I finally feel vindicated, as in all my 20+ years living in the USA I have never seen the point of professional basketball. With games frequently scoring in the high double digits, but the winning margin only being a few points, it always seems that the final outcome is really just down to luck. Turns out this is not so far from the truth.
Thursday, September 22, 2011
Random walks.
Finance academics often view stock prices as being "random walks" in that the price change at any given time is basically random. If it wasn't, then you'd be able to predict where the price was going and make a killing trading stocks. But random walks also occur in other areas of life. For example, in professional basketball, a recent research paper shows that the scoring pattern can be characterized as a random walk.
Raleigh
Sorry, I got that wrong - the best city in America, according to Businessweek.
As a resident of Raleigh for the past 9 years, I have to agree. It gets a bit warm in the summer, but other than that, this is a nice place to live.
(Also posted by Craig)
As a resident of Raleigh for the past 9 years, I have to agree. It gets a bit warm in the summer, but other than that, this is a nice place to live.
(Also posted by Craig)
Thursday, September 15, 2011
Jack Bogle, diversification and idiots.
Finance Professor blog posts a video of Jack Bogle (the father of indexing) talking about indexing.
Jack is responding to Mark Cuban's recent claim that "diversification is for idiots". I am sure Mark is a talented entrepreneur but being a entrepreneur requires taking undiversified risks. Investing for your retirement is completely different - diversification is essential. If Cuban doesn't realize this then he is the idiot here.
Jack is responding to Mark Cuban's recent claim that "diversification is for idiots". I am sure Mark is a talented entrepreneur but being a entrepreneur requires taking undiversified risks. Investing for your retirement is completely different - diversification is essential. If Cuban doesn't realize this then he is the idiot here.
Moral Hazard in Investment Management.
Via Craig: The overlooked failure in pension markets
Moral hazard occurs in pension markets because investment advisers have the incentive to maximize fees, but don't really get rewarded for performance.
Consider a simple example:
You have $100,000 with an adviser. The annual management fee is 1%. The annual dollar fee paid is therefore $1,000. If the adviser works hard and earns you say an extra 2% return, his fee will increase to: 100,000*(1.02)*(0.01) = $1,020.
Alternatively, the adviser could recommend an "new" investment for your portfolio that charges a 1.5% fee. Total fees in this case would be $1,500.
Given how hard it is to beat the market and earn an abnormal return, the adviser's best bet is to try and push his clients into higher fee products.
I've said it before and I'll say it again. There are really only two things you can control in saving for retirement. One is the amount of money you put in your account. The other is the fees you pay to invest that money. Your goal is to maximize the first and minimize the second.
Moral hazard occurs in pension markets because investment advisers have the incentive to maximize fees, but don't really get rewarded for performance.
Consider a simple example:
You have $100,000 with an adviser. The annual management fee is 1%. The annual dollar fee paid is therefore $1,000. If the adviser works hard and earns you say an extra 2% return, his fee will increase to: 100,000*(1.02)*(0.01) = $1,020.
Alternatively, the adviser could recommend an "new" investment for your portfolio that charges a 1.5% fee. Total fees in this case would be $1,500.
Given how hard it is to beat the market and earn an abnormal return, the adviser's best bet is to try and push his clients into higher fee products.
I've said it before and I'll say it again. There are really only two things you can control in saving for retirement. One is the amount of money you put in your account. The other is the fees you pay to invest that money. Your goal is to maximize the first and minimize the second.
People just don't understand inflation.
A recent article on Yahoo Finance talks about "Hedging 7 Big Retirement Risks"
The article is OK overall, but demonstrates a serious misunderstanding of the effect of inflation on stock prices (something that I am particularly interested in). The offending paragraph states that:
The article is OK overall, but demonstrates a serious misunderstanding of the effect of inflation on stock prices (something that I am particularly interested in). The offending paragraph states that:
To guard against inflation, you can invest in inflation-protected securities or other investments that will gain value as overall prices climb. For instance, stocks in your portfolio aimed at growth rather than income will provide a hedge against inflation, says Michael Reese, Certified Financial Planner and founder of Centennial Wealth Advisory based in Traverse City, MichIt is incorrect that growth stocks (low dividend paying high P/E stocks) will be a better inflation hedge than dividend paying stocks. The value of both stocks derives from the present value of the cash flows generated by the underlying business. Growth stocks reinvest this cash flow, income stocks tend to pay it out. Either way, on average, the cash flow will grow at the rate inflation. Thus the expected return on both types of stock is directly correlated to the expected inflation in the economy. They are both "real" assets and should provide a hedge against inflation.
Rogue Trader at UBS
UBS is likely to post a loss this quarter because a Rogue Trader lost $2bn. Ouch.
If you haven't seen it, the movie "Rogue Trader" about the Barings trader Nick Leeson is worth watching.
If you haven't seen it, the movie "Rogue Trader" about the Barings trader Nick Leeson is worth watching.
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