Cyde Weys Musings

Four computer science graduate students recently created fifty playable game prototypes in one semester. Each student worked alone, putting out around twelve games at a rate of one per week. And they were responsible for not only the programming, but also the graphics and sound. That is quite the Herculean effort, and their results are impressive. I’ve seen that Swarm game before (I guess it was linked on Digg or something), but I didn’t know to examine it in the context of this rapid development game project.

The idea of creating lots of simple game prototypes in rapid succession really appeals to me. Yes, not all of them will be great, but some will be good. Little enough time is invested in each one that even if only one pays off, it’s all worth it. Compare this to the traditional game development process, which takes longer to create one game than these guys could use to pump out 100, and often yields terrible results nonetheless. Yes, that’s right, some of these fifty games are already better than what professional studios spend man-decades creating.

Unfortunately, I just don’t have the free time at the moment to devote my attention full-bore to creating lots of neat games in short periods of time (what with work and all). But I do have enough free time to create a couple, so I think I shall have to try it. Flash seems like the obvious language to do this in, but I’m not experienced in it, and I am concerned by its closed, proprietary nature. I think I’ll do what I did a lot of in high school: making prototype-sized Java applets. I guess I’ll have to read up on some Free Software Java libraries, because I don’t want to have to code something as simple as sprite rotation from scratch.

And working on creating some fun little games will also give me the opportunity to try out the ultimate form of game loop which I expressed a desire to attempt a month and a half ago. Now, I just need an idea. Hrm, stats in RPGs are fun, why not try to play around with that mechanic? I’ll see what I can do.

One of my pet peeves is when people misuse words. I put a lot of effort into making my language as correct and precise as possible because I know I get distracted when I run across errors in others’ work. There’s a certain critical threshold of errors beyond which I am so irritated that I find myself unable to concentrate on or consider the central thrust of the writing (for example, blog posts written in IM speak). I don’t want to give readers of my work any excuse to dislike it beyond a real disagreement with my ideas.

But still, misuses of words are still pretty minor in the grand scheme of things. I would never dare write a blog post about how I get annoyed when people write “your” when they mean “you’re”, so what misuse of a word could possibly be prompting this blog post? It has to have greater ramifications than simply causing annoyance. And thus, it does. Misuse of the this word is partly responsible for the terrible financial situation the United States is currently in. Of course, I’m talking about the word “invest”. Follow along as I explain the power of words, and how co-opting of them can cause huge problems.

The United States is awash in bad debt. Aggregate consumer debt has grown larger than our Gross National Product. The housing bubble and economic growth of the past few years have all been predicated on an illusion of economic growth that simply wasn’t there. The personal savings rate is negative. You can only go so far with an economy that is built upon people spending money that they don’t have, and we’ve now reached that limit. All you have to do is look at the advertising right now encouraging people to borrow against their tax rebate checks to buy big screen televisions to know that there’s a problem.

And some of this can be traced back to the intentionally misleading ways in which the word “invest” is used, both by the advertising campaigns designed to make you feel better about frivolously parting with your hard-earned money and by people themselves rationalizing unnecessary purchases. But first, a definition. An investment is a purchase that can be reasonably expected to increase in value in real terms over time. For instance, the purchase of stocks, bonds, mutual funds, etc., is an investment. Even the purchase of fine wine can be an investment if you know what you’re doing (and over the past decade, the growth in value of cellars full of fine vintages has significantly outpaced the S&P 500). But keeping cash in a checking account (or burying it in coffee jars in your backyard, pretty much the equivalent) is not an investment, because its value will depreciate in real terms over time as its purchasing power is eaten away by inflation.

It’s very simple. Investment is the act of purchasing an appreciating asset. The act of purchasing a depreciating asset is, by definition, not investment. Yet so many people use the word “invest” when what they’re really describing is the purchase of a depreciating asset, for instance: “I’m going to invest in a new car” or “I’m going to invest in a new set of speakers”. People only started using this deceptive terminology because companies ran slick advertising schemes that perverted the meaning of the word. They rely on the word’s positive connotations persisting even when it’s used incongruously. It joins a long line of propagandist double-talk like “fighting for peace”, “Operation Iraqi Freedom”, and “freedom is slavery” (alas, there’s no better place for an Orwell reference).

