The Stingy News Quarterly (Q4/2010)
New @ StingyInvestor
Roads to Investment Success
"I was pleased to talk to the University of Toronto Faculty Association where I made the case that novice investors should opt for low-fee balanced funds. I then discussed more advanced topics in dividends and value investing. Although the session was not recorded, here are the slides that were used..."
A collection of links to help inspire a little Christmas cheer.
The Best of Stingy Links
Stingy Links: Academia
The Truth Wears Off
"Although many scientific ideas generate conflicting results and suffer from falling effect sizes, they continue to get cited in the textbooks and drive standard medical practice. Why? Because these ideas seem true. Because they make sense. Because we can.t bear to let them go. And this is why the decline effect is so troubling. Not because it reveals the human fallibility of science, in which data are tweaked and beliefs shape perceptions. (Such shortcomings aren.t surprising, at least for scientists.) And not because it reveals that many of our most exciting theories are fleeting fads and will soon be rejected. (That idea has been around since Thomas Kuhn.) The decline effect is troubling because it reminds us how difficult it is to prove anything. We like to pretend that our experiments define the truth for us. But that.s often not the case. Just because an idea is true doesn.t mean it can be proved. And just because an idea can be proved doesn.t mean it.s true."
The disposable academic
"There is an oversupply of PhDs. Although a doctorate is designed as training for a job in academia, the number of PhD positions is unrelated to the number of job openings. Meanwhile, business leaders complain about shortages of high-level skills, suggesting PhDs are not teaching the right things. The fiercest critics compare research doctorates to Ponzi or pyramid schemes."
Accounting for Leverage
"This paper lays out a decomposition of book-to-price (B/P) that articulates precisely how B/P 'absorbs' leverage. The B/P ratio can be decomposed into an enterprise book-to-price (that pertains to operations and potentially reflects operating risk) and a leverage component (that reflects financing risk). The empirical analysis shows that the enterprise book-to-price ratio is positively related to subsequent stock returns but, conditional upon the enterprise book-to-price, the leverage component of B/P is negatively associated with future stock returns. Further, both enterprise book-to-price and leverage explain returns over those associated with Fama and French nominated factors - including the book-to-price factor - albeit negatively so for leverage. The seemingly perverse finding with respect to the leverage component of B/P survives under controls for size, estimated beta, return volatility, momentum, and default risk."
"It is likely that someone who engaged in large amounts of deliberate practice in mathematics could perform extremely well on mathematical tests, exams, and other competitive measures so long as these tests involved calculations or derivations that had been practiced. The problem is that by their nature inventions and discoveries involve problems that have never been solved by anyone. There is no way to practice in this way."
Stingy Links: Behaviour
A Bully Finds a Pulpit on the Web
"Which means the owner of ... might be more than just a combustible bully with a mean streak and a potty mouth. He might also be a pioneer of a new brand of anti-salesmanship . utterly noxious retail . that is facilitated by the quirks and shortcomings of Internet commerce and that tramples long-cherished traditions of customer service, like deference and charm."
Programming our lives away
"Increasingly, algorithms are used to determine whether we can get access to credit, insurance and government services. They are posing a challenge to human decision-making in the arts. They are being used by prospective employers to decide if we should be hired. They can determine whether your online business will succeed or fail, and they have revolutionized the world of high finance."
Volatility mesures behavioural risk
"I was wrong to dismiss standard deviation as a risk measure for all of those years. It's not a measure of investment risk but a measure of behavioural risk. Still, standard deviation measures a type of risk that has potentially damaging consequences."
Bank Leverage Limits
"Crises are often compared to drinking binges, where excessive exuberance is followed by hangovers. Following that analogy, if you try to say, 'we don't want people drinking to excess, so we will stop everyone at 6 drinks', well then, they will switch from beer to wine, whiskey, or grain alcohol. But the drinking problem is potentially soluble because you can measure alcohol, and say allow people one 12 ounce beer, one 5 ounce glass of wine, etc. Basically, the key unit is 'ethanol, which has measurable properties. In contrast, we don't know what 'risk' is. Beta? Volatility? Skew? Get back to me on that. You can't regulate what you can't define."
"A few years ago, Dan Ariely, a psychologist at M.I.T., did a fascinating experiment examining one of the most basic external tools for dealing with procrastination: deadlines. Students in a class were assigned three papers for the semester, and they were given a choice: they could set separate deadlines for when they had to hand in each of the papers or they could hand them all in together at the end of the semester. There was no benefit to handing the papers in early, since they were all going to be graded at semester.s end, and there was a potential cost to setting the deadlines, since if you missed a deadline your grade would be docked. So the rational thing to do was to hand in all the papers at the end of the semester that way you.d be free to write the papers sooner but not at risk of a penalty if you didn.t get around to it. Yet most of the students chose to set separate deadlines for each paper, precisely because they knew that they were otherwise unlikely to get ar! ound to working on the papers early, which meant they ran the risk of not finishing all three by the end of the semester. This is the essence of the extended will: instead of trusting themselves, the students relied on an outside tool to make themselves do what they actually wanted to do."
