Reviews of "Too Big to Fail" and "The Inside Job"

A review of two movies related to the financial crisis.  I've seen "the Inside Job" and I think the review pretty much captures it - it has a very populist bias.   I haven't seen Too Big to Fail - its not on Netflix yet - but it seems a more reasonable account of events.

Reblogged from Greg Mankiw.

One of the wealthiest B School Profs ever

Re-posted from my colleague, Craig Newmark's excellent blog.

Gene Brigham - author of countless finance text books and actually an Emeritus Professor at my alma mata - the University of Florida.   The article is a nice discussion of the evolution of B-School text books from dense academic tomes to the more readable volumes produced today.

A college degree returns 15% after inflation.

A new study reports that getting a college degree returns an inflation adjusted return of 15%.  I haven't checked the math - but at face value that seems a pretty good return on your (or your parents') money.

The Inside Job - a review.

I finally got around to watching "The Inside Job" - the documentary about the causes of the financial crisis.  It was actually rather tedious - with relatively little technical detail and mostly lots of broad statements about who is to blame.  On the list: Presidents, Wall Street, The Fed, Rating Agencies, Derivatives and economists.  There was a bit of a bias in that several causes were ignored - for example congressional pressure to expand home ownership to lower income families, homeowners who actively engaged in speculative activities and the media that continually promoted housing as a no-lose investment.  But overall it covered most of the bases.

The basic format of the film was to try and skewer various individuals in interviews.  The smart folks declined to be interviewed, but some economists did agree and presumably thought that they were being interviewed for their expertise on the issue.  In fact they were being pilloried.  Case in point: Glenn Hubbard (Dean of Columbia Business School).

Overall - probably worth watching if you are interested in the topic, but don't treat it like a definitive explanation.  A recent article in the Washington Post sums up the movie perfectly.

 It was an excellent documentary for people who don’t want to understand the financial crisis but want to believe they would’ve seen it coming.

A collection of retirement resources

Lifehacker has put together a nice page of retirement calculators.   Well worth checking out to see if you are on track or if you'll be living with your kids.

French Fries and Compound Interest

An article in my local paper today (reprinted from the LA Times) talks about how much weight the average person puts on per year from eating potatoes.  Why is this relevant to a finance blog you ask?  Well, the article states that:

The research team calculated that participants gained an average of 0.8 pound a year...It may not sound like much, but as the years go by "it becomes like compounded interest," adding up to 16 pounds over 20 years, said Dr. Jeffrey Schwimmer  (emphasis added)

I hate to be a boring finance pedant, but actually that is like simple interest, not compound interest.  If eating french fries was like compound interest - then the amount of weight you'd put on would be a function of your existing weight.

Does Wall Street "hate" solar stocks?

I came across this article by the manager of the Green Alpha Fund - an environmentally focused mutual fund that is run out of the Sierra Club.   In full disclosure, I am a member of the Sierra Club and very supportive of much of their work, but this article seemed a little over the top.

The basic premise is that several solar power related stocks, such as LDK Solar, are being shorted irrationally by Wall Street firms that somehow "hate" solar power.  Without getting into a debate on whether or not LDK is fairly valued or not, it is worth noting a few things.

1. Short selling is a risky strategy - you are exposed to losses that can be potentially far greater than your gains.  You also have to pay to borrow the stock (in order to short), and thus you are constantly incurring losses if the stock just does nothing.  As a result, it is not that surprising to find that most of the evidence on short selling supports the idea that short sellers tend to be pretty informed.  These traders have a lot to loose and their positions are expensive to put on and as a result they tend to have done their homework.

2. To say someone has an "irrational hatred" of a stock because they short it, is quite frankly, stupid.  I am sure that short sellers as a group don't have any pathological desire to see solar power fail as an alternative energy source, they are just interested in making money on overpriced stocks.

3. The price level of solar stocks is not really a barometer of the viability of solar power.   In fact, it seems reasonable to think that specialty solar stocks may do poorly in the long run as the technology becomes more of a commodity and their competitive advantage gets eroded.  We've seen this happen in the LED lighting market.

4. If the Green Alpha Fund really thinks these shorts are irrational, then they should keep quiet and buy more solar stocks - they'll be proven right in the end (if they are correct).

Short sellers are frequently vilified in the press, by politicians, and by the management of shorted firms.  They are cast as some sort of unpatriotic group that is only interested in ruining everyone's fun.   In reality the evidence shows that markets that have active short sellers are priced much more efficiently and show less tendency to develop speculative bubbles.  In the end, short sellers are good for markets and that includes the market for solar stocks.