Our goal is to watch what other investors are doing and find a way to take a position against them if the risk/reward is favorable. We are looking for mispriced bets.

Betting on volatility

This article from the WSJ discusses who is making the bet.

From the article:

Donald Pierce, the chief investment officer of the $9.3 billion San Bernardino County Employees’ Retirement Association, has been trading volatility for about six years, most recently by buying options on stock indexes, often with trades equivalent to about $300 million of risk for the plan.


Sometimes, Mr. Pierce buys products betting on rising volatility. Other times he sells these products, depending on his view of where U.S., Japanese, Russian, Brazilian and other markets are headed. Mr. Pierce says his trading has saved the county millions recently and that he will continue to make volatility trades.

He is making bets based on “his view” of the world. We don’t do that. There are too many variables that affect asset prices. We watch other investors, like Mr. Pierce, who like to make bets based on what they think will happen.

Why are investors flocking to these strategies?

“The low-return environment pushes people into investments they wouldn’t have made eight to 10 years ago,” said David Morehead, Senior Director of Investments at Baylor University’s endowment.


Many big investors who flocked to these products have been under unique pressures to generate returns. Pension funds across the U.S. typically need to earn 7% to 8% each year to meet obligations. In the past decade, they have struggled to meet that target, while their total assets have fallen as retirement payouts have increased.

My thought bubble

In other words, these guys are desperate. Making wagers because you are desperate is a bad investing strategy.


What products are these guys trading? Two of note.

  1. Proshares Short VIX Short-Term Futures ETF. Ticker: SVXY
  2. VelocityShares Daily Inverse VIX Short-Term ETN(exchange traded note). Ticker: XIV.

Both of these products have lost 90% of their value.

(Click to enlarge: SVXY)
(Click to enlarge: XIV)

Is it too late betting against these guys? Maybe with these products, but if calm returns and more investors want these kinds of strategies, Wall Street will make them.

Chipotle hires new CEO from Taco Bell

Since hitting $758 dollars per share in 2015, Chipotle’s(CMG) stock has fallen 67%.

(Click to enlarge)

What happened to the company?

Chipotle started falling in 2015 as news broke that some of their food had been contaminated. They have not been able to right the ship as their brand has taken a hit.

Will the new CEO be able to turn the company around?

Not sure. He has the experience. He ran an outfit twice the size of Chipotle. My question is…Has the brand been so diminished that any efforts to right the ship will be futile?

Chipotle was one of the first fast-casual chains to achieve scale and capture share of mind among consumers.

In order to help us, we are going to use Warren Buffet’s framework he laid out in his 1991 shareholder letter.

Warren Buffet’s 1991 shareholder letter

We are trying to determine if Chipotle is an economic franchise or just a business.

In his 1991 letter he stated the following:

An economic franchise arises from a product or service that:

  1. Is needed or desired.
  2. Is thought by its customers to have no close substitute.
  3. Is not subject to price regulation.

The existence of all three conditions will be demonstrated by a company’s ability to regularly price its product or service aggressively and thereby to earn high rates of return on capital.


Moreover, franchises can tolerate mismanagement. Inept managers may diminish a franchise’s profitability, but they cannot inflict mortal damage.


In contrast, “a business” earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long.


With superior management, a company may maintain its status as a low-cost operator for a much longer time, but even then unceasingly faces the possibility of competitive attack. And a business, unlike a franchise, can be killed by poor management.

Let’s run Chipotle through this framework:

Is their product needed or desired?

Yes, people love burritos and food in general as long as they are reasonably certain they will not get sick…

Is it thought by its customers to have no close substitute?

For some, the answer is yes. Most restaurants have hard-core fans that will eat there no matter what.

However, Chipotle started at the beginning of the fast-casual movement and let’s face it, other people have figured out how to cook burritos.

Before 2016, fast casual was growing at 10-11% per year. In 2016 it slowed to 8%. In 2017 likely slowed in the 6% range. Which brings us to the third point.

Is not subject to price regulation.

Meaning, can they maintain or raise prices in the face of increasing competition? Do they have some sort of differentiated product(burrito) that others can’t match? No, they don’t.

Based on the above answers, I would say Chipotle does not have the characteristics of an economic franchise.

Final thoughts…

I think this line from above explains why Chipotle had early success.

In contrast, “a business” earns exceptional profits only if it is the low-cost operator or if supply of its product or service is tight. Tightness in supply usually does not last long. 

In the beginning, there was more demand for their type of food than places to eat. As with anything that gets traction, other companies pile in, thus increasing supply.

That is ok… as long as demand is increasing as well. Problems happen when there are too many choices and the market becomes saturated. With more choices, a company has less room for error. When the contamination stories hit, consumers chose to eat elsewhere, partly because there are many options for that type of food.


That does not mean Chipotle can’t be a good business. They have the staying power to stick around when other players are going to be knocked out.

In the final analysis, I don’t trade based on my opinion of the current state. I trade based on order flow. Right now, I will be watching to see if buyers can maintain control above the $240 level.

That’s all for today,



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