I even heard a talking head on the local news refer to the purchase of a $5 lottery ticket as a “good investment” for the people who won the recent $270 million PowerBall jackpot. Gambling is not an investment! The expected payout of a lottery ticket is less than the cost of the ticket, so it is not an investment. Don’t confuse luck with financial prudence. For everyone who wins a PowerBall jackpot, there are millions of people whose “investment” in the lottery tickets didn’t pay off, and the total amount of money they threw away far exceeded the pay-out to the few lucky winners.

So the next time you hear someone refer to the purchase of a depreciating asset as an “investment”, please slap them with some common and fiscal sense. That poor innocent word has been perverted beyond all recognition into a synonym for “purchase” even though it absolutely does not mean the same thing. The best way out of our current financial mess is to promote real saving amongst the American populace to dig ourselves out of this debt hole. And to accomplish that, we need to wage a war of words and reclaim the true meaning of the word “invest”.

The scariest, indeed the defining, aspect of stock market bubbles is that nobody sees them coming. If we saw them coming, the prices wouldn’t rise any higher than the companies involved were actually worth, and there’d be no bubble. In hindsight, of course, bubbles are incredibly obvious, and everyone and their dog can point to them and recite a litany of reasons why they were bound to happen. Yet it’s very hard to distinguish bubbles from true organic stock growth on a going-forward basis. For instance, the advent of computing looked for all purposes like a bubble — oh look at this newfangled technology, it can’t hardly be as revolutionary as they claim it is. But of course, it was even more revolutionary than anyone except scifi authors had anticipated, and companies like IBM, Intel, Microsoft, et al, all minted their own billionaires off it.

The dotcom bubble seemed to most people to be the next revolutionary stage in computing. It would be even more groundbreaking, and mint even more billionaires, than the original computing revolution. Of course, the Achilles heel was that very few people actually knew how to monetize these new dotcom websites. The ideas were grandiose. The business reality simply wasn’t there. I sometimes feel that we failed to learn the lessons of the past dotcom bubble, and that we’re currently in another one. After all, the vicious thing about bubbles is that no one can see them coming, not even when they’ve already happened before.

How do sites like Facebook, MySpace, Digg, and YouTube justify their valuations? They have lots of eyeballs, sure, but the monetization simply isn’t there. Their sole selling point is their exponential growth, pushing the problem of how to effectively make money off their site into the future; after all, for the present, they can just continue growing, right? Except they can’t grow indefinitely. The addressable market is only so large. They will stagnate. And what will happen to them then?

Face it, online advertising sucks in a multitude of ways. It’s trivial to block (just install the Adblock Plus extension for Firefox*). No other form of advertising can be combated nearly as effectively. Click rates are horrendously low. People using the web have learned to tune it out to a very large degree. It’s just not enough of a revenue stream to sustain the huge valuations of sites like Facebook. $15 billion?! Come on! And Digg? Digg is just terrible now. It’s so overwhelmed by the lowest common denominator that no one takes it seriously. I use it for finding mildly amusing stupid photographs and that’s about it. It’s constantly derided for its low quality advertising that no one clicks on. Can anyone really justify the amount of money it is claimed to be worth? It works out to how many hundreds of dollars per active user?

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A year ago, I was just getting into watching Jim Cramer’s show on CNBC Mad Money, and I decided I would run a little experiment to see how well his stock picks performed. I analyzed the data five months later in July and it turns out he did pretty well, out-performing the Dow Jones Industrial average by just a hair over 1%. In the investing world, if you can beat the indexes reliably, you’re doing a damn good job. So I was impressed. But if you’ve been paying any attention at all to financial news since July, you’ll know that lots of important things have happened since then, like the bust in the home prices bubble and the neutron-star-caliber implosion of the subprime lending industry. It’s easy to outperform in a bull market simply by being over-exuberant, but when a bear market hits, that same outlook can cause you to fall, hard. So I took another look at how Jim Cramer’s picks fared since then. Spoiler alert: It isn’t pretty.

