped forward and admitted to having sex with the Captain while the ship crashed. (Both of these would drive up the cost of the lawsuit, making it more likely to have a ruling against them).

Additionally, the Day 1 Black Swan event triggers stop-loss orders to fire off, causing a snowball effect downwards. By Day 2, people are back to manually looking at the stock and have interpreted the information and it adjusts slightly upwards.

If I had to bet, I'd be willing to bet that 51%+ of the time, in a Black Swan event of a single company, where 80%+ of the information is known on Day 1, the stock will rebound on Day 2. And if it happens 51%+ of the time, then someone invested in enough Black Swan events, they are getting a "free lunch."

I made about 4% in a few days time back around 2008 in muni bonds during a similar Black Swan type crash. Hedge funds had piled money into muni bonds and experienced a margin call on a competing investment. They dumped billions of dollars of muni bonds in the market, causing the price to drop 4% in one day. It was an artificial blip caused by financial inefficiencies of the market.  I capitalized on it, and the muni funds regained their position within a few days. There were a bunch of articles on the Wall Street Journal about it... however by the time the articles came out, the market already rebounded. I just happened to be paying attention at the right time, and bought MUB, and Muni Bond ETF and made a similar "lucky" deal as I did with CCL.

Most of my money is in the PP but it's fun to think outside the box with the VP.

[murphy_p_t]

excellent analysis, TripleB.

just curious, what percent of your total portfolio (PP + VP) did you allocate to this speculation?

[TripleB]

excellent analysis, TripleB.

just curious, what percent of your total portfolio (PP + VP) did you allocate to this speculation?

About 5% of my total portfolio (PP+VP combined).

Nothing too exciting. The market did about 1% today so I beat the market by 2% with 5% of my portfolio for a whopping 1/10% total portfolio gain.

To me it's more of an intellectual pursuit. I believe I discovered an inefficiency in the market, and I wanted to make it more interesting by putting some money on it.

Primarily, I do this every so often (like in the Muni Bond Black Swan event I described above), because the few times I did notice an inefficiency, and I didn't capitalize on it, I felt awful afterward.

From a psychological standpoint, I'm personally more averse to missing an opportunity that I identify than I am to losing money in a position I am wrong in.

A few weeks back I had the idea (And posted about it on this forum) that the 3 big banking stocks BAC, WFC, and C would do amazing this year, due to Dodd Frank laws forcing smaller banks out of the market, and allowing the big 3 to capitalize on their departure.

I didn't act on it. I watched BAC go up 15% combined over the next few days after making that post. C went up similarly. I felt sick to my stomach every day I looked at the market to see that I was correct, but didn't act on it.

Suppose I bought BAC and it went down 15%. I could easily justify that because I'm holding onto it for the long term, knowing that BAC will do well over the next 18 months, so a short term loss isn't a problem. I could live with that. I can't live with watching it go up 15%.

You might argue, "But BBB, if BAC did go up 15%, and it was an 18 month investment for you, then why would it really matter what happened in the first 3 days of owning it?"

The answer is that on my intermediate term speculations (12 months+), I give myself a short-term buyout "clause" whereby if the investment does incredibly well over the first week, compared to the market, I ditch it. Even though I intended to hold BAC for 18 months, if I made 15% in 3 days, I'd sell it and be happy with a 1500%+ annualized profit (obviously I can't make 15% every 3 days for the whole year, but extrapolated out, and that's what you get). I was really only hoping to make 25% to 30% over 18 months so if I can make 15% in 3 days, I'm out the door. I don't get greedy.