The 10 Biggest Gold Myths
"Gold has been the investment phenomenon of the past decade. It hit a new high of 1,278 an ounce this week. In the past 10 years, investors in gold have made nearly five times their money. Over the same time, Wall Street has gone sideways. But few investments seem to attract more myths and hokum than gold and other precious metals. At the risk of inflaming those on both sides of the issue, here are 10."
The power of vulnerability
"Brene Brown studies human connection -- our ability to empathize, belong, love. In a poignant, funny talk at TEDxHouston, she shares a deep insight from her research, one that sent her on a personal quest to know herself as well as to understand humanity"
The 10 Mistakes Investors Most Commonly Make
"In an interview with DailyFinance, Statman, a professor of finance at Santa Clara University in California, shared his top 10 errors that trip up average investors"
Stingy Links: Bonds
The Bond Bubble
"If anybody is to blame for a bond bubble, it isn't Joe Schmo it's Uncle Sam, with some help from overseas.'The Fed has effectively been taxing money-market funds by cutting short-term interest rates to recapitalize the financial system and to make things easier on borrowers,' says Dan Dektar, chief investment officer at Smith Breeden Associates."
Stingy Links: Books
Jim Otar's Christmas freebie
"I'd be happy to make the green edition of my book 'Unveiling the Retirement Myth - Advanced Retirement Planning based on Market History', a textbook on non-Gaussian approach to retirement planning, to your readers for a limited time, from now until January 2nd."
The Non-Economist's Economist
"Now comes the test of whether his popular writings will endure longer than the memory of his celebrity and the pleasure of his prose. 'The Great Crash' has a fighting chance, because of its very lack of analytical pretense. 'History that reads like a poem,' raved Mark Van Doren in his review of the 1929 book. Or, he might have judged, that eats like whipped cream.But the other books in this volume seem destined for only that kind of immortality conferred on amusing period pieces. When, for example, Galbraith complains in 'The Affluent Society' that governments can't borrow enough, or that the Federal Reserve is powerless to resist inflation, you wonder what country he was writing about, or even what planet he was living on."
It's Not Rocket Science
"We've compiled four years of Tom's articles and blogs into a new book titled It's Not Rocket Science: Plain-English Advice for Managing Your Investments. The pieces are short narratives that reinforce some of the basic, yet most important, principles of investing."
The Rational Optimist
"Today's Outside the Box is two essays, by Matt Ridley and Bill Gates, from the Review section of the WSJ. Ridley has written a book called The Rational Optimist... Bill Gates writes a longer essay to say why he thinks Ridley has some things wrong, while overall giving the book high marks. This is one of the more thought-provoking exchanges I have read in a while."
Stingy Links: Brokers
Your Adviser Is Scared to Set You Straight
"One danger is that if you voice a strong opinion, your adviser might not give you a second opinion. He might merely echo your own, making you think he is smart because he agrees with you.and clearing the path of least resistance to his next commission. Sometimes, acting like a sheep just pays better."
Stingy Links: Buffett
$200 Billion Blunder
"Warren Buffett says Berkshire Hathaway is the 'dumbest' stock he ever bought. He calls his 1964 decision to buy the textile company a $200 billion dollar blunder, sparked by a spiteful urge to retaliate against the CEO who tried to 'chisel' Buffett out of an eighth of a point on a tender deal."
Dear Uncle Sucker
"Well, Uncle Sam, you delivered a motherload of cash. Considering the dollar sums involved, your actions were remarkably ineffective. What was left over afterwards was a wildly over-leveraged consumer whose credit limits had been reached State and municipal budgets were heavily dependent upon that excess consumer spending, creating huge budget holes because of it. Net net: The resultant economy was in the worst recession since the Great Depression."
Pretty Good for Government Work
"You have been criticized, Uncle Sam, for some of the earlier decisions that got us in this mess . most prominently, for not battling the rot building up in the housing market. But then few of your critics saw matters clearly either. In truth, almost all of the country became possessed by the idea that home prices could never fall significantly. That was a mass delusion, reinforced by rapidly rising prices that discredited the few skeptics who warned of trouble. Delusions, whether about tulips or Internet stocks, produce bubbles. And when bubbles pop, they can generate waves of trouble that hit shores far from their origin. This bubble was a doozy and its pop was felt around the world. So, again, Uncle Sam, thanks to you and your aides. Often you are wasteful, and sometimes you are bullying. On occasion, you are downright maddening. But in this extraordinary emergency, you came through . and the world would look far different now if you had not."
