The Best of the Aleph Blog, Part 10

This era encompasses May through July 2009, as the market rallied.  As usual, I sold too soon, and did not benefit from the continuing rally.

Farewell to John Davidson

This is my only short story at my blog, about an honest insurance executive in the credit crisis.  I know many insurance executives like his adversary, but few like him.

Choose Two: Principal Protection, Liquidity, and Above-Market Returns

The main idea is simple: you can get two out of three at best.

The Zero Short

Shorting is a tactical discipline and not a structural discipline.  Don’t try to short stock to zero, or near it.

The First Priority of Risk Control

Can you assure liquidity under all reasonable possible futures, and a few unreasonable futures?

“Just Gimme the Answer, Will Ya?”

Do you want to understand the situation fully, or do you want a soundbite answer to your question?

Problems with Constant Compound Interest

Problems with Constant Compound Interest (2)

Problems with Constant Compound Interest (3)

No tree grows to the sky.  Nothing can grow at above average growth rates forever.

Do you Want to be Proud, or do you Want to Make Money?

Humility is a core asset for investment managers.

Loss Severity Leverage

Structured securities have a higher probability of “losing it all.”  Also, the medium-sized insurer mentioned did not go insolvent, but did have to get a cash infusion from some other insurers that had joined with them into a greater entity.

Fruits and Vegetables Versus Assets in Demand (2)

Fresh produce is what it is, a perishable commodity, where quantity and quality are positively correlated, and pricing is negatively correlated.  Financial assets don’t perish rapidly, quantity and quality are negatively correlated, and pricing is often positively correlated to the quantity of assets issued, since the demand for assets varies more than the supply.  Whereas, with fresh produce, the supply varies more than the demand.

The Benefits of Dumb Regulation

In short, why regulators have to have some spine, and just say no to fancy ideas.  Implied in this is that state regulation of insurance, dumb as it is, is more effective than Federal regulation of banks.

It Takes Two to Tango

Why simple explanations of market phenomena are frequently wrong.

Sorry, Doctor Shiller, not Everything can be Hedged

“The concept that everything can be hedged assumes deep markets everywhere, which is not the case.”

Toward a New Concept of Asset Allocation

An attempt to flesh out what a better concept on asset allocation would look like.

To Control Bubbles, the Fed Must First Control Itself

Why the Fed should be the systemic risk regulator.

The Equity Premium is No Longer a Puzzle

Why stocks are slightly better than bonds in the long, long run.

Central Bank Independence is Overrated

If the independence of the Central Bank is never used to resist that desires of the politicians to goose, then that is not independence, but a sham.