The Investments Blog: Munger on Black-Scholes

Thursday, December 23, 2010

Munger on Black-Scholes

"Black-Scholes is a know-nothing system. If you know nothing about value - only price - then Black-Scholes is a pretty good guess at what a 90-day option might be worth. But the minute you get into longer periods of time, it's crazy to get into Black-Scholes. For example, at Costco we issued stock options with strike prices of $30 and $60, and Black-Scholes valued the $60 ones higher. This is insane." - Charlie Munger

Origin of Newton's 4th Law?

"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." - Warren Buffett

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Find good businesses; buy at nice discounts to value; stay within limits & stick to what's understandable (necessarily unique for each investor); minimize trading, frictional costs, & errors of all kinds.

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This site is for generalized informational purposes only and the views found here should never be considered specific investment advice.

Visitors should always do their own homework and consult, as needed, with a personal financial adviser who understands their specific individual circumstances before taking action on any particular investing idea. What makes sense as an investment in one set of individual circumstances may not in another.

Opinions found on the blog are just that, opinions, could easily be wrong in all kinds of ways, and should never be considered advice that is specific in nature. Stocks and other investment vehicles are inherently filled with risks including the possibility, or even likelihood, of permanent loss of capital. Past performance, of course, should not be considered indicative of future results. Due diligence is necessary.

The content found here shall not be taken as a recommendation to buy or sell any security or to participate in any particular investment strategy. Again, that necessarily comes down to individual circumstances. So, in other words, there is no personal financial adviser here, just some opinions and views. These opinion and views are subject to change at any time and, since they are not individualized in any way, consultation with an investment professional and doing one's own rigorous research/analysis before making any investment decisions is essential.

All posts are simply presented as one view on investing and some related topics though never specific recommendations. An investor should always get help from an investment professional if they feel they need it and, most importantly, before mistakes are made. Ultimately, the actions of individual investors, whether they happen to be a visitor to this site or not, are their own responsibility (and, if applicable, so are the associated losses). While there will always be a very real risk of permanent capital loss in investing, those who know their own limits and ask for professional advice when they require it can improve their chances substantially. Investors should never buy or sell a security based upon what they've read on any blog.

Information on this site is believed to be accurate yet may include errors or omissions and is not guaranteed. The site is also never a solicitation or offer to buy or sell any securities.

Posts on this blog do not offer opinions on the future price action of specific stocks or the capital markets as a whole. Instead, the focus is sound investing principles but never predictions or recommendations. It's understanding productive assets and their likely intrinsic value; how they may or may not compound in intrinsic worth over a long time horizon. It's about investing with a comfortable margin of safety. It's NOT about speculating on price action. In the near-term, or even longer, the market price of an asset can do just about anything.

A temperamental market pretty much assures it.

Those with a long investing horizon, it's worth noting, actually benefit from lower stock prices in the near-term (though not many market participants seem willing to put this truism to effective use). Those who attempt to profit primarily via speculating on short-term price action likely won't find this way of thinking to be of much interest.

The bottom line: This site does not provide individual investment advice of any kind and the blog posts found here are never a recommendation to buy or sell anything. Visitors should start with the assumption that the ideas found here are not good ones and do their own homework (or get individualized help from an investment professional) before taking ANY action.

Otherwise, hopefully some occasionally find the site worthwhile.

Notable Quote

"Warren and I have not made our way in life by making successful macroeconomic predictions and betting on our conclusions.

Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.

I recommend to all of you exactly the same attitude.

It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger

The Investments Blog

Thursday, December 23, 2010

Munger on Black-Scholes

Origin of Newton's 4th Law?

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