The same group of stocks that I analyzed in my first experiment, that was originally up 9.7%, is now down a grand total of 17.2% since February 2007. In that same time period, the S&P 500 has only decreased from 1,450 to 1,350, or 6.9%. Jim Cramer’s pick underperformed the market by a whopping 10.3%. That is bad. It looks like his stock picking strategies, which worked advantageously in good market conditions, went to hell with the first market downturn. See below for the full portfolio with all of the picks included.

But that first experiment wasn’t quite rigorous enough. I had “bought” a lot of stocks that Jim Cramer merely recommended in his Lightning Round segment. These stocks are chosen by callers to the show, and Jim Cramer has to deliver a verdict right on the spot, without being able to research them. So I’ll give him a break on his Lightning Round segment picks. That’s why I started a second portfolio in August including just the stocks that Jim Cramer personally recommended in the other segments of his show, the stocks that he researched thoroughly. These picks were supposed to be better, right?

So why did a portfolio consisting of only his hand-picked stocks fare even more poorly than the portfolio that also contained his Lightning Round picks? His picks from August have declined a staggering 20.6%. In that same time period, the market has only declined from 1,430 to 1,350, or 5.4%. He underperformed the market by 15.2% in 7 months! That is one hell of a feat. One wonders if only the hedge fund managers performed more poorly. See below for the full portfolio with all of the picks included.

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Awhile ago I announced I would be conducting a little experiment about Mad Money, an off-the-wall financial advice show on CNBC hosted by Jim Cramer. The first results are in, and it turns out that Jim Cramer’s advice isn’t bad at all. It’s not particularly good either, giving good evidence for the concept of an efficient stock market, but it’s not bad. The aggregate value of the stocks he suggested the viewer purchase has increased by 9.7% since middle-to-late February. In the same time period, the Dow Jones Industrial Average went from around 12,750 to 13,850, for an increase of 8.6%. Jim Cramer just barely outperformed the market. This is to be expected — if any talking head on television really could predict the stock market accurately, then a lot of people would listen to his recommendations and act on them, thus driving the prices of those stocks higher and negating any potential above-the-market returns.

My experimental protocol for finding these values was pretty simple, and I hope to be able to do a more rigorous examination soon. Jim Cramer’s show has two kinds of segments on it. The first kind of segment, which usually book-ends the show at beginning and end, involves Jim Cramer making recommendations of stock. Since he is picking these himself, I assigned greater weight to them and “invested” $100,000. The other kind of segment is the lightning round, where Jim Cramer takes a lot of phone calls in quick succession and gives the caller advice on whether or not they should buy a particular stock. Since Jim Cramer isn’t generating these stocks themselves I gave them a lower weight, but for the ones that he did recommend buying I “invested” $50,000.

I did this for three separate days and then waited until today, periodically checking the portfolio based on Jim’s recommendation to see how he did. His best performing stocks were Charter Communications (CHTR) (+49.7%), Transocean Inc. (RIG) (+44.2%), Ludin Mining Corporation (LMC) (+37%), and Joy Global Inc. (JOYG) (+36.7%). His worst performing stocks were MRV Communications Inc. (MRVC) (-28.7%) and Melco PBL Entertainment (Macau) LTD. (MPEL) (-28.8%). See below for the full results.

Overall he didn’t do too badly. If you wanted to invest based on Jim Cramer’s advice, you need to figure out your risk tolerance. If you just buy a few stocks your risk is going to be pretty high — you could earn a lot, like if you had bought CHTR when he recommended it, but you could also lose a bit too, like if you had bought MRVC. And just going by the strength of his recommendations at the time, there would’ve been no way to know. If you were to buy more stocks, kind of like how my experiment went, it’s basically like taking a random sub-section of the market, and you’d be about as well off if you simply just bought an index-tracking fund.

