The Stingy News Weekly (11/13/2011)
The real genius of Steve Jobs
"One of the great puzzles of the industrial revolution is why it began in England. Why not France, or Germany? Many reasons have been offered. Britain had plentiful supplies of coal, for instance. It had a good patent system in place. It had relatively high labor costs, which encouraged the search for labor-saving innovations. In an article published earlier this year, however, the economists Ralf Meisenzahl and Joel Mokyr focus on a different explanation: the role of Britain’s human-capital advantage—in particular, on a group they call “tweakers.” They believe that Britain dominated the industrial revolution because it had a far larger population of skilled engineers and artisans than its competitors: resourceful and creative men who took the signature inventions of the industrial age and tweaked them—refined and perfected them, and made them work."
How a Financial Pro Lost His House
"Everywhere I looked, people were being rewarded for buying as much house as they could possibly afford, and then some. There was this excitement in the air, almost like static. I started to think that if I didn’t buy a house right then, I would never be able to afford one. At moments during our house hunt, I felt in my gut that something wasn’t right. We’d go to open houses for $400,000 homes and see lines of couples in their late 20s — younger than we were — waiting to get inside. I kept wondering where all the money was coming from. How did all these people make so much? But prices just kept rising, and when people kept buying, that made it seem safer. I knew from my work as a financial adviser that following the crowd could be costly. But like everyone else, I felt safer in a crowd."
What happened to momentum?
"The total return to Momentum was impressive for many decades. It's a simple strategy, basically going long past winners and short the losers, hoping they continue to win and lose. Interestingly, the past returns should go only up to the prior month, because there's slight mean-reversion at the one-month horizon, so most people use the returns from months t-12 through t-1. This highlights the non-fractal nature of stock returns, in that there's momentum in the data from 3-18 months, but mean-reversion at the shorter and longer frequencies."
The king of human error
"When you wander into the work of Kahneman and Tversky far enough, you come to find their fingerprints in places you never imagined even existed. It’s alive in the work of the psychologist Philip Tetlock, who famously studied the predictions of putative political experts and found they were less accurate than predictions made by simple algorithms. It’s present in the writing of Atul Gawande (Better, The Checklist Manifesto), who has shown the dangers of doctors who place too much faith in their intuition. It inspired the work of Terry Odean, a finance professor at U.C. Berkeley, who examined 10,000 individual brokerage accounts to see if stocks the brokers bought outperformed stocks they sold and found that the reverse was true. Recently, The New York Times ran an interesting article about a doctor and medical researcher in Toronto named Donald Redelmeier, whose quirky research projects upended all sorts of assumptions you might not know you even had. He’d shown that changing lanes in traffic is pointless, for instance, and that an applicant was less likely to be admitted to a medical school if he was interviewed on a rainy day. More generally he had demonstrated the power of illusions on the human mind. The person who had sent him down this road in life, he told the Times reporter, was his old professor Amos Tversky."
Leveraging + High Payout Funds = Unhappy Ending
"The final chapter to the series of articles I’ve written this year on high-payout investments funds features leveraging. Over the past few years, I have been contacted by several individual investors and financial advisors about strategies they’ve been proposed or have seen in use involving borrowing to invest in funds that pay out fat monthly distributions. Every inquiry I received described a troubling and strikingly similar plan. Each case involved an investor setting up a line of credit secured by available home equity. The proceeds from the line of credit would be used to invest in one or more T-series or other funds paying out large monthly distributions. Then, the investor would take the distributions in cash – mostly made up of return of capital - either for personal spending or to put toward the investment loan. After some undefined period of time, the expectation is that the remaining investments (i.e. net of cash distributions) would be sufficient to wipe out the loan balance, with hopefully something extra to add some jingle to the investor’s jeans."
Rising from the ruins
"The economic landscape is unquestionably littered with the wreckage of the crash. Home prices languish near post-bubble lows, over 30% below peak. The plunge in prices has left nearly a quarter of all mortgage borrowers owing more than the value of their homes nearly 10m are seriously delinquent on their loans or in foreclosure. The hardest-hit markets are ghost neighbourhoods, filled with dilapidated properties. Housing markets are far from healthy. Yet current pessimism seems overdone. A turnaround in sales, prices and construction may be closer than many imagine."
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