The Stingy News Weekly (05/16/2010)
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Value Investing Flip Books
"The flip book helps to highlight a core problem for investors. Namely, the urge to swap out of a good strategy during periods of underperformance which happen frequently and can last for several years. So, be warned. Oh, and also have a little fun with the flip books."
The difficult choices facing Europe
"Pimco's chief executive Mohamed El-Erian considers the painful options facing policy makers now that the massive interventions already appear to be stalling"
Complexity in financial systems
"We can probably all agree that modern day financial systems are complex, but what that actually means isn't something that everyone agrees on. Typically, though, a system characterised by complexity isn't something that anyone's designed - it emerges, it adapts spontaneously and it produces stunningly unexpected outcomes when no one's expecting them. Which, let's face it, sounds a lot like modern finance. The problem is that many economists are focusing on how they manage this system when, in reality, it's impossible to do so. It's like trying to contain swine flu using a butterfly net."
Gross profitability as a predictor
"Controlling for gross profitability dramatically improves the performance of value strategies, especially among large, liquid stocks. A value-weighted portfolio that is long (short) the extreme high gross profit-to-assets, high book-to-market (low gross profit-to-assets, low book-to-market) produced by a double sort on the two ratios generates an average monthly excess return of 1.16%"
The case for doom and gloom
"Brenner's analysis of the current downturn can be boiled down to a fairly simple point: that the underlying cause of the current downturn lies in the 'real' economy of private goods and service production rather than in the financial sector, and that the current remedies - from government spending and tax cuts to financial regulation - will not lead to the kind of robust growth and employment that the United States enjoyed after World War II and fleetingly in the late 1990s. These remedies won't succeed because they won't get at what has caused the slowdown in the real economy: global overcapacity in tradeable goods production."
"The Inoculated Investor has a series of handy notes from the Berkshire, Markel, Wesco and VIC meetings"
Silencing the whistleblowers
"Amid the frenzy of the nation's mortgage boom, the back-of-the-hand treatment that Parmer describes wasn't out of the ordinary. Parmer was one of a small band of in-house gumshoes at various financial institutions who uncovered evidence of corruption in the mortgage business - including made-up addresses, pyramid schemes, and organized criminal rings - and tried to warn their employers that this wave of fraud threatened consumers as well as the stability of the financial system. Instead of heeding their warnings, they say, company officials ignored them, harassed them, demoted them, or fired them."
Equity premium an artifact?
"Before the twentieth century, stocks were in many ways an immature financial instrument; they should have carried a premium, because they were risky. As the twentieth century wore on, they matured--thanks in part to the New Deal era reforms that toughened up on disclosure and market rules for buying and selling shares in public companies. But the generation who lived through the Great Depression still thought of the stock market as speculative."
"I suspect that there will be a certain amount of evidence that stop-loss orders will be implicated to at least some degree. Stop loss orders are the most idiotic order type known to man (if you're willing to sell something at $45, why the hell aren't you selling at $50? It makes no sense!) but have immense popularity."
The bond return puzzle
"High Yield bonds highlight the most fundamental problem in finance: that risk is not positively related to expected returns, and this fact is not empirically obvious. This strikes at the heart of finance, because 'risk' is a rationalization for many things, but after 50 years, remains like dark matter, a convenient assumption for an empirical 'anomaly'."
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