I left one small question for last; I gave a partial answer to this one at the conference.  I think I was the only one that said much on it.  Here it is:

Where does academic theory fail in finance and in economics?

Little questions, big answers.  How do you eat an elephant?  One bite at a time.  Let’s start with math in economics:

1) We have to reduce the complex math in economics — I think we are trying to apply math where it is not valid.  As such, the true strength of ability to explain what is going on decreases, while economic becomes an odd “inside game” for a funny group of mathematicians trying to make sense of an idealized world that bears little resemblance to our own world.

2) The next piece is on maximizing utility or profits.  Maximizing takes work, assuming one can even do it.  Work is a negative, so people conserve on that.  Most of us know this: we look for a solution that is “good enough,” and do it.  That means we don’t maximize utility, and the pretty equations don’t represent reality.

What’s worse is that men care more about relative results than absolute results.  We would rather be kings over an impoverished realm rather than middle class in a wealthy country.  We are worse than greedy; we are envious.

It’s even worse for firms.  There you have agency problems where the management often has its own goals that do not maximize profits, or their net present value, but maximize the benefits they receive.  Boards are frequently a cover for management, rather than advocates for the shareholders.

Regardless, since firms don’t maximize, the elegant math does not work. Putting it simply, if you want to understand economics better, don’t listen to economists — become a businessman.  An ordinary businessman knows more about how the world works than a neoclassical economist.

3) One of the beauties of a capitalist economy is its dynamism.  It adapts to changing needs and desires.  The variation is considerable; as an example, go through your supermarket and try to count the total number of different tomato products.  Or  look at the amazing degree of variety in a major tools catalog.  Or go to Costco, Walmart, Home Depot, Ikea, and look at the incredible variety that exists under one roof.

But that level of variety cannot be mathematically accommodated by economics.  They have to aggregate the complexity into categories, and a lot of the reality is lost in the process.  That is why I distrust  many economic aggregates, such as inflation, GDP, etc.  Politicians find “economists” to suit their political ends, and they come up with complex reasoning for why measured inflation is higher than it should be, inequality is rising, etc.  You can find an economic advocate for almost anything.

Macroeconomics

4) Because of the aggregation problem, the link between microeconomics and macroeconomics is made weak, especially since utility cannot be compared across any two people, and yet the economists mumble, and implicitly do it anyway.

5) At least with microeconomics, we can agree that demand falls as prices rise, and supply rises as prices rise.  But with macroeconomics, there is little agreement as to whether a given policy aids real growth or not.  Modern neoclassical economics is to me a bunch of sorcerer’s apprentices playing around with very large and crude tools that they think can affect the economy, only to find the results are not what they expect.  Somewhere, economists got the naive idea that they could eliminate the boom-bust cycle, only to find that by eliminating minor busts, they set up the conditions for growth in indebtedness, leading to a huge bust.  Far better to be McChesney Martin, or Volcker, who let recessions do their work, than slaves of the government who did not — Burns, Miller, Greenspan or Bernanke.

Take inflation as an example.  Does printing more money, or creating more credit boost asset prices, product & services prices, both, or neither?  The answer to this is not clear.  The Fed has taken many actions over the past 30 years, using a model that assumes tight relationships between short interest rates and inflation/ labor unemployment.  The evidence for these relationships are not evident, except at the extremes.

6) The idea that running deficits to “stimulate” the economy is questionable.  Debts have to be paid back, repudiated or inflated away, any one of which would make business and consumers less confident.  Further, the way the the money is spent makes a great deal of difference.  Much government spending inhibits or does not help economic growth; think of the complexity of the tax code — a recipe for wasted time, and unneeded social enginerring.  Some government spending does aid economic growth, where it lowers the costs of consumption or production — critical infrastructure projects, etc.  But those are rare.  If it were really needed, lower level governments or private industry would do it.

The thing is, most of the deficit spending has not been useful; there’s no economic reason to run such large deficits.  If we were rebuilding all of our aging infrastructure, that would be one thing, but the crazy quilt of tax breaks and subsidies affects behavior, but does not compound and aid growth.

7) We need to admit that culture is not a neutral matter.  Some cultures will have faster economic growth, and others will be slower.  There is no universal culture, no generic economic man.  Some cultures are more enterprising than others.  That has a big impact on growth quite apart from resources, population, education, etc.

8 ) Whether the money is tied to gold or fiat, banking must be tightly regulated.  Solvency of all financial institutions should be tightly regulated.  With financials risks arise when the is too much leverage, and too much leverage that is layered.  Things should be structured such that there is no possibility of dominoes knocking over other dominoes.

• Limit leverage
• Increase liquidity of assets vs liabilities
• Forbid lending to/investing in other financials
• Derivatives should be regulated as insurance, insurable interest must exist, which means that bona fide hedgers must initiate all transactions.

On Finance

9) The first thing to realize is that a mean-variance model for investments is loopy.  First, we can’t estimate the mean or the variance, much less the covariance terms.  There is also good evidence that variances are infinite, or close to it.  Thus the concept of an efficient frontier is bogus.  Far better to try to estimate crudely the likely forward returns on a cash flow basis, the way a businessman would, and weakly factor in the uncertainty of the forecasts.

10) Thus, beta is not risk, and volatility is not risk.  At least at present, until the low volatility funds get too big, there seems to be an anomaly where low volatility equity investing beats high volatility equity investing.  This is consistent with my theory that the relationship of risk and return is non-linear.  Taking no risk brings no return; taking moderate risk brings decent return; taking high risks brings low returns.  There is a sweet spot of prudent risk-taking that brings the best returns on average.

11) Multiple-player game theory indicates that to win, you assemble a coalition with more than 50% of all of the power, and you get disproportionate benefits.  Think about the poor buyer of a home in 2006, going into the closing with the deck staked against him.  Or think about forced arbitration of disputes on Wall Street, where the investors rarely win.

Complexity is not the friend of most ordinary economic actors.  Avoid it where you can.

12) Capital structure does matter; it is not irrelevant like Modigliani and Miller said.  Companies with low leverage tend to return more than companies with high leverage.  There are real costs to being in distress or near distress.

13) Markets can have non-linear feedback loops, like in October 1987, or the “Flash Crash.”  Markets are not inherently stable, and that is a good thing.  Instability shakes out weak players that are relying on a shaky funding base, leaving behind stronger players who understand risk.  It is not wise to try to eliminate the possibility of disasters occurring.  When you do that, pressures build up, and something worse occurs.  Better to let the market be free, and let stupid speculators get burned, so long as they aren’t regulated financial companies.