Evan Davis meets Warren Buffett
"Warren Buffett is the greatest investor of all time. His decisions about buying shares and companies have beaten the stock market year after year and made him the richest person in the world - thought to be worth 37 billion dollars. Yet Buffett lives modestly in his native Omaha, in America's mid-West, and runs his 150 billion dollar business with a staff of just twenty. Evan Davis meets him to find out about his unique investment strategy and his eccentric lifestyle. He talks to Buffett's family, friends and colleagues about the man they call the Sage of Omaha, and Buffett's friend Bill Gates praises his philosophy of life. As the greed of the super-wealthy is widely criticised in the current financial crisis, Davis asks whether Warren Buffett is the acceptable face of the filthy rich"
Buffett: Combs is 'a 100% Fit'
"Mr. Combs was one of hundreds of people who responded to an unconventional 'help wanted' request Mr. Buffett made in early 2007. But his initial inquiry didn't distinguish itself. Undaunted, the low-key father of three, who lives in Darien, Conn., recently sent another letter to Berkshire Vice Chairman Charles Munger asking for a meeting. Mr. Munger said in an interview that he gets 'hundreds' of such requests each year, but 'something in his request piqued my interest.' The two soon met for a lunch that extended well into the afternoon at the California Club in downtown Los Angeles. Mr. Munger later phoned Mr. Buffett and told him, 'this is a guy I am sure you are going to like,' Mr. Munger recalls."
Forget gold, buy stocks
"You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"
Stingy Links: Christmas
"Wishing you, your family, and friends the best of the season."
Stingy Links: Crime
U.S. Arrests Online Seller Who Scared Customers
"Federal law enforcement agents on Monday arrested a Brooklyn Internet merchant who mistreated customers because he thought their online complaints raised the profile of his business in Google searches."
Stingy Links: Derivatives
Individual Investors Duped by Derivatives
"Leona Miller, an 84-year-old retired beautician, says she was seeking safe and steady income from bonds two years ago when she bought securities recommended by her Wachovia (WFC) broker, Robert Baldacci, paying 9 percent interest. Within six months, Miller lost about 30 percent of her 20,000 investment, and the bonds were converted into shares of Merck (MRK) in a falling stock market."
Stingy Links: Dividends
Dogs could have their day in 2011
"Michael O.Higgins is the first to admit that the Dogs of the Dow strategy has fallen on hard times as a stock-picking technique. .I.d say it.s very unpopular right now,. he said. .In the investment world, if something hasn.t worked for a year or two, they damn it.."
Stingy Links: Economics
The High Cost of Free Parking
"Professor Shoup is the author of The High Cost of Free Parking, and points out that, 'just because the driver doesn't pay for parking doesn't mean the cost goes away.' In addition to making it harder to find a spot when you need one, 'free' parking exacerbates other problems, from pollution to traffic congestion. Using the power of market pricing, Shoup explains how to fix the parking mess in three steps."
Stingy Links: Fun
Public Pension Parody
"Thousands of retired government employees are getting pensions of over $100,00 per year, and taxpayers have to pay for them. See how it happened..."
Stingy Links: Funds
The megamind of Miami
"As he nears the end of his morning walk, Berkowitz begins musing on his aversion to losing money. He is not, he insists, interested in taking risks. His contrarian investments may look perilous to outsiders, but to him they are the safest opportunities he can find. He stops and shuffles to the dotted yellow line in the center of the street and points down: 'This is where we can make our shareholders plenty of money.' For Berkowitz, out of the ordinary is middle-of-the-road."
"Active share can have a direct influence on returns. Looking at U.S. stock fund performance in the 20 years ending 2009, Prof. Petajisto found that the most active stock pickers beat their benchmarks by 1.26 percentage points annually after fees. On average, funds with lower active share didn't beat their benchmarks."
Stingy Links: Government
"By the 1990s, Canada had also become one of the developed world.s most socialized economies, with the government accounting for 53% of the country.s GDP. Economic growth was stagnating, while debt levels were inexorably and dangerously mounting. At its scariest zenith, Canadian federal and provincial government debt amounted to 120% of GDP, with roughly 70% at the national level and an outrageously bloated 50% owed by the provinces. Again, to put that in perspective, despite our debt binge over the last decade, US government debt is around 60% of GDP, while state debt is nearly 17% of GDP, or 77% overall (this is based on net, not gross, debt and excludes the Social Security trust fund holdings as well as intergovernmental liabilities.)Moreover, unlike in our present situation, Canada.s interest rates were rising due to worries about the nation.s solvency. Its coveted AAA credit rating was yanked, and the market was treating it as an increasingly unreliable borrower. In oth! er words, it was much like the situation a number of European countries find themselves in today.except that Canada didn.t have Germany to bail it out. As you can readily see, there.s simply no question that Canada was in some very deep doo-doo. Which begs the multitrillion-dollar question: How the heck did it get out of that jam? "
Speak softly and carry a big chainsaw
"Mr Obama badly needs to show that he can still lead on domestic policy. He should start by cajoling Congress into an agreement to tackle America.s ominous fiscal arithmetic. Conventional wisdom says such an agreement is impossible: the problem is too big, the politics too difficult. But it is wrong to suppose that the deficit is unfixable, as two proposals for fixing it have shown this month. And even the politics may not be totally intractable."
