Monday, May 9, 2016

A Third Grade Logic Test Failure

May 4, 2016
The Market Ticker: Chanos, Valeant, and Math

I just saw an utterly amusing "interview" on CNBS with Jim Chanos in which he defended continuing to be short Valeant.

The problem is that his argument doesn't pass the third grade arithmetic test.

And why is that?

You can have all the conviction you want but the fact of the matter is that whenever you have managed to get 82% of the maximum return possible out of a trade you are a damned idiot if you don't take the money.

Logic dictates that if Chanos is a damned idiot to continue to sell the stock, then I am a damned idiot not to buy that stock. I did not buy that stock when given the chance. Therefore, I must be a damned idiot. That's what logic says.

Further, third grade logic suggests that we have just found a sure thing in a market with no sure things. We simply buy any stock that is 82% off of its highs. We'd be damned idiots not to do so.

Valeant trades at $28 and change as I type this, down from $34 and change last week. So what went wrong with the third grade math test? The stock market doesn't care where we've been. It only cares where we're going. Perhaps Chanos is not an arrogant damned idiot after all. As Warren Buffett once said, if past history was all there was to the game, the richest people would be librarians.

In my opinion, Karl Denninger's argument didn't and doesn't pass the third grade logic test. There are no sure things in the stock market. Saying that you'd be a damned idiot to sell a stock is no different than saying you'd be a damned idiot not to buy. It's just two sides of the same coin.

When it comes to the stock market, there are no sure things. If you ever think you've found a table pounding screaming bargain, for example, then be very careful. You may shortly become a damned idiot.

Where will Valeant go from here?

To paraphrase a favorite quote, better to remain silent and be thought a damned idiot than to speak out and remove all doubt. ;)


Stagflationary Mark said...

Just to be clear here, I have absolutely no opinion on what the fair price for Valeant stock is, other than to say that the market thinks it is $28.06 (today's closing price).

I have no desire to attempt to figure it out either. How much time and effort would I have to put in? It's a complicated stock, to say the least. I have no confidence that I could be smarter than the market on this one. None. So far, Chanos has been a lot smarter than the market on this one though. It would take a lot for me to want to bet against him, perhaps even a lobotomy. ;)

Further, I'm frugal. I like value. I don't just buy everything I see that's 82% off though. If I did, I'd be broke. I'd be stopping at every yard and garage sale cleaning my neighbors out.

Oh, look! A used Twisted Sister cassette tape! 82% off! A bargain at any price! Woohoo!

We're Not Gonna Take It! Sing with me! Never gets old! Hey, where are you going? There are other songs on it too! Come back! Let me play them all for you! No? I've got some Neil Diamond on 8-track tapes! Picked them up last week at an estate sale. Real cutting edge stuff! What's it going to take for you to be my friend? ;)

Nick Rivers said...

Crazy Karl is like Mish in my book. They both make some good points but inevitably run off the rails and arrive at the same old illogical conclusions based on personal biases. As if there is no other possible outcome.

It wouldn't bother me if they presented their conclusions as opinions. But no. Their inescapable "conclusions" are based on the iron laws of arithmetic or, better yet, the mysticism known as Austrian eCONomics (GOLD!!!!!).

And they really know their "history" too!

Stagflationary Mark said...

Nick Rivers,

I enjoy reading both of them, but in my opinion, you're right.

There have been more than a few WTF moments. You might enjoy this one.

Mish: Running a Car on Saltwater

I am not a physicist so I simply do not know. But I am convinced that this is both a new method and not a hoax. Proof that it is not a hoax are the patents given to the process. Here is a list of John Kanzius Patents. As best as I know, not a single patent has ever been erroneously given to the maker of a perpetual motion device.

As one with a physucs degree, one who has a patent, and one who holds high standards for proofs, I had to stop reading Mish for a few months after I stumbled upon that. ;)

Stagflationary Mark said...

1. Not knowing should not convince.
2. Patents are not proofs.
3. There have been many patents granted for perpetual motion devices. Many.
4. Water is a waste product of combustion. It's like trying to power a vehicle on ashes instead of burning wood. It's why firefighters use water to put out fires.

Stagflationary Mark said...

Patents for Unworkable Devices

Many persons think that you can't get a patent on an unworkable device. That's not true, as these examples show. This is only a small sampling of the inventive looniness of restless minds.

Nick Rivers said...

As one with a physucs degree

I'm sure you meant physucks. Seriously, nobody majors in physics.

As for for Mish's car, that's amazing. Maybe it uses high calorie saltwater!

Stagflationary Mark said...

Nick Rivers,

High calorie saltwater! Hahaha! It's bad for your heart, it's bad for your heart, and it rusts your underbody. Um, of your car. ;)

You sound like my uncle. When he heard I was majoring in computer science (double major) in the early 1980s, he dud not approve. Said programmers were a dime a dozen. Years later, I sure showed him... a picture of Bill Gates. ;)

Stagflationary Mark said...

As a side note, I wanted to be a computer game programmer. The physics degree was therefore actually very useful. :)