Ethics matters

14) Economics would be more valuable if it focused what is right, rather than what is “efficient.”  I know there will be differences of opinion here, but a discipline that focused on explicit and implicit fraud could be far more valuable than men who don’t have good models for:

• Inflation
• Asset Allocation
• GDP
• Unemployment
• and more

Imagine applying all of that intelligence to fair dealing in economic relationships, rather than vainly trying to stimulate the economy, and accomplishing nothing good.  It would be like the CFA Institute applied to the economy as a whole.

Most of Friday I spent as judge at the Global Investment Research Challenge for Washington, DC and Baltimore.  I really like working with students.  They are so earnest, and they work so hard.

Last year, the company was Under Armour, which was tough because it was a growth company.  Very difficult to value.  This year, the company was Marriott, which I think is even harder to value because of its asset-light strategy.   Further, they have bought back so much stock that not only is the company’s tangible book value negative, but the unadjusted book value is negative too.

But for what it is worth, the students this year had similar views about the target company, and the range of target prices was small versus what I saw with Under Armour.

But when I listen to the students, I sometimes cringe, because I’ve studied statistics to a far higher degree.  Now, when I judge, I don’t take my views into account, because I know I am in the minority, and the students don’t know that they are getting bad methods for analysis.  Let them listen to their professors, who don’t have a clue as to how the economy really works, and express what they have learned.

But if I had control over what Finance students were taught, I would do the following:

1) I would reduce the math content for finance students and increase the qualitative understanding of markets.  No more MPT.

2) I would increase the level of understanding on how to relate with people, because that makes a big difference in negotiating trades.

3) I would want them to work in a simple business, like a hot-dog cart, or mowing lawns, so that they could begin to get an idea of how tough it is to earn a profit.  My best boss in my life grew up watching his parents’ delicatessen, and it shaped his view of how to make a profit.  I didn’t have that as a kid, but I did have two parents who pointed out to me that life wasn’t easy.  The profits of my Dad’s business were by no means certain, and evaporated in the early 80s.  My Mom reinvested much of my Dad’s earnings into her stock portfolio, far exceeding what most investors achieve, but with periods that would make you wonder.  I partly paid for some of my college education by encouraging my Mom to buy a company that she previously sold that several years later went private for a handsome price.

4) I would revise the concept of the cost of capital to make it credit-centric.  All the efforts to calculate the cost of equity capital from equity market correlations are bogus.  They don’t make any economic sense.  In most cases, the cost of equity should not exceed the yield on an average CCC bond.

5)  I would tell them that changes in inflation and real GDP don’t have as large of an impact on corporate profits as is commonly thought, both positively and negatively.  I would tell them to focus on the stock, and drop the complex model.  Few in the investment business work off a complex model, and if you need one, you can buy Value Line, which I like, which tries to use a single macroeconomic model for 1700 popular stocks.  (and I get the model for FREE, because my county library subscribes to the WHOLE ENCHILADA, and I can ride on their back.  Morningstar too.)  I’m generous with my insights, but I rarely pay for services, because I know that they can be obtained cheaply, most of the time.

Positively

I would teach students to think on a higher level.  Not this causes that, but this influences that, and a lot of other effects occur as a result.  This is similar to Howard Marks’ concept of “second level thinking.”

By the way, I would do the same thing for the SOA and CFA syllabuses.  Modern Portfolio Theory is garbage, and needs to be abandoned.  We understood the markets better prior to MPT,

I would teach students that markets are not neutral, and that there are people out there trying to deceive you.  I’ve had more than my share of charlatans that I have had to oppose.

In place of randomness, and statistics that imply randomness, I would teach about margin of safety, and tell them, “Do your hard work.  Analyze likely profitability.  Analyze free cash flow.  Analyze the likelihood that you are correct; make sure the price at which you are buying includes a significant margin of safety.”

I would tell them to analyze free cash flow.  Today, with the company Marriott, that was the only thing that mattered.  One team hit the nail on the head. The rest did not.  The team that hit the nail on the head is going to Toronto to compete in the North American competition.  Should they win, they go to the final round, I know not where.

-=-=-=-=-==–=-=-==-=-=-=-=-=-=-=-=-=-=–==–==–==-=-=-=-=-=-=-=-=-=-=-=-=–==-

Anyway, that is a start.  As with Buffett, who always thinks of what is the best way to earn and compound earnings, it is far better to analyze successful businesses than to analyze what academics think about business.  After all, what, academic has created a successful business?  Few, if any.

Yesterday I represented the Baltimore CFA Society at the kickoff meeting for the 2013 CFA Institute Research Challenge.  As is the norm, the Washington, DC CFA Society (which is 2.5x larger than us) and Baltimore choose a local company for the students to analyze.  Last year, it was Under Armour [UA].  This year, it is Marriott [MAR].

One quick aside.  Last year, the more bearish you were on Under Armour, the better a team scored.  But guess what?  Under Armour rose 15% in the last 7+ months — the team that finished last had the result that was the best, and the winner did the worst.  I know many of my readers don’t like Jim Cramer, but one thing that he said shines through here: “The bear case always sounds more intelligent.”  The same is true in academic competitions.  That’s one reason it is good to have a mix of temperaments in an investment firm.  Personally, I believe that bulls and bears do better together than separately — they need to round each other out.

Personally, I would prefer to analyze a growth stock like Under Armour, to the “asset light” hotelier Marriott.  That said, Marriott’s  Investor Relations team was out in force for the six (maybe seven) colleges who showed up, and gave what I thought were credible answers to the students who asked them questions.  Near the end of the presentation, the senior Investor Relations person walked them through each line of the income statement — I thought that was a nice touch, but wondered what Marriott used as an internal measure of profitability.

(Note to any students reading me: take a look at what Moody’s, S&P, and Fitch use as their metrics on Marriott.  The rating agencies are not dumb, and they get more data than stock analysts do. They are inside the wall.  They get material nonpublic information, and disclose the portion of it that is relevant to bond investors.  At the presentation, the Marriott IR folks stressed repeatedly that they want to maintain an investment grade credit rating.  That is a large constraint on what Marriott does, and should be considered in any good analysis.)

This will be an interesting competition, and five months from now, it will be fun to be a judge in the local version of the Investment Challenge.

-=-=-=-=-=-=-=-=-=-

Two weeks ago, I was a judge in a competition among finance students for four colleges that met a McDaniel College.  I was the only judge that did not graduate from McDaniel, which was formerly Western Maryland College, named after the Western Maryland Railroad which funded the school in its early years.

The question at hand was whether the Texas Rangers should have acquired A-Rod in 2000.  This is a tough question, because it is a binary decision, and it faces the winner’s curse.  So, you hired A-Rod.  How badly did you overpay to get him?