70 Years Early
"Looking back into the 1920s, he found that investment-grade bonds went bust with alarming frequency, often in the same year they were rated. On average, he showed, a bank that followed the new rules would end up with a third of its bond portfolio going into default. The record was so unreliable that it would be 'still more responsible,' Mr. Palyi growled, to 'stop the publication of ratings altogether.'"
Pensions: Angry populists' next target
"This is d jed off on them. Now a majority of union members work for the government, and labor is determined to protect its pensions. Unlike those in the private sector, government retirement packages are often embedded in law. Wait until politicians tell that to the taxpayers stuck footing the bill."
The Financial Time Bomb of Longer Lives
"First the good news: We.re living longer, healthier lives than ever before.We.re already so used to the idea of greater longevity, in fact, that it may seem ho-hum to learn that boys and girls born in 2008 in the United States have life expectancies of 75 and 81, respectively.Those life spans, however, represent a bonus of about three decades, compared with Americans born in 1900, according to a report last year from the Census Bureau. And, by the way, Spain, Greece and Austria fared even better, proportionally: Life expectancies in those countries doubled over the course of the 20th century.Now for the bad news: At this rate, we can.t afford to live so long."
The Fed Loses Twice
"Bad timing for the Fed. They are powerless, or even negatively powerful (They will achieve the opposite of what they are intending), because they don.t understand how monetary policy really works, particularly during times of crisis. The Fed is imitating Japan, which has done horribly over the last 20 years. Can.t they learn from recent data? Interest rates that are too low cause businessmen to make bad decisions."
The Crisis in Local Government Pensions
"We calculate the present value of local government employee pension liabilities as of June 2009 for approximately 2/3rds of the universe of local government employees. Using local government accounting methods, the total unfunded liability in these areas is 190 billion or over 7,000 per municipal household. When government accounting is corrected by discounting already-promised benefits at zero-coupon Treasury yields, the total unfunded obligation is 383 billion or over 14,000 per local household."
N.Y. Faces 200 Billion in Retiree Health Costs
"The health benefits are entirely separate from the pensions that New York.s public workers have earned. Governments have reported their pension obligations for years, but their retiree medical obligations have been building up unseen, because governments were not required to account for them. The information is starting to come to light because of a new accounting requirement."
Congressional Staffers Gain From Trading in Stocks
"The aides identified by the Journal say they didn't profit by making trades based on any information gathered in the halls of Congress. Even if they had done so, it would be legal, because insider-trading laws don't apply to Congress."
Day of Reckoning
"60 Minutes recently did a short program on the looming municipal bond problems, with a focus on Illinois and New Jersey, plus an interview with Meredith Whitney..."
Labour and the left
"Last year there were more public-sector employees (7.9m) than private-sector workers (7.4m) in unions.the first time this has happened. And public-sector unions have a distinct advantage over private ones. 'Through their extensive political activity,' says Mr DiSalvo, 'these government-workers' unions help elect the very politicians who will act as 'management' in their contract negotiations.in effect handpicking those who will sit across the bargaining table from them, in a way that workers in a private corporation (like, say, American Airlines or the Washington Post Company) cannot.' And the public-sector managers sitting across the table don't have the same worries as private-sector bosses, who must answer to profit-driven overlords. The lack of competition in government services produces little pressure on management or unions to come up with the most efficient work agreement. As a result, public-sector unions have become accustomed to getting what they want."
Night of the Living Fed
"Since it is customary in polite society to apologize for causing distress, on behalf of the Fed, let me apologize for the extraordinary destructiveness of its policies for the last 15 years. Bernanke.s version of an apology, delivered in January this year to the American Economic Association, was to claim that the Fed.s monetary policy during the 2000-08 period was appropriate, and that there were no major failings, such as missing the housing bubble completely, that were worth mentioning. This stubbornness in the face of clear data is right up there with efficient market believers. And very impolite indeed."
In praise of inflation
"In times when people are reluctant to take risks, a little inflation can help grease the skids. In doing this, though, inflation helps debtors and spenders at the expense of creditors and savers. It.s easy to see why this makes us uncomfortable. It seems to reward those who have behaved recklessly, and to punish those who played by the rules, saving their money and living frugally. But the economy doesn.t exist, in the end, to reward virtue and punish vice. It exists to maximize our well-being, and, currently, doing that may require helping the undeserving and irresponsible, if only because there are so many of them. Boosting inflation isn.t the right policy, but it may just be the correct one."
Accounting for Public Pensions
"A generation ago, when Ronald Reagan was president, the accounting rule makers forced American companies to come clean on the cost of the pension plans they were promising to employees. That decision, perhaps more than any other, heralded the eventual demise of defined-benefit pensions for employees of American companies. Now something very similar may be in store for public sector employees..."
Stingy Links: Graham
Four Stocks Ben Graham Might Pick
"My Graham-inspired picks sell for less than book value (corporate net worth per share) and less than 12 times earnings. They also have debt less than 50 percent of stockholders. equity."
The Papers of Benjamin Graham
"These papers are not part of either Intelligent Investor nor Security Analysis. The papers range from 1930 to 1974, basically Ben Graham's entire professional life."