Next up, I plan to continue running this experiment, but more rigorously. I’ll “buy” more of his stocks from more days of the show, and I’ll also run a separate portfolio to track how well the stocks that he didn’t recommend buying are doing. After all, if he is accurate about those, you could stand to make a bit of money by shorting the stocks he doesn’t like.

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So here’s the latest stock scam spam email I’ve just started noticing (and I’m only noticing it because it’s so “clever” that it bypasses both of my spam filters, whereas the “traditional” stock scam emails don’t). I’m getting stock scams in the form of Adobe Acrobat (PDF) attachments on otherwise blank emails. There’s no message body or subject, and the usual randomized fake sender identity. I must admit, the blank subject emails are rather noticeable, as is the fact that they come with attachments. So I did end up looking at one, though of course I didn’t trade on it either way, which is something I’ve long been suggesting.

This particular stock scam is for a company called Latitude Industries Inc. (LTDI). The company makes powerboats, but they really haven’t been doing well recently. Their stock is down from a high of $3.50 as recently as December to its current price of $0.11. In other situations, it might make a good (risky) investment — that is, you’d go into it full well knowing you could lose everything you invested on the off-chance that it rebounds back to somewhere near its higher peaks, yielding a huge profit. But with the spam activity surrounding this stock, I wouldn’t even consider it. It’s being heavily manipulated by spammers who already own large numbers of shares in the stock or who have placed a large number of shorts on the stock, and there’s no way to really know which way they intend it to go. Trading this, either selling short or buying shares, would be like playing slots at a casino, only with worse odds. Don’t fall for it.

And I am still amazed at the numbers these people have no compunctions whatsoever about making up. The 5-day “target price” is listed at $0.50. Anyone who knows anything about the stock market knows that there’s no such thing as a target price. The market reacts nearly instantaneously to information. If somehow it is known that the share price of a stock is guaranteed to rise to a certain value in five days, then the share price will rise to that value in minutes as everyone furiously buys it. If there really was any validity to this claim of a $0.50 price target in five days then the stock would already be trading at $0.50.

And you can check out the stock scam PDF for yourself if you’re curious. I received four separate copies of these in my Inbox, not including all of the copies that were variously caught by my two spam filters.

See my other posts on stock scams.

I’m starting to wonder if these stock scams are ever going to let up. If anything, they’re just getting worse and worse. Many trends have an exponential ramp-up period and then fade away into obscurity (think Pogs); I’m just hoping it comes sooner rather than later for these stock scam emails. But they have to stop at some point eventually, right? Or do you think that, a hundred years from now, we’ll just be dealing with 3D holographic stock scam messages? Ugh.

So, let’s take a look at the latest round. Harris Exploration Inc. (HXPN.PK) was first promoted right around the beginning of 2007. Its share price rose rapidly from $0.30 to $1.60, but has been in decline ever since, and now stands at around $0.65. This stock is still being actively promoted though, which makes me think the scammers haven’t yet sold all of their shares, and are still hoping to get the price up some so they can sell off their last shares. This stock looks to have been very profitable for the scammers though. If they snatched up a bunch of shares at $0.30 and then sold them off at $1.60, I don’t need to tell you that that’s a huge profit. It’s just everyone else who bought the stock — especially on the “advice” of the spam emails — that got fleeced.

China Voice Holding Corporation (CHVC.PK) has been heavily promoted for a few months now. I’m guessing it was chosen for how hot Chinese stocks are doing right now (over 100% growth in the past year), though it’s actually a company headquartered in Florida that does most of its business overseas through subsidiary companies. Historical stock data on this company is limited, although I can say that it’s been trading between $0.40 and $0.60 this past month. I don’t know how high it was right before March, when it was first touted, but I imagine that the spammers (and nobody else) made a nice profit off this one as well. I just wonder who all of these people who continue to fall for stock spams are. Do they really think that they can beat the spammers?

The spammers send out millions of emails (and apparently junk faxes too), and all it takes is one poor unfortunate sap to invest a decent amount of money for the spammers to profit handsomely. Really small market cap stocks are basically a zero sum game: most of the money put into them by people responding to the spams just goes directly into the hands of the spammers. So don’t get caught up in it, and never buy any stock that was recommended to you unsolicited.