I don’t think I am overstating the problem.  Anytime there are multiple bidders for a unique asset, the winning buyer tends to overpay.

The case study (from Harvard) had its own issues.  It overestimated how fast average player salaries would grow, and the econometrics behind the estimation of wins as a function of player salaries was decidedly poor.  More than the Harvard Business School case study would admit, it was a lousy decision to hire A-Rod.  Add in the social effect on other players when A-Rod is paid a huge amount relative to them, and even if he is a nice guy, you wonder if you are truly valuable to the franchise.

But when you are a judge in such a competition, your mind works this way: the first team sets the tone, and has an advantage until a team eclipses them.  Then that team sets the tone.

The judges were pretty neutral on whether A-Rod should be hired or not.  The vote depended more on the process they undertook.  How much research did they do?  How do they back up their assertions?  Did they believe the data in the case study blindly?

–==-=–==-=-=-=-=-=-=–==-=-=-=-

Face it, the business world is unclear/dirty, and those that analyze it have to take account of what they don’t know, and make the best decision that they can.  This is the virtue of hard questions for young security analysts, and why we hold such competitions.

Toss them a hard problem.  Make them think outside the box.  Life is tough, and investment decisions are often unclear.  This is life.

Investment competitions are a far better way to train students than the raw academics.  Modern Portfolio Theory is garbage.  Most academic approaches to investing don’t work.  But try to understand a business like Marriott.  They make money off of selling their name.  They make money managing hotels.  How can they be sure to make money as they do so?  Those are the tough questions to analyze.

It’s a good thing to make young analysts face a hard question.  Whether they win or lose, they had to work hard, plan, compromise with team members, and come to a decision that would face criticism.  When we invest money, we don’t get criticism vocally, but we do see the gains and losses.  Thus the investment competitions are a very good way to prepare students for the eventual gains and losses they will face when they are making business decisions on their own.

I don’t think I have mentioned this publicly, but I am on the board of the the Baltimore CFA Society.  My main task is to be co-chair for Programs, though I also like working with college students via the CFA Institute’s Global investment Research Challenge.

In general, I help where I am asked to help.  The two times that I have been on the board of the Baltimore CFA Society, I joined because I was asked.  I don’t need to lead.  I am very happy to not lead, except when things are confused, and no one is leading.

One of the fun things about being on the program committee is that you get to interact with a bunch of interesting potential speakers, some of whom turn you down, and others that accept the invitation.

And so it was my great pleasure to introduce Preston Athey (AY-thee), to speak to the Baltimore CFA Society.  He manages the T. Rowe Price Small Cap Value Fund.  That fund has 4 stars from Morningstar over 3 and 5 years, and 5 stars over 10 years.  It has other awards from Money Magazine and Kiplinger’s, and I’m pretty certain a number of others.

When he sat down at our table, prior to the talk, we talked about finding good companies in bad industries, which is a concept near and dear to me.  So he asked us what industries are hated now?  I volunteered shipping and coal, and later mentioned steel.

I then introduced him to the Society, and he gave his talk.  He highlighted four things:

1. The CFA Institute has capitulated to the academics who teach the nonsense of the CAPM.  Volatility is not risk.  Risk is the permanent impairment of capital.  (I commented that when the economics profession went mathematical in the ’40s and ’50s, they felt everything had to be quantified, whether it was correct or not, and that anything that made the math simple was a boon to being able to publish “research.”
2. The companies that actually do buybacks, as opposed to merely announcing them, do very well, and that is intensified for those that buy back stock at high free cash flow yields.
3. Lower turnover in mutual funds tends to lead to better performance.  He attributed it to having more conviction in the companies that you buy.  His turnover rate is 10%, and half of that is due to buyouts.
4. As a result, he talked about letting your winners run, though he also mentioned trimming positions to reduce risk.  That is similar to what I do.

He also mentioned how new management with a company that has gone nowhere can produce large returns.  Analyzing the nature of the new management is necessary — their past track record, current incentives, etc.  During the Q&A, he handled a number of questions — one that stuck out to me was industries where there are non-economic competitors.  I think of Chinese steel companies as an example that has finally failed.  The world does not need that much steel, even at current prices.

Aside from that, he was a Gentleman, as a few informed me he would be… a really nice guy.  Wish I had gotten to know him earlier.

Now if you want to know more about him, I have some articles here:

• T. Rowe Price Small Cap Fund Veteran Preston Athey to Exit in 2014
• Q&A: Preston Athey, Portfolio Manager, T. Rowe Price
• A Different Tune
• Extreme Avoidance

We had a great time with Preston Athey today, and for those that hung around thereafter, he answered many more questions.  Truly generous with his time, and gracious.

Why should insurance companies be such a good place to invest?  That’s a great question, and I will try to outline an answer.  Before I do, let me draw a few distinctions:

• I’m not talking about life companies, they are far more capital encumbered then P&C companies.
• I am also not talking about title, mortgage, or finance insurers.  They are too risky, and that was my opinion in the early 2000s.
• Health insurers have a different model, much more subject to regulation.
• Many insurance companies that don’t survive 10 years as a public company do poorly.  They did not underwrite well.
• Small companies tend to fail disproportionately.
• We aren’t talking about specialty companies.

What I am talking about are non-microcap companies with stable P&C liability structures and conservative reserving.  Boring, maybe.  Simple, somewhat, but you try setting up a competitor to them.  It takes some doing.  That is the competitive advantage; it is the barrier to entry.  Few companies have diversified liabilities; fewer reserve conservatively.

Thus I highlight P&C companies with ten year track records.  Here are the good ones: ACE, Chubb, Cincinnati Financial, Donegal Group, HCC Insurance, Markel, ProAssurance, RLI, Selective Insurance, Travelers, United Fire Group, W.R. Berkley, Arch Capital, Alterra Capital Holdings, PartnerRe, Everest Re, Renaissance Re, White Mountains, Progressive, State Auto Financial, and Erie Indemnity.

And here are the trailing ones: American Financial Group, Baldwin & Lyons, EMC Insurance, Navigators Group, XL Group, Allegheny Corporation, American National, Allstate, and Horace Mann.

And two really lousy ones: CNA Insurance and Meadowbrook Insurance Group.

On the whole, the outperformers more than absorb the underperformers, though I can’t prove that, for these reasons:

• Hasn’t happened much in a while, but P&C insurance companies do occasionally die & disappear.  Think of Reliance Insurance Company.
• Sometimes P&C companies make very bad underwriting decisions, lose a dramatic amount of money, and their stock prices fall enough that they get taken over, e.g., PXRe would be an example.
• I may be guilty of selection and survivor bias by sticking with diversified bigger firms that are at least 10 years old.  I know of a lot of smaller firms that flame out because they take too much underwriting risk due to hubris and/or inexperience.