Stingy Links: Growth Investing
Bill Miller's Nov 2010 Commentary
"It is useful to remember that the great bond bull market that began nearly 30 years ago was preceded by a 30 plus year bond bear market that took long term treasury yields from 3% to nearly 15%. The devastating losses people suffered were such that my friend Lee Cooperman dubbed bonds, .certificates of guaranteed confiscation,. when he was overseeing the Goldman Sachs research and strategy effort. A common feature of that 30 year bond bear market was the bond swap. Almost every year, investors who owned bonds lost principal value as yields rose, so they sold their bonds in December and took a tax loss, replacing the bonds with others of similar maturity and quality. This continued year after year, inexorably. Finally, in 1982, yields started to fall. One elderly relative of mine had been taking her tax losses year after year, for over 30 years. When she asked me to look at her portfolio in late 1982, I told her there were some things I thought she needed to do. She said, .O! h yes, it.s time for my bond swap.. I told her that was not necessary as she now had gains in her bonds. She looked startled, and asked, .Is it legal to have gains in bonds?. I suspect that question may again be asked in the next 30 years."
Stingy Links: Health
Lies, Damned Lies, and Medical Science
"He zoomed in on 49 of the most highly regarded research findings in medicine over the previous 13 years, as judged by the science community.s two standard measures: the papers had appeared in the journals most widely cited in research articles, and the 49 articles themselves were the most widely cited articles in these journals. These were articles that helped lead to the widespread popularity of treatments such as the use of hormone-replacement therapy for menopausal women, vitamin E to reduce the risk of heart disease, coronary stents to ward off heart attacks, and daily low-dose aspirin to control blood pressure and prevent heart attacks and strokes. Ioannidis was putting his contentions to the test not against run-of-the-mill research, or even merely well-accepted research, but against the absolute tip of the research pyramid. Of the 49 articles, 45 claimed to have uncovered effective interventions. Thirty-four of these claims had been retested, and 14 of these, or 41 p! ercent, had been convincingly shown to be wrong or significantly exaggerated. If between a third and a half of the most acclaimed research in medicine was proving untrustworthy, the scope and impact of the problem were undeniable."
Stingy Links: Indexing
Hidden Cost for Index Funds
"This paper empirically investigates the index premium and its implications from 1990 to 2005. First, we find that the price impact has averaged 8.8% and 4.7% for additions to the S&P 500 and Russell 2000, respectively, and -15.1% and -4.6% for deletions. The premia have been growing over time, peaking in 2000, and declining since then. Second, the implied price elasticity of demand increases with firm size and decreases with idiosyncratic risk, supporting theoretical predictions. Third, we introduce a new concept that we label the index turnover cost, which represents a hidden cost borne by index funds (and the indexes themselves) due to the index premium. We illustrate this cost and estimate its lower bound as 21-28bp annually for the S&P 500 and 38-77bp annually for the Russell 2000."
Are ETFs a Menace?
"The proliferation of ETFs, the report contends, raises at least three worries. First, these funds have overconcentrated the ownership of thinly traded stocks. Second, they have led to an escalating number of trading failures. Third, ETFs could trigger another massive market swing like the May 6 'flash crash.'"
The Hidden Costs of Indexing
"Petajisto estimated that from 1990 to 2005 the annual turnover drag for the small-cap Russell 2000 was at least 0.38%-0.77% and for the S&P 500 at least 0.21%-0.28%. Researchers Honghui Chen, Gregory Noronha, and Vijay Singal in a 2005 paper estimated the cost of index turnover drag at 1.30%-1.84% for the Russell 2000 and at around 0.03%-0.12% for the S&P 500. These figures imply that index funds that don't slavishly follow the index can beat their benchmarks by avoiding the price pressure surrounding index additions and deletions. It's one of those rare free lunches in investing."
A closer look at BetaPro's HXT
"In a recent blog post, I provided an overview of the new Horizons BetaPro SP/TSX 60 Index ETF (HXT/TSX). HXT.s synthetic exposure left us with two questions, both of which are addressed below."
Stingy Links: Law
Securities Class Actions Punish Shareholders
"It.s a belief many law-school graduates cling to fiercely, in the face of all contrary evidence: That the tort system is a mechanism for discovering the truth, disciplining wrongdoers, and compensating victims for their losses. A new study in the Financial Analysts Journal casts serious doubt on the premise, at least when it comes to shareholder class actions. In most cases, the authors found, the litigation mainly serves to punish shareholders who have already suffered from a downturn in their stock. Only suits targeting illegal insider trading, and to a lesser extent, accounting fraud were associated with subsequent higher long-term returns."
Stingy Links: Management
The Perfect Stimulus: Bad Management
"One day, a position opened above me, and I was the most obvious candidate to fill it. My boss called me into her office and said she had some bad news. She explained that the media was giving our company a lot of heat because almost all of our managers and executives were white males. Promoting me, she explained, would only make things worse. I asked how long I might need to wait for all of this to blow over. My boss was vague, but she said the timeline involved smoothing out the effects of two centuries of corporate discrimination."
