Wednesday, December 17, 2014

ESOP at a grocery store

Apparently the employees of the Winco grocery chain are doing very well in the retirement department, thanks to an ESOP (employee share ownership plan).  

This Forbes article gushes about awesome this all is, but makes no mention of the elephant in the room.   I'll give you a hint:  Nobody at Enron ever thought that their retirement plans would become worthless overnight!!  

So while the ESOP makes a lot of sense in some ways, in other ways, the employees are horribly un-diversified.  They are one very bad salmonella outbreak away from loosing their jobs and their savings.

Wednesday, December 3, 2014

AQR puts data library online

AQR - the investment firm, has published the data sets used in its research papers.   A great resource for those interested in testing out momentum and other strategies!

Tuesday, November 18, 2014

Do the portfolios of finance professionals underperform?

Apparently, using data from "the yelp of investing", it has been discovered that finance professionals underperform advertising and tech professionals when it comes to investing.

At first blush, this finding seems consistent with yet another failure for finance.  But I think the truth is somewhat less exciting.  I am guessing that finance professionals are far more diversified and more conservative in their investments.   A point that is raised in the article.

Further on there is discussion of a research paper that finds that finance experts don't beat regular folks when it comes to mutual funds.  Again, I don't think that there is much surprise here for the simple reason that markets are efficient.  Being an expert in finance doesn't make you able to predict the future.

Ironically, being an expert in finance does tell you that you shouldn't pay big fees to experts in finance to run your money.   You should index.

Thursday, November 13, 2014

Why the $13bn mortgage fraud settlement against Chase is pretty much a sham

The ugly truth revealed in Rolling Stone.  It's a long article but worth the read.  

All very depressing, especially in light of the most recent scandal involving forex market rigging by various UK banks.

Basically, despite the largest financial crisis since the great depression, nothing has changed and the regulators seem happy with that outcome.

Monday, November 10, 2014

The lottery - an embarrassment to our state.

John Oliver rips the lottery - and pays particularly attention to North Carolina.

Thursday, November 6, 2014

A 30 second course on asset allocation

From Josh Brown:

Josh cites Jeremy Siegel's classic "stocks for the long run" which argues, that over any 30 year period, stocks virtually always beat bonds.   Still this doesn't mean that everyone should be 100% stocks - a topic that I've blogged on quite a bit over the years.   You can see my old posts here:

Tuesday, November 4, 2014

UK to start paying off perpetual bonds.

A 100 years ago, the British government decided to consolidate a variety of its debts.  In effect the government took out debt consolidation loans.  These loans got the name "Consols".

The debts consolidated read like a history of the UK including costs from Napoleonic wars and even the South Sea Bubble Crisis of 1720.  

Now, the UK government has now announced that it will begin "calling" - or redeeming - some of these debts - in effect finally paying them off.

Consols are interesting not just because of the slice of history that they provide, but because they are also perpetual bonds.  The pay a fixed coupon forever.  They are valued using the simple formula:

A recent quote shows a 2.5% consol trading off a yield of about 3.86%.  This would price the bond at:

The Economist has a nice article about the introduction of Consols. (Might be behind a paywall).

As a side, from this picture of one of the bonds that was consolidated.  It is pretty clear why we call interest payments on debts "coupons"!
Perpetual securities are actually not as rare as we might think.  Another similar type of security is Preferred Stock - which pays a fixed dividend forever.   Berkshire Hathaway (Warren Buffet's firm) bought a big chunk of preferred stock from Bank of America a few years back.

Monday, October 27, 2014

A tepid defense of hedge funds by Cliff Asness

Cliff Asness of AQR capital has an excellent blog - well worth reading.  A recent posting is called a tepid defense of hedge funds.  

This is a nice article and from it we can draw a few interesting conclusions...

1. Hedge funds look a lot like boring stocks (they have betas between 0 and 1).

2. Based on 1), hedge funds are not hedged.  If they were, they would have zero betas.

3. The positive alpha earned by hedge funds is probably not enough to cover the 2/20 fees that they charge.

4. Hedge funds didn't really provide much protection in 2008.

Tuesday, October 14, 2014

Is Yahoo worthless?

I missed this story earlier when Alibaba went public, but as we're talking about stock valuation, it is timely to talk about why Yahoo's US operations is basically worthless.  Another article is here
The math is pretty simple (numbers as of 10/14/2014):

YHOO owns 16% of BABA.  So YHOO's share of BABA is 0.16*209Bn = $33.44Bn
YHOO also owns 35% of Yahoo Japan (YAHOY) Mkt Cap = $20Bn.  
So YHOO's share of YAHOY is 0.35*20 = $7Bn.

So YHOO's non-BABA, non-Japan operations are worth:  38 - 33.44 - 7 = $-2.44Bn

What does this mean?
There are two ways of looking at this.   One is to say that YHOO is worthless.  This is perhaps a little surprising given that the company is profitable.  

Another way of looking at this is to assume that BABA is overpriced and YHOO is underpriced.  In which case a rational trader would try to short BABA and go long YHOO.  

This latter option isn't as crazy as it may seem.  In fact, it occurred famously with 3COM and Palm.

Saturday, October 11, 2014

Multitasking in class?

Most professors allow students to use laptops in class.   Many students use them to take notes, to look at spreadsheets etc - but many students also use them for multi-tasking.  And I use the term "multi-task" very broadly.

When I sit in other professor's classes to review teaching, I often am surprised by the amount of "multi-tasking" that is going on.   I usually sit at the back where I can get a good view and invariably, students that are engaged in "multi-tasking" are on facebook, checking the weather, checking email etc.   They aren't really multi-tasking, they are just doing a different task from what they are supposed to be doing.

That's why this article was particularly interesting to me.   A Professor of New Media at NYU has basically banned laptops from class (except for specific projects).   He's reporting a much improved environment.

A counter argument from a student might be:"Hey, if the prof says anything interesting or important, I'll pay attention", but I think this is perhaps a little delusional.   I know that if I am at home watching a movie and in the quiet bit, I answer an email on my laptop, I invariably end up having to ask my wife: "what happened?"   I am pretty sure that I can't multi-task effectively.