To do a complete study, we would have to use the CRSP database, which has all of the data for stocks not currently living.  We would see the losses from insolvencies, and the losses/gains fhereof.  It would take place at the halfway point for US efforts, which would be 4 seconds ahead of the Greeks as they hurried to compete/complete at constant speeds.

That’s what would happen.  Now before I go, I want to leave charts behind for the stocks mentioned:

Above

1. http://finance.yahoo.com/q/bc?t=my&s=ACE&l=on&z=l&q=l&c=&ql=1&c=^GSPC
2. http://finance.yahoo.com/q/bc?t=my&s=CB&l=on&z=l&q=l&c=&ql=1&c=^GSPC
3. http://finance.yahoo.com/q/bc?t=my&s=CINF&l=on&z=l&q=l&c=&ql=1&c=^GSPC
4. http://finance.yahoo.com/q/bc?t=my&s=DGICB&l=on&z=l&q=l&c=&ql=1&c=^GSPC
5. http://finance.yahoo.com/q/bc?t=my&s=HCC&l=on&z=l&q=l&c=&ql=1&c=^GSPC
6. http://finance.yahoo.com/q/bc?t=my&s=MKL&l=on&z=l&q=l&c=&ql=1&c=^GSPC
7. http://finance.yahoo.com/q/bc?t=my&s=PRA&l=on&z=l&q=l&c=&ql=1&c=^GSPC
8. http://finance.yahoo.com/q/bc?t=my&s=RLI&l=on&z=l&q=l&c=&ql=1&c=^GSPC
9. http://finance.yahoo.com/q/bc?t=my&s=SIGI&l=on&z=l&q=l&c=&ql=1&c=^GSPC
10. http://finance.yahoo.com/q/bc?t=my&s=TRV&l=on&z=l&q=l&c=&ql=1&c=^GSPC
11. http://finance.yahoo.com/q/bc?t=my&s=UFCS&l=on&z=l&q=l&c=&ql=1&c=^GSPC
12. http://finance.yahoo.com/q/bc?t=my&s=WRB&l=on&z=l&q=l&c=&ql=1&c=^GSPC
13. http://finance.yahoo.com/q/bc?t=my&s=ACGL&l=on&z=l&q=l&c=&ql=1&c=^GSPC
14. http://finance.yahoo.com/q/bc?t=my&s=ALTE&l=on&z=l&q=l&c=&ql=1&c=^GSPC
15. http://finance.yahoo.com/q/bc?t=my&s=PRE&l=on&z=l&q=l&c=&ql=1&c=^GSPC
16. http://finance.yahoo.com/q/bc?t=my&s=RE&l=on&z=l&q=l&c=&ql=1&c=^GSPC
17. http://finance.yahoo.com/q/bc?t=my&s=RNR&l=on&z=l&q=l&c=&ql=1&c=^GSPC
18. http://finance.yahoo.com/q/bc?t=my&s=WTM&l=on&z=l&q=l&c=&ql=1&c=^GSPC
19. http://finance.yahoo.com/q/bc?t=my&s=PGR&l=on&z=l&q=l&c=&ql=1&c=^GSPC
20. http://finance.yahoo.com/q/bc?t=my&s=STFC&l=on&z=l&q=l&c=&ql=1&c=^GSPC
21. http://finance.yahoo.com/q/bc?t=my&s=ERIE&l=on&z=l&q=l&c=&ql=1&c=^GSPC

Below

1. http://finance.yahoo.com/q/bc?t=my&s=AFG&l=on&z=l&q=l&c=&ql=1&c=^GSPC
2. http://finance.yahoo.com/q/bc?t=my&s=BWINB&l=on&z=l&q=l&c=&ql=1&c=^GSPC
3. http://finance.yahoo.com/q/bc?t=my&s=EMCI&l=on&z=l&q=l&c=&ql=1&c=^GSPC
4. http://finance.yahoo.com/q/bc?t=my&s=NAVG&l=on&z=l&q=l&c=&ql=1&c=^GSPC
5. http://finance.yahoo.com/q/bc?t=my&s=XL&l=on&z=l&q=l&c=&ql=1&c=^GSPC
6. http://finance.yahoo.com/q/bc?t=my&s=Y&l=on&z=l&q=l&c=&ql=1&c=^GSPC
7. http://finance.yahoo.com/q/bc?t=my&s=Y&l=on&z=l&q=l&c=&ql=1&c=^GSPC
8. http://finance.yahoo.com/q/bc?s=ANAT&t=my&l=on&z=l&q=l&c=^GSPC
9. http://finance.yahoo.com/q/bc?t=my&s=ALL&l=on&z=l&q=l&c=&ql=1&c=^GSPC
10. http://finance.yahoo.com/q/bc?t=my&s=HMN&l=on&z=l&q=l&c=&ql=1&c=^GSPC

Well Below

1. http://finance.yahoo.com/q/bc?t=my&s=CNA&l=on&z=l&q=l&c=&ql=1&c=^GSPC
2. http://finance.yahoo.com/q/bc?t=my&s=MIG&l=on&z=l&q=l&c=&ql=1&c=^GSPC

So though I know many value investors think a lot of P&C insurers, my answer on whether they are a generally good industry to invest in is “possibly,” but not “certainly.”  There are advantages for sophisticated investors that can understand complex accounting and its limitations, as well as those that can sense whether a management team is conservative or not.  That may be part of the reason for how I limited the selection of companies above; I was trying to mimic what sort of companies tended to last a long time; they tend to be conservative.

That’s all for now; criticism is welcome.

Full disclosure: Long HCC , TRV

PS — I will be gone the next three days, and posting will be irregular, as it has been recently.

I have not read this book.  I read almost all books that I review, so I disclose when I have merely scanned a book such as this.

Why scan?  First, I didn’t ask for the book.  Second, it is 800+ pages long.  Third, it is a series of academic articles defending and attacking the Kelly Criterion — it will have a very specific audience that cares about the academic side of the debate.  The popular side is covered by the book, “Fortune’s Formula,” which I have favorably reviewed here.

The simple way to phrase the argument for the Kelly Criterion is this: you have an advantage versus the markets for whatever reason.  You have an edge on average, and the odds are tilted in your favor.  You size your bets as a ratio of edge over odds.  If your edge is durable, and the odds are calculated right, the optimal decision leads to the best compound growth of capital on average.