Stingy Links: Markets
Are Monthly Seasonals Real?
"Over 300 years of UK stock returns reveal that well-known monthly seasonals are sample specific. For instance, the January effect only emerges around 1830, which coincides with Christmas becoming a public holiday. Most months have had their 50 years of fame, showing the importance of long time series to safeguard against sample selection bias, noise, and data snooping. Only . yet undocumented . monthly July and October effects do persist over three centuries, as does the half yearly Halloween, or Sell-in-May effect. Winter returns . November through April . are consistently higher than (negative) summer returns, indicating predictably negative risk premia. A Sell-in-May trading strategy beats the market more than 80% of the time over 5 year horizons."
Stocks Acting Like Commodities
"In the past few years, many investors have concluded that commodities like oil, corn and gold offer independent returns that can diversify away the risks of stocks. But the correlations between stocks and commodities.the extent to which their prices move together.are in many cases the highest they have been in nearly 30 years."
No Margin of Safety
"This creates a terrible problem for investors here. Given that the yield on the SandP 500 is now below 2%, it is essential for investors to recognize that they now rely on the achievement and maintenance of sustained bubble valuations in the years ahead. Unless investors believe that bubble valuations can be maintained indefinitely, they can expect little but abysmal returns over the coming 5- 7 year period."
BoC December 2010
"The Bank of Canada has released the December 2010 Financial System Review which includes reports on: The Countercyclical Bank Capital Buffer: Insights for Canada, Strengthening the Infrastructure of Over-the-Counter Derivatives Markets, Central Counterparties and Systemic Risk, Contingent Capital and Bail-In Debt: Tools for Bank Resolution"
"After that there was no stopping the love affair between financial economists and number-crunching. Myron Scholes, now a Nobel laureate, became director of CRSP in 1974 and ensured the database was both kept up-to-date and made readily available to academic economists everywhere. In turn, this resource became ever more useful as computing power became more pervasive and affordable. The CRSP database has since been expanded to include bonds, property, some commodities, mutual funds and exchange-traded funds. It has been replicated across the world."
Losing the Lender of Last Resort
"Now, of course, the default risk free asset is the government bond. Ultimately, the reasoning goes, a government can just print money if it needs to, so an investor can guarantee getting paid even if the value of that money is devalued. The problem is, that as Reinhart and Rogoff have shown, this ain.t necessarily true."
Why are High Risk Stocks so Crappy?
"The key to the dominance of low volatility equities is that high volatility stocks are bad investments on the two main dimensions of stockworthiness: volatility and return. Volatile stocks by definition have high volatility, and also high correlation with the overall market (CAPM beta) and the business cycle. They all have below average returns. So why do so many people like them?"
Stingy Links: Real Estate
Google Map Foreclosure Tricks
"I wanted to demonstrate the full extent of Foreclosures in the US, so after setting GMaps on foreclosure listings, I slowly zoomed out of the map. Voila! Most foreclosures that are for sale in the USA are now showing on your screen."
The 25-Year Foreclosure
"Patsy Campbell could tell you a thing or two about fighting foreclosure. She's been fighting hers for 25 years. The 71-year-old retired insurance saleswoman has been living in her house, a two-story on a half acre in a tidy middle-class neighborhood here in central Florida, since 1978. The last time she made a mortgage payment was October 1985."
Why the housing bulls are wrong
"Hedge fund manager Bill Ackman is the latest prominent investor to jump on the housing bandwagon. But here are four reasons by housing is still not a good investment."
Stingy Links: Stocks
How to Erase the Lost Decade?
"Whatever figure turns out to be right, the bottom line is that .people should ratchet down their expectations for stocks,. he said..There.s no harm in hoping that things turn out better,. Mr. Arnott added. .But the danger is assuming and planning for the best while saving as if the market can do your work for you.."
Share buybacks put a shine on Danier
"The market, in other words, appears to be assigning scant value to Danier.s ongoing business . and that.s hard to understand. In the year to June . certainly no boom time for the Canadian economy . it produced 7.2-million in earnings, or about 1.58 for each of the shares remaining at the end of the most recent quarter. If the market were willing to pay even 12 times those earnings, Danier would be a 19 stock."
Stingy Links: Taxes
The Tax Haven
"Google uses a complicated structure to send most of its overseas profits to tax havens, keeping its corporate rate at a super-low 2.4 percent "
Stingy Links: Thrift
Bargain Junkies Beating Retailers
"'I wonder why they waste money on advertising,' she muses. 'We'll buy whatever they want us to buy.as long as they pay us to buy it.'"
Wedbush's roof leaks, but his wallet doesn't
"His investment firm, Wedbush Inc., manages more than $15 billion in assets, employs 1,000 people and is valued at $300 million. His personal stake is worth more than $150 million. Yet Wedbush has never let go of a compulsive frugality with roots in a Great Depression boyhood and his early days as an entrepreneur, when pinching pennies was the difference between survival and oblivion. For Wedbush, cost control is much more than a slogan. It's a guiding principle, maybe even a way of life."
