It can work for a very long time, long enough that its practitioners start believing they are invincible when they aren't.
More after the jump but first Bryce Elder with Markets not Live at FT Alphaville:
Damn, Son.
SoftBank’s quarterly operating profit fell 99 per cent after its huge Vision Fund recorded a $2bn loss, as the Japanese technology group came under pressure from US activist fund Elliott Management.
....MUCH MORE, quite brutalThe Tokyo-based conglomerate said on Wednesday that operating profit for the October to December period was just ¥2.59bn ($24m). Earnings from its telecoms unit and other businesses helped offset unrealised losses at the $100bn Vision Fund, which has been hit by a soured investment in US office-sharing company WeWork.Meanwhile, reports suggest that Masayoshi Son has scrapped the $108bn fundraise target for his Vision Fund 2 in response to investors finally wising up. Softbank shares rose overnight, needless to say, because it was easier to read US approval of the Sprint and T-Mobile merger as being worth $10 about a share than wander through its Geocities circa 1999 style results bumf. Want to see UBS’s Softbank sum-of-the-parts chart? Here you go:...
See also:
November 2019
SoftBank’s problems aren’t so surprising if you understand this one thing about the company
Throughout the manic phase of SoftBank and the Vision fund there was almost no mention of the fact that at the start of this century Masayoshi Son was the richest person in the world:
"But Son’s fairytale didn’t last long. After the dot-com bubble burst, his company Softbank’s shares plunged 75 percent in two months and was 93 percent lower by the end of 2000.We had a couple posts around the time of the above that touched on the craziness but not the past history:
The business almost went bankrupt and Son ended up losing USD 70 billion, the highest ever recorded financial loss for a person in history."
—MoneyControl, October 13, 2017
SoftBank In Talks To Acquire U.S. Treasury
Sprint, T-Mobile Plunge: SoftBank Calling Off Merger, Will Use Cash to Buy Canada
See also semi-variance, after the jump....
*****
....When the swings are as big as Son's are you need a bankroll that is
gigantic. Even if you are right and have an edge, the natural variation
can kill you and the last downturn will be the last downturn....And June 2, 2019
"Something is not quite right with SoftBank"
Additionally, SoftBank investee WeWork was out looking for a few billion dollar line of credit.
Shades of another disruptor, Sam Insull, leverage at the holding company level, leverage at the operating company level, leverage all the way down...
The leverage in all this, with Softbank lending money to Son and other Softbank employees to invest in Vision Fund 2 and the margining of assets is eerily familiar to folks who know the Insull story.
Some related links:
"Is semi-variance a more useful measure of downside risk than standard deviation?"
"The Equation that Will Change Finance"
What Proportion of Your Bankroll Should You Bet? "A New Interpretation of Information Rate"
Gambler's Ruin and Bet Sizing
Repost: Dreamtime Finance (and the Kelly Criterion)
I've been meaning to write about Kelly for a couple years and keep forgetting. Today I forget no more."How did Ed Thorp Win in Blackjack and the Stock Market?"
In probability theory the Kelly Criterion is a bet sizing technique used when the player has a quantifiable edge.
(When there is no edge the optimal bet size is $0.00)
The criterion will deliver the fastest growth rate balanced by reduced risk of ruin.
You can grow your pile faster but you increase the risk of ending up broke should you, for example bet 100% of your net worth in a situation where you have anything less than a 100% chance of winning.
The criterion says bet roughly your advantage as a percentage of your current bankroll divided by the variance of the game/market/sports book etc..
Variance is the standard deviation of the game squared. In blackjack the s.d. is 1.15 so the square is 1.3225.
As blackjack is played in the U.S. the most a card counter can hope for is a 1/2% to 1% average advantage with much of that average accruing from the fact that you can get up from a negative table.
Divide by 1.3225 and you've got your bet size.
It's a tough way to grind out a living but hopefully this exercise will stop you from pulling a Leeson, betting all of Barings money and destroying the 233 year old bank.
Markets, Risk and Gambler's Ruin
Journal of Investment Consulting: Interview With Edward O. Thorp
Finally, another rule of life:
Cassandra's (Not so) Golden Rules About Investing (And Not Investing)
#21. NEVER double-down (except when you have material non-public information and deep pockets) or if you're Ed Thorp, or if you're playing at The Martingale Room.
Don't double down, double up.