Samuelson sits in his ivory tower, where only efficient markets exist.  Those of us that are practitioners know that the markets are hard, but not efficient.

To me, the Kelly Criterion is intuitive, whereas the ideas of Modern Portfolio Theory are a stretch.  They don’t fit the way the market operates.

Who would benefit from this book:   If you are really interested in the Kelly Criterion debate , and are willing to pay up to get a good summary of the debate, it is available here.  Note: you have to like math.  If you want to, you can buy the book here: The Kelly Capital Growth Investment Criterion: Theory and Practice (World Scientific Handbook in Financial Economic) (World Scientific Handbook in Financial Economic Series).

Full disclosure: This book came out of the blue; did not ask for it.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

Market Dynamics

• On Paradigm Shifts http://t.co/h68quEDX Hunter takes us through mental exercises 2 make us intelligently contrarian. “Invert, Always Invert” May 02, 2012
• Hedgers’ net short position vanishes in US oil http://t.co/X0hLOWGB Commercial interests do not fear lower prices, could be bullish 4 crude May 02, 2012
• There’s Plenty of Money for Junk http://t.co/vXML0Bao Presently the credit cycle is virtuous; vicious part is coming, but no appt set $$ May 02, 2012
• Bad Models Mistook Housing Bust for Dot-Com Bubble http://t.co/IxC8m2mk Busts of assets that are heavily levered harder than unlevered $$ May 02, 2012
• Best U.S. Real Estate With Self-Storage http://t.co/mxyHdK2U Self storage a winner in the past, may not do so well in the future; hi vals May 02, 2012
• Marginal oil production costs are heading towards $100/barrel http://t.co/G2zNB5JS Same as my reasoning on high crude prices $$ May 02, 2012
• Four-percent rule a relic, advisers say http://t.co/PrdHQy48 Better rule: 10y Tsy yield plus 0% if bearish, 1% if neutral, 2% if bullish $$ May 01, 2012
• The remarkable resurgence in synthetic credit tranches http://t.co/1iIZ8ous Increases in the notional amounts of several corp bond swaps May 01, 2012
• Contra: Black Scholes & the formula of doom http://t.co/flVNsYMx Debt levels & Asset-Liab mismatch largest causes of crisis not BS model Apr 30, 2012
• Energy’s Pain is Consumer Discretionary’s Gain http://t.co/lM7UW0T7 I have been on the wrong side of this trade. Sigh. $$ Apr 30, 2012
• Notes from the DoubleLine Lunch with Jeffrey Gundlach, Spring 2012 http://t.co/KDiqA5Sp Gives a good overview, w/a large topping of snark $$ Apr 30, 2012

China

• China’s Auditing Train Wreck http://t.co/UeIZtw06 Any Chinese firm listed in the US, the auditors should be subject to SEC scrutiny. $$ May 05, 2012
• China bear Pettis says world coming around to his view http://t.co/lo1nGc7e Pettis isn’t a bear but a realist; invt-led growth overplayd $$ May 04, 2012
• The Family and Corruption http://t.co/R4NwZ6od Family ties & group affiliation dominate economic/political power among Chinese Communists $$ May 04, 2012
• Who is Fu? Chinese exile is ‘God’s double agent’ http://t.co/plyQhwtg Story of a Chinese Pastor in US & escape of Chen Guangcheng $$ May 02, 2012
• Microblogs Survive Real-Name Rules–So Far http://t.co/5UItJjwj Even the CCP would have a hard time shutting down their Twitter-apps $$ May 02, 2012
• Beijing’s secret: It’s not really loosening http://t.co/3RPhAOwH There is not enough demand in China 2 pay all of the high prices. $$ May 02, 2012
• China’s Left Behind Children http://t.co/OL0gmSFE Economic growth that separates parents from children imposes significant costs on China $$ May 02, 2012
• China Closes Unirule Website http://t.co/ItkW0p0A Founder receives award from Cato Institute; China government shuts down his website $$ May 02, 2012
• China’s property boom has peaked, forever http://t.co/aLC2U8F8 Amount of deadweight in China property is so large that prices have peaked $$ Apr 29, 2012

Financial Services

• Caution: Contents May Be Hot http://t.co/cp9yjbH3 I worry about ETF slippage from bad creation/redemption unit design & bad trading by users May 04, 2012
• Well, That Was Awkward… http://t.co/zS5f6zAI Bank Chiefs’ Regulatory Concerns Met With Official Silence; maybe regulators getting fed up May 04, 2012
• A talent shortage looms as the industry booms http://t.co/QGLZzzg7 Financial planners getting old/retiring faster than the Baby Boomers $$ May 04, 2012
• 2nd attempt2 automate bond trading 1st failed RT @BloombergNews: Goldman preps trading system for corporate bonds | http://t.co/NceasmN7 May 04, 2012
• Mortgage Rates in US for 30-Year Loans Fall to Record Low http://t.co/LPolAP5Q Mtge rates b nimble, MR b quick, MR go under limbo stick $$ May 04, 2012
• Spending A Year On An M&A Bidding War Is Apparently Overrated http://t.co/tKguPYGy It’s well-known that scale acquirers underperform $$ May 04, 2012
• Every liability has an asset, but not every asset has a liability. Some are owned outright. http://t.co/fB3ARju7 May 03, 2012
• Canadians Dominate World’s 10 Strongest Banks http://t.co/qj6TOgA3 Ask again after their housing bubble pops, same 4 other fringe nations May 03, 2012
• Pimco’s latest ETF shields against price spikes http://t.co/TmOrCIj2 I wonder if active ETFs will have more performance slippage. $$ May 02, 2012
• Hedge Funds Hurt by Volatility http://t.co/ogoL62qT Hedge funds r vehicles that do better when credit spreads r tightening $$ May 01, 2012
• Bond Market Is Creating A New Galaxy for Trading http://t.co/YgvNwz1j Dealer inventories thin; trading costs rise; electronic mkts start May 01, 2012
• US banks still cutting commercial real estate exposure http://t.co/qsqIMRph Banks still rotating out @ an almost constant rate since 2009 $$ Apr 30, 2012
• Largest U.S. Banks Resist Federal Reserve’s Credit Limits http://t.co/JndcrvWI Big banks need 2b broken up or shrunk; they don’t accept it Apr 29, 2012