Stingy Links: Value Investing
Neosho Capital Q3-10 commentary
"When asked how he had weathered the 2008/9 financial meltdown, Markowitz said he had been moderately liquid going into those years, thanks to having sold off some of his 20-odd ETFs and some of his Kraft holdings. Thinking that his own use of MPT, CAPM, Monte Carlo simulations, etc. formulas, had contributed to his decision to reduce his allocation to securities in the run-up to the .08/.09 meltdown, we were surprised when Markowitz confessed, somewhat sheepishly, that it was a phone call with his friend, .Steve., a hedge fund manager, who advised him to sell off a significant enough portion of his holdings prior to the panic that started in September of 2008. Given this admission, we wonder if a further updating of the MPT models is needed to reflect this invaluable step: Call Steve. The trick will be finding a way to put this extra step into algorithmic form."
You Can't Be Too Thin
"Roger Ibbotson has devoted a career to answering a question that has defied the greatest minds of finance. Namely, why some securities offer better returns than others, even when they have a close resemblance. Now a 67-year-old finance professor at Yale University, Ibbotson thinks he's discovered the answer. It's liquidity. Or the lack of it."
Patient Capital 2010 Q3
"At current bond prices we strongly believe prospective returns are very low while the potential for loss is extremely high. If interest rates were to rise to only one half of their historical average fixed income securities would suffer substantial losses! We would recommend only very short term fixed income securities at this time. For those looking for income, high quality dividend paying equities are safer and will likely provide returns that are superior to fixed income alternatives over the next several years."
Prem Watsa sees commodity bubble
"Never mind the current hype over commodities: Prem Watsa and his team at Fairfax aren.t convinced that resources and agricultural goods will continue to skyrocket. .Anything that everybody thinks is going to happen worries us,. Mr. Watsa said in an interview. .The excesses get built up. Recessions take them out.."
Life and investing after Buffett
"So it may be time to start taking a look at Berkshire substitutes. While no company is a Berkshire clone, a couple of U.S.-based holding companies offer a similar mix of experienced management, financial heft and the assurance that your money is being overseen by value-oriented investors who have much of their money riding along with yours."
Enduring Values, Enduring Value
"There are four ways to create wealth it is not just cash flow. They are, one, having cash flow from operations available to security holders. A company can use that cash to expand its asset base, reduce liabilities or distribute the money to shareholders, either by paying dividends or buying back stock. Two, and probably much more important, is having earnings, which we define as creating wealth while consuming cash. Remember, though, that earnings for most companies do not have a long-term value unless the company also has access to capital markets because if it doesn't, sooner or later, it will to run out of cash. The third.and very, very important.value-creation method is resource conversion. Such as? Mergers and acquisitions, changes in control, massive recapitalizations, spinoffs, etc. The fourth wealth-creation method, which I touched on previously, is having extremely attractive access to capital markets."
Stingy Links: Whitman
A Tax Cut To Save
"Ambac Financial declared bankruptcy, needlessly. Had Congress acted to change the tax code to give troubled corporations a much needed break, Ambac probably could have raised enough equity to rebuild its core business. Unfortunately the U.S. tax code left Ambac with no way of raising equity without destroying one of its most valuable assets, $7 billion worth of net operating losses that could have been used to offset future tax burdens after the company returns to profitability."
Stingy Links: World
A Greek Bankruptcy Is Unavoidable
"Sitting in his bare office at Harvard University with the shades drawn, Rogoff says, coolly and soberly: 'A Greek bankruptcy is unavoidable. There is a 95 percent chance that Spain will go bankrupt. Hungary is on the brink. Things will get much worse in Eastern Europe. We will have a certain number of countries that will go bankrupt. We will have a number of euro zone countries that would be well advised to take a sabbatical from the euro for a year. The situation in the United States is very worrisome. The markets will refuse to tolerate this level of debt.' The worst of it is that it sounds as if he were expressing unavoidable facts."
Coming in from the cold
"The consoling thought for Ireland.s put-upon taxpayers has been .at least we.re not Iceland., whose outsize banks failed spectacularly in 2008. But that comfort is fading. Evidence of economic recovery in Iceland means the Irish can no longer persuade themselves that things are worse elsewhere."
The slaying of the Celtic Tiger
"Ireland itself is a fiscal mess, thanks to a budget deficit that makes Greece's look like spare change. The real estate market is a disaster, and interest rates demanded by bond investors are so high that the exchequer effectively can't afford to finance the country. The Irish government has some breathing room . it doesn.t have to return to the capital markets until next July. But if that bond auction fails, the country will almost certainly be broke and require a bailout from the European Union."