See my other posts on stock scams.

Damn, the stock market was pwned today. And I use that gamers’ colloquialism in the non-ironic sense. The stock market took a huge beating (I don’t even want to disclose how much I lost, but it wasn’t pretty). The sell-off was a result of huge downturns in the Chinese markets. The Chinese markets gained 100% over the past year on rampant margin trading (where people borrow money then invest the money they don’t actually have). Actual growth in China’s economic indicators did not gain 100% in a single year. So, earlier today, the strong centralized Communist government in China (correctly) realizes that there is a huge problem with their stock markets, and that they are going to crash very hard in the future because all of the numbers are based on unsubstantiated growth. Thus, the government of China steps in and says they’re going to deal with it.

What happened next was inevitable. The Chinese markets fell nearly 10% in a single day of trading on rumors that margin trading will soon be limited or banned outright. It was a correction on the false 100% growth of the previous year. Unfortunately, large downturns like this send ripples through the international markets, so all of the European and American indices took heavy losses as well. Which is how the Dow lost 400 points today.

What really annoys me is that months of slow and gradual growth can be erased in a single bad day. It never works the opposite way. The stock market never “suffers” huge jumps.

I previously wrote about Randolph from Capitalism2.0, who had a very dismal (but perhaps accurate) outlook on Second Life’s future. Now he’s at it again. This latest article is very detailed, and contains more figures and graphs than one can shake a stick at. It’s hard to argue against, and even harder to dismiss out-of-hand, which is what some people did with Randolph’s last post.

Randolph has backed off on the rhetoric a little bit. He no longer thinks Second Life is a pyramid ponzi scam. He does, however, see a significantly negative economic outlook. In particular, he says that Second Life will need to maintain a staggeringly high 40% monthly growth over the long term to prevent rampant currency devaluation. Linden Lab has been very busy selling currency in-game (making them lots of money), but Randolph questions how willing they will be to buy a lot of back to prevent an economic collapse when the growth rate inevitably slows down. The whole economy seems to be based on rapid growth, with the large influx of new people supporting the established users. What happens when this hierarchy of spending collapses?

Randolph also makes some good points about how the Linden dollar isn’t actually a real currency by any financial definition of the term, but rather, can best be summed up as a virtual microtransaction token. He also has all sorts of interesting numbers on average hours of playtime per character and such. I’ll be following this saga with fascination. The potential of virtual worlds seems so high, but who knows if Second Life is actually sustainable? One wonders if they even have an economist on-staff to help manage their virtual currency. If not, all it could take is one Black Tuesday (which meatspace economies tend to experience a couple times each century) to shut down the whole endeavor permanently.

Maybe you’ve seen that crazy investing guru on CNBC. You know, the guy who doesn’t have a chair in the studio and is always pacing around yelling at the camera? Yeah, that’s the show Mad Money with Jim Cramer. As unorthodox as the show is, it is possible that this guy knows what he’s talking about. So I’ve decided to do a scientific investigation of how good his stock picks are.

My methodology is simple. I’ll be “buying” (using a virtual portfolio) $100,000 worth of every stock that he personally recommends in his two main segments at the start of the show. The Lightning Round segment in the middle of the show consists of people calling in and asking stock advice, and since Jim isn’t coming up with these himself, but rather, merely evaluating them, I’m going to be “buying” $50,000 each of every stock that he evaluates positively during the Lightning Round.

Then, I’m going to hold these stocks until he suggests that they should be sold (which could take awhile). At some point, I’ll just sit down and see what percentage growth Jim’s picks resulted in, and whether they beat the market. I’m not going to be playing games with trying to sell short stocks that he doesn’t like, as all of his recommendations are generally made against other stocks in the same sector, and I’ve never actually heard him recommending that anything be sold short.

Mad Money Recap is going to be very useful in this endeavor. It’s a fan site that faithfully transcribes each show and lists all of his stock picks. The basic plan is to buy the stocks after the close of market on the day that the transcript is published. For instance, I started by buying all of Jim’s recommendations from Tuesday last night.