US Fiscal/Regulatory Policy

• CEOs rank Texas tops for business, California worst http://t.co/jWEIGP89 8th year in a row for this survey; high taxes/regs annoy CEOs $$ May 04, 2012
• Exposing the Medicare Double Count http://t.co/HIVIx3lJ Same $$ being spent twice, must borrow the difference. May 02, 2012
• Coburn: `We Ought to Totally Revamp Our Tax Code’ http://t.co/71WquMIf Very similar to my proposals; simplify code eliminate deductions $$ May 02, 2012
• U.S. Considers Notes That Float http://t.co/jynXGcYG Intermediate-dated Tsy floaters would trade above par, neg yields like TIPS $$ May 01, 2012
• Trying to Shed Student Debt http://t.co/0GmvckOn Lawmakers Rethink Bankruptcy-Law Ban on Walking Away From Education Loans $$ #slavery Apr 30, 2012
• Can the US Economy Recover Without a Housing Recovery? http://t.co/Tqy4l8J3 It will probably have to try w/o housing’s assistance $$ Apr 30, 2012
• Central Bank paper suggests house prices have ‘over-corrected’ http://t.co/KDrXCkzy Have Irish housing prices overshot? Tough 2 say. $$ Apr 30, 2012
• http://t.co/KbnUO93s Treasury floaters could b issued @ premium 2 par 2 inflation speculators allowing the Tsy 2 finance @ negative rates Apr 30, 2012
• U.S. Perfecting Formula for Budget Failure, Says Bowles http://t.co/vlLQzZ8q It’s nice 2b a part of a nation that is a global leader $$ Apr 30, 2012
• Will TARP Make a Profit? That’s the Wrong Question http://t.co/MZBHaO51 Conflicting govt goals make policy hard 2 implement & interpret $$ Apr 30, 2012
• You will buy more Govvies, or else http://t.co/DLrnyb9u Financial Repression, Quantitative Easing, Debt Monetization, Hyperinflation $$ Apr 30, 2012
• On Student Loans, Accounting Gimmicks, Electric Cars, FX and a note on SS http://t.co/2BCB9nAi Hodgepodge of insight from @brucekrasting $$ Apr 30, 2012
• “The Treasury should be issuing 100 year or perpetual bonds until the market can’t stand it anymore to lock in these … http://t.co/gXMUXW4C Apr 30, 2012
• The floating YTMs will probably be negative, as interest rate speculators will pay more than par for the floating rat… http://t.co/OSmE7QuJ Apr 30, 2012

Eurozone

• The euro crisis just got a whole lot worse http://t.co/XSqmQnGv Election of Hollande may lead2 Euozone policy paralysis; growth v austerity May 04, 2012
• Making eurozonians, or not http://t.co/JmuO5OXC The Eurozone was never a natural place to set up a shared currency. $$ May 04, 2012
• Madness in Spain Lingers as Ireland Chases Recovery http://t.co/BXdYSX5e Ireland may b rebounding, as Spain’s slump deepens #austerity $$ May 02, 2012
• Why the New York Times’s Paul Krugman is clueless about the European economic crisis http://t.co/xMuzZXC7 Aside frm Ireland no austerity yet May 02, 2012
• Core infection and eurozone PMIs http://t.co/xr97yPgD Core of the EZone sluggish @ a time when it can least afford it $$ #depressionary May 02, 2012
• ECB Measures Pushing Domestic Bonds Into Domestic Banks, Planting Seeds for Euro Disintegration http://t.co/HAITJJnX Yeh, this da future $$ May 02, 2012
• The rise in the Eurozone money supply has not improved credit conditions http://t.co/rYazqcuP Euro M3 diverges from bank loans $$ May 01, 2012
• The ECB lending to periphery governments via “backdoor SMP” http://t.co/uQeG2QQK How to stuff the ECB full of Eurofringe debt, c/o LTRO $$ May 01, 2012

Rest of the World

• Brazil: cutting at any cost? http://t.co/mh3vN1Te Pushes up asset & price inflation, as currency held down 2aid exporters; unsustainable $$ May 04, 2012
• Turkey Credit Rating Outlook Cut by S&P on Worsening Trade http://t.co/pFDzEhZl Wide current account def & hi external financing needs $$ May 02, 2012
• Once poster child of crisis, Iceland recovers http://t.co/Sgr2wTGl Letting banks fail & stiffing foreign creditors -> winning solution $$ May 02, 2012
• Which emerging economies are at greatest risk of overheating? http://t.co/olHdiYRE A gauge from the Economist on which Em Mkts r2 hot $$ Apr 29, 2012

Company News

• Buffett’s CTB Adds Chicken Eviscerators in Dutch Purchase http://t.co/K6Q3NGt2 Buffett’s firm is no chicken; it has a lot of guts! $$ May 04, 2012
• Sorry, really sorry… May 04, 2012
• Ackman Rejects Canadian Pacific Deal Ruling Out CEO Pick http://t.co/KYe970NJ Pick is former CEO of $CP rival $CNI – Bad blood; good CEO May 02, 2012
• Impressive work Mr. Einhorn. The analyst that wrote up the question deserves praise; if you did that… http://t.co/tSTWxqBa May 01, 2012
• Phillips 66 aims to run more shale oil http://t.co/tC7NBfLO LD: + $COP $PSX First day of trading for the new $PSX. Combo up 2%+ so far $$ May 01, 2012
• Value investing does not mean cheap. It means margin of safety. Cemex does not have that. Look at the debt. $CX $$ http://t.co/ydklVkth May 01, 2012
• Falcone Agrees To Step Aside http://t.co/bYgLxMMV “a final agreement may not be reached, and a bankruptcy filing was still possible” $$ Apr 30, 2012
• Delta to buy US refinery for $150 million http://t.co/IsK9xsDu If zero is dumb & 100 is very dumb, this one scores in the 90s. $$ Apr 30, 2012
• Discuss “At $1.7 billion, Nook is worth more than Barnes http://t.co/xOz6skwP Spin off Nook 2 create value $$ $BKS $AMZN #interneteatsbooks Apr 30, 2012
• @ampressman Would it have been value-enhancing to $BKS 2 sell the whole Nook unit 2 $MSFT, in your opinion? $$ Apr 30, 2012

Statistical Analysis

• trading-and-the-null-hypothesis http://t.co/QpYutOTb Problem:No academic journal wants2 publish studies with ‘no result’ as their conclusion May 04, 2012
• . @thenumb47 Allows for too much of a specification search; would be good to require disclosure of everything tried but not published $$ May 03, 2012
• Have to allow for accidents! RT @incakolanews: just scrub the word “validate” and I think you have a great idea May 03, 2012
• Thus my proposal for economists: come up w/research idea: goes 2a database. Randomly assigned economist will analyze & trash/validate it $$ May 03, 2012
• Unlike double-blind studies, raw statistical research allows health analysts to inject their own bias into the analysis, as economists do $$ May 03, 2012
• Analytical Trend Troubles Scientists http://t.co/bzcAIpHG Health researchers using statistics like economists find ambiguous results $$ May 03, 2012