China's credit bubble
"Experts argue heatedly over whether or not China has managed to outdo America.s subprime bubble, or even match the Tokyo frenzy of late 1980s. The IMF straddles the two. It concluded in a report last week that there was no nationwide bubble but that home prices in Shenzen, Shanghai, Beijing, and Nanjing seem 'increasingly disconnected from fundamentals'. Prices are 22 times disposable income in Beijing, and 18 times in Shenzen, compared to eight in Tokyo. The US bubble peaked at 6.4 and has since dropped 4.7. The price-to-rent ratio in China.s eastern cities has risen by over 200pc since 2004 The IMF said land sales make up 30pc of local government revenue in Beijing. This has echoes of Ireland where 'fair weather' property taxes disguised the erosion of state finances."
Cultures of Impunity
"The Irish government now has to deal with the effective evaporation of a major source of revenue at the worst possible time . raising taxes on either individual taxpayers or businesses will further deepen the economic hole that the country is in. But even with drastic cutbacks in government spending, it.s unavoidable. This particular bit of the Irish crisis is a direct result of the country.s grossly skewed taxation model. And it.s left the country in a pretty horrible bind."
Secret Past of Chinese Stocks
"This week, the People's Bank of China jolted stock markets around the world with a surprise interest-rate rise, and the leaders of China's Communist Party called for 'accelerating the transformation of the nation's economic-development pattern.' This drive to manage growth harks back to a declaration on April 22 that 'of the many government functions, the most important is to facilitate commerce and help industries.' The odd thing is, the Chinese government made that statement on April 22, 1903. Amid the almost irresistible excitement over China's explosive growth, it is important to understand that the Asian giant has run this exact race before.several times.and the results weren't pretty."
The Future of Fish
"As overfishing threatens the world's wild fisheries, aquaculture advocates say fish farms will play a far greater role in feeding people around the world. 'We are no more going to get our seafood from the wild than we get our beef, nuts, fruit from the wild,' predicts Kevin Fitzsimmons, a professor at the University of Arizona and former president of the World Aquaculture Society. He is also on the board of HQ Sustainable Maritime Industries (HQS), an NYSE Amex-listed company that sells Chinese-raised tilapia. 'It's all going to be farm-raised,' he says. And there's no fish better suited to this new world than tilapia, says Fitzsimmons. It's a fast-growing species with mild-tasting flesh that producers can easily adapt to all kinds of uses. 'Tilapia,' says Fitzsimmons, 'is going to be basically where chicken is with poultry.'That means that the creatures thrashing in Chen's ponds are the future of fish. The growing American appetite has led to a boom in Chinese aquaculture:! With hundreds of breeding centers, fish farms, feed mills, and processing plants, China is the world's tilapia superpower."
Ridley and the rational optimist
"Matt Ridley, author of The Rational Optimist, talks with EconTalk host Russ Roberts about why he is optimistic about the future and how trade and specialization explain the evolution of human development over the millennia. Ridley argues that life is getting better for most of the people on earth and that the underlying cause is trade and specialization. He discusses the differences between Smith's and Ricardo's insights into trade and growth and why despite what seems to be strong evidence, people are frequently pessimistic about the future."
The Man Who Saved the Whales
"In the last half of the 19th century, whales were facing extinction. They were hunted in large part because their oil was the best, most affordable illuminant available to growing western nations. One man more than any other headed off their extinction, a man whose picture should be in on the wall of every Greenpeace office: John D. Rockefeller, founder of the Standard Oil Company."
200 Countries, 200 Years, 4 Minutes
"Hans Rosling's famous lectures combine enormous quantities of public data with a sport's commentator's style to reveal the story of the world's past, present and future development. Now he explores stats in a way he has never done before - using augmented reality animation. In this spectacular section of 'The Joy of Stats' he tells the story of the world in 200 countries over 200 years using 120,000 numbers - in just four minutes. Plotting life expectancy against income for every country since 1810, Hans shows how the world we live in is radically different from the world most of us imagine."
Spain's Solar on Edge of Bankruptcy
"Spain stands as a lesson to other aspiring green-energy nations, including China and the U.S., by showing how difficult it is to build an alternative energy industry even with billions of euros in subsidies, says Ramon de la Sota, a private investor in Spanish photovoltaic panels and a former General Electric Co. executive. "
More from less for more
"Engineer RA Mashelkar shares three stories of ultra-low-cost design from India that use bottom-up rethinking, and some clever engineering, to bring expensive products (cars, prosthetics) into the realm of the possible for everyone."
How Fake Money Saved Brazil
"This is a story about how an economist and his buddies tricked the people of Brazil into saving the country from rampant inflation. They had a crazy, unlikely plan, and it worked."
Toronto a city of socioeconomic extremes
"Toronto is becoming a city of stark economic extremes as its middle class is hollowed out and replaced by a bipolar city of the rich and poor . one whose lines are drawn neighbourhood by neighbourhood."
Ireland is effectively insolvent
"Ireland faced a painful choice between imposing a resolution on banks that were too big to save or becoming insolvent, and, for whatever reason, chose the latter. Sovereign nations get to make policy choices, and we are no longer a sovereign nation in any meaningful sense of that term. From here on, for better or worse, we can only rely on the kindness of strangers."
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