Stocks and Trading Thread - Channeling your inner Mono

[citizen k]

Can somebody explain why I should care or be concerned about the "flash crash"?

No need for concern, just don't use stop loss orders.

[DGuller]

Can somebody explain why I should care or be concerned about the "flash crash"?

There are high frequency computer algorithms driving trades and there are people that try to take into account the value of the underlying asset (company, index, etc). I'm in the latter category. If a program (or cascade of programs) completely jumps the shark, in the unlikely event I'm paying attention I get to either buy at a steep discount or sell at a windfall. Winnings for me.

If you're trading in options, and your position is unprotected on one side, you should be very concerned.  If the flash crash causes a liquidity crisis because every trader gets an instant margin call, you should be concerned as well.

[alfred russel]

So lets assume I'm not out using exotic and complex derivatives (a bit tongue in cheek on the exotic and complex part) and I'm not placing counterintuitive orders to sell when the price gets low. I'm just an ordinary investor that buys when valuations look right and sells when they look high.

[MadImmortalMan]

Then your main risk is exposure to the secondary effects of the flash. Like people ripping their money out of the market quickly out of fear and the value of your stuff going down as a result.

[alfred russel]

Then your main risk is exposure to the secondary effects of the flash. Like people ripping their money out of the market quickly out of fear and the value of your stuff going down as a result.

That sounds like more opportunity.

I don't think we need to regulate the sale of plasma TVs based on the risk that a moron manager at Wal Mart will price one at $20. If that happens and I see it, I will happily take advantage and buy the TV at $20. If everyone else panics and starts selling their plasma TVs for $20, I will outfit every room I have with a plasma TV.

This breaks down in that I have a limited opportunity to use plasma TVs. But stocks give me an ownership claim to the future cash flows of a company. I have an unlimited appetite for those. If I don't think those justify the purchase price, I don't buy the stock.

[MadImmortalMan]

So Delta Airlines bought an oil refinery. I know it's near impossible to make an airline profitable in modern times, but this is a different strategy. I guess they are forced to get creative, and figured some vertical integration might help. I doubt it will do much for their operating costs on the airline itself, although it may provide a profitable sideline to offset their flying losses. 

[DGuller]

Then your main risk is exposure to the secondary effects of the flash. Like people ripping their money out of the market quickly out of fear and the value of your stuff going down as a result.

That sounds like more opportunity.

I don't think we need to regulate the sale of plasma TVs based on the risk that a moron manager at Wal Mart will price one at $20. If that happens and I see it, I will happily take advantage and buy the TV at $20. If everyone else panics and starts selling their plasma TVs for $20, I will outfit every room I have with a plasma TV.

This breaks down in that I have a limited opportunity to use plasma TVs. But stocks give me an ownership claim to the future cash flows of a company. I have an unlimited appetite for those. If I don't think those justify the purchase price, I don't buy the stock.

Liquidity events have real costs, they're not zero-sum. 

[alfred russel]

Liquidity events have real costs, they're not zero-sum.

For modern equity markets traded on exchanges? I'm skeptical...

[stjaba]

So Delta Airlines bought an oil refinery. I know it's near impossible to make an airline profitable in modern times, but this is a different strategy. I guess they are forced to get creative, and figured some vertical integration might help. I doubt it will do much for their operating costs on the airline itself, although it may provide a profitable sideline to offset their flying losses. 

A few years ago, at least one one of the major airlines made a profit almost  based solely on petroleum futures.

[Richard Hakluyt]

Airlines seem to have been going broke for as long as I can recall. I wonder how the average returns on the entire sector since, say, 1950, compare to other industries? At a guess pretty poorly. Rational markets vs.  ooh! it's big and shiny and flies through the air! 

[alfred russel]

Airlines seem to have been going broke for as long as I can recall. I wonder how the average returns on the entire sector since, say, 1950, compare to other industries? At a guess pretty poorly. Rational markets vs.  ooh! it's big and shiny and flies through the air! 

I don't know if it is still true, but at one recent point the airline industry had net losses since inception.

I big part of the problem is that airlines are relatively cheap to operate, sans massive upfront costs made years in advance (buying the plane). People in an industry have a bias to overproject their future prospects: no one projects they are going to lose market share, afterall. The result is chronic overcapacity. Unfortunately for the airlines (and fortunately for the flying public), those giant expensive planes are sunk costs and airlines have to slash prices to attract passengers and cover current operating costs.

I understand the same problems existed with trains on the competitive passenger routes.

[Barrister]

Airlines seem to have been going broke for as long as I can recall. I wonder how the average returns on the entire sector since, say, 1950, compare to other industries? At a guess pretty poorly. Rational markets vs.  ooh! it's big and shiny and flies through the air! 

But a lot of the newer, low-cost airlines have generally been pretty profitable, such as Southwest, Ryan Air, and Westjet.

So in's not some problem inherent to the airline industry.

[DGuller]

So Delta Airlines bought an oil refinery. I know it's near impossible to make an airline profitable in modern times, but this is a different strategy. I guess they are forced to get creative, and figured some vertical integration might help. I doubt it will do much for their operating costs on the airline itself, although it may provide a profitable sideline to offset their flying losses. 

A few years ago, at least one one of the major airlines made a profit almost  based solely on petroleum futures.

That's doesn't seem that funny or strange to me, that just seems like an accounting quirk.  If you're going to hedge the price of fuel, which a competent airline should do, then it's not surprising that a lot of your "profit" is going to come from the futures if the price of fuel goes up.  The futures are supposed to insure your operations against rising fuel prices.  If your house burns down, then most of your "profits" for the year are going to come from the insurance policy.

[Sheilbh]

But a lot of the newer, low-cost airlines have generally been pretty profitable, such as Southwest, Ryan Air, and Westjet.

So in's not some problem inherent to the airline industry.

Isn't a big part of their business model using older, often second hand planes?

[alfred russel]

Airlines seem to have been going broke for as long as I can recall. I wonder how the average returns on the entire sector since, say, 1950, compare to other industries? At a guess pretty poorly. Rational markets vs.  ooh! it's big and shiny and flies through the air! 

But a lot of the newer, low-cost airlines have generally been pretty profitable, such as Southwest, Ryan Air, and Westjet.

So in's not some problem inherent to the airline industry.

Business isn't supposed to be zero or negative sum. If it was, long term investing would be equivalent to going to vegas--you tend to lose, even if some might win. If the airline industry hasn't been historically profitable even though a few companies have been over the shorter term, I would think there are inherent problems in the industry.