Miscellaneous

• 14 Lessons From Benjamin Franklin About Getting What You Want In Life http://t.co/BWAjCz1l Advice from 1 of the wealthiest men of America $$ May 04, 2012
• Is Wall Street Meeting God’s Expectations? http://t.co/5H5j2QGG Many Christians misuse the Bible; almost all non-Christians misuse it $$ May 03, 2012
• What would Jesus trade? http://t.co/Dkrfwt9k Many Christians misuse the Bible; almost all non-Christians misuse it; another example $$ May 03, 2012
• And in a more honest way than Google RT @SconsetCapital: Long good, short evil. May 03, 2012
• Apparel-Swapping Millennials Eschew Stores and Malls http://t.co/B7jq2dcY “Is that a new outfit?” “Well, it’s new to me!” An odd trend $$ May 03, 2012
• @TheStalwart Kasriel was different enough that he will be missed, kind of like the sound of one hand clapping $$ #littledoghasbuddhanature May 01, 2012
• The record 4 tallest bldg s/b based on weighted average height; weighting based on cross-sectional area @ height http://t.co/03HNZ0BB $$ Apr 30, 2012
• So if you have something thin at the top, it wouldn’t count 4 much. A rectangular parallpiped would get full credit 4 height $$ #usingmath Apr 30, 2012
• That would work, simpler than mine $$ RT @Pollack7: @AlephBlog Meh.Highest continuous occupancy floor. Apr 30, 2012
• As the smartest boss I ever had said “Make bets, but never bet the franchise.” http://t.co/qWdHX3BS Apr 30, 2012

Monetary Policy

• Bernanke Charts New Mission For Fed: Financial Stability http://t.co/6RrWEQws Fed has a hard enuf time w/a double mandate, triple will b wrs May 02, 2012
• Then again, if focusing on financial stability forces the Fed to be more restrained in its monetary policy, that would be good. $$ May 02, 2012
• Bernanke: Be Humble! http://t.co/6icSHD1K The picture says it: http://t.co/OqOflqsI Humility in BB’s view: leaving monetary policy loose $$ May 01, 2012
• My Speech Delivered at the New York Federal Reserve Bank http://t.co/DbAhOdQR An Austrian let loose amid the marble palace in NYC?! Wow. $$ Apr 29, 2012

US Politics

• Renewed Hope that Jon Corzine, President Obama’s Top Tier Campaign Bundler, Will Face Criminal Charges http://t.co/wCLrXFve J. Tavakoli $$ May 01, 2012
• Occupy Wall Street Plans Global Protests in Resurgence http://t.co/0FLjKfiJ #OWS won’t b effective until they organize as a 3rd party $$ + May 01, 2012
• Or, organize to influence the Democrats the way the t-party does the Republicans. #OWS is irrelevant until then, b/c it doesn’t do anything May 01, 2012
• Is that a bailout in your pocket? http://t.co/8xwW4Cbi Boyazny, panel’s populist, replied that the credit markets had become “undemocratic” May 01, 2012

I consider Tadas Viskanta to be a friend of mine.  I write my eclectic blog, and Tadas occasionally features me on his daily curation of the economics/finance/investment blogosphere.

But it is not friendship that leads me to write the following: this is a really good book.  Why?  Every day, Tadas curates the best thoughts in finance.  He finds them, he motivates them, and links to them.  If I had just one site to visit everyday, it would be his, not mine.  He’s really good at finding the best content in finance.

But it goes a step further than that.  Tadas is a very good blogger in his own right.  It’s not that he comes up with new insights, but he is very good at taking the insights of others and weaves them into a greater insight than the separate thoughts of the individuals.  He finds themes, and he finds disagreements.  Each provides good food for thought.

Now, if Tadas can do this on a daily basis, let’s call him the Chief Synthesizer of the economics/finance/investment blogosphere — then, what happens if he decides to take several steps back, and synthesize the grand themes he has seen in six years of writing his blog.

It’s been a violent period, after all.  Tadas has been blogging from the peak of residential real estate (October 2005), through the tail of the boom (October 2007), to the bust (March 2009), to the present.  He keeps it relevant, and he doesn’t take sides, which allows him to source the best content better.

So as he synthesizes the themes of the last six or seven years, he comes down to really basic ideas for each chapter: Risk, Return, Stocks, Bonds, Portfolio Management, Does Active Investing Work, ETFs, Global Investing, Alternative Assets, Behavioral Finance, Using Media, and the Lost Decade.  He handles them deftly, highlighting differences, but giving a consensus opinion.

The book is modest, in that it does not promise you greater profits if you follow his advice.  It is a realistic book, because most of us know that the basic principles of investing are straightforward, but they get clouded by academics and hucksters.  After you read this book, you may or may not earn more, but you will probably be safer.

Also, the book is an easy read; I glided through it in less than three hours.

Quibbles

The editor could have done more work to make the index complete; I was surprised to find myself mentioned in the book more times than the index noted.

Who would benefit from this book: Most amateur investors would benefit from the book, and many, though not all professionals would benefit from the book’s basic approach. Think of it this way — what if you could explain basic concepts to the uninstructed more clearly? Wouldn’t it help you in your business?  If you want to, you can buy the book here: Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere.

Full disclosure: I asked the publisher for the book and he sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

This is two books in one, and very well done.  The main part of the book explains risk and uncertainty in general terms, such that most people can understand it.  But for those that can deal with complex math, the latter part of the book offers a lot of additional firepower.

Risk is a tough subject because history only vaguely informs you as to how bad things can get.  Past is not prologue.  There are two possibilities, the past contains and event that was so horrible that it can never happen again, or, the past does not tell you how bad things can be.

Market observers took the first view, that the Great Depression could not repeat.  As a result, few prepared for a situation where there was too much debt, and insufficient ability to service it.

The subtitle of the book is rightly “Uncertainty at the Core of Finance.” Not risk, but uncertainty.  The distinct is important, because risks are things that we know some things about the possible economic outcomes, and can control them to a degree.  Uncertainty is where we don’t really understand the dimensions of the outcomes, and have little if any control.

There is fundamental uncertainty to the simplest aspect of finance, money.  Money seems stable enough in the short-run, but every now and then it fails due to hyperinflation, or the slow steady failure in the store of value sense of moderate inflation over long periods.

Wealth itself is uncertain.  Even if you own it free and clear, there’s no way to tell what it will be exchangeable for next year, much less further out.  There are a lot of people who thought they knew what their homes were worth 5-7 years ago that are decidedly disappointed.

Government debt is uncertain, as governments think they can always roll it over, but political and other obstacles can lead to a refusal to pay when debt service becomes high relative to tax revenues.

Banking is uncertain, mainly because of borrowing short to lend long.  If banks limited themselves to facilitating transactions, a lot of the uncertainty would go away.  Banks would be a lot smaller, less profitable, and there would be fewer of them, and the economy would be more stable.  (Entities with longer liability structures, like pension plans, endowments, and life insurers would become the new source of lending. More would be financed through equity.)

Credit is uncertain.  During boom times, corporate bonds behave independently, and diversification evens out results.  As a result, corporate credit seems safer than it really is, and marginal ideas get to borrow.  During bust times, far more corporate debt defaults than would be expected — there’s almost no such thing as an average year.  It’s either feast or famine.

There are things that can be done to try to mitigate uncertainty: credit ratings, or any scoring system for assets, lending at a more senior level, and Value-at-Risk.  Also using more robust assumptions on possible outcomes, which would lead to smaller position sizes, less leverage, or more cash.

The book has a real strength in showing how the the assumption of normally-distributed risks fails dramatically in many cases, and offers alternatives that would work better.  Trouble is, once you realize how volatile the world really is, a lot of strategies either don’t work, or need to be scaled back.

The book praises actuaries as risk managers, with their ethic codes and stress tests, as opposed to quants with Value-at-Risk and no ethics code.  Banks and Wall Street would be better off in the long run hiring actuaries, who think about risk more holistically, and getting rid of the quants in their risk control departments.  Same for the regulators who evaluate banks.

There are other controversial ideas here: is it possible that the strong economic growth of the past is an anomaly?  Is it possible that growth for nations, and the world as a whole follows S-curves, like products and companies?

This is an ambitious book, and I like it a lot because it is willing to cross boundaries and apply the principles in one  area to another that seemingly should not receive it.  I liked it a lot, and would recommend it to many.

Quibbles

On page 17, he thinks of currency as a put option, but I think of it as 0% overnight commercial paper.  On page 37, he confuses Moses and Joseph, having Moses predict the 7 good followed by 7 bad years, when it was Joseph who did that.

Who would benefit from this book: Every financial regulator should have this book.  Every academic burdened by the lies of Modern Portfolio Theory should get this book.  Anyone who fancies himself to be a risk manager should have this book.  Finally, if you want to understand why financial markets are inherently uncertain, this book will teach you well.  If you want to, you can buy it here: Pandora’s Risk: Uncertainty at the Core of Finance (Columbia Business School Publishing).

Full disclosure: The publisher asked if I wanted the book.  I said “yes” and he sent it to me.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

This period of the Aleph Blog covers May through July of 2010.  The one big series that I started in that era was “The Education of a Corporate Bond Manager” series.  The idea was to describe how a neophyte was thrust into an unusual position and thrived, after some difficulties.

The Education of a Corporate Bond Manager, Part I

How I learned the basics, and survived 9/11.

The Education of a Corporate Bond Manager, Part II

How I learned to trade bonds, and engage in intelligent price discovery.

The Education of a Corporate Bond Manager, Part III

What is the new issue bond allocation process like, and what games get played around it?

The Education of a Corporate Bond Manager, Part IV

On the games that can be played in dealing with brokers.

The Education of a Corporate Bond Manager, Part V

On selling hot sectors, and dealing with the dirty details of unusual bonds.

The Education of a Corporate Bond Manager, Part VI

On dealing with ignorant clients, and taking out-of-consensus risks.

Then there was the continuation of “The Rules” series:

The Rules, Part XIII, subpart A

On the biases the come from yield-seeking.

The Rules, Part XIII, subpart B

Repeat after me, “Yield is not free.”

The Rules, Part XIII, subpart C

Reaching for yield always has risks, but the penalties are most intense at the top of the cycle, when credit spreads are tight, and the Fed’s loosening cycle is nearing its end.  It is at that point that a good bond manager tosses as much risk as he can overboard without bringing yield so low that his client screams.

The Rules, Part XV

Securitization segments a security into liquid and illiquid components.

The Rules, Part XVI

“Governments are smaller than markets; markets are smaller than cultures.“

A fundamental rule of mine, but one with a lot of punch.

The Rules, Part XVII

On the differences between panics and booms.

The Journal of Failed Finance Research

Much research fails quietly, but other researchers don’t learn about the dead ends.  Better that they should learn of the failures, and avoid the dead ends.

How I Minimize Taxes on my Stock Investing

Sell low tax cost lots and donate appreciated stock to charities.

Place Political Limits on Overly Compliant Central Banks

Gives a simple rule to control central banks so that they avoid the present troubles.

Yield, the Oldest Scam in the Books

Yes, offering yield is the oldest way to trick people into handing over their money.

A Summary of my Writings on Analyzing Insurance Stocks

A good place to get started if one wants to get up to speed on insurance stocks, but there is a lot there.

Economics is Hard; the Bad Assumptions of Economists Makes it Harder

Going over Kartik Athreya’s letter criticizing nonprofessional economics bloggers.  Why the math behind macroeconomics and microeconomics doesn’t work.

Why Are We The Lucky Ones?

When you are a part of a small broker-dealer, all manner of harebrained deals get offered to you.  This explores three of them.  Note: management did not ask my opinion on the fourth deal, and that is a large part of why they no longer exist.

One more note: the guy who was going to pledge $5 million of stock in example 2 for a $1 million loan?  The stock is worth $7,000 today.

Watch the State of the States

The economics of the states tells us a lot more about the national health because they can’t print money to buy national debts.  (Though they can can raid accrual accounts…)

We Might Be Dead In The Long-Run, But What Do We Leave Our Children?

My view is that neoclassical economists are wrong.  Aggregate demand has failed for four reasons:

1. Overleveraged consumers will not readily buy.
2. Citizens of overleveraged governments will not readily spend, for fear of what may come later from the taxman, or from fear of future unemployment.
3. Aggregate demand is mean-reverting.  It overshot because of the buildup of debt, and is now in the process of returning to more sustainable levels.  The same is true of private debt levels, which are being reduced to levels that will allow consumers to buy more freely once again.
4. When the financial system is in trouble, people get skittish.

The Market Goes to the Dogs, Which Chase Their Tail Risk

Complex and expensive hedging solutions, many of which embed some credit risk, can be less effective than lowering leverage, and (horrors) holding some cash.

Fishing at a Paradox. No Toil, No Thrift, No Fish, No Paradox.

This one had its detractors, because I believe the paradox of thrift is wrong.  Too much aggregation, and it does not allow the dynamism of the economy to adjust over time, even